Download the compilation of all summaries of all the new article here


GS-2

India and neighbors


Debt, project delays worry Bhutan: (The Hindu)

Context:

Recently, the Doklam stand-off brought a spotlight on India-Bhutan ties however there is need for greater focus on other issues like hydropower project construction.

What is the role of Hydropower in Bhutan’s economy?

  • Hydropower projects are critical for the Bhutanese economy.
  • They have been at the core of Bhutan’s plans for self-reliance since the first five-year plans in 1961

What are the emerging challenges?

  • At present Bhutan is facing growing debt burden due to delays in hydropower projects.
  • As of July 2017, Bhutan’s debt to India for the three major ongoing projects: Mangdechhu, Punatsangchhu 1 and 2 is approximately ₹12,300 crores
  • This accounts for 77% of the country’s total debt, and is 87% of its GDP.
  • A major reason for delays in hydropower projects is attributed to the fact that India is at present a power-surplus country and the demand growth was slower than expected.

What proposals has the Bhutanese Hydropower Committee put forward for India?

  • To only undertake any new projects after the current projects being undertaken by NHPC are commissioned;
  • to move from “run of the river” projects currently favoured to only a few major “reservoir” projects;
  • To undertake only those that come with Inter-governmental guarantees rather than joint ventures between Indian and Bhutanese entities.

What is India’s response?

  • The Government has looked at the proposals of the Bhutanese hydropower committee however; it has also accepted that it would be difficult to meet many of them, as India’s own power sector needs to compete.

 

Indian Economy

Must restore banks’ health in months, if not weeks: RBI: (The Hindu)

Context

  • Reserve Bank of India’s deputy governor Viral Acharya said a feasible plan was quickly needed to address the massive recapitalization requirements of public sector banks.

What is the need of the plan?

  • The central bank has been trying to restore the condition of these banks in order to facilitate loan offtake, seen as essential in reviving economic growth.

Need to raise capital

  • It is the heat of the moment and banks are not raising capital at a time when plenty of liquidity was chasing stock markets.

The Indradhanush plan

  • In 2014, the government announced the Indradhanush plan — a blueprint to revive public sector banks, which included capital infusion in these banks over a four-year period
  • The Indradhanush was a good plan, but not powerful enough.
  • we need a much more powerful plan

What next then?

  • A Sudarshan Chakra aimed swiftly, within months if not weeks, restoring public sector bank health, with the current ownership structure or otherwise.

The contemplating question

  • Whether bringing down government’s stake in these banks to 52% was sufficient to restore health, as some of them had incurred huge losses remains a big question.

On Insolvency and Bankruptcy Code (IBC)

  • Banks should not wait for directions to pursue bankruptcy proceedings in the case of defaulting clients.
  • RBI has twice directed banks to start insolvency and bankruptcy proceedings against defaulting firms.
  • The reason behind mandating a higher provision for accounts brought under the IBC was to “increase banks’ provision coverage ratio.

Social revolution in a JAM: (The Hindu, Editorial)

Context

There is a difference between equality in the digital space and empowering Indians in the bricks-and-mortar world.

Introduction

  • Just like GST (goods and services tax) created one tax, one market, one India, the PMJDY and the JAM revolution can link all Indians into one common financial, economic, and digital space.
  • No Indian will be outside the mainstream.

Role of JAM in achieving Social Revolution and major developments

  • JAM, deriving from Jan Dhan, Aadhaar and Mobile, combines bank accounts for the poor, who barely had the money to deposit in them, direct transfer of benefits into these accounts and the facility of making financial payments through mobile phones.
  • Aadhaar is the pivot here, allowing the government to ensure that benefits reach the poor and enabling them to make payments through ordinary mobile phones. For furthering the latter the government has devised the Bharat Interface for Money (BHIM) app.
  • These developments are a “social revolution”, perhaps alluding to the feature that the poor are the most direct beneficiaries.

Role of JAM beyond Bank Accounts

  • Eliminating leakage in the transfer of welfare payments and enabling the poor to have bank accounts are worthy objectives.
  • But claims of having achieved inclusion by operationalizing the JAM trinity appear somewhat exaggerated.
  • A financial inclusion, in the sense of everyone having a bank account and access to reliable and free electronic payments system, is not the same as economic inclusion.
  • JAM functions in the digital space while much of our life is lived in the brick and mortar world. In the latter space, we have seen very little improvement, not just recently but since economic reforms were launched over 25 years ago.

Focusing on Capabilities

  • Moving from production to being, JAM cannot even claim equalization, leave alone empowerment.
  • We would have achieved a social revolution when we have equipped all individuals with the essential capabilities.
  • This happens when a society has, at a minimum, universal health and education infrastructure accessible to all.

Achieving Social Revolution

  • Given the extraordinary challenges faced by India in the provision of public infrastructure ranging from health and education to drainage and sewerage, the claim made for JAM is breathtaking in its simplicity.
  • JAM ensures seamless transfer of welfare payments and facilitates the making payments in real time. These are worthy objectives, but fall well short of the social revolution the honourable minister claims for them.
  • Our social revolution will arrive when all Indians are empowered through an equality of capabilities. This would require committing resources to building the requisite social and physical infrastructure and investing time to govern its functioning.
  • JAM may have achieved equality in the digital space but is far from having empowered Indians in spheres in which they are severely deprived at present, an empowerment that they clearly value.
  • The government has leveraged IT smartly in operationalizing JAM but the possibility of replicating this to transform the ecosystem of production for firms and the ecosystem of living for individuals is limited.

Conclusion

  • Private investment in India has declined steadily over the past few years.
  • But now even growth appears to be stalling.
  • The latest GDP figures from the Central Statistics Office show growth in the first quarter of the current financial year to be lower than the average for 2016-17.
  • Data actually point to a steadily slowing economy with growth having been successively lower in the past five quarters.
  • There appears to be a mismatch between the government’s own assessment of its policies and the private sector’s valuation of their worth.
  • The jubilation over JAM is an example of this.

Demonetisation: now a proven failure?: (The Hindu, Editorial)

Context:

Demonetization as a way to tackle black money.

To what extent the demonetization was successful?

  • It was thought that if cash was squeezed out, the black economy would be eliminated.
  • Cash is only about 1% of the total black money estimated in the economy.
  • Not even 0.01% of the black money has been extinguished.

Why there is a little impact of demonetization on the black economy?

  • Black money is a result of black income generation.
  • It is produced by various means which are not affected by the one-shot squeezing out of cash.
  • Squeezed out cash quickly get regenerated.
  • Criticism of the demonetization:
  • Demonetization is not a way to tackle the black economy.
  • The government’s intention behind the demonetization was not clear and still.

What is the challenge in tracking black money?

  • The income tax department does not have the resources for dealing with lakhs of tax payers.

Who was impacted due to the demonetization?

  • The demonetization was carried out without preparation.
  • The unorganized sector was badly impacted.
  • The Farmers, traders and those who never had any black money.
  • The demonetization has impacted the overall growth rate of the country.

Size of Contingency Fund: Where govt, RBI disagree: (Indian Express, Explained)

Context

  • Centre was in talks with the RBI over the transfer of its surplus. The surplus sum transferred from earnings during 2016-17 was Rs 30,659 crore, less than half of the Rs 65,876 crore transferred the previous year. However, the government expected more.
  • Part of the reason for the smaller surplus was the RBI’s setting aside Rs 13,140 crore for its Contingency Fund (CF), a provision that was not made last year.

The issue

  • The government is of the view that there are no special risks to the central bank and the RBI should transfer the surplus earning to the government instead of setting aside a part of it for its contingency reserve.
  • The government is in talks with the RBI for the transfer of the payout over and above the surplus the RBI had already transferred to it.
  • The question is, what level of reserves should a central bank keep to tide over extreme financial disruptions?

Government’s view

  • The government’s view has been that compared to many other central banks in the world, the RBI has been earmarking amounts far in excess of what is needed to maintain its credit-worthiness.
  • Also, the government argues that as the owner of the Indian central bank, the sovereign would infuse more capital (or recapitalise) if at all the RBI’s balance sheet were to be impacted.
  • It seems like the Ministry may be working on a benchmark to compare the RBI and other central banks.
  • Chief Economic Advisor Arvind Subramanian has in the past made out a case for utilising the RBI’s reserves to provide capital to state-owned banks.

RBI’s view

  • The RBI bases its assessment on an economic model — a risk management framework, which it has adopted to calculate the level of reserves that need to be maintained.
  • Former RBI Governor Raghuram Rajan has said that based on the results of a sophisticated risk analysis by RBI staff, the board of the central bank had decided over the last three years that an equity position (including reserves) of around Rs 10 lakh crore was adequate.
  • Rajan has argued against the transfer of a special dividend to the government over and above the surplus — it just amounts to putting back into the system the money the RBI made from it.

Conclusion

  • The RBI’s approach on bolstering its reserves may be guided by a desire to ensure that it does not have to approach the government for capital at any time. Strengthening its balance sheet in preparation for a black swan event could be its way of protecting its independence from the government.
  • It will be interesting now to see how the arguments progress, and which view prevails finally. With the accounts for the year having been finalised and adopted, it would be extraordinary if the central bank approves a payout over and above the surplus.

What is a contingency fund?

  • A contingencies fund or contingency fund is a fund for emergencies or unexpected outflows, mainly economic crises.

Contingency fund in India

  • The Constitution of India authorized the parliament to establish a contingency fund of India. The Contingency Fund of India is established under Article 267(1) of the Indian Constitution. Accordingly, Parliament enacted the contingency fund of India Act 1950.
  • However, the contingency fund maintained by the RBI is different from the mentioned above.

Funds maintained by the RBI

  • RBI maintains a contingency reserve for meeting unexpected and unforeseen contingencies.
  • RBI also maintains Asset Development Reserve, created in 1997-98, to meet the internal capital expenditure and make investments in its subsidiaries and associate institutions.

Why RBI needs to maintain contingency funds:

  • The RBI says the CF is meant for unforeseen contingencies including depreciation in the value of securities, exchange guarantees and risks arising out of monetary or exchange rate policy operations.
  • It is basically a buffer against valuation losses on bond holdings or foreign exchange assets in the event of a rise in interest rates or appreciation of the rupee.
  • The Fund would also be helpful in a “black swan” event — such as the collapse of Lehman Brothers or of local banks that may threaten financial stability.
  • RBI has got wide area of responsibilities, and hence it is at greater risks.
  • RBI may require recapitalisation, precisely at a time when the fiscal position is under strain, say, due to a financial crisis.
  • According to central bankers, since RBI is also the lender of last resort, it needs to maintain a healthy contingency reserve so that it can lend its support in the event of a bank’s failure

 

U.S. backs sale of fighters to India:

Context

Trump Administration (or, United States) has supported the sale of F-18 and F-16 fighter planes to India.

What is the issue?

  • Trump is in principle against companies relocating facilities abroad.
  • S. lawmakers have been enthusiastic supporters of proposals to sell these fighters to India.
  • They are now presenting them as deals that could reduce America’s trade deficit with India and create more jobs in America than they relocate.
  • There is strategic significance. Defense cooperation with India is vital to U.S. interests because they need India to be a net security provider in the Indo-Pacific.
  • America also needs to do more to reduce the deficit.

More details:

  • F-16 and Gripen, built by Swedish company Saab, are competing for the proposed single engine fighter acquisition for the IAF.
  • French Rafale and Boeing’s F/A-18 are competing for the contract for the Navy’s twin engine fleet for its aircraft carriers.
  • Lockheed Martin and Tata have formed a joint venture to make F-16, while Saab announced a JV with the Adani for Gripen.

NASA captures images of strong solar flares:

Context

Recently, NASA recorded two high-intensity solar flares.

What are the features of these solar flares?

  • Out of the two flares, the second one was more intense
  • The flares were recorded since start of the sun cycle in December 2008
  • The category of such solar flares is called X eruption.

How solar flares affects us?

  • These radiation flares can disrupt communication satellites, GPS and power grids by reaching the upper earth atmosphere,
  • These radiations also disrupt radio signals
  • These X eruptions disrupted high frequency radio communications on the earth’s side facing the sun and low-frequency communications used in navigation.

What are the features of a sun cycle?

  • The current cycle of the sun, which began in December 2008, saw the intensity of solar activity decline sharply, opening the way to the “solar minimum”.
  • Solar cycles last on average eleven years.
  • At the end of the active phase, these eruptions become increasingly rare but still can be powerful.
  • Solar storms result from an accumulation of magnetic energy in some places.
  • These jets of ionized matter are projected — at high speed into and beyond the crown of the sun —hundreds of thousands of kilometers outward.

 

Print Friendly, PDF & Email

Did you like what you read?

Enter your email address below to get all our updates in your inbox the moment it is published. Once you enter your email address, you will be subscribed immediately.


We do not spam you, so you can easily unsubscribe anytime, by clicking on unsubscribe link in the email.