Gist of EPW April Week 3, 2023

The Economic and Political Weekly (EPW) is an important source of study material for IAS, especially for the current affairs segment. In this section, we give you the gist of the EPW magazine every week. The important topics covered in the weekly are analysed and explained in a simple language, all from a UPSC perspective.

TABLE OF CONTENTS

1. Rationalising Truths Out of Textbooks
2. Era of Services Sector Globalisation
3. Trade Reforms, Technology Import, and Firm Productivity in the Indian Manufacturing Sector
4. Effects of Demonetisation on Deployment of Credit
5. Pakistan and Rentier Geopolitics
6. Identifying Zombie Banks

1. Rationalising Truths Out of Textbooks

Introduction:

• Textbooks issued by the National Council of Educational Training and Research (NCERT) have reportedly undergone some significant changes recently as part of their latest decision about textbook revisions. 
• These changes are being justified in light of the National Education Policy (NEP) 2020, which emphasises upon reducing the load or burden of heavy textbooks and rote learning upon the students.
• The recent modifications made by the NCERT have come under criticism from various scholars and political opposition groups. 
• The reason behind this criticism is that the changes seem to largely exclude chapters and content that could be perceived as politically inconvenient for the ruling establishment.

Key Changes:

• Some of the changes include deleting chapters on the history of Mughal courts as well as various topics dealing with the Cold War, industrial revolution, gender, religion, caste, etc. 
• Another deletion reported from the Class 11 political science textbook was the references to Maulana Abul Kalam Azad, who, apart from being a stalwart of the freedom struggle and independent India’s first education minister, was also an accomplished Islamic scholar, writer, and journalist. 
• The NCERT has also made changes in textbooks for physics, chemistry, biology, and mathematics. 
• NCERT has removed the full chapter on reproduction in organisms from the Class 12 biology textbook and have removed nearly all references to concepts and methods for the study of biological evolution, and renamed the chapter on “Heredity and Evolution” as “Heredity.”

Impact:

• The revisions made to Indian textbooks have been criticised for being a short-term strategy to flatten intellectual vibrancy and promote certain narratives about Indian history, which may not be historically accurate. 
• The recent revisions in NCERT textbooks do not align with the Phule-Ambedkarite conception of education, which emphasises an egalitarian and modern-rational system of education.
  • They believed that education should equip individuals to test their perceptions and experiences rationally, and that it should be emancipatory and egalitarian. 
  • Phule compared education to opening an individual’s “third eye,” while Ambedkar placed education at the centre of his slogan “Educate, Agitate, Organise.” 
• The deletions and omissions may lead to a lack of understanding of India’s history and its relationship with the world, and create a hierarchy of curricula, with students in elite private schools receiving a better education than those in NCERT-administered schools. 
• The effectiveness of recent changes in textbooks towards creating more interactive and engaging classrooms is uncertain, and it may hinder students’ natural curiosity about the history of India and the world. 
• This could result in students being unaware of the various people, rulers, and movements that have shaped history.
• These deletions will not only affect schoolchildren, but also the scores of aspirants who study these books while preparing for various competitive exams of government services. 

Read more on removal of Darwin’s theory of evolution

2. Era of Services Sector Globalisation

Context: The world has witnessed a fall in global merchandise trade over a period of time. This situation demands a greater focus on the trade in the service regime in order to keep the wheels of the trade moving. 

Statistics related to trade: 

• Between 1990 and 2008, global merchandise trade grew at an annual average rate of 9.1%. 
  • However, the growth of the global merchandise trade has halved to 4.1% since then. Though global merchandise trade has now touched $45 trillion in 2021, its share in the global GDP shrunk from 51% in 2011 to 46.5% in 2021.
  • The overall growth of merchandise trade more than halved from 27% in 2021 to just 12% in 2022. 
  • While the growth of trade in agriculture products slowed down from 19% to 11%, that of the mining and fuels segment only dipped from 60% to 42%. The worst hit was manufacturing where growth shrunk sharply to 7%.
  • The growth of trade fell by around half including iron and steel, chemicals, automotive products, and clothing. The worst affected was the textile trade.
• A positive trend during this period has been the sustained growth of services trade, which has steadily expanded at an annual average rate of 6.9% between 1990 and 2021 to $11.5 trillion.
  • The share of services trade in global GDP has almost doubled from around 6% to 12% during this period. The growth of digital technologies, which has significantly reduced trade costs of services, is a major factor that has made these gains possible.
  • While the growth of overall services trade dipped from 17% in 2021 to 15% in 2022, that of travel (mainly tourism) shot up sixfold to 79%. 
  • However, services trade growth hovered around the 5% mark in segments like telecommunication, recreational, computer, information, and other business services.

Changes over the period: 

• While merchandise exports grew by 11% to around $25 trillion in 2022, the national trends were very uneven. It is seen that while merchandise exports from China, the world’s largest exporter, rose by 7% in 2022, that of the United States (US), the second largest, shot up at more than double the pace.
  • India, which was ranked the 18th largest merchandise exporting nation, with a 1.8% share of the global market, saw its exports grow by 15%.
• For services, its global exports rose by 15% to around $7 trillion in 2022. The US, the largest exporter of services, saw its flows go up by 16%, while that of the United Kingdom, the second largest exporter, grew at just half the pace.
  • India, the seventh largest exporter of services with a 4.4% global share, saw its services outflows go up by 31%.
  • A major advantage for India is that it has emerged as the fifth largest exporter of digitally exported services with its outflows almost doubling in four years to $227 billion.

Problems related to trade under the present context: 

• Under the present context, trade is expected to suffer due to various restrictions that are being imposed by Western nations. It will make the trade regime more difficult and complex.
• Additionally, the global value chain has been disrupted due to the war that broke out in the European continents. 
• The multilateral institutions have suffered a crisis of credit in the present context. There are various agreements on which consensus has not been reached. It creates confusion in the minds of countries across the world. 

The above problems could be addressed with the help of focusing on the trade in services. India must realign its priorities in order to tap its full potential.

3. Trade Reforms, Technology Import, and Firm Productivity in the Indian Manufacturing Sector

Details

• The economic reforms of 1991 brought systematic and comprehensive policy changes in the trade and industry sector.
• The major thrust of the reforms was to improve industrial productivity through better investment choices and technological upgradation.
• Liberalization provided the opportunity to access global technology through imports.

For details on economic reforms, read here: Economic Reforms of 1991

Technology Import

• It should be noted that technology is highly concentrated in a few advanced countries of the world.
• The import of knowledge-intensive products provides domestic adaptation and assimilation of technology.
• The import of technology also helps firms to reduce their marginal cost of production. 
• It also helps in offering better-price-adjusted quality along with variety in contrast to autarky.
• Notably, as the production cost falls, firms can devote a larger share of expenditure to upgrading technology and improving productivity.

An Analysis of the Import of Technology

• A study was conducted on various firms across the country that used data and information from sources like the Index of Industrial Production (IIP) 2011-12, the Centre for Monitoring Indian Economy (CMIE), and the National Industrial Classification Scheme of 2008.
• The products were classified into the following categories:
  • Basic Goods
  • Intermediate Goods
  • Capital Goods
  • Consumer Goods
  • Durable Consumer Goods
  • Non-Durable Consumer Goods

• It was found that in the context of basic production inputs, the capital stock registered a growth rate of 11%, whereas the growth rate of wages was only 5% per annum.
• The intermediate firms have the largest production share at 56%.
• The growth rates of consumer goods and capital goods were 13% and 10% respectively.
• It is observed that the major importing products were consumption-oriented goods comprising 78% share.
• The major importer of technology is the intermediate goods sector (52%). It is followed by the consumer durable sector with a 22% share and the capital goods sector at 13%.
• It is found that the share of technology imports in total manufacturing is approximately 1.6%.
• It is observed that the technology import is an important factor in improving firm production.
• The use of foreign technology supplements internal technological capability and has a positive impact on the output.
• The import of technology is considered a major source of technology diffusion for emerging economies like India.
• Various industrial segments experienced trade integration.

Conclusion:

Despite the positive impacts of technological imports, it is important to invest in building domestic technological capabilities through research and development.

4. Effects of Demonetisation on Deployment of Credit

Introduction:

• Demonetisation refers to withdrawing a coin or a currency from its use as legal tender. The current money is pulled from circulation and is often replaced by new notes or coins. Demonetisation is carried out when a country wants to replace its old currency with a new one.
• Recent Demonetisation in India took place on 8 November 2016 for Rs 500 and Rs 1000 by the Government of India. 
• It was an attempt made by the Indian government to flush out the black money from the Indian capital circulation and expansion of the formal sector of the market. 
• The Indian government tried to decrease the informal sector’s size with demonetization.
• With demonetisation in India, various impacts were seen in India over the past few years on the economy and GDP.

Learn more about Supreme Court’s decision on Demonetisation below:

Impact on credit deployment:

• Demonetization in India in 2016 caused a significant decline in currency-in-circulation, leading to an increase in low-cost deposits.
• The creation of 27 million new Jan Dhan Yojana accounts during this period generated large surplus liquidity conditions in the banking system.
• As a result, banks were able to significantly reduce the weighted average lending rate on outstanding and fresh loans, allowing for the transmission of monetary policy and the benefits of cheaper loans to be passed on to new borrowers at a rapid pace.
• The use of digital transactions increased significantly after demonetization, with retail electronic payments growing in both volume and value.
  • The Indian government encouraged digital transactions by offering incentives and reducing charges for online banking.
• Increased digital transactions and the availability of cheap credit led to a surge in demand for personal loans, which gave credit to a large proportion of the credit-underserved population.
• Lower output growth weakened corporate loan demand, leading to a shift in lending patterns of scheduled commercial banks with a sharp rise in personal loans and a deceleration in credit to the industry.

Deployment of Outstanding Credit:

• Post-demonetisation, there was a shift in lending behaviour towards household credit, with the private corporate sector losing its share to the household sector.
  • The increase in personal loans was due to the availability of digital transactions, easy access to credit, and incentives offered to those using digital platforms for money transactions.
• Within household credit, credit cards and other personal loans saw growth, while education, consumer durables, and vehicle loans show deterioration.
  • The growth in personal loans is primarily driven by unsecured loan advances.

Image Source: EPW

• This shows a marked reversal and complete switch in the lending configuration of banking sectors during the post-demonetization period.
• This surge in personal loans helped credit-underserved populations come under the scope of the formal credit system.

Deployment of Outstanding Personal Loans:

• Shares of personal loans have increased for all population groups (rural, semi-urban, urban, and metropolitan) in the post-demonetisation period.
• Credit allocations for credit cards and other personal loans have rapidly ballooned for rural and semi-urban population groups.
• Education loans have continuously shrunk due to high default rates.
• Vehicle loans and consumer durable loans started narrowing since 2017-18 due to a slump in discretionary consumption.
• Housing loans exhibit stagnation in credit share for all the years.
• Commercial banks increased advances for retail lending by enlarging the number of consumers with access to credit, with a major proportion devoted to rural and semi-urban population groups.
• The growth was marked by a constant progression of unsecured lending categories, implying that commercial banks targeted untested population groups with high-priced loans to improve profit margins.
• Rising inequalities and worsening distribution of incomes suppressed the wage share, reduced consumption propensities, and consistently dampened domestic demand in the economy.
• Easing liquidity constraints by commercial banks over this period generated the phenomenon of rising household debt, acting as a substitute for higher wages, which facilitated maintaining the relative standards of consumption and enabled stagnant incomes to coexist with the necessity of high levels of consumption and aggregate demand.
• Household debt also lessened the erratic deviations of current incomes from its average trend, allowing unconstrained consumption and diminishing aggregate savings in the short run at the expense of lower long-run steady-state values of per capita output and consumption.

Conclusion: The channels through which credit is supplied can lead to cycles of economic growth and decline. When households take on too much debt through retail lending, they may struggle to repay it during economic downturns. This can have a domino effect on financial institutions and increase their vulnerability, potentially making the resulting recession more prolonged.

5. Pakistan and Rentier Geopolitics

Context: Despite falling on every economic parameter, Pakistan’s economy was able to survive well because of its strategic location.

Details: 

• Pakistan’s economy is facing a severe crisis in recent times and has failed to generate sufficient resources in order to finance its daily requirements. Despite that, Pakistan’s economy did not face a crisis like that of Sri Lanka. 
  • One of the major reasons for this survival is the economic help that is being received by Pakistan from the US, Saudi Arabia, and China. 
• Pakistan’s polity has been facing a political crisis on a regular basis. 
  • Nawaz Sharif was sentenced to life imprisonment and later, General Musharraf’s September 2001 decision to back the United States in its war against terror. Benazir Bhutto was assassinated in December 2007 after her return to Pakistan from eight years in exile.
  • In May 2011, Osama bin Laden was killed by United States Special Forces in Abbo­ttabad. The year 2017 witnessed the resignation of Prime Minister Nawaz Sharif, and later, his disqualification by the Pakistani Supreme Court from holding any public office. 

Pakistan’s Economic Crisis

• Since 1958 till 2019, Pakistan has approached the International Monetary Fund (IMF) 21 times for assistance. Since 2000, Pakistan has taken IMF loans five times and is now negotiating for the last tranche of the fifth one. 
  • Pakistan currently has an outstanding loan of SDR 4.8 billion (nearly $6.4 billion) to the IMF. 

Image: IMF loan to Pakistan

Image source: EPW

• Pakistan has been negotiating with the IMF to clear its ninth review; if the IMF Board approves it, the IMF will issue about $1 billion of the 2019 bailout.

State of Pakistan’s economy:

• With a per capita income of around $1,600 and a GDP of $376 billion, Pakistan is classified as a “lower middle income” country. Its global share is less than 1%. 
  • Pakistan’s performance appears to be moderate, with growth hovering around the 4% mark.
  • It has high­ ­double-digit inflation from 2008 through 2012 and again in recent times.
• Since 2000, the PKR–USD exchange rate has experienced steep depreciation from 54 to 163. Pakistan ranks 93 out of 127 countries, implying very high import dependence and poor export performance. 

Pakistan and Rentier Geopolitics

• The term “rentier state” is used to refer to countries that draw a substantial portion of government revenue from their resource attributes. Pakistan has used its strategic location and military capabilities for economic advantage. 
• The alliance with China grew out of their mutual desire to contain India, a country with which they had religious and ideological differences as well as border disputes.
  • For China, Pakistan provides a link to the Persian Gulf region which is an important source of oil for China. It is also seen as critical for countering India, a country which both see as a strategic rival.
  •  China also provides economic support by way of lending for major infrastructure projects which Pakistan desperately needs.
• Pakistan’s close relationship with the Persian Gulf states, particularly Saudi Arabia, was based not only on religious affinities, but also on Pakistan’s close military ties with the region. 
  • The monarchies of the Persian Gulf saw Pakistan as a dependable ally against a theocratic Iran and a hedge against possible US disengagement from the region.

The three alliances were useful not only for increasing its defence capabilities but also for economic sustenance. It is these alliances which will probably ensure that the current crisis in Pakistan will not cause its economy to collapse like Sri Lanka’s.

6. Identifying Zombie Banks

What are Zombie Banks? 

• A zombie bank is a bank that would not continue existing without government help, either in the form of bailouts or some kind of guarantee or credit support. Its economic net worth is less than zero – if you add up all its assets and deduct its liabilities. 
• Zombie banks typically have huge amounts of non-performing assets on their balance sheets, which undermine expectations for any decent future earnings.

Image: Characteristics of zombie bank

Source: businessnews

• The evidence shows that these banks account for 16% of state-owned banks’ equity, 23% of non-performing loans and 18% of their lending portfolio within the country. 
• Findings reveal that these firms account for 10% of non-financial corporate debt, are heavily levered and highly sensitive to monetary policy shocks.
• A zombie bank can continue operating as long as creditors are sure that the government will continue supporting it. As soon as that state support is in doubt, the zombie institution usually dies.

Concerns with the zombie banks: 

• A growing proportion of zombie firms in an economy can congest the credit channel by diverting productive resources towards these entities, lowering the lendable resources for healthy firms.
• This will discourage the entry of new firms and lead to a low-level equilibrium, akin to the “lost decade” in Japan.
• Efforts to recapitalise the zombie banks can create reputational risks and lead to adverse signalling effects. And even if banks participate in the measure, its efficacy remains an open question.
• They also lead to diversion of the resources towards unproductive sectors and thus create hurdles in the process of economic transformation. 
• These banks are more likely to crumble in the situation of economic stress and economic downturn. 
• They are not in a position to generate their own economic resources, hence are excessively dependent upon the government for resource allocation. This reduces their competitiveness. 

Zombie banks create hindrances in the process of economic development and divert resources towards unproductive sectors. It is necessary to recognise these banks and take measures to fix their problems.

Read previous EPW articles in the link.

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