Daily Current affairs 16 February 2019UPSC - Daily Current Affair
- In retaliation to the dastardly terror attack in Pulwama district, J&K, India has decided to revoke the Most Favored Nation (MFN) status granted to Pakistan in 1996.
What is Most Favored Nation (MFN) status?
- Article 1 of General Agreement on Tariffs and Trade (GATT), 1994, requires every WTO member country to accord MFN status (or preferential trade terms with respect to tariffs and trade barriers) to all other member countries.
- MFN status ensures that the goods entering a country from another country gets the same treatment as goods entering from all other member countries in terms of tariffs and duties in that country.
- In effect it is a principle of non-discrimination in trading of goods.
MFN Status to Pakistan
- India accorded MFN status to all WTO member countries, including Pakistan, from the date of entry into force of the so called Marrakesh Agreement, establishing the WTO.
- This meant that all good exported from Pakistan are met with same tariffs and duty structures in India as exports from any other member country that has been accorded the MFN status by India.
- However, though there have been promises from Pakistan to grant MFN status at various times, it has not been done yet.
- Responding to the terror attack in Pulwama district, India has decided to revoke the MFN status granted to Pakistan.
Imports and Exports between India and Pakistan
- Exports from India: Cotton, dyes, chemicals, plastics, vegetables and iron and steel
- Imports from Pakistan: Fruits, cement, leather, spices, petroleum products, bulk minerals and ores.
Revoking MFN: Is it enough?
- The countries with MFN status have broader access to a market for trade goods, reduced cost of export items owing to highly reduced tariffs and trade barriers.
- While it is seen as a strong message to Pakistan, revoking MFN status to Pakistan is only a ‘symbolic’.
- Revoking Pakistan’s MFN status is aimed at signalling to the world the change in India’s stance regarding Pakistan, rather than one aimed at doing economic damage.
Steps to isolate Pakistan: What can be done?
- India may review and even consider withdrawal from the Indus Water Treaty which is allowed under the international law. Indus, being a jugular vein to Pakistan, any change in the flow of water will seriously affect it.
- Given the economic crises (low levels of growth) Pakistan is going through, it is heavily dependent on IMF assistance. Thus India should work with the US to persuade IMF to delink its all-important economic assistance to Pakistan to its action against terrorism.
- In the long-term India should work with other conflict-ridden neighbors of Pakistan such as Afghanistan and Iran, to put pressure on Pakistan.
- India should squarely deny the proposal to attend SAARC summit in Islamabad.
- India should work on strategies to persuade China to take measures against Pakistan, however this seems too far-fledged as China is uses Pakistan as a pawn in the region.
- India should also garner support from Saudi Arabia and UAE with whom Pakistan has good relations, both economic and political.
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Section : Economics
- Recently, the United States and Canada have approached to the World Trade Organization’s Committee on Agriculture (WTO COA) on India’s minimum support prices (MSP) for certain agricultural commodities.
- It has been complained that India has substantially underreported its market price support for chickpeas, lentils, pigeon peas, black matpe and mung beans.
About Minimum Support Price (MSP)
- MSP is price fixed by Government of India as a guarantee price for their produce in order to protect the farmers against excessive fall in price during bumper production years.
- In case the market price for the commodity falls below the announced minimum price (because of bumper production and surplus in the market), government agencies purchase the entire quantity offered by the farmers at the announced minimum price.
- The MSP is announced at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
- Crops Covered: Government announces minimum support prices (MSPs) for 22 mandated crops and fair and remunerative price (FRP) for sugarcane. The crops for which MSP is announced includes:
- Cereal crops - paddy, wheat, barley, jowar, bajra, maize and ragi
- Pulses - gram, arhar/tur, moong, urad and lentil
- Oilseeds - groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and nigerseed
- Raw cotton
- Raw jute
- De-husked coconut
- Sugarcane (Fair and remunerative price)
- Virginia flu cured (VFC) tobacco
About WTO's Committee on Agriculture
- It oversees the implementation of the WTO Agreement on Agriculture, which came into force in 1995, to reform agricultural trade and making it fairer and more competitive.
- Key Responsibility: To monitor the compliance of WTO members with their commitments.
- The committee comprises of all WTO members, which usually meets three or four times a year.
- Members are required to share information and may ask each other questions or raise concerns about each other's agricultural policies.
- Both US and Canada have complained about the following issues they observed:
- Issues with the quantity of production of certain pulses used in MSP calculations
- Issue regarding the lack of information necessary to assess WTO compliance
- Issues with currency conversions
- Issues regarding the prices used in India’s calculations
- Thus, it has been alleged that India's market price support for certain pulses exceeded its allowable levels of trade-distorting domestic support
- This is the third U.S. COA counter notification regarding another country’s measures, previous U.S. counter notifications have addressed India’s market price support for cotton, rice and wheat.
- Australia has submitted a counter notification regarding India’s market price support for sugarcane.
India's concerns with MSP calculation
- The rules allow for use of the U.S. dollar in calculations, rather than the Indian Rupee, which Canada and the U.S. argue should be used.
- India has also maintained that only eligible production (what is procured by government entities), rather than “total production” should be considered in calculating support prices.
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Section : Economics
- Day before the Pulwama terror attack, there was an almost identical attack in Iran’s Sistan-Balochistan province, which borders Pakistan.
Copycat attack: Iran attack and Pulwama attack
- The modus operandi of both the attacks was similar i.e. ramming an explosive-laden vehicle into a bus carrying soldiers.
- While terror outfit Jaish-e-Mohammad (JeM) has claimed responsibility for the Pulwama attack, Jaish al-Adl (JuA) was behind the Iran bombing act.
- Both have been mentored in Pakistan and both are based in Pakistan.
Origin of the Terror outfits:
- The Jaish-e-Mohammad was set up under ISI patronage by Masood Azhar after his ISI-Taliban-negotiated release by India at Kandahar in return for the Air India IC 814 hostages in 1999.
- The Jaish ul Adl was created by the remnants of Jundullah (a Sunni militant organization based in Iran), after its leader Abdul Malik Riggi was captured by Iranian security forces and hanged in 2010.
Links between JeM , JuA and Taliban
- Though, there is no clear connection between the Jaish-e-Mohammed and the Jaish-ul-Adl, but both are Sunni extremist groups, having close links to the Taliban.
- It is belived that JuA is actually a front of the Lashkar-e-Taiba (LeT) and both, LeT and JeM, are working with and learning from the Taliban, and the Haqqani network in Afghanistan.
Reasons for Iran and India to be nervous about Pakistan-aided US-Taliban talks
- Pakistan has been facilitating talks between the United States and Taliban to find a negotiating settlement of the war in Afghanistan, which would ensure that the Taliban gains more control in Afghanistan, which in turn is not good for either India or Iran.
- It may increase the number of such terror attacks in both the countries.
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Section : Defence & Security
- The Pulwama terror attack that claimed more than 40 lives of CRPF personnel, is posing a security challenges to India because of its modus operandi.
- The modus operandi adopted was a ‘car bomb’, generally termed as Vehicle-borne Improvised Explosive Device.
About Vehicle-borne IEDs
- Car bombs or Vehicle-borne IEDs are lethal explosive devices installed in a vehicle able to be detonated in various ways including remotely.
- The VBIEDs are installed in the ignition system, fixed magnetically under the passenger seat, bonnet, door, boot, mudguard etc.
- Normally VBIEDs are detonated using a mercury switch where tilt tube is used, one end of which is filled with mercury and the other is connected to an electric circuit.
- The tilt tube may be connected to the vehicle door, bonnet or even a timer.
- Once the door, bonnet, boot or other mechanical devices in the car moves, it enables flow of mercury to the top of the tube where it completes the electric circuit and triggers the explosion.
VBIEDs: New-age Security Threat
- VBIEDs are tactful weapons extensively used by Palestinian terror groups, the Islamic State, Taliban etc. and now Jaish-e-Mohammad which is responsible for Pulwama attack.
- VBIEDs are evolving as new security threat due to following reasons:
- Large scale damage they cause as a result of car parts acting as sharpnels during explosion.
- Due to mercury switch they can be triggered in a short period leaving very little time and scope for bomb squad to detect and detach the device.
- Since they can be remotely activated, they can be used in motion, when parked etc.
- As a result of above reason car bombs are difficult to counter and thus are increasingly seen as a new-age security threat by armed forces.
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Section : Defence & Security
RBI's latest Monetary Policy Statement:
- Interest Rates cut: In February, 2019, the Monetary Policy Committee (MPC) reduced the repo rate under the liquidity adjustment facility (LAF) by 25 bps to 6.25%. Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5 per cent.
- Monetary policy stance changed to 'neutral': RBI has also changed the stance of the monetary policy to ‘neutral’ from ‘calibrated tightening’. more rate cuts to come in the coming months if inflation remains range-bound.
- Calibrated tightening refers to a situation where a rate cut is ruled out in the existing rate cycle. A neutral policy will mean that depending upon the situation, RBI can increase or decrease interest rates.
- Growth Rate: The RBI projected GDP growth for 2019-20 at 7.4 per cent – in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3.
- Need for private investment: Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.
- With RBI signalling a change in stance to the lowering of rates, some banks have decreased their lending rates.
- There is also a positive sentiment in the market.
- Banks as well as borrowers have always been talking of interest rates to be lowered.
- Helps in higher investment growth:
- Theortically, lower interest costs provide an incentive to companies to invest which in turn helps to foster growth.
- Lower interest rates bring down the interest cost for companies which helps in stabilising profits.
- The interest-to-turnover ratio will vary across industries but it could be as high as 10% for capital intensive industries.
Commercial banks offering cheaper loans after rate cuts:
- Data shows that transmission of rate cuts by banks (i.e., banks lowering interest rates whenever RBI cuts rate) has been quite efficient as lending rates on new loans have come down in a commensurate manner.
- This is significant because, often, it has been argued that banks have not been proactive in terms of lowering their lending rates when RBI takes such an action.
Pattern of growth in bank credit:
However, the pattern of growth in bank credit is quite interesting.
- Rate of growth actually declining:
- The rate of growth of bank credit has actually been declining or unchanged in 3 of the 4 years leading to 2017-18.
- Rate of growth in credit-to-industry hasn't taken off:
- Typically, the lowering of cost of capital should have led to higher credit flow to this sector.
- Industry sector constitutes around a third of total credit.
- Yet, the rate of growth in credit-to-industry, which is what one can relate directly with investment, has been coming down.
- It turned negative in 2016-17, before recovering with an anaemic 0.7% growth in 2017-18.
- Growth in credit-to-agriculture positive:
- Growth in credit-to-agriculture has been buoyant in four of the five years.
- However, this is driven more by law as it comes under priority sector lending (PSL).
- Retail loans growing at the highest rates:
- Retail loans have been growing at the highest rates.
- This is positive for the household sector and has supported both the housing (people buying more houses) and auto sectors (people buying more vehicles).
- This is also because, in the last couple of years, there has been a tendency for even PSBs to concentrate more on retail loans.
- This helps banks build up a better portfolio as NPAs tend to be lower in this retail loans segment.
- Service sector credit growth haphazard:
- The service sector has witnessed a mixed growth pattern.
- It declined to 5.7% in 2014-15 before recovering in the next two years and then slowing down, again, in 2017-18.
- Here, NBFCs and trade are the two leading sectors which account for around half of credit to the services segment.
- 2018-19 saw growth in credit despite increase in interest rates:
- In 2018-19, growth in credit has picked up across all the sectors contrary to conventional wisdom considering this was a period when interest rates increased (interest rates were hiked twice during 2018).
Lessons from the pattern of growth in bank credit
Merely lowering rates does not lead to credit growth:
- Data indicates (as seen above on credit growth rate across various segments) that merely lowering rates does not lead to higher growth in credit across the sectors.
Impact of lower rates varies across segments:
- Most effective in Home segment:
- It is most effective for the home segment which is also preferred by banks.
- Impact on Industry depends on other factors like capacity utilization:
- In case of industry, a lot would depend on the state of capacity utilisation and investment opportunities that are there.
- Lowering interest rates works in case there is appetite for investment.
- In FY19, for example, RBI data shows that capacity utilisation rates have been improving and was at 74.8% in September from 73.8% in June.
- Therefore, some industries were in a position to scale up by borrowing more even though interest rates had increased.
- In the preceding years, this rate has hovered between 70-72%, which in turn proved to be a deterrent even though the cost of borrowing had come down.
- Impact on Services not clear:
- The services sector needs further probing.
- NBFCs are re-lenders as they borrow money from banks and use the same for onward lending.
- They would tend to switch across to borrow from different sources like corporate debt and Commercial Papers (CPs).
Willingness of banks to lend also impacts credit growth rate:
- Another issue which becomes important is the willingness of banks to lend.
- For example, the current NPA issue has made banks cautious on the lending side.
- Also, the NPA problem is concentrated in sectors like power, steel, telecom, etc., where the demand for fresh funds has also been subdued as companies try and sort out the resolution issues.
Impact of lower interest rates on growth in term deposits:
- The fallout of the declining interest rates scenario has also meant that it has had an impact on growth in term deposits.
- Growth rate in term depostis has been coming down quite sharply over the years, from a range of 17% to a low single-digit rate in the last 3 years.
This is a concern for two reasons:
- Can pressurise liquidity for banks:
- From the point of view of banks, this is something which can pressurise liquidity.
- This, in turn, will call for affirmative action from the central bank in the form of support from OMO and term repos.
- Open Market Operations (OMOs) are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions. RBI buys back g-secs to infuse liquidity into the system.
- A term repo is a repo of more than one-day duration. It is a way for banks to avail money from the RBI for more than one-day duration).
- Impacts financial savings:
- At the broader level, this has an impact on financial savings.
- The overall savings as per CSO is down from 33.1% in FY13 to 30.1% in FY18 which is a concern.
- Increases risks: Further, within financial savings, migration (from savings in banks) to the capital market through the mutual funds route or direct equity has also increased the risk taken by households which can be volatile depending on market conditions.
- The issue of low interest rates is often looked at from the point of view of borrowers.
- While lower rates do cause cost of funds to come down, it is not necessary that it will lead to higher investment.
- This depends on the state of the banking system as well as opportunities for growth.
- Continuous reduction in rates also flags the possibility of banks finding it harder to garner deposits, which is also the case today where RBI intervention has been almost relentless.
- Therefore, there are trade-offs because savers also have their preferences (not just borrowers).
GS Paper III: Economy
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Section : Editorial Analysis