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Type: Op-ed

  • Ease legal constraints on fiscal expenditure

    The article discusses the two legal provisions that need to be changed in order to provide a fiscal stimulus of the size that could save the economy from collapse. Other major concern after the package would be the inflationary pressure resulting from government spending.

    The urgency of the fiscal package by the Centre

    • The longer the Centre dithers over a big-bang fiscal package to counter the adverse economic fallout of covid-19, the closer it risks pushing India’s economy to the precipice of disaster.
    • The nationwide lockdown has more or less paralysed commercial activity, our exit path looks dreadfully long-winded, and the distress being seen right now could just be an early sign of what is to come.
    • The suffering of citizens will likely expand once the shutdown’s second-order effects, which operate with a lag, begin to kick in.
    • Estimates of ₹10 trillion needed by way of fiscal relief, once seen as too much by some, could yet turn out to be too little.
    • Either way, preparatory work in terms of legal enablers should be done alongside the arithmetic

    Legal constraints in the way of the stimulus programme

    • There are two major constraints that we need to be relieved of—if only temporarily—for a stimulus programme to take shape.
    • The first is the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.
    • And the second is the amendment done in 2016 of the Reserve Bank of India Act to give legislative cover to a flexible inflation-targeting framework that set our central bank the task of keeping India’s retail price index within a certain band.
    • Both of these were aimed at long-term economic stability but made no allowance for a robust fiscal response to the kind of crisis we now face.
    • It would be best if these were tweaked appropriately by a special session of Parliament.
    • If not, then ordinances should be issued to suspend specific restrictions for a while.

    Projections of fiscal deficit

    • Under the budget presented in February, the Centre’s fiscal deficit for 2020-21 was projected at 3.5% of gross domestic product (GDP).
    • This included a half percentage point deviation from the FRBM glide path allowed by the law’s contingency clause.
    • Total expenditure was placed at a little over ₹30.4 trillion, and receipts at ₹22.4 trillion-plus.
    • With tax revenues and asset-sale realizations expected to fall short, the fiscal gap could widen to about ₹10 trillion even without any extra spending.
    • Drastic cuts in expenditure could save some money, but even if a heavy axe is wielded on expenses, the government’s deficit this year would have to exceed twice the legal limit for a stimulus that saves the economy from collapse.
    • If this turns out to be a year of negative growth, as some fear, effecting a revival will only get harder.
    • For pre-emptive action, the government should use its parliamentary clout to permit a limitless deficit for 2020-21.

    A question based on the limits placed by the FRBM Act and the changes brought by the amendment to the RBI Act which mandated RBI with managing the inflation could be asked by the UPSC.

    Prospects of inflationary pressure and RBI’s mandate

    • An effort to spend our way out of an economic morass could prove inflationary if too much cash ends up chasing too few goods and services.
    • As we have undergone both demand and supply shocks, opinion is divided on whether prices will go haywire.
    • This risk would depend on how much cash gets pumped around at what point in time and the pace at which supplies are restored.
    • In other words, the inflation outlook is highly uncertain.
    • But should prices threaten to rise, it would be counterproductive of the central bank to tamp them down by tightening credit.
    • As of now, RBI’s mandate is to keep inflation at 4%, with a tolerance band of 2% on either side.
    • This target is valid till March 2021, but needs to be reviewed right away to let the central bank focus on growth.
    • The acceptable range could be widened and the time limit to achieve the goal lengthened as a special reprieve.

    Conclusion

    A few tweaks of the law must go alongside calculations of a stimulus package designed to relieve economic distress. The government should act on these quickly to save the day.

  • Common problems of South Asia call for collective efforts against Covid-19

    The article discusses the various common features shared by the South Asians countries. One of them is the poor public healthcare infrastructure. So, the pandemic offers an opportunity to make the required policy changes. It also offers the opportunity for cooperation among the regional countries in dealing with Covid-19. These issues are discussed in the article.

    South Asian countries: Common features, common problems

    • South Asia, one of the world’s most populous regions, is also affected by the COVID-19 pandemic.
    • Both Karachi and Mumbai, among the world’s most densely populated cities, where we live and work, are being overwhelmed by cases.
    • While the death rate in these places may not be as alarming as in Europe and the U.S., the collateral damage of the lockdown is taking its own toll.
    • Common features of South Asia: While there are many differences amongst the countries of the region, there are also common features which impact the health of its people, some of them a result of our shared cultural and geopolitical history.
    • The collective experience of dealing with COVID-19 may provide important lessons, which transcend national boundaries.

    Poor healthcare system: a common problem

    • South Asian countries have invested very little in health.
    • This is reflected in our abysmally low health parameters.
    • It is interesting that Britain, which formulated our health policies before independence, went on to form one of the world’s strongest public health systems, the National Health Service.
    • Whereas its South Asian colonies chose to stray from that path.
    • This resulted in a dysfunctional public healthcare
    • Governments have also relinquished what ought to have been their primary duty, of health care provision, to the private sector.
    • Having become an industry, the focus of healthcare in the private sector is on profit rather than on people’s needs.
    • High treatment costs in private sector: Whilst privatisation has brought in advanced technology and expertise, the high costs of treatment in the private sector have resulted in impoverishment as most of the population has no insurance or third-party coverage, and pays out of pocket.
    • The sector has also been poorly regulated.
    • The result is that it is responsible for several excesses in its quest for profit.

    Other common features of the region

    • Hunger, malnutrition, poor sanitation and large-scale migration are features of this region.
    • Existing infectious diseases like TB, HIV and malaria have been worsened by emerging ones like dengue, chikungunya, healthcare-associated infections and antimicrobial resistance.
    • The region is also an epicentre of an epidemic of lifestyle diseases.
    • Conflicts and expenditure on defence: Constant internal and external conflicts in South Asia not only consume a large portion of national budgets but also divert the attention of the public and policymakers from healthcare needs.
    • Defence budgets take the largest share of national budgets, and obviously adversely impact social sector spending.
    • Underfunded public health is going to hinder region’s capacity to fight COVID-19.
    • The central role of religion: Religion continues to occupy a central space in the society and politics of the region.
    • Though it offers succour to many, religious dogma can impact health policy and health-seeking behaviour.
    • The refusal of devotees across Pakistan to avoid religious congregations during Ramadan despite the government’s orders has significantly fed the community spread of the virus.

    Opportunity for policy changes to address healthcare problems

    • COVID-19 has forced us to seriously reflect on our healthcare system.
    • This is welcome if it results in policy change.
    • Healthcare professionals and bodies must seize this opportunity to push our respective governments to address it seriously and not just as a pre-election strategy.
    • A long-term commitment to universal health care, with not only a national but also a regional and global focus, is needed.

    A question on this theme could be asked by the UPSC, for instance, “South Asian countries share the common problem of poor public healthcare infrastructure, which increases their vulnerability to the pandemic. But corona pandemic also offers an opportunity to improve the shortcoming in the health infrastructure and cooperation among the SAARC countries. Comment.”

    Regional strategy and cooperation needed

    • The SAARC heads of state have already offered help to one another.
    • A regional strategy has a better chance of controlling the pandemic than isolated national-level efforts.
    • The pooling of resources and sharing data may not only help flatten the curve but perhaps even develop into longer-term efforts towards effective treatment.
    • It is being speculated that our populations are behaving differently; that the BCG vaccine may be a protective influence.
    • Joint research into such areas can be a unifying point for SAARC.

    Conclusion

    It is in our collective interest to look at health security and not just national security. By the accident of their birth, South Asians have endured a lot. They merit better.

     

  • It will take fiscal boldness now to relieve financial distress

    The article discusses the fiscal response of the government to deal with the corona crisis. Fiscal response to the 2008 financial crisis was higher in terms of GDP percentage. Also, a comparison with emerging peer economic indicates that India might be running the tighter fiscal policy in the time of crisis. The article suggests higher spending by going beyond the traditional fiscal space.

    A possible explanation for moderate fiscal response by the government

    • The Indian government has till now come up with an insipid fiscal response to the ongoing economic crisis.
    • Long battle: One view is that the government does not want to fire all its bullets in what threatens to be a long battle. It wants to time its interventions.
    • Weak public finances: The other possible explanation for this fiscal timidity is that India has entered this crisis with weak public finances.

    Comparison with finances at the 2008 financial crisis

    • The combined official fiscal deficit of the Union plus state governments was at its lowest level in many decades.
    • The economic boom of the preceding four years had led to higher tax collections pouring into the treasury.
    • The massive increase in spending announced in the budget of February 2008 was with an eye on the national election scheduled a year later, rather than in anticipation of a coming storm.
    • Then followed the second wave of fiscal expansion after the North Atlantic financial crisis hit Indian shores seven months later.
    • Back then, India’s effective fiscal stimulus over two years was a substantial 4.3% of gross domestic product (GDP).
    • In 2020, the crisis-driven spending plan announced by the government so far is less than 1% of GDP.
    • There could yet be a big fiscal push in the coming days.

    Tighter fiscal policy in crisis compared to other emerging economies

    • Some of the budget estimates released a few days ago by the International Monetary Fund are telling.
    • In 2018, the total fiscal deficit of the Indian government as a proportion of GDP was 2.4 percentage points higher than the average for Asian emerging markets.
    • India is expected to end 2020 with a total fiscal deficit that will be 2.5 percentage points lower than Asia’s average.
    • In other words, India ran a looser fiscal policy compared to the rest of Asia in normal times, but is likely to run a tighter fiscal policy than its regional peers in a crisis year.
    • Something similar can be seen in estimates for public debt.
    • Asian public debt as a proportion of GDP is expected to go up by nine percentage points in 2020.
    • The comparable figure for India is 2.9 percentage points. (These estimates are being cited with full knowledge that forecasting models break down during extreme events.)

    Funding extra expenditure through money creation

    • Lack of traditional fiscal space should not hold the government back in a crisis situation.
    • There are many options outside the consensus macro playbook.
    • Money creation: A commonly cited option right now is funding extra expenditure through money creation rather than borrowing.
    • The size of the Reserve Bank of India (RBI) balance sheet as a percentage of nominal GDP is close to its 35-year average.
    • There is scope for printing more money right now.
    • Lower inflationary pressure: And the inflationary consequences are likely to be muted because of the lower velocity of money amid a demand collapse.
    • Public finances in the future: Getting public finances back on track is a battle that lies in the future.
    • A rapid recovery in economic activity would be the best solution.
    • Otherwise, history tells us that countries have brought down their public debt numbers through some combination of financial repression, austerity, higher taxes and inflation.
    • Some element of capital controls could also be back in play.

    Need for increasing discretionary government spending

    • The collapse in tax revenues as the economy is shut down will automatically lead to a rise in India’s fiscal deficit.
    • However, there is a need for an increase in discretionary government spending as well.
    • Economists have shown that spending multipliers are higher than tax multipliers in India.
    • In other words, the increase in economic output for every unit increase in the fiscal deficit is higher when the government spends rather than changes tax rates.
    • State’s spending Vs. Union spending: Spending by states gives more bang for the buck than equivalent spending by the Union government.

    “Below the line measures” to support the economy

    • Also, there are options other than direct spending to support the economy.
    • Countries such as Germany, the UK, Italy, France and South Korea have complemented traditional fiscal expansions with “below the line” measures such as loans and guarantees to companies.
    • In an excellent recent study, analysts estimate that more than half of Indian corporate balances sheets will be unable to meet expenses with zero revenues.
    • They are careful to point out that their analysis is based on extreme assumptions that there is no fall in their wage bills, no revenues, and no access to fresh credit.

    One of the common suggestions we have been coming across is the spending by the government by printing money. In this article, the second important suggestion is below the line measures. Take note of these measures and options available with the government.

    Way forward

    • The poor need income support for their very survival. That should be at the top of any democratic government’s list of
    • However, protecting Indian companies from a financial collapse also matters, because otherwise, the economy will see a reduction in its capital stock, which will be needed both for a rapid recovery as well as job creation once the worst is over.
    • There are contagion risks in financial markets as well, going by what has happened to some mutual funds that were invested in bonds.

    Conclusion

    These are extraordinary times that require extraordinary measures. The danger from a delayed fiscal programme is that hysteresis may set in, as companies run out of money and supply chains are broken, damaging our economic prospects in the medium term.

     

     

  • Sharp fall in oil prices is opportunity for India to increase stockpile

    This article highlights the opportunity that the sharp drop in the oil prices presents to India. It also highlights several issues with India’s strategic petroleum reserves and suggests ways to deal with them. We have covered an article from livemint on the same topic in the past week.

    Negative price in the international market for WTI crude oil

    • Oil prices continue to decline globally, with crude hitting multi-decade lows, as global demand evaporates.
    • Earlier last week, in unprecedented price action, the near-month contract for West Texas Intermediate (WTI) sweet crude oil dropped to -$37.63 a bbl.
    • A negative price has never before been registered for a major global crude oil benchmark.
    • The extreme price action is a signal that there is a global oil glut with few places to store oil.
    • Global oil markets have been severely disrupted.
    • While WTI does not feature in India’s basket, Brent Crude Oil, which does, is trading around $25 a barrel, the lowest in 18 years.

    Price of oil: The silver lining of the future recovery

    • Even as India suffers from a lockdown, a silver lining for future recovery and reconstruction is the price of oil.
    • Given India’s growth aspirations and lack of self-sustaining oil production, a sharp reduction in oil prices is a bonanza.
    • Normally, reduced oil prices would translate into surplus for the consumers and a fiscal bonus for the government through increased tax collections.
    • However, given that the demand for petrol has slumped, those gains will not accrue right away.
    • Opportunity for India: India should look at this as an opportunity to strengthen its energy security by buying oil and filling up our Strategic Petroleum Reserves (SPR).
    • Considering that India was the third-largest consumer of energy in the world, as well as the third-largest importer of oil in 2018, we are particularly vulnerable to oil price fluctuations.
    • The dramatic reduction in oil prices offers a once-in-a-generation opportunity for us to fill up our reserves in an extremely cost-effective way.

    India’s Strategic Petroleum Reserve (SPR) Programme

    • Currently, we do maintain an emergency stockpile of oil reserves: Under the existing Strategic Petroleum Reserves programme, India claims to have 87 days of reserves.
    • Out of this, refiners maintain 65 days of oil storage and the rest of the reserves are held in underground salt caverns maintained by Indian Strategic Petroleum Reserves Limited (ISPRL).
    • The existing and planned capacity for the underground reserves is 10 and 12 days of import cover for crude oil respectively.

    Following point highlights the importance and various issues with India’s Strategic Petroleum Reserves (SPR). SPR plays an important role in India’s energy security.  A question based on its role may be asked by the USPC “Assess the importance of Strategic Petroleum Reserves for India and what are the issues associated with that need to be improved?”

    Issues with the strategic reserves

    • First, capacity does not directly translate into utilisation, which is partly because oil is an expensive commodity most days of the year.
    • In 2019, the average closing price of a barrel of crude was $57.05.
    • In 2018, it was $64.90, and in 2017, U$50.84.
    • Of the existing 10 days of capacity, only about 50 per cent is utilised.
    • The second issue is with regard to the refinery holdings.
    • In India, the SPR arrangement between the oil refineries and the Union or state governments is not specified well, though most of the refineries that hold stock are publicly-owned companies.
    • In fact, a breakdown of which refineries hold SPR and in what form (crude or refined) or information about where they are located is not publicly available.

    Need for transparency in relation to SPR

    • The first step, therefore, should be to introduce transparency and accountability in relation to the SPR.
    • The procedures, protocols and facts about Indian SPR storage require greater public and parliamentary scrutiny, just like India’s other strategic reserves (for instance, foreign exchange).
    • For this, there should be timely and reliable dissemination of information.
    • Instead, it is now shrouded in secrecy.
    • The ambiguity surrounding mobilisation process: The lack of transparency around our SPR holdings is compounded by the ambiguity surrounding the mobilisation process.
    • SPR reserves are meant to be used in emergencies, where time is likely to be of the essence.
    • The SPR mobilisation process could be made more efficient by laying out designated roles for different agencies to avoid redundancies in times of crisis.
    • There should be role and process clarity regarding SPR mobilisation.
    • For instance, to begin with, there should be clarity on who (or which agency) can define an emergency and therefore order a mobilisation.

    Diversification of SPR

    • Further, in order to mitigate risks better, India should look to diversify its SPR holdings.
    • Diversification can be 1)Based on geographical location (storing oil either domestically or abroad), storage location (underground or overground) and 2) Product type (oil can be held in either crude or refined form).
    • Storage and transportation costs could be saved by diversifying geographically.
    • 3) Diversification could also be in the form of ownership — either publicly owned through ISPRL or by private oil companies, such as ADNOC of Abu Dhabi.
    • The private companies could fill up the SPR when prices are low and take advantage of price arbitrage.
    • This could achieve a degree of price stability and reduce the cost for India to buy such large quantities of oil.
    • The only requirement for this to work is to have a clear contract with the private companies about the mandatory minimum level of stock that they should preserve for use in emergency times.

    Storing oil abroad

    • With oil dirt-cheap, if we can purchase more than we can store in our existing facilities, why not go abroad for more storage space?
    • For instance, one option could be to operationalise, modernise, and add to the oil tanking facilities at Trincomalee in Sri Lanka.
    • Another opportunity would be to enter into a strategic partnership with Oman (Ras Markaz) for oil storage.
    • Partnership with Oman would also help India avoid the potential bottleneck of the straits of Hormuz.
    • Geopolitical risk factor: Since many of these places could potentially be vulnerable to geopolitical risks, only a small part of India’s overall SPR strategy should involve storing abroad.

    Conclusion

    Energy is and will remain vital to India’s aspirations for growth. The sharp fall in the price of oil presents an opportunity for the Union government to increase its SPR stockpile and achieve a degree of energy security.

  • New global order in post-Covid-19 world

    The article discusses the changes that the world will experience in the global order in the aftermath of Covid-19. The major changes will be on the economic and geopolitical front. Various changes are discussed in the article. We have read some article on the same topic and the basic theme is the same. Role of China and the US, failure of the international institutions are some of the common themes.

    Failure of international institutions

    • The existing international institutions such as the United Nations, the United Nations Security Council and the World Health Organization (WHO) are seen to have failed to measure up to the grave challenge posed by the pandemic.
    • The UN Security Council is under attack for being slow in dealing with a situation that appears, at least on the surface, far graver than any military threat in recent decades.
    • The WHO has been tarred with the charge of bias and of grossly underestimating the nature of the epidemic.
    • That prestigious global institution should have been singled out for attack at this time speaks volumes about the mood prevailing across the world.

    Economic shock

    • There are many other aspects of the COVID-19 crisis that will drastically impact the globe.
    • Negative growth: On the economic front, the World Bank has already predicted negative growth for most nations. India’s growth forecast for the current fiscal year has been put at 5% to 2.8%.
    • Contraction of the economy and the loss of millions of jobs across all segments will further complicate this situation.

    One of the most important factors that we realised in the corona crisis in the role of the state. Take note of this factor. A question can be asked on the role of the state, for ex. “The COVID-19 pandemic has brought into focus the important role of the state in our lives. comment.”

    The important role of the state in focus

    • What is likely to change even more dramatically are certain other aspects relating to political management and security. Both terms are set to gain new meanings.
    • The role of the state as an enforcer of public goodwill almost certainly become greatly enhanced.
    • The dominant imperative would be to not put limits on the role of the state even where the situation may not be as grave as the present one.
    • Many pieces of legislation of yesteryears that had been relegated to the archives — they were perceived to be anachronistic in a modern democratic set-up — may get a new lease of life.
    • Some pieces of legislation such as the Disaster Management Act already reflect this reality today.
    • Other pieces of legislation could follow in its wake.
    • This trend is already becoming evident to some extent across the world. Europe has shown a willingness to sacrifice personal liberties in favour of greater state control.
    • Post COVID-19, the world may have to pay a heavy price in terms of loss of liberty. An omnipotent state could well become a reality.

    Following are the changes in geo-economics and geo-politics that post-covid world would see.

    Role of China under scrutiny

    • Far-reaching changes can also be anticipated in the realm of geo-economics and geopolitics. The world needs to prepare for a sea change.
    • One nation, viz. China, is presently seeking to take advantage of and benefit from the problems faced by the rest of the world in the wake of the epidemic.
    • Negligence on the part of China: China remains totally unfazed by the stigma that the current world pandemic owes a great deal to its negligence.
    • More importantly, it is seeking to convert its ‘failure’ into a significant opportunity.
    • This is Sino-centrism at its best, or possibly its worst.
    • China now seeks to benefit from the fact of its ‘early recovery’.
    • It wants to take advantage of the travails of the rest of the world, by using its manufacturing capability to its geo-economic advantage.
    • Seeking geopolitical advantage: Simultaneously, it seeks to shift from being a Black Swan (responsible for the pandemic), to masquerade as a White one, by offering medical aid and other palliatives to several Asian and African countries to meet their current pandemic threat.
    • In turn, it seeks to gain a geopolitical advantage by this action.

    Hostile takeover bids by China

    • There are enough reports of China’s intentions to acquire financial assets and stakes in banks and companies across the world amid crisis.
    • Shares in HDFC: India seems to have woken up only recently to this threat after the Peoples’ Bank of China acquired a 1% stake in India’s HDFC.
    • Across the world, meanwhile, the clamour against China’s hostile takeover bids is becoming stronger.
    • Several countries apart from India, such as Australia and Germany, have begun to restrict Chinese foreign direct investment in companies and financial institutions in their countries.
    • These countries recognised the inherent danger of a possible Chinese hostile takeover of their critical assets.

    China taking advantage of RCEP and Belt and Road initiative

    • Restricting hostile takeovers may not be adequate to checkmate China.
    • It is poised to dominate the Regional Comprehensive Economic Partnership (RCEP).
    • Which will enable China to exploit market access across the Association of Southeast Asian Nations, East Asian nations, Australia and New Zealand.
    • Together with its Belt and Road Initiative, China is ostensibly preparing the way for a China-centric multilateral globalisation framework.

    The diminishing role of the US’s and Europe

    • The geopolitical fallout of this pandemic could be still more serious.
    • One distinct possibility is that COVID-19 would effectively put paid to the existing global order that has existed since the late 1940s.
    • The United States which is already being touted in some circles as a ‘failing’ state, will be compelled to cede ground.
    • Weakened economically and politically after COVID-19 has ravaged the nation, the U.S.’s capacity to play a critical role in world affairs is certain to diminish.
    • The main beneficiary of this geopolitical turnaround is likely to be China, a country that does not quite believe in playing by the rules of international conduct.
    • Weakened Europe: Europe, in the short and medium-term, will prove incapable of defining and defending its common interests, let alone having any influence in world affairs.
    • Role of Germany: Germany, which may still retain some of its present strength, is already turning insular.
    • Both France and the post-Brexit United Kingdom will be out of the reckoning as of now.

    Problems in West Asia and the possible role of Israel

    • In West Asia, both Saudi Arabia and Iran are set to face difficult times.
    • The oil price meltdown will aggravate an already difficult situation across the region.
    • There may be no victors, but Israel may be one country that is in a position to exploit this situation to its advantage.

    India: Economic and geopolitical challenges

    • In the meantime, the economic downturn greatly reduces India’s room for manoeuvre.
    • In South Asia, India faces the prospect of being isolated, with the Chinese juggernaut winning Beijing new friends and contacts across a region deeply impacted by the economic consequences of the COVID-19 pandemic.
    • Likewise, India’s leverage in West Asia — already greatly diminished — will suffer further.
    • With oil prices going down and the Indian expatriate community (who are among the hardest hit by this downturn) out on a limb.
    • Reduction in remittances: Many of the latter may seek repatriation back to the host country, substantially reducing the inflow of foreign funds to India from the region.

    A question based on the changes in the global order in the post-pandemic world could be asked by the UPSC, for ex- “In the post-Covid-19 world, we are experiencing several changes. What are the changes in the geo-politics that are likely to affect India’s interests?”

    Conclusion

    In the post-Covid-19 world, we are about to see many changes on the economic and geopolitical front. India should prepare itself for the emerging challenges on various fronts.

  • The universal delivery of food and cash transfers by the state amid Covid-19

    This focus of this article is on the universal delivery of food and cash transfer amid corona pandemic. There are some estimates of the cost of universal cash transfer and food delivery in the article and suggestion to ensure universal delivery.

    Universal food and cash delivery is needed

    • The immediate need for universal food and cash delivery is by now obvious and urgent.
    • Across the country, there are reports of people — migrant workers, local workers, peasants, pastoralists, fisherpeople, vendors, ragpickers, and the destitute — facing extreme hardship, even starvation, because their livelihoods have been extinguished by the lockdown.
    • These have created further an unprecedented humanitarian crisis, as millions of households with depleted savings have no way to access food and other basic necessities over the coming weeks.
    • The threat of infection from COVID-19 makes even harder their coping mechanisms.
    • In these dire circumstances, it is essential for the state to directly provide the basic means of survival to anyone who needs it.
    • This must be in both cash and kind. Food access is the most important.
    • But because of the closure of economic activity and the absence of any livelihood opportunity, this must be combined with cash transfers to tide over this period and the immediate aftermath.
    • Food transfers must be provided for at least six months, and cash transfers for at least three months, though these can be extended depending on the period of lockdown.
    • Because of the severity of the crisis and the high probability of widespread hunger and descent into poverty, these transfers must be universal, made available to every person who needs them, without relying on exclusionary criteria, existing lists or biometric identification.

    The points mentioned below give us the ideal of food-grain stocks with India. And there are also the estimates of how much would be required if we decide to go for universal delivery of food. The data given below is important from Mains perspective.

    How much will be the cost of universal food delivery?

    • Consider first free universal provisioning of 10 kg of grain (wheat or rice) per person per month.
    • This is likely to be availed of by at most around 80 per cent of the population.
    • With an estimated population of 1.3 billion, providing this for six months would require 62.4 million tonnes of grain.
    • This is a maximal estimate — the actual requirement would be lower.
    • Stocks with the FCI: The FCI is currently holding 77 million tonnes of foodgrain stocks, compared to buffer stock norms of 24 million tonnes.
    • It is expected to procure another 40 million tonnes from the current rabi harvest.
    • It could easily release and allow the free distribution of foodgrain of 5 million tonnes and still have foodgrain stocks of 54.5 million tonnes, if the expected rabi procurement targets are met.
    • Cost of storing grains: Furthermore, it is costly for the FCI to store this grain. The current costs of storage are estimated to be Rs 5.60 per kilogramme per year or Rs 2.80 for six months.
    • This means that by releasing 4 million tonnes to feed the hungry of India over the next six months, the FCI would actually be saving Rs 17,472 crore, assuming that these idle stocks would have persisted.
    • But even if these were sold, the costs are the revenue that would have been earned.
    • This is difficult to estimate but by using Finance Minister’s estimates in Budget we get a (maximal) figure of Rs 1,17,000 crore.

    Cost of universal cash transfer

    • In addition, a proposed cash transfer of Rs 7,000 per month for three months to every household, assuming again that 80 per cent of households would receive this.
    • With five persons per household, this expenditure would be Rs 4,36,800 crore.
    • The two transfers together amount to Rs 5,53,800 crore, or around 9 per cent of currently estimated GDP.

    Financing the expenditure through fiscal deficit

    • This sum of Rs. 5,53,800 is not a forbidding sum.
    • A great part of the responsibility to make these resources available vests with the Union government.
    • But whatever taxes are introduced in a supplementary budget that has become unavoidable, the expenditure incurred has to be financed immediately through a fiscal deficit.
    • Given the massive deflationary pressures and a complete collapse of economic activity, there is a strong case for financing the additional public expenditure through deficit financing or borrowing directly from the RBI.
    • This is required both for coping with the pandemic and for softening the blow of the lockdown.

    Following two suggestions are important suggestions for the delivery of food and cash in case we don’t have reliable data.

    How to ensure universal delivery of food?

    • The question arises of how universal delivery of these food and cash transfers is to be ensured.
    • Existing lists are inadequate for the purpose because they significantly underestimate and exclude those who should be beneficiaries.
    • For example, at least 100 million people are excluded from access to food under the National Food Security Act based on the 2011 Census.
    • The most effective way of dealing with the food emergency is to provide food delivery at doorsteps or neighbourhood collection points to anyone who asks for it, with a simple marker such as the indelible ink used during elections to serve as the indicator of receipt.

    How to endure universal delivery of cash?

    • For cash transfers, the matter is more complicated.
    • In rural India, MGNREGA job cards and pensions cover most households and allow bank payments.
    • The urban poor include migrants, contract and casual workers mostly in small and medium enterprises, daily wagers, domestic workers, self-employed persons like street vendors, sex workers and ragpickers, and the destitute including homeless people.
    • But there is no comprehensive record of the urban poor because the state has instituted no effective mechanisms to secure labour rights or social security rights to most urban workers.
    • The urban poor build and service the city, surviving without rights and a hostile or indifferent state.
    • The legally-mandated registration of inter-state migrants and construction workers in practice excludes most because their employers with the connivance of the state don’t wish to be bound to secure their rights.
    • The humanitarian emergency created by the pandemic and lockdown entails universal cash transfers again to every adult who presents herself to designated officials in decentralised offices.
    • For those who have accessible bank accounts, the funds can be credited to these accounts.
    • For others, the Odisha system, whereby pensions are disbursed as cash in hand at pre-specified times, maybe a useful model to follow.
    • This also can be adopted with indelible ink as proof of receipt.

    Employment schemes after cash transfers

    • The income transfers must quickly give way to an expanded rural employment guarantee scheme, and a new urban employment programme.
    • These urban employment programs include caregiving and building water supply, sanitation and shelter for the urban poor.
    • Private hospitals also need to be nationalised at least for the duration of the pandemic.

    Conclusion

    The working and poor people should not be made to bear the burden of the pandemic. There is a need for a bold resolve, by central and state governments, to literally reach the last person, rural or urban, with the food and cash they require to survive with dignity.

     

     

  • East India will require heavy investment to tide over the post-Covid loss of livelihood

    The article discusses the issue of migrant labourers and the problems eastern states could face due to the return of labourers and the lack of employment opportunities in these states. The return of migrant labourers may lead to the mechanisation in the states where they worked. A relief-cum-stimulus package at least 5% of the GDP is suggested by the author.

    IMF’s projections for the economy

    • The IMF’s projections for GDP growth for this year seem to be either in the negative or below 2 per cent for almost all major countries of the G-20 group.
    • India could do a little better compared to the other BRICS nations, but its growth will most likely be below 2 per cent.
    • This, of course, is under an optimistic scenario.
    • Many experts reckon that India could also go into negative GDP growth this year if it does not reboot the economy properly and in time.

    The problem of collapse in demand

    • The Centre and the Reserve Bank of India are trying to remove all roadblocks so that factories and farms can resume operations.
    • The focus is largely on the supply side — how to ease restrictions and how to increase liquidity in the system for resuming production.
    • It may not take too long as the real problem is the collapse in demand.
    • And that demand may not pick up easily as the virus is likely to stay with us for quite some time.
    • We could have lockdowns again if there is a surge in infection.
    • This will surely limit our travel and restrict our shopping for non-essentials.
    • However, there is one demand that can easily revive — that of food.

    Why food demand matters?

    • The NSSO survey of consumption expenditures for 2011-12 revealed that about 45 per cent of the total expenditure of an Indian household is on food.
    • For the poor, the NSSO reckoned, this figure was about 60 per cent.
    • We do not have information about the consumption patterns in 2020, guess is that about 35-40 per cent of the expenditure of an Indian household is on food and for a poor household, this figure is around 50 per cent.
    • Herein, lies the scope to reboot the economy.

    Labour shortage and mechanisation

    • The sudden announcement of the nationwide lockdown gave labours no time to go back to their families.
    • They lost their jobs and incomes and having spent whatever little savings they had, these workers have been reduced to penury.
    • The Centre and states, despite their best efforts, have not managed to address the problem of hunger of these workers.
    • Even civil society has not managed to bridge the gap.
    • The migrant labourers may well have lost their trust in the state, and once the lockdown is lifted, most of them are likely to rush back to their families in villages.
    • And, it could be some time before they are back in the cities — that is, if they return at all.
    • So, farms and factories, especially the MSMEs in the relatively developed states of western, southern and north-western India are likely to face labour shortages for many months, perhaps years.
    • This could lead to more mechanisation of farms and factories in these states.
    • In Punjab, for example, most of the wheat harvesting is already done by combined harvesters.
    • Now even paddy harvesting could be done by mechanised harvesters.

    The double challenge for states which are home to migrants

    • However, eastern Uttar Pradesh, Bihar, Jharkhand, West Bengal, and Odisha, from where much of the migrant labour comes, will face a double challenge.
    • Their agriculture, with tiny farm holdings, is already saddled with a large labour force — this comprises 45 to 55 per cent of the total labour force of these states.
    • Non-farm income from wages and salaries, through migrant labour, was an important source of income for households in these states.
    • This is now severely hit. In all probability, the per capita rural incomes of these states could shrink, at least in the short run.
    • This could lead to poverty and increase hunger and malnutrition.
    • How does one then reboot the economy and also address hunger and malnutrition?

    The lockdown and the subsequent plight of the migrant labourers brought to the fore uneven development in the country. The points mentioned below suggest the ways to address this problem. A question based on this issue could be asked by the UPSC, for ex- “The issue of migrant labourers amid Covid-19 pandemic highlighted the uneven development in the country. In this context, state the reasons which led to the uneven development of various regions of the country. Suggest ways to address the problem”.

    The requirement of a special investment package for eastern states

    • A special investment package — like the Marshall Plan of USA in 1948 — for the eastern belt of India is required.
    • Investment should be used to build better infrastructure, agri-markets and godowns, rural housing, primary health centres, schools and enhances people’s skills.
    • The package will go a long way to revive the economy and augment the incomes of the migrant workers.
    • Rising incomes will generate more demand for food as well as manufactured products, giving a fillip to the growth engines of agriculture as well as the MSME sector.
    • Building better supply chains for food directly from farm-to-fork, led by the private sector, will enhance the export competitiveness of agriculture.
    • It will also ensure a higher share of farmers in the consumers’ rupee.
    • Long-term demand-driven growth: Such broad-based development in a relatively underdeveloped region of the country will lay the foundations of a long-term, demand-driven, growth of the industry in India.
    • The all India relief package of Rs 1.7 lakh crore announced by the central government earlier, which is about 0.8 per cent of the country’s GDP, is too small to reboot the economy.

    Conclusion

    If India has to bounce back quickly, it needs a much bigger relief cum stimulus package — certainly not below 5 per cent of GDP. And, it should focus more on the eastern belt, where the issue is that of survival.

    Back2Basics: Marshall Plan, 1948

    • The Marshall Plan, also known as the European Recovery Program, was a U.S. program providing aid to Western Europe following the devastation of World War II.
    • It was enacted in 1948 and provided more than $15 billion to help finance rebuilding efforts on the continent.
    • The brainchild of U.S. Secretary of State George C. Marshall, for whom it was named, it was crafted as a four-year plan to reconstruct cities, industries and infrastructure heavily damaged during the war and to remove trade barriers between European neighbours – as well as foster commerce between those countries and the United States.

  • Public policy dilemma of choosing between lives and livelihood

    This article deals with how the different sections of a society assign different weightage to the various factors they are faced with in life. In the case of Covid-19, one section of society which is well-off might care more about the possible loss of life while other section might end up attaching more weightage to the loss of livelihood than to the possible loss of life due to infection. The article discusses this issue in detail.

    Difference between risk and uncertainty

    • Since the days of Frank Knight, economists have differentiated between the two.
    • Risk has a known probability distribution.
    • For uncertainty, the probability distribution is unknwon.
    • COVID-19 makes us confront uncertainty, not risk.
    • For uncertainty, there is a subjective probability distribution, which can, and does, vary from individual to individual.

    So, how the subjective probability distribution is devised by a person?

    • Through information and experience, one already possesses.
    • There are various rationality assumptions used by economists. They are often violated.
    • Otherwise, behavioural economics wouldn’t have come into existence.
    • Typically, given a situation, when your decision doesn’t agree with someone else, you say they are being irrational.
    • However, with uncertainty, the problem may not be with rationality assumptions, but with differences in subjective probability distributions.

    Lack of data for various factors

    • Because of COVID-19, there is a certain risk of getting infected. Let’s call this the infection rate — total infections divided by the total population.
    • We don’t know this infection rate for India or for any other country for that matter.
    • No country has done universal testing.
    • No testing for random sample: No country has done universal testing for a proper random sample either.
    • The ICMR has told us more than 75 per cent of Indian patients will be asymptomatic.
    • Who do we test? Those who show symptoms, those who have been in contact with confirmed patients and those who suffer from severe respiratory diseases.
    • Most countries do something similar.
    • Sampling bias: In other words, when we work out an infection rate based on those tested, there is a sampling bias.
    • This isn’t a proper infection rate.
    • The only country where we have had something like a random sample is Iceland.
    • There, the infection rate was 0.8 per cent.
    • Data for death rate: There are similar caveats about the death rate.
    • If we mechanically divide the number of deaths by the number of confirmed cases for India, we will get a death rate just over 3 per cent.
    • The global figure is a little less than 7 per cent.
    • But neither of these is a death rate for the total population since only those with severe symptoms are included in infection numbers.
    • Three per cent or seven per cent are over-estimates.
    • In a controlled environment like Diamond Princess, death rate as a ratio of total passengers, and not those infected, was less than 0.4 per cent.
    • The true infection rate and true death rate are not alarming numbers.

    How the lack of data is reflected in subjective probability distribution?

    • There are slices in India’s population pyramid with rural/urban and other spatial differences too.
    • Consider two extreme types-type A and type B.
    • Type A, who are globalised in information access and morbidity.
    • Life expectancy is 80 plus and there are lifestyle diseases like diabetes and high blood pressure.
    • This co-morbidity increases possible death rates and thanks to globalised access to information, certainly increases perceptions about death rates, making them out to be higher than they are.
    • Some of them have fixed incomes, regardless of what happens to lockdown.
    • The high probability assigned to loss of life: In terms of maximising expected payoffs with a subjective distribution, high probability is attached to loss of life and low probability to loss of livelihood.
    • How type B forms a subjective probability?
    • Type B, someone whose life expectancy is 60, without a fixed income stream and whose health concerns are tuberculosis and water-borne diseases, not COVID-19.
    • Nor is access to information that globalised.
    • The high probability assigned to loss of livelihood: High subjective probability will be attached to loss of livelihood and low probability to death from COVID.
    • Both types reflect subjective probabilities. Neither is “irrational”.
    • The tension between the two: Type A would like the lockdown to continue indefinitely, until the long tail of the infection curve tapers off, perhaps beyond September.
    • Type B would like lockdown to be eased soon, with necessary restrictions in hotspots.
    • There is indeed tension between lives and livelihood.
    • Even if health outcomes and information access are like Type A, but income is contingent on growth, preferences might mirror Type B.

    The issues highlighted here can be broadly used in the various scenario where there is uncertainty involved and various stakeholders perceive the probable outcomes in entirely different ways. Various points here can be used to answer the question based on policy making.

    Balancing the differential individual preferences in public policy

    • One set of individuals imposes its choice on the rest.
    • Type A disproportionately influences policy.
    • This determination of aggregate preferences is a dynamic process.
    • Therefore, sooner or later, Type B contests this and as the lockdown is prolonged and livelihood costs mount, discontent surfaces, as it has across a range of countries.
    • There were also welfare economics notions that pre-dated social choice theory, such as compensation principles of Kaldor, Hicks and Scitovsky.
    • The point can be made using the two stereotypes. Specifically, Type A need to compensate Type B for their losses.
    • To state it starkly, livelihood losses suffered by Type B need to be compensated by the government through redistributive measures and this has to be financed by higher taxes imposed on Type-A.
    • The right question for the Type A is not whether they want the lockdown to continue, but whether they are willing to pay a COVID-tax to support lockdown extension.

    A question based on policy formation issues explained here can be framed, for ex. “Risk has a known probability distribution. For uncertainty, the probability distribution is unknown. COVID-19 makes us confront uncertainty, not risk. In this context, there is a debate between saving lives and saving livelihoods. In such a scenario, what can be the most probable solutions that public policy must delve into, in order to maintain the balance between this uncertainty and risk.”

    Conclusion

    Extending or ending the lockdown decision represent the public policy dilemma. Without a revival in growth, the tax-paying capacity of Type B is limited and with job losses, some Type As become Type Bs. The choice is starker.

  • Stress test of leadership in pandemic

    The article discusses the three stages involved in successfully dealing with the pandemic. In the next part, it goes on to explain the factors that determine the success or failure of the governments. In the last week, we read about the success story of Kerala and underlying reasons. This article is also written on similar lines.

    Stages in the pandemic response

    • Disease outbreaks, even global pandemics, are scarcely new. The playbook for dealing with them, therefore, is well understood and has been honed by practices and lessons gleaned from hard-fought battles.
    • A first stage is an early clear-eyed recognition of the incoming threat, and, in the case of COVID-19 at least, requires the unpalatable decision to lock down society.
    • Ideally, this is done with full consideration of how to support the most vulnerable members of society, especially in a country such as India, where so many survive hand-to-mouth.
    • This is a phase aimed at buying time, of flattening the epidemic curve, so that public health facilities are not overwhelmed.
    • And, for using this time, paid for by collective sacrifice, to secure the personal protective equipment (PPE) and medical supplies necessary to save lives.
    • The second phase of the pandemic response is slowly to ease the burden on the economy by permitting a measured return of business activity so that livelihoods and supply chains can be restored.
    • This stage can only be safely executed if accompanied by a war-footing expansion of testing capacity so that new infections can be identified and isolated at once, allowing contact tracing to be implemented by masses trained to do this crucial and painstaking work in communities across the country.
    • The final stage, which for COVID-19 seems a lifetime away, is a mass vaccination programme and then the full rebuilding of economic and social life.
    • None of this is easy, but, like an examination in a dreaded subject, one’s only hope is early and persistent preparation and, at crunch time, remembering the lessons learned.

    The above-mentioned stages are sort of a template that seems to have gained acceptance for dealing with the pandemic. A question based on it, like “What are the various stages involved in government’s response to deal with a pandemic?”

    Following three factors make the difference between successful and failed response

    1. Leadership problems in global politics

    • The defensive finger-pointing, opportunistic politicking and xenophobic posturing are shown by some leaders amid pandemic.
    • This is not a crisis that can be tackled without robust and multidimensional international cooperation between nations.
    • We are watching in real-time the benefits of intellectual collaboration that does not stop at national borders.
    • From the epidemiologists to the medical community identifying more effective treatments, to the research scientists racing to find a vaccine, we are benefiting from collaboration.
    • But the nationalistic turn in global politics over the past two decades has reduced investment in and undermined the legitimacy of the very institutions that facilitate international partnership at the very time they are needed most.
    • Prime Minister Narendra Modi did well to convene the leaders of the South Asian Association for Regional Cooperation (SAARC) nations in mid-March to discuss the possibility of a regional response.
    • But that video-conference call also highlighted that there have been no summit-level meetings of SAARC since 2014.
    • Similarly, United States President Donald Trump demanded that the U.S. end funding of the World Health Organization (WHO).
    • This not only endangers American lives by cutting off his own administration’s access to vital international data.
    • But also directly affects India which receives significant funding and expertise from WHO with ~10% of its overall WHO financing in 2019 coming directly from the U.S.

    2. The whole-of-the-government strategy

    • Pandemic response requires a whole-of-government strategy, for which political will and legitimate leadership are vital to convene and maintain.
    • Germany and Kerala provide two powerful though different examples of this in action.
    • In Germany, in spite of a high level of federalism that gives its States (Länder) a lot of power, Chancellor Angela Merkel’s ability to mobilise the entire system has allowed Germany to emerge as a success story in Europe.
    • In Kerala, State Chief Minister Pinarayi Vijayan convened a State response team at the earliest possible moment and has provided the full weight of his office in support of a coordinated public health strategy that has been accepted by the State’s citizens who have learned to trust the government in such situations.
    • Yet these two examples stand out in part for how rare they are.
    • Consider again the cautionary tale of the U.S. where some State Governors have yet to issue stay-at-home orders.

    3. The robust public health system

    • We are seeing first hand the consequences of starving public health systems of necessary funds and resources.
    • The comparative advantage of the private sector is efficiency; the need of the hour in pandemic response is redundancy, or, more precisely, excess capacity.
    • Most hospitals do not need invasive ventilators normally, just as they do not need vast stocks of PPE and extra intensive care units beds, but these are essential goods right now as we brace ourselves for a flood of sick patients into hospitals.
    • Watching the advanced health-care system of northern Italy buckle under the unimaginable pressures to which it was exposed over the past six weeks should be a cautionary tale for all countries that thought turning health care over to private actors was responsible governance. It is not.
    • Again, consider Kerala, which has consistently ranked at the top of State rankings for health expenditures.
    • Kerala has, a well-functioning local public health system capable of implementing the test-isolate-trace protocols critical for fighting COVID-19.

    Conclusion

    With the central role of leadership and governance underlined in the successful dealing with the pandemic, leadership across the world need to come together to coordinate at all levels in dealing with the problems that are not bound by any border.

  • The deal raises several concerns for privacy, net-neutrality and consumer welfare

    Facebook’s decision to acquire a 9.99 per cent stake in the parent company of Reliance Jio could have several implications. It could impact retail stores which we are trying hard to protect by restricting FDI in retail. Second, it could have implications for net neutrality. Third, it would have implications for data privacy.

    Implications for the country’s retail landscape

    • Recently, Reliance Industries and Facebook announced that the California-based social media giant will acquire a 9.99 per cent stake in Jio Platforms limited, the holding company of Reliance Jio, for $5.7 billion (Rs 43,574 crore).
    • At its core, the idea is to create an ecosystem around JioMart, enabling customers to access the local Kirana stores using WhatsApp, combining both offline and online retail.
    • This ability to connect millions of local businesses with end consumers, and provide them a seamless online transaction experience could radically alter the country’s retail landscape.
    • Both firms have stressed on the new opportunities for businesses of all sizes, and especially for the millions of small businesses across the country.
    • With the ongoing lockdown in the country only reaffirming the importance of the local Kirana store — major online delivery channels have struggled to reach consumers during this period — integration is bound to be an enticing proposition.

    Opportunities for cross-selling

    • A scaling up of this model will also provide opportunities for cross-selling — significantly increasing the upside for firms and increasing the valuation of its retail arms.
    • At present, though, the reach of WhatsApp Pay is limited — just over a million Indians are reported to currently have access to the pay feature.
    • But this sort of model is popular in other Asian economies such as China, Korea and Japan where apps like WeChat have a wide range of product offerings, which induces consumer stickiness.
    • This arrangement also allows Jio to greatly expand its product offering to its more than 370 million-odd subscriber base.
    • The deal may also open up the entire WhatsApp consumer base of around 400 million — to Reliance, including those on other telecom platforms such as Airtel and Vodafone.

    The following concern could arise from the deal and the UPSC can frame a question based on these concern, like ” Recently a global IT giant acquired a significant stake in an Indian telecom giant. Discuss the various issues which could arise from coming together of such dominant players.”

    What are the concerns in such deals?

    • Implications for consumer welfare: Given the dominant market position of the players, concerns over the market structure and its implications for consumer welfare are bound to arise.
    • Questions over net neutrality: The tie-up also raises questions on net neutrality with the possibility of preferential treatment being granted.
    • Data privacy issue: Third, given the data privacy issues highlighted in the past by the Cambridge Analytica episode, for instance, there are apprehensions over the enormous amounts of data that will be collected by these entities.
    • This concern gains significance especially when India still does not have a personal data protection law.

    Conclusion

    Whenever two dominant players of respective fields come together, it gives rise to concern. The government must keep watch on the implications and how such a deal plays out in the future. If the concerns raised turn out to come true, maybe India should come out with the antitrust law of its own.