Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3-What economic measures and reforms are needed to deal successfully with the crisis.
The article discusses three fronts on which actions are required viz- health, economy and geopolitics. How much the global economy is going to be affected? how the US-China rivalry would affect the recovery? what the lack of global coordination means? all such questioned are discussed here. It also suggests actions that India should take to deal with the crisis.
Many unknowns than knowns about Covid-19
- The virus currently has many more unknowns than knowns.
- We don’t know for sure how it spreads, whether people can get re-infected, whether it is mutating, whether the hot weather kills it, and what the real fatality rate is.
- We don’t know for sure how far we are from an anti-viral.
- We know that we are at least 18 months away from having a vaccine that works and is available at scale.
- Till an anti-viral is found, economic activity will be constrained, and this will affect people, industries and countries in disparate ways.
The extent of damage to the global economy
- Loss of ten trillion dollars: The global economy is set to lose close to ten trillion dollars because of the “self-induced coma” it has been put into — to use Paul Krugman’s evocative phrase.
- Loss of effectiveness of monetary policy: The preceding global financial crisis (GFC) has exhausted the efficacy of monetary tools.
- In addition, corporates globally are leveraged to the tune of $12 trillion.
- The slump in demand: The accompanying oil price collapse, beginning due to a spat between producers Saudi Arabia and Russia have been compounded by a precipitous slump in demand.
- The Chinese economy can’t help as it did during the GFC, as it is hemmed in itself.
- Even if it could, there is too much global suspicion of China to allow it to do so. So, countries will largely be on their own.
Tensions between the US and China
- The tensions between the US and China have escalated into a full-scale superpower crisis after the virus spread.
- Since 2010, there has been great concern in the US about China’s rise.
- China’s muscular foreign policy together with its aggressive stance on multiple issues, most importantly on technology and technology standards, has created conflict.
- The coronavirus is spreading in the US in an election year and smashing its economy.
- The virus infected over three-quarter of a million people in the country and killed more than 40,000.
- After this, China could be seen as enemy number one in the US.
No global coordination
- No wonder then that at a time when the world yearns for global coordination, there is almost none — in healthcare responses and economic coordination.
- Multilateral agencies, especially the WHO and UN, suffer a complete loss of credibility.
- India needs to chart its own course in these turbulent times.
- If India takes the requisite actions it may come out well.
Following suggestions are important from the UPSC perspective. The suggestions deals with three fronts-health, economic and geopolitics.
How India could come out of the crisis?
- India needs to act at three levels — health, economic and geopolitical.
1. Actions at the health level
- The Union Ministry of Health and Family Welfare has done well to stem the spread of the infection.
- It has sensitised the public, introduced the concept of social distancing and isolation in the most challenging situations.
- Now it must test at scale and isolate.
2. Actions at the economic level
- Indians cannot afford to stay locked much longer.
- We are too poor and too many of us live on a day-to-day basis — not even on a paycheck to paycheck basis.
- Economic activity will be subdued in the near-term, but it must be “unlocked”.
- The current IMF projections suggest that India will have the highest growth rate in the world this year.
- Oil prices have collapsed, really helping our balance of payments.
- Our food stocks are plentiful, the rabi crop has been good, and the prognosis for the monsoon is positive.
- Low inflationary pressure: This, together with the fact that aggregate demand is down, will dampen inflationary impulses.
- The “new RBI” has acted boldly and strongly.
- It has taken prompt actions to reduce rates, increase liquidity, adjust prudential norms, allow moratoriums, and protect financial entities.
- Indian is better placed: The weakened rupee will help our exports and with a debt to GDP ratio of about 73 per cent, along with better growth prospects, India is relatively better placed than several other countries.
- We should, therefore, not unduly worry about our credit rating. This both allows and actually requires the government to act on the fiscal front.
- The government needs to implement the following four steps to spur the economy.
- (1) It should do so by “printing money” given the moderated inflation
- (2) It needs to provide additional direct benefit transfers of Rs 2,000 every month for three months to Jan Dhan accounts, together with foodgrains release from the FCI, to the tune of around Rs 65,000 crore, to alleviate people’s miseries.
- (3) It needs to protect MSMEs directly by providing them working capital (with an RBI backstop) and, like in the UK, provide 80 per cent of the salary to employees of the “GST-paying MSMEs” for six months.
- (4) It needs to launch a massive public works programme outside the Budget as suggested by the chairman of CII’s National Committee of Infrastructure and PPP, Vinayak Chatterjee.
- This fund should be earmarked for infrastructure and a quarter of its budget should be set aside for strengthening and upgrading primary health centres.
- The allocation should not be less than Rs 200,000 crore.
- Push through pending reforms: The government should take advantage of the crisis to push through much needed pending reforms in agriculture-especially those pertaining to APMC), power-pricing and discoms, banks-government ownership at 30 per cent and bad banks.
- Revenue from private gold: Given the paucity of tax revenues, the government could also consider having the PM making an appeal for private gold from people and temples.
- It could target 1,000 tonnes of gold worth $30 billion and offer a five per cent tax-free return repayable ($1.5 billion a year) after 10 years, in rupees or gold.
3. Actions at the geopolitical level
- India can come out ahead if we act now.
- Super-power rivalries will create opportunities to replace China as a major supplier to the US and Japan.
Conclusion
The battle to deal with the corona disaster has to be fought on many fronts. India must form a strategy and act on various front i.e. health, economic and geopolitical- to be victorious at the end.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: MPC and its various tools
Mains level: Not Much
The rate-setting Monetary Policy Committee (MPC) will be meeting five times in FY21, against seven in FY20.
Monetary Policy tools are all-time favourites of UPSC. Kindly go through the link given in the Back2Basics section.
Monetary Policy Committee (MPC)
- The Monetary Policy Committee (MPC) is a committee of the RBI, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
- The RBI Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC to bring more transparency and accountability in fixing India’s Monetary Policy.
- The policy is published after every meeting with each member explaining his opinions.
- The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
- Suggestions for setting up a Monetary policy committee is not new and goes back to 2002 when YV Reddy committee proposed to establish an MPC, then Tarapore committee in 2006, Percy Mistry committee in 2007, Raghuram Rajan committee in 2009 and then Urjit Patel Committee in 2013.
Composition and Working
- The committee comprises six members – three officials of the RBI and three external members nominated by the Government of India.
- The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
- The Governor of RBI is the chairperson ex officio of the committee.
- Decisions are taken by a majority with the Governor having the casting vote in case of a tie.
- They need to observe a “silent period” seven days before and after the rate decision for “utmost confidentiality”.
Back2Basics
Monetary Policy tools and Money Supply in India
Also read:
How reverse repo rate became benchmark interest rate in the Indian economy?
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: ‘Milk Tea Alliance’
Mains level: Chinese assertion in the Indo-China region
The ‘Milk Tea Alliance’ is an informal term coined by social media users which are highly trending these days.
The term though in news without any institutional backing is gaining popularity. It clearly shows the public outrage against Chinese agressiveness in Taiwan and Hong-Kong.
What is the ‘Milk Tea Alliance’?
- Thai social media users began calling for the sovereignty of Taiwan and Hong Kong, extending support to the two countries.
- This spurred social media users from other Southeast Asian countries to join the call, in a rejection of China’s influence in the region for its own diplomatic and economic gains.
- The ‘Milk Tea Alliance’ is an informal term coined by social media users because in the region, tea is consumed in many nations with milk, with the exception of China.
- Memes were formed showing flags of the countries in the “Milk Tea Alliance” with China as a lone outsider.
What started this online war?
- The online battle started with a Thai twitter post that questioned whether coronavirus had emerged in a laboratory in Wuhan.
- There were some related tweets by pro-Taiwanese and Hong Kong people.
- Pro-China social media users then began attacking Thailand for being a “poor” and “backward” nation and also hurled insults at the Thai king and the Thai prime minister.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: COVID India Seva
Mains level: Coronovirus outbreak and its mitigation
The Union Ministry of Health & Family Welfare has launched the COVID India Seva platform to establish a direct channel of communication with millions of Indians amid the pandemic.
We can take this initiative as an example while answering mains questions like – “India’s fight against Coronavirus pandemic is a public movement at large. Discuss.”
COVID India Seva
- This initiative is aimed at enabling transparent e-governance delivery in real-time and answering citizen queries swiftly, at scale, especially in crisis situations like the ongoing COVID-19 pandemic.
- Through this, people can pose queries @CovidIndiaSeva and get them responded to in almost real time.
- @CovidIndiaSeva works off a dashboard at the backend that helps process large volumes of tweets, converts them into resolvable tickets, and assigns them to the relevant authority for real-time resolution.
- The dedicated account will be accessible to people be it local or national in their scope.
- The Ministry will respond to broader queries and public health information. This does not require the public to share personal contact details or health record details.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Daporijo bridge and its location
Mains level: Border disputes with China
A key bridge over the Subansiri River in Arunachal Pradesh close to the Line of Actual Control (LAC) was constructed by the Border Roads Organisation (BRO) in record 27 days.
North-East has seen the construction of a series of bridges by BRO in recent times post-Doklam standoff. Make a note of all such bridges and the corresponding rivers over which they are built.
Daporijo Bridge
- This Bridge is one of the two over River Subansiri which connect Daporji in North Subansiri dist. with rest of state.
- This and the other bridge at Tamin sustaining more than 600 villages and troops strength of around 3000 personnel manning the LAC which includes disputed Areas of Asaphila and Maza.
- All supplies, rations, constructional material and medicines pass over this bridge.
- The new bridge now can withstand 40 tonnes of weight allowing a safe passage for heavier vehicles catering for the requirements of the Indian Army as well as future infrastructure development requirements.
Significance
- India has speeded up the construction of critical infrastructure in its northeast in the past half a dozen years including airports, railways and roads with an eye on China that has motorable roads right up to the border.
- Arunachal Pradesh was the scene of the 1962 India-China border conflict that ended badly for India. China on its parts claims all of the state as “Southern Tibet.”
- Of the 3488 km long Line of Actual Control with China 1126 lies with Arunachal Pradesh alone.
- The two countries are yet to demarcate their border with the two sides patrolling the LAC but reporting incursions by the other side since the frontier is not clearly marked.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Thrissur Pooram
Mains level: NA
For the first time since its inception, Thrissur Pooram, considered as mother of all poorams in Kerala, has been cancelled earlier this month.
Note the cultural terms in the newscard. As the name itself suggests the state of celebration, it very unlikely to be asked in the ‘fest-state’ format. Rather UPSC can ask – “The terms X, Y, Z …. are associated with which of the following reknown festival?”
Thrissur Pooram
- Thrissur Pooram is an annual Hindu festival held in Kerala.
- It is held at the Vadakkunnathan Temple in Thrissur every year on the Pooram day – the day when the moon rises with the Pooram star in the Malayalam Calendar month of Medam.
- It is the largest and most famous of all poorams.
- Thrissur Pooram was the brainchild of Raja Rama Varma, famously known as Sakthan Thampuran, the Maharaja of Cochin (1790–1805).
Actual course of the festival
- The Pooram is centred on the Vadakkunnathan Temple, with all these temples sending their processions to pay obeisance to the Shiva, the presiding deity.
- The Pooram officially begins with a flag hoisting ceremony (Kodiyettam).
- All the participating temples of Thrissur Pooram are present for the ceremony, and there is a light firework to announce the commencement of the festival.
- The seventh day of the pooram is the last day. It is also known as “Pakal Pooram”.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Strategic Petroleum Reserves.
Mains level: Paper 3-How India can make the most of cheap oil prices?
For the first time in history, oil prices hovered in the negative territory recently. This article discusses how this opportunity can be utilised by India in various ways.
Oil selling for negative price
- In a dramatic and unprecedented turn of events on Monday, crude oil began trading in negative territory for the first time since records began.
- The price on a futures contract for West Texas crude that was due to expire on 21 April crashed to minus $37.63 a barrel.
- Covid effect: This is a direct result of the market mayhem caused by covid-19, which has resulted in lockdowns around the world, brought economies to a screeching halt, and crushed demand for transport fuel.
- No space to store oil: Reports say there is so much unused oil in the US that there is no space left to store fresh supplies.
- Storage costs money. Thus, oil producers had to pay to offload their stock.
How did we get here?
- Thanks to the covid-19 pandemic, multiple demand and supply shocks are wrecking economies across the globe and bringing economic activity to a standstill.
- Assembly lines have halted, supply chains have snapped, commodity prices have fallen, the services sector has ground to a halt, financial markets are in a panic.
- And the Great Lockdown has depressed various other economic variables and pushed the world into a deep recession.
- Tensions among suppliers: The sudden fall in oil prices is tied not just to a demand crunch, but also tensions among the world’s major suppliers.
- Relatively high prices over 2019 had allowed non-traditional players like US shale oil companies to thrive.
- Meanwhile, Saudi Arabia and Russia, the most influential members of OPEC+, the Organization of Petroleum Exporting Countries that have allied with Russia on and off since 2016, had been in competition to expand their market share.
- A flashpoint arose in early March, when Moscow refused to agree to OPEC’s desired production cuts to keep prices stable.
- This prompted a price war with Riyadh, as both attempted to increase market share or put other competitors (particularly US shale) out of business.
- Though a production cut has since been agreed to between Russia and Saudi Arabia, demand is estimated to have fallen far more than that.
- Contracts for late 2020 are still going for only around $30 per barrel.
- As a result, producers such as Kuwait, Oman, Nigeria, and Venezuela will continue to feel the strain.
How can India maximise potential gains?
- India imports nearly 80% of the oil it consumes, and so cheap oil is to be taken as an opportunity.
- Under normal circumstances, such a drastic fall in oil prices would have a big positive effect on the finances of the Union government and the economy in general.
- The current circumstances, however, are anything but normal.
- So, India must use this low price opportunity in the following ways.
The strategic petroleum reserves (SPRs) assumes significance in India’s energy security whenever tension rises in the region from which we import our oil. Take note of the suggestion with respect to SPRs.
Fill up the strategic petroleum reserves (SPRs)
- The best way to turn this situation to India’s advantage, therefore, is to grab this chance to fill up the country’s strategic petroleum reserves (SPRs).
- Like other large consumers, India holds oil inventories for the sake of energy security during a supply cut-off or some other emergency.
- How much are our SPRs? Our SPRs are estimated at five days’ worth of oil imports, stored in underground salt caverns, and a further 65 days’ worth held by commercial refineries.
- Current prices provide a perfect opportunity to bolster these reserves in preparation for future shocks.
- The government-owned agency, Indian Strategic Petroleum Reserves Limited (ISPRL), should now be focused on filling up and utilizing the existing capacity of the country’s underground caverns.
- In fact, it should be hardwired to consider filling these up each time the price of Brent crude falls below $40.
- Separately, in the second phase of India’s SPR plans should be fast-tracked.
- Working with private players: This involves working with private players to design, build, finance, operate, and transfer underground oil tanks.
Negotiate long term contracts at current prices
- Commercial refineries, many of which are public-sector enterprises, should strike and renegotiate long-term contracts with suppliers based on current prices.
- Other firms reliant on oil and subject to the vagaries of oil prices, such as airline companies, should also do likewise.
Geographically diversify the SPR holdings
- This is also an opportune time for the Indian government to geographically diversify its SPR holdings.
- To lower transport and storage costs, and to diversify risk, Oman or Fujairah in the UAE could be contracted to hold a quantity of oil on India’s behalf.
- These reserves can be shipped to India when needed.
- India should also operationalize, modernize and add to its oil tank facilities in Trincomalee, Sri Lanka, which is partially owned by India.
Conclusion
The global energy landscape is likely to remain volatile in the near future and oil is likely to remain an important part of India’s energy needs. This is a good time to enhance the country’s energy security.
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From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Various geopolitical factors that influence the recovery of the world in post-pandemic period/How India could play a crucial role in forming the global coalition for faster recovery?
This article discusses the various factors with geopolitical significance. These factors would shape the post-pandemic recovery on a global scale. Though these factors have been touched upon in the previous op-eds, they are dealt with in detail here.
Post-pandemic strategic environment for the recovery
- It’s the post-pandemic strategic environment that will dictate how soon the world recovers from this unexpected shock.
- It must start with the international geopolitical angle, with many assumptions.
- With some clarity in this domain, we can prepare ourselves better for the recovery phase of a near post-war situation.
- Shortly, even as the world continues to reel under the pandemic threat, there will be more endeavours on enhancing human security through better strategic management of the world.
- So, what will all that be about? It could be a major conference.
- Major conference with agenda for revival: The situation is similar to the elusive efforts towards the creation of new world order after the end of the Cold War in 1989.
- Will the world consider a major conference with the agenda being a revival after the coronavirus?
- The 2015 Paris Summit of the United Nations, which was convened to save the world from the rapid impact of climate change, could not muster a consensus.
- Will a potential 2020 “pandemic conference” succeed in getting big powers to jettison their geopolitical ambition?
China’s role has significance for India. The UPSC asks questions touching the economic or security aspect of China for India. So, the role played by China in the post-pandemic world is important from Mains perspective. Take note of the issues discussed below.
The US-China rivalry
- The US-China rivalry will remain the core issue, with several other regions and nations aligning with the one who can bring them short to medium-term advantages.
- Contingent upon how badly the US is finally affected, its current confused leadership is unlikely to inspire and its efforts at internal stabilisation may compromise US power.
- A major turn in political fortunes in the US and its bumbling on pandemic management could throw open opportunities for others to exploit.
- The US will perceive itself far more insecure than it was even after 9/11.
Accusations over China’s role in the pandemic
- There is likely to be a huge effort to slander China — accusing it of being the originator of the scourge — and isolate it economically and politically.
- The allegations on the use of biological warfare are the ones which will cause turbulence in relationships.
- Ironically, China is also in a unique position to help the world bounce back.
- Against the backdrop of these accusations regarding culpability, we need to be ready for changes in the norms of international cooperation and behaviour.
- Cold war situation: A cold war of sorts could well be on the cards for some time, hampering a full recovery.
- It will be brutal in the cyber world — fake news on social media will prevent international cooperation in crucial fields such as scientific research, patents.
- And this could perhaps even slow down the ability to prevent the next pandemic.
The crucial role of the US
- Subject to the US’s economic capability after the pandemic, the ability to find a consensus to put on hold defence spending for the sake of human security will be the key.
- But the trust deficit between nations will probably hamper this to a great extent.
- The key anchor of globalisation — the US-China trade relationship — will change even more.
- China cannot be replaced by the US as a major industrial producer (even for the US market).
- Other countries or blocs — ASEAN, Bangladesh and India — will all chip in but that will still not be enough.
- Nor can any country buy as much grain from the US as China does.
- So, an economic relationship will continue but will be politically fractured as both parties search for alternatives, which don’t exist on a scale that both of them need.
The growing influence of China
- China’s recovery is likely to be the fastest.
- Its ambitious Belt and Road Initiative (BRI) may now go uncontested by the US-led efforts to create alternatives.
- The Chinese ability to influence politics among smaller nations in Asia and Africa could bring it strategic advantages.
- But this influence is unlikely to be enough to replace America unless the recession-hit US remains defensively oriented.
- Potential for conflict: Knowing the US propensity to bounce back, China’s efforts will have to remain energetic and that is where the potential for conflict is likely to rise.
- Of course, it is not as if the US would abandon its interests for an era of only-inward economic healing.
- Its eye on the future will remain firmly in place.
The decline in the credibility of the UN
- Role of WHO: The UN has lost credibility with the World Health Organisation taking the worst hit any UN agency has suffered in years.
- Its future is contingent upon how it manages the geopolitical fallout of the pandemic.
- The sooner it can get the world leaders on board, the better.
Instability in Iran and Afghanistan
- The collapse of the economy: Iran has been hit badly and with the US unrelenting on sanctions, its economy could collapse with frightening results as far the Middle East is concerned.
- The threat for peace in the region: A big nation in instability mode with internal turbulence and leadership challenges could spread greater threats of an undefined kind.
- The US may abandon Afghanistan with less commitment towards keeping its economy sustainable.
- Possibility of IS revival: It could be a sure recipe for internal instability, which could see the Islamic State emerge a major player.
- Russian advantage: Everything in the Middle East points towards Russian advantage and domination.
Opportunities for India
- India without recession: Economically hit but probably one of the few nations without a recession, India’s strong central leadership could be a big advantage.
- International cooperation: Prime Minister Narendra Modi would need to use all his influence to cobble together international cooperation to pull the world from the abyss it could sink into.
- His credibility is already higher than most international leaders and could spell a leadership role for India not in conflict with China but in cooperation with it.
- It is India’s established multilateral foreign policy that could eventually come to the assistance of the world.
Conclusion
Successful and swift recovery of the world hinges on international cooperation among the nation. This provides India with an opportunity to stitch together international cooperation in dealing with the aftermath of the crisis.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Need to revisit the state's role in political, social and economic aspect of the society.
The role of the state has come in the focus in the corona crisis. This article describes how the dominant role once played by the state declined over time and what implications it has for society. In the next part of the article, need to revisit the political system of the country is emphasised.
Paradigm shift due to Covid-19
- We are unlikely to return to pre-coronavirus homeostasis after the war against it is won.
- No section or sector is going to remain untouched and unaltered by the devastation the novel coronavirus is now unleashing.
- Its annihilation in the near future is not on the cards.
- Vaccines are going to be slow in coming; therefore, its taming is not immediate.
- The second wave of an outbreak is a realistic probability.
- Unlike the other threats: Unlike other threats to humanity such as global warming and nuclear armageddon, this threat is now, not in the future.
- It is here simultaneously for everyone, not for someone else and somewhere else; its casualties are around us, not in faraway battlefields or polar regions and coastal areas.
- No country can rescue another; it is each one fending for itself.
Possibility of a deep recession in the world
- If the lockdown continues, the world economy will contract by as much as 6% according to the International Monetary Fund.
- If it is not extended, the loss of human lives could be of unacceptable proportions.
- The global community will be fortunate if it does not spiral into depression.
- Both demand and supply contractions are likely to be severe.
- They are not going to be short-lived. Political systems, economic architectures and cultural mores are on trial.
Time to build a new paradigm
- Work patterns, production and distribution practices are up for
- Denial and wishing away unpleasant, yet probable, realities by governments, global organisations and public intellectuals will only compound economic, social, political and human costs.
- Build a new paradigm: We must now be quick in seizing lessons from the present crisis and get ready to embark on measures to build a new paradigm of life, work and governance.
Role of state in focus once again
- The enlarged economic role of the state in the aftermath of the Second World War came under major assault since the 1980s.
- Leaders who asked ‘where is society?’ rode to power on the promise of cutting down the government’s role.
- Systems that were alternatives to capitalism fell out of favour.
- Entrepreneurs heading unicorns and ‘soonicorns’ have become the new demigods.
- Minimum governance became the mantra.
- India too without much consideration joined this creed.
- Role of state in focus: But COVID-19 is beginning to challenge the political economy of this creed.
- Very soon the full scores of the performance of state and non-state actors in the COVID-19 stress test will be available across the globe.
- The Indian state will also have to give answers as far as its report card is concerned.
How the state’s role declined in India?
- India embarked on the path of reducing the role of the state, initially, with such caveats as ‘safety net’ and ‘reform with a human face’.
- Gradually, those caveats fell by the wayside.
- The Indian state’s role in health care, education, creation and maintenance of infrastructure and delivery of welfare has shrunk or become nominal, half-hearted, inefficient, and dysfunctional.
- Of course, it is true that it did not give a great account of itself in these sectors even before the 1991 departure.
- Disappointment with the dismal performance in its economic and administrative functions in the backdrop of a changing global ideological ecosystem encouraged a sharp de facto downsizing of the Indian state’s role.
- Acceptance among the upper section of society: Its retreat from vital functions and abdication of its social responsibility have gained acceptance and legitimacy among the articulate upwardly mobile.
- While retreat and abdication found influential and forceful evangelists, the selective retreat had few advocates.
- This departure, however, was not vigorously interrogated.
- Supporters of the departure, on the other hand, had little engagement in giving shape to the new policy.
- Nor did they worry about calibrating the architecture of the emerging role for the state.
- As a result, ‘private sector’ became the new holy cow in place of the ‘state sector’.
- What made matters worse is the culture of a simplistic and shallow discourse of public policy that took hold in civil society.
- It mindlessly privileges the agenda of corporates. It transacts in the idiom of stock exchanges and international rating agencies.
Who is affected due to declined role of the state?
- Today, those who bear the brunt of the consequences of shrunken and unresponsive state are the farmer and farm labour, the migrant worker, the unemployed, those in the unorganised sector, the rural poor, and the small entrepreneur.
- They are paying the highest price for the necessary but unbearable lockdown.
- They are either stranded far away from home or confined to their homes with no work and incomes, unsupported by the state.
- Underfunded public health systems are unable to serve them.
- But the dominant strand of public discourse is out of its depth. It has no time for these concerns.
- Worse, this discourse can be gamed from time to time.
- And the alternative discourse is too feeble to draw the attention of the government to the grave implications of COVID-19 for the weak in our society.
State’s responsibility towards the marginalised
- The state’s first responsibility is marginalised.
- The marginalised are also the crucial part of our economy. They lubricate its wheels and generate demand.
- Demand-side needs to be revived: Announcing stimulus packages that address the supply side alone without beefing up the demand side will be self-defeating to corporates.
- Prioritising the needs of corporate entities will lead to convulsions in our body politic in the wake of COVID-19.
- The state is in danger of forfeiting legitimacy if it does not ensure the survival and revival of the marginalised sections.
From the Mains perspective, following points are important to highlight the importance of the state’s role in ensuring the welfare of society and why there is a need to revisit the current system owing to certain problems in it.
Time to revisit the political economy of the Indian state and its role
- The country should begin a vigorous discourse on redefining every aspect of its involvement in our collective political, economic and social life.
- The relation between the state and economy, its role in allocating resources and addressing questions of inequality, its duty to provide basic human needs, the extent of the market’s role in providing services such as health, education, civic amenities needs to be revisited.
- The responsibility of the state and private enterprise towards deprived sections need urgent attention.
- Re-examining the political structure: We should re-examine the efficacy of our political structures too.
- The equation between citizens and government and what its implications are for individual freedom, privacy and national security.
- Also, the equation between the legislature and executive needs to be re-visited.
- Financial powers: The balance of administrative and financial power between provinces and the union on the one hand and provinces and local bodies on the other should be reconsidered.
- Election of the representatives: The way we elect our representatives to legislatures must also come under the lens.
- The issue of weakened local authorities and enfeebled legislatures need attention.
- For, they are at the coalface, delivering the state to the citizen.
- The way legislatures are elected and governments are made and unmade must be scrutinised.
- Our outrage at the power of big money in our electoral system has not arrested its growth.
- The role of serving and retired members of higher judiciary ought to be a part of the debate.
- We had an opportunity for intensive debate when the Justice Venkatachaliah Commission submitted its report in 2002 to review the working of the Constitution.
Conclusion
The opportunity that COVID-19 provides should not be squandered and must be utilised to have a fresh look at the various issues regarding our social, economic and political life. And states responsibility towards marginalised.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: West Texas Intermediate (WTI), Brent Crude
Mains level: Global crude oil pricing dynamics and its impact on India
Context
- Recently US oil markets created history when prices of West Texas Intermediate (WTI), the best quality of crude oil in the world, fell to “minus” $40.32 a barrel in New York.
- Not only is this the lowest crude oil price ever known the previous lowest was immediately after World War II — but also well below the zero-mark.
- At this price, the seller would be paying the buyer of crude oil $40 for each barrel that is bought.
Crude oil price dynamics are undergoing dramatic changes this year. The ongoing pandemic has worsened the situation further. India has ample opportunities to get benefited from the ongoing situation.
But how can that be? How did prices fall below zero in the first place? Let us see:
Global fall in crude oil prices
- The first thing to understand is that, even before the Covid-19 induced global lockdown, crude oil prices had been falling over the past few months.
- The reason was straightforward. The price of a commodity falls when supply is more than demand.
- The global oil pricing is by no stretch an example of a well-functioning competitive market. In fact, it’s seamless operations crucially depend on oil exporters acting in consort.
OPEC+ failure (earlier)
- Historically, the OPEC, lead by Saudi Arabia, which is the largest exporter of crude oil in the world (single-handedly exporting 10% of the global demand), used to work as a cartel and fix prices in a favourable band.
- It could bring down prices by increasing oil production and raise prices by cutting production.
- In the recent past, the OPEC has been working with Russia, as OPEC+, to fix the global prices and supply.
- This happy accord came to an end as Saudi Arabia and Russia disagreed over the production cuts required to keep prices stable.
- As a result, OPEC undercutting each other on price while continuing to produce the same quantities of oil.
What it costs to a country for cutting production
- The production cut was made worse with the growing spread of Coronavirus, which, in turn, was sharply reducing economic activity and the demand for oil.
- It must be understood that cutting production or completely shutting down an oil well is a difficult decision because restarting it is both costly and cumbersome.
- Moreover, if one country cuts production, it risks losing market share if others do not follow suit.
Demand-supply mismatch got worse
- By the time the Saudi Arabia and Russia discord was sorted out last week, under pressure from US President, it was possibly too late.
- Oil-exporting countries decided to cut production by 6 million barrels a day — the highest production cuts — and yet the demand for oil was shrinking by 9 to 10 million barrels a day.
- This meant that the supply-demand mismatch continued to worsen right through March and April.
- According to reports, all possible the mismatch resulted in almost all storage capacity being exhausted.
What led to negative oil prices: Immediate causes
- The contracts fir this month for WTI, the American crude oil variant, was due to expire. As the deadline came near, prices started plummeting. This was for two broad reasons.
- There were many oil producers who wanted to get rid of their oil even at unbelievably low prices instead of choosing the other option shutting production.
- The space to store the oil too got exhausted. Trains and ships, which were typically used to transport oil, too, were used up just for storing oil.
- They figured that it would be more costly for them to accept the oil delivery, pay for its transportation and then pay for storing it, especially when there is no storage available than to simply take a hit on the contract price.
Future prospects
- It is important to note that it was the WTI price for May in the US markets that went so low.
- Crude Oil prices elsewhere fell but by not so much. Moreover, at least for now, oil prices are pegged at around $20 a barrel.
- It is likely that this was a one-off event and will not happen as producers are forced to cut back production further.
- But one cannot rule out such a repeat, with COVID-19 continuing to spread, demand is falling every day.
- In the end, it would be the demand-supply mismatch (adjusted for how much can be stored away) that will decide the fate of oil prices.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: FDI in India
Mains level: Features of India's FDI Policy
The Government of India has reviewed the extant Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19.
Context
- The Indian policy revision is meant for sectors and enterprises other than defence, space, atomic energy and sectors and activities “prohibited for foreign investment”.
- It was understood that the Indian decision was a response to the news of an incremental purchase of shares in HDFC by the People’s Bank of China.
FDI is an all-season hot topic for both prelims as well as mains. Reading the newscard will make you aware of its scope. We can expect a mains question like – Recent amendment in the FDI Policy aims for curbing opportunistic takeovers/acquisitions of Indian companies. Elucidate.
Background
FDI in India
- Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
- There are two routes by which India gets FDI.
- Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.
- Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single-window clearance of FDI application under Approval Route.
- India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
- In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.
What is the amendment about?
- The govt. has amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017.
- In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership, such subsequent change in beneficial ownership will also require Government approval.
The present position and revised position in the matters will be as under:
Present Position
- A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
- However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
- Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.
Revised Position
- A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
[spot the difference]
- However, an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
- Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.
In response to China
- China accused that India’s recently adopted policy goes against the principles of the World Trade Organisation (WTO).
- It tends to violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.
Impact
- The amended policy brings every kind of Chinese investors to India within the ambit of government approval reducing the space for private business negotiations.
- The decision would face difficulties, especially if the government tried to attribute nationality to venture capital funds.
Back2Basics: Foreign Direct Investment (FDI)
- An FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
- It is thus distinguished from a foreign portfolio investment by a notion of direct control.
- FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
- Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
- In a narrow sense, it refers just to building a new facility, and lasting management interest.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not Much
Mains level: Highlights of the policy
The Ministry of Power has issued a draft proposal for amendment of Electricity Act, 2003 in the form of the draft Electricity Act (Amendment) Bill, 2020.
Draft Electricity Act (Amendment) Bill 2020
Major amendments proposed in the Electricity Act are as follows:
Viability of DISCOMs
- Cost reflective Tariff: To eliminate the tendency of some Commissions to provide for regulatory assets, it is being provided that the Commissions shall determine tariffs that are reflective of cost so as to enable Discoms to recover their costs.
- Direct Benefit Transfer: It is proposed that tariff be determined by Commissions without taking into account the subsidy, which will be given directly by the government to the consumers.
Sanctity of Contracts
- Establishment of Electricity Contract Enforcement Authority: Such an authority headed by a retired Judge of the High Court is proposed to be set-up with powers of the Civil Court to enforce performance of contracts related to purchasing or sale or transmission of power between a generating, distribution or transmission companies.
- Establishment of adequate Payment Security Mechanism for scheduling of electricity: It is proposed to empower Load Dispatch Centres to oversee the establishment of adequate payment security mechanism before scheduling dispatch of electricity, as per contracts.
Strengthening the regulatory regime
- Strengthening of the Appellate Tribunal (APTEL): It proposed to increase the strength of APTEL to seven apart from the Chairperson so that multiple benches can be set-up to facilitate quick disposal of cases.
- Doing away with multiple Selection Committees: It is proposed to have one Selection Committee for selection of Chairpersons and Members of the Central and State Commissions and uniform qualifications for appointments of Chairperson and Members.
- Penalties: In order to ensure compliance of the provisions of the Electricity Act and orders of the Commission, section 142 and section 146 of the Electricity Act are proposed to be amended to provide for higher penalties.
Renewable and Hydro Energy
- National Renewable Energy Policy: It is proposed to provide for a policy document for the development and promotion of generation of electricity from renewable sources of energy. It is also proposed that a minimum percentage of purchase of electricity from hydro sources of energy is to be specified by the Commissions.
- Penalties: It is being further proposed to levy penalties for non-fulfilment of obligation to buy electricity from renewable and/or hydro sources of energy.
Miscellaneous
- Cross border trade in Electricity: Provisions have been added to facilitate and develop trade in electricity with other countries.
- Franchisees and Distribution sub licensees: It is proposed to provide that the Distribution Companies, if they so desire, may engage Franchisees or Sub-Distribution Licensees to distribute electricity on its behalf in a particular area within its area of supply. However, it will be the DISCOM which shall be the licensee, and therefore, ultimately responsible for ensuring quality distribution of electricity in its area of supply.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: IED
Mains level: Not Much
Researchers from the Indian Institute of Geomagnetism (IIG), Mumbai, have developed a global model to predict the ionospheric electron density with larger data coverage—a crucial need for communication and navigation.
We can gauge these days that PIB is coming with ample news which is visibly important and are focused on basic GS concept. Ionospheric Electron Density is one such concept. Its significance for prelims cannot be denied.
Ionospheric Electron Density (IED)
- The ionosphere exists between about 90 and 1000 km above the earth’s surface.
- Radiation from the sun ionizes atoms and molecules here, liberating electrons from molecules and creating a space of free electron and ions.
Studying IED
- The ionospheric variability is greatly influenced by both solar originated processes and the neutral atmosphere origin.
- Scientists have tried to model the ionosphere using theoretical and empirical techniques; however, the accurate prediction of electron density is still a challenging task.
- In recent years, Artificial Neural Networks (ANNs) are showing potential to handle more complex and non-linear problems.
What are Artificial Neural Networks (ANNs)?
- ANNs are computing systems vaguely inspired by the biological neural networks that constitute animal brains.
- Such systems “learn” to perform tasks by considering examples, generally without being programmed with task-specific rules.
- For example, in image recognition, they might learn to identify images that contain cats by analyzing example images that have been manually labeled as “cat” or “no cat” and using the results to identify cats in other images.
- They do this without any prior knowledge of cats, for example, that they have fur, tails, whiskers and cat-like faces.
- Instead, they automatically generate identifying characteristics from the examples that they process.
Significance of IED
- Due to the ability of ionized atmospheric gases to refract high frequency (HF, or shortwave) radio waves, the ionosphere can reflect radio waves directed into the sky back toward the Earth.
- Radio waves directed at an angle into the sky can return to Earth beyond the horizon.
- This technique, called “skip” or “skywave” propagation, has been used since the 1920s to communicate at international or intercontinental distances.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: UNESCO heritages in India
Mains level: Not Much
The Union Ministry for Culture has launched the National List of Intangible Cultural Heritage (ICH) of India.
Various art forms (either tangible or intangible) are hotspots for Prelims. We can expect a direct description based question. For example, a question based on Manipuri Sankirtana was asked in CSP 2017.
National List of ICH
Following UNESCO’s 2003 Convention for Safeguarding of Intangible Cultural Heritage, this list has been classified into five broad domains in which intangible cultural heritage is manifested:
- Oral traditions and expressions, including language as a vehicle of the intangible cultural heritage
- Performing arts
- Social practices, rituals and festive events
- Knowledge and practices concerning nature and the universe
- Traditional craftsmanship
Why need such a list?
- India houses a repository of unique ICH traditions, 13 of which have also been recognized by UNESCO as Intangible Cultural Heritage of Humanity.
- The National ICH List is an attempt to recognize the diversity of Indian culture embedded in its intangible heritage.
- The list aims to raise awareness about the various intangible cultural heritage elements from different states of India at the national and international level and ensure their protection.
- This initiative is also a part of the Vision 2024 of the Ministry of Culture.
Pls go through this link for complete details of 13 ICH : https://www.indiaculture.nic.in/national-list-intangible-cultural-heritage-ich
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Helicopter Money, Quantative easing
Mains level: Not Much
With the coronavirus-hit economy falling deeper and deeper into a chasm with each passing day, Telangana chief minister KC Rao earlier this month has said helicopter money can help states come out of this crisis.
Various monetary policy tools are being considered to boost consumer demand in the economy which is stricken by the coronavirus pandemic. Helicopter Money is one such tool.
What is Helicopter Money?
- This is an unconventional monetary policy tool aimed at bringing a flagging economy back on track.
- It involves printing large sums of money and distributing it to the public. American economist Milton Friedman coined this term.
- It basically denotes a helicopter dropping money from the sky.
- Friedman used the term to signify “unexpectedly dumping money onto a struggling economy with the intention to shock it out of a deep slump.”
- Under such a policy, a central bank “directly increases the money supply and, via the government, distributes the new cash to the population with the aim of boosting demand and inflation.”
Is helicopter money the same as quantitative easing (QE)?
- Quantitative easing involves the use of printed money by central banks to buy government bonds.
- But not everyone views the money used in QE as helicopter money.
- It sure means printing money to monetize government deficits, but the govt has to pay back for the assets that the central bank buys.
- It’s not the same as bond-buying by central banks “in which bank-owned assets are swapped for new central bank reserves.
- Helicopter money is also different from a central bank directly financing the debt of a government.
Pros and cons of helicopter money
Pros
- Helicopter money does not rely on increased borrowing to fuel the economy, which means that it doesn’t create more debt and interest rates can remain unchanged.
- Generally, helicopter money boosts spending and economic growth more effectively than quantitative easing because it increases aggregate demand – the demand for goods and services – immediately.
- While government money drops that come from debt might not boost consumer spending, due to the debt needing to be repaid, it is often thought that ‘money finance’ will stimulate the economy.
Cons
- Unlike quantitative easing, using helicopter money as a tactic is not reversible, and many argue that it’s not a feasible solution to revive the economy.
- A country’s central bank sets its interest rates to reach economic growth targets.
- However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan).
- Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
- One of the main risks associated with helicopter money is that it could lead to a significant devaluation of the currency on the foreign exchange market.
- As more money is printed and supply increases, the value of the domestic currency could significantly decrease.
- It could also discourage speculators from buying the currency as it is less likely to perform well.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- A stimulus package to deal with the economic disruption of pandemic is suggested by various experts. What should be its size and how effective it would be in your opinion?
This op-ed discusses the latest projections by the IMF. The latest projection and suggestions by IMF are the bleak reminder of economic disruption we have been experiencing.
IMF discards its previous projections
- Less than two months ago, IMF had asserted that “global growth appears to be bottoming out” (i.e. announcing the worst is over).
- But the pandemic induced ‘Great Lockdown’ has forced the IMF to junk all its previous projections for economic output in 2020.
- Faced with the stark reality of sweeping shutdowns of almost entire economies worldwide, the fund last week acknowledged that the current “crisis is like no other”.
- The IMF slashed its projection by 6.3 percentage points from its January forecast for 3.3% growth to a 3% decline.
- This is the sharpest contraction in world output since the Great Depression of the 1930s.
- Comparison with 2009 slowdown: In contrast, the recession of 2009 saw world output contract by a mere 0.1%.
- The IMF was blindsided by the comments from Chinese authorities and WHO.
- Which is clear from the fact that as recently as February 22, the fund’s chief, Kristalina Georgieva, told G20 Finance Ministers that “global growth would be about 0.1 percentage points lower” than forecast in January.
- China’s GDP, she projected, would expand by 5.6% this year, 0.4 percentage points slower than assumed in January.
Latest projections for China by the IMF
- Last week, the IMF slashed China’s forecast to a growth of 1.2%, citing data on industrial production, retail sales, and fixed asset investment that, it said, suggested a contraction of about 8% in the first quarter.
- China reported a 6.8% first-quarter contraction.
- Still, in projecting an annual expansion in Asia’s largest economy, the fund is rather optimistically foreseeing a sharp rebound in activity over the rest of the year.
The following data of the revised projections gives us an idea about the extent to which the crisis has been damaging the economy. There are also suggestions about the strategy to deal with the crisis and that includes a stimulus package.
Projections and suggestions for India
- On India, the IMF has cut its projection for growth in the fiscal year that started on April 1, from January’s 5.8%, to 1.9%.
- This projection is base on two assumptions given below.
- 1. This again appears predicated on the fund’s baseline scenario that assumes that the pandemic would ‘fade in the second half of 2020’, allowing containment efforts to be unwound and economic activity to normalise.
- 2. Another key assumption by the IMF’s economists is the availability of policy support to nurture the revival once activity restarts.
- Suggestion for India: Jettisoning its storied fiscal conservatism, the IMF’s chief economist, Gita Gopinath, has advocated ramping up a broad-based and coordinated stimulus once the disease has been contained.
- Such measures would help avoid the errors of the Great Depression years when premature efforts to prune budget deficits prolonged the downturn.
- Inadequate fiscal measures in India: In this context, India’s fiscal measures pale in terms of scale when compared with what several other nations have undertaken.
Conclusion
Given the size of the informal sector in India as well as the anticipated prolonged disruption in labour supply even in more formal parts of the economy, the Centre needs to proactively commit to a substantial stimulus package in order to ensure that once the economy reopens, it has the legs to run.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: FDI in India.
Mains level: Paper 3- Implications of growing Chinese investment in India.
This editorial discusses the implications of growing Chinese investment in India. After People’s Bank of China bought 1 per cent stake in HDFC bank, Indian government made prior government approval mandatory for investment from countries sharing border with India. Various aspects of the move are discussed here.
No separating commerce and security in dealing with China
- India’s move to prevent a predatory Chinese hunt for Indian companies comes at a time when the stock market has been badly bruised by the coronavirus.
- It underlines the emerging perception in India that there is no separating commerce and security in dealing with China.
- India’s concerns are similar to those being expressed elsewhere in the world.
- A number of European countries have already moved in that direction.
- In recent years, apprehensions have grown, in both the developing and developed world, that China is targeting their infrastructural, industrial and technological assets for control.
- But many governments were willing to give the benefit of doubt to Beijing.
- That willingness has rapidly eroded in the wake of the corona crisis that has devastated the Western world.
Taking economic advantage of other nation’s misery
- Although few world leaders want to join the US President in publicly attacking China.
- Many of them know that Beijing bears some responsibility for letting a health emergency in one of its cities become a global pandemic.
- That Chinese companies, with access to easy money and strong political support in Beijing, are now taking economic advantage of other nations’ misery has added insult to injury.
- While most leaders are preoccupied with the corona crisis, they are not likely to let Beijing have its way.
- Even in Britain, where the Boris Johnson government is now taking a second look.
- Last week, the British Foreign Secretary, said there will be no going back to “business as usual” with China.
China’s growing influence has been posing challenges for India on various fronts. Its growing footprint on India’s economy is one of such challenges. The UPSC frames question in relation to China from various angles. So, the penetration of China in India economy is also an important aspect from the Mains perspective.
Rethinking the commercial engagement with China
- Beyond the question of accountability for the spread of the coronavirus, many countries are rethinking the very nature of their commercial engagement with China.
- Gaming the system by China: On a host of issues ranging from trade and investment to intellectual property protection, there is an inescapable sense that China has gamed the global system for unilateral gains.
- India late in learning: India certainly has had a longer learning curve than the West in recognising the relationship between commerce and national security.
- Since the early 1990s, Delhi bet that expanding economic cooperation with China will help mitigate political disputes.
- But the differences have only become intractable even as China became stronger economically.
- India gave China an easy pass into the WTO.
- India’s trade deficit: It let cheap imports from China undermine India’s manufacturing sector and run up a massive trade surplus.
- India allowed massive Chinese penetration of its telecom, digital and other advanced sectors only to discover the multiple negative consequences.
- India’s new approach: The last few years have seen a new approach that has seen India oppose China’s Belt and Road Initiative and walk out of the RCEP negotiations citing the trade imbalance with China.
Conclusion
The decision on Chinese FDI can be seen as one of the piece of the puzzle India has to face on the various front. But the puzzle of dealing with a rising China’s strategic economic onslaught will test India for a long time.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- How effective is the democratic system in dealing with the pandemics like Covid-19?
The article deals with the fundamental differences between democratic states and one-party state against the backdrop of response to Covid-19. The second part of the article focuses on post-Covid-19 scenarios like changes in the supply chains and the state of the China’s economy.
Two aspects of Chine’s propaganda campaign
- China, with the lack of transparency inherent in its one-party authoritarian system, contributed to the spread of Covid-19.
- There is a desperate effort on the part of China to erase its culpability in unleashing COVID-19 across the world.
- It has sought to overcome the damaging global public opinion which it has suffered by a subsequent sustained propaganda campaign.
- This has two aspects.
- 1. Highlighting the success: One highlights the success China claims to have achieved in arresting the pandemic within the country through drastic measures on a massive scale.
- Thereby demonstrating the superiority of its authoritarian system.
- This authoritarian system is contrasted with the delayed and often less-than-effective measures taken in democratic European countries and the US in particular.
- 2. Publicity of assistance provided to other countries: The other seeks blanket publicity of much-needed medical equipment and medical teams to assist affected countries.
- The main target is Europe, though assistance to other countries is also given prominence.
- Chinese diplomats are using Twitter, Facebook and other social media platforms to create an image of a benign China providing public goods to a grateful community of beleaguered nations.
- In reporting on India, Chinese media has often highlighted the plight of migrant workers and the frequent violations of social distancing regulations.
- It is true that India has sought and received much-needed medical supplies from China.
What China would like us to believe?
- China wants us to believe that COVID-19 virus did erupt in Wuhan, but it may not have originated in China.
- That there may have been a delay in acknowledging the seriousness of the crisis, but this was due to missteps by the local leadership in Wuhan city and Hubei province.
- Once the gravity of the situation was recognised, Chinese leaders promptly informed the WHO and shared the DNA sequence of the virus with it and other countries.
- The unprecedented measures adopted by Chinese authorities bought valuable time for the rest of the world to get prepared to deal with the pandemic.
- Having achieved notable success in arresting the spread of the virus, valuable assistance is now being provided to affected countries in the spirit of solidarity.
- China’s economy is beginning to recover and this will contribute to the recovery of the global economy.
China has been highlighting its success in dealing with Covid-19 as an achievement of its single-party system. So, it is important to understand why it is not entirely true. And UPSC can frame a question like “To what extent has democratic system helped India in dealing with the corona crisis? “. Following points highlight the advantages of democracy in this regard.
Democracy Vs. One-party system
- Has China demonstrated the superiority of China’s one-party system as compared to democracies? No!
- There is no escaping the fact that COVID-19 may not have become a pandemic if China were a democracy.
- With a free flow of information through an independent media and accountable political leadership, the rest of the world would have been alerted in time.
- There are democracies which have done as well if not better than China without resorting to its sledgehammer tactics.
- Notably, there is Taiwan, which is constantly bullied by China.
- There is South Korea, which has even held parliamentary elections after having brought the pandemic under control.
- Even in India, the government is providing daily updates on the spread of the virus.
- Conclusion: The bottom line is that as a result of being a democracy, we have a better chance of knowing the true dimensions of the crisis.
- With the democracy we have a better chance of being able to obtain constant feedback on people’s reactions and access the best advice from multiple sources.
China’s assistance and resentment against it
- One must acknowledge China’s assistance to affected countries despite reports of defective and low-quality materials.
- But recipients have often been “persuaded” to express fulsome praise for China.
- This accompanying publicity overdrive has caused resentment rather than gratitude
- Then there have been reports from Guangzhou on racial discrimination against stranded African students.
- This has led to a sharp reaction from African countries.
- This will be difficult to live down.
The revival of China’s economy
- There is no doubt that economic activity in China is beginning to revive after a steep drop of 6.8 per cent (year on year) in GDP during the first quarter of 2020.
- Latest estimates are that the Chinese economy is now functioning at about 80 per cent of the level last year, which is impressive.
- Less dependence on export: China’s economy is not as export-dependent as it has been in the past.
- Exports were 5 per cent of GDP in 2018 against 32.6 per cent in 2008.
- But the external economic environment is critical for China’s globalised economy.
- It is a significant node in the most important regional and global supply chains.
Changes in supply chains in the future and opportunity for India
- China’s position as a significant node will be impacted by countries re-shoring production or opting for shorter and closer-to-home supply chains.
- Japan will spend $2.2 billion to assist Japanese companies to shift units from China back to Japan or relocate to South East Asia.
- In 2012, when China-Japan tensions were at a peak, there was a similar move and India was seen as an alternative.
- But that opportunity was lost. Perhaps India has a second chance.
- Decoupling from the US economy: China will suffer from accelerated “decoupling” from the US economy with COVID-19 sharpening the already fraught bilateral relations.
- In a sense, China was already decoupled from the US by denying entry to US tech giants, Google, Facebook, Microsoft and Amazon.
- This even while its own tech multinationals like Huawei and Alibaba have built markets in the West.
- This cannot be sustained.
- The winners in the more digital world which will emerge post-COVID-19 will be the American tech giants, even though the US is politically dysfunctional.
- Democracies sometimes win even if their politics is frustrating.
Conclusion
Rather than express envy of Chinese authoritarianism, Indians should be thankful that we are a democracy. We need more democracy, not less, to overcome the COVID-19 challenge. India should also be ready to grab the opportunities in the post-Covid-19 era in the economic realms.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: LTRO, Repo and Reverse repo rate
Mains level: Read the attached story
Context
- The Indian economy’s slowdown during 2018 and 2019 is becoming much worse in 2020 with the spread of COVID-19 and the stalling of almost all economic activity.
- Like most other central banks in the world, the RBI, too, has tried to cut interest rates to boost the economy.
- However, unlike in the past, when the RBI used its repo rate as the main instrument to tweak the interest rates, today, it is the reverse repo rate that is effectively setting the benchmark.
We can expect a straight forward question based on this newscard. For example: “Critically examine the efficacy of reverse repo rate as benchmark interest rate in the Indian economy. “
What are repo and reverse repo rates?
- The repo rate is the rate at which the RBI lends money to the banking system (or banks) for short durations.
- The reverse repo rate is the rate at which banks can park their money with the RBI.
- With both kinds of the repo, which is short for repurchase agreement, transactions happen via bonds — one party sells bonds to the other with the promise to buy them back (or repurchase them) at a later specified date.
- In a growing economy, commercial banks need funds to lend to businesses.
- One source of funds for such lending is the money they receive from common people who maintain savings deposits with the banks. Repo is another option.
Repo as benchmark
- Under normal circumstances, that is when the economy is growing; the repo rate is the benchmark interest rate in the economy.
- This is because it is the lowest rate of interest at which funds can be borrowed and, as such, it forms the floor rate for all other interest rates in the economy.
- For instance, the interest rate consumers would have to pay on a car loan or the interest rate they will earn from a fixed deposit etc.
What has changed now?
- Over the last couple of years, India’s economic growth has decelerated sharply.
- This has happened for a variety of reasons and has essentially manifested in lower consumer demand.
- In response, businesses held back from making fresh investments and, as such, do not ask for as many new loans.
- Add to this, the pre-existing incidence of high non-performing assets (NPAs) within the banking system.
- Thus, the banks’ demand for fresh funds from the RBI has also diminished. This whole cycle has acutely intensified with the ongoing lockdown.
Consequences: Rise in Liquidity
- As such, the banking system is now flush with liquidity for two broad reasons.
- On the one hand, the RBI is cutting repo rates and other policy variables like the Cash Reserve Ratio to release additional and cheaper funds into the banking system so that banks could lend.
- On the other, banks are not lending to businesses, partly because banks are too risk-averse to lend and partly because the overall demand from the businesses has also come down.
So, how has reverse repo become the benchmark rate?
- The excess liquidity in the banking system has meant that banks have been using only the reverse repo (to park funds with the RBI) instead of the repo (to borrow funds).
- As of April 15, RBI had close to Rs 7 lakh crore of banks’ money parked with it.
- In other words, the reverse repo rate has become the most influential rate in the economy.
What has the RBI done?
- Recognising this, the RBI has cut the reverse repo rate more than the repo (see graph) twice in the spate of the last three weeks.
- The idea is to make it less attractive for banks to do nothing with their funds because their doing so hurts the economy and starves the businesses that genuinely need funds.
Will the move to cut reverse repo, work?
- It all depends on the revival of consumer demand in India.
- If the disruptions induced by the outbreak of novel coronavirus continue for a long time, consumer demand, which was already quite weak, is likely to stay muted.
- Businesses, in turn, would feel no need to borrow heavily to make fresh investments.
- If consumer demand revives quickly, the demand for credit will build up as well.
Concerns of lower reverse repo
- From the banks’ perspective, it is also important for them to be confident about new loans not turning into NPAs, and adding to their already high levels of bad loans.
- Until banks feel confident about the prospects of an economic turnaround, cuts in reverse repo rates may have little impact.
Back2Basics: Long Term Repo Operations (LTRO)
- The LTRO is a tool under which the RBI provides 1-3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
- Funds through LTRO are provided at the repo rate.
- But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
- According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
- The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: SDR mechanism
Mains level: Issues with SDR mechanism
- Finance Minister has said that India could not support a general allocation of new Special Drawing Rights (SDR) by the IMF because it might not be effective in easing coronavirus-driven financial pressures.
- FM Nirmala Sitharaman has stated that such a global liquidity boost by the IMF could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.
Details of SDR mechanism:
What is SDR?
- The SDR is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
- To participate in this system, a country was required to have official reserves.
- This consisted of a central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency.
- It is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi.
- It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.
- The value of the SDR is not directly determined by supply and demand in the market but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.
Who can hold SDRs?
- SDRs can be held and used by member countries, the IMF, and certain designated official entities called “prescribed holders”.
- It cannot be held, for example, by private entities or individuals.
- Its status as a reserve asset derives from the commitments of members to hold, accept, and honour obligations denominated in SDR.
- The SDR also serves as the unit of account of the IMF and some other international organizations.
General allocation of SDRs
- An SDR allocation is a low-cost way of adding to members’ international reserves, allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
- The IMF has the authority under its Articles of Agreement to create unconditional liquidity through “general allocations” of SDRs to participants in its SDR Department (currently, all members of the IMF) in proportion to their quotas in the IMF.
The SDR Interest Rate
- The interest rate on SDRs, or the SDRi, provides the basis for calculating the interest rate that is charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF.
- It is also the interest paid to member countries on their own SDR holdings and charged on their SDR allocation.
- The SDRi is determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of five basis points.
How many SDRs have been allocated so far?
The general SDR allocation of August 28, 2009 is by far the biggest allocation to date:
- SDR 9.3 billion was allocated in yearly installments in 1970–72.
- SDR 12.1 billion was allocated in yearly installments in 1979–81.
- SDR 161.2 billion was allocated on August 28, 2009.
What happens to the SDRs once they are allocated?
- The IMF’s SDR Department keeps records of members’ SDR allocations and holdings; the SDR Department is also the channel through which all transactions and operations involving SDRs are conducted.
- Once allocated, members can hold their SDRs as part of their international reserves or sell part or all of their SDR allocations.
- Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders; such exchange can take place under a voluntary arrangement or under designation by the Fund.
- IMF members can also use SDRs in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for future quota increases.
Issues with new allocations
- New reserves are allocated according to members’ quotas — or shares in the IMF.
- A great deal of the benefit in 2009 went to advanced economies that didn’t need help in accessing markets or financing fiscal deficits.
- If the same system is being used now, only 40 per cent of the total would be given to the emerging economies. That is not good enough.
Other reasons
- The possible extraneous purposes FM could be referring to maybe misuse of resources for terror funding or some such purpose by neighbours.
- This may seem far-fetched to some, but is par for the course for the government.
- The other possibility is that India is merely trying to prove its loyalty to the Trump administration.
- India has already requested to access the US Fed’s currency swaps.
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