Daily Current affairs 21 February 2019UPSC - Daily Current Affair
Middle income trap:
- Many countries that have succeeded in moving out of mass poverty (through rapid economic growth) have struggled in their effort to move to mass prosperity.
- Research by economists showed that the most common point when inertia sets in (that is per capita income levels stagnate), is when average incomes are either around $11,000 or $15,000 a year.
- This is the famous middle income trap.
- Fewer countries emerge from it than enter it.
Reasons for this:
- Initial growth is input intensive:
- Economic growth in the initial phases is predominantly driven by the use of more inputs (labour, capital etc.).
- The labour force is growing. Investment rates are high.
- At a certain stage, productivity growth is required to leap to the next phase of development:
- After the initial growth phase, the need for productivity growth kicks in.
- The transition from one phase to the other—from using more inputs to using them more productively—is not an easy one.
- Most countries find this transition difficult:
- Economies such as South Africa and Brazil have not, for decades, been able to get out of this "middle income trap".
- The countries of East Asia also painfully realised this in 1997.
China has arrived at that point:
- China has entered challenging territory of "middle income trap".
- The International Monetary Fund (IMF) estimates that average incomes in China will be $10,098 this year.
Inputs peaked and now looking for productivity growth:
- The Chinese labour force seems to have peaked. The investment rate is already unsustainably high.
- China is now struggling with the challenge of finding ways to switch the economic growth model from input intensity to productivity growth.
China's efforts to get out of the middle income trap has led to financial stress:
- China has responded to its challenges of productivity through stimulus measures.
- The credit booms directed by the government have raised the risk of a financial meltdown.
- The true fiscal deficit, which includes subnational borrowing as well as money raised off balance sheet (many local governments in China raise debt without showing it on balance sheet in order to avoid lending limits imposed by central government), is perhaps close to 10% of Chinese GDP.
- Most of this is connected to the challenge of changing the growth model to escape the middle income trap.
China's worries ahead:
- The ruling Chinese Communist Party fears that any economic collapse will lead to a political collapse of the sort the Soviet Union saw in 1991.
- It is also worried about the sort of financial meltdown that many Asian countries saw in 1997.
- Another fear is a long stagnation (very low growth rates) like the one Japan encountered after its financial bubble burst in 1989, at the very end of its economic miracle.
But China can still come out of the middle income trap:
- Economists have been forecasting the collapse of China for two decades but that has not happened so far.
- China to its credit has seen the most spectacular economic boom in human history as well as the most astonishing development story ever.
- So the possibility that China will extricate itself from the middle income trap should not be dismissed.
Can India catch up with China while it slows down?
China's economic status built through very high growth rate for a long time:
- In the two decades before its structural slowdown began in 2013, China expanded its economy at double digits in nine years while it grew in excess of 9% for another six years.
- China has on average been growing around two percentage points faster than India since the early 1990s.
India grew fast only for a few years:
- India had one year of double digit growth and three years of 9%-plus growth in the same period.
- As a result, China moved ahead very rapidly.
India lags behind China is many ways:
- Gap in living standards:
- The Indian average income in 2019 is broadly similar to the Chinese average income in 2006. This means is that India is now 13 years behind China in terms of living standards.
- There is a similar gap when it comes to the size of the economy (GDP).
- Gap in global strategic heft:
- China's economic power gives it enormous strategic heft which it uses aggressively.
- Indian economy needs to grow fast for a long time to achieve similar status.
- Gap in social development:
- There is a large gap between India and China for social development indicators such as health and education.
Now India has a chance to close the gap:
- With China slowing down, India has a chance to close the gap on China.
- India has been growing faster than China in the past couple of years, and has taken over as the fastest growing major economy in the world.
- That is likely to continue as the Chinese economy continues to lose momentum.
Depends on policy choices:
- However, whether the income gap can be closed, or at least narrowed, depends on whether India can improve its economic trajectory even while China slows down.
- A lot depends on the respective policy responses in the two countries.
- It depends on whether China can come up with policies to change its growth model without a financial shock.
- It depends on whether India can accelerate its growth rate over the next two decades.
- The China slowdown is an opportunity for India to close the gap.
- The first condition for that will be policy reforms to sustain higher economic growth.
GS Paper II: International Relations
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Section : Editorial Analysis
India withdrawing MFN status to Pakistan:
- In the wake of the terrorist attack by Pakistan based terrorist group in Pulwama on CRPF convoy, the Indian government withdrew the Most Favoured Nation (MFN) status to Pakistan.
- It means that India will not treat Pakistan on an equal footing in trade as is expected of fellow members of the WTO (World Trade Organisation).
Can it impact Pakistan?
- The impact of the MFN status, and the current revocation of the status, on Pakistan in terms of its trade with India is to be understood looking at various trade channels.
Trade now takes place using three channels:
- The official route
- Through third countries, mainly Dubai and Singapore, which have free ports and accommodate legal agents of traders from India and Pakistan.
- The illegal (informal) route
The informal route of trade
- This is the trade done through smuggling along porous India-Pakistan land borders and also Afghanistan, and so not accounted for in the national income.
Methods of informal trade between India and Pakistan:
- Exchange of goods at the border: Traders carry out informal trade between Pakistan and India through the exchange of goods at the border.
- Using green channel at airports: Everyone is allowed certain personal baggage which is allowed through “green channel” of customs at international airports. This route can be used to carry items for trade.
- Via Afghanistan: Informal trade has also taken place through Afghanistan where goods are exported officially from India and later smuggled into Pakistan. Indian-made goods smuggled into Pakistan include cosmetics, liquor, stainless steel utensils, ayurvedic medicines, videotapes/CDs, confectionery/cashew nuts, tea, coffee, live animals and spices.
Reasons for informal trade:
- Restrictions on import of specific items on grounds of health and religious beliefs
- High tariff barriers or transportation costs - making it cost effective to smuggle goods in the country
- Imposition of non-tariff measures (NTMs) - policy measures other than ordinary customs tariffs like labelling requirements and Sanitary and Phytosanitary Measures.
- Weaknesses in the ‘rules of origin’ - resulting in trade routed through a third country.
- This is because duties and restrictions in several cases depend upon the source of imports, and 'rules of origin' are the criteria needed to determine the national source of a product. For example, if enforcement of 'rules of origin' are weak, Pakistan can route cement trade via a third county that has FTA with both India and Pakistan even as India imposes high customs on import of cement directly from Pakistan.
- Distortions in domestic policies such as the absence of or relatively low indirect taxes, creating an incentive to transport items illegally to neighbouring countries.
- Leakages in transit trade
Why the current trade restrictions on Pakistan may not be impactful
1. Informal trade higher than formal trade:
- Formal trade:
- From 2011-12 to 2017-18, India’s formal trade with Pakistan increased from $1.94 billion to $2.41 billion.
- Informal trade:
- In 2012-13, informal trade between India and Pakistan (estimated in a study by ICRIER) was $4.71 billion, which was double when compared to formal trade.
2. India exports more than it imports from Pakistan:
- Of the formal trade, the share of exports stands at almost 80% and has been fairly stable over the years (as per the Indian Ministry of Commerce and Industry).
- Even in the informal trade, India’s export share to Pakistan is estimate to be much higher (at 85%) than the import share.
- Growth rate also higher for exports:
- Besides, imports from Pakistan grew at a lower rate (1.04%) compared to exports (1.32%) per annum from 2011-12 to 2017-18.
- Major exports from India that would hard hit would be cotton, p-Xylene and polypropylene.
- Pakistan’s loss from major exports to India would be from dates, portland cement, other petroleum oil etc. but the value would be much less.
3. Indian NTMs are more impactful than those of Pakistan:
- Pakistan's NTMs:
- Pakistan imposes a large number of NTMs (143) on Indian exports, the major ones being export related measures, technical barriers to trade and sanitary and phytosanitary measures.
- These are concentrated on agriculture, plants, and food-related products and operate as bans that shut competitors out of its market. However, Pakistan’s NTMs are not effective and it is difficult to use them to provide targeted protection to the strategic industries.
- Indian NTMs:
- In contrast, India’s NTMs are 'soft' barriers which operate as delays or bureaucratic hurdles rather than bans.
- The widely used NTMs India uses include defence procurement procedure, preference to domestically manufactured electronic goods in government procurement’ and a ban on goods largely manufactured within the country.
- India’s NTMs focus on particular industries and trading partners.
- Apart from revocation of MFN status, India also made the follow-up measure to raise tariff duty on imports to 200%.
- The impact of this, as well as other measures like NTMs, on Pakistan will be minimal as imports from Pakistan are low, and informal trade is high.
- In fact, informal trade may proliferate after the current measures, which might not be in India’s interest and an appropriate strategy is required to bring it to a halt.
- Pakistan may also look for new markets beyond South Asia, like Saudi Arabia while also seeking to grow prospects of trade through a third country, mainly via Dubai.
GS Paper II: International Relations
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Section : Editorial Analysis
Why in news?
- Recently, Saudi Arabia’s crown prince Mohammed bin Salman (MBS) visited India.
- This comes as the situation in the Indian subcontinent is tense following the terrorist attack in Pulwama.
Trade between India and Saudi Arabia:
- Saudi Arabia has long been an important Indian trade partner, with the bilateral trade of around $25 billion.
- In 2017-18, the India-Saudi bilateral trade has grew by 9.6 %.
- It is India's 4th largest trade partner (after China, USA and Japan) and is a major source of energy (India imports around 17% of our crude oil requirement from Saudi Arabia).
- Saudi's position in Indian imports and exports:
- Saudi Arabia is the 3rd largest source of India’s imports (close to 5% in 2017-18).
- But it is only the 15th largest market in the world for Indian exports (less than 2% in 2017-18).
- India's position in Saudi's imports and exports:
- For Saudi Arabia, India is the 4th largest market for its exports, accounting for about 9% of its global exports (2017 data).
- In terms of imports by Saudi Arabia, India ranks 7th and is source of around 4% of Saudi Arabia’s total imports.
Shift in India's approach towards Saudi Arabia
- Energy trade has traditionally been the foundation of the India-Saudi relationship, but during the past one decade, there has been a big shift in India’s approach to the Saudi Kingdom.
- India is looking to shift the current buyer-seller relationship (mostly energy related) with Saudi Arabia to a strategic level, with increased focus on security and counter-terrorism cooperation.
- India has many times showed its willingness to cooperate with Saudi Arabia on a variety of security issues such as joint military exercises, intelligence sharing, counter-terrorism, anti-money laundering, and terror financing.
Key Highlights of the news
- Saudi Arabia said it sees opportunity of potential investments worth $100 billion in India in various sectors, including energy, refining, petrochemicals, infrastructure, agriculture, minerals and mining, manufacturing, education and health.
- The two sides signed five pacts to expand cooperation in a range of areas, including trade and investment.
- Both sides decided to set up a Strategic Partnership Council and hold a summit meeting every two years.
- India and Saudi Arabia also agreed on:
- The need to put pressure on countries that back terror
- Share intelligence on counter-terrorism
- The need for UN sanctions on terrorists
- Saudi Arabia has ordered release of 850 Indian prisoners lodged in its jails.
- Saudi Prince has also announced an increase in the quota for Indian Haj pilgrims from 1.75 lakh to 2 lakh.
- As the threat from terrorism is not going to diminish in the near future, India and Saudi Arabia must augment their capabilities to disrupt terrorist networks by working close together.
- The ever-expanding scope of India-Saudi Arabia bilateral relations demands sustained strategic engagement and frequent interactions between the two sides at all levels.
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Section : International Relation
Objective of the article : Learning about the RBI's Payout to the government
- Last year, RBI paid an interim dividend of Rs 10,000 crore to the government.
- Recently, the RBI Board has again approved an interim dividend payout of Rs 28,000 crore to the government.
- It is believed that the interim dividend will help to keep the fiscal deficit at the projected 3.4 per cent of GDP for 2018-19.
Functions of RBI
- The RBI is mandated to keep inflation or prices in check
- It is also supposed to manage the borrowings of the Government of India and of state governments
- RBI supervise or regulate banks and non-banking finance companies
- RBI also manage the currency and payment systems.
Central bank's income sources
- Central bank earns return on its foreign currency assets.
- Interest earned on rupee-denominated government bonds or securities
- Interest earned on lending to banks for very short tenures, such as overnight
- Commission received on management of borrowings of state governments and the central government
- Revaluation of foreign assets and gold
Central bank's main expenses
- Printing of currency notes and on staff
- Commissions to banks for undertaking transactions on behalf of the government across the country and to primary dealers including banks, for underwriting some of these borrowings
- The central bank’s total costs is only about a seventh of its total net interest income, generating a large surplus.
Government's claim over RBI's surplus
- As, the Government of India is the sole owner of the RBI, thus it can make a legitimate claim to this surplus.
- RBI generates more surplus than the entire public sector put together.
- Out of the total surplus, RBI sets aside some as equity capital to maintain its creditworthiness and pays remaining surplus to the government under the provisions of Section 47 of the Reserve Bank of India Act, 1934.
- By paying to the government as dividend, the RBI is putting back into the system the money it has made from it.
- The payout of government is done in early August, after the completion of the bank’s July-June accounting year.
Paying Extra dividends to government
- When the RBI pays an additional dividend to the government, it has to create additional permanent reserves by printing more money.
- In order to maintain the balance, the RBI would have to withdraw an equivalent amount of money from the public by selling government bonds in its portfolio.
Why does a central bank need capital?
- The Central banks that have foreign assets need capital to absorb potential losses.
- The RBI needs capital to shield the economy from monetary and financial shocks.
- In case of unstable governments, monetary authorities carry a bigger burden. A Central bank would need more capital in such a situation.
- A central bank needs reserves to perform functions such as price and exchange stability.
- The reserves give independence to a central bank. Low capital will force central bank to turn to government in time of need. This will give government influence over the central bank.
Is there a right level of reserves?
- The RBI Act does not specify the amount to be transferred to the government.
- There is no consensus on the right level of capital for a central bank.
- Unlike a private bank, a central bank can work with a negative net worth too.
Transfer of large payouts not in interest of central banks
- Large payouts can limit central banks ability to create buffers that would provide a cushion in case of crisis.
- Keeping some surplus with the central bank helps in maintenance of their financial stability and automony.
Relation between demands for an interim dividend and government finances
- During periods of high growth, the government doesn’t make such demands, as there is no need of asking extra surplus from the RBI.
- Thus, demand of extra surplus indicate that government finances are under pressure.
Global practice on payment of surplus by central banks
- Almost all central banks in the world are owned by their respective governments, and have to transfer their surplus or profits to the Treasury, or the equivalent of India’s Finance Ministry.
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Section : Economics
- A global analysis on the estimate of elimination of cervical cancer is published in the journal ‘The Lancet Oncology’.
About cervical cancer and HPV vaccine
- Cervical cancer is a cancer arising from the cervix, which is due to the abnormal growth of cells that have the ability to invade or spread to other parts of the body.
- Infection with some types of Human papillomavirus (HPV) is the greatest risk factor for cervical cancer, followed by smoking.
- Human papillomavirus (HPV) is a group of more than 150 viruses responsible for majority of cervical cancers.
- Worldwide, cervical cancer is both the fourth-most common cause of cancer and the fourth-most common cause of death from cancer in women.
- Cervix is the second most common site for cancer in Indian women, preceded only by breast.
- One fourth of the world’s cervical cancer burden is in India and more Indian women die of cervical cancer than in any other country in the world.
- HPV vaccines protect against high-risk strains of this family of viruses and may prevent up to 90% of cervical cancers.
- Two HPV vaccines (Gardasil and Cervarix) reduce the risk of cancerous or precancerous changes of the cervix and perineum by about 93% and 62%, respectively.
- The vaccines are effective between 92% and 100% against HPV 16 and 18 up to at least 8 years.
- According to National Health Portal-India has a population of 436.76 million women aged 15 years and older who are at risk of developing cervical cancer.
- Every year 1,22,844 women are diagnosed with cervical cancer and 67,477 die from the disease.
- In India cervical cancer is the second most common cancer among women and also the second most common cancer among women between 15 and 44 years.
- The National Technical Advisory Group on Immunistation (NTAGI) approved the HPV vaccine for inclusion in the universal immunisation programme of India by 2020.
- India has also just started screening for cervical cancer in health and wellness centres under the Ayushman Bharat programme.
Highlights of the global analysis on cervical cancer
- The analysis published in the Lancet Oncology estimates that introduction of HPV vaccine and cancer screening could eliminate cervical cancer as a public health problem.
- The estimates of the study published are as follows:
- The study predicts that 44.4 million cervical cancer cases would be diagnosed over the next 50 years due to population growth and ageing.
- Treatment and outcome
- The study suggests that combining the vaccine and screening in all countries from 2020 onwards could prevent up to 13.4 million cases of cervical cancer within 50 years - or by 2069, eliminating cervical cancer as a public health problem.
- The study estimates that if the average rates of declining cervical cancer continues across countries it will fall down to less than 4 cases per 1 lakh.
- India specific highlights
- Indian rates are declining at 3.8% per year.
- It is assumed that this rate will dampen over time and will plateau to 0% change per year by 2030.
- Further with this rate cervical cancer can be eliminated in India by 2079.
- The estimates are the first of their kind at a global scale.
- Majority of cases prevented with HPV vaccine and screening would be in countries with low and medium levels of human development like India, Nigeria, and Malawi.
- HPV and screening are proven cervical cancer interventions in the world and investing in these interventions is an opportunity for poor countries.
- If the countries fail to adopt these measures they will have to face millions of avoidable premature deaths.
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Section : Social Issues
- The National Physical Laboratory has developed an ‘invisible ink’ that could potentially replace the use of ‘indelible ink’ in elections in many countries.
- The ‘indelible ink’ used in Indian elections is developed by National Physical Laboratory.
- The ‘indelible ink’ was first used in the 3rd general election held in 1962 in order to check the rampant fraudulent double voting.
- Now the National Physical Laboratory has developed an ‘invisible ink’ which is likely to replace ‘indelible ink’ in many countries, especially in Europe.
Invisible Ink: How does it work?
- The ‘invisible ink’ is a transparent liquid made out of a mixture of both organic and inorganic materials.
- The material in the invisible ink when exposed to a certain specific frequencies of ultraviolet light, it glows.(Fluorescence)
- Since the invisible ink glows upon exposure to only a narrow band of frequencies of UV light, an LED emitting those specific frequencies of UV light is also delivered along with it.
- Further the invisible ink is biodegradable in nature and can be washed off in 48 hours.
- As security inks in case of bank notes, passports etc
About Indelible ink
- The currently used indelible ink is made out of unknown composition with traces of silver nitrate which is photo-sensitive.
- When silver nitrate is exposed to sunlight or even artificial light, it leaves a trace by darkening the skin.
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Section : Miscellaneous
- The Indian Air Force got the much awaited full operational capability (FOC) certification for Tejas Mark-1 from DRDO.
- Accordingly the Tejas Mark-1aircraft in the FOC configuration is ready with combat capabilities.
- In January 2019, the HAL was given the nod to start the production of Tejas Mark-1 in FOC configuration.
- The FOC certification was granted by CEMILAC- an authorized laboratory of the DRDO responsible for certifying military aircrafts and airborne systems.
- FOC certification will now mean that the Tejas Mk 1 being manufactured by HAL currently is combat-ready and thus can be inducted in the IAF.
- The strategic objectives of IAF include:
- Deterrence on ‘two fronts’ including Pakistan and China
- Offensive Defence posture
- Enhanced Air Defence capability
- Enhanced combat force levels
- Increased surveillance and automation of Air Defence
- However the IAF has been facing a severe shortage of fighter aircrafts with its current strength reduced to 32 squadrons against the sanctioned strength of 42.
- Further the combat aircrafts MiG 21 and MiG 27 of the IAF are due to retire by 2025. This will further shrink the squadron strength of IAF.
- In this backdrop the IAF placed the order for 40 Tejas Mk-1 which is expected to be delivered by 2023.
- 20 out of 40 Tejas Mk-1s shall be in the FOC configuration making them combat-ready.
About Tejas Light Combat Helicopter
- Tejas LCA is a 4th generation fly-by-wire, supersonic, single-seat, single-engine multirole light fighter aircraft.
- Tejas LCA was inducted in Indian Air Force in 2016 and commenced formal operations in 2018.
- The Aeronautical Development Agency of DRDO is responsible for designing and development of Tejas LCA.
- Tejas Mk-1 is a weaponised version of Tejas LCA indigenously developed to replace ageing MIG-21of IAF.
- The FOC configuration of Tejas Mk-1 which is combat-ready has the following upgraded features
- AESA Radars (active electronically scanned array radars): The AESA radars procured from Israel will help in engaging multiple air and ground targets simultaneously without getting detected.
- Mid-air refueling capabilities
- Electronic warfare suites
- Bombs and weapons etc
- Tejas Mk-1(initial operational clearance version) was tested for air-air combat capabilities in the recently held Vayushakti exercise in February 2019 and Gaganshakti of April 2018.
- Tejas Mk-1 is expected to replace the decreasing IAF squadron fleet strength. However the production rates of HAL is extremely low.
- In order to meet the requirement of 40 Mk-1s by 2023, HAL needs to manufacture 8 Mk1s every year. This requires a second line of production for HAL which is planned in Nashik.
- In order to keep up with the decreasing squadron strength, we need to increase the production rate.
- This can be done by involving private players in the production of Tejas Mk1, Mk-1A and Mk2.
- Expedite the setting up of additional production line of HAL.
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Section : Defence & Security