Note4Students
From UPSC perspective, the following things are important :
Prelims level: GST compensation to States
Mains level: Paper 3- GST compensation discontinuation
Context
The five-year transition period after the adoption of the Goods and Services Tax (GST) on July 1, 2017, came to an end on June 30, 2022. With this, the era of GST compensation that the state governments were entitled to has ended.
High estimated loan issuance
- Many state governments have asked for the compensation period to be extended by a few years.
- To tangibly assess the near-term outlook for state finances, we have to rely on the states’ own estimates for their market borrowing requirements for the second quarter of 2022-23.
- The indicative calendar of market borrowings by 23 state governments and two Union territories for the second quarter has pegged their total state development loan issuance — the primary source of financing state government deficits — at Rs 2.1 trillion.
- This projected issuance is 29 per cent higher than the same period last year, and at an eight-quarter high.
- This high level of issuance projected by states reflects concerns that some of them might rightfully have regarding the uncertainty of their cash flows in the post-GST compensation era.
- High dependence on GST compensation: Of these 23 states, Tamil Nadu, Andhra Pradesh, Haryana, Punjab and Gujarat have indicated large increases in borrowings.
- Most of these states have an above-average dependence on GST compensation.
Implications of discontinuation of GST compensation
- Alter the revenue compensation: The discontinuation of the GST compensation flows would alter the revenue composition of some states adversely, particularly those with a relatively larger share of such receipts in their overall revenue streams.
- Increase in debt level: To offset a portion of the associated revenue loss, such states are likely to enhance their borrowings and/or to undertake some expenditure adjustments in the quarters ahead.
Adjustment of borrowing limit of the States by the Centre
- At the time of communicating to states their annual borrowing limits for the ongoing year, we understand that the Centre had informed state governments that their off-budget borrowings for the past two years (2020-21 and 2021-22) would be adjusted from their borrowing ceiling this year.
- Data on off-budget borrowing: It appears that the calculation of the adjusted borrowing limit required the submission of detailed data by the state governments related to their off-budget borrowings for the last two fiscal years, followed by a thorough assessment of the same by the Centre.
Need for early step up in tax-devolution
- On the whole, though, states appear to have entered the year with a comfortable cash flow position.
- This follows from the back-ended release of the tax devolution to states for 2021-22 — nearly half of the full-year amount was released in the fourth quarter.
- Additionally, the total amount was also well above the revised estimate, providing an unexpected gain to states.
- This may have allowed them to temporarily withstand the changes related to their borrowing permission.
- Subsequently, the release of the GST compensation grant of Rs 869 billion for several months in May is likely to have further eased their cash flows.
- If the government does decide to step-up tax devolution to the states in the near term, instead of back-ending it as was done in the last year, it may reduce the size of state borrowings in the second quarter.
- But more significantly, such revenue certainty, despite the end of the GST compensation era, may embolden states to ringfence their capital spending, providing a positive impulse to the economy.
Conclusion
The discontinuation of the GST compensation flows would alter the revenue composition of some states adversely, tax devolution to the states in the near term could cushion the blow of the discontinuation.
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Back2Basics: Compensation under GST regime
- The adoption of the GST was made possible by the States ceding almost all their powers to impose local-level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed under the GST.
- While the States would receive the SGST (State GST) component of the GST, and a share of the IGST (Integrated GST), it was agreed that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for a period of five years that is set to end in 2022.
- This corpus in turn is funded through a compensation cess that is levied on so-called ‘demerit’ goods.
- This GST Compensation Cess or GST Cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- Labour productivity and roads
Context
The commute time for the labour force to the workplace plays a very important role in determining their productivity in cities.
Issue of long travel time to work
- Labour market: Cities are labour markets where the labour force exchanges their labour and creates knowledge spillovers.
- Relation between commute time and productivity: The commute time for the labour force to the workplace plays a very important role in determining their productivity in cities.
- The longer the commute time in a city, the smaller is its effective labour market and vice-versa.
- Difference between nominal and effective labour market: While the nominal labour market of the city refers to all jobs created in the metropolitan area, the effective labour market refers to the jobs accessible within a certain commute.
- Importance of effective labour market: The larger a city’s effective labour market, the greater its agglomeration economies and knowledge spillovers will be.
- From the viewpoint of enlarging a city’s effective labour market and economic output, it is therefore very important to keep the commute time short and commuting cost cheap within a city as it keeps growing in population.
Way forward
- One way in which urban local bodies (ULBs) directly impact the city’s economic output is through their infrastructure.
- Increase in tax base: Road length has a positive effect on the city’s tax base.
- Motivation to pay texes: This is because roads lead to easy access to jobs and increased economic activity; that also gives the public more confidence and motivation to pay taxes.
- Cities should not view investment in road networks as expenditure; rather, roads add to the city’s revenue base which the city can use to improve infrastructure and public services.
Conclusion
Investing in roads not only reduces travel time and enlarges effective labour markets of cities and their economic output, but also improves access to schooling for children as well as healthcare, thereby upgrading human development. This is indeed the road to the $5 trillion economy along with improvement in human well-being.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- India- Japan ties
Context
The article recounts the contribution of Japan’s former Prime Minister Shinzo Abe in strengthening India-Japan ties.
Indo-Japan ties: Background
- Japan-India ties are 70 years old this year.
- For the first five post-war decades of the 20th century, bilateral ties were friendly.
- India was not among the signatories of the 1951 San Francisco Peace Treaty, which brokered post-war relations between the defeated Axis power and the Allies.
- Instead, Delhi established an independent peace treaty and bilateral relations with Japan.
- Nehru’s decision to accept Japanese Overseas Development Aid, the first country to do so, also generated a lot of goodwill in the bilateral relationship. Several collaborations took place.
- But it was only in the 21st century that bilateral ties climbed up to the next level.
India-Japan ties during Shinzo Abe’s premiership
- While Prime Ministers Yoshiro Mori had signed the Global Partnership for the 21st Century Agreement in 2000, to Abe goes much of the credit for the transformation of India-Japan ties in the last two decades.
- This period witnessed the Japanese funding for ambitious projects such as the Mumbai-Delhi Industrial Corridor and the Mumbai-Ahmedabad bullet train.
- The two countries upgraded the relationship to a Special Strategic and Global Partnership.
- After a waiver to India from the Nuclear Suppliers Group following the India-US civil nuclear deal, Abe — and his Liberal Democratic Party successors — had begun to consider a similar deal with India, and a round of negotiations was held in that period.
- The deal was eventually signed in 2016, and became operational a year later.
- It was during his tenure that the Japanese Maritime Self Defence Force (constitutionally, the Japanese military exists only for self-defence purposes) began naval exercises with friendly powers — India and Japan held their first naval exercise in December 2013 — and the country appointed its first National Security Advisor.
Conclusion
Abe believed that he was both destined and better equipped than many of his peers to play a transformational role in Japan’s politics and foreign affairs. He certainly achieved that with India. His passionate advocacy of closer ties with India will be missed.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Article 324
Mains level: Paper 2- Powers of Election Commission
Context
The recent split in Shiv Sena and the subsequent political slugfest in Maharashtra has brought into focus the legal and constitutional framework to deal with issues when a party splinters and rival factions assert themselves as the recognised political party.
Culture of functioning political parties in India
- What is a political party? A political party is an organised group of citizens who hold common views on governance and act as a political unit that seeks to obtain control of government with a view to further the agenda and policy they profess.
- Political parties maintain a continuous connection between the people and those who represent them either in government or in the opposition.
- Political parties in India are extra-constitutional, but they are the breathing air of the political system.
- There are reportedly 2,598 registered political parties, eight national parties and 50 state parties.
- The regulation of these parties and elections in the country is a crucial segment of India’s constitutional imagination.
- Yet, the proliferation of political parties also means that established parties splinter.
- A battle ensues for recognition of one faction or group as the recognised political party and securing the party symbol.
Legal and Constitutional framework
- There is a legal and constitutional framework to deal with issues when a party splinters and rival factions assert themselves as the recognised political party.
- Article 324 of the Constitution provides that the superintendence, direction and control of elections is vested in the Election Commission.
- Conduct of Election Rules, 1961, Rule 5 specifies that the Commission shall specify the symbols that may be chosen by candidates at elections in parliamentary or assembly constituencies and the restrictions to which their choice will be subject.
- Choice and allotment of symbol: The Election Symbols (Reservation and Allotment) Order 1968 provides for the choice and allotment of symbols in Parliamentary and Assembly constituencies and for recognition of political parties and matters connected.
- Power to recognise party from splinter group: Paragraph 15 of this Order specifies that the Commission has the power to recognise as the party, from amongst splinter groups or rival sections.
Important case on recognition of faction
- The classic case on recognition of a faction and accrual of the party symbol is Sadiq Ali v the Election Commission of India (1972).
- Here, the Supreme Court was confronted with the case of the Indian National Congress which had split into two factions.
- The Commission ruled in favour of Congress (J) being the recognised political party and the case reached to the Supreme Court,
- The SC relied on the figures presented to the Commission and found that a substantial majority of the members of the Congress in both its legislative wing as well as the organisational wing supported the Congress (J).
- The SC concludes that “numbers have importance in a democratic system of government or political set up, and it is neither possible nor permissible to lose sight of them. Indeed, it is the view of the majority which in the final analysis proves decisive in a democratic set-up.”
- It was also concludes that paragraph 15, which gives the Commission power to settle such disputes pertaining to symbols between factions of a party, is entirely legal, for this power accrues from Article 324 that creates the Commission and vests in it the power of superintendence over elections.
Conclusion
In India’s 72nd year as a constitutional democracy, the free and fair regulation of political parties by the Election Commission and the courts is a crucial part of our political success as a nation. The Supreme Court’s thoughtful judgment decades ago is a realisation of the importance accorded to judicial oversight of our political parties.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Anti-profiteering Authority
Mains level: Paper 3- Impact of GST on inflation
Context
The monumental indirect tax reform, the Goods and Services Tax (GST), has completed five years in existence. The article analyses the impact of GST on inflation.
Background
- Before the implementation, it was said that it would be a boon to the economy in terms of higher revenue buoyancy, lower inflation, higher revenue, higher growth etc.
- During the 12 months preceding GST implementation, the Consumer Price Index (CPI) inflation was 3.66%, while it increased to 4.24% post-GST in the next 12 months.
- A similar pattern was observed in Australia, New Zealand, and Canada.
- An Australian Competition and Consumer Commission study showed that GST initially increases inflation.
How GST can affect prices
- In theory, implementing GST should not lead to a change in overall inflation.
- The revenue-neutral rate (RNR) is calculated so that it would not cause higher inflation.
- But revenue neutrality does not mean that prices would not go up or down in the economy.
- This is because the weight of goods in the consumption basket and their contributions to indirect tax collections are not the same.
- Importantly, the effect of GST on the prices of certain goods and services depends on the structure and design of taxation.
- The RBI, in a 2017 report, showed that about half of the groups of items that GST covers are not in the CPI basket.
- So, the effect of GST on prices was expected to be small.
- Finally, prior to the GST implementation, it was expected that prices would go down because GST harmonises indirect tax rates and eliminates the cascading effect.
- Thus, whether GST has any effect depends on how different factors affect each other.
So, how can we ascertain whether GST has had an inflationary impact in India?
- Inflationary impact can be assessed by turning to statistical modeling?
- Statistical results provide us with an interesting picture of the impact of GST on price levels.
- First, we look into the overall price index (CPI).
- Here, the actual CPI growth in the study period is 4.61%, whereas the counterfactual estimate of inflation is 3.24%.
- This implies that without the GST implementation, the CPI inflation would have been 3.24%.
- This indicates that with the implementation of GST, CPI increased by 1.37 percentage points (pp).
- Second, CPI core inflation (which strips off volatile components such as food and fuel from the headline inflation) increased by 1.04pp in the post-GST period (actual inflation was 4.57%, counterfactual inflation was 3.53%).
- Third, GST is found to have a significant positive impact on inflation of commodity groups such as paan, tobacco and intoxicants, clothing.
What explains rise in inflation post GST?
- Rise in tax rate of some goods: The rise in inflation post-GST implementation could be due to the rise in the tax rate of some goods and services, the inclusion of business activities that were not taxed earlier, or the market structure.
- The average weighted GST rate was designed to be neutral, so it might not have contributed much to the observed higher inflation.
- Coverage of business activities under GST not taxed earlier would result in higher prices since the firms would pass on the cost to the consumers.
- Market power: There is another possibility which would cause result inflation after the GST implementation.
- As Joseph Stiglitz opined, rising market power is bad for the economy as it raises economic inefficiency and inequality and lowers the economy’s resiliency.
- Further, taking advantage of market power, it is possible that most firms would have passed the taxes to end consumers.
- With the existence of market power, firms’ price includes a significant mark-up over marginal costs.
- Some results point out the possibility of profiteering in select segments after GST.
- To pre-empt this possibility, the government set up National Anti-profiteering Authority (NAA).
Way forward
- NAA should monitor the prices of critical or essential goods and services to see the price impact of GST.
- Similarly, the Competition Commission of India should observe anti-competitive producer behaviour that hurts consumers via excessive price increases.
- These measures may ensure that producers do not take advantage of the GST.
Conclusion
Statistical results suggest that GST implementation has resulted in a decrease in inflation of food items and raised inflation of non-food items.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Inflation targeting
Context
All emerging markets (EMs), including India, are facing outflows of foreign portfolio investment as the US Fed tightens.
Inflatioon and exchange rate
- Exchange rate as response to capital flow: Canonical inflation targeting wants exchange rates to float as the correct response to capital flows.
- Policy should respond to exchange rate fluctuations only after they affect inflation or output.
- Any interest rate defence of the exchange rate would reduce the focus on inflation.
- But most EMs intervene in foreign exchange (FX) markets in order to reduce volatility.
- A research paper by Edward F Buffie and co-authors indicate that FX intervention greatly enhances the efficacy of inflation targeting.
- Two instruments for two targets work better than trying to do everything through the interest rate.
- Excess depreciation of currency can raise inflation.
- Other researches such as from the IMF, argues for the use of prudential capital flow management techniques and finds reserve accumulation and its use reduces risks and crises in EMs.
Policies followed by RBI to reduce volatility
- Not fully convertible: RBI’s sequenced approach to capital account convertibility, where, for example, debt inflows are only allowed as a percentage of domestic markets, saved it from the kind of interest rate volatility Indonesia experienced during the taper tantrum and is helping it now.
- More liberalisation measures can be taken when needed.
- India’s large foreign exchange reserves have allowed rupee depreciation to be lower than most other countries as the dollar strengthens.
- The cost of holding foreign exchange: There are costs of holding large reserves and of too much intervention.
- The central bank ends up supporting the US and not its own government borrowing and it sacrifices interest income.
- But holding reserves and then not using them when required is the most costly.
- Again use of multiple instruments can mitigate over-reliance on intervention.
- Much research and recent experience suggest that all available instruments should be used to moderate volatility in nominal variables.
Why increasing interest rates will be ineffective in reducing capital outflow
- A common suggestion is to raise policy rates to maintain a historical gap with US Fed rates.
- But such an interest rate defence did not prevent outflows during the taper tantrum or in 2018 and only triggered a slowdown.
- It forgets that interest-sensitive flows are only about 8 per cent of India’s foreign liabilities.
- There have been no debt outflows in 2022 despite a narrowing interest differential.
- Equity outflows also seem to be tapering.
- Monetary tightening that dampens expectations of growth, induces more outflows as country risk-premiums rise.
Issues with less intervention
- Some want less intervention and more rupee depreciation in order to improve the current account deficit.
- But less intervention can lead to a chaotic fall and jittery markets as we saw in 2011.
- It is best for policy to prevent over-depreciation due to global risks.
- After about 4 per cent nominal depreciation, India’s real effective exchange rate against a basket of 40 countries is approaching 100.
- That implies the real exchange rate is too depreciated since India has had relatively more structural reform and productivity growth.
- Future corrections toward equilibrium will require a rise of the rupee.
- High oil prices are a risk for India’s balance of payments, but multiple types of adjustments have the best chance of succeeding.
Why sometimes policy changes are introduced as surprise?
- Market participants want clear communication and no surprises for markets.
- Forward guidance is an important part of inflation targeting. But when markets tend to overreact and are influenced more by the US than by Indian policy, the best way to introduce a policy change may be by surprise.
- Thus markets had priced in excessive rate hikes after the US Fed began tightening.
- The steep surprise hike in Indian repo rates prevented additional rate hikes from being priced in as domestic rate-rising began.
Conclusion
Inflation targeting is an art that requires skill, attention to context and an open mind.
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Back2Basics: Real Effective Exchange Rate
- The real effective exchange rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies.
- The weights are determined by comparing the relative trade balance of a country’s currency against that of each country in the index.
- An increase in a nation’s REER is an indication that its exports are becoming more expensive and its imports are becoming cheaper.
- It is losing its trade competitiveness.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- Unethical practices in pharma sector
Context
The judgment by a two-judge Bench of the Supreme Court dismissed the Special Leave Petition by Apex Laboratories to claim deduction on freebies given to doctors.
About the case
- In the said case, the company was giving out freebies to doctors in order for them to create awareness about a health supplement it was manufacturing called Zincovit.
- Prohibited by the law: Upholding a decision by the Madras High Court, the Bench said that the act of pharmaceutical companies giving freebies to doctors is clearly ‘prohibited by the law’.
- Further, it cannot be claimed as a deduction under Section 37(1) of the Income Tax Act, 1961.
- The judge said that in the process of interpretation of the law, it is the responsibility of the court to discern the social purpose which the specific provision subserves.
- Invoking the principle of implied condition, the Court relied on the precedents in the case of P.V. Narasimha Rao (1998) 4 SCC 626 under the Prevention of Corruption Act, and Jamal Uddin Ahmad (2003) 4 SCC 257 under the Representation of the People Act.
Immoral practice
- Breach of trust: Laying emphasis on the fiduciary relationship between doctor and patient, the Court noted that a doctor’s prescription is considered as the final word on medication by the patient even if the cost of such medication is unaffordable.
- In a situation where such trust is reposed in doctors, having prescriptions manipulated by the lure of freebies is immoral.
- Driving up the cost of medicine: The Court was conscious that the cost of such freebies is factored in the cost of medicines sold, in turn driving up their prices and perpetuating a publicly injurious cycle.
- This fact was taken note of by the Parliamentary Standing Committee on Health and Family Welfare in its 45th report, dated August 4, 2010.
- Report from the US: In its elaborate judgment, the Supreme Court bench also took note of a report issued by the United States Department of Health and Human Services Office called “Savings Available Under Full Generic Substitution of Multiple Source Brand Drugs in Medicare Part D”.
- Here, it was stated that the beneficiaries could have saved over $600 million in out-of-pocket payments had they been dispensed generic equivalent drugs.
- In the U.S., by the reason of the Physician Payments Sunshine Act 2010 also known as Section 6002 of the Affordable Care Act (ACA) of 2010, the law compels the manufacturers of drugs, devices, biologic and medical supplies to report to the Centers for Medicare and Medicaid Services, on three broad categories of payments or transfers of value.
Way forward
- Keeping the price under control: Even though the Drug Price Control Order and Drugs and Cosmetics Act are there on the statute book, there is hardly any action to keep the sale price of medicines under control with due and proper investigation into their so-called research and development costs and keeping their profit margins within a prescribed limit.
- The law should be amended to compel the manufacturer of drugs to sell at the verified genuine cost, that also factors in a reasonable profit margin for each product by bringing manufacturers, both foreign or domestic, under the control of the MCI or any other equivalent body.
- This must be at a uniform rate throughout the country; further, classified life saving drugs should be sold at cost only or even at subsidised rates.
Conclusion
This judgment can also go far. It should be debated and applied to other unethical practices and expenditure out of public funds.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- Diversification of security partnerships
Context
For the first time, the prime ministers of Australia, Japan, and New Zealand as well as the president of South Korea participated in a NATO summit.
How Ukraine war revived NATO
- More than a decade ago — in 2010 — when NATO agreed on a strategic doctrine, it was discussing it with its Russian partners.
- There was no reference to China in the 2010 strategic concept.
- At that time, the West was trying to deepen ties with Russia and build expansive economic cooperation with China
- In unveiling a new strategic conception for the alliance in the wake of the war in Ukraine, NATO has declared Russia “the most significant and direct threat to Allies’ security and to peace and stability in the Euro-Atlantic area”.
- Not ignoring the threat from China: NATO has declared that China’s “stated ambitions and coercive policies challenge our interests, security and values.”
- The last few months have seen a closing of ranks in NATO that is now determined to cope with the Russian threat.
- Germany — which has long sought good political and commercial relations with Russia — has agreed to raise its defence spending and do more for European security.
- Sweden and Finland have ended their historic neutrality and decided to join NATO.
- The US is doubling down on its military commitments to Europe.
- The last few decades of peace and prosperity in Europe and Asia had enormously increased the influence of Russia and China in their neighbourhoods.
- But the imperial ambitions of both — rooted in a profound misreading of their leverage — have produced a massive geopolitical backlash.
- Consolidation of old alliances: Rather than sharpen the contradiction between the US and its regional allies, Russian and Chinese actions have helped consolidate old alliances and gave birth to new security coalitions.
Why small European countries seek alliances and how it applies to Asia as well
- Small countries seek alliances when their fears of more powerful neighbours become acute.
- Russia’s invasion has sent countries on Moscow’s western flank looking for NATO cover.
- Most Central European states don’t want to rely purely on a European response to the Russian challenge.
- They suspect France and Germany are more likely to accommodate Moscow at their expense than stand up to Russia.
- For the Central Europeans, it is the US that offers a real balance against Russia.
- It should not be too difficult for India to understand why some Asian countries are turning to NATO.
- After all, India’s own turn to the Quad was a direct consequence of Chinese actions on the disputed bilateral frontier.
How China’s expansionist policies are reshaping Asian security landscape
- Way back in 2007 — when India conducted a mere joint naval exercise with the US, Japan, Australia and Singapore — Beijing called it a precursor to an “Asian NATO”.
- Australia and New Zealand are a bit further away but are deeply tied to the Chinese economy.
- For those like Japan, who face a direct threat from China, “Ukraine could well be about the future of Asian security”.
- What has happened in case of Ukraine created fear in Asian, at a moment when China has become so much more powerful than its neighbours.
- Improving national capability: Creation of more sophisticated national military capabilities has been the first priority of some of Beijing’s neighbours.
- Resolution of differences: Resolving mutual differences and strengthening security cooperation — for example between Japan and South Korea — has been another.
- Alliance with US: Boosting bilateral alliances with the US is yet another.
- Diversification of security partnership: Even as nations in the region reboot ties with the US, Asia is also seeking to diversify its security partnerships.
- Engagement with Europe: This has led to greater Asian engagement with Europe as well as the creation of new Indo-Pacific regional institutions – including the Quad, and the AUKUS.
Conclusion
Thanks to the egregious expansionism of Russia and China, the strategic integration of the Asian and European geopolitical theatres has now begun. Whether they like it or not, all countries in Europe and Asia will have to deal with the consequences.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Partners in the blue pacific
Mains level: Paper 2- Need for balanced outlook to strategic policy
Context
Three back-to-back summits in the past fortnight have helped settle the dust on who stands where on the Russian invasion of Ukraine.
Background of the summits
- The BRICS summit took place on June 23-24, followed by the G-7 summit (June 26 and 27), and then the North Atlantic Treaty Organization (NATO) Summit in Madrid (June 29).
- In order to understand what they portend for the future global world order, it is necessary to study the messages sent out by each of these groupings against the backdrop of the situation in Ukraine.
- Most importantly, how can India, that has hitherto managed a careful balancing act between all the groupings, build a movement out of this moment of deep polarisation in the world?
Why outcomes of BRICS Summit throws some challenges for the West
- The fact that India agreed to join the summit showed India’s commitment to BRICS as an alternate grouping of economies spotlighted India’s refusal to shun Russia, and agreement to set aside the two-year stand-off with China in favour of multilateral meetings such as BRICS and the Shanghai Cooperation Organisation (SCO).
- The BRICS Beijing Declaration was a consensus document, as each member cited differing “National Positions” on the Ukraine issue.
- Economic initiatives: BRICS’s New Development Bank (NDB), has approved about 17 loans totalling $5 billion for Russian energy and infrastructure projects, the “Contingent Reserve Arrangement” (CRA).
- A BRICS Payments Task Force (BPTF) for coordination between their central banks for an alternative to the SWIFT payments system, was proposed.
- Mr. Putin also proposed building a global reserve currency based on a “basket of currencies” and trading in local currencies.
- Challenges to western sanctions: The BRICS economic initiatives contain several challenges to the western-led sanctions regime against Russia
- Russia also committed to providing more oil and coal supplies to BRICS countries, which will no doubt raise red flags in the West.
- The possible admission of countries such as Argentina and Iran that have applied to the BRICS mechanism will also sound alarm in the West.
G7 Summit and India’s flexibility
- A day after BRICS, Mr. Modi left for the G-7 Summit in Germany, proof of India’s flexibility in dealing with both sides of the conflict.
- In a number of statements, the G-7 targetted Russia’s war in Ukraine and China’s economic aggression.
- Its outreach documents — on “Resilient Democracies” and “Clean and Just Transitions towards Climate Neutrality” — the only ones that India and other invitees signed on to, were devoid of any mentions of either.
Key takeaways from NATO Summit
- Reference to China: NATO for the first time, made a reference to “systemic competition” from China as a challenge to NATO “interests, security and values”.
- Presence of US allies: The presence of the U.S.’s trans-Atlantic and trans-Pacific military allies at one conference sent out a clear message against a perceived Russia-China alliance.
- US’s growing focus: The launch of another Indo-Pacific coalition — of “Partners in the Blue Pacific” (PBP), i.e., the U.S., the U.K., Australia, New Zealand and Japan, in addition to last year’s Australia-U.K.-U.S. (AUKUS), is another signal of the U.S.’s growing focus on countries that it has military alliances with, against its adversaries.
- No consideration of Russian sensitivities: Apart from the Indo-Pacific partners at the summit, there were leaders of the five countries that have applied to join NATO.
- The direct message was that NATO would no longer consider Russian sensitivities on the subject of NATO expansion.
What is the strategy adopted by India?
- The outcome of all three summits points to a growing polarisation, even battle lines being drawn, between the Western Atlantic-Pacific axis and the Russia-China combine.
- Neutral stand on Ukraine crisis: India has adopted a singular strategy, albeit a defensive one, that does not condone Russia for its attacks on Ukraine, but one that does not criticise it either.
- India has joined China as global economies that have most increased their intake of Russian oil, and where India continues to source fertilizer, cement and other commodities from Russia.
- Strategic tilt towards the U.S. India is working to diversify its defence purchases from Russia, hostilities with China are high, and a strategic tilt towards the U.S. and Quad partners in the Indo-Pacific is growing.
- Balancing Act: On the multilateral stage, too, India remains a balancing voice in the room: along with Brazil and South Africa, India ensured that the BRICS Beijing declaration did not carry the Russian position on the Ukraine war or any criticism of the West.
- While making certain with other partners of the global South that the G-7 outreach documents carried no criticism of Russia and China.
Way forward for India
- It is time for New Delhi to seize the moment for leadership in a world that is becoming increasingly uncomfortable with the growing polarisation and the disruption due to the Ukraine war.
- India is not alone.
- At the United Nations General Assembly, for example, a majority of 141 countries voted to castigate Russia for its invasion of Ukraine, but much fewer, only 93, voted to oust Russia from the Human Rights Council.
- This represents a large pool of independently-minded countries that do not see it in their own national interest to blandly choose one side over another.
- India’s national interests would be better served by building a community of those like-minded countries (from South America to Africa, the Gulf to South Asia and to the Association of Southeast Asian Nations), who cannot afford the hostilities, and want to avoid the possibility of a global war at all costs.
- In 1955, it was in such a similar moment that India took leadership along with countries such as Indonesia and Egypt at the Asian-African Conference of 29 newly independent nations, at Bandung that eventually led to the Non-Aligned Movement (NAM).
Conclusion
This is the time to rethink India’s role in reducing the polarisation and bringing the objective and balanced outlook Nehru spoke of, to the forefront of India’s strategic policy.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Floods in Assam
Context
This year’s floods in Assam have been merciless. In many parts of the state, both rural and urban, shoals of water drove people from their homes and forced many of them to seek shelter for their livestock.
Understanding the reasons for massive flood in Assam this year
- The Bay has a major influence on the monsoon in Northeast India.
- Two coupled ocean-atmosphere phenomena, one from the distant Pacific, La Niña and another in the tropical Indian Ocean, a negative dipole condition, combined to create high rainfall in the Bay of Bengal.
- To add to that, a warmer atmosphere because of climate change can hold more moisture leading to intense bouts of rain.
- Apart from embankment failures, a number of unofficial and media reports suggest that the devastation in the floodplains is also a consequence of the way the dams and reservoirs are operated.
- This indicates that environmental factors unique to each locality are responsible for the floods.
- The flooding pattern is usually repeated year-to-year. However, at times, this pattern is disturbed — this year for example.
- The incidence of such megafloods depends on several variables like unusually high rainfall and the failure of critical embankments.
Role of floods in the making of the floodplain environment and ecology
- Rejuvenation of ecosystem: Floods cause disruption and damage but they also generate a bounty of fish and rejuvenate flood-plain ecosystems all along the Brahmaputra, including in the Kaziranga.
- Landscape: This landscape has been shaped over millions of years with the help of an active monsoonal environment and mighty rivers that carry sediments weathered from the still-rising Himalaya.
- Every year, the Brahmaputra and its tributaries — which are at the centre of Assam’s environment — transport billions of tonnes of sediment, mainly from the Eastern Himalaya, making the landscape volatile.
- Flooding helps release waters to surrounding land and distribute sediments and nutrients across the floodplains and wetlands.
How human presence has influenced floodplains
- As the human footprint intensified on the floodplains, the landscape was increasingly “developed and engineered”.
- The engineered and planned landscape has affected the floodplains in two ways: It has undermined their ability to store and absorb water and reduced their capacity to transport sediment.
- Urban floods: This year’s floods took an especially worrying proportion in several urban areas.
- Guwahati has historically been a lowland and the city has been uniquely shaped by three hills that accumulate water during the monsoon.
- Its northern side faces one of the most turbulent rivers in the world.
- However, extensive swamps, channels and their tributaries worked in tandem to make the place habitable.
- A transformation, however, took place in the 20th century, especially in the later decades, when these natural features were forced to disappear.
- From an estimated 11,000 people in 1901, the city now is home to close to 1.1 million people.
- Such a population increase is bound to have several footfalls and not all of them could have been prevented.
- What has hit the city hardest is the disappearance of some of its critical environmental features.
Way forward
- Human interventions such as dams to “tame” rivers and “stabilise” hydrologically dynamic landscapes and riverscapes should be based on guidelines that account for the environmental conditions in Northeast India, especially the fragile geology, changing rainfall patterns, high seismicity and the risk of landslides.
- Resilience of people: The rapid transformation in rainfall characteristics and flooding patterns demand building people’s resilience.
- Reconsider projects: Construction projects that impede the movement of water and sediment across the floodplain must be reconsidered.
- Use of technology: At the same time, climate-imposed exigencies demand new paradigms of early-warning and response systems and securing livelihoods and economies.
Conclusion
Floods have played a key role in Assam’s ecology. But increasing human footprint has affected the ability of flood plains to absorb water and transport sediment.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Indian aviation sector- challenges and opportunities
What is the issue?
Policymakers ought to recognise the country’s untapped potential and work towards dismantling the many hurdles.
What is the significance of aviation sector?
India is the world’s third-largest market in aviation sector.
- Aviation is integral to equitable economic growth, for a country to be globally competitive and to change the situation of poverty and unemployment.
- Passenger airlines and air cargo overcome geography and connect remote areas that are alienated from the mainstream.
- They can drive investment deep into the country, giving people access to markets.
- They also boost tourism, which is the largest employment generator in the unorganised sector.
What is the status of aviation sector in India?
- Pre-economic reform period– India had only two airlines – Air India and Indian Airlines.
- Post 1991 reforms– The reforms that opened up the aviation sector in 1991 and ended the licence raj and the monopoly of Indian Airlines and Air India changed the sector.
- Numerous private sector airlines were given the licence to fly, but Jet Airways and Sahara, survived, resulting in cartelisation.
- The concept of low cost airlines in India took shape in 2003 which overcame the cost barrier.
- Sadly, Indian aviation has become ‘the sick man of India’.
What are the barriers in Indian aviation sector?
- Per capita consumption of air tickets – The number of Indians who buy air tickets in 2019 is 140 million of which 35 million to 40 million frequent flyers form the bulk of ticket buyers.
- It translates to less than 4% of the population who can afford air travel, placing India just alongside some poorer African countries, in terms of the per capita consumption of air tickets.
- Factors affecting the growth of aviation sector– The growth of aviation has been affected by
- Choking regulations
- Tough entry barriers for new entrants
- High fuel prices on account of sky high taxes
- Inefficient public sector airports that pave the way for monopoly airports
- Frequent and knee-jerk changes point to the absence of a long-term visionary strategic policy for the entire gamut of sectors in aviation.
How efficient are government schemes in the development of the airline sector?
- Boosting entrepreneurship- Start-up India initiative was started with the objective of supporting entrepreneurs, building a robust startup ecosystem and transforming India into a country of job creators.
- Regional connectivity– Ude Desh Ka Aam Naagrik (UDAN) scheme aims to connect small and medium cities with big cities through air service.
- Low cost airlines– UDAN plans to connect the underserved airports to key airports through flights that will cost Rs 2,500 for per hour flight.
- Comprehensive development– The National Civil Aviation Policy 2016 aims to take flying to the masses and covers 22 areas of the Civil Aviation sector.
What reforms are needed?
- Reforms in all sectors– It is critical to understand that for passenger airlines to grow, there have to be reforms in all areas of aviation – air cargo, airports, aviation fuel taxes and Maintenance, Repair and Overhaul (MRO).
- Updated laws– India’s Aircraft Act, 1934 and Aircraft Rules, 1937 need to be updated to keep pace with modern technology in aerospace, increasing costs to the industry and ultimately affecting passenger growth.
- Overhaul DGCA – India’s statutory regulatory authority, the Directorate General of Civil Aviation (DGCA), needs to be modernised, well-staffed, motivated and incentivized.
- Need for aviation professionals– There need to be aviation professionals in charge rather than the ubiquitous bureaucrat from the Indian Administrative Service.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Nutrition Mission
Mains level: Paper 2- Need for direct nutrition intervention
Context
More than seven decades after independence, India still suffers from the public health issues such as child malnutrition attributing to 68.2% of under-five child mortality.
What is malnutrition?
- Malnutrition refers to deficiencies, excesses or imbalances in a person’s intake of energy and/or nutrients.
- The term malnutrition covers 2 broad groups of conditions.
- One is ‘undernutrition’—which includes stunting (low height for age), wasting (low weight for height), underweight (low weight for age) and micronutrient deficiencies or insufficiencies (a lack of important vitamins and minerals).
- The other is overweight, obesity and diet-related non-communicable diseases (such as heart disease, stroke, diabetes, and cancer).
Marginal improvement on Stunting and Wasting
- The National Family Health Survey (NFHS-5) has shown marginal improvement in different nutrition indicators, indicating that the pace of progress is slow.
- This is despite declining rates of poverty, increased self-sufficiency in food production, and the implementation of a range of government programmes.
- Children in several States are more undernourished now than they were five years ago.
- Increased stunting in some states: Stunting is defined as low height-for-age.
- While there was some reduction in stunting rates (35.5% from 38.4% in NFHS-4) 13 States or Union Territories have seen an increase in stunted children since NFHS-4.
- This includes Gujarat, Maharashtra, West Bengal and Kerala.
- Wasting remains stagnant: Wasting is defined as low weight-for-height.
- Malnutrition trends across NFHS surveys show that wasting, the most visible and life-threatening form of malnutrition, has either risen or has remained stagnant over the years.
National Nutrition Mission (NNM): Focus on essential nutrition interventions
- Government appears determined to set it right — with an aggressive push to the National Nutrition Mission (NNM), rebranding it the Prime Minister’s Overarching Scheme for Holistic Nutrition, or POSHAN.
- Window of opportunity: The Ministry of Women and Child (MWCD) continues to be the nodal Ministry implementing the NNM with a vision to align different ministries to work in tandem on the “window of opportunity” of the first 1,000 days in life (270 days of pregnancy and 730 days; 0-24 months).
- POSHAN Abhiyaan (now referred as POSHAN 2.0) rightly places a special emphasis on selected high impact essential nutrition interventions, combined with nutrition-sensitive interventions, which indirectly impact mother, infant and young child nutrition, such as improving coverage of maternal-child health services, enhancing women empowerment, availability, and access to improved water, sanitation, and hygiene and enhancing homestead food production for a diversified diet.
Key findings of NHFS-5 data
- Data from the National Family Health Survey (NFHS)-5 2019-21, as compared to NFHS-4 2015-16, reveals a substantial improvement in a period of four to five years in several proxy indicators of women’s empowerment.
- No progress on nutritional intervention: Alarmingly, during this period, the country has not progressed well in terms of direct nutrition interventions.
- Preconception nutrition, maternal nutrition, and appropriate infant and child feeding remain to be effectively addressed.
- India has 20% to 30% undernutrition even in the first six months of life when exclusive breastfeeding is the only nourishment required.
- Neither maternal nutrition care interventions nor infant and young child feeding practices have shown the desired improvement.
Suggestions
- Child undernutrition in the first three months remains high. Creating awareness on EBF, promoting the technique of appropriate holding, latching and manually emptying the breast are crucial for the optimal transfer of breast milk to a baby.
- Complementary feeding: NFHS-5 also confirms a gap in another nutrition intervention — complementary feeding practices, i.e., complementing semi-solid feeding with continuation of breast milk from six months onwards.
- The fact that 20% of children in higher socio- economic groups are also stunted indicates poor knowledge in food selection and feeding practices and a child’s ability to swallow mashed feed.
- Creating awareness: So, creating awareness at the right time with the right tools and techniques regarding special care in the first 1,000 days deserves very high priority.
- Revisit nodal system for nutrition program: There is a need to revisit the nodal system for nutrition programme existing since 1975, the Integrated Child Development Scheme (ICDS) under the Ministry of Women and Child and examine whether it is the right system for reaching mother-child in the first 1000 days of life.
- Alternative way to distribute ICDS supplies: There is also a need to explore whether there is an alternative way to distribute the ICDS supplied supplementary nutrition as Take- Home Ration packets through the Public Distribution (PDS) and free the anganwadi workers of the ICDS to undertake timely counselling on appropriate maternal and child feeding practices.
Conclusion
It is time to think out of the box, and overcome systemic flaws and our dependence on the antiquated system of the 1970s that is slowing down the processes.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- \Multilateral engagement vs. bilateral engagement
Context
At a time when the world is trying to grapple with the impact of unprecedented problems which arose in the first two decades of the 21st century, the various intergovernmental organisations and groupings, which are undergoing fundamental changes, may not be fertile places for building peace.
Contradiction in the BRICS
- The 14th virtual BRICS summit hosted by China (June 23-24) was a clear attempt by China to hijack the grouping, going by a blueprint it has prepared for the new world order.
- Not a political grouping: BRICS was not meant to be a political grouping when the acronym, BRIC, was coined by Goldman Sachs economist Jim O’Neill in 2001.
- Economic grouping: Seeing the possibility of developing a non-western global economic system, China welcomed the idea of BRICS as the nucleus of a new economic grouping and invested energy and resources in building it.
- Two permanent members of the Security Council together with three aspirants to permanent membership underscored the contradictions in composition.
- No support for permanent membership: The fundamental question of support for the three countries to secure permanent membership was fossilised on China’s position that the role of the developing countries should be enhanced, implying that there shall be no expansion of the permanent membership of the Security Council.
- But the grouping focused on possibilities of cooperation among them by developing institutions such as the New Development Bank, the BRICS Contingent Reserve Arrangement and cooperation in certain sectors.
- India-China relations: The entire fragile framework of limited cooperation was shattered with the bloodshed at Galwan, when China unilaterally sought to alter the situation on the Line of Actual Control (LAC).
- China showed no enthusiasm to bring India into the Asia-Pacific Economic Cooperation (APEC) even after India met the criteria of a liberalised economy.
- Expansion for friends: The way China brought in 13 like-minded countries through the back door for a high-level dialogue on global development smacked of unfair means to expand the group with their friends.
What was achieved by India at G7 meeting
- India’s presence at G7 meetings are not rare and Germany invited the India to attend the G7 summit in Bavaria.
- The G7 made its own statement on the Ukraine war on expected lines and India was only involved in other issues such as environment, energy, climate, food security, health, gender equality and democracy.
- Since it was a war summit, it did not produce any results on other major issues.
- Curtailing energy supplies from Russia would hurt Germany, France, Japan and others, but they could not get any exemption.
- India’s gain has been the opportunity it got to interact with world leaders, though it was tinged with the disappointment that India, as a Quad member, did not condemn Russia’s action in Ukraine.
Conclusion
Multilateral negotiations will be increasingly difficult in the present chaotic global situation. It is only by working bilaterally with potential allies that India can attain the status of a pole in the new world with steadfast friends and followers.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Poverty line
Mains level: Paper 3- Estimating poverty in India
Context
There has been an uproar about the working papers of the IMF and World Bank, reporting no or low poverty for India in the pandemic year or just before that.
About the IMF paper
- The paper by Roy and Weide (2022) for the World Bank explores the possibility of using CMIE (unemployment data) in poverty calculations after correcting for the unrepresentative character of its panel data by modifying the weightages of households for aggregation.
- These adjustments carried out to remove the non-convergence of the CMIE data with other macro statistics have resulted in a poverty figure of 12 per cent.
What does the poverty index measure or attempt to capture?
- Its construction involves complex calculations — to identify a poverty basket of consumption, working out price indices for updation of the poverty line and then applying it to the income or consumption of households for determining their poverty status.
- Absence of consumption expenditure: The computation becomes far more challenging in the absence of data on consumption expenditure as is the case in India and several developing countries.
- Intending to provide inputs for policy making, researchers have evolved ingenious methods of estimating the data, using past datasets and those that have not been designed to get robust expenditure estimates.
Background of poverty line in India
- A nine-member working group set up by the Planning Commission proposed the poverty line at Rs 20 per capita per month in the early Sixties, loosely ensuring the adequacy of minimum requirements.
- Poverty line based on calorie needs: Dandekar and Rath (1970) went into detail about minimum calorie needs, based on the average consumption pattern.
- Issues with calorie based poverty line: During the Eighties and Nineties, it was realised that this linkage is getting blurred due to changes in the consumption pattern, microenvironment for living, etc.
- Sukhatme argued that the emphasis on calories and nutrition is misplaced as the absorption of nutrients depends on physical health, particularly the presence or absence of gastrointestinal diseases.
- Water and sanitation facilities were noted as important in determining the poverty line.
- It was accepted that the state, through poverty interventions, cannot and should not try to guarantee adequate nutrition to people.
- Delinking the nutritional norms: The Tendulkar Committee formally announced delinking of nutritional norms from poverty in 2010.
Extrapolating the consumption expenditure on NSS 2011-12
- Bhalla, Virmani and Bhasin (2022) in their IMF Working Paper have developed a method of interpolation and extrapolation of the consumption expenditure of the NSS 2011-12 and building a series up to 2019-20.
- They use the growth rate of private final consumption expenditure (PFCE) but bring in the distributional changes by allowing household consumption to grow as per the nominal per capita income in each state.
- Takes into account rural-urban price difference: Rural-urban price differences are also introduced through separate poverty lines.
- The method is reasonable except that it assumes the distributions to remain unchanged both within the rural and urban segments in each state over 2014-20.
- Also, the growth rates of different commodities in the PFCE are significantly different and hence commodity-wise adjustments can be done to give higher weights to the items of consumption by the poor.
- Taking into account the role of state: The most significant contribution of the study is its bringing in the differential engagement of the state in the provisioning of the essentials to the poor into poverty calculations.
- This opens up the possibility of changes in the level of state engagement in poverty estimation, including free gas cylinders, etc.
Conclusion
People find the World Bank paper figures pegged at 12% more acceptable not because of the methodology but the magnitude. One does not know whether the poverty estimate would be a bit higher had the adjustments been carried out for a few other parameters and also at the state level.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Dutch disease
Mains level: Paper 3- Inflation challenge
Context
The Indian economy has been hit by inflationary shocks of late.
Inflation story so far
- RBI mandate: The inflation target of the Reserve Bank of India is 4 per cent, with a band of 2 per cent on either side.
- Inflation was at or above the upper threshold of 6 per cent since the beginning of this year.
- Only after inflation hit 7 per cent did the RBI raise the repo rate.
- Increase in interest rate: The RBI has raised the cost of borrowing (by 90 basis points so far), with a promise of more to come.
- Fuel taxes reduced: The central government has cut fuel taxes with alacrity, and has banned the export of certain items.
Role of monetary authorities
- Monetary authorities raise interest rates if inflation is above the preferred target, and vice versa.
- What should be the interest rate? Interest rates should rise more than inflation so the “real” interest rates rise, causing a compression in demand (and a fall in economic activity), which in turn will reduce inflation.
- The RBI embraced this idea. In 2016, an independent monetary policy committee was constituted.
Effects of global inflation
- Some part of inflation is coming from abroad is an added complication.
- Outflow of fund: There has also been a steady outflow of foreign funds from the stock market.
- Depreciation of rupee: This could cause the rupee to depreciate, in turn, raising the prices of imported goods thereby adding to the inflationary woes.
Two ways in which the Indian economy is different
1] Role of agriculture in Indian economy
- India’s non-food and non-oil components of the consumer price index CPI are about 47 per cent.
- In comparison, for the ECB, it is less than one-third of the CPI.
- Of course, the RBI has no control over international prices of food and oil, so it must squeeze less than 50 per cent of the domestic economy to lower inflation.
- The real interest rise works through demand compression.
- But the problem is on the supply side.
- Also, as compared to the RBI, the ECB would suffer a lower rise in inflation, and has a larger menu on which to apply demand compression.
2] Exchange rate and its effect on output
- Until the 1970s, the accepted wisdom was that an economy had to achieve both internal balance and external balance.
- Internal balance consisted of full employment and low inflation using monetary and fiscal policies.
- Over time, the internal balance has come to mean, from a policy perspective, low inflation, since “the market” will ensure full employment.
- External balance required a balanced current account over some horizon (“don’t get too much into foreign debt”), by using, for example, the exchange rate.
- For the OECD countries, the external balance was not a constraint any longer, since they had made their currencies fully convertible, and international capital flows were unrestricted.
- But this is not the case with India.
- If it were so, no one would be interested in discussing the country’s foreign exchange reserves, because these could be generated instantaneously by exchanging the domestic currency for foreign exchange.
India’s foreign reserves and its impact on competitiveness of Indian products
- Until 2020, India had seen massive portfolio capital inflows when OECD interest rates were low, and its current account deficits were financed by foreign reserves.
- But portfolio inflows can, and do, reverse themselves.
- FII inflows also contribute to India’s lack of competitiveness.
- The RBI bought foreign exchange (with rupees).
- But fearing this would stoke inflation, it sold government bonds, and removed the excess liquidity.
- This “sterilised intervention” saw the RBI’s foreign exchange assets going up, matched by a reduced holding of government bonds.
- Thus, India’s foreign exchange reserves were not its “own”— there were liabilities against it.
- India’s Dutch Disease: The RBI could have let the rupee appreciate or have accumulated foreign reserves.
- It chose an intermediate solution — a mix of an appreciation and accumulation of reserves.
- The appreciation caused by inflows reduced international competitiveness for Indian products.
- In effect, we had our own episode of the “Dutch Disease”.
Way forward
- As the RBI raises interest rates, outflows will possibly slow down with the rupee appreciating.
- That is not good for external balance.
- It is easy to see that inflation targeting could be at odds with external balance.
Conclusion
If inflation does prove stubborn, and fighting inflation is all that the authorities in India worry about, we could see an external crisis.
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Back2Basics: What is Dutch Disease?
- Dutch disease is an economic term for the negative consequences that can arise from a spike in the value of a nation’s currency.
- It is primarily associated with the new discovery or exploitation of a valuable natural resource and the unexpected repercussions that such a discovery can have on the overall economy of a nation.
- Symptoms include a rising currency value leading to a drop in exports and a loss of jobs to other countries.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Issues with export ban
Context
There are reports suggesting that the government is mulling a ban on rice exports to tame inflation.
Background
- This is surely not the first time an attempt is being made to ban wheat and rice exports.
- It was also done in 2007-08, in the wake of the global financial crisis.
- Perhaps government will also impose stocking limits on traders for a host of commodities, suspend futures trading in food items, and even conduct income tax raids on traders of food.
Issues in India’s rice export strategy
- Highest ever volume: India exported the highest-ever volume of 21 million metric tonnes (MMT) of rice in 2021-22 (FY22) in a global market of about 51.3 MMT, which amounts to about 41 per cent of global exports.
- Reduces price: Such large volumes of rice exports brought down global prices of rice by about 23 per cent in March (YoY), when all other cereal prices, be it wheat or maize, were going up substantially in global markets.
- In fact, in FY22, the unit value of exports of common rice was just $354/tonne, which was lower than the minimum support price (MSP) of rice.
- Below MSP buying or leakage from PMGKAY: This meant that rice exporters were either buying rice (paddy) from farmers and millers at below the MSP or that quite a substantial part of rice was given free under the PM Garib Kalyan Ann Yojana (PMGKAY) was being siphoned away for exports at prices below MSP.
- Artificial competitive advantage: Free electricity for irrigation in several states, most notably Punjab, and highly subsidised fertilisers, especially urea, create an artificial competitive advantage for Indian rice in global markets.
- Suggestion: This is a perfect case for “optimal export tax” — not a ban — on rice exports.
- If we can’t raise the domestic price of urea, which is long overdue, we should at least recover a part of the urea subsidy from rice exports by imposing an optimal export tax.
Why export ban on wheat and rice is not a solution
- Small contribution of cereals in inflation: In May, the consumer price index (CPI) inflation was 7.04 per cent (YoY). The cereals group as a whole contributed only 6.6 per cent to this inflation.
- Within that, wheat, other than through PDS, contributed just 3.11 per cent and non-PDS rice contributed 1.59 per cent.
- So, by imposing a ban on wheat and rice exports, India can’t tame its inflation as more than 95 per cent of CPI inflation is due to other items.
- Interestingly, inflation in vegetables contributed 14.4 per cent to CPI inflation, which is more than three times the contribution of rice and wheat combined. And within vegetables, tomatoes alone contributed 7.01 per cent.
- What all this indicates is that agri-trade policies need to be more stable and predictable, rather than a result of knee-jerk reactions.
- Irresponsible behaviour: Export bans on food items also show somewhat irresponsible behaviour at the global level, unless there is some major calamity in the country concerned.
- The recently concluded WTO ministerial meeting as well as the G-7 meet expressed concerns about food security in vulnerable nations.
Way forward
- Efficient value chain and processing facilities: In commodities like vegetables, most of which are largely perishable, we need to build efficient value chains and link these to processing facilities.
- The same would go for onions, which often bring tears to kitchen budgets when prices shoot up.
- A switch to dehydrated onion flakes and onion powder would be the answer.
- Our food processing industry, especially in perishable products, is way behind the curve compared to several Southeast Asian nations.
Conclusion
If India wants to be a globally responsible player, it should avoid sudden and abrupt bans and, if need be, filter them through transparent export taxes to recover its large subsidies on power and fertilisers.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2: Custodial deaths and technology
Context
The recent spate of custodial deaths in Tamil Nadu has yet again highlighted the methods used by the police during interrogation.
Custodial deaths in India
- It is not uncommon knowledge that the police, when they grow increasingly frustrated with the trajectory of their interrogation, sometimes resort to torture and violence which could lead to the death of the suspect.
- Custodial deaths are common despite enormous time and money being spent on training police personnel to embrace scientific methods of investigation.
- This is because police personnel are humans from different backgrounds and with different perspectives.
Use of technology by law enforcement agencies
- There is no doubt that technology can help avert police custodial deaths. For example, body cameras could hold officers liable.
- Deception detection tests (DDTs), which deploy technologies such as polygraph, narco-analysis and brain mapping, could be valuable in learning information that is known only to a criminal regarding a crime.
- Among the DDTs, the Brain Fingerprinting System (BFS) is an innovative technology that several police forces contemplate adding to their investigative tools.
- The technique helps investigative agencies uncover clues in complicated cases.
- With informed consent, however, any information or material discovered during the BFS tests can be part of the evidence.
- Police departments are increasingly using robots for surveillance and bomb detection.
- Many departments now want robotic interrogators for interrogating suspects.
- Use of robots: Police departments are increasingly using robots for surveillance and bomb detection.
- Use of robots for interrogation: Many departments now want robotic interrogators for interrogating suspects.
- Many experts today believe that robots can meet or exceed the capabilities of the human interrogator, partially because humans are inclined to respond to robots in ways that they do to humans.
- Robots equipped with AI and sensor technology can build a rapport with the suspects, utilise persuasive techniques like flattery, shame and coercion, and strategically use body language.
- Use of AI/ML: Artificial Intelligence (AI) and Machine Learning (ML) are emerging as tool of interrogations. AI can detect human emotions and predict behaviour.
- Therefore, these are also options.
- ML can in real-time alert superiors when police are meting out inhumane treatment to suspects.
Issues with the use of technologies
- Informed consent: In 2010, the Supreme Court, in Selvi v. State of Karnataka, rendered the BFS evidence inadmissible.
- The court observed that the state could not perform narco analysis, polygraph, and brain-mapping tests on any individual without their consent.
- High cost of technology: As the BFS is high-end technology, it is expensive and unavailable in several States.
- There is a lot of concern about AI or robot interrogations, both legally and ethically.
- Risk of bias: There exists the risk of bias, the peril of automated interrogation tactics, the threat of ML algorithms targeting individuals and communities, and the hazard of its misuse for surveillance.
Way forward
- Multi-pronged strategy: What we need is the formulation of a multi-pronged strategy by the decision-makers encompassing legal enactments, technology, accountability, training and community relations.
- Onus of proof on police: The Law Commission of India’s proposition in 2003 to change the Evidence Act to place the onus of proof on the police for not having tortured suspects is important in this regard.
- Strict implementation of D.K. Basu case guidelines: Besides, stringent action must be taken against personnel who breach the commandments issued by the apex court in D.K. Basu v. State of West Bengal (1997).
- Law against custodial torture: The draft bill on the Prevention of Torture, 2017, which has not seen the day, needs to be revived.
Conclusion
While the technology available to the police and law-enforcement agencies is constantly improving, it is a restricted tool that can’t eradicate custodial deaths. While it might provide comfort and transparency, it can never address the underlying issues that lead to these situations.
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Back2Basics: Supreme Court judgement in DK Basu case
- The DK Basu judgment since 1987 is crucial in dealing with issue of custodial deaths.
- The judgement has origin from a letter complaint in 1986, which was converted into PIL.
- 4 crucial and comprehensive judgments — in 1996, twice in 2001 and in 2015 — lay down over 20 commandments, forming the complete structure of this judgement.
Details of judgment:
First 11 commandments in 1996, focused on vital processual safeguards:
- All officials must carry name tags and full identification, arrest memo must be prepared, containing all details regarding time and place of arrest, attested by one family member or respectable member of the locality.
- The location of arrest must be intimated to one family or next friend, details notified to the nearest legal aid organisation and arrestee must be made known of DK Basu judgement.
- All such compliances must be recorded in the police register, arrestee must get periodical medical examination, inspection memo must be signed by arrestee also and all such information must be centralised in a central police control room.
- Breach to be culpable with severe departmental action and additionally contempt also, and this would all be in addition to, not substitution of, any existing remedy.
- All of the above preventive and punitive measures could go with, and were not alternatives to, full civil monetary damage claims for constitutional tort.
8 other intermediate orders till 2015:
- Precise detailed compliance reports of above orders to be submitted by all states and UT and any delayed responses to be looked into by special sub-committees appointed by state human rights body.
- Also where no SHRC existed, the chief justice of the high courts to monitor it administratively.
- It emphasised that existing powers for magisterial inquiries under the CrPC were lackadaisical and must be completed in four months, unless sessions court judges recorded reasons for extension.
- It also directed SHRCs to be set up expeditiously in each part of India.
The third and last phase of judgment ended in 2015:
- Stern directions were given to set up SHRCs and also fill up large vacancies in existing bodies.
- The power of setting up human rights courts under Section 30 of the NHRC Act was directed to be operationalised.
- All prisons had to have CCTVs within one year.
- Non-official visitors would do surprise checks on prisons and police stations.
- Prosecutions and departmental action to be made unhesitatingly mandated.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Energy security and challenge
Context
Our long-standing “friend“ (Russia) is now in the bad books of our other friends (the US and Europe) and in a deepening relationship with our adversary (China). The Gulf countries are crucial for our energy security but Russia has replaced them as our principal supplier
How Ukraine war is changing the energy policies
- Six months back before the start of the Ukrainian conflict, there was a deepening sense that fossil fuels and the industry built around them were in terminal decline.
- After the Ukraine war began, the petroleum market is tight and prices are ratcheting up.
- Oil prices are close to $120/bbl and gas prices have jumped 500 per cent year on year in Europe.
- The regulatory constraints on petroleum exploration and distribution infrastructure have been eased and several countries have removed the output limits on thermal power generation and reopened the coal mines that were closed.
- The share prices of the oil majors are trading at multi-year highs.
Three issues that influences India’s energy policy
1] Long term implications of buying oil from Russia
- India is now a major purchaser of Russian crude.
- Last month, it reportedly purchased an average of 1.2 mbd.
- If this figure is correct, Russia is now our largest provider of crude oil surpassing Saudi Arabia and Iraq.
- The reason for this ramp-up is the price discount offered by Russia.
- The decision is driven by good economics and energy security.
- The Western world does not, however, see it this way.
- The question does arise: What might be the medium to longer-term implications of our “support” to Russia on relations with Capitol Hill, the UK and the European Commission?
2] Increased economic and energy ties of Russia and China
- Russia and China have, for long, shared the view that the US is their biggest security threat.
- China also increased the purchase of Russian oil and gas.
- This tightened economic and energy embrace has implications for India.
- Several questions will need to be addressed.
- Russia’s role in India-China conflict: How might a post-Ukraine weakened Russia that is in hock to China respond to India in the event matters deteriorate on our border with China?
- Will they be reliable providers of crude oil, military equipment, minerals, and metals essential for our green transition?
- Will they be politically autonomous or client states?
3] Important role of the Gulf states
- The Ukrainian crisis has forced a presidential u-turn. Later this month, President Biden will visit Saudi Arabia.
- Several other European leaders will also beat a path to the Gulf, all in the hope of extracting a promise of higher production to lower oil prices and some to negotiate gas supply deals.
- India needs the Gulf producers for supply security. But it also wants oil prices to come down.
- The position of these producers in the reordered post-Ukraine energy landscape is, therefore, of relevance.
- Will they respond positively to the courtship of Russia/China, move back into the Western fold, or stay outside both orbits, neutral and opportunistic?
- The answer will bear on India’s energy security.
Way forward
- Integrated energy policy: What we need is a mechanism for the development and execution of an integrated energy policy.
- This is because currently there is no executive authority responsible for energy.
- There are ministries responsible for components of energy policy but no formal mechanism for aligning their separate approaches.
- The Ukraine war has disrupted the existing energy order.
- The new energy (dis) order has created fissures that impact our national security, economic growth, trade, clean energy supply lines, transfer of technology and international relations.
- We cannot, therefore, afford to continue with our existing siloed approach.
Conclusion
The Ukrainian crisis has radically altered the contours of the global energy landscape and created a tangle of relationships and issues for India. To smoothen this tangle and address the issues India should adopt “a whole of the system” approach to energy policy.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Liquidity corrridor
Mains level: Paper 3- RBI innovative approach during pandemic
Context
Recently, the RBI has been at the receiving end for mission the inflation target.
Understanding the RBI’s rationale
- Supply side shock: Inflation has been largely the result of supply side shocks from vegetable prices, caused by crop damages due to unseasonal rains (tomato, onion and potato) in late 2019 and widespread supply-side disruptions after the outbreak of the pandemic.
- A narrow-minded focus on inflation caused by supply shocks would have constrained the MPC from supporting growth amidst the unprecedented loss of life and livelihood.
- Focusing on recovery: Therefore, it was necessary to provide a lifeline to the economy at that juncture by focusing on the recovery.
- Moreover, the wide tolerance band of 200bps +/- in the inflation targeting framework was specifically designed to accommodate such supply shocks, which provided the flexibility in the flexible targeting (FIT) framework.
- Taking into account objective of growth: In contrast to a pure inflation targeting framework (inflation nutters), the amended mandate of the RBI under FIT reads as “price stability, taking into account the objective of growth”.
- Therefore, the MPC was justified in looking through the higher inflation print during the pandemic while trying to resurrect growth.
No contradiction between Governor’s statement and MPC resolution
- Recently, the MPC highlighted inflation concerns and voted to raise the policy repo rate.
- The governor’s statement of the same day noted that the RBI will ensure an orderly completion of the government’s borrowing programme.
- Contradictory objectives: It is said that the above two actions created confusion as lowering inflation and lowering government bond yields are contradictory objectives.
- This justification is redundant as an orderly completion of the borrowing programme does not imply lowering yields.
- It basically ensures that the borrowing programme is completed seamlessly at low costs (ensured through auctions).
- Moreover, from a theoretical perspective, this is not inconsistent because controlling inflation and lowering inflation expectations bodes well for the term premia of bond yields — which moderate once expectations are anchored.
- Therefore, if inflation is reined in, the government stands to gain in terms of lower interest costs.
- Was width of corridor lost during pandemic? It is argued that the MPC kept repo rates unchanged while the RBI changed the reverse repo rate during the pandemic, meaning that the fixed width of the corridor was lost and the MPC lost its role in setting interest rates and so, its credibility.
- This argument does not stand scrutiny.
- During the pandemic, the policy repo rate was cumulatively reduced by an unprecedented 115 bps and the interest rate on the overnight fixed-rate reverse repo was reduced cumulatively by 155 bps.
- Assymetric corridor justified in crises: This measure was not incongruous with contemporary wisdom as an asymmetric corridor has been justified, particularly during crisis times (Goodhart, 2010).
- Given that elevated inflation concerns precluded the possibility of any further repo rate cuts (cumulatively reduced by 250 basis points since February 2019), financial conditions were eased substantially by reducing the reverse repo rate, which lowered the floor rate of interest in the economy.
- Since the mandate of the MPC is to control inflation for which the policy instrument is the repo rate, the RBI had used the LAF through changes in the reverse repo rate to alter liquidity conditions.
Trade offs involved in inflation targeting for emerging economies
- Inflation-targeting countries, because of their sole focus on inflation, experience lower inflation volatility but higher output volatility.
- Higher output volatility entails a higher sacrifice ratio — the proportion of output foregone for lowering inflation.
- For an emerging economy, the costs of higher output foregone against the benefits of lower inflation must always be balanced as potential output keeps on changing given the shift of the production function.
- Developed countries, on the other hand, operate near full employment — therefore, sacrifice ratios are lower.
- As a result, smoothening inflation volatility is relatively costless for them.
Conclusion
The RBI has innovated admirably under its current stewards during the pandemic, keeping in mind the task of reinvigorating the economy. Despite the existing targeting framework, it did not get fixated on a one-point agenda, daring to look beyond the inflation print.
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Back2Basics: Liquidity corridor
- The Corridor in monetary policy of the RBI refers to the area between the reverse repo rate and the MSF rate.
- Reverse repo rate will be the lowest of the policy rates whereas Marginal Standing Facility is something like an upper ceiling with a higher rate than the repo rate.
- The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Schedules of the Constitution
Mains level: Paper 2- Strengthening anti-defection law
Context
The political developments in Maharashtra throw up troubling questions about how the political class is weakening the anti-defection law.
Background of the anti-defection law
- It was enacted as the Tenth Schedule of the Constitution of India, in 1985, under Rajiv Gandhi’s premiership.
- The law as it was enacted provided for the disqualification of a legislator belonging to a political party if he voluntarily gave up his membership of his party or if he defied the whip of his party by voting contrary to its directions in the legislative house.
- Two exceptions: Initially, there were two exceptions provided in the schedule which would exempt a legislator from disqualification.
- 1] Split: The first exception was a split in their original political party resulting in the formation of a group of legislators.
- If the group consisted of one third of such legislators of that party, they were exempted from disqualification.
- This exception was deleted from the schedule through a Constitution Amendment Act of 2003 because of frequent misuse.
- 2] Merger: The second exception was ‘merger’ which can be invoked when the original political party of a legislator merges with another party and not less than two thirds of its legislators agree to such a merger.
Interpretation of term ‘merger’ and issues with it
- It is this second exception contained in paragraph four of the schedule which has been taken recourse to by a large number of legislators across States and even in Parliament to defect to the ruling party.
- These legislators interpreted for themselves the term ‘merger’ to mean the merger of two thirds of legislators.
- Now, the same is being repeated in Maharashtra.
- But there is a little difference here.
- It appears that the dissidents of Shiv Sena believed that if they get the two third number they can form a separate group and topple the government and then form a government with the help of the Bharatiya Janata Party.
- The law imposes the condition of merger of the original political party.
- However, a recent judgment of the Goa Bench of the Bombay High Court ( Girish Chodankar vs The Speaker, Goa State Legislative) that held that the merger of two thirds of Members of the Legislative Assembly is deemed to be the merger of the original party seems to have given them a ray of hope.
- So, the legal position is if the dissidents do not merge with another party they will be disqualified now or later.
Question of disqualification
- Disqualification petitions have been filed by the Shiv Sena against 16 of the dissidents under paragraph 2(1)(a) on the ground that they have voluntarily given up the membership of the party.
- The question of whether they have voluntarily given up the membership of the party is decided on the basis of the conduct of a member.
- In Ravi S. Naik vs Union of India (1994), the Supreme Court had said “an inference can be drawn from the conduct of a member that he has voluntarily given up the membership of the party.
Weakening the anti-defection law
- Unprincipled defection: The ongoing developments in Maharashtra have once again brought before the country the reality of what the Supreme Court also described as the political evil of unprincipled defection.
- But the order of the Supreme Court, on June 27, on petitions from the dissidents in the Shiv Sena, gives undue advantage to the dissident legislators.
- The Court has granted them a longer time to submit replies than the rules mandate.
- This order is going to set in motion certain political developments which will resurrect in a big way what the Supreme Court characterised as political evil.
- The intervention by the Supreme Court too has thrown up some crucial question.
- Kihoto Hollohan case: The first question is whether the Court can intervene at a stage prior to the decision by the Deputy Speaker.
- A Constitution Bench of the Supreme Court had held in Kihoto Hollohan (1993) that judicial review cannot be available prior to the making of a decision by the Speaker nor at an interlocutory stage of the proceeding.
- The notice of no-confidence against the Deputy Speaker has added another piece to the jigsaw puzzle.
- Nabam Rebia case: The Supreme Court had held in Nabam Rebia (2016) that the Speaker shall not decide the disqualification cases till the no-confidence motion against him is disposed of.
- The House rules clearly say that the notice of no-confidence against the Speaker/Deputy Speaker needs to be admitted in the first place which is done only by the Speaker.
- But it is the House which takes the final decision on the motion. If the notice of no-confidence does not contain specific charges, it can be disallowed by the Speaker.
- Further, the notice can be given only if the House is summoned.
- When the notice was given, the Assembly was not convened. So, the notice against the Deputy Speaker can have no validity under the rules.
Conclusion
The law, though not perfect, is a serious attempt to strengthen the moral content of democracy. There will be shortcomings in this Bill but as we see and identify those shortcomings we should try to overcome them.
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