22 Feb 2023: UPSC Exam Comprehensive News Analysis

C. GS 3 Related

Category: ECONOMY

1. Vostro accounts and how they facilitate trade

Syllabus: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Prelims: About Vostro account and Nostro account 

Mains: Special Rupee Vostro Accounts (SRVA) arrangement between India and Russia

Context

About 20 Russian banks such as Centro Credit Bank, Credit Bank of Moscow, Rosbank, and Tinkoff Bank have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India. 

Special Rupee Vostro Accounts (SRVA) arrangement

• A Vostro account refers to an account that a domestic bank holds for a foreign bank in the domestic bank’s currency.
• Such accounts are used by domestic banks to facilitate international banking services to their clients with global banking requirements.
• Vostro accounts arrangement is an offshoot of correspondent banking that helps the banks to provide wire transfers, conduct business transactions, accept deposits and gather documents on behalf of the other bank.
• This arrangement further aids domestic banks to gain broader access to foreign financial markets and serve international clients without the need for being physically present in their home countries.
• The Special Rupee Vostro Accounts or the SRVA arrangement is an additional arrangement that facilitates the establishment of a complementary system by using freely convertible currencies.

Read about – Russian Banks Open Vostro Accounts in India

Nostro account  A Nostro Account refers to a bank account that a bank holds in a foreign currency. A bank, through a Nostro Account, holds the currency of the country where the funds are held. i.e Nostro accounts are denominated in foreign currencies. Nostro Accounts are generally used to simplify foreign exchange and trade transactions between countries. The word “Nostro” is derived from the Latin word that means “ours”. Vostro account The word “Vostro” is derived from the Latin word that means “yours”. A Vostro account refers to an account that a correspondent bank holds on behalf of another bank. Vostro account helps to enable a foreign correspondent bank to act as an agent or an intermediary for a domestic bank.  Services provided by a Vostro account include wire transfers, withdrawals, and deposits for customers in countries where the domestic bank does not have a physical presence. Example: If an Indian bank maintains an account in the US with dollars, such an account, maintained in a foreign currency at a foreign centre is called Nostro Account for that concerned Indian bank. The American bank which is holding dollars from the concerned Indian bank will refer to the same account as a Vostro Account.

For more information on Vostro Account, watch the following video:

Functioning of the SRVA arrangement

• The SRVA framework mainly involves three important components which are invoicing, exchange rate and settlement. 
  • Invoicing requires all exports and imports to be denominated and invoiced in Indian Rupees. 
  • The exchange rate between the two currencies of the partner countries will be market-determined. 
  • The final settlement also takes place in Indian Rupees. 
• To facilitate the SRVA arrangement, the authorised domestic banks are mandated to open SRVA accounts for the correspondent banks of the partner country. 
• Further, domestic importers are required to make payments in Indian Rupees into the SRVA account of the correspondent bank against the invoices for the supply of goods or services from overseas suppliers.
  • Likewise, the domestic exporters must be paid for their exports in Indian Rupees from the balances in the designated account of the correspondent bank of the partner country.
• The reporting of all such cross-border transactions must be done in accordance with the existing guidelines under the Foreign Exchange Management Act (FEMA), 1999.

Eligibility criteria for banks

• Banks from the partner trading countries would approach an authorised domestic bank for opening the SRVA. 
  • The domestic bank is then required to seek approval from the Reserve Bank of India (RBI) which is the apex banking regulator in India.
• It is to be noted that, it is the responsibility of the domestic banks to ensure that the correspondent bank is not from a country listed under the updated Financial Action Task Force (FATF) Public Statement on High Risk & Non-Co-operative jurisdictions. 
• Furthermore, domestic banks should also put forth for perusal, financial parameters pertaining to the corresponding bank.
• Authorised banks are free to open multiple SRV accounts for different banks from the same country and the balances in the account can be recovered in freely convertible currency or the currency of the partner country depending on the transactions for which the account was credited.

The need for SRVA arrangement

• The Economic Survey 2022-23 highlighted the fact that such a framework could help reduce the demand for foreign exchange, especially the U.S. dollar, for the settlement of current account-related trade flows.
• As per the Economic Survey, the SRVA arrangement would also play a key role in reducing the need for holding foreign exchange reserves and dependence on foreign currencies which would make the country less vulnerable to external shocks. 
• Further, the SRVA arrangements help Indian exporters get advance payments in Indian Rupee from foreign clients which in the long-term helps promote Indian Rupee as an international currency once the rupee settlement mechanism gains momentum.

Nut graf: At a time when various countries are showing interest in the Indian Rupee trade mechanism as they are facing foreign exchange problems with the US Dollar and Euro, opening up special vostro accounts with such partner countries will facilitate cross-border trade in the Indian currency which not just helps in narrowing down India’s trade deficit but also popularise Indian Rupee.

E. Editorials

Category: GOVERNANCE

1. India needs a Budget for its young

Syllabus: Government Budgeting.

Mains: Provisions in the budget for the young population.

Prelims: Budget 2023-24.

Context: Budget 2023-24.

Details:

• India accounted for 20.6% of the global population of 15 to 29-year-olds in the year 2020. This implies that in the coming years, one out of every five workers in the world could be an Indian.

Also read: Demographic Dividend

Key Proposals in Budget 2023-24:

• There is a considerable increase in capital expenditure. It is expected to be 3.2 lakh crore higher than the revised estimate of 2022-23.
• The government’s expenditure will fall for various social sector schemes and subsidies. For instance, food subsidies will reduce by ₹0.9 trillion, fertilizer subsidies by ₹0.5 trillion, and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) by ₹0.3 trillion. 
• There are marginal increases in the budget allocations for health, education, agriculture, and the Angwandi scheme.

For detailed information on the Budget, read here: Union Budget 2023 Summary

Associated concerns:

• An increase in capital expenditure is important to reinvigorate the economy. Investment as a proportion of income or GDP rose constantly during the mid-2000s and peaked at 42% in 2007 (even better than China).
• It further increased the economic growth in India which lasted till early 2010.
• However, the global financial crisis in 2007-08 had been a turning point. On one hand, China increased its domestic investment whereas India restrained its expenditures (due to fear of the rising fiscal deficits).
• As a result, public expenditures nosedived and private investors lost confidence. Investment as a proportion of GDP fell from 33.8% in 2013-14 to 27.3% in 2020-21.
• Though subsidies and social sector spending are considered to be ‘wasteful’ for economic growth, the reduction in these segments worsens the existing social inequalities and dampens the long-term growth prospects.
• There are serious issues of unaffordable education (both basic and higher education), and lack of employment opportunities. For example, in 2022, only 2.6% of the around 1.9 million appeared candidates for the National Eligibility cum Entrance Test (NEET) could secure admission to a government college.
• Apprehensions about the fiscal deficit and government debt can be counterproductive for a country like India which possesses huge reserves of untapped human resources.
  • It should be noted that only 4.2% of GDP in 2022 is owed to external agencies. 
  • Moreover, it is largely held by domestic financial institutions like public sector banks, insurance companies, and provident funds.

Way Ahead:

• Notably, public expenditures on the social sectors are an investment for the future, particularly for the young population. For instance, the income a woman receives through MGNREGA can ensure education and nutrition for her children.
• Increased government expenditure on sectors like health and education can provide a boost to both the supply and the demand fronts in a knowledge-driven economy.
• Increased government borrowing to strengthen human resources that generate new jobs and incomes would set off a virtuous cycle. For instance, higher incomes and higher levels of development will also lead to fresh savings that will help to pay off debts. 

Conclusion:

The share of the population aged 30 years and above in India will rise to 58.6% in 2040 (from 37.5% in 2000). It is important to increase government expenditures to provide food security, health, and education as it will inspire millions of India’s youngsters to grow into bright stars that illuminate the world.

Also read: 08 Feb 2023: UPSC Exam Comprehensive News Analysis

Nut Graf: India is currently in a demographic sweet spot, with a large share of the young population. The government should make use of this opportunity and increase its public spending on sectors like education and health to build a strong army of scientists, engineers, and nurses to fulfil its global ambitions.

2. Turn off the tap of urban bias in rural development

Syllabus: Government policies and interventions.

Mains: Jal Jeevan Mission.

Prelims: Jal Jeevan Mission.

Details:

• Some of the major reasons for the rural-urban divide are:
  • It is argued that the disparity between urban and rural areas has grown due to an inherent urban bias among policymakers and institutions. 
  • Groups in urban areas are able to easily influence institutions like the government in their favour.
  • The spillover from markets in urban areas is limited to the rural areas that are closer to urban settlements. 
  • Thus the rural areas that are far away from the urban core suffer from a lack of development. Furthermore, it also falls behind those rural regions that are closer to urban areas.
• The Jal Jeevan Mission (JJM) is a special and targeted measure for developing rural areas. Its aim is to provide safe and adequate drinking water to all households in rural India by 2024.
• Benefits of safe drinking water:
  • Safe drinking water is an essential non-food factor that positively impacts health and nutrition. 
  • It also reduces the drudgery faced by women and girl children. 
  • It will also help in achieving the Sixth Sustainable Development Goal of “availability and sustainable management of water and sanitation for all” by 2030.

CASE STUDY OF TAMIL NADU Tamil Nadu’s progress is better than all other states in the first two quarters of 2022. Analysis of JJM in different districts of the state is as follows: In some districts, significant progress was registered. For example, Kanchipuram (100%), Ranipet (98.73%), Kanniyakumari (83.99%), Vellore (80.89%), and Tiruchirappalli (78.55%). Districts like Coimbatore, Thanjavur, and Dindigul districts have also performed well with more than one lakh rural households getting tap water connections. However, in some other districts, the progress was not commensurate with others. For example, Ramanathapuram and Virudhanagar covered only 9% of households in the last three years. In Nagapattinam, it was very low reaching only 5.97% in three years. According to the 2011 census, Tamil Nadu has a total urban population of 48.4%. It is found that districts with low urban populations are lagging behind in the implementation of the JJM. For example among the 10 low-performing districts, 8 have an urban population below 38%.

Way Ahead:

• Government should prioritize the implementation of the JJM scheme in districts with a high rural population.
• It will further help to correct the urban bias and meet SDG goal 6.
• It would further have a demonstration effect on other districts of the country.
• Apart from data on tap water connections, additional details on the volume of water being supplied per day and its quality would further help in understanding the rate of progress better.

Also read: AIR Spotlight -Jal Jeevan Mission: Har Ghar Jal

Nut Graf: The Jal Jeevan Mission is a great initiative to ensure safe and adequate drinking water for every household by 2024. It would further help achieve Sustainable Development Goal 6 (Clean water and sanitation) and reduce urban bias. However, it has some issues that require timely redressal for effective implementation.

Category: INTERNATIONAL RELATIONS

1. A new chapter in defence and tech

Syllabus: Bilateral agreements affecting India’s interest.

Mains: India-U.S relations

Context: The initiative on critical and emerging technologies (ICET) was inaugurated in February 2023.

Details:

• The U.S. and India jointly inaugurated their initiative on critical and emerging technologies (ICET) in February 2023. This initiative could have a transformative impact on India-U.S. relations.
• Despite several efforts from India (since the 1960s) to join the  U.S. technology bandwagon, it could not achieve it primarily because of a mismatch between the purposes of the two nations.
• ICET is better positioned and comes at a time when India has developed its technological and managerial capacities and is emerging as a major economic power in the world.
• The 6 identified areas under ICET co-development and co-production are:
  • Strengthening innovation ecosystems
  • Defence innovation and technology cooperation
  • Resilient semiconductor supply chains
  • Space
  • STEM talent
  • Next generation telecom
• ICET has a range of ambitious goals which will help India develop advanced jet engines.

India-US relations:

• During the cold war era, the U.S. focused on modernizing engineering and management education, science and technology (S&T), and agriculture.
• It also assisted in nuclear energy and helped India build its first reactors for research and power. However, the cooperation abruptly ended after India’s first nuclear test in 1974 (the same happened in space cooperation also).
• The U.S. provided massive aid to modernize Indian education, especially engineering and management, to strengthen the industrial sector. However, the Indian economy stalled in the 1960s and  IIT and IIM graduates benefitted the U.S. economy.
• The Bangladesh War of 1971 and the 1974 nuclear tests impacted the relations between the two. Moreover, a technology denial regime called non-proliferation was introduced targeting India.
• India-U.S. signed an MoU on sensitive technologies, commodities, and information in 1984.
• In 1987, America agreed to assist India’s Light Combat Aircraft (Tejas) programme and allowed the sale of the front-line GE 404 engine to India. However, broader cooperation was denied as the U.S. was unwilling to let go of its non-proliferation agenda.
• There was another round of sanctions by the U.S. on India after its 1998 nuclear tests.
• Due to rising challenges from China, both India and the U.S. signed a nuclear deal in 2008.
• India has constantly improved its status as a friend of the U.S. in the last decade. However, it did face challenges in the form of CAATSA and on account of its oil trade with Russia.

For more information on the India-U.S. relationship, read here: India – United States Relations

Associated Concern:

It should be noted that cutting-edge jet engines are the crown jewels of the U.S. and it will not part with this very easily. Moreover, the U.S. will also adopt a similar approach in the field of technology and guard its technological prowess as it is a major component of its global power status.

Nut Graf: The India-U.S. relations are growing stronger. The initiative on critical and emerging technologies (ICET) is a new step in this direction that has the potential to bring transformative change in the friendship between the two countries.