How Covid-19 lockdowns have impacted the global energy sector

  • 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

Report Summary:

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:
    • 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.

  • Coal:
    • Global coal demand was hit the hardest, falling by almost 8% compared with the first quarter of 2019.
    • Reasons:
      • 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:
    • 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.

The WTO’s dispute settlements mechanism is all but dead

Headline : The WTO’s dispute settlements mechanism is all but dead

Details :

In News:

  • The World Trade Organization’s (WTO’s) dispute settlement mechanism is on the brink of collapsing.

 

About: World Trade Organisation (WTO)

  • In 1948, the General Agreement on Tariffs and Trade (GATT) came in as an ad hoc and provisional mechanism to enable international trade and to establish multilateral rules for the settlement of trade disputes.
  • More than four decades after GATT, the U.S. drove the agenda to establish the World Trade Organisation (WTO) which came into existence in 1995.
  • It’s an organization for liberalizing trade. It operates a system of trade rules.
  • It’s a forum for governments to negotiate trade agreements.
  • It’s a place for governments to settle trade disputes.

Dispute settlement at WTO:

  • Resolving trade disputes is one of the core activities of the WTO.
  • A dispute arises when a member government believes another member government is violating an agreement or a commitment that it has made in the WTO.
  • The WTO has one of the most active international dispute settlement mechanisms in the world.
  • Dispute Settlement Body:
    • Settling disputes is the responsibility of the Dispute Settlement Body, which consists of all WTO members.
    • The Dispute Settlement Body has the sole authority to establish “panels” of experts to consider the case.
    • As the panel’s report can only be rejected by consensus in the Dispute Settlement Body, its conclusions are difficult to overturn.
  • Appellate Body:
    • The appeal to the DSB ruling is heard by the Appellate Body (AB) and a report is submitted to the DSB.
    • The appeal is heard by three member panel of the permanent Appellate Body (consisting of a total  seven-members) set up by the Dispute Settlement Body and broadly representing the range of WTO membership.
    • Once the AB report is adopted by the DSB, the member concerned is obliged to implement the findings and recommendations within a reasonable period of time.
  • Enforcement of dispute settlement:
    • In case of reluctance or refusal to implement of the recommendations by a party, the affected member may seek enforcement by requesting the DSB to authorise retaliatory measures.
    • The DSB may allow retaliation in the same sector (goods, services or intellectual property rights) or even authorise cross-retaliation, but it must be at the same level as the measure complained against.
    • The process of enforcement is, thus, controlled multilaterally to ensure fairness of treatment towards all concerned.

 

Over the years, US has criticized the Appellate Body and called for changes:

  • Over the years, the US in particular found itself on the wrong side of these developments on a few occasions.
    • The US is frustrated at the AB’s rulings against its anti-dumping duties against foreign products, as well as AB’s relaxations for Chinese state-owned enterprises (SOEs).
  • The US believes the WTO is biased against it, and has criticised it for being “unfair”.
  • The US President Trump and others also believe the WTO has encouraged China — helping it to strengthen its economy at the cost of other nations including the US.

US caused AB membership to shrink:

  • The US administration, hoping to raise attention to these issues, began blocking the he appointments of new members, and the reappointments of members who had completed their four-year tenures.
  • For more than two years, the US has refused to allow vacancies at AB to be filled up.
  • As a result, the strength of the AB (which can have seven members) has already been reduced to three.

 

News Summary:

AB will be rendered disfunctional:

  • The AB will become dysfunctional as two more members retired on December 10, 2019. This leaves AB with only 1 member and the requirement of a quorum of three members can no longer be met.

What it means:

  • AB becoming disfunctional would mean that dispute resolution would not progress beyond the panel process and there would be no final decision in disputes raised before the body.
  • The importance of AB can be seen from the fact that between 1995 and 2014, around 68% of the 201 panel reports adopted were appealed.
  • It could also signal the demise of the 24-year-old WTO itself, as the system for settling disputes has been the organisation’s most important function.
  • Once the appellate body becomes non-functional, with no avenue for appeal, there could be the risk of arbitration proceedings against any member at the wrong end of the panel report.
  • Shortage of members was already impacting AB:
    • The strength of the AB has already been reduced to three in last year or two.
    • The understaffed appeals body has been unable to stick to its 2-3 month deadline for appeals filed in the last few years. The backlog of cases has prevented it from initiating proceedings in appeals that have been filed in the last year.
    • The three members have been proceeding on all appeals filed since October 1, 2018 (as minimum of three members must hear any appeal).

Impact on India:

  • India has so far been a direct participant in 54 disputes, and has been involved in 158 as a third party.
  • India has been impacted directly as a result of this situation of shortage of AB membership.
  • Case of dispute with Japan:
    • Earlier, the panel had found that India had acted “inconsistently” with some WTO agreements in a dispute with Japan over certain safeguard measures that India had imposed on imports of iron and steel products.
    • India had then notified the Dispute Settlement Body of its decision to appeal certain issues of law and legal interpretations in December 2018.
    • However, India’s appeal could not be heard due to the inability to staff the AB to hear the dispute.
  • The situation could be difficult for India, which is facing a rising number of dispute cases, especially on agricultural products.
Section : 

About: Purchasing Manager Index (PMI) and It’s significance

Headline : Manufacturing PMI improves

Details :

In News:
  • The Nikkei India Manufacturing Purchasing Managers’ Index rose in November from October, indicating an increase in manufacturing activity November.
About: Purchasing Manager Index (PMI)
  • The Nikkei India Manufacturing PMI is based on data compiled from monthly survey responses by purchasing managers in more than 400 manufacturing companies, on various factors that represent demand conditions.
  • PMI measures activity at the purchasing or input stage. It is very different from industrial production which is indicative of actual production. For example, the Index of Industrial Production (IIP) measures output
  • The PMI is constructed separately for manufacturing and services sector, but the manufacturing sector holds more importance.
  • PMI does not capture informal sector activity.
Significance:
  • The Index is considered as an indicator of the economic health and investor sentiment about the manufacturing sector.
  • PMI is also the earliest indicator of manufacturing activity and economic health, as the manufacturing PMI report for any given month comes out without any delay – either on the last day of that month or on the first day of the next month.
How it is captured:
  • The PMI is derived from survey responses from purchasing managers to a a series of qualitative questions.
  • PMI is composite index based on five individual sub-indices:
    • New orders
    • Output
    • Employment
    • Suppliers’ delivery times
    • Stock of items purchased
Reading the PMI:
  • A figure above 50 denotes expansion in business activity and anything below 50 denotes contraction.
  • Higher is the difference from this mid-point, greater is the expansion or contraction.
  • The rate of expansion can also be judged by comparing the PMI with that of the previous month data. If the figure is higher than the previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.
News Summary:
  • The October Nikkei India Manufacturing Purchasing Managers’ Index, at 50.6, was a two-year low.
  • Now, in November, the Index rose to 51.2. In comparision, the survey average is 53.8.
  • This indicates that, although business conditions in the Indian manufacturing sector improved in November, the upturn remained subdued compared to earlier in the year and the survey history.
  • The rates of expansion in factory orders, production and exports remained far away from those recorded at the start of 2019. Subdued underlying demand is being seen as a major reason for this.
Performance of sub-indices:
  • Good: The Index rise was driven by a modest increase in the growth of new orders and production.
  • Bad: On the other hand, it was concerning that firms shed jobs (for the first time in 20 months) and continued to reduce input buying.
Various segments:
  • The consumer goods segment growth mainly propped up the growth in the overall manufacturing sector.
  • The intermediate goods segment also returned to expansion.
  • However, the capital goods segment reported a deterioration in the operating conditions.
Section : Economics

About: Core Industries, Index of Industrial Production (IIP), Core sectors and their weights in their 40.27% contribution to the calculation of IIP

Headline : Core sector output falls 1st time in 4 yrs

Details :

The News:

  • The eight core sectors reported their worst decline in at least eight years, shrinking 5.8% in October.
  • The fall is the sharpest since the start of the new data series using 2011-12 as the base year.

About: Index of Industrial Production (IIP)

  • Index of Industrial Production (IIP) shows the performance of different industrial sectors of the Indian economy.
  • The IIP is estimated and published on a monthly basis by the Central Statistical Organisation (CSO) of the Ministry of Statistics and Programme Implementation..
  • The base year for the current series of IIP is 2011-12.
  • It is published monthly with a time lag of six weeks from the reference month.
  • As an all India index, it gives general level of industrial activity in the economy. It is a short term indicator of industrial growth till the results from Annual Survey of Industries (ASI) and National Accounts Statistics (Example: GDP) are available.

Importance of Index of Industrial Production:

  • The IIP is used by public agencies including the Government agencies/ departments including that in the Ministry of Finance, the Reserve Bank of India etc. for policy purposes.
  • The all-India IIP data is used for estimation of Gross Value Added (GVA) of Manufacturing sector on quarterly basis.
  • Similarly, the data is also used extensively by analysts, financial intermediaries and private companies for various purposes.
  • It is crucial considering the IIP is the only measure on the physical volume of production.

 

About: Core Industries

  • The core sector is an aggregate of 8 core sectors that are fundamental to the Indian economy.
  • These are Electricity, Steel, Refinery products, Crude oil, Coal, Cement, Natural gas and Fertilisers.
  • These 8 sectors constituting the core sector are important because they account for nearly 40.27% of the overall IIP and hence have long term repercussions for corporate profit growth as well as for the overall GDP growth.
  • The growth of the country’s eight core sectors is a lead indicator of the monthly industrial performance.

Core sectors and their weights in their 40.27% contribution to the calculation of IIP

 

 

News Summary:

  • According to recent data released by the Commerce and Industry Ministry, the core sectors saw a second straight month of contraction.
  • The slump in the eight core sectors in October to 5.8% was even worse than September, when the index saw a 5.2% decline.
  • According to data shared by the Commerce Ministry, overall growth has been hit by declining production in most core sectors, especially a steep drop in electricity production.
  • Only two industries — fertiliser and refinery products — in positive terrain.
  • Negative Growth Sectors (November 2019 data):
    • Electricity: – 4 per cent
    • Coal: – 17.6 per cent
    • Crude oil: -5.1 per cent
    • Natural gas: -5.7 per cent
    • Cement: -7.7 per cent
    • Steel: -1.6 per cent
  • Positive Growth Sectors (August 2019 data):
    • Refinery Products: 0.4 per cent
    • Fertilizer: 11.8 per cent

What it signifies:

  • These sectors are lead indicators for performance of the industrial sector.
  • Contraction in these sectors of the economy in October reflects the broader slowdown facing the Indian economy.
  • The weakness in these industry groups is expected to adversely impact the index of industrial production (IIP) since the core sector has an over 40% weight in IIP calculation.
  • The decline witnessed in electricity is mainly due to lower power demand in major industrial states.
  • A part of the reason for the decline in the core sector index may have been disruption caused by rains as also fewer working days due to the festival season.
Section : Economics

India can learn agri-policy lessons from China Editorial 25th Oct’19 FinancialExpress

Headline : India can learn agri-policy lessons from China Editorial 25th Oct’19 FinancialExpress

Details :

India and China have similar challenges in agriculture:
  • India and China are the most populous countries in the world, having a population size of 1.35 billion and 1.39 billion, respectively, in 2018.
  • With limited arable land [about 120 million hectare (m ha) in China, and 156 m ha in India], both face the challenge of producing enough food, fodder, and fibre for their population.
Followed many similar methods to increase output:
  • Both have adopted similiar methods to get more food from limited land, including:
    • Modern technologies in agriculture, starting with High Yielding Variety (HYV) seeds in the mid-1960s
    • Use of more chemical fertilisers
    • Increased irrigation cover
      • China’s irrigation cover is 41% of cultivated area, and India’s is 48%.
      • As a result of this irrigation, China’s total sown area is 166 m ha compared to India’s gross cropped area of 198 m ha.
But China produces more output than India:
  • Even with much lesser land under cultivation, China produces agricultural output valued at $1,367 billion—more than three times that of India’s $407 billion.
Lessons for India from China in agriculture:
  • There are three important lessons for India, if it is to catch up to the levels achieved in China.
 
I) Increased spending on Agriculture Knowledge and Innovation Systems
  • Agriculture studies have revealed that the highest impact is from investments in agriculture Research and Education (R&E).
  • China spends more:
    • China spends a lot more on agriculture knowledge and innovation system (AKIS), which includes agri R&D, and extension.
    • China invested $7.8 billion on AKIS in 2018-19, amounting to 5.6 times the amount spent by India ($1.4 billion).
    • Presently, India invests just about 0.35% of its agri-Gross Value Added (GVA) whereas China spends 0.8%.
  • India needs to spend more:
    • For increasing total factor productivity, India needs to increase expenditure on agri-R&Dwhile making the Indian Council for Agricultural Research (ICAR) accountable for targeted deliveries.
  • Note: Better seeds that result from higher R&D expenditures generally demand more fertiliser. China’s fertiliser consumption in 2016 was 503 kg/ha of arable area compared to just 166 kg/ha for India, as per World Bank estimates. Consequently, China’s productivity in most crops is 50 to 100% higher than India’s.
II) Better incentive structure to farmers through agri-marketing reforms
  • The incentive structure, as measured by Producer Support Estimates (PSEs), is much better for Chinese farmers than Indian ones.
  • The PSE concept measures the output prices that farmers get in relation to free trade scenario, as well as input subsidies received by them.
    • The PSE concept is adopted by 52 countries that produce more than three-fourths of global agri-output.
  • China’s PSE much higher to India:
    • For Chinese farmers, PSE was 15.3% of gross farm receipts during the triennium average ending (TE) 2018-19.
    • For the same period, Indian farmers had a PSE of -5.7%.
    • In a way, this reflects that Indian farmers had been net taxed, not subsidised, despite high amounts of input subsidies.
  • Due to restrictive trade and marketing practices in India:
    • This negative PSE (support) comes due to restrictive marketing, and trade policies that do not allow Indian farmers to get free trade prices for their outputs.
    • This negative market price support is so strong that it exceeds even the positive input subsidy support the government gives to farmers through low prices of fertilisers, power, irrigation, agri-credit, crop insurance, etc.
  • China’s experience that high MSPs do not work:
    • India can take a leaf out of Chinese bad experience from high MSPs.
    • China, in fact, used to give procurement prices to farmers that were much higher than even international prices.
    • The result was massive accumulation of stocks of wheat, rice, and corn that touched almost 300 million metric tonnes (MMT) in 2016-17 (see graphic).
    • As a result, they had to incur large expenditure for withholding these stocks without much purpose.
    • Having learnt lesson, China dropped the price support scheme for corn, and in fact, have been gradually reducing support prices of wheat, and rice.
  • India should learn from China and move away from high MSPs:
    • Indian government has been trying to jack up minimum support prices (MSPs) for 23 crops.
    • As a result, India’s stock situation in July 2019 was 81 MMT as against a buffer stock norm of 41 MMT.
    • India needs to reduce the gamut of commodities under the MSP system, and keep MSPs below international prices.
    • Else, India will also suffer from the same problems of overflowing granaries as China did.
  • Marketing reforms are necessary in India:
    • To improve this situation, large-scale agri-marketing reforms (APMC and Essential Commodities Act) need to be carried out.
III) Implementation of single direct income support scheme:
Single input subsidy scheme in China:
  • China has combined its major input subsidies in a single scheme that allows direct payment to farmers on a per hectare basis, and has spent $20.7 billion in 2018-19.
  • This gives farmers freedom to produce anything, rather than incentivising them to produce specific crops.
  • Inputs are priced at market prices, encouraging farmers to use resources optimally.
India offers heavy input subsidies apart from direct benefits:
  • India spent only $3 billion under its direct income scheme, PM-KISAN, in 2018-19.
  • On the other hand, it spent $27 billion on heavily subsidising fertilisers, power, irrigation, insurance, and credit.
  • This leads to large inefficiencies in their use, and has also created environmental problems.
India needs to consolidate subsidies into a single scheme:
  • It may be better for India to also consolidate all its input subsidies and give them directly to farmers on a per hectare basis, and free up their prices from all controls.
  • This would go a long way to spur efficiency, and productivity in Indian agriculture.
Conclusion:
  • If India needs to learn these three lessons from China, i.e., to invest more in agri-R&D and innovations, improve incentives for farmers by carrying out agri-marketing reforms, and collapse input subsidies into direct income support on a per hectare basis.
  • Through this, India can benefit its farmers and put agriculture on a high growth trajectory.
Importance:
GS Paper III: Indian Economy
Section : Editorial Analysis

IMF members delay quota changes, agree to maintain funding

Headline : IMF members delay quota changes, agree to maintain funding

Details :

In News

  • Members of the International Monetary Fund (IMF) have agreed to maintain its funding at $1 trillion but postponed changes to its voting structure.

Highlights of the deal

  • The deal will allow an extension of non-permanent, supplementary sources of funds, such as the New Arrangement to Borrow (NAB) and the bilateral borrowing facility.
  • The agreement extended the bilateral borrowing facility by a year —to the end of 2020 — and a potential doubling of the NAB.
  • The agreed package will leave IMF quotas (the primary source of IMF funds), which determine voting shares, unchanged. Instead, these will be reviewed before the end of 2023.

 

About: IMF Quotas and Voting Share:

  • An important factor that helps the IMF’s functioning is the quota. This quota is basically money that a member country has to give to the IMF and as per the norms, each member has to subscribe a quota of the IMF.
  • For any member country, out of the quota, 25% should be paid in the form of foreign currency or gold (called as reserve tranche or gold tranche) to the Fund.
  • The remaining 75% in the form of domestic currency (called as credit tranche).

How the size of quota for each member country is determined:

  • When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members that are broadly comparable in economic size and characteristics.
  • The IMF uses a quota formula to guide the assessment of a member’s relative position, which depends on its economic importance.
  • The current quota formula (applied for 14th quota review) is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent).
  • India’s quota is 2.76% and China’s is 6.41%, while the U.S.’s quota is 17.46 %.

Multiple purposes of Quotas:

  • Quota subscribed by the members indicates funds provided by the members to the IMF, and hence it constitute to the resource base of the IMF.
  • A member country’s loan availability depends upon size of its quota. The amount of financing a member can obtain from the IMF (called as access limit) thus depends upon its quota.

Voting Power:

  • The size of quota basically determines voting power of a member.
  • As per the IMF rules, for an important resolution to be passed, at least 85% of the votes should be secured. This means that the US, with 16.54 % of voting power, enjoys a veto power.
  • Thus, a member’s quota indicates basic aspects of its financial and organizational relationship with the Fund.

Review of Quotas:

  • Quotas are supposed to be reviewed every five years although these reviews can be delayed — as was the case with the 14th review.
  • That process, completed in 2010, needed approval of the U.S. Congress, and it was not closed out till early 2016.
  • The review’s outcomes included a doubling of the quota total and a shift in some voting rights to under-represented and emerging market countries.

 

About: Permanent Resource Base

  • Quotas are the IMF’s main source of financing, wherein each member of the IMF is assigned a quota, based broadly on its relative position in the world economy.
  • Quotas of each of the IMF’s 189 members increased to a combined SDR 477 billion (about US$668 billion) from about SDR 238.5 billion (about US$334 billion) after the 14th quota review.

About: New Arrangements to Borrow (NAB)

  • It is a renewable funding mechanism that has existed since 1998. Through the New Arrangements to Borrow (NAB) a number of member countries and institutions stand ready to lend additional resources to the IMF.
  • The NAB constitutes a second line of defense to supplement IMF resources to forestall or cope with an impairment of the international monetary system.
  • Concurrent with the quota increases under the 14th Review, the NAB was rolled back from SDR 370 billion to SDR 182 billion in February 2016.
  • The activation of NAB requires support from 85% of creditors eligible to vote

About: Bilateral Borrowing Agreements

  • The IMF had entered into Bilateral Borrowing Arrangements after the 2008 financial crisis to increase its lending ability. BBAs serve as a third line of defense after quotas and the NAB.
  • In 2016, in view of continued uncertainty in the global economy, the membership committed to maintain access to bilateral borrowing, under a revised borrowing framework.
  • The initial term was till the end of 2019 extendable for a further year with creditors’ consents.
  • Activation of the agreements requires support from 85% of creditors eligible to vote

 

Criticisms and call for governance reforms at IMF

Domination of developed countries:

  • Some IMF members are frustrated with the pace of governance reforms, as the balance of economic and geopolitical power has shifted, becoming more dispersed, particularly with the emergence of China and India.
  • Developed countries have been seen to have a more dominant role and control over less developed countries (LDCs).
  • The scholarly consensus is that IMF decision-making is not simply technocratic, but also guided by political and economic concerns.
  • The United States has historically been openly opposed to losing its “leadership role” at the IMF, and its “ability to shape international norms and practices
  • The criticism of the US-and-Europe-dominated IMF has led to what some consider ‘disenfranchising the world’ from the governance of the IMF.

Discrepancy in the calculated and actual quotas:

  • While quotas as computed by the above formula are the basic starting point in allocating shares, they serve as guidance rather than as a rigid rule, since the IMF’s Board of Governors has full discretion in decisions about shares.
  • There are significant differences between actual and calculated quotas. Notably, for Europe and the euro area, actual quotas are higher than calculated quotas.
  • For China, the actual quota, at 6.4 percent, is only about half of the calculated quota.
  • Many developing countries are up in arms that this discrepancy in particular merits quick correction.

Over reliance on non-permanent sources of funding:

  • Out of the three main financing sources, only one is a permanent feature and there has been an overreliance on non-quota sources of funding.
  • This is inconsistent with the IMF’s basic principle that quota subscriptions should be the main source of IMF resources. Hence, the reliance on alternate funding sources should be reduced.

Narrow development concerns:

  • The IMF is only one of many international organisations, and it is a generalist institution that deals only with macroeconomic issues, while its core areas of concern in developing countries are very narrow.
  • Hence, the IMF should work towards close partnerships with other specialist agencies such as UNICEF, the Food and Agriculture Organization (FAO), and the United Nations Development Program (UNDP).
Section : Economics

Explained: Why interest rates aren’t falling

Headline : Explained: Why interest rates aren’t falling

Details :

Context for the article:
  • This article explores why, despite significant repo rate cuts by the RBI, the interest rates in the banking system are not falling much.
Rate cuts by the RBI:
  • Since February, the Reserve Bank of India (RBI) has aggressively cut the repo rate.
  • Repo rate is the interest rate that the RBI charges the banks when it lends them money.
Why does RBI want lower interest rates?
  • Since February, India’s economic growth momentum has rapidly decelerated.
  • Projections of GDP growth rate have come down from roughly 7.2%-7.5% in February to 5.8%-6.0%.
  • There are two key problems in the economy – Consumption and Investment – and a lower interest rate regime is expected to help in resolving both.
  • To this end, RBI has been cutting repo rates, especially since overall retail inflation has been well within the RBI’s comfort zone of 4%.
Lower interest rates could revive consumption:
  • The main issue is that people are not consuming at a high enough rate.
  • Some economists argue that if banks reduce their lending rates, they would also have to reduce their deposit rates (the interest rate banks pay when we park our money with them in a savings bank deposits or a fixed deposit).
  • This, in turn, will incentivise people to save less and spend more.
Lower interest rates could revive private investment:
  • The other problem in the economy at present is that businesses are not investing in existing or new facilities.
  • Part of the reason is also that the interest rate charged on loans is quite high.
  • If banks reduce the interest rates on loans, more businesses are likely to be enthused to borrow new loans for investment.
  • This is particularly relevant with the recent corporate tax rate cuts done in the hope that it will boost the corporate sector’s profitability and get it thinking of investing more.
 
The ‘transmission’ of rate cuts by RBI to the banking system is not happening:
  • By cutting the repo rate, the RBI has been sending a signal to the rest of the banking system that the lending rates in the system should come down.
    • Lending rates are the interest rates that banks charge from their customers.
  • This process of repo rate cuts leading to interest rate cuts across the banking system is called “monetary policy transmission”.
  • The transmission process in India is quite inefficient:
    • For example, between February and August, the RBI cut repo rate by 110 basis points — 100 basis points make a percentage point — from 6.5% to 5.4%.
    • But, the interest rate charged by banks on fresh loans that they extended during this period fell by just 29 basis points – that is just 27% of the amount by which the repo rate came down.
To force transmission, RBI is linking bank lending rates to repo rate:
  • Concerned by the sluggish transmission, the RBI in October 2019 (after cutting the repo rate by another 25 basis points) took steps to make banks link their lending rates to the repo rate.
  • The RBI made it mandatory for all banks to link certain loans to external benchmark rates like Repo Rate, Yields on treasury bills etc.
Only few banks have cut rates:
  • For the most part, the banking system has ignored RBI’s signalling and only some banks have reduced lending rates on new loans by 10 basis points.
  • In essence, while the RBI has cut its lending rate to the banks by 135 basis points (or 1.35 percentage points) in the nine months since February, the interest rates being charged to the common consumer have come down by only about 40-odd basis points.
Why aren’t interest rates in the banking system coming down?
  • The interest rates in the banking system are not coming down despite repo rate cuts by the RBI.
  • This is because repo rates have little impact on a bank’s overall cost of funds, and reducing lending rates just because the repo has been cut is not feasible for banks.
Difference between lending and deposit rates allows banks to function:
  • For any bank to be viable, there must be a clear difference between the lending rates (interest rates it charges from borrowers on loans it provides) and the deposit rates (interest rate it gives to consumers on deposits it accepts).
  • The difference between these two sets of interest rates has to be not only positive but also big enough for the bank to make profits.
Banks can be profitable only if they cut deposit rates also:
  • To attract deposits, banks pay a high deposit rate. Such deposits make up almost 80% of all banks’ funds from which they then lend to borrowers.
  • Banks borrow only a small fraction under the repo.
  • So even sharply reducing the repo rate doesn’t change the overall cost of funds.
  • Unless banks reduce their deposit rates, they will not be able to reduce their lending rates.
Why are banks not reducing their deposit rates?
  • Others could offer better rates: That’s because if a bank were to reduce its deposit rates, depositors would shift to a rival bank that pays better interest rates or invest in small saving instruments such as public provident fund, Sukanya Samriddhi Yojana etc that pay much higher interest rates.
  • Can’t reduce rates immediately: Even if banks wanted to reduce their deposit rates, they can’t always reduce them immediately. This is because 65% of total deposits are “term” deposits (fixed for a certain duration) and take, on an average, up to two years to get repriced at fresh rates.
What hasn’t linking the lending rate to the repo rate worked?
  • This is not a viable solution for the banks.
  • The banks cannot link their lending to the repo rate because repo doesn’t determine their cost of funds.
  • For a repo-linked regime to work, the whole banking system would have to shift to that – in other words, along with banks’ lending rates, their deposit rates too must go up and down with the repo.
  • But if such a regime were in place, depositors would have earned 1.10 percentage points less interest rate on their savings account.
Is this problem of weak transmission new?
  • As per some experts, this is not a new issue.
  • Never even in the past has monetary transmission been better than 50% (that is, only half the rate cuts by RBI were passed through by the banking system).
  • The reason for weak transmission, too, has been largely the same.
Why doesn’t this happen in developed countries?
  • The slow transmission does not happen in developed countries because the financial system is far more developed and diversified.
  • Banks are not burdened to fund everyone:
    • Most importantly, the banking system there doesn’t have to bear the burden of providing loans to everyone in the economy – from farmers to small businesses to large businesses, like in India.
  • Developed bond market:
    • Most demands for big loans are directed towards the corporate bond market – wherein a company floats bonds (or IOUs) and borrows money from the public by paying whatever interest rate the market demands.
  • Better grasp of borrowing and lending dynamics:
    • Depositors there are not in the habit of getting a fixed interest rate on their savings while expecting a variable interest rate on their loans.
    • The savers there are far more willing to take risk and to invest in higher-risk instruments other than bank deposits.
    • On the other hand, at the current low levels of per capita income, Indian savers are risk averse and prefer saving in banks.
  • Government borrowing does not impact interest rates much:
    • The overall borrowing by the public sector – that is the government and government-owned institutions – is not so high so as to drive up the interest rates in the economy, as it happens in India.
Section : Economics

What impact will the thundershowers, hailstorm have on rabi crop?

Headline : What impact will the thundershowers, hailstorm have on rabi crop?

Details :

The topic

  • Recently, there was heavy rainfall and hailstorms in the many areas of northern India.
  • This articles assesses the impact of heavy rainfall and hailstorms on rabi crops.

Background

  • In early February, the National Capital Region, Punjab, Haryana, parts of Uttar Pradesh and northern Madhya Pradesh witnessed heavy rainfall and hailstorms.
  • According to the Meteorological department, the source of the thundershowers was a fresh Western Disturbance. Further fresh Western Disturbance are also expected.
  • This will affect the Rabi crops in these regions.

About Rabi crops

  • ”Rabi” is an Arabic word for “spring”.
  • Harvesting of the winter crops happens in the springtime, thus these crops are called as Rabi crops.
  • The Rabi season usually starts in November and lasts up to March or April.
  • Rabi crops are mainly cultivated using irrigation as monsoon rains are already over by November.
  • Moreover, the unseasonal showers in winter seasons can ruin the crops.
  • Wheat, barley, mustard and green peas are some of the major Rabi crops of India and different crops require different climatic conditions. For example:
    • Wheat
      • It requires cool temperatures during its growing season in the range of about 14°c to 18°c.
      • Rainfall of about 50 cms to 90 cms is most ideal.
      • However, during harvesting season in the spring, wheat requires bright sunshine and slightly warmer temperatures.
    • Mustard
      • It requires a subtropical climate to grow which is a dry and cool climate.
      • The temperature range to grow mustard is between 10°c to 25°c.
    • Therefore, the heavy rainfall and hailstorms differently impact various Rabi crops based on various stages of crop production.

Assessment of impact of rainfall and hailstorms on different Rabi crops this season

Negative impact

  • Heavy rains during this period have negative impact on the mustard, chana (chickpea) and potato crops that are about to mature or in early-harvesting stage.
  • Mustards
    • This crop that is usually planted during the first half of October, and in early February would be in the pod-filling stage (the beginning of the last stage ripening), where the flowers and seeds have already taken shape and size.
    • The kernels would have been accumulating starch, fat and protein matter.
    • Hence, rains during this time can impact the yields negatively.
    • Moreover, if the rain continues, the environment will become helpful for fungal diseases such as sclerotinia stem rot and alternaria blight.
    • Such diseases could result in the premature ripening of the crop or the pods producing dry, shrinking or discoloured seeds.
    • The rains are more likely to damage early-sown crops, sown in the last week of September, which would have been ready for harvesting.
  • Other crops:
    • Many other Rabi crops are harvested during February-March like Chana, Masur (lentil), Potato, Jeera (cumin-seed) and Dhania (coriander).
    • These might already be in its final stages of grain-filling or ripening stages.
    • The risk of rainfall and hailstorm is more for such crops.
  • In the worst scenario, experts are predicting the repeat of conditions as was in March 2015, when the winter rainfall and hailstorm affected the total area of 182 lakh hectares in North, West and central India.

Positive impact

  • The positive impact of winter rainfall can be predicted for Wheat, as this crop is sown by mid-November and currently would be in the late-tillering stage, when it produces multiple side stems.
  • Only the wheat crops sown early in the end of October may get negatively affected.
  • In fact, rains will have following benefits for the timely or late-sown wheat crops-
  • It will provide additional round of irrigation to the crops.
  • It will reduce the temperatures and prolong the winter, which is good for yields.

Section : Economics

MicroCredit Vs MicroFinance

Headline : Explained: What ails the existing microcredit model

Details :

In News

  • Studies suggest that the existing systems of microcredit have a limited impact on the long-term wellbeing of the recipients.

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About: Microcredit

  • Microcredit refers to the granting of very small loans to impoverished borrowers.

Rationale

  • Loans given as microcredit are often given to people who may lack collateral, credit history, or a steady source of income.
  • The core idea is that a small loan will provide access to the larger economy to people who live outside the mainstream economy.
  • It has an aim of enabling the borrowers to use that capital to become self-employed and strengthen their businesses.

Terms

  • Microcredit agreements generally do not require any sort of collateral.
  • At times it may not even involve a written agreement, as many recipients of microcredit are often illiterate.
  • When borrowers demonstrate success in paying their loans on time, they become eligible for loans of even larger amounts.

Applications

  • Conventionally, microcredit has been used mainly for entrepreneurs to begin production and attain self-sufficiency.
  • However, there are other, mostly unexplored paths for the utilisation of microcredit for poverty alleviation and productivity-boosting measure, like:
  • Supplement rural labourers
  • Small microcredit loans can allow rural labourers to migrate to urban areas to find work during the lean season (when there is no work on farms).
  • Those who migrated temporarily during the lean season experienced increased spending in both food and non-food areas, and increased their calories consumed.
  • Address climate shocks
  • It can also be used to reduce the effects of shocks like floods and drought.
  • It can provide people with a form of insurance that both increases production before the shock and provides a safety net after.

Example

  • An example of a microcredit institution is the Grameen Bank in Bangladesh, founded in 1976 by Mohammed Yunus. It is a pioneering institution in the realm of micro finance.
  • The bank has 8.4 million followers, 97% of whom are women, and the bank has repayment success rates between 95 to 98 percent.

 

About: Microfinance

  • Microcredit falls under the larger umbrella of microfinance.
  • Microfinance activities usually target low-income individuals, with the goal of helping them to become self-sufficient.
  • Hence, microfinance activities have an aim of poverty alleviation as well.

News Summary:

  • Microcredit has emerged as a tool for ensuring the welfare of the most impoverished in society, and boosting development alongside.
  • However, some studies claim that certain flaws in microcredit transactions has led to limited benefits, and access to microcredit made very little difference to changing the lifestyles of borrowers.
  • As per a study, indicators like Household business profits, business expenditures, consumption, consumer durables spending etc. saw only a 5% impact when microcredit was available.

Repayment schedules main reason for low impact of microcredit:

  • To lower the risk of defaulting, microcredit lenders demand an initial repayment that is almost immediate.
  • After that, borrowers are required to follow an inflexible weekly schedule for repayments.
  • Due to this, borrowers are unable to use loans on investments that may take some time for benefits to be fully realised.
  • Hence, they are forced to use the loans on short term investments that only boost production to an extent, and the overall growth of their income remains small.

 

Findings of various studies on improving impact of microcredit

Initial grace period:

  • According to a study, borrowers who received an initial grace period were more likely to have started a new business.
  • Such borrowers also reported higher profits and household incomes.
  • However, there was also an increased rate of defaulting in this group.

Monthly repayment:

  • When borrowers switched from a weekly repayment schedule to a monthly one, there was an increase in incomes without the increased rate of defaulting.
  • Under a monthly repayment schedule, borrowers scored 45% lower on the Financial Stress Index.
  • Increases in income were more than double when compared to the borrowers under a weekly repayment schedule.

Mitigation of credit risk:

  • The barriers to assessing credit risk can be mitigated by using community information.
  • Communities can be an accurate source of information about credit risk for microcredit institutions.
  • However, the implementation of such processes would require the elimination of bias and incentivising accurate information.
Section : Economics

Fintech committee recommends new legal framework for consumer protection

Headline : Fintech committee recommends new legal framework for consumer protection

Details :

In News:

  • A panel on issues related to financial technology (fintech) has recently submitted its recommendations to the Finance Ministry.
  • The committee has suggested putting in place a comprehensive legal framework to protect consumers of digital services.

What Is Financial Technology (Fintech)?

  • Financial technology (Fintech) is used to describe new technologies that seeks to improve and automate the delivery and use of financial services. ​​​
  • At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.

Background:

  • The fintech panel was announced by former finance minister Arun Jaitley in his 2018-19 Budget.

Committee on issues related to financial technology

Objectives of the committee:

  • To consider various issues relating to development of Fintech space in India with a view to make Fintech related regulations more flexible and generate enhanced entrepreneurship in an area where India has distinctive comparative strengths vis-à-vis other emerging economies. 
  • The Steering Committee also focused on how Fintech can be leveraged to enhance financial inclusion of MSMEs.

Key Recommendations of the committee:

  • Examining the suitability of virtual banking system:
    • The committee suggested the Department of Financial Services (DFS) and Reserve Bank of India to examine the suitability of ‘virtual banking system’ in the Indian context.
  • Adoption of RegTech:
    • The committee has recommended adoption of regulation technology (or RegTech) by all financial sector regulators to develop standards and facilitate adoption by financial service providers.
  • Use of Financial Technologies:
    • The committee suggested usage of fintech to improve access of financial products for MSMEs, farmers and poorer sections of the society.
  • Change in the form of RBI adopting open data access approach:
    • RBI may consider making available banking data (such as transaction and account history data) for use by the financial sector, including fintech firms, (based on consumer consent and with other appropriate safeguards)
  • Study the Potential of Open data access:
    • It also recommends that all financial sector regulators study the potential of open data access among their respective regulated entities, for enhancing competition in the provision of financial services
  • Use of drones and remote sensing technologies by Insurance companies and lending agencies:
    • The panel has also recommended that insurance companies and lending agencies be encouraged to use drone and remote sensing technology for crop area, damage and location assessments to support risk reduction in insurance/lending business.
  • Coordination among Department of Financial Services (DFS) and PSU banks:
    • The Department of Financial Services (DFS) should work with PSU banks to bring in more efficiency to their work and reduce fraud and security risks.
    • Significant opportunities can be explored to increase the levels of automation using artificial intelligence (AI), cognitive analytics and machine learning in their back-end processes.
  • Digitization of land records:
    • The committee also suggested digitisation of land records across the country on a war footing.
  • Setting up a Inter-Ministerial Steering Committee:
    • The report favoured setting up of an Inter-Ministerial Steering Committee on fintech applications in the Department of Economic Affairs (DEA) to monitor progress, including exploring and suggesting the potential applications in government financial processes and applications.
  • Common fintech platform
    • The panel suggested usage of common fintech platform for MUDRA loans, small saving schemes, pension schemes and provident fund.
    • It recommended creating a common digital platform for all micro-pension schemes and government pension schemes, including EPF, through which pension subscribers can subscribe to specific schemes seamlessly.
    • It would also reduce access barriers by allowing payments through various modes such as Jan Dhan Yojana accounts, debit card, credit card, internet banking, mobile wallets etc.
  • Explore permitting digital alternatives:
    • The government should undertake a campaign to convert all financial assets held, especially by entities under its control like post offices, in demat form as far as possible but certainly in electronic form
  • Reducing the cost of KYC:
    • The committee recommended need to reduce the costs of KYC to promote financial inclusion among the weaker sections.
    • The panel suggested that there should be no charge for uploading KYC data, while every download can be priced based on the user pays principle and this will enable Central KYC to take off early.
  • Creation of a nodal agency:
    • A nodal agency to coordinate developments across ministries and regulators in the area of financial technology (fintech).
    • A dedicated team on digital economy and fintech is being set up in the Investment Division, Department of Economic Affairs for coordination on fintech with relevant ministries.

Section : Economics