Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Factors contributing to the drop in oil prices and implications for India.
Context
The global economy, grappling with the COVID-19 pandemic, is now facing an energy war, with crude oil prices crashing in the international market.
Developments that contributed to the fall in oil prices
- First, Crude oil prices tanked, as the Organisation of the Petroleum Exporting Countries (OPEC) and its alliance partners failed to reach any consensus on cutting back production to levels that would enable prices to remain stable.
- Second, the U.S., as the largest oil producer today, has stayed away from the OPEC-plus arrangement, hoping that production cuts by OPEC-plus countries will help it increase its market share.
- Russia refused any production cuts, unleashing an energy war with Saudi Arabia. There has been a spectacular fall of around 30% in crude oil prices.
- The International Energy Agency (IEA) has scaled down global demand for oil, a move not taken by the energy watchdog since 2009.
- COVID-19 Factor: Demand for oil had already weakened owing to the global economic slowdown, and this weakening has become more pronounced due to the COVID-19 pandemic, which has hit China’s economy and reduced consumption by the world’s largest importer.
The US-Russia oil war
- Denying market share to the US oil producer: Russia’s decision to reject any production cuts is driven directly by its strategy of denying market share to American shale oil producers.
- Shale oil companies can sustain in high prices only: The American shale oil producers rely on higher prices in the range of $50-$60 to remain profitable because of higher production costs.
- At $31 per barrel, not more than five American shale oil producers can remain profitable.
- Sanctions on Rosneft: Russia also remains resentful of sanctions imposed on Rosneft, which is building the gas pipeline project Nord Stream 2 across the Baltic Sea, carrying Siberian gas to Germany, a major consumer.
- Delay in completion of the pipeline: This pipeline was delayed due to opposition from Denmark’s environmental activists and could not be completed before the U.S. sanctions kicked in.
- Moscow has accused Washington of using geopolitical tools for commercial reasons.
- The energy war over prices is Russia’s revenge, to cripple the American shale oil industry.
- Russia’s signal to Saudi Arabia: Russia is also signalling to Saudi Arabia that its American patrons can do little to protect its oil interests and it would be prudent for Saudi Arabia to reach some understanding with Russia.
- Both Saudi Arabia and Russia depend heavily on oil revenues — upwards of 80% of export revenues accrue from crude oil.
- Russia and Saudi Arabia fighting for market share: Both are also fighting to retain market share.
- Impact on India: It has been reported that Saudi Arabia has agreed to supply crude oil at lower rates to refiners in India and China, two primary customers, but refused to supply to other refiners in Asia. This will have an impact on India’s oil procurement from the U.S.
The benefits to importing countries
- Why the price drop matters to India? Lower crude oil prices are not necessarily bad news for oil importing countries like India, which is the world’s third-largest importer of crude oil and the fourth largest importer of LNG.
- Collateral adverse consequences: There are, however, collateral adverse consequences like the battering of the stock markets worldwide.
- Impact on the global economy: The global economy, already impacted by President Donald Trump’s trade war with China and other countries, including India, and the COVID-19 pandemic, may find lower energy costs helpful in overall growth.
Benefits for India
- From a high of $147 per barrel in 2008, crude oil prices have fallen to around $24 per barrel and may even go further southwards.
- How much the price drop matter for India? India, with 80% of its energy requirements met by imports from the international market, stands to save ₹10,700 crores for every $1 drop in prices.
- Non-oil related factors: While this may help manage the current account deficit, fiscal deficit and inflation, there are non-oil related collateral factors that can cause countervailing adverse economic impact.
How long Russian and Saudi Arabia can sustain the war?
- Can Russia and Saudi Arabia sustain the energy war for long?
- Saudi Arabia’s production cost is the cheapest in the world and it can ramp up production to around 12 million barrels a day.
- By offering discounts, it can undercut other producers, including Russia.
- Domestic considerations also matter.
Conclusion
There is no doubt that India will benefit from lower oil prices if the cost of fuel at the pump is passed on to consumers. It will reduce transportation costs and boost demand. The consumer, however, may not benefit much since the government may choose to use this financial windfall for other purposes, like bailing out banks which have been hollowed out by NPAs to leading Indian companies.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- India's growing defence export.
Context
Based on the latest estimates released by the Stockholm International Peace Research Institute (SIPRI) in the period between 2009-13 and 2014-18, Indian defence imports fell even as exports increased.
What are the factors responsible for the shift?
- Make in India initiative: The first is the ‘Make in India’ initiative, as part of which a number of components from Indian private and public sector enterprises have been prioritised by the government.
- Delay by vendors in supplying equipment: The second set of factors is extraneous to India in the form of delays in supplying equipment by vendors and the outright cancellation of contracts by the Indian government or at least a diminution of existing contracts.
How ‘Make in India’ made the difference?
- DPP’s measures to build India’s defence industry: Under the ‘Make in India’ initiative, the Defence Procurement Procedure (DPP) lays out the terms, regulations and requirements for defence acquisitions as well as the measures necessary for building India’s defence industry.
- It created a new procurement category in the revised DPP of 2016 dubbed ‘Buy Indian Indigenously Designed, Developed and Manufactured’ (IDDM).
- Earmarking projects for MSMEs: The ‘Make’ procedure has undergone simplification “earmarking projects not exceeding ten crores” that are government-funded and ₹3 crores for Micro, Small and Medium Enterprises (MSMEs) that are industry-funded.
- Technology transfer to private companies: In addition, the government has also introduced provisions in the DPP that make private industry production agencies and partners for technology transfers.
- The growing share of SMEs in the defence market: Small and Medium Enterprises (SMEs) until 2016 accounted for a 17.5% share of the Indian defence market.
- According to the government of India data for the financial year 2018-19, the three armed services for their combined capital and revenue expenditures sourced 54% of their defence equipment from Indian industry.
- Four companies among the top 100: Among arms producers, India has four companies among the top 100 biggest arms producers of the world.
- It is estimated, according to SIPRI, their combined sales were $7.5 billion in 2017, representing a 6.1% jump from 2016.
- All four of these companies are public sector enterprises and account for the bulk of the domestic armament demand.
- The largest Indian arms producers are the Indian ordnance factories and the Hindustan Aeronautics Limited (HAL), which are placed 37th and 38th, respectively, followed by Bharat Electronics Limited (BEL) and Bharat Dynamics Limited (BDL).
Reasons for falling imports
- Cancellation of contracts: Indian defence acquisitions have also fallen due to the cancellation of big-ticket items. For instance the India-Russia joint venture for the development of the advanced Su-57 stealth Fifth Generation Fighter Aircraft (FGFA).
- India cancelled involvement in 2018 due to rising dissatisfaction in delays with the project as well as the absence of capabilities that would befit a fifth-generation fighter jet.
- Reduction in order: In 2015, the Modi government also reduced the size of the original acquisition of 126 Rafale Medium Multi-Role Combat Aircraft (MMRCA) from Dassault to 36 aircraft, which is also responsible for significantly driving down the import bill.
- Delay by suppliers: That apart, the delays in the supplies of T-90 battle tanks, and Su-30 combat aircraft from Russia and submarines from France, in 2009-13 and 2014-18, also depressed imports.
- Industrial model at odds with the global trend: India’s defence model faces challenges despite the positive trends generated by ‘Make in India’.
- SMEs still face stunted growth because India’s defence industrial model is at odds with global trends in that it tends to create disincentives for the private sector.
- Governments, including the incumbent, have tended to privilege Defence Public Sector Units (DPSUs) over the private sector, despite ‘Make in India’.
- Undermining the private sector: This model is highly skewed, undermining the growth of private players and diminishes the strength of research and development.
The rise in Indian defence export
- Considerable rise between 2012 and 2019: The period between 2012 and 2019 saw Indian defence exports experiencing a considerable jump sourced from Indian public and private sector enterprises.
- In the last two fiscal years, 2017-18 and 2018-19, exports have witnessed a surge from ₹7,500 crore to ₹11,000 crores, representing a 40% increase in exports.
- Measures introduced by the government: The sharpest rise in defence export products can be attributed to the measures introduced by the government which in 2014, delisted or removed several products that were restricted from exports.
- It dispensed with the erstwhile No Objection Certificate (NOC) under the DPP restricting exports of aerospace products, several dual-use items and did away with two-thirds of all products under these heads.
- According to the Ministry of Commerce and the Industry, Export-Import Data Bank export of defence items in the aerospace category has witnessed an increase in value.
- Small naval crafts account for the bulk of India’s major defence exports. However, the export of ammunition and arms remain low.
- As a percentage of total Indian trade, defence-related exports for the fiscal years 2017-18 and 2018-19 were 8 and 0.73%, respectively.
Conclusion
From a volume and value standpoint, Indian defence exports, while showing a promising upward trend, still remain uncompetitive globally. It is likely that Indian defence exports will take several years before they are considered attractive by external buyers. But green shoots are emerging in a sector that has long been devoid of any dynamism and Indian policymakers should make the most of the opportunities this represents.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: "Natural Disaster" clause in FRBM Act.
Mains level: Paper 3-What should be the policy response of the government to the damage inflicted by the Covid-19 on the economy.
Context
Though there is coherence in India’s response to the Covid-19, still there is more that needs to be done.
Sense of coherence in India’s response
- Since last week, a sense of coherence is settling over India’s response to the COVID-19 outbreak.
- The national lockdown, the incomes and credit support, and the three-month debt moratorium announced by the government and the RBI are the needed first steps to contain the outbreak on the one hand and lessen the economic impact on the other hand.
Uncertainty in two important factors
- Several laundry lists of measures have already been proffered by many, however, these are not of much help.
- Uncertainty: Given the extreme uncertainty clouding how long and intensely social distancing policies will need to be pursued, the attendant economic impact and, crucially, how quickly and strongly the recovery can take place.
- 1. The answer to the first depends on how much the outbreak tests the capacity of the already-stretched public health system.
- Extending the social distancing policy: If the lockdown does not slow the spread of the virus to a rate that the healthcare system can handle, then the social distancing policies, in some form or another, will need to be extended.
- Destruction of demand: The longer such containment measures last, the larger will be the destruction to (of) demand and the bigger the collapse in output and incomes.
- 2. Then, there is the question about the pace and strength of the recovery.
- Much will depend on how much damage the eventual output loss inflicts on households’ and corporates’ balance sheets.
- Lower consumption: For example, even if a worker starts earning once the lockdown is lifted if one has incurred large debts in the interim, one’s consumption demand will naturally be much lower than before the crisis.
- The same holds for corporates, both big and small.
- No help from global demand: What makes the situation worse is that there is not likely to be much help coming from global demand.
- Growth estimates: It is now expected global growth would decline to 5 per cent (annualised) in 1H20 (first half 2020), considerably more than during the global financial crisis, and rebound only partially in 2H20, leaving global GDP 2.5 percentage points below its pre-crisis level at the end of this year.
How the uncertainty makes policy response calibration difficult?
- Difficulty in assessing economic damage: Given these extreme uncertainties, it is very hard to assess the economic damage with any degree of conviction.
- In fact, in last week’s policy review, the Monetary Policy Committee refrained from providing any projections for future growth and inflation, breaking from its normal practice.
- So, if the outlook is so uncertain, how does one calibrate the policy response?
- 1. Under-support the economy: One can easily under-support the economy, which could prolong the slowdown.
- 2. Or over-support the economy, which could end up stoking inflation (as it did in 2010-13 when the massive monetary and fiscal easing during the global financial crisis was not withdrawn quickly) or creating asset price bubbles.
What is the way out in such a situation?
- Don’t try to calibrate: The way out is not to even try calibrating policies under such extreme uncertainty but to let the size of the support be determined endogenously by the extent and nature of the economic damage.
- Falling back of first principles: This requires falling back on first principles. We know that the economic damage could be very large.
- Delay in recovery: We also know that if the damage to households’ and firms’ balance sheets is substantial, then the recovery could be delayed and weakened.
- Give extensive income support: This calls for extensive income support through existing government Jan Dhan and Mudra accounts to households and SMEs, and temporary tax cuts or deferments to the larger corporates.
- Tax cuts needed: It also needs substantial cuts in indirect taxes (GST) when social distancing is relaxed.
Problems with RBI measures
- RBI providing support: The RBI has begun to provide support via its liquidity facility (TLTRO) and regulatory forbearance that allows banks to offer a debt moratorium to their customers for the next three months.
- But both these measures work through banks.
- The problem of bank turning risk-averse: Given that banks have turned substantially risk-averse because of the restructuring and bad debt problems of the last few years, the RBI likely needs to start providing liquidity directly to corporates, as recently announced by the US Fed.
- At the same time, any debt moratorium will reduce profit and, in turn, capital, banks might be reluctant to extend it to all their customers.
- Accommodate capital shortfall in the bank: Consequently, the RBI also needs to change regulations to accommodate possible shortfalls in bank capital because of the debt moratorium.
What should be the scope and size of the policy support?
- Support should be based on the extent of the damage: The scope and size of such policy support need to be determined by the extent of the economic damage, and not by perceived limits about what India can afford or those imposed by existing institutional arrangements and practices.
- It is quite possible that the size of the economic damage ends up requiring support that widens the fiscal deficit substantially.
- India clearly does not have the fiscal space to provide any material economic support when measured against standard benchmarks of fiscal prudence.
- Directly funding the budget deficit: The market is on edge, and fears of eventual large government borrowing has spiked long-term interest rates despite large cuts in short-term rates by the RBI, which are likely to delay and weaken the recovery.
- Any large bond auction by the government, even if it is offset by the RBI through open market operations, is not likely to calm market nerves and bring down lending rates.
- The government should invoke “natural disaster” clause: What is needed is for the government to invoke the “escape” or the “natural disaster” clause in the fiscal responsibility act (FRBM) that allows the RBI to directly fund the budget deficit without having to go through market auctions.
Conclusion
Such a proposal is likely to raise the hackles of any fiscal conservative and there is the natural question about how rating agencies might react. As long as the government credibly commits to reversing the action as soon as the crisis is over, rating agencies and fiscal conservatives alike will likely treat this kindly, as it is a response to a crisis caused not by poor economic policies, but by an act of nature.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Telemedicine/Telehealth
Mains level: Telemedicine and its effectiveness
The Medical Council of India and the NITI Aayog have developed new guidelines released on March 25, 2020 for registered medical practitioners to deliver consultations to patients via telemedicine.
Telemedicine
- Telemedicine involves the use of telecom and virtual technology to deliver health care outside of traditional health-care facilities.
- It is the essential delivery of health care services where distance is a critical factor — comes in.
- At least one doctor is needed for a population of 1,000, according to WHO guidelines.
- Telemedicine, thus, holds significance for countries like India that have low doctor-to-patient ratios.
About the guidelines
- The guidelines aim to empower registered doctors to reach out to patients safely using technologies for the exchange of valid information.
- This information can be used for diagnosis, treatment and prevention of disease and injuries, research and evaluation and for continuing the education of healthcare providers.
- The guidelines have empowered medical practitioners. They have, however, also imposed many restrictions.
- Registered medical practitioners, for instance, have to take the patient’s consent.
- If the patient denies her consent, however, the practitioner cannot insist that the patient to go in for telemedicine.
How telemedicine can help against COVID-19?
- Telemedicine can help bridging the gap between people, physicians and health systems, enabling everyone, especially symptomatic patients, to stay at home and communicate with physicians through virtual channels.
- It thus helps reducing the spread of the virus to mass populations and the medical staff on the frontlines.
- It can help provide routine care for patients with chronic diseases who are at high risk if exposed to the virus.
Limitations
- The out-of-hospital management is has not been yet established in India. Perhaps a ‘crisis-based’ evolution of telemedicine can help find local testing centers and also manage the flow of patients seeking a test.
- However, for a smaller subset of higher risk patients, the clinical course may not be consistent with conventional telemedicine.
- These patients often present with a more serious condition require rapid hospitalization.
- Telemedicine hasn’t traditionally been used in response to public health crises. Many health practitioners are not equipped to deliver care in this way.
- Another issue is access to broadband – some hospitals struggle with running a quality connection within their facilities and now we are faced with taking this to potential new areas of care, such as an outside tent.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Countercyclical Capital Buffers (CCyB)
Mains level: Various minimum capital requirements measures
The RBI has announced that banks need not activate countercyclical capital buffers (CCyB) amid slowdown due to COVID-19 outbreak.
What is Countercyclical Capital Buffer (CCyB)?
- A capital buffer is a mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements.
- CCyB is the capital to be kept by a bank to meet business cycle related risks. It is aimed to protect the banking sector against losses from changes in economic conditions.
- Banks may face difficulties in phases like recession when the loan amount doesn’t return.
- To meet such situations, banks should have own additional capital. This is an important theme of the Basel III norms.
CCyB framework in India
- The framework on CCyB was put in place by the RBI in terms of guidelines issued in 2015 wherein it was advised that the CCyB would be activated as and when the circumstances warranted.
- The framework envisages the credit-to-GDP gap as the main indicator, which is used in conjunction with other supplementary indicators.
- It requires banks to build up a buffer of capital in good times, which may be used to maintain flow of credit to the real sector in difficult times.
- The buffer was also meant to restrict the banking sector from indiscriminate lending in the periods of excess credit growth, which have often been associated with the building up of system-wide risk.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: WMA
Mains level: Tools for countering cash-flow mismatches
The RBI has raised the Ways and Means Advances, or WMA, limit by 30% for all States and UTs to enable them to tide over the crisis caused by COVID-19 outbreak.
What are Ways and Means Advances?
- The RBI gives temporary loan facilities to the centre and state governments as a banker to the government. This temporary loan facility is called WMA.
- It is a mechanism to provide to States to help them tide over temporary mismatches in the cash flow of their receipts and payments.
- It was introduced on April 1, 1997, after putting an end to the four-decade-old system of adhoc (temporary) Treasury Bills to finance the Central Government deficit.
- Under Section 17(5) of RBI Act, 1934, the RBI provides Ways and Means Advances (WMA) to the central and State/UT governments.
How is WMA availed?
- This facility can be availed by the government if it needs immediate cash from the RBI.
- The WMA is to be vacated after 90 days.
- The interest rate for WMA is currently charged at the repo rate.
- The limits for WMA are mutually decided by the RBI and the Government of India.
Types of WMA
There are two types of WMA — (1) Normal and (2) Special :
- Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state.
- After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.
- The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.
Back2Basics
How the govt. meets temporary cash needs?
The fund deficit or cash-flow mismatches of the Government are largely managed through:
- Issuance of Treasury Bills
- Getting temporary loans from the RBI called Ways and Means Advances (WMA) and
- Issuance of Cash Management Bills (CMBs)
- Treasury Bills are short term (up to one year) borrowing instruments of the Government of India which enable investors to park their short term surplus funds while reducing their market risk.
- CMBs are short term bills issued by the central government to meet its immediate cash needs. The bills are issued by the RBI on behalf of the government having a maturity of less than 90 days.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Price Monitoring and Research Unit (PMRU)
Mains level: Drug prices monotoring mechanisms in India
The National Pharmaceutical Pricing Authority (NPPA) has set up price monitoring and resource unit (PMRU) in the UT of Jammu and Kashmir. With this J&K has become the 12th State/UT where the PMRU has been set up.
Price Monitoring and Research Unit (PMRU)
- It is a registered society set up for drug price monitoring.
- PMRUs have already been set up by the drug price regulator NPPA in 11 states such as Kerala, Odisha, Gujarat, Rajasthan, Punjab, Haryana, Nagaland, Tripura, Uttar Pradesh, Andhra Pradesh and Mizoram.
Its composition
- The State Health Secretary would be the Chairman of the society and the Drugs Controller would be its member secretary.
- Its members include a State government representative, representatives of private pharmaceutical companies, and those from consumer rights protection fora.
- The society would also have an executive committee headed by the Drugs Controller.
Terms of reference
PMRU offers technical help to the State Drug Controllers and the NPPA to:
- Monitor notified prices of medicines
- Detect violation of the provisions of the DPCO
- Look at price compliance
- Collect test samples of medicines, and
- Collect and compile market-based data of scheduled as well as non-scheduled formulations.
Why need PMRU?
- Pharma companies have been accused of overcharging prices of drugs in the scheduled category fixed by the DPCO and those outside its ambit too.
- The suggestion to set up PMRUs was made against the backdrop of the lack of a field-level link between the NPPA and the State Drugs Controllers and State Drug Inspectors to monitor drug prices.
Expected outcomes
- The NPPA had fixed the prices of around 1,000 drugs and the unit would track if buyers were being overcharged.
- It would also check if pharma companies were hiking the prices of non-scheduled drugs by more than 10% a year.
- It will check if there is any shortage of essential medicines.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: ArogyaSetu App
Mains level: Coronovirus outbreak and its mitigation
The Government of India has launched a mobile app ArogyaSetu developed in a public-private partnership to bring the people of India together in a resolute fight against COVID-19.
AarogyaSetu App
- The App enables people to assess themselves the risk of their catching the Corona Virus infection.
- It will calculate this based on their interaction with others, using cutting edge Bluetooth technology, algorithms and artificial intelligence.
- Once installed in a smartphone through an easy and user-friendly process, the app detects other devices with AarogyaSetu installed that come in the proximity of that phone.
- The app can then calculate the risk of infection based on sophisticated parameters if any of these contacts has tested positive.
- The personal data collected by the App is encrypted using state-of-the-art technology and stays secure on the phone till it is needed for facilitating medical intervention.
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