06 Aug 2020: UPSC Exam Comprehensive News Analysis

E. Editorials

Category: ECONOMY

1. How to pay for the stimulus

Context:

• The article explores the options available to finance enhanced public spending to revive the Indian economy.

Background:

• Given the economic impact of the pandemic, economists have been deliberating on the appropriate economic policy response.
• Some economists have argued for a more active government intervention to revive the economy in the form of greater public spending. This will ensure a greater amount of money in the hands of the people which can boost the demand and help economic revival.

For more information on this issue, refer to:

CNA dated August 3, 2020

• However, there are concerns that greater public spending will increase the fiscal deficit and this expansion of public spending will have to be financed.
  • Considering that the economy has stalled and the government will not be getting its revenues, the “general” government (that is, Centre plus states) fiscal deficit is expected to shoot up to around 15% of GDP when the permissible limit is only 6%.
  • The announcement of a bailout or relief package would only further increase the fiscal deficit.
  • The government’s fiscal deficit (the total amount of borrowings to bridge the gap between its spending and revenues) will be way over the permissible limit.

For more information on the issue of fiscal deficit, refer to:

CNA dated April 25, 2020

Details:

• The article analyzes the options available to finance enhanced public spending.

Increasing taxes:

• Theoretically, public spending can be financed by higher tax rates for both direct as well as indirect taxes.

Challenges:

• However, when the economy is in a recession this option may not work as incomes would have decreased and subsequently, there would be decreased expenditure on the purchase of goods and services. This is already evident as the government is facing a major shortfall in revenues through GST.
• New avenues for tax revenues are not feasible in the short term.

Domestic debt financing:

• One of the available options to finance the government expenditure would be to issue debt to the public.

Challenges:

• However, with the economy stalled, there isn’t enough money in the market for the government to borrow from.
  • Data show that savings of domestic households have been faltering and are barely enough to fund the government’s existing borrowing needs.
• Moreover, as the government borrows more from the market, it pushes up the interest rate. This would affect private investment.

External borrowing:

• The government could also consider borrowing from the World Bank and the International Monetary Fund (IMF).

Challenges:

• In the case of debt financing, the borrowed money will have to be repaid in hard currency. This would require India to earn hard currency by stepping up exports by substantial proportions. This would be a difficult task under present circumstances given that Indian exports have been faring poorly since 2014 and the multiple shocks that have been witnessed in global output and trade.
• Other significant issues when considering borrowing from the World Bank and the IMF include the issue of conditionalities and the extended time frame required for loan negotiations.
• Also, external borrowing accounts for being a national debt as compared to domestic borrowing. Most economists believe developing economies like India should not have debt higher than 80%-90% of the GDP. At present, it is around 70% of GDP in India.
• Foreign investors have been pulling out and rushing to safer economies like the US, and are unwilling to lend in times of such uncertainty.

Money financing:

• Another option worth exploring is money financing which involves borrowing from the Reserve Bank of India (RBI). Deficit monetisation by the RBI involves printing new money. This involves the “direct” monetisation of government deficit. This is also termed ‘money financing’ as it increases the money supply.

Mechanism of money financing:

• In this case, the government asks the RBI to print new currency in return for new bonds that the government gives to the RBI. Now, the government would have the cash to spend and alleviate the stress in the economy.
• In lieu of printing this cash, which is a liability for the RBI, it gets government bonds, which are an asset for the RBI since such bonds carry the government’s promise to pay back the designated sum at a specified date.
• This is different from the “indirect” monetising that RBI does when it conducts the so-called Open Market Operations (OMOs) and/or purchases bonds in the secondary market

Significance:

• The money financing tool provides an opportunity for the government to boost overall demand at the time when private demand has fallen. Government expenditure using this new money boosts incomes and raises private demand in the economy.
  • Recently, the Bank of England extended direct monetisation facility to the UK government to help revive the slowing economy.

Challenges:

• Until 1997, the RBI “automatically” monetised the government’s deficit. However, given the concerns regarding direct monetisation of government deficit this facility was ended by 1997.
• There have been concerns expressed by economists that money financing may lead to high intangible and institutional costs.

Fiscal profligacy:

• An argument against direct monetising is that governments are considered inefficient and corrupt in their spending choices.
• Extended fiscal profligacy in the past had led to the balance of payments crisis in 1991.

Inflation concerns:

• The standard economic argument against money financing is that it is inflationary.
  • Retail inflation in India has been on the uptick breaching the central bank’s tolerance limit of 6%.
• Printing new currency notes increases the flow of money in the economy. This leads to an increase in inflationary pressures which lead to the rise in prices of goods and services in the country. Deficit financing is inherently inflationary.
• High inflation can have an undesired effect on the economy.
  • When there is inflation in the economy employees demand higher wages to survive. If their demands are accepted it increases the cost of production which de-motivates the investors. Deficit financing thus affects investment adversely.
  • This could lead to a situation where India enters a phase of slow growth and rising prices often referred to as the stagflation phase.
  • Higher inflation and higher government debt provide grounds for macroeconomic instability.

Counter arguments:

• The article argues that the perception that money financing would be inherently inflationary is wrong. The article argues that whether a fiscal expansion is inflationary or not is related more to the state of the economy than the medium of its financing.
• Economic resources are currently unemployed. With enhanced public expenditure and the subsequent increase in demand, these unused resources will get back to work and this will lead to an increase in output without inflation.
• The article argues that enhanced public expenditure through money financing will help India revive its economy to pre-COVID-19 levels of output and employment.

Conclusion:

• Given the concerns that money financing may be imprudent to do so in the current circumstances, it is suggested that money financing must only be used as the last resort when all other options are exhausted.

For more information on money financing, refer to:

CNA dated June 9, 2020

Category: INTERNAL SECURITY

1. Taking nuclear vulnerabilities seriously

Context:

• The article discusses the concerns associated with nuclear weapons.

Concerns:

Increasing nuclearization:

• Since 1945, the United States, the Soviet Union/Russia, the United Kingdom, France, China, Israel, India, Pakistan, and North Korea have armed themselves with destructive nuclear weapons.
• Over 1,26,000 nuclear weapons have been built since the beginning of the atomic age.

Damage potential:

• The use of existing weapons against civilian populations can cause a high number of casualties as observed in the atomic bombing of Hiroshima and Nagasaki.
  • The atomic bombing of Hiroshima and Nagasaki killed over 2,00,000 people. Another 2,00,000 people or more who survived the bombings of these two cities have suffered permanent disabilities.
• The large number of nuclear tests are causing grave and long-lasting damage to the environment and public health.

Vulnerability:

• Nuclear weapons could be launched at any moment against any target around the world.
• There is no realistic way to protect against nuclear weapons, whether they are used deliberately, inadvertently, or accidentally.
• The availability of ballistic missiles has made it impossible to intercept nuclear weapons once they are launched. Neither fallout shelters nor ballistic missile defence systems have succeeded in negating this vulnerability.

The problems of deterrence:

• Nuclear weapons supporters have often argued that the use of nuclear weapons is impossible because of deterrence.
  • Deterrence theory holds that nuclear weapons are intended to deter other states from attacking with their nuclear weapons, through the promise of retaliation and possibly mutually assured destruction (MAD).

Lack of restraint:

• Nuclear weapons supporters claim that nuclear weapons do not just protect countries against the use of nuclear weapons by others, but even prevent war and promote stability. However, the article argues that the claims of deterrence do not hold up to evidence.
• Nuclear threats have not always produced fear and caution as propounded by nuclear enthusiasts. On the contrary, countries with nuclear weapons have gone to war quite often, even with other countries with nuclear weapons, albeit in a limited fashion. Countries have not always shown the expected restraint.

Unstable policy:

• Nuclear deterrence cannot be considered stable.
• Strategic planners often use worst-case assumptions about the intentions and capabilities of other countries to argue for the acquisition of greater destructive capabilities, driving endless upgrades of nuclear arsenals, and offering a rationale for new countries to acquire nuclear weapons.
• All nuclear-weapon states have admitted to the possibility that deterrence could fail, evident in their plans for preparing to fight a nuclear war.

The illusion of control:

• A major concern with respect to nuclear weapons is the illusion regarding the controllability of nuclear weapons.
• In the real world scenario, it would not be possible to have complete control. The desire to believe in the perfect controllability and safety of nuclear weapons creates overconfidence, which is likely to lead to accidents and possibly to the use of nuclear weapons.

H. UPSC Prelims Practice Questions

Q1. Consider the following statements with respect to Qualified Institutional 
Placements (QIP):

1. It is a tool for raising capital with limited regulatory compliance.
2. In a QIP, only equity shares can be issued.
3. Only qualified institutional buyers are allowed to participate in a QIP issuance.

Which of the given statement/s is/are correct?

1. 1 only
2. 1 and 2 only
3. 1 and 3 only
4. 1, 2 and 3

CHECK ANSWERS:-

Answer: c

Explanation:

• Qualified institutional placements (QIPS) are a way to issue shares to the public without going through standard regulatory compliance.
• It follows a looser set of regulations; however, the allottees are highly regulated.
• Qualified institutional buyers (QIBs) are the only entities allowed to purchase QIPs.
• QIBs include mutual funds, domestic financial institutions such as banks and insurance companies, venture capital funds, foreign institutional investors, and others.
• In a QIP, a listed company can issue equity shares, fully and partly convertible debentures, or any security (other than warrants) that is convertible to equity shares.

Q2. Consider the following statements with respect to “Pokkali rice”:

1. It is a variety of rice known for its saltwater tolerance.
2. It has got a Geographical Indication Tag.
3. It is extensively cultivated in Tamil Nadu.

Which of the given statement is/are correct?

1. 1 only
2. 1 and 2 only
3. 1, 2 and 3
4. 2 only

CHECK ANSWERS:-

Answer: b

Explanation:

• The pokkali variety is known for its saltwater tolerance.
• It is endemic to central Kerala.
• It is grown in coastal Alappuzha, Ernakulam and Thrissur districts.
• It has been granted the Geographical Indication (GI) tag.
• Pokkali is an ancient farming practice. One season of rice farming is alternated with another season of prawn culture.
  • When the salinity is high, prawn farming takes over.

Q3. Which of these states have Geographical Indication Tag for Basmati Rice?

1. Punjab
2. Haryana
3. Uttarakhand
4. Madhya Pradesh

Choose the correct option:

1. 2 and 3 only
2. 1, 2 and 3 only
3. 3 and 4 only
4. 2, 3 and 4 only

CHECK ANSWERS:-

Answer: b

Explanation:

In May 2010, Geographical Indication status was given to basmati grown only in Punjab, Haryana, Delhi, Himachal Pradesh, Uttarakhand and parts of western Uttar Pradesh and a few districts of the Union Territory of Jammu & Kashmir.

Q4. Consider the following statements with respect to River Sarayu:

1. The river originates from Lake Mansarovar in the Himalayas and is also known as the Ghaghra.
2. Sarayu flows through Uttarakhand and Uttar Pradesh.
3. Ayodhya is situated on the banks of this river.

Which of the given statement/s is/are incorrect?

1. 2 only
2. 3 only
3. 1 and 2 only
4. None of the above

CHECK ANSWERS:-

Answer: d

Explanation:

All the statements are correct.

• The Sarayu originates from Lake Mansarovar in the Himalayas and is also known as the Ghaghra and the Manas Nandini. It merges with the Ganga in Bihar’s Saran district.
• Sarayu flows through Uttarakhand and Uttar Pradesh.
• Ayodhya is situated on the banks of this river.