Content

1. A Budget blueprint for difficult times
2. Casting the net in a sea of conflict

Editorial: A Budget blueprint for difficult times

Context:

• As the country prepares to enter a new financial year after an ominous and gloomy 2020-21, there are great expectations about green shoots and the shape of the economic recovery.

Relevance:

• GS Paper 3: Government Budgeting

Mains Questions:

1. Alarming inequality, failing health care and border tensions loom large and the economic situation needs full attention. Discuss. 15 Marks

Dimensions of the Article:

• Impact of Covid19 upon Economy:
• Challenges to revive the Economy:
• Way Forward:

Impact of Covid19 upon Economy:

• The havoc wreaked by the novel coronavirus pandemic on people’s lives and livelihoods is deep and enormous.
• The impact of the COVID-19 induced lockdown cannot be understood merely through headline macro-economic numbers of Gross Domestic Product (GDP), stock market indices, industrial activity indices or any such measure. COVID-19 has destroyed lives and incomes; it has also ruptured our social fabric.
• It has exacerbated the inequality between the haves and the have-nots, which can turn into a permanent scar if not remedied urgently.
• It is in this context that we must assess the current state of the economy and evaluate further action for the immediate future.

Challenges to revive the Economy:

• Rising unemployment rate: Nearly 120 million people have asked for work under MGNREGA this financial year, the highest in the history of the programe. Total work demanded under MGNREGA in 2020-21 is 53% higher than last year. The optimism about headline economic recovery in the last few months seems hollow when we realize that nearly 35 million people have requested MGNREGA work.;
• Rising inequality:  The top 50 companies increased their market wealth by nearly ₹3,00,000 crore ($40 billion) during this time. The excess liquidity pumped in by central banks is finding its way to asset markets, including India’s stock markets, driving it to unreasonable highs.
  • If the stock market exuberance were to benefit the broader economy and most Indians, then it is welcome. Alas, the benefits of rising stock markets have accrued only to a minuscule few.
  • The curative economic measures of governments in response to the COVID-19 pandemic may have unintentionally caused one of the worst phases of economic disparity between the rich and the poor in most nations.
• Rising Inflation: Soaring asset prices and supply shocks have also led to a rise in consumer price inflation. Rising inflation will inevitably force the RBI to tighten interest rates or at least pause the lowering of rates.
  • A tighter monetary policy carries the risk of slowing down private investment, with the consequential effect of lacklustre growth in jobs and wages. India’s macro economy is, thus, precariously poised and needs deft handling.
• Challenges related to external sector: The external sector could be a potential savior of India’s economy as global trade grows from its post-COVID-19 lows.
  • Unfortunately, however, the government has shot itself in the foot by reversing its trade policy suddenly and turned inwards toward import substitution, quantitative restrictions, non-tariff barriers and shunning trade alliances.
  • Over the past three decades, a surge in labour intensive exports has been the predominant driver of growth in jobs and wages for millions of high- and low-skilled Indians.
  • The slowdown in exports and the misplaced aversion to two-way external trade will further harm the livelihoods of many Indians.
• Skewed Supply Side Measures: Most supply-side measures such as the government’s corporate tax cuts, loan moratoriums, and guaranteed credit schemes seem to have helped corporates to boost their profits and reduce their debt. They have hardly been used to make new investments or create jobs or increase wages.
• Reducing the government expenditure: The government had budgeted to collect tax revenues of ₹16-lakh crore in 2020-21. Eight months into the year, the government has been able to collect only ₹7-lakh crore in tax revenues at the end of November 2020.
• Increasing the expenditure: The government had budgeted to spend ₹30-lakh crore this financial year and is on track to fulfilling, and even possibly exceeding, its expenditure budget.
• Growing border disputes: India’s borders have been under threat by the Chinese. Any weakness will invite a war. India must immediately shore up its defense preparedness and be ready to defend its borders. India’s defence expenditure as a share of GDP has been falling.
  • The government must increase defence expenditure from the current level of 1.6% of nominal GDP to 3% of nominal GDP in the next year, keeping in mind that the GDP will be lower than the level attained in 2019-20.

Way Forward:

Policy measures recommended by IMF to combat economic slowdown:

• Financial sector: these reforms are needed in the short term as per IMF, such as: o Resolution of balance sheet issues including in the commercial banks, the corporate sector, and the NBFCs including housing finance companies.
  • More information on smaller NBFCs is needed to better understand the impact of reduced credit on private demand, especially micro, small, and medium-sized enterprises and in rural areas.
• Fiscal policy suggestions:
  • In the short term, focus on the composition of expenditures and rationalizing GST.
  • Over the medium-term, focus on domestic revenue mobilization like increasing personal income tax collections by ending exemptions, reducing the minimum threshold for taxpayers and by raising contributions by top earners, decreasing expenditures on subsidies, and enhancing fiscal transparency and thus reducing uncertainty.
• Increasing Public Investment: Expanded public investment can provide jobs and stimulate demand, the two most pressing needs of the country today. The central government’s capital expenditure must be increased significantly from the level of ₹4 lakh crore (14% of total expenditure) in 2020-21 to at least 20%-25% of total expenditure.
• A basic income safety net: Any increase in the government’s public investment will take time to translate into jobs and incomes for large numbers of the labour force. So, there is an immediate need for a basic income safety net for the bottom half of India’s families for a six-month period.

Editorial:Casting the net in a sea of conflict

Context:

• Four fishermen from Ramanathapuram district are the latest casualties in the decades-old Palk Bay fisheries conflict between India and Sri Lanka.

Relevance:

GS Paper 2: India and its Neighbourhood (relations)

Mains questions:

1. The India-Sri Lanka relationship is strong and poised for a quantum jump by building on the rich legacy of historical linkages and strong economic and development partnerships that have been forged. Critically comment. 15 marks
2. Sri Lanka’s importance, for India, increases many folds due to its strategic location in the Indian Ocean, especially with the Quad talks in progression. Elaborate 15 marks

Dimensions of the topic:

• Historical aspect of India Sri Lanka relations
• Convergence between India and Srilanka
• Divergence between Indian and Srilanka
• Way forward

Historical aspect of India and Sri Lanka:

India is Sri Lanka’s closest neighbour. The relationship between the two countries is more than 2,500 years old and both sides have built upon a legacy of intellectual, cultural, religious and linguistic intercourse. Relations between the two countries have also matured and diversified with the passage of time, encompassing all areas of contemporary relevance. In recent years, the relationship has been marked by close contacts at the highest political level, growing trade and investment, cooperation in the fields of development, education, culture and defence, as well as a broad understanding on major issues of international interest.

Convergence between India and Sri Lanka:

Commercial relations: –

• Sri Lanka is one of India’s largest trading partner in SAARC.
• Trade between the two countries grew particularly rapidly after India-Sri Lanka Free Trade Agreement came into force in March 2000.
• Bilateral trade in 2015 amounted to US $ 4.7 billion. Exports from India to SL in 2015 were up by 2.1%, while exports from SL to India were up by 3.2%.
• India is among the top four investors in Sri Lanka with cumulative investments of over US$ 1 billion since 2003.

Recent Development: –

• Sri Lanka recently allowed India to jointly develop the Trincomalee port (oil tanks farm) in north-eastern part of the country.
• Sri Lanka has invited Petronet LNG to set up a liquid gas import terminal in the country. It may help it straddle the gas sector, the dominant fuel for future economic growth.
• Sri Lanka signed an agreement with India to build 1,200 houses in Hambantota.
• India has also bid to lease and manage the Mattala airport in Hambantota.
•  India is also helping build various road and rail projects in Sri Lanka.

Developmental assistance provided by India:

• There has been a significant progress in implementation of developmental assistance projects for Internally Displaced Persons (IDPs) and disadvantaged sections of the population in Sri Lanka  by India which is further in line with India’s “Neighbourhood First Policy”.

Divergence between India and Sri Lanka:

Fishermen Issue:

• The issue of Tamil Nadu fishermen allegedly poaching in Sri Lanka’s territorial waters has been an ongoing conflict, with Sri Lanka’s northern fishermen repeatedly raising concerns over their falling catch and the serious environmental damage caused by trawlers originating from India.
• The two countries have established a Joint Working Group (JWG) on fisheries to help resolve the dispute and in future must evolve mechanisms for sustainable fishing.

Devolution of power:

• India stands for a “united Sri Lanka”, but wants an “early and full implementation of the 13th Amendment” that provides for devolution in the Tamil majority Northern and Eastern provinces.

Reconciliation process and war crime:

• The UNHRC resolution on war crimes is another important issue on which both the countries have to reach an understanding.
• India has advocated for speedy rehabilitation and ports and other facilities in friendly countries – including Pakistan, Bangladesh, and Myanmar.
• This concerns India as China’s encroachment on its sphere of influence and eroding its commercial and cultural links with the island. resettlement of the Internally Displaced Persons (IDP).

The ‘China factor’:

• China has invested heavily in Sri Lanka’s infrastructure as part of its “string of pearls” policy aimed at establishing a naval presence across South Asia by building.
• Under the previous regime, Sri Lanka looked to China for economic and diplomatic backing at a time when the West was threatening to sanction Colombo for crimes committed in its conflict with Tamil separatists. China is the largest investor in Sri Lanka.
• China’s economic dominance in Sri Lanka both in terms of debt as well as investments increased.
• Sri Lanka also recently formally handed over its southern port of Hambantota to China on a 99-year lease which had become an obvious site of the India-China geopolitical tussle on the island, has in the past witnessed protests against projects involving both countries.

Way forward:

New Delhi’s anxiety over Chinese presence might be justified, it should avoid using the China lens to view Sri Lanka, respecting the country’s autonomy to engage with any willing partner. The more India treats Sri Lanka as an equal partner, the stronger the relationship is likely to grow. Even Sri Lanka is now seemingly trying to balance its policy between India and China, giving India a stake in Hambantota airport, Colombo port project and a key expressway, besides preventing Chinese submarines in Sri Lankan waters in the backdrop of loans from Beijing that have pushed Sri Lanka into debt trap.