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Type: Op-ed

  • Neglect of demand side

    What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.

    Why stakeholders are not happy with the package?

    • Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
    •  Marketing reforms and infrastructure creation are distant promises.
    • MSME sector:  The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
    • In their experience, lenders are not always supportive in extending loans.
    • While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
    • What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
    • Corporate sector: There is nothing for the corporate sector in manufacturing or services.
    • The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
    • Ironically, there is little for public health, already in a dilapidated state.
    • Even stock markets, characterised by irrational exuberance in the past month, have dropped.

    Government expenditure in the fiscal stimulus

    • The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
    • This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
    • Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
    • The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
    • Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

    Focus of the package: supply side

    • It is clear that the design of this relief package seeks to focus on the supply side.
    • Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
    • Focus is not on the demand side by stepping up government expenditure.
    • This is done with the aim of minimising the cost to the government.
    • The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.

    So, let’s understand why focus on supply side is flawed strategy

    • This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
    • Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
    • Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
    • At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
    • In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
    • For this reason, the fiscal stimulus should have been much larger.

    Excessive concerns over fiscal deficit

    • The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
    • Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
    • The conclusion drawn, wrongly, is that there is no fiscal space.
    • The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
    • In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.

    Monetising the deficit  and issues involved in doing so

    • This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
    • Such market borrowing would simply drive up interest rates and nip recovery in the bud.
    • It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
    • Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
    • In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
    • Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
    • For one, their ethics and integrity have seen steady erosion.
    • Moreover, how many sovereign governments will they downgrade?
    • In fact, we might be better off without the footloose and volatile portfolio investment inflows.

    Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”

    Conclusion

    If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.

  • Focus on supply side

    Whether to focus on supply side or demand side is the dilemma governments often face while deciding the measures to cure the ailing economy. This article explains using basic economics and evidence from across the world to make the case for a focus on the supply side. In doing so, it explains the problems with demand side measures such as cash transfers and tax rebets.

    Issue of neglect of demand side

    • The Union government is often criticised for its apparent neglect of the demand side and its excessive focus on the supply side.
    • Structural reforms — the COVID-19 package was no exception.
    • Low credit growth, weak inflation, and flat wage growth are the factors focused by demand-side proponents.
    • The deand side proponents suggest measures such as cash transfers, income tax cuts, and cheap credit to consumers.

    So, let’s focus on Demand vs. Supply side debate

    Low growth in credit to MSME

    • A demand shock typically leads to a rise in both volume and the price.
    • A supply shock not only hurts the volume but also leads to price rise.
    • In banking, a good proxy for the price of credit is the spread.
    • Spread is difference between lending rate and the funding rate  repo rate or deposit rates for the banks.
    • The spread reflects the risk premium banks charge to their customers.
    • The spread has consistently risen from just below 4 per cent at the start of 2018 to around 6 per cent in January 2020.
    • That means, the banks charged 4-6 per cent more on loan than it paid to its depositor or to RBI on the funds it got from them.
    • The fact that spreads are rising was highlighted by the 2019 Economic Survey as well.
    • At the same time, the credit growth — especially for public banks and to the MSME sector — has been sluggish for the previous two to three years.
    • The MSME sector witnessed sub-zero credit growth for the whole of 2017 and even now, the credit growth is very tepid at around 2 per cent Y-o-Y.
    • Rising spreads with lower credit volume provide a clear sign that credit supply is broken.

    What a paper by Nobel laureates on MSME says?

    • Paper by Nobel laureates Abhijit Banerjee and Esther Duflo examines the reasons for MSME problems.
    • The paper amply highlights the fact that the MSME sector suffers from lack of credit availability to finance investments rather than the lack of demand for credit.
    • They showed that when the government changed the definition of small firms, the firms newly covered by the priority sector lending programme used the extra credit to increase production and investment.
    • If there was no demand for credit, cheaper credit under the priority sector programme should have been used to repay the older expensive sources of borrowings.

    So, how will the recently announced package help MSEs?

    • Consistent with this view, we think that the government’s approach of guaranteeing SME credit by resolving the risk-sharing problem for banks will expand credit to credit-starved SMEs at lower credit spreads.
    • Similarly, expansion of the universe of small/medium firms will bring fresh investments from the firms, which are newly covered under priority sector programme as they will be able to get cheaper credit.

    2 Measures to increase consumer demand and issues involved

    1. Direct transfers schemes

    • No doubt that cash-transfers are superior to distortive subsidies and the “Garib Kalyan” package was a step in this direction.
    • In fact, the government has already transferred close to Rs 40,000 crore to bank accounts including Rs 10,000 crore to women under PMJDY.

    But is cash-transfers the ultimate solution to recovery?

    • In fact, the PMJDY account balance has increased.
    • The increase is from close to Rs 1,17,000 crore before the advent of COVID-19 to Rs 1,35,911 crore as of May 13 .
    • This is a massive jump of close to Rs 18,000 crore.
    • Recent research by Prasanna Tantri and co-authors shows that PMJDY account holders actively use the accounts — 1.12 transactions per quarter compared to the World Bank standard of one transaction.
    • In fact, PMJDY accounts see withdrawals when account holders are in distress, according to the study.
    • So the rise in balances is not mechanical.

    So, why are they not spending?

    • It’s not that people covered under PMJDY are comfortable financially.
    • A number of papers show that tax rebates boost demand in the short-run, but the quantum is limited.
    • For example, Sumit Agarwal and his co-authors show that the 2001 tax rebate programme in the US led to an average spending of only $60 on $500 rebate over nine months.
    • A recent study at the Kellogg Business School by Christian Borda and co-authors shows that tax rebates after the 2008 crisis in the US led to rise in spending, but by only 3.5 per cent in the first month of the rebates.
    • The crux is that no rational consumer goes on a consumption spree when he is facing job uncertainty!

    2. What about providing cheap credit to customers?

    • Trying to boost demand by providing cheap credit to consumers is not a good idea either as evidenced by the debt-financed housing boom in the US, which led to the 2008 crisis.
    • In fact, Atif Mian and Amir Sufi, using a large panel of 30 countries, uncover a more general pattern — an increase in household debt to GDP ratio leads to a sustained drop in future GDP, investments, and unemployment.
    • On the other hand, the economic cycles are much more muted when the initial growth is caused by structural reforms as pointed in a recent IMF study covering over 80 countries.

    Consider the question “Whenever governments decide on the stimulus package amid financial crises, supply side vs. demand side debate flares up. This has also been the case in India as the government announced the stimulus package recently. In light of this, examine the issues involved in demand side measures.”

    Conclusion

    To put the burden of recovery on risk-averse consumers, incentivising them to spend rather than save when there is employment uncertainty, is against any reasonable risk-sharing principle. Risk should be borne by those who have the appetite — the firms and government.

  • Ensuring MGNREGA lives up to its potential

    With migrant workers returning home, work demand under MGNREGA is bound to rise. Sensing that the government increased the allocation to MGNREGA. This article suggests some steps to make the MGNREGA more effective in catering to this surge in the wake of the pandemic. Some issues that plague the scheme are also examined at the end. So, what are the suggestion? and what are the issues? Read to know….

    Acknowledgement of the importance of MGNREGA

    • The government made an allocation of an additional Rs 40,000 crore as part of the stimulus package.
    • This is an acknowledgement of the importance of MGNREGA.
    • The most important part of MGNREGA’s design is its legally-backed guarantee for any rural adult to get work within 15 days of demanding it.
    • This demand-based trigger enables the self-selection of workers and gives them an assurance of at least 100 days of wage employment.

    Let’s put allocation in context of World Bank recommendations

    • Since 2012, an average of 18 per cent of the annual budgetary allocation for MGNREGA has been spent on clearing pending liabilities from the previous years.
    • Even this financial year began with pending wage and material liabilities of Rs 16,045 crore.
    • An allocation of Rs 1 lakh crore for FY 2020-21 would mean that approximately Rs 84,000 crore is available for employment generation this year.
    • This will still be the highest allocation for MGNREGA in any year since the passage of the law.
    • However, the allocation, which amounts to 0.47 per cent of the GDP continues to be much lower than the World Bank recommendations of 1.7 per cent for the optimal functioning of the programme.

    Some immediate steps to ensure the MGNREGA lives up to its potential

    • First, state governments must ensure that public works are opened in every village.
    • Workers turning up at the worksite should be provided work immediately, without imposing on them the requirement of demanding work in advance.
    • Second, local bodies must proactively reach out to returned and quarantined migrant workers and help those in need to get job cards.
    • Third, at the worksite, adequate facilities such as soap, water, and masks for workers must be provided free of cost. For reasons of health safety, MGNREGA tools should not be shared between workers.
    • The government should provide a tool allowance to all workers — some states are already providing such an allowance.
    • Fourth, procedures for implementing MGNREGA must be simplified but not diluted.
    • The pandemic has demonstrated the importance of decentralised governance.
    • Gram panchayats and elected representatives need to be provided with adequate resources, powers, and responsibilities to sanction works, provide work on demand, and authorise wage payments to ensure there are no delays in payments.
    • Fifth, as per a study by the RBI, more than half the districts in the country are under-banked.
    • The density of bank branches in rural India is even more sparse.
    • At this time, payments need to not only reach bank accounts on time, but cash needs to reach the workers easily and efficiently.
    • The limited coverage of bank infrastructure in rural areas must not be made a hurdle.
    • Attempts to distribute wages in cash, sans biometric authentication, must be rolled out.
    • Sixth, there needs to be flexibility in the kinds of work to be undertaken, while ensuring that the community and the workers are the primary beneficiaries.

    Issuse with MGNREGA

    • Over the last few years, MGNREGA had begun to face an existential crisis.
    • Successive governments capped its financial resources, and turning it into a supply-based programme.
    • Workers had begun to lose interest in working under it because of the inordinate delays in wage payments.
    • With very little autonomy, gram panchayats had begun to find implementation cumbersome.
    • Barring a few exceptions, state governments were only interested in running the programme to the extent funds were made available from the Centre.
    • Allocating work on demand, and not having enough funds to pay wages on time was bound to cause great distress amongst the workers and eventually for the state too.
    • As a result, state governments had begun to implement MGNREGA like a supply-driven scheme, instead of running it like a demand-based guarantee backed by law.

    Consider the question “With migrant workers returning to villages in the wake of corona pandemic, demand for work is likely to increase. In light of this, discuss the utility of MGNREGA and challenges it may face.”

    Conclusion

    With nearly eight crore migrant workers returning to their villages, and with an additional allocation for the year, this could be a moment for the true revival of MGNREGA. A revival led by workers themselves.

    Mahatma Gandhi National Rural Employment Guarantee Act, 2005

    • The Act aims at enhancing the livelihood security of people in rural areas by guaranteeing hundred days of wage employment in a financial year to a rural household whose adult members (at least 18 years of age) volunteer to do unskilled work.
    • The central government bears the full cost of unskilled labour, and 75% of the cost of material (the rest is borne by the states).
    • It is a demand-driven, social security and labour law that aims to enforce the ‘right to work’.
    • Ministry of Rural Development (MRD), Government of India in association with state governments, monitors the implementation of the scheme.

  • Stimulus package aims to turn the crisis into opportunity

    Economic disruption caused by the corona crisis stems from both-demand side and supply side. So, the stimulus package announced was expected to address the issues on both sides. This article breaks downs the various elements of the package in demand-side as well as supply-side measures. We also know aggregate demand is not just consumption demand. So, this fact was also considered while deciding the demand-side measures.

    Twin mantra of stimulus package

    • 1) To ensure that human cost of the crisis is minimised, especially for those at the bottom of the pyramid.
    • 2) To convert this crisis into an opportunity by implementing bold structural reforms.
    • Such reforms will go beyond repairing the damage to the production capacities and enhance the overall supply response capabilities of the economy.

    Impact on demand side as well as supply side

    • The present crisis is far worse than both the Asian financial crisis of the late Nineties as well as the global financial crisis of 2008-09.
    • It has seriously impacted both the supply and demand side of the economy.
    • The government’s response has been to effectively address both these aspects.

    Government’s four-fold response to address supply-side problems

    1. Ensuring food security

    • To ensure that the government declared agriculture and all related activities as essential services.
    • This permitted the successful harvesting and efficient procurement of the critical Rabi crop.
    • It also implied pumping in Rs 78,000 crore as new purchasing power in the hands of the farmers.

    2. Preventing cash/liquidity crunch

    • Preventing the pressing cash/liquidity crunch was necessary to avoid insolvencies and bankruptcies.
    • An immediate moratorium was announced on their debt servicing obligations to commercial banks.
    • This measure was reinforced for MSMEs, for whom an additional credit line of Rs 3 trillion without any fresh collateral was extended.
    • MSMEs could also avail of new equity from the Rs 50,000 crore fund of funds and take advantage of the subsidiary debt facility announced by the FM.
    • These measures provided succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment and retail.
    • The Rs 90,000 crore credit package made available to state discoms should also be included in this set of measures.
    • It will prevent bankruptcies of state electricity utilities and the power producers, which would have had disastrous results.

    3. Reforms in agriculture and manufacturing sector

    • The third set of measures were directed to significantly improve the ecosystem for private producers, both in agriculture and manufacturing.
    • Long-pending reforms to give farmers the much-needed freedom to choose their clients and for traders and exporters of agro-products to maintain necessary stocks have now been announced.
    • Defence production and exports will get a new fillip with the liberalisation measures.
    • Greater space will be given to private businesses in sectors in which public sector enterprises hitherto had either a monopoly or a predominant presence.

    4. Credit to street vendors

    • Finally, this is a measure that does not have a large fiscal footprint, but touches the lives and livelihoods of more than 50 lakh families.
    • Under which street vendors all over the country have been given a credit of Rs 10,000 each for re-stocking and use as working capital.

    Understanding the aggregate demand

    •  It is important to point out that aggregate demand is made up of- i) consumption, ii) investment iii) demand for intermediate goods.
    • So,  the cash-in-hand of consumers is not the only means for reversing the declining demand in the economy.
    • Therefore, additional credit lines provided to MSMEs, vendors or farmers will contribute to the strengthening of aggregate demand.

    Government’s response to address demand-side problems

    • A significant number of measures were announced to hike consumption demand directly as well.
    • Among these are:
    • Rs 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts.
    • Rs 50,000 additional incomes in the hands of those whose TDS and TCS were reduced by 25 per cent.
    • Rs 40,000 crore additional allocation for MNREGA, which will provide jobs and succour to those returning to their villages from metros and cities.
    • Rs 30,000 crore for construction workers.
    • Rs 17,800 crore transferred to 12 crore farmers and Rs 13,000 crore transferred to states to finance the costs of running quarantine homes and shelters for migrant workers.
    • These measures, which will directly benefit different categories of individuals, will surely raise the flagging demand — the necessary condition for triggering a fast-paced recovery in economic activity.

    Consider the question “The stimulus package announced by the government in the wake of pandemic sought to address both the demand side as well as supply-side problems. Examine the various components of package and other reforms announced in the economy.”

    Conclusion

    Combined with the significant number of bold structural reform measures, which hold the potential to make Indian firms attain global scales and competitiveness and give the much-needed freedoms, flexibility and financial strength to our beleaguered farmers, “the package” promises to promote India’s economic recovery in the post-COVID-19 period.

  • India and China after pandemic

    The article broadly discusses the impact of the pandemic on the Indian economy. While the package has been declared to alleviate the economic pain, the government faces the challenge of finding the resources to plug the gaps. Though pandemic erupted from China, it successfully controlled it. This along with the its calibrated approach towards strategic progression is going to stand China in good stead.

    Grappling with the “unknown unknowns”

    • Several weeks before the advent of the COVID-19 pandemic, India’s Minister for External Affairs delivered a lecture.
    • In the lecture, he had observed that “what defines power and determines national standing is also no longer the same. Technology, connectivity and trade are at the heart of the new contestations.”
    • He did mention a point about “known unknowns”.
    • But the pandemic has forced us to face the “unknown unknowns”.
    • Within a few weeks, his prediction would be overtaken by a tectonic shift in the global situation thanks to a virus and a pandemic.

    Impact on India’s economy

    • What distinguishes the present pandemic from earlier ones is its economic impact.
    • The economic impact is perhaps even more threatening than the human costs involved.
    • In the case of India, all forecasts have had to be shredded.
    • Job losses have been massive, specially in urban areas.
    • India’s exports in the month of April, for instance, were the worst in the past 30 years.

    Finding resources for the stimulus package

    • Well before pandemic India had been witnessing a persistent economic downward slide.
    • Prime Minister Narendra Modi’s announcement of a ₹20-lakh crore stimulus package was, hence, timely.
    • Even though economists now believe that in real terms it amounts to around 2% of GDP rather than 10% .
    • Finding resources for even this stimulus package will, however, not be easy.
    • The Centre’s finances are not in the best of health. It has already had to resort to a second tranche of $1 billion loan from the World Bank to support COVID-19 relief measures.
    • The finances of States are, to say the least, in a perilous state.
    • Questions are, thus, bound to be raised as to whether adequate funds would be forthcoming for relief purposes.

    China’s calibrated approach: Strategic progression

    • Since its early recovery, China has followed a calibrated approach — one that stems from a policy of deliberate strategic progression conceived over the years.
    • It may be worthwhile to understand the facts so as to underscore the gap that currently exists between China and India.
    • In 2015, China’s President, Xi Jinping, had floated the idea of “a Community of Common Destiny of Mankind”.
    • In this, he outlined China’s viewpoint on aspects such as economic globalisation and the information technology revolution.
    • The Belt and Road Initiative — which encompasses policy, infrastructure, trade, financial, and people-to-people connectivity, and, implicitly also, security ties — was an adjunct to it.
    • The 19th National Congress of the Communist Party of China (2017), thereafter, gave its assent, considering it essential to enable China to achieve pre-eminence status within the global order.
    • Ever since, China has focused on-
    • i) attaining economic and technological progress.
    • ii) defining how power would be determined in the new globalised era through devising new international norms in many emerging domains such as cyber, space, artificial intelligence, etc.
    • China also set about rewriting international rules, premised not so much on governing where global goods are made, but on setting standards that define production, exchange and consumption.
    • China Standards 2035 plans to set new standards with regard to the Industrial Internet of Things (IoT) and define next-generation information technology and biotechnology infrastructure.
    • China is hoping, to reap the “early bird” advantage, even as other industrial nations struggle to recover from the devastation caused by the COVID-19 pandemic.
    • Internationalisation of Chinese standards would provide China a clear advantage by providing it an opportunity to set the standards in emerging industries such as high-end equipment manufacturing, unmanned vehicles, new materials, cybersecurity and the like.
    • This would enable it gain a dominant position in the global economy.

    India must plan well to cope with the China challenge

    • Mounting an effective challenge to China at this time would require a well-conceived and carefully calibrated plan of action by India.
    • As of now, this is not evident.
    • India and China will certainly emerge from the pandemic more diminished than previously, but to varying extents.
    • Each country will, no doubt, suffer an economic setback.
    • But while both nations would be among the very few that would still have a positive growth rate in the near future.
    • Which is 1% in the case of China and 1.8% in the case of India, according to the International Monetary Fund.
    • Given the size of China’s economy, it does not translate into a massive shift in India’s favour.

    Consider the question “Economies across the world have been bruised by the corona pandemic. There have also been talks of India being the beneficiary of changes in the global supply chains. In light of this, examine the issues and challenges that India may face in this regard.”

    Conclusion

    India would more than welcome some of the entities exiting China, but there are no “green shoots” to suggest that such a shift has, or is, about to take place. Many alternatives are available to these companies and it would be excessively optimistic on our part to hold on to the belief that India is the only alternative choice for most of them.

  • Exploring the avenues to fill the budgetary gaps

    What are the options available with the government to fill up the budgetary gaps created by the stimulus package? Well, one seems to be exercising its disinvestment or privatisations plans. But like always disinvestment comes with its own set of issues. The next could be raising the taxes and duties on the fuels. But this will defeat the very purpose of the package. Third option is borrowing. But borrowing in the external currency is another problem story. Let’s figure this all out with this article….

    Containing the fiscal deficit through privatisation

    • Government is apparently hopeful that money could come partly from the new privatisation programme.
    • Finance Minister recently said that privatisation — a policy that has already gained momentum in the last budget, would now be the order of the day.
    • According to the new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four public sector enterprises.
    • The PSEP is a strategic move intended to rationalise the public sector.
    •  Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue from GST among other things was declining.
    • And this void could only partly be filled by alternative sources of tax revenues such as that on fuel.
    • Today, the government needs this money in order to contain the fiscal deficit.
    • So, the privatisation programme has suddenly been expanded.
    • The Centre has set a budget target of Rs 2.1 lakh crore from disinvestment in the current fiscal year.

    Progress made so far on disinvestment process

    • Towards the end of 2019, the government approved the privatisation of BPCL and the Shipping Corporation of India.
    • In addition to selling stakes in the Container Corporation of India, THDC and NEEPCO.
    • The government had initially planned to complete its “strategic disinvestment” in BPCL and Air India by the end of this fiscal year.
    • It now wants it completed earlier. Some estimate say that the government’s disinvestment in BPCL, SCI and CONCOR could fetch it Rs 78,400 crore.
    • Should India’s flying Maharaja also find a buyer, the government could raise over Rs 1,05,000 crore.

    Issues with privatisation

    • The revenue from privatisation is a one-off benefit and generally, only profit-making units are sold at a good price.
    • Privatisation is a two-way street — it requires a buyer and a seller. Who will be the buyers?
    • Excessive political interference with the private sector makes owning an ex-government entity risky.
    • A handful of Indian capitalists who are already at the helm of oligopolies may be in a position — financially and politically — to buy the big PSUs.
    • If they were allowed to grow even more by acquiring public entities, sectors of the economy would be under the influence of quasi-monopolies.
    • This could foster crony capitalism and may even result in the making of oligarchs.

    Where else can the government find the money it needs?

    1. Increasing tax and duties on fuel

    • Government has already increased the excise duty on petrol and diesel by Rs 3 per litre — the steepest hike since 2012.
    • The government imposed additional taxes while global crude oil prices fell.
    • As oil prices can only go up after the last round of negotiations between Russia and Saudi Arabia, the Indian government will not be in a position to use this source of revenue again.
    • Such a move would contradict the very idea of a relief and stimulus package anyway. Why?
    • An increase in the excise duty or tax would affect purchasing power, when the package is supposed to help the poor and to boost demand.
    • Low demand and lowest investment rate:  Even before the present crisis, industrialists complained that 25 per cent of their productive capacity was idle.
    • And that’s why their investment rate had never been this low, in the 21st century at least.

    2. Borrowing money and issues with it

    • Even if some privatisation helps India financially, it seems that the country will need to borrow money.
    • External borrowing, however, is problematic. There are three issues with external borrowing-
    • 1) The only way governments pay back external borrowings is by wisely using borrowed capital to drive high GDP growth and generating revenues.
    • Which is unlikely to happen any time soon as a recession is round the corner.
    • 2) The rupee is at its lowest level compared to the US dollar.
    • Any more devaluation will only make it harder for the government to pay back its debt.
    • Since external borrowings must be paid back in borrowed currency, exports and foreign reserves or gold reserves are generally the only two reliable options.
    • The third one being borrowing more to pay back the previous debts — a slippery slope to pay government debt.
    • However, India should account for the inevitable global slump in international demand and a consequent drop in its exports.
    • Other countries may also move towards “atmanirbharta” and over-regulate imports.
    • 3)  Indian industries are already a bit debt-laden.
    • Following factors compelled industries to resort to overseas borrowing-
    • i)The risk in the banking sector, tight liquidity in debt markets,
    • ii) Comparatively lower international borrowing rates
    • iii) The RBI’s ECB rationalising measures.
    • More overseas borrowing, combined with the industry’s high debt status, could lead to rating agencies downgrading India’s investment prospects — deterring foreign investments in the process.

    3. Foreign reserves and other options

    • On the positive side, India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs.
    • The rest may have to come from privatisation, taxation, loans and more international aid.
    • Already, India is receiving more funds from the World Bank, the ADB and the Japanese ODA.
    • India may help others, but it needs aid too.

    Consider the question- “The government had to declare the relief and stimulus package in the wake of corona crisis. This expenditure leads to budgetary gaps. What are the options with the government to close this gap? Examine the issues associated with these options.”

    Conclusion

    The government must weigh each option with due consideration and explore all the possible avenues. Options like privatisation or borrowing must be exercised with caution. As these decisions could have severe consequences for the economy in the future.

     

     

     

     

     

     

     

  • Terrorism and its ideologies

    Pakistan is a unique country in the sense that it is both a victim and the perpetrator of terrorism. This article explains the situations which made Pakistan home to the terrorism. So, why some terrorist organisations turned against Pakistan? What are the ideologies followed by various terrorist organisation and how it makes a difference in their functioning? Read to know…

    Terrorism paradox of Pakistan: Both Victim and perpetrator

    • This Terrorism paradox can be traced to the deliberate policy of the Pakistani state to create and foster terrorist groups in order to engage in low-intensity warfare with its neighbours.
    • Pakistan first operationalised this strategy in regard to Afghanistan in 1973.
    • And intensified it with the cooperation of the U.S. and Saudi Arabia after the Marxist coup of 1978 after which USSR entered Afghanistan.

    Soviet withdrawal and rise in insurgency in Kashmir

    • The Soviet withdrawal in 1989 left the Pakistani military with a large surplus of Islamist fighters that it had trained and armed.
    • Islamabad decided to use this “asset” to intensify the insurgency in the Kashmir Valley.

    Radicalisation of Pakistani population

    • The decade-long Afghan “jihad” in Afghanistan had also radicalised a substantial segment of the Pakistani population.
    • Radicalisation was intense in the North-West Frontier Province and Punjab.
    • Sectarian divisions were also on the rise not only between Sunnis and Shias but also among various Sunni sects.
    • The division was intense between two Sunni sects-the puritanical Deobandis and the more syncretic and Sufi-oriented Barelvis.
    • In the process, a number of homegrown terrorist groups emerged that the Pakistan Army co-opted for its use in Kashmir and the rest of India.
    • But, it soon became clear that Pakistan had created a set of Frankenstein’s monsters some of whom turned against their creator.
    • The Musharraf government, under American pressure, decided to collaborate with the latter in the overthrow of the Taliban regime in Afghanistan.
    • This resulted in some of the terrorist organisation turning against Pakistan.

    Monsters who don’t spare even its creator

    • The Tehreek-e-Taliban Pakistan (TTP), which has ideological affinity with the Afghan Taliban.
    • The TTP and its affiliates have fought pitched battles with the Pakistan Army in the Federally-Administered Tribal Areas (FATA) and parts of the NWFP.
    • Also, the Jaish-e-Mohammad (JeM) has not hesitated to launch terrorist attacks on targets within Pakistan as well, especially against the Shias and Sufi shrines.

    Did all terrorist organisation turn against Pakistan?

    • No!
    • Consider the case of ‘loyalist’ LeT.
    • Lashkar-e-Taiba (LeT), is a classic example of a “loyalist” terrorist organisation that has played by the rules set by the Pakistani military.
    • It only launches attacks on targets outside Pakistan, primarily in India.
    • As the evidence in the case of the Mumbai carnage of 2008 clearly indicates LeT operations are coordinated with the Inter-Services Intelligence (ISI).
    • ISI provides it with intelligence and logistical support in addition to identifying specific targets.
    • This is why the LeT and its front organisations have continued to receive the military’s patronage and unstinting support.
    • Consequently, its leader, Hafiz Saeed, was until recently provided protection by the Pakistani state.

    Ideological differences

    • Both the LeT and the Jaish-e-Mohammed (JeM) have been engaged in attacks on Indian targets identified by Pakistan’s ISI.
    • The difference between LeT and JeM lies in the fact that while the LeT is more pragmatic and less ideological.
    • The JeM is highly ideological and sectarian.
    • JeM draws its ideological inspiration from a very extreme form of Deobandi puritanism.
    • That extreme form considers all those who do not believe in its philosophy beyond the pale of Islam.
    • For many JeM diehards, these include not only Shias and Barelvis but also the Pakistani state and the Pakistani military.
    • LeT on the other hand does not consider Muslims of different theological orientations as non-believers and therefore legitimate targets of attack.
    • This relatively “liberal” interpretation is related to the fact that LeT draws its ideological inspiration from the sect called the Ahl-e-Hadis, which composes only a small proportion of Pakistan’s Muslim population and cannot afford to engage in sectarian conflict.
    • Moreover, it draws its membership from different Muslim sects including the Sufi-oriented Barelvis and the puritanical Deobandis.
    • Both these factors drive LeT toward greater tolerance in sectarian terms and to eschew intra-Islamic theological battles.
    • Its primary goals are political; above all, driving India out of Kashmir.
    • This jells well with the objectives of the Pakistani military and makes LeT and Hafiz Saeed, favourites of the Pakistani establishment.

    Consider the question asked by UPSC in 2017-“The scourge of terrorism is a grave challenge to national security. What solution do you suggest to curb this growing menace? What are the major sources of terrorist funding?

    Conclusion

    The fact that using terrorist outfits for state objectives is a highly risky business whose blowback cannot be predicted and can have very negative consequences for the stability of the state itself.

     

  • Proposed amendments could harm DISCOMs

    Despite several policy measures, DISCOMs continue to suffer from various issues. This article focuses on the comprehensive proposal to amend the Electricity Act 2003. But here’s a catch, we will be discussing some issues with proposed amendment. Let’s dive into our DISCOMs analysis.

    Two-part tariff policy

    • At the core of DISCOM woes is the two-part tariff policy.
    • Two-part tariff policy was mandated by the Ministry of Power in the 1990s at the behest of the World Bank.
    • As more private developers came forward to invest in generation, DISCOMs were required to sign long-term power purchase agreements (PPA).
    • Under PPA, DISCOMs were committed to pay-  1) a fixed cost to the power generator, irrespective of whether the State draws the power or not, 2) a variable charge for fuel when it does.

    How Over-optimistic projection led to losses?

    • The PPAs signed by DISCOMs were based on over-optimistic projection of power demand estimated by the Central Electricity Authority (CEA).
    •  The 18th Electric Power Survey (EPS) overestimated peak electricity demand for 2019-2020 by 70 GW.
    • The 19th EPS published in 2017, by 25 GW, both pre-Covid 19.
    • Thus, DISCOMs were locked into long-term contracts, ended up servicing perpetual fixed costs for power not drawn.
    • Due to the CEA’s overestimates, the all-India plant load factor of coal power plants is at an abysmal 56% even before COVID-19.
    • This means that coal power plants are generating electricity only 56% of what maximum these power plants are able to generate.

    Renewable energy factor

    • Renewable impacted the power sector in the following 3 ways-
    • 1) From 2010, solar and wind power plants were declared as “must-run”.
    • This required DISCOMs to absorb all renewable power as long as there was sun or wind, in excess of mandatory renewable purchase obligations.
    • This means backing down thermal generation to accommodate all available green power.
    • This resulted in further idle fixed costs payable on account of two-part tariff PPAs.
    • 2)  Power demand peaks after sunset.
    • In the absence of viable storage, every megawatt of renewable power requires twice as much spinning reserves to keep lights on after sunset.
    • DISCOMs, especially in the southern region, have had to integrate large volumes of infirm power, mostly from solar and wind energy plants.
    • These renewable energy plants enjoy must-run status irrespective of their high tariffs.
    • The tariff is  ₹5/kwh in Karnataka and ₹6/kwh in Tamil Nadu for solar power.
    • All this even as the demand growth envisaged in the 18th EPS failed to materialise.
    • 3) In 2015 the Centre announced an ambitious target of 175 gigawatts of renewable power by 2022.
    • This followed with a slew of concessions to renewable energy developers, and aggravating the burden of DISCOMs.
    • Incidentally, China benefited by as much as $13 billion in the last five years from India’s solar panel imports.

    So, what are the proposals in the Electricity Act-2020?

    1. Sub-franchisees and  issues with it

    • The amendment proposes sub-franchisees, presumably private, in an attempt to usher in markets through the back door.
    • Issue:  Private sub-franchisees are likely to cherry-pick the more profitable segments of the DISCOM’s jurisdiction.
    • The Electricity Bill 2020 containing the proposed amendments is silent on whether a private sub-franchisee would be required to buy the expensive power from the DISCOM or procure cheaper power directly from power exchanges.
    • If it is the first, the gains from the move are doubtful since the room for efficiency improvements is rather restricted in the already profitable regions attractive to sub-franchisees.
    • If it is the second, DISCOMs will then be saddled with costly power purchase from locked-in PPAs and fewer profitable areas from which to recover it.

    2. Concession to renewable

    • The amendment proposes even greater concessions to renewable power developers.
    • This would have a cascading impact on idling fixed charges, impacting the viability of DISCOMs even more.

    3. Elimination of cross-subsidies

    • The most controversial amendment proposed, seeks to eliminate in one stroke, the cross-subsidies in retail power tariff.
    • This means each consumer category would be charged what it costs to service that category.
    • Rural consumers requiring long lines and numerous step-down transformers and the attendant higher line losses will pay the steepest tariffs.
    • The proposed amendments envisage that State governments will directly subsidise whichever category they want to, through direct benefit transfers.
    • Cross-subsidy is a fact of life in even private industries, soap, newspapers, or even utilities such as telecom.
    • But eliminating them in one stroke is bound to be ruinous to State finances.
    • There are also myriad problems with Direct Benefit Transfer.
    • This proposal is practically infeasible; if forcibly implemented, it will lead to chaos.

    4. Selection of the State regulator

    • State regulators will henceforth be appointed by a central selection committee.
    • The composition of which inspires little confidence in its objectivity.
    • This could result in jeopardising not only regulatory autonomy and independence but also the concurrent status of the electricity sector.

    5. Electricity Contract Enforcement Authority

    • Its members and chairman will also be selected by the same selection committee referred to above.
    • The power to adjudicate upon disputes relating to contracts will be taken away from State Electricity Regulatory Commissions and vested in this new authority.
    • This is being done ostensibly to protect and foster the sanctity of contracts.
    • This is also to ensure that States saddled with high-priced PPAs and idling fixed costs, yet forced to keep increasing the share of renewables in their basket, have no room for manoeuvre.

    Consider the question “Despite various policy interventions, DISCOMs continue to suffer from financial woes. Analyse the reasons for their woes. Examine the proposals in the Electricity Act (Amendment) Bill 2020.”

    Conclusion

    Beyond a doubt, the Electricity sector requires change but we must try to bring holistic and participatory approach to find solutions.

    Back2Basics: Electricity Act 2003

    • The act covers major issues involving generation, distribution, transmission and trading in power.
    • Before Electricity Act, 2003, the Indian Electricity sector was guided by The Indian Electricity Act, 1910 and The Electricity (Supply) Act, 1948 and the Electricity Regulatory Commission Act, 1998.
    • The Electricity Act 2003 consolidates the position for existing laws and aims to provide for measures conducive to the development of electricity industry in the country.
    • The act attempted to address certain issues that have slowed down the reform process in the country and consequently had generated new hopes for the electricity industry.

     

  • Unanimity at WHO

    WHO has been in news recently for all the wrong reasons. This article focuses on wide-ranging support for the resolution calling for the inquiry into the origin of the novel coronavirus. With this resolution, WHO has a chance to redeem its credibility. Until recently China seemed to be in the control of the global narrative on the pandemic. And now we witness near-unanimous support to this resolution.

    Inquiry of the origin of the virus

    • International attention is riveted on the question of an inquiry into the origin of the corona-virus.
    • The call for an international investigation was first voiced formally by the Australian prime minister, Scott Morrison.
    • Beijing reacted with open threats of trade sanctions. But Canberra pushed the investigation ahead.
    • It is working with the European Union to promote a resolution at this week’s World Health Assembly (WHA), which brings ministers from all the member states of the WHO.
    • The resolution also calls for an “impartial, independent and comprehensive” evaluation into the international response to the corona pandemic.
    • The WHA has 194 members.
    • So, the entire international community — has a voice in addressing the key issues raised by the corona crisis by debating the resolution.

    Wide support to the resolution

    • According to media reports, the resolution is close to gaining support from two-thirds of the WHA’s 194 members.
    • Australia and the EU hope to have the resolution approved unanimously.
    • Since the resolution does not mention China by name, Canberra and Brussels hope Beijing will not oppose the resolution.
    • They also hope to persuade Washington, which wanted tougher language including references to China, to endorse the resolution.
    • Whatever the fate of the resolution, the wide-ranging support it has got amidst the vocal Chinese opposition is impressive.

    So, how effective is the resolution?

    • To be sure, the resolution was watered down to get the maximum possible backing at the WHO.
    • But it is said to have enough teeth to dig deep into the issues raised by the corona crisis.

    How China controlled the corona narrative until now?

    • A few weeks ago, it seemed China and the Director-General of WHO, had full control over the corona narrative on the issues involved.
    • The Trump administration’s aggressive questioning of China’s role and WHO DG’s role had not gone down well.
    • Nor did the US threat to cut off funding for the WHO.
    • Within the US itself, opposition Democrats and the foreign policy establishment has attacked Trump for trying to “divert attention”.
    • China’s success in quickly getting things under control at home and its expansive mask diplomacy seemed to give Beijing an upper hand at the WHO.
    • China’s growing clout in the developing world and bilateral economic levers against major developed countries, including in Europe, appeared to insure against any serious international questioning of its handling of the virus.
    • What factors played the role in the passing of the resolution?
    • 1) The public pressure from the US concentrated minds at the WHO.
    • 2) Some quiet diplomacy by middle powers, including India, appears to have created the political basis for learning the right lessons from the pandemic and preventing similar eruptions in the future.

    Is it a setback for China?

    • Some observers see a unanimous approval of the resolution as a diplomatic setback for Beijing.
    • Since limiting the demands for an external inquiry has been a major political priority for Beijing.
    • There are similar demands at home for an investigation into a crisis that led to an enormous loss of life in China and punishing those responsible.
    • The leadership in Beijing is not comfortable with these demands.

    Issues with the WHO that India must pay attention to

    1. International norms for early detection

    • There is the need to develop new international norms that will increase the obligations of states and the powers of the WHO in facilitating early detection and notification of pandemics.
    • This will involve finding ways to bridge the contested notions of state sovereignty and collective security.

    2. Funding of the WHO

    • If you have a club that depends on donations rather than membership fees, donors will inevitably set the agenda.
    • Over the decades, the WHO has become ever more reliant on voluntary contributions from governments and corporations rather than assessed contributions from the member states.
    • This is going to leave the WHO rather vulnerable to pressures.

    3. WHO’s focus should be on fewer objectives

    • India must also ask if the WHO is trying to do too many things.
    • The WHO’s initial successes came when it focused on a few objectives like combatting malaria and the elimination of smallpox.
    • A limited agenda might also make the WHO a more effective organisation.

    Way forward for India

    • India knows it is one thing to pass to a resolution and entirely another to compel a great power like China to comply.
    • Any current effort to understand the origin and spread of the COVID-19 virus and a long-term strategy to deal with future pandemics must necessarily involve more than a measure of Chinese cooperation.
    • Sustained engagement with Beijing, then, is as important for Delhi as deeper cooperation with Washington and the “Quad plus” nations.
    • India should also focus on more intensive engagement with the non-aligned nations in promoting a new global regime on preventing and managing pandemics.

    Consider the question “Corona pandemic and its handling by the WHO resulted in the loss of its credibility. But the collective efforts of the nations which resulted in the passage of the resolution for inquiry of the origin of the virus, could soften the blow the credibility of WHO had suffered. Comment.”

    Conclusion

    For India, the widespread support for the resolution is a vindication of its early call for transparency and accountability in the responses of China and the WHO to the pandemic. India should take initiative to ensure the reforms at WHO and the formation of global order for preventing and managing the global order.

  • Atmanirbhar Abhiyan Package

    The article examines the various aspects of the recently announced Atmanirbhar Bharat Abhiyaan (ANBA). But before digging deeper into the ANBA the author ruminates over India’s growth (GDP) story. Reasons for India’s failure to deliver on the economic empowerment are also examined. In the end, the relation between the free economies and the welfare states is examined.

    The good and the bad of India’s GDP story

    • India crossed the UK two years ago, France last year, and will cross Germany and Japan in the next five years. (In terms of nominal GDP)
    • That will leave only America and China ahead of us.
    • But India’s per capita GDP story is on a different track.
    • We once equalled Korea (1960) and China (1997) but today there are 138 countries ahead of us.
    • The COVID-19 lockdown and the stories of pain inflicted on migrant workers exposes how per capita GDP is more important for our citizens than total GDP.

    A take on Economic empowerment

    • Ramchandra Guha, in his book- Gandhi: The Years that Changed India, suggests that while other patriots had used Swaraj to signify national independence, Gandhiji made India aware of its true or original meaning, Swa-Raj, or self rule- both political and economic.
    • Our collective political Swaraj hasn’t always translated into individual economic Swa-Raj because of inadequate formalisation, industrialisation, urbanisation, financialisation, and skilling.

    Atmanirbhar Bharat Abhiyaan(ANBA) – A step towards Swaraj

    • The Atmanirbhar Bharat Abhiyaan (ANBA) policy announcements are important moves in meeting Gandhiji’s vision of individual self-reliance and recognising poverty as the worst form of violence.
    • ANBA targets avoiding unemployment becoming hunger and illiquidity becoming insolvency.
    • The agriculture package of Rs 1.63 lakh crore included farm-gate and aggregation point infrastructure, fisheries, animal husbandries, and others like animal vaccination, micro food enterprises.
    • The non-bank liquidity package of Rs 5.94 lakh crore included MSMEs, NBFCs, MFIs, housing finance companies, power discoms, and others (PF, tax relief).
    • The migrant and farmer package of Rs 3.16 lakh crore included concessional credit via kisan credit card, farmer working capital, affordable housing, and others (food, street vendors, microloans).
    • The welfare and health package of Rs 1.85 lakh crore included women and pensioner benefits, MNREGA, emergency health response, and others like food, financial security.
    • RBI’s liquidity measures of Rs 5.24 lakh crore included two phases of targeted long-term repo operations, CRR cut, marginal standing facility limit increase, refinancing facilities, and mutual fund special liquidity facility.
    • The reform to the Essential Commodities Act, APMCs and contract farming directly impact prosperity as 45 per cent of our agricultural labour force generates only 14 per cent of GDP.

    How ANBA maintained fiscal health?

    • ANBA is also important for what it is not. It’s not fiscal profligacy-i.e. the government is spending with due care for fiscal deficit figures.
    • Total spending may be higher if the loans for which government has stated to stand as a guarantor turns NPAs (for ex. MSMEs loans).
    • But for now, it marginally raises our already difficult fiscal deficit.
    • It’s not an institutional assault — RBI’s role in ANBA keeps it away from the political minefield that the US Federal Reserve has entered.
    • The US Fed is buying the bonds sold by corporations (i.e. Fed is spending itself) while the RBI has only lent the money to banks.
    • There is a recognition that RBI has lending powers, not spending powers.
    • It’s not a mindless public sector expansion: The end of monopolies (public sector monopoly) and new public-private partnership opportunities signal pragmatism and efficiency targeting.
    • It’s not waiting for potential COVID upsides: it makes us worthy if risky global just-in-time supply chains get replaced by resilient just-in-case diversification.
    • It’s not shutting off India from the world i.e. Atmanirbhar is not isolationist policy.
    • It creates new openness to ideas, investment, and trade.

    What is on agenda for ANBA 2.0?

    • The unfinished agenda for ANBA 2.0 includes following-
    • Civil service reform-the steel frame has become a steel cage.
    • Government reform-Delhi doesn’t need 57 ministries and 250 people with Secretary rank.
    • Financial reform-sustainably raising credit to GDP ratio from 50 per cent to 100 per cent.
    • Urban reform-having 100 cities with more than a million people rather than 52.
    • Education reform-our current regulator confuses university buildings with building universities.
    • Skill reform-our apprentice regulations are holding back employers and universities.
    • Labour reform-our capital is handicapped without labour and labour is handicapped without capital.

    Welfare state and free economies

    • A modern state is a welfare state with formal private jobs.
    • The idealisation of Scandinavian social democracies forgets that their dense social security nets are underwritten by remarkably free economies.
    • The World Bank Ease of Doing Business scale ranks Denmark third, Norway seventh, and Sweden 12th of 190 countries.
    • Despite — or thanks to — America’s capitalism, its central government spends 37 per cent of GDP while India’s spends 14 per cent.
    • And its ferocious fiscal pandemic response involves $3 trillion government borrowing in the next three months.
    • People suggest the US can sustain its welfare state because it has the world’s reserve currency.
    • But America can afford its welfare state because of the productivity of its cities, companies and citizens. Consider the following-
    • New York’s GDP equals Russia with 6 per cent of the people and 0.00005 per cent of the land.
    • The $4.5 trillion revenue of its 25 largest companies is more than Germany’s GDP.
    • Its per capita income is $55,000.
    • India’s welfare state does not lack intentions but lacks resources.
    • No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.
    • This is what ANBA hopes to achieve.

    Consider the question “Far from being an isolationist, Atmanirbhar Bharat Abhiyan seeks to make India a welfare state with more productive cities, firms and citizens. Comment.”

    Conclusion

    India missed the manufacturing export train that China boarded but another may be coming.  Policy reform is not the solving of a sum but the painting of a picture — 90 days after the lockdown ends, we need ANBA 2.0 to finish the job.

    Back2Basics: Just in time inventory

    • The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.
    • Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.
    • This method requires producers to forecast demand accurately.

    Just in case inventory

    • Just in case (JIC) is an inventory strategy in which companies keep large inventories on hand.
    • This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.
    • The company that utilizes this strategy likely has a hard time predicting consumer demand or experiences large surges in demand at unpredictable times.
    • A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold-out inventory.