Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Government budget, $5tn dollar economy
Context
The Budget was a workmanlike exercise, more a statement of account, around which was woven many strands of intent and vision, which, read in its entirety and by connecting interlocking dots, framed a strategy of moving towards a $5 trillion economy over the next five years.
Fiscal arithmetic of the Budget
- A clearer picture of off-balance-sheet borrowings: To a large extent, the Budget has done this, giving a much clearer picture of the off-balance-sheet borrowings, which add to the government’s debt and its obligations to pay.
- Increasing the credibility of government: This move will enhance credibility among the investor community while taking decisions on committing capital for India’s future.
- Possibility of nominal 10 % growth: The nominal growth projected for 2020-21 at 10 per cent is feasible, with a stretch, given the expected rise in inflation, which will add around 4 per cent to a projected 6 per cent real growth.
- Aggressive revenue projection: The revenue projections are more aggressive, assuming a buoyancy which can be attributed in large measure to checking evasion using data analytics.
- Disinvestment and privatisation revenue: The major boost to revenues is expected from disinvestment and privatisation of central public sector enterprises, together with asset monetisation.
- The target is up sharply to Rs 2.25 lakh crore.
- This initiative has been one of the core focus areas of the government, has to be lauded for-
- The effects of increasing efficiency in operations and-
- Restricting the losses to the public balance sheet.
- Disinvestment revenues are likely to be augmented with higher dividend receipts, including, from higher profits of the Reserve Bank of India.
- Optical allocation by the Govt.: Spending, which depends on revenue collection, has also been optimally allocated, with capital expenditure budgeted to increase faster than revenue.
- High revenue expenditure: Capital expenditure is still a much smaller fraction of total expenditure compared to the committed revenue spending on interest payments, salaries and pensions and subsidies.
The slowdown in the economy and squeeze in the credit flow
- Three aspects of the current slowdown that makes it different
- First– Multiple engines of growth have synchronously decelerated-
- Consumption, investment, exports and sporadically, government spending — compared to earlier ones when one or some of these drivers were still functioning
- Second- Demand led slowdown:
- This is more a demand-led slowdown, versus the earlier ones, which tended to originate with a supply shock, whether from oil or foreign capital.
- Third– the trigger for this episode was a financial shock-
- NBFC lending — which tipped the weaknesses building in the system into deep deceleration.
- Squeeze in the credit flow of the banks
- Drastic reduction in credit flows: A telling statistic released by the RBI shows that compared to Rs 8 lakh crore of loans provided to borrowers during April-September 2018, credit flow fell to Rs 90,000 crore in the six months of 2019.
- MSMEs worst affected by the credit squeeze: Bank credit has continued to remain very weak. In the context of the broader slowdown, credit to micro, small and medium enterprises (MSMEs) has been one of the worst affected.
Whether the slowdown is more cyclical or structural-conundrum for policymakers
- If it is more cyclical, aggressive use of monetary and fiscal counter-cyclical policy could yield the desired result.
- If not, then the wait is likely to be longer and will involve more sector-specific de-bottlenecking initiatives.
- Signs of structural constraints: While there is certainly a cyclical component in the manufacturing segment- the proximate source of the slowdown- there are signs of deeper structural constraints.
- Quintuple problem– This problem has now expanded into almost quintuple problems, encompassing the government, households, NBFCs along with the banks.
- Overlaid on these structural impediments is a sharp weakening of consumer, investor and corporate confidence.
Conclusion
Implementation, as always, will be key to achieving the $5-trillion goal. The arena for the next set of reforms and actions for sustained growth is at the state level: Agriculture, land, electricity, and even labour. The Budget acknowledges this. A federal approach to tackling the slowdown, in a coordinated fashion, will probably be the most effective.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Government budget and allocations for various sectors and schemes.
Context
The Budget can be judged in terms of its effect on rural demand, investment and private sentiments– all critical elements for recovery. While the Budget offers hope on the last count, it leaves much to be desired on several other parameters.
Skill development allocation- 3000 Crore
- Unmet Demand: There is a huge, unmet demand for teachers, paramedical staff and caregivers, and skilled workers.
- Need for quality education and skills: Well-paying jobs are created in the organised services and industry but require candidates with quality education and skills.
- Both elude India’s youth due to the poor quality of education and lack of opportunities to acquire practical skills.
- Skilling will require massive investment and concerted efforts.
- What could have been done? The Budget could have given tax incentives to companies to provide internships and on-site vocational training to unemployed youth.
- The country cannot afford to let the world’s largest workforce waste this way.
On flagship welfare schemes
- The MGNREGA is allocated ₹61,500 crore, which is less than ₹71,000 crore for the current fiscal year.
- PM-KISAN: Going by the last year, disbursement under the PM-KISAN will also be less than budgeted, unless the beneficiary base is expanded.
- Good schemes for increasing demand: These two schemes are good instruments for income transfers to small and marginal farmers, landless labour who spend most of their income and generate demand for a wide range of goods and services.
- Higher disbursement under these schemes would have benefited most sectors of the economy. Budgetary allocations for health and education are also well below what is needed.
- Micro-irrigation schemes for 100 water-stressed: Focus of schemes such as micro-irrigation schemes for 100 water-stressed districts is welcome and so is a modest increase in allocations for agriculture and rural development schemes.
- Rural roads, cold storage, and logistical chains are crucial for the growth of income and employment in rural India, as the multiplier effects of rural infrastructure investment on growth and employment are large and extensive.
- ₹1.7 lakh crore for transportation infrastructure: The allocation of ₹1.7 lakh crore for transportation infrastructure is also a welcome step. If the public investment infrastructure actually materialises, it will lend credence to the government’s stated commitment to revive the investment cycle –to spur job-creating growth.
- To pull in private investment, public funding should be front-loaded in under-implementation projects.
- Small irrigation and rural road projects are also relatively easy to complete and deliver immense benefits to several sectors.
Bonds Market development and startups
- Need for the corporate bond market: The fundamental problem of infrastructure finance is the asset-liability mismatch which can be addressed only by developing a vibrant ‘corporate bond market.
- No focus on the corporate bond market: The focus of the Budget is the multiple schemes for government bonds mainly through additional room for foreign portfolio investors and exchange-traded funds in government bonds.
- Need for the well-developed market: Government’s moves are welcome but not enough. A well-developed bond market should draw upon-
- Domestic insurance funds.
- Pension funds and
- Mutual funds-which are capable of investing in corporate bonds across different schemes.
- Startups: The other leg of the “aspirational” Budget is the startups.
- Some relief on the tax they have to pay and on taxation of the Employee Stock Option Plans is welcome.
- Reluctance to abolish angel tax: But the reluctance to abolish the angel tax that results in harassment of start-ups and their investors is unfathomable.
Scheme for NBFC
- Allowing NBFCs into TReDS: Another welcome feature is the scheme to allow the non-banking financial companies into the Trade Receivables Discounting System (TReDS).
- TReDS is an ecosystem that aims to facilitate the financing and settling of trade-related transactions of small entities with corporate and other buyers, including government departments and public sector undertakings.
Changes in provisions for SMEs and their problems
- Audit threshold increased to 5 crore: To reduce the compliance burden on small retailers, traders and shopkeepers who comprise the Small and Medium-sized Enterprises (SMEs) sector, the threshold for audit of the accounts has been increased from ₹1 crore to ₹5 crores for those entities that carry out less than 5% of their business transactions in cash.
- Restructuring window increased: A provision in the budget extended the window for the restructuring of loans for micro, small and medium-sized enterprises till March 31, 2021.
- Problems faced by the SMEs
- Input tax rate higher for input than for the final goods: For many products produced by these enterprises, the tax rates are higher for inputs than the final goods.
- High taxes on imports and exports: In addition, many SMEs suffer from high taxes on imports of raw material and exports of intermediary services by them.
Other provision made to revive the private sector
- Recognising the need to revive the dying spirit of the private sector, several provisions have been made in the budget to revive the spirit of the private sector like-
- Decriminalisation of several civil offences by firms under the Companies Act.
- The abolition of dividend distribution tax (DDT).
- The assurance that tax-related disputes will be considered with compassion.
- The scheme to reimburse to exporters assorted duties, such as excise duty on transport fuels and electricity.
Conclusion
Everything considered the future of the economy will turn on whether the government delivers on the promises of public investment and the promises made to different sections of society including the taxpayer and companies. When it comes to reviving private sentiments, actions will speak much louder than the budgetary promises.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Cyber security in the wake of Huawei ban and concerns over cyber security in 5G age.
Context
India should grab cybersecurity opportunities instead of focusing on smaller issues like import tariffs during Trump’s visit.
Opportunity for India in the US-China trade war
- Technology will be an important front in the emerging trade war between the US and China.
- It will create significant opportunities for India as global supply chains re-adjust to geopolitical pushes and pull.
- In manufacturing: The immediate opportunity is in across-the-board manufacturing, especially if the Government puts in place a special task force to unclog the regulatory issues.
- In cybersecurity: Beyond manufacturing, the unfolding US-China technology war is creating opportunities for India in the cybersecurity space on a scale that could match Y2K.
Balance national security and industry economics
- The UK’s approach: It is a carefully constructed middle path.
- Not allowing high-risk vendors: The UK decided that “high-risk vendors” will not be permitted in its core networks.
- High regulatory and security oversight: High-risk vendors will also be subject to higher levels of regulatory and security oversight.
- Ability to switch: Operators are expected to have the ability to switch away from such vendors should the government so require.
- 35% restriction: The UK restricted to less than 35% of the equipment base of each telecom operator.
- The EU approach: The European Union is likely to adopt some variant of the British approach.
- This means Chinese-made equipment will be deployed across EU countries but under tighter surveillance, audit and assurance regime.
How is it going to create opportunities?
- 5G and more need for more security professionals
- More base stations: 5G networks will employ many more base stations than existing networks.
- The internet of things (IoT) is set to bring billions of connected sensors and devices online.
- The requirement of security professionals: Tightening security norms will require both telecom firms and their customers to employ a lot of cybersecurity professionals in a wide range of roles, of varying levels of sophistication and sensitivity.
- Shortage of cybersecurity professionals
- The problem is: the world is already short of cybersecurity professionals.
- Even before 5G networks are rolled out, estimates suggest that there are 2 to 3 million unfilled cybersecurity vacancies around the world.
- Scrutiny of the Chinese vendors and employment opportunities: The more stringent the security regimes around Chinese vendors, the greater the demand for cybersecurity professionals security regimes around Chinese vendors, the greater the demand for cybersecurity professionals.
- Where is the opportunity for India? The industry is responding to this shortage by employing more automation.
- But demand for human will increase: The demand for trustworthy, reliable and competent human beings to keep an eye on cyber threats will only increase.
- Where can hundreds of thousands of technology professionals who might be able to fill this gap come from? India and China.
- Advantage India: Chinese firms and individuals are unlikely to be chosen to keep an eye on Chinese equipment makers and state-linked cyber attackers, it is advantage India.
Can India grab this opportunity?
- Inadequate professionals in India: India doesn’t have adequate numbers of cybersecurity professionals either.
- Skill initiative by the government: The government has launched a skills initiative to plug the shortage, but we’re far away from addressing our own cybersecurity needs.
- India has all the necessary conditions to become as big a player in the global cybersecurity market.
- India has the numbers, the companies and the market-driven economic models that can produce the skills that the industry wants.
- Private sector’s role: During the 1990s’ information technology boom, India produced hundreds of thousands of software engineers not because of any government skills development programme, but because private firms popped up and supplied the skills that people and their employers wanted.
Way forward
- Government to government arrangements: Unlike the Y2K days, the global demand for cybersecurity professionals has entry barriers that firms and individuals cannot easily cross on their own. Government-to-government arrangements can help Indian firms and individuals get clearances for cybersecurity roles.
- Developing cybersecurity partnership: India will have to work on developing cybersecurity partnerships with the US, UK and the EU, focused on opening up their markets to Indian firms.
- Win the trust: The latter, for their part, must work on gaining the trust of the West’s national security establishments.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Dealing with outbreaks of infectious disease.
Context
The World Health Organization (WHO) has declared the coronavirus outbreak a global emergency, as the outbreak continues to spread outside China.
Coronavirus outbreak and Chinese response
- What is coronavirus? Normally, coronavirus is a large family of viruses that are often the source of respiratory infections, including the common cold.
- A small number of common infecting virus: Most of the viruses are common among animals and only a small number of them infect humans.
- Mutation of animal base virus: Sometimes, an animal-based coronavirus mutates and successfully finds a human host.
- Dangers of rapid urbanisation: Rapid urbanisation that forces animals and humans into closer proximity (as in the “wet market” in Wuhan) creates a perfect petri dish from where such zoonotic outbreaks can originate.
Concern for India
- Reported case in Nepal and cause of concern for India: For India, the most critical is cases being reported in Nepal since India and Nepal share an open border though so far.
- All tests undertaken in India have been negative.
- A tweet by the Ministry of Health and Family Welfare on January 30 said that one positive case of a novel coronavirus patient
Understanding the new virus
- The possible mode of transmission: According to the World Health Organization, during previous outbreaks due to other coronavirus, human-to-human transmission occurred through droplets, contact and fomites (objects or materials which are likely to carry infection, such as clothes, utensils, and furniture).
- This suggests that the transmission mode of the 2019-nCoV can be identical.
- The transmission even in incubation period: More significant is the new understanding that the virus is contagious even during incubation, that is even before a patient exhibits any symptoms.
- This characteristic amplifies
Experience from the past outbreaks
- Comparison with SARS: Comparisons are being drawn the Severe Acute Respiratory Syndrome) outbreak in 2002-03.
- Zoonotic case: SARS is also a zoonotic case, part of the coronavirus family with clues pointing to horseshoe bats in China as the likely source.
- Late reporting by China in SARS:
- The first incidents were reported in Guangdong province in November 2002 but WHO was officially informed only after three months.
- Different response this time: Comparison with SARS: Comparisons are being drawn the Severe Acute Respiratory Syndrome) outbreak in 2002-03.
- Zoonotic case: SARS is also a zoonotic case, part of the coronavirus family with clues pointing to horseshoe bats in China as the likely source.
- Late reporting by China in SARS: The first incidents were reported in Guangdong province in November 2002 but WHO was officially informed only after three months.
- Different response this time: This time around, the Chinese government has been more open but the question being asked is whether it has been open enough?
- The difference in time to develop vaccine: For SARS, it took 20 months from the genome sequencing to the first human vaccine trials; for the 2019-nCoV, authorities in the U.S. are working on a deadline of 90 days.
Lessons from Kerala in Nipah outbreak
- Managing an outbreak with few casualties: Kerala managed to curtail the Nipah outbreak with few casualties.
- Nipah is also zoonotic and made the jump from fruit bats to humans.
- Though there were 17 deaths in India, effective quarantine measures by local authorities prevented the spread.
- Infectious disease on the rise: Infectious diseases including those of the zoonotic variety are on the rise in India.
- In addition, regions in India suffer from seasonal outbreaks of dengue, malaria and influenza strains.
- The nation-wide disease surveillance programme needs to be strengthened.
Conclusion
India should brace itself for the possible outbreak of infectious diseases and frame policies to deal with such outbreaks in fast and effective ways.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Green Growth Equity Fund
Mains level: Paper 3- Climate change, Steps taken by India to mitigate the impact, collaboration in innovation with other countries.
Context
Both India and the UK are exploring how best to develop the technology and investment needed to spur the transition from fossil to renewable fuels and make this a beneficial trajectory for everyone.
Areas of collaboration with the UK
- Resilience to climate change: To build resilience to climate risks, the U.K. is working with the Mahatma Gandhi National Rural Employment Act to build flood defences and river structures to encourage aquifer replenishment.
- Monsoon forecasting: Together with India’s Ministry of Earth Sciences, we are gathering land, sea and atmospheric data to help deliver a decisive step forward in monsoon forecasting.
- Electric mobility: On electric mobility, a major joint venture between UK’s EO Charging and India’s Yahhvi Enterprises will deliver world-class smart charging infrastructure for electric vehicles across India.
- Finance of Green Growth Equity Fund: On finance, the U.K. government committed 240 million pounds of anchor capital in the Green Growth Equity Fund.
- Its first investment going to Ayana Renewable Power, which is developing 800MW of solar generation capacity.
India’s efforts to tackle climate change
- India’s size and ecological diversity have placed it on the frontlines of global warming.
- India walking the talk on climate change: It is on course to deliver the target of 40 per cent electricity generation from non-fossil fuels by 2030.
- ISA: India has already demonstrated this personal commitment on the world stage with the India-led International Solar Alliance.
- CDRI: India also announced the global Coalition for Disaster Resilient Infrastructure, both of which the UK a part of.
- India and the UK can also work together on–
- Resilience and adaption.
- Clean energy.
- Green finance and nature-based solutions.
- Infrastructure development.
- Sustainable energy and smart cities.
Conclusion
India and the UK need to make sure that the present partnership on climate and the environment go from strength to strength in the future.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- India's foreign relations with the EU and concerns raised over CAA in EU parliament.
Context
The European Union Parliament’s discussion recently on India’s Citizenship (Amendment) Act or CAA, is a cause of concern.
Reactions in the West over the act
- In the U.K. and the U.S.: Parliamentarians in the U.K. and U.S. Congressmen, including Democratic presidential contenders, have asked India to “reconsider” the law and to “engage” with the protesters.
- Resolution in the EU parliament: The EU parliamentarians went a step further.
- Six critical resolutions: The EU parliament put out six different and extremely critical resolutions.
- One of the six articles spoke of the possible risk by the CAA and the proposed National Register of Citizens, of creating “the largest statelessness crisis in the world”.
- A sixth less critical resolution, but which worried about the “brutal crackdown” on protesters, was dropped.
- Diplomatic outreach by India
- After India’s intense diplomatic outreach, the parliamentarians agreed to put off voting on the resolution until after External Affairs Minister and the PM visit Brussels.
- The hope is that with the U.K. scheduled to leave the EU on January 31, interest in the anti-CAA resolutions will wane.
- Finally, the government has held that the CAA is India’s internal law.
India’s Reaction
- The sovereign right of India: While the government is right about India’s sovereign right, it would be deluding itself if it thinks any of these explanations are passing muster with the EU parliamentarians.
- Dilution of case against foreign interference: The government diluted its own case against foreign interference when it facilitated a visit by EU MEPs to Srinagar last year.
- By engaging the EU MEPs to avoid a vote in the EU Parliament this week, and offering to explain the reasons behind CAA, the government is diluting it further.
- Need to stop reference to Pakistan: New Delhi must also consider the impact of its repeated reference to Pakistan as the sole mover of any motion against it at world legislatures and fora.
- 626 MEPs of the total 751 were members of the groups that originally drafted the six resolutions, and it seems unlikely that Islamabad could have achieved such a majority.
Diplomatic toll
- Cumulative toll: The government must reflect on the cumulative toll on its diplomatic heft following international alarm over the CAA, plans for an NRC and the dilution of Article 370.
- Instead of pushing a positive agenda for India or handling global challenges, Indian diplomats seem to be overwhelmed keeping out any negative references to India at official fora.
Conclusion
India must take steps to address the concerns raised at the global level over the act and also prepare itself for the possible impact of such actions.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Provisions in the budget to revive the economy-need for the fiscal stimulus, policies of the Government with respect to agriculture.
Context
The stimulus needs to continue and the reforms will help to keep the economy going. If gross savings and investment rates keep on falling it is difficult to revive the economy.
What was expected in the last budget?
- Increase in pubic investment: The first thing, it said, was to increase public investment and not play statistical or token announcement games.
- The upswing in manufacturing growth, from negative to slightly less than 3 per cent (not industrial growth, because that includes mining and electricity), needed consolidation.
- Real outlays in infra did not go up: Real outlays on the infrastructure needed to go up, but they did not.
- So the push to private demand and a virtuous cycle of growth was missed.
- The implicit numbers in the Budget math comprise growth of around 7 per cent, assuming a 5 per cent inflation rate.
Prospects of the Agri-sector
- A good sign in Agri in midterm: For agriculture, in the medium-term, we are alright. Kharif grain production was 6.4 per cent higher than the previous five-year average output.
- Kharif oilseeds output around eleven lakh tonnes above the earlier year.
- This was, however, based on a delayed monsoon which caused problems and anxieties in the second quarter of this year.
- Nightmare of government unloading grain in the market: Foodgrains are doing well and we have huge food stocks.
- But, instead of a blessing, the government turned public operations in grain into a nightmare by announcing that FCI will unload grain at a reserve price less than MSP.
- Rabi acreage recovered and is now 8 per cent more than last year, but the policy of government operations to reduce the market price of grain by its intervention is a nightmare.
- This is bound to affect input growth in the expanded acreage in the winter crops.
Wrong policy in Agriculture
- Terms of trade against agriculture: The terms of trade are going against agriculture, according to CACP (Commission for Agricultural Costs & Prices) estimates, and selling of the grain will make it worse.
- While the fundamentals are alright, to wallop the farmer with a “cut in the reserve price” would harm the farmers.
- The rabi report of CACP will say that the terms of trade have gone down more.
Conclusion
The Government should continue with the stimulus and opt for the reforms in the economy only to keep the economy going. If the gross savings and investment rates keep falling it would be difficult to revive the economy. If savings keep up, the government will have actual space to divert some real resources to infrastructure investment.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- 6th Schedule, Demand for separate states in North-East.
Context
It is to be seen if the pact will lead to true autonomy, true peace, and true development.
What the pact involved?
- Which groups signed the deal?
- Four factions of the National Democratic Front of Bodoland (NDFB), along with an influential Bodo students’ organization and a Bodo civilian pressure group, signed the peace agreement with the central and Assam governments.
- What are the major concessions given?
- The Bodoland Territorial Area Districts, the name given to Kokrajhar, Baksa, Chirang and Udalguri, the four contiguous districts bordering Bhutan and Arunachal Pradesh, will now be known as Bodoland Territorial Region.
- Acknowledgement of Bodo homeland: The changed nuance from districts to the region is significant as it acknowledges a Bodo homeland within the state of Assam, without separating from Assam.
- Why this acknowledgement matters: This is dialled down from earlier rebel demands for a breakaway state and later suggestions for Union territory status.
- What is the significance of the change from district to the region?
- Satisfying identity aspiration: The renaming is designed to satisfy the identity and aspirations of the Bodo people.
- Not ceding territory solved tricky matter: Renaming also solved the politically tricky matter of ceding territory for the government of Assam.
- Ceding territory would also have fuelled similar demands from the other parts of the state like- Karbi Anglong, Dima Hasao and Cachar, which also have homelands of non-Ahom ethnicities.
- Avoiding similar demand from other states: Indeed, it could have affected the ongoing Naga peace process, leading Naga rebels to demand territorial and administrative autonomy in Naga homelands in Manipur.
Scope of the success of the pact
- Inherent vulnerability: There is already an inherent vulnerability to the Bodo peace deal even without the overhang of ceding territory.
- This is rooted in the birth of the Bodo rebellion, which began in the 1980s on account of administrative and development apathy of the state of Assam.
- Feeling of subsuming in Bodo: A feeling that Bodo, the people, the language, the identity, was subsumed by the Assamese and migrants.
- The relation between NDFB and the Front: The Bodoland People’s Front, is in majority in the District council. Will the front be comfortable with newly peaceable colleagues of NDFB?
Conclusion
The Government of Assam needs to ensure that the pact signed changes the situation on the ground and leads to a development on the ground. The state also needs to allay the fears in the Bengali-speaking minority. Moreover, true autonomy, true peace, and true development are always worth more than the paper on which they are promised.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Digital payments in India, growth potential, various security challenges and how to tackle it.
Context
Digital payments in India are witnessing consistent growth at a compound annual growth rate (CAGR) of 12.7%.
Growth potential and challenges involved in digital payments
- Expected growth in mobile wallet payment: The mobile wallet market is expected to continuously grow at a CAGR of 52.2% by volume between 2019-23, according to a recent report by KPMG.
- This digital explosion can be seen in the accelerating rise in the download and use of electronic wallets as well as an unprecedented increase in digital transactions/payments.
- UPI/IMPS use growth: Payment systems such as UPI/IMPS are likely to register average annualised growth of over 100%, according to RBI’s 2021 vision document.
- Challenge of Cybersecurity: Cybersecurity is one of the most critical challenges faced by stakeholders of the digital payment ecosystem.
- Types of risks involved: With more and more users preferring digital payments, the chances of getting exposed to cybersecurity risks such as-
- Online fraud
- Information theft.
- Malware or virus attacks are also increasing.
- Digital payment frauds account for about half of all bank frauds in India.
Steps taken by the RBI
- Guidelines issued: In view of risks, the Reserve Bank of India (RBI) has also issued some guidelines as security and risk mitigation measures for digital payments.
- It has also issued guidelines that limit the liability of customers on unauthorised electronic banking transactions
- Steps taken: The central bank has taken steps for securing card transactions, internet banking, electronic payments, ATM transactions, and prepaid payment instruments (PPIs).
Securing the fintech revolution
- Fraudsters building advanced technologies: The changing nature of cybersecurity attacks such as-
- Web application attack.
- Ransomware.
- Reconnaissance.
- The DDoS attack clearly establishes cyber-risk as a new reality.
- What needs to be done to secure the fintech revolution?
- A robust regulatory framework.
- An effective customer redressal framework.
- Foolproof security measures to enable confidence and trust.
- Incentives for larger participation and benefits similar to cash transactions- are some measures that can help ensure long-term success for digital payments.
- Leveraging technology: Technology can be leveraged for making popular methods of cashless payments secure.
- Biometric authentication-enabled cards can provide a greater layer of security by enabling replacement of the traditional PIN.
- Through biometric authentication, consumers can authenticate transactions by placing their finger on a fingerprint sensor embedded in the card.
- Ensuring security: Safety is ensured as the consumer’s fingerprint is stored only in the secure chip within the card and the same chip is used to match the scanned fingerprint with the stored one.
- The biggest advantage: The biggest advantage is that the bank or merchant cannot access the consumer’s biometric data, which also counters potential privacy concerns.
Conclusion
To reap the advantages of the promising fintech revolution steps must be taken to secure the digital environment.
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Context
The policy currently being pursued is intended primarily to incentivise potential investors while social objectives and help in indigenisation are being jettisoned.
Call for more liberalisation and its possible impacts
- What reforms are asked for?
- Reforms such as labour market liberalisation and removal of constraints on the acquisition of land for industrial purposes are demanded.
- What could be their possible impacts?
- The negative impact such reform measures are likely to have on the incomes, living conditions and the economic security of the workers and the agricultural class.
- Counterproductive labour policy: The policy of freedom of hiring and firing of labour will be counterproductive as it would squeeze demand further in a situation of huge demand deficit.
Social sector and demand
- Neglect of human infrastructure: While talks of economic revival focus on infrastructure there is little talk of investment in human infrastructure, particularly in education and
- Conditional expenditure: On the contrary, the expenditure in social sectors is made conditional upon a higher rate of growth.
- The flawed premise of long term impact: Most mainstream economists believe that public expenditure in social sectors can only have a long- term impact on growth. Which is not entirely correct.
- The benefit of investment in human infrastructure:
- Increases demand in short-run: Investment in social sectors results in creating demand in the short run by way of opening avenues for large-scale employment.
- Competitiveness and sustainability: It imparts competitiveness and sustainability to the Indian economy in the medium and long run.
- Example of RTE, teacher employment and demand creation
- The recruitment of 5.7 million additional teachers over a period of, say, five years, can create huge scale demand.
- And, this is only one factor essential for universalising quality school education.
- There is also a large gap between the requirement of infrastructure in the schools and that available and built recently.
- The gap between requirement and availability: According to government data, only 12.5% of the schools covered by the RTE Act were compliant with RTE norms.
- Meeting these norms has the potential of creating employment on a large scale.
- Importance of health and education
- Education has a crucial role to play for an individual in gaining employment and retaining employability.
Conclusion
The gestation period of projects in social sectors is not as long as it is made out to be. It is, therefore, time for reprioritising education and health in the scheme of development strategy and the allocation of budgetary resources.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- The crowding out effect, effects of the Government borrowing on various variables.
Context
Market borrowings of the government do not always squeeze credit for the private sector in India.
What is ‘crowding out’ effect?
- Increased government spending and borrowing: It refers to how increased government spending, for which it borrows more money, tends to reduce private spending.
- Why does private spending reduce? This happens because when the government takes up the lion’s share of funds available in the banking system, less of it is left for private borrowers.
- Relationship with interest rate: Higher borrowing by the government and subsequent crowding out also impacts interest rates in the economy.
How the Government borrowing works and the role of RBI
- Local borrowing local spending: Typically, the government funds its fiscal deficit by borrowing from the domestic bond market.
- Its expenditure is also local in nature.
- Overdraft from RBI: The Reserve Bank of India (RBI) is the official banker to the government-which spends money by first taking an overdraft from the central bank.
- This overdraft gets repaid through bond market borrowings.
- Why overdraft? The understanding is that any such government spending should ideally not affect the availability of funds to other borrowers in the market.
- Excessive borrowing and effects on the interest rate: Excessive government borrowing from the bond market, many cautions, could lead to a rise in interest rates for the government itself and consequently for everyone else in the economy.
Analysis of the effects of borrowing on other variables
- Analysis of the data reveals the following trends.
- No impact on other variables: Local borrowing and spending by the Indian government does not impact any other macroeconomic variables like-
- The availability and cost of funds for other participants in the economy.
- Inflation.
- Deposit growth, at the current deficit level—that is, with the state and central combined figure above 6% of GDP.
- What impacts the interest rate the most?
- The two most important variables that impacted interest rates were inflation and the repo rate. Which tend to move together.
- What does it indicate? This clearly indicates that RBI is extremely proactive in the way it manages interest rates.
- Effects of funds on inflation: Such borrowings that are funded by the central bank could lead to inflation, the same is true for large external inflows to domestic money markets.
- The foreign borrowings finally get reflected in the country’s foreign exchange reserves, which have a very strong relationship with inflation.
- Effects on interest rates: Technically, any large inflow of a foreign currency sterilized by RBI does have the potential to move the inflation needle up, thus placing upward pressure on interest rates.
- Relationship between borrowing and growth: It is clear that government borrowing and spending actually drives GDP growth.
- Government borrowing should not impact bank lending to companies, as the sums borrowed return to the market almost immediately.
- How RBI controls bond yield?
- RBI ensures that bond yields don’t shoot up because of the excessive borrowing, by taking bonds onto its books to be released back into the market in good times.
The uniqueness of the Indian money market
- Why is it unique? India market is a unique money market, different from the rest of the world, for the following reasons-
- We have investors who are explicitly required to invest in government debt.
- Banks, non-banking financial companies, insurers, provident funds, and pension funds are all forced to invest in government debt as a condition for their licence to operate in India.
- We also find that RBI works towards aiding the government borrowing programme rather effectively, ensuring that interest rates do not change too adversely.
Conclusion
The government should not be excessively worried about the government living beyond its means at this juncture. Government spending being the main driver for the country’s GDP growth, it could be a good way to put the economy on a higher growth trajectory. Perhaps it is time to revisit the entire FRBM framework.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Bilateral trade opportunity with Australia and area of cooperation in Technology and innovation
Context
The challenge for India and Australia is to transform people-to-people ties into a trade relationship.
People-to-people the two countries
- Soft power: Soft power rather than hard economics has traditionally been the driving force behind India-Australia relations.
- Cricket is a dominant theme that connects the two countries.
- The Indian diaspora in Australia is a vibrant community that plays a robust role in connecting their country of adoption with their country of origin.
Trade relationship scenario
- $31 bn bilateral trade: The trade between the two countries has been at a modest $31 billion, largely composed of resources like coal and other minerals.
- No progress on FTA: Negotiations on a Free Trade Agreement, which began in 2011, have not moved forward significantly.
- No progress on coal mining projects in Australia: The problems faced by the Adani Group to begin work on a coal mining project in Queensland did not go down too well with investors from India.
- India Economic Strategy 2035 by Australia: One of the most widely commended initiatives has been the Australian government’s release of an India Economic Strategy 2035 Report.
- It observes that no single market over the next 20 years will offer more growth opportunities for Australia than India.
- It lays down a comprehensive road map for strengthening Australia’s trade engagement with India.
Development in digital technology and the role of youth
- Development of new architecture: Meanwhile India-Australia trade has been steadily evolving into a new architecture underpinned by developments in digital technology.
- There is a rise of a younger generation of entrepreneurs and a noticeable shift in the trade basket from resources to services.
- Technology and young entrepreneurship make a formidable combination and should set the agenda for the future of bilateral trade relations.
- About 80% of the Australian small and medium-sized enterprises are managed by young professionals.
- The young can see issues like immigration and outsourcing with far more equanimity than the older generation.
- An important role of young Australians: Young Australians are thus emerging as great champions of India-Australia trade relations.
Scope for engagement in innovation and trade relations
- Tech. expertise of Australia: There is also recognition that Australia is a laboratory of ideas, innovation, technology-led growth and university-industry partnerships.
- Scope for India in innovation and trade: India is a large and demographically young market with a love for innovation and an appetite for new products and services.
- These synergies should add momentum to a growing engagement in trade relations.
India’s weakness and Way forward
- Weakest link and way forward: The weakest link in India’s exports to Australia is in merchandise. India needs to look at three broad areas.
- First-Focus on Market Research: Despite globalisation, markets are country-specific and culturally sensitive.
- Indian companies will need to invest a little more in market research on Australian consumer expectations and lifestyles.
- Second-Brand creation: Australia is a brand-conscious market while India has not created a single consumer brand of international acceptance.
- Only when products are visible across the world’s shopping malls and supermarkets displaying their own brands that India will be recognised as a major player in the global markets.
- Third-Innovation: Innovation is emerging as the single-most-important factor for sustained success in every sphere. Global trade cannot be different.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Delays in NCRB data release, Increasing crime reporting, role played by the media.
Context
Delay in releasing the crime data by NCRB reduces the utility of the data for the policymakers.
Formidable challenges faced by NCRB
- The First-Casual approach of the States: The first is the lackadaisical approach of some of the States in providing data.
- The NCRB merely assembles the figures it receives from the State police forces and does not tinker with them to reach a predetermined conclusion.
- States’ irregularity: Data collection hits a roadblock when a few States either don’t bother to send the figures or send them much after the volume is published.
- The second-Utility of the released data: The second problem is that questions are raised over the utility of the data.
- There was a two-year delay in releasing the crime statistics for 2017.
- Just two months after it was published, the ‘Crime in India’ (CII) 2018 report was released.
- Reduced utility from a policy point of view: These numbers are only relevant to researchers, not policymakers as it does not carry us far in understanding what is happening on the ground.
- A fossilised CII is meaningless.
- The third- Third problem lies with the police and the public.
- The Reluctance of the police to register the complaint: The police are notorious the world over for not registering complaints.
- They do this so that they can present a false picture of a decline in crime.
- The reluctance of the public: The public is also not very enthusiastic about reporting crimes to the police.
- Catch-22 situation: Public is fearful of being harassed at the police station or do not believe that the police are capable of solving the crime. This is a Catch-22 situation.
Crimes difficult to bury
- The positive role played by the media: However, the problem has declined slightly over the years due to public awareness and intense media scrutiny.
- There are a few classes of offences which are becoming increasingly difficult to bury. This is attributable to the extraordinary interest evinced by the media in reporting crime.
- The crimes which are difficult to bury: The following cases of crime are becoming difficult to bury.
- Homicide: The first category of crimes that is difficult to bury is of homicides.
- Matter of distress: India reports an average of 30,000 murders every year (29,017 were registered in 2018). Every murder is a matter of distress.
- Nevertheless, the stabilisation of the figure at 30,000 is a mild assurance.
- The corresponding figure for the period in the U.S. was around 16,200.
- Need to study the US decline: Though the U.S. has about one-third of India’s population, the reported decline in murders in many major U.S cities is worth studying.
- Crime against women: The common man in India does not lag behind others in reacting strongly to attacks on hapless women and men.
- The growth of the visual media possibly explains this welcome feature in Indian society.
- The hope of a decrease in crime: The nationwide outrage over the gang-rape in Delhi and the subsequent tightening of laws on sexual crimes generated the hope that attacks against women would decrease.
The issue of under-reporting
- Under-reporting of crime in rural areas: In 2018, there were 33,356 rapes, a higher number than the previous year.
- But these figures do not fully reflect realities on the ground.
- There is still the unverifiable suspicion that while in urban areas sexual violence cases are reasonably well-reported, the story is different in rural India.
- The role played by money and caste: Money power and caste oppression are believed to play a significant role in under-reporting.
- What is more significant is that a substantial number of such crimes are committed by the ‘friends’ and families of victims.
Conclusion
- To be fair to the NCRB, we must concede that the organisation has more than justified its existence. The CII is used extensively by researchers.
- Need for educating the people on realities of crime and its reporting: There is scope for more dynamism on the NCRB’s part, especially in the area of educating the public on the realities of crime and its reporting.
- Greater pressure on the States to stick to a schedule: The NCRB will also have to be conscious of the expectation that it should bring greater pressure on States to make them stick to schedules and look upon this responsibility as a sacred national duty.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Cause of the emergence of trade disputes and how can emerging economies negotiate the deals
Context
Developing countries have argued for decades that the rules governing international trade are profoundly unfair. But similar complaints are now emanating from the developed countries that established most of those rules.
Why are developed countries complaining now?
- Competition: A simple but inadequate explanation is “competition.”
- Turning tide: In the 1960s and 1970s, industrialized countries focused on opening foreign markets for their goods and set the rules accordingly.
- Since then, the tide has turned.
- Left behind communities in developed countries
- Cheap labour-an advantage: One reason why emerging-market producers are competitive is that they pay workers less.
- Job creation in services by developed countries: To replace lost manufacturing jobs, developed economies have been creating jobs in services.
- Not everyone has moved to the service sector job: Unfortunately, not everyone in developed countries has been able to move to good service jobs.
- Efforts by the left-behind bring back the manufacturing job: The left-behind former manufacturing communities have a voice in the capital city now, and it wants to bring back manufacturing.
- Yet this explanation, too, is incomplete. The ongoing US-China trade war is not about manufacturing, it is about services.
- Services a reason behind US-China dispute: Much of the US dispute with China is not about manufacturing. It is about services.
- Emerging market competition increasing in services: Although eight of the top ten service exporters are developed countries, emerging-market competition is increasing.
- New services related rules: This increased competition from emerging markets is prompting a major push by advanced-economy firms to enact new service-related trade rules.
- An opportunity to protect the developed country producers: The new rules will ensure continued open borders for services. But it will also be an opportunity to protect the advantages of dominant developed-country producers.
Trade disputes- The combined effects of the two factors
- There are no easy trade deals anymore.
- Two conflicting factors: In sum, two factors have increased the uneasiness over international trade and investment arrangements.
- First-Left behind community: Ordinary people in left-behind communities in developed countries are no longer willing to accept existing arrangements.
- They want to be heard, and they want their interests protected
- Second-emerging economy demanding access to service sector: At the same time, emerging-economy elites want a share of the global market for services and are no longer willing to cede ground there. So, there is no easy trade deal anymore.
- Trade disputes-exercise in power politics
- High tariffs and ram tactics: Threats of sky-high tariffs to close off markets, for example, and battering-ram tactics to force “fairer” rules on the weaker party.
- The important difference from the past: One important difference is that the public in emerging markets is more democratically engaged than in the past.
- Short timed victory: Any success that rich countries have in setting onerous rules for others today could prove pyrrhic.
- No consensus on the rules: For one thing, it is unclear that there is a consensus on those rules even within developed countries. For example- rules to regulate social media.
Way forward
How should developed countries respond to domestic pressures to make trade fairer?
- Demand lower tariffs from developed countries: For starters, it is reasonable to demand that developing countries lower tariffs steadily to an internationally acceptable norm.
- Challenge the discriminatory barriers: Discriminatory non-tariff barriers or subsidies that favour their producers excessively should be challenged at the World Trade Organization.
- Go for less intrusive treaties: To go much beyond these measures—to attempt to impose one’s preferences on unions, regulation of online platforms, and duration of patents on other countries—will further undermine the consensus for trade.
- Less intrusive trade agreements today may do more for the trade tomorrow
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Reasons for the slowdown in the Indian economy, declining household saving, consumption driven growth.
Context
Setting aside the gloomy projections based on short-term economic trends, the long-term and comparative evidence reveal interesting trends about the health of the Indian economy.
Performance of the Indian economy after 1991
- Higher growth plateau reached after 1991: After the 1991 economic reforms, the Indian economy reached a higher growth plateau of 7% compared to a prior rate of 3. 85%.
- The high growth rate during 2003-2011: India witnessed a high growth momentum during 2003-04 and 2010-11 with a period average of 8.45% (GDP with base 2004-05) or 7% (base 2011-12).
- Ups and downs after 2012: The momentum lost steam in 2011-12 and 2012-13, gradually picked up again gradually to reach the 8% mark in 2015-16, and then started falling consistently to reach 6.63% in 2018-19.
- Structural dimension? This trend suggests that India’s current growth challenge has a structural dimension as it began in 2011-12.
- Comparison with China and the world
- Average at 7.07% after 2011-12: Despite these fluctuations from 2011-12, on average, India clocked a growth rate of 7.07% from 2011 to 2019, a decent figure compared to China’s and the world’s economic growth rates.
- Whereas like India, the growth of the world economy was fluctuating since 2011, China’s growth declined consistently from 10.64% in 2010 to 6.60% in 2018.
Why couldn’t India’s growth momentum be sustained after 2010-11?
- Analysis of five variables: To answer the above question, an in-depth analysis of trends in five key macroeconomic variables was done for two different periods: 2003-04 to 2010-11 and 2011-12 to 2018-19.
- Consumption.
- Investment.
- Savings.
- Exports.
- Net foreign direct investment (NFDI) inflows.
- What emerged from the analysis: The results reveal that compared to 2003-2011, investment and savings rates and exports-GDP ratio declined in the 2011-2019 period.
- How much the investment declined? The investment rate declined from 34.31% of GDP in 2011-12 to 29.30% in 2018-19.
- Household vs. corporate sector decline: The investment decline was caused mainly by the household sector and to some extent by the public sector, but not the corporate sector.
- The decline in investment compensated by NFDI: The slump in the domestic investment rate in the 2011-2019 period was compensated by increased NFDI inflows.
- On average, NFDI inflow was 1.31% of GDP during 2011-2019 compared to 0.89% during 2003-2011.
Why tax-cut not help the economy
- The justified policy of reviving the housing sector: The decline in household sector investment justifies the package of measures introduced by the Central government to revive the housing sector.
- Why corporate tax cut won’t help much? The questionable policy, however, is the steep cut in the corporate income tax rate from 30% to 22%, aimed at boosting private investment.
- Given that the corporate investment rate has not eroded severely during 2011-2019, the tax cut would help economic revival.
- Lost opportunity to spur rural consumption: A part of the largesse offered to Corporate India could have been used to spur rural consumption.
What the decline in saving rate mean?
- Importance of savings: The savings rate declined almost consistently from 27% of GDP to 30.51% between 2011 and 2018.
- This was also caused by a significant fall in the savings of the household sector in financial assets. Corporate savings did not fall.
- Why the fall in household financial savings needs to be increased? The fall in household financial savings is alarming and needs to be arrested.
- Savings are required to meet the requirements of those who want to borrow for their investment needs.
- Saving-investment relation: Lower household savings imply lesser funds available in the domestic market for investment spending.
- Economic growth powered by consumption: The decline in household savings has pushed up private final consumption expenditure consistently
- Private final consumption rose from 56.21% of GDP in 2011-12 to 59.39% in 2018-19.
- Consumption driven economic growth in 2011-19: The increase in private consumption suggests that economic growth during 2011-2019 was powered by consumption, not investment.
- Investment driven growth during 2003-2011: In contrast, during 2003-2011, growth was powered by investments.
- So, declining saving rate means a slowdown in the economy may not be due to structural issues.
- Re-examination of popular view: Thus, the popular view that economic slowdown was caused due to a slowdown in consumption demand needs to be re-examined.
- There is no concrete evidence to suggest that the economy is facing a structural consumption slowdown.
Export-GDP ratio decline and what it means
- Export-GDP decline from 24.54% to 19.74%: India’s exports-GDP ratio declined from 24.54% to 19.74% during 2011-2019.
- A trend similar to the rest of the world: The decline started from 2014-15, coinciding with a similar trend in the world export-GDP ratio.
- However, the drop in India’s exports was significantly larger than the world, a cause for concern.
- The exports- and NFDI-GDP ratio has deteriorated sharply and consistently in China after 2006.
- Indian economy doing better than China: Sharp decline in China’s export-GDP and NFDI-GDP, together with the consistent fall in China’s GDP growth after 2010, proves that the Indian economy is doing better than China.
Conclusion
The popular view that the slowdown in the Indian economy is due to the structural problems needs a re-examination in the view of the decline in investment in tandem with the world.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Pros and cons of strategic disinvestment.
Context
Air India is on the block.
Why disinvestment is not such a bad idea?
- Wisdom lies in the use of resources to meet the emergent needs: True wisdom lies in the use of resources, including the so-called “family silver”.
- To meet emergent needs.
- As also for better returns.
- Even individuals and private sector organizations committed to meeting their obligations or optimizing wealth creation take such initiatives routinely.
- The weakening of Indian economy
- This fiscal year’s second quarter growth in the gross domestic product (GDP) slipped to 4.5% and the portents of a slowdown have been quite apparent.
- Private sector investment is sagging. Gross capital formation has dipped.
- Aggregate demand has contracted.
- Public sector expenditure is the single engine that’s driving economic growth.
- Clamour for the government to open its purse and limited fiscal room.
- Shrunk revenue growth: There is a clamour for the government to open its purse and help out. However, its revenue growth has shrunk.
- Low direct tax collection: Direct tax collections registered a growth of only a little more than 6%.
- The cautious approach by the RBI: The Reserve Bank of India has taken a rate cut pause, inter alia, to watch the government’s approach to the fisc.
- Commitment to low inflation: The political executive seems determined to honour its commitment to low inflation and macroeconomic stability.
- India facing Hobson’s Choice: India is thus faced with a Hobson’s choice—either to significantly revise its fiscal deficit target or monetize state assets.
- The liberalized markets and optimizing wealth.
- Perception in the capital market: Capital markets operate on perceptions. Valuations of public sector enterprises tend to be much lower than those of private sector companies even if their profit numbers are the same.
- Why should India suffer suboptimal wealth creation?: The liberalized market philosophy that the country has pursued aims at optimizing wealth creation. In case a change in ownership structure can deliver higher wealth, why should Indian society retain the current ownership frame and suffer suboptimal wealth creation?
- Need to make policies aimed at value creation: Given the limits on India’s resources, it is all the more important to see that policies are geared to ensure that value is created.
- Stake sales can achieve value creation: For validation of this surmise, look at the rapid rise in the enterprise value of Bharat Petroleum, as indicated by its share price, since the announcement of its strategic disinvestment.
- Not all private sector companies perform well: In those cases, the losses are not funded by innocent taxpayers.
Twin angles to welcome strategic disinvestment
- One: The need for India to invest in fresh asset creation.
- The fresh asset can be created by way of roads, ports and airports that would result in a cascade effect for the economy’s growth.
- Two: The optimization of wealth generation from the country’s assets.
- This, incidentally, will benefit individual shareholders, including employees with shares, who have invested in the equity of listed public-sector companies such as Bharat Petroleum.
- Energy security of the country not harmed: As there are other state-owned petroleum companies undertaking exactly the same activities, such as refining and marketing crude oil, the sale of one company does not tamper with the energy security of the country.
Way forward
- Caution against undervaluation: The government, however, must ensure that it is not taken for a ride. It must make a good judgment of the value of the company it decides to disinvest from and if the market conditions are not favourable for the move it must wait for the opportune moment.
- Asset creation from the proceeds: Instead of using the proceeds from the disinvestment to fund revenue deficit the proceeds must be utilized strictly for new asset creation.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Effects of low growth rate on the State's finances.
Context
Lower tax devolution, delays in GST compensation are potential risks to the states.
Trends in the finances of the state
- The unaudited fiscal data of 21 states:
- These states account for around 90 per cent of India’s GDP in 2017-18. The data reveal some trends.
- First Trend: Revenue receipt sliding down
- From 15.6 to 4.6 %: At the aggregate level, revenue receipts of these 21 states have grown by a mere 4.6 per cent, sliding down from 15.3 per cent over the same period last year.
- Decrease in Central tax devolution: The analysis shows that the states’ share in Central tax devolution has slowed the most, contracting by 2.3 per cent during this period, after having grown by 12.1 per cent over the same period last year.
- Second trend: The Centre’s gross tax revenues are expected to fall short of the budgeted target by a considerable Rs 3- 3.5 trillion this fiscal year.
- The aggregate tax devolution to all states may be as much as Rs 1.7 – 2.2 trillion lower in the current fiscal year than what was budgeted.
- This is a key revenue risk staring at the state governments this year.
- Third trend: States own tax and non-tax revenue contracting.
- The states’ own non-tax revenues have contracted by 5 per cent during the first eight months of this fiscal year, after an expansion of 15.3 per cent over the same period last year.
- Decreasing tax revenue: Growth of states’ own tax revenues, the largest source of their revenue receipts, eased to a tepid 2.2 per cent during this period from a healthy 16 per cent over the same period last year.
- This is in part by the modest rise in collections of the State Goods and Services Tax (SGST).
- Fourth trend: Increase in the grants from the Centre
- The primary factor boosting the GST compensation seems to be the low growth in states’ GST revenues relative to the mandated 14 per cent annual growth for the five-year transition period.
Delay in receipt of the GST collection and the risk
- Some state has voiced concerns over the delays in receipt of the compensation amount in recent months.
- The delay has complicated their fiscal position and cash flow management.
- Risk for the states: The timing of receipt of the compensation is the second major revenue risk facing state governments.
- If compensation gets delayed to the next fiscal year, we may well find some traditionally revenue surplus states staring at a revenue deficit
- Case of no GST compensation: But it seems states will have to start gearing up for life without the GST compensation.
The Rise in State Development Loans or Market borrowing by states
- SDL rising in first three quarters: According to ICRA’s estimates, net SDL issuance of all states and UTs rose by 15.5 per cent to Rs 2,806 billion in the first three quarters of this fiscal year, up from Rs 2,429 billion last year.
- The combined gross SDL issuance has expanded by a significant 34.9 per cent to Rs 3,874 billion this fiscal year (April-December), up from Rs 2,872 billion last year.
- The calendar for state government market borrowings for the fourth quarter indicates tentative gross SDL issuances of Rs 2,086 billion in the quarter, implying a moderate 9.1 per cent growth.
- But, this conceals a large dip in redemptions.
- Net SDL issuances will expand by a staggering 55.7 per cent to Rs 1,766 billion in Q4FY20, up from Rs 1,134 billion last year, underlining the stress in state government finances this year.
- About 25 % rise in borrowing this fiscal: If market borrowings in the fourth quarter are in line with the amounts indicated, total gross borrowing this fiscal year would rise by 24.6 per cent to nearly Rs 6 trillion, up from Rs 4.8 trillion last year.
- Net borrowing by states as large as Central govt. borrowing: Net borrowings by states would rise by an even sharper 28.3 per cent to Rs 4.6 trillion this year, becoming nearly as large as the Central government’s net market borrowings of Rs 4.7 trillion that have been announced so far for this year.
Conclusion
The figure and the trends indicated the financial risk the states are staring at. The government must take measure to revive the economy in order to address the problems faced by the states and ensure that the states are not left in lurch while SGT compensation receipts get delayed.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Facial recognition technique and issues associated with it.
Context
Face recognition technology calls for a more comprehensive domestic framework that promotes the use of new technologies for the public good as well as imposes necessary constraints against their abuse.
Debate on finding the balance between regulation and promotion
- Google calls for partial ban: TheGoogle CEO’s recent support for a temporary ban on facial recognition technologies seems uncharacteristic.
- It is not often that companies developing a technology call for its ban.
- Their interest is in promoting the use of technology, not proscribing it.
- Not every one of the leading tech companies agrees with Google on facial recognition.
- Microsoft against the ban: Microsoft has questioned the idea of a ban. Calling facial recognition a “young technology”, it said “it will get better.
- To get better the technology has to be used: The only way to make it better is actually to continue developing it.
- And the only way to continue developing it actually is to have more people using it.
- IBM’s precision regulation: IBM has taken a step forward in developing the policies for the use of technology by setting up a “lab”.
- The lab will generate actionable ideas for policymakers to manage the emergence of new technologies like facial recognition that are shaping our digital future.
- Precision regulation vs. complete ban: The idea is to develop “precision regulation” rather than enforce “blunt” instruments like the ban.
- The EU’s plans for temporary ban: The debate on finding the right balance between regulation and promotion of emerging technologies comes in the wake of leaked plans of the EU to issue a temporary ban.
- The ban could be up to five years.
- Ban on use in public places only: The proposed ban is not a comprehensive one and will be applicable to the use of facial recognition in public spaces.
- India’s own plans for law enforcement agencies: The intensifying global debate also coincides with India’s own plans to roll out a massive project on deploying facial recognition technologies, essentially for law enforcement.
- The international discourse provides the context for developing a broad and effective Indian policy framework for the use of facial recognition.
Background of the backlash against the tech companies
- Techlash: Well before the EU had begun to discuss a temporary ban on facial recognition, there has been a “techlash” against the companies.
- The companies faced backlash because they have so dramatically altered our lives in the last few years.
- The idea of “digital is different”: For nearly two decades, the idea that “digital is different” and does not need public oversight had triumphed in most capitals of the world.
- Problems with regulations: The main argument was that regulation constrains technological innovation and retards progress.
- AI and Big data: The urge to regulate has triggered widespread concerns about the dangers of digitalisation, especially the use of big data and AI by private companies as well as governments.
Major concerns against facial recognition
- Surveillance capitalism and surveillance state: The companies were seen as monetising the data generated by the widespread use of digital platforms like Google and Facebook.
- Surveillance state: China became the prime example of states using data and information to exercise ever more control over its citizens.
- Accuracy: At the other end are concerns that facial recognition is not entirely accurate and could lead to punitive actions against innocent people.
- Racial bias misogyny: There is also a concern in the US that the algorithms behind facial recognition carry the baggage of racism and misogyny.
- Concerns in India: It also remains a fact that the Indian state has always been tempted to empower itself against its citizens in the name of collective security.
- It has also tended to weaponise information against political opponents and dissidents.
Potential Advantages
- In the control of crime.
- Better border controls and countering terrorism.
- Aid the Police: In India, a severely under-policed nation, facial recognition surely offers many benefits.
Conclusion
The foreign office must reclaim India’s place in the international discourse on AI and facial recognition and develop a productive alignment between India’s national interests and the development of new digital norms.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Globalisation-Convergence of the rich and the poor economies- hopes and the reality.
Context
Sound policies are needed to put emerging economies back on a higher growth path and ameliorate regional inequalities.
The theory of convergence
- The theory of convergence is one of the most powerful and noblest ideas in economics.
- What is it? It is the concept that other things being equal, poorer economies should catch up with richer ones so that inequality between the rich and the poor attenuates, and conceivably even disappears over time.
- Capital is more productive in poor economies: The premise driving convergence is that capital (whether physical or human) is more productive in poor economies than rich ones due to what economists call “diminishing marginal productivity”.
- In layman’s terms, a small amount of investment yields a greater increase in output where there is less capital than where there is more.
- Lesser the development more the development: Even more simply, the rate of return on investment is inversely related to the level of economic development.
- Experience of Japan and Germany after WW 2: The experience of advanced economies gave economists reason to be optimistic that convergence occurs according to the script.
- Thus, the devastated economies of Europe, along with Japan, quickly caught up with the advanced economies that had not been ravaged by World War II, most notably, the US.
- Germany and Japan closing the gap: At the end of the war, with their capital stocks destroyed, Germany and Japan were much poorer than the US; by the 1960s, they had closed the gap.
Globalisation and the unfulfilled hopes of convergence
- Replication of the rise of Japan and Germany? At one time, it appeared that the same play was at work between emerging economies and advanced economies.
- Rise of India and China: Economies such as China and India, as well as others, were far outstripping the growth rates of the US and other rich economies,
- Hope of closing gap: India and China gave hope that at least the more rapidly growing of the emerging economies would close the gap with the rich world within decades rather than centuries.
- Adoption of technology at low cost: There was presumed to be an additional powerful force working toward convergence.
- Poorer economies are, almost by definition, far away from the technological frontier at which the richest economies operate.
- There is thus ample room to absorb newer technologies at relatively low cost and in a relatively short span of time, without encountering slowing growth like the rich economies,
- In simpler terms, it is difficult and costly to innovate the latest Apple iPhone, but relatively easy to reverse engineers at least some of Apple’s technology.
Reality: Convergence is faltering
- Recent evidence suggests that convergence is faltering.
- World Bank report of retarding convergence: A recent World Bank report documents a worrying slowdown in productivity growth in emerging economies, significantly retarding convergence.
- Lower productivity: The report’s calculations suggest that emerging economies have 14% lower productivity than they would have had if previous trends of high productivity growth were maintained.
- Lower commodity exports: For commodity exporters, this is a whopping 19%.
- The silver lining for faltering economies: According to the World Bank, the main driver of falling productivity are-
- Insufficient investment in physical and human capital.
- Insufficient mobility of machines and workers from less productive to more productive sectors of the economy.
- India’s case: The Indian case clearly bears this out, with languishing investment and unfinished productivity-enhancing reforms, especially in the country’s labour market, being the key culprits behind the sharp slowdown in growth.
Way forward
- Repair financial systems: Governments, including India’s, need to do the heavy lifting of repairing damaged financial systems overladen with bad debt.
- Restore fiscal rectitude.
- Inflation focused monetary policy: Ensure that monetary policy remains focused on stable inflation rather than being excessively loose as a risky substitute for structural reforms.
- Reforms: Press ahead with unfinished reforms to capital, land and labour markets.
- Address the regional disparities: There is a further critical dimension in the case of large multi-region economies such as India.
- Not only has convergence been faltering between nations, but it has also been faltering between the richer and poorer regions of large nations such as India.
Conclusion
The data does not present an epistle of despair, but of hope. The pursuit of sensible and conventional sound economic policies ought to put emerging economies as a group back on a higher growth trajectory. Convergence may yet end up being a parable of promise rather than a fable of folly.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Avangard-HGV
Mains level: Paper 3- Hypersonic Glide Vehicle, whether India go for developing it- and challenges to Indian security.
Context
Russia announced that its new hypersonic glide vehicle (HGV), Avangard, had been made operational.
What HGV is and where the US and China stand
- What is HGV and what is it capable of?
- Speed over 5 Mach: A hypersonic delivery system is essentially a ballistic or cruise missile that can fly for long distances and at speeds higher than 5 Mach at lower altitudes.
- Invulnerable to interception: This allows it to evade interception from current Ballistic Missile Defence (BMD).
- High manoeuvrability: It can also execute a high degree of manoeuvres.
- Avangard-Developed by Russia: Russia claims that this HGV can fly at over 20 times the speed of sound.
- Invulnerable to interception: and is capable of such manoeuvring as to be invulnerable to interception by any existing and prospective missile defence means of the potential adversary.
- China and the U.S. are also close on the heels: The U.S. has moved from the research to the development stage.
- Where China stands: China demonstrated the DF-17, a medium-range missile with the HGV, at the military parade in October 2019.
- What were the reasons for the development: The U.S. walked out of anti-ballistic missile treaty in 2002, prompted by the U.S. exit from the treaty and fear of the U.S. anti-ballistic missile defence system.
How would hypersonics complicate the security concerns?
- First complication-Increase in the possibility of miscalculation: These missiles are being added to the military capabilities of countries that possess nuclear weapons.
- For these nations, the concern is always an attack on nuclear assets to degrade retaliation
- Destination ambiguities: Another layer of complication is added by the fact that these missiles bring in warhead and destination ambiguities.
- Increasing tendency to assume worst: In both cases, when an adversary’s early warning detects such missiles headed in its direction, but cannot be sure whether they are conventional or nuclear-armed, nor ascertain the target they are headed towards, the tendency would be to assume the worst.
- For an adversary that faces a country with a BMD but itself has a small nuclear arsenal, it would fear that even conventionally armed hypersonic missiles could destroy a portion of its nuclear assets.
- The tendency to shift to trigger-ready postures: The tendency could then be to shift to more trigger-ready postures such as launch on warning or launch under attack to ostensibly enhance deterrence.
- Risk of miscalculation: But such shifts would also bring risks of misperception and miscalculation in moments of crisis.
- Second complication-Offence defence spiral: According to reports, the U.S. has begun finding ways of either strengthening its BMD or looking for countermeasures to defeat hypersonics, besides having an arsenal of its own of the same kind.
- Possibility of arms race: The stage appears set for an arms race instability given that the three major players in this game have the financial wherewithal and technological capability to play along.
- This looks particularly imminent in the absence of any strategic dialogue or arms control.
- Third complication-Possibility of the arms race into outer space: A third implication would be to take offence-defence developments into outer space.
- Sensors are already placed into space: Counter-measures to hypersonics have been envisaged through the placement of sensors and interceptors in outer space.
- While none of this is going to be weaponisation of outer space would, nevertheless, be a distinct possibility once hypersonic inductions become the norm.
Conclusion
The induction of this technology would likely prove to be a transitory advantage eventually leading nations into a strategic trap. India needs to make a cool-headed assessment of its own deterrence requirements and choose its pathways wisely.
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