27 Jul 2023: UPSC Exam Comprehensive News Analysis

E. Editorials

Category: ECONOMY

1. Shedding more light on the debt dilemma

Syllabus: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Mains: How the high level of debt is a burden on future generations and what steps need to be taken for course correction?

Prelims: What is fiscal deficit, Data related to fiscal deficit and public debt

Context: India’s high fiscal deficit & public debt, worsened by the pandemic, require policy changes for sustainable economic recovery.

Current status of Debt:

• India’s fiscal deficit and public debt levels have been a concern even before the COVID-19 pandemic, ranking among the highest among developing economies.
• Due to the pandemic, the fiscal deficit in 2020-21 increased to 13.3% of GDP, and aggregate public debt rose to 89.6%. As the economy recovered, the deficit and debt ratios reduced to 8.9% and 85.7%, respectively.
• Projections indicate that debt levels are unlikely to return to pre-pandemic levels in the medium term.
• Elections in 2023 and 2024 could exacerbate the debt situation due to electoral budget cycles.

Fiscal Repression: Fiscal repression is a government strategy to keep interest rates on its borrowing low, often through central bank interventions and mandatory requirements for financial institutions to hold government securities. This helps reduce borrowing costs but can distort financial markets and hinder economic growth.

Consequences of Fiscal Repression:

• The Reserve Bank of India (RBI) enforces the statutory liquidity ratio (SLR), requiring banks to hold 18% of their liabilities in government securities.
• RBI intervenes in the market through open market operations to suppress interest rates during government borrowing.
• High deficits and debt lead to heavy interest payments, constituting over 5% of GDP and 25% of revenue receipts, crowding out essential expenditures on infrastructure and human development.
• Large debt levels make it challenging to implement counter-cyclical fiscal policies and respond to economic shocks.
• The debt market in India is primarily captive, limiting lending resources for the manufacturing sector and increasing borrowing costs.
• High deficits and debt also result in lower sovereign ratings, increasing the cost of external commercial borrowing and burdening future generations with the debt.

Sign of Hope:

• Despite the challenges, there is hope for fiscal consolidation with the stabilization of the Goods and Services Tax (GST) and its potential for high growth.
• Improved tax administration and compliance, including cross-matching GST and income tax returns, can contribute to an increased tax-GDP ratio by 1.5 to 2 percentage points in the medium term.

Way Forward:

• Rethinking the role of the state and reducing activities that can be handled by the market is crucial.
• The government should accelerate disinvestment efforts and avoid competing with the private sector in areas like telecom.
• Ensuring responsible fiscal policies at both the central and state levels is essential. States should be subject to hard budget constraints and enforce Fiscal Responsibility and Budget Management rules.
• Redistribution through cash transfers is preferable to subsidies on commodities and services to avoid unintended resource distortions.
• The Union government should lead in macroeconomic stabilization and follow and enforce the rules it sets for fiscal responsibility effectively.

Nut Graf: India grapples with a concerning debt dilemma due to a high fiscal deficit and public debt, worsened by the pandemic. Financial repression and interest payments hinder economic growth and development. Targeted interventions, responsible fiscal policies, and disinvestment efforts are essential to ensure sustainable recovery and alleviate the burden on future generations.

2. Resilient, but just

Syllabus: Growth, Development

Mains: Challenges the Global Economy faces in the wake of ongoing Geopolitical conflict  and slowdown in major Economies 

Context:  IMF predicts global economic growth, but challenges persist with US and China slowdowns, euro area troubles, and debt vulnerabilities.

World Economic Outlook Forecast:

• The International Monetary Fund (IMF) released its latest update on the world economic outlook.
• The global economy has shown resilience by weathering recent challenges, including bank collapses in the U.S. and Switzerland.
• The IMF projects a potential expansion of 3% in 2023, indicating positive growth prospects.

Emerging Challenges in the Recovery of the Global Economy:

• The IMF’s cautious upgrade of 20 basis points from its April projections does little to assure that the world economy is completely out of the woods.
• Many challenges continue to loom on the horizon, and risks, both known and unforeseen, abound.
• The two largest economies, the United States and China are facing slowdowns and increased uncertainty due to various global and domestic factors.
• The U.S. has seen a depletion of surpluses from pandemic-era cash transfers meant to support families during COVID-19 and the subsequent cost-of-living crisis.
• China’s post-reopening rebound has faltered due to a contraction in the real estate sector, weakening consumption, and declining overseas demand for exports.
• The euro area, another crucial engine of the global economy, is still impacted by the spike in gas prices resulting from the Ukraine war, with momentum decelerating in major regional economies like Germany and France.
• Eurozone business output has experienced a sharp decline, and forward-looking indicators suggest a potential deepening of the region’s downturn.
• Inflation, especially core inflation, remains high above central banks’ targets, leading to the possibility of demand-retarding monetary tightening.
• Russia’s termination of the Black Sea grain deal may result in a 15% increase in grain prices, affecting low-income economies in Africa.
• Frontier economies are facing heightened debt vulnerabilities, and urgent action is needed to prevent debt distress through a global debt resolution initiative.

Way Forward:

• Economic leaders must recognize the risks of lopsided growth that neglect vulnerable nations, as this could weigh down the larger global economic structure in an interconnected world.
• Policymakers should continue efforts to address inflation while being mindful of potential impacts on demand and economic growth.
• The IMF’s chief economist emphasizes the need for a concerted global debt resolution initiative to support highly indebted countries and prevent further economic instability.
• International cooperation and support are essential to ensure a sustainable and inclusive recovery for the world economy.

Nut Graf: The International Monetary Fund’s latest world economic outlook suggests global resilience amid past challenges, but uncertainties persist. Slowdowns in major economies like the US and China, euro area struggles, inflation concerns, and debt vulnerabilities pose risks. A concerted effort is needed to ensure an inclusive and stable global economic recovery.

Category: INTERNATIONAL RELATIONS

1. The SCO is a success story that can get better

Syllabus: India and its Neighbourhood – Relations, Bilateral, Regional and Global Groupings and Agreements involving India and/or affecting India’s interests.

Mains: Relevance of SCO in emerging Geopolitical context?

Prelims: Member countries of SCO

Context: SCO’s success, challenges, and way forward in a changing world; emphasizing unity, security, and cooperation among member-states.

Recent Outcomes of SCO Meeting:

• The 23rd Meeting of the Council of Heads of State of the Shanghai Cooperation Organization (SCO) was successfully hosted by India on July 4, 2023.
• During the summit, the New Delhi Declaration was signed, and statements were issued on countering radicalization and exploring cooperation in digital transformation.
• Iran was granted full SCO membership, and Belarus signed the memorandum of obligations to join the SCO as a member state.
• The SCO adopted an economic development strategy for the period until 2030, demonstrating the vitality of the “SCO family.”

Relevance of SCO in Changing Geo-Political Scenario:

• The world is facing geopolitical tensions, economic slowdown, energy crises, food shortages, and climate change.
• Challenges such as power politics, economic coercion, technology decoupling, and ideological contest are major risks to world peace and development.
• The SCO has been committed to becoming a community with a shared future for mankind and supporting each other’s core interests and development strategies.
• The SCO has played a significant role in regional peace, stability, and prosperity by promoting dialogue and cooperation over confrontation and alliance.

Headwinds in the path for SCO:

• Bilateral differences between India and China have been a challenge for the SCO, requiring strategic communication and cooperation.
• The ongoing Russia-Ukraine conflict may impact regional stability and require the SCO’s attention in addressing potential spillover effects.
• China’s stance on terrorism and its support to Pakistan may create tensions within the SCO member-states and need to be addressed to enhance security cooperation.
• External elements orchestrating a new Cold War and bloc confrontation in the region must be met with vigilance and rejection.

Way Ahead to Make SCO More Effective:

• Enhance solidarity and mutual trust among member-states to address common security challenges. Upgrade security cooperation to combat terrorism, extremism, and transnational organized crime.
• Embrace win-win cooperation to achieve shared prosperity. Collaborate on trade, investment, technology, climate actions, infrastructure, and people-to-people engagement.
• Advocate multilateralism and engage with observer states, dialogue partners, and international organizations to uphold the UN-centered international system and international law.
• Strengthen cooperation among emerging economies and developing countries, including through platforms like BRICS and G-20 summits.
• Commit to common, comprehensive, cooperative, and sustainable security, respecting each country’s independent path to development and social system.
• Forge a united, equal, balanced, and inclusive global development partnership, promoting humanity’s common values of peace, development, equity, justice, democracy, and freedom.
• Reject hegemony, unilateralism, cold war mentality, and bloc confrontation, while opposing illegal unilateral sanctions and long-arm jurisdiction measures.
• Safeguard the development rights and legitimate interests of the developing world through dialogue, diplomacy, and peaceful means.

Nut Graf: The article highlights the successful 23rd SCO meeting, its importance amid changing global dynamics, and the challenges it faces. It emphasizes unity, security cooperation, and win-win collaboration to enhance the SCO’s effectiveness in promoting peace, stability, and prosperity among member-states in a rapidly evolving world.