Headline : Simply Put: Why a currency war is a worry
- Recently, the RBI Governor warned that trade wars among various countries may lead to a currency war.
What is Currency War?
- Currency war is a situation when economies, in order to maintain and preserve their export competitiveness, manage the exchange rates vis-à-vis hard currencies.
- A hard currency is a monetary system that is widely accepted around the world as a form of payment for goods and services. It usually comes from a country that has a strong economic and political situation. The most common hard currencies include the US dollar (USD), UK pound sterling (GBP), the euro (EUR).
- Generally, the economies are seen devaluing their currencies in order to preserve their export competitiveness.
Why do economies devalue their currencies?
- If the demand for US dollar increases in India, we end up paying ‘more’ rupee to get the same amount of dollars. In such situations, the value of rupee is said have depreciated.
- On the other hand, if ‘less’ rupee is offered to buy same amount of USD as a result of reduced demand for dollars, the value of rupee is said have appreciated.
- If the rupee value is low, the exports from India become cheaper, thereby becoming competitive in the global market.
- On the other hand, an appreciated rupee makes exports from India costlier.
- Thus, some economies tend to manipulate their currencies by devaluing their currency in order to make exports from their economies cheaper.
- This is done by buying out excess dollars in their economy in order create a slump in the supply of dollars thereby increasing the demand for dollars.
- On the other hand, some economies having ‘pegged exchange rates’ – they directly peg a lower value to their currency vis-à-vis a hard currency.
What is the problem?
- In a globalised world, free trade is promoted in order to maximize welfare for all.
- However, as a result of managed exchange rates, some economies are able manipulate the global markets providing cheaper products thus stifling competition.
- Further, cheaper products from other economies can arrest the growth in one’s own economy.
- In such a situation, the negatively impacted economies sometimes adopt protectionist policies.
- However, this leads to closing of economies which is against the principle of free trade in a globalised world.
- The 2008 global financial crisis led to sharp slide in growth curves of major economies of the world.
- At the G20 Summit held in 2008, the countries decided to coordinate efforts for reviving of the global economy.
- In order to revive growth, developed economies adopted expansionary fiscal and monetary policies.
- Further, some countries also turned protectionist in order to revive growth in their own economies. They introduced non-tariff barriers, and also occasionally imposed higher duties on imports.
- Thus, imports from some economies became expensive.
- Many countries resorted to devaluing their currencies so that their exports remained cheaper and competitive in the world market.
- China a major global exporter deliberately kept its currency value low.
- Even Japan and South Korea stepped into the currency markets to keep their currencies low.
- Such competitive lowering of currency values using monetary and exchange rate instruments was described as “international currency wars”.
Currency wars in play
- The debates on protectionism have resurfaced.
- In March 2018, the US President threatened to slap tariffs on Chinese goods.
- Higher tariffs make Chinese products more expensive.
- However, the Chinese yuan has depreciated almost 8% vis-à-vis the US dollar in the recent times, offsetting the impact.
- Similarly, US imposed tariffs on European steel and aluminum in the beginning of June.
- Higher customs duties on EU steel and aluminum make these expensive in the US.
- This may entail the risk of countries using exchange rate and monetary policy instruments competitively to weaken or devalue their currencies.
- Thus, trade skirmishes raise fears of a global currency war.
Impact on India
- Indian economy is integrated with global markets.
- Rising crude oil prices impacts major macro-economic indicators in India like fiscal deficit and current account deficit.
- Further, if the macro-economic indicators worsen, it will adversely impact currency, inflation and interest rates.
- This might lead to capital outflow from India.
- This leads to increasing demand for USD thus depreciating the value of rupee.
- In 2018, the Indian rupee has already depreciated or weakened 6.77% against the dollar.
- This has the potential of creating a currency crisis or a free fall situation.
- This might severely hurt India’s growth prospects too.
- The International Energy Agency (IEA) has released a report, Global Energy Review 2020, detailing the impact of Covid-19 on global energy demands and CO2
Covid-19 impact on global energy demands:
- Decline in overall Energy demand:
- The IEA is forecasting a 6% decline in energy demand for the year.
- In absolute terms this is the largest on record.
- Percentage wise, it’s the steepest decline in 70 years.
- The demand hit is expected to be seven times greater than the decline in the aftermath of the financial crisis in 2008.
- Under a faster return-to-business scenario, the IEA said demand loss could be limited to 3.8%, while a possible second wave of the virus could cause a greater than 6% decline.
- Countries in full lockdown: There is average decline of 25 per cent in energy demand per week
- Countries with a partial lockdown: The fall in energy demand is about 18 per cent per week.
- Oil has also been heavily impacted.
- Roughly 60% of global demand for crude stems from driving and flying, so with people at home and planes grounded demand has fallen off a cliff.
- The global demand for oil could drop by nine per cent on average this year, which will return oil consumption to 2012 levels.
- Global coal demand was hit the hardest, falling by almost 8% compared with the first quarter of 2019.
- China – a coal-based economy – was the country the hardest hit by Covid‑19 in the first quarter;
- Cheap gas and continued growth in renewables elsewhere challenged coal;
- Mild weather also capped coal use.
- Coal demand could decline by eight per cent this year.
- The report expects increase in coal demand in some markets if recoveries are faster, such as in Southeast Asia, driven by Indonesia and Vietnam
- Electricity demand has also contracted with factories shuttered and businesses closed as people work from home.
- For the full year, the IEA expects electricity demand to fall 5%, which would be the largest decline since the Great Depression.
- Natural Gas:
- Because of reduced demand in power and industry applications, the gas demand could also fall much further than in the first quarter of 2020.
- This decline is less than the anticipated fall in oil demand, reflecting the fact that natural gas is less exposed to the collapse in demand for transportation fuels.
- But it nonetheless represents a huge shock to a gas industry that is used to robust growth in consumption
- Nuclear Power:
- Nuclear power demand would also fall in response to lower electricity demand.
- Renewable energy:
- The only energy source expected to grow this year is renewables.
- The demand for renewables is expected to increase because of low operating costs and preferential access for many power systems.
- The total global use of renewable energy is expected to rise by 1 per cent by 2020.
- Renewable sources of energy have been the “most resilient” to Covid-19 lockdown measures
Impact of slump in demand on energy markets:
- Oil prices have slumped
- Brent crude trading near a 21-year low
- US oil futures being pushed into negative territory – a historic feat.
- The resultant glut in oil has overwhelmed the world’s limited storage facilities, with ships laden with surplus oil production idling at high seas.
- Also, the historic collapse in energy prices has also hit the global commodity markets, threatening to tip the sluggish global economy into a deep recession.
Note: The projections are based on the assumption that shelter-in-place and social distancing measures will slowly ease in the coming months, with a gradual economic recovery following.
Covid-19 impact on CO2 emissions:
- The worldwide halt in business has resulted in the largest drop in global CO2 emissions on record.
- The decline in CO2 emissions witnessed in 2020 is largest since the end of World War II.
- This year saw an 8 per cent decline in coal emissions, 4.5 per cent from oil and 2.3 per cent from natural gas.
- Overall, the emissions decline in 2020 could be 8 per cent lower than in 2019.
- It would be the lowest level of emissions since 2010 and the largest level of emission reduction(six times larger than what was witnessed during the 2009 financial crisis) and twice as large as the combined total of all reductions witnessed since World War II.
- The decline in CO2 emissions was more than the fall in global energy demand
- Reason for reduced demand: The most carbon-intensive fuels saw the biggest fall in demand.
- In the first quarter of this year, carbon emissions were five per cent lower than during the same time in 2019.
- Emissions declined the most in regions which were impacted the highest by the diseas
- For instance, there was an 8 per cent decline in emissions in China and Europe, and a 9 per cent decline in the US.
- It is expected that emissions will soar once economies restart, unless governments take a conscious decision to change the sources of energy.
Covid-19 impact on India’s energy demands
- India’s 40-day long lockdown has resulted in a 30% fall in the country’s energy demand i.e. with each additional week of lockdown, annual energy demand is reduced by 0.6%.
- However, the impact on first quarter of 2020, energy demand in India was modest, with demand increasing by 0.3 relative to first quarter of 2019.
- As the lockdown continues, the impact on energy demand are set to be notably larger second quarter of 2020.
Note: China and India are the largest and third-largest electricity users in the world respectively, and coal use is dominant in both these countries shaping the global demand for this fuel.
- Locusts are a group of short-horned grasshoppers, that are about the length of 6-8 centimeters.
- According to the FAO, eggs can hatch in about two weeks, with locusts maturing to adulthood in two to four months on average.
- They multiply in numbers as they migrate long distances in destructive swarms (up to 150 km in one day), which can contain as many as 80 million locusts per square kilometer. Swarms can vary from less than 1 square kilometer in size to several hundred square kilometers.
- Four species of locusts are found in India:
- Desert locust (Schistocercagregaria)
- Migratory locust (Locustamigratoria)
- Bombay Locust (Nomadacrissuccincta)
- Tree locust (Anacridium sp.)
- The desert locust does not cause any harm while it moves about independently.
- These winged insects differ from normal hoppers, and become dangerous only when their populations build up rapidly and the close physical contact in crowded conditions triggers behavioural changes.
- They, then, enter the “gregarious phase”, by grouping into bands and forming swarms that can travel great distances (up to 150 km daily), while eating up every bit of vegetation on the way.
- One locust can consume its own weight in food each day.
- The swarms devour leaves, flowers, fruits, seeds, bark and also destroy plants by their sheer weight as they descend on them in massive numbers.
- As per some estimate, a small swarm of the desert locusts eats on average as much food in one day as about 10 elephants, 25 camels or 2500 people.
- Threaten food security:
- The Desert Locust is regarded as the most destructive pest in India as well as internationally.
- If not controlled at the right time, these insect swarms can threaten the food security of countries.
Hurt India recently:
- During late 2019 and early 2020, locusts have caused great damage to the growing rabi crops along western Rajasthan and parts of northern Gujarat.
Hurting Africa this year:
- Desert Locusts, the destructive migratory pests, are currently devouring acres of maize, sorghum and wheat crops in East Africa.
- Kenya is already reporting its worst locust outbreak in 70 years, while Ethiopia and Somalia haven’t seen one this bad in quarter of a century.
- It is common to see locusts in India, but normally only during July-October and mostly as solitary insects or in small isolated groups.
- But this year, the desert locusts appeared along the India-Pakistan border before mid-April.
- The crop-eating pests had first entered Rajasthan from Pakistan in the second week of April.
- After Rajasthan and Madhya Pradesh, the swarm of desert locusts has reached the state of Uttar Pradesh.
- In Uttar Pradesh, locusts are feared to affect 17 districts.
- It is highly concerning as a big swarm of locusts can eat acres of crop within an hour.
Measures to counter them:
- To deal with the situation, Uttar Pradesh’s agriculture department has launched a massive drive to educate farmers on how to keep the locust menace at a bay.
- In Agra, the district administration has deployed 204 tractors mounted with chemical sprays.
- Drone usage permitted:
- The aviation ministry has permitted state government entities to use drones for anti-locust operations.
- Battery-operated rotary-wing drones will be used for aerial surveillance, photography, public announcements and/or aerial spraying of anti-locust pesticides.
The five Ps of disaster management Editorial 26th May’20 HindustanTimes
Destruction caused by Amphan cyclone:
- Amphan was the first super-cyclone in the Bay of Bengal after 1999 (ie, wind speeds beyond 220 kph).
- West Bengal chief minister (CM) even called Amphan “a bigger disaster than Covid-19”.
- In less than two days, Bengal lost an estimated Rs 1 lakh crore.
- The cyclone left 80 dead, hundreds of thousands homeless, uprooted trees, ravaged houses, marooned dwellings, knocked out electricity and phone lines, flooded cities and villages, plundered embankments, fencings and boundaries.
- It wreaked ecological destruction and devastation, especially in the eco-sensitive Sundarbans.
Relief package announced is too small:
- The Prime Minister (PM) made an aerial tour of the destruction and announced a relief package of Rs 1,000 crore ($132 million) for WB and Rs 500 crore ($66 million) for Odisha.
- However, these figures underestimate both the size of the disaster and, consequently, the size of the package needed to deal with it.
- In comparision, the 2001 Gujarat earthquake led to the central government releasing Rs 500 crore (at 2001 value, 20 years ago) plus ad hoc release of share in central taxes.
- On top of it, the Centre is yet to release to Bengal the pending GST refunds of approx Rs 2,400 crore for last quarter of FY 2019-20.
- Centre is also yet to release Rs 53,000 crore on account of social security refunds from central government schemes (such as the MGNREGS, Food Security Act and so on) owed to the state.
Emergency steps needed to ensure efficient rehabilitation and effective growth of the affected areas
- We need five “Ps” to cope up with recurring disasters:
- Prominence, as in the role of governments
- Pool of funds
- Planning, especially long-term, of rehabilitation and development
- Policy qua institutional support
- Preparedness qua countermeasures
Non-discriminatory approach to all states:
- There is a need for a genuinely non-discriminatory and equal approach towards all states.
- The Gujarat episode led many international agencies to come up with financial assistance including the European Union, United States (US) Agency for International Development (USAID), Canadian International Development Agency and World Bank ($300 m) and Asian Development Bank ($500 m).
- Irrespective of a state’s eligibility or capacity, the Centre must specially reach out to international institutions.
Greater allocation to fight natural disasters:
- There is a need to exponentially increase government allocation to fight natural disasters.
- As an aspiring global leader, India cannot pale when it comes to justifiable proportionate global comparisons.
- For example, after the 2011 tsunami-earthquake, Japan allocated $167 billion for rehabilitation and recovery. It made a five-year plan to do so comprehensively.
- Similarly, the US Congress allocated $121.7 billion in hurricane relief in 2005 and 2008.
Targeted and focused relief measures needed:
- Random allocation is far less useful than targeted and focused relief measures.
- Japan’s targeted five-year plan focussed on each stakeholder — from fisheries to housing and power.
- Grand mega-announcements immediately after natural disasters, but without specific sub-allocations, lose their limited vigour by the time they reach the ground target.
Robust institutional framework:
- Planned and targeted measures need to be coupled with a robust institutional framework.
- After 2011, the Japanese government enacted the “Act on the Development of Tsunami-resilient Communities”, to efficiently combine structural and non-structural measures to minimise damage.
- All municipalities had to draft their reconstruction plans based on modelling and the plans were based entirely on urban planning, land management, structural mitigation and relocation.
- Such innovations have barely been conceptualised in India, much less implemented.
- Short-term ad hoc measures are more prominent in India that medium-term thinking or long-term planning.
Policy focus on pre-disaster countermeasures:
- Despite our cyclical annual natural disasters, we have very little policy focus on pre-disaster countermeasures.
- Prevention is always better than cure, and such countermeasures will be highly effective as well as cost-effective.
- Many countries in their disaster-prone coastal regions have constructed high seawalls to protect vulnerable communities.
- Odisha’s cyclone shelters are a praiseworthy-but-partial achievement, and must be followed elsewhere.
GS Paper III: Disaster ManagementClick to View More