IBPS PO -SBI PO INTERVIEW BSC SEPTEMBER 2018 CURRENT TOPICS DESCRIPTIVE

Current Topics

MSP of 14 kharif crops raised

The minimum support price (MSP) announced by the Cabinet Committee on Economic Affairs for 14 kharif crops, is the highest ever one-year rise, with prices set at a minimum of 1.5 times the cost of production. It will cost the exchequer an estimated  12,000 – 15,000 cr annually. Although there are 24 crops for which MSP has been raised (14 kharif and 10 rabi), procurement is effective only in paddy, wheat and cotton.

The decision to raise the MSP of 14 kharif crops reflects the pre-election pressures, not farm efficiency imperatives. It would add marginally to inflation and the fiscal deficit. While the promise of hiking the MSP by 1.5 times was undoubtedly successful in attracting farmers to vote BJP in the 2014 elections, the increase has finally been announced four years later, less than a year before the next general elections. More damagingly, it would make Indian cotton and yarn unexportable without subsidy and distort the cropping pattern.

The MSP regime was instituted in 1965, with the aim of boosting food production and protecting farmers from any sharp fall in market prices. It is a form of market intervention by the govt to insure farmers and agricultural producers against any sharp fall in farm prices. Agricultural scientist MS Swaminathan had in his 2006 report laid out a ‘holistic national policy for farmers’. “MSP,” he spelt out, “should be at least 50 per cent more than the weighted average cost of production.” Thus he ended up laying the template for calculating MSP. Farmers’ organizations swear by the Swaminathan formula. However, the govt did not ever accept the Swaminathan formula.

The MSP for rice has been raised by 13 per cent, a signal to raise its acreage at a time when huge stocks rot with the govt. Ditto for pulses. The govt says designated agencies will continue to procure oilseeds and pulses. This will further jack up costs – these include storage, transport, spoilage and market levies – in addition to procurement costs. The govt must procure only to maintain the minimum buffer norm, and allow private trade to procure and distribute grain.

Liberal MSPs put the crop choice for farmers in disarray, make production inefficient and are not sustainbale. Providing direct income support to farmers is better option to avoid market distortions. The govt should step up productivity enhancing investment in agriculture. The need is to create market linkages, free farmers from the stranglehold of middlemen, and institute organized retail to raise competition. India also needs a robust futures market.

Project Sashakt

With the banking sector’s bad-loans problem spiraling to epic proportions, public and private sector bank officials hashed out a new framework to deal with the crisis. The Inter-Creditor Agreement (ICA) framework, which envisages effective communication among lenders and lays down some ground rules for multiple-banking arrangements and consortium lending, will now be taken to boards of all the banks. ICA is a part of the recently announced Project Sashakt, the five-pronged strategy to deal with non-performing assets (NPAs) recommended by the Sunil Mehta-led committee.

Project ‘Sashakt’ offers little by way of any actionable plan to tackle the issues at hand. The committee’s five-pronged strategy is nothing but a shoddy attempt to politicize cleaning up of banks’ balance sheet and state the obvious, after the initial intent of setting up an asset reconstruction company to take over bad loans ran aground.

Although ICA will be voluntary for banks, the mechanism is reportedly expected to iron out the problems faced in consortium lending, help the banks work as a team and not in silos, and remove procedural glitches to ensure timely availability of credit to enterprises. Project Sashakt comes at a time when bad loans of the 38 listed banks collectively crossed  10.17 lakh cr in the Mar quarter, and the RBI expects the Gross NPA (GNPA) ratio to rise further. The idea behind Project Sashakt is to ensure the operational turnaround of the banks and stressed companies so that the asset value is retained. The resolution process suggested by the committee will also help bring in credible long-term external capital to limit the burden on the domestic banking sector while ensuring robust governance and credit architecture to prevent a similar build-up of non-performing loans in the future.

Most of the Mehta committee’s recommendations are largely aimed at deferring the inevitable, rather than resolving the NPA mess. For instance, for loans up to 50 cr, the panel has suggested a steering committee within the bank to resolve it within 90 days. But by giving this extension for resolution, the panel has subverted the RBI’s circular that mandated the banks to report a bad loan to RBI by the 91^st day and plan to take it to insolvency thereafter. Surprisingly, it has even suggested giving additional loans to revive the asset.

Similarly, for loans of 50-500 cr, the panel has suggested another bank-led resolution within 180 days. This process already exists under the Insolvency and Bankruptcy Code. By giving another 180 days, the panel has provided a buffer to the defaulting company when their default and non-performing asset has already been recognized. So while Project Sashakt certainly provides a breather from the tough bankruptcy code, it is questionable whether it will end up making banks stronger.

Rupee slumps to all-time low

After an extraordinarily smooth ride in 2017, the Indian currency rupee has been on a steady decline since Apr and crashed to a life-time low in the recent time. A sudden outrush of foreign investors triggered by the US Federal Reserve signaling a tighter monetary policy further complicated the challenges of managing currency markets. Escalating trade tensions too weighed on the trading front.

The rupee stands out as one of the most vulnerable and worst-performing currencies in Asia with an almost 8 per cent fall in the value against the resurgent dollar bull. The greenback has rallied since new Federal Reserve Chairman Jerome Powell delivered upbeat testimony to lawmakers. His acknowledgment of stronger US economic growth fuelled speculation the central bank may raise interest rates as many as four times this year.

A weak rupee against the dollar makes imports costlier. Some imports cannot be cut down such as oil, which can negatively affect India’s current account deficit. Costlier oil means costlier vegetables and groceries since transportation costs go up. Weak rupee also makes education and holidays in foreign countries more expensive. The goods that use imported components such as computers, smartphones and  car also get more expensive. All import-based industry and trade suffer.

India’s current account deficit (CAD) widened to $13.5 bn during the third quarter of 2017-18 from $7.2 bn in the second quarter and $8 bn in the corresponding period in 2016-17. A higher CAD puts pressure on rupee as demand for dollar rises to make payments for the additional imports done for the Indian economy. This leads to more dollar purchases by the govt to pay its bills. That leads to a dent in the value of the local currency further.

With India importing most of its oil needs, any rise in crude-oil prices means more dollars are needed to buy the same amount of oil. And as US interest rates go up, investors who borrowed at a cheaper rate find returns from investing in India not worth the risk. If US G-Sec returns at 1.5 per cent made buying Indian G-Secs at 7 per cent a good investment, US yields at 3 per cent make Indian bonds at 8 per cent less attractive. Dollar inflows from foreign institutional investors (FIIs), which have been supporting the rupee in the last three years, have dried up. So far in 2018. FIIs have pulled out  46,197 cr from the Indian markets.

Now one question arises here : Is a weaker rupee bad for the economy? Experts opine that not necessarily. The rupee is still overvalued, according to the 36-country Real Effective Exchange Rate (REER) calculation. REER is currency value adjusted for inflation. RBI data shows the rupee is overvalued by 14.67 per cent as of May. A weaker rupee may give exports a boost as they become cheaper.

LIC-IDBI Bank deal

How is an insurance company that has no major prior experience in handling banking business taking over one of the worst-performing banks? Beginning with the Congress-led United Progressive Alliance (UPA) era, the Centre has been scouting for potential buyers for smaller state-owned banks to push ahead with its privatization agenda. This was after several experts, including the PJ Nayak committee, had recommended that the govt exit its majority stake in state-run banks. Yet, nothing worked as there was no special interest from the private sector to take ownership of badly governed, inefficient and NPA – ridden state-run banks.

The Life Insurance Corporation of India’s (LIC) plants to increase its stake in the state-owned IDBI Bank have raised quite a few eyebrows in recent days. Experts say LIC is hardly going to gain any advantage from this investment, but it could give a huge lifeline for the ailing IDBI Bank and address some of its capital requirements. LIC already holds around 11 per cent stake in the state-owned lender.

The Insurance Regulatory Development of India (IRDAI) on Jun 29 allowed the state-owned life insurance giant to increase its stake in IDBI Bank. Under the proposal, LIC could raise its stake to about 51 per cent, and will have to inject over  10,000 cr in the bank.

IDBI Bank could undoubtedly be the biggest beneficiary of this deal. The lender, hit by huge non-performing assets and higher provisions for the same, reported a net loss of  8,238 cr in 2017-18. This was higher than the net loss of 5,158 cr in the previous financial year.

Also, by bringing in LIC as an investor in IDBI Bank, the govt could also benefit to the extent that it would not have to provide the bank with the capital requirements now, and in turn that much amount could be diverted to other state-owned lenders in need. It believes the deal could be done under the policyholder’s accounts of LIC and hence even a 51 per cent stake in IDBI Bank will not make it a subsidiary of LIC.

Many see this as a clear bailout of the distressed lender by LIC, and the insurer is unlikely to gain any advantage. Rather, the lender would continue to require more capital if slippages increase as its common equity tier I (CET 1) ratio stood at 7.42 per cent at the end of Mar, barely above the required 7.37 per cent.

As the IDBI Bank promoter, it can look at cross-selling its products to bank customers and manage IDBI Bank just like it treats LIC Housing Finance. But, unlike the housing finance arm, it is getting into multiple problems by picking a majority stake in one of the most problematic banks in India. The bank is already under the prompt corrective action (PCA) plan of the Reserve Bank of India (RBI) on account of its financial ill-health. Neither does the RBI expect it to come out of PCA before 2020-21.

Higher Education Commission

India’s higher education system needs thorough overhauling for five reasons: (a) to catch up with the global higher education order and be relevant to changing times; (b) to integrate it with the job market more effectively; (c) to stop the discriminatory functioning style; (d) to universalize the global and domestic best practices in the curriculum; and (e) to protect the system from politicization and to introduce new methods of accountability.

The University Grants Commission (UGC), which currently overseas this rotten system, is to be replaced by a new Higher Education Commission of India (HECI) to correct all the existing defects. But the HECI Bill has not set out how it is going to meet the challenges.

The HECI plan does well to justify the new bill, the failures of the system, changes in the global economy, employment issues and strategies for arresting discriminatory curriculum, but except for declaring lofty ambitions like uniform development of quality and standard higher education in the preamble, it has not looked deeper into the daunting issues to confront.

In the composition of the HECI, its chairman and vice chairman are to be salaried and full-time individuals, selected by a common search committee. The other members hold office for five years on honorary basis. To achieve objectivity, it would be ideal to appoint a retired Central university vice chancellor as chairman and an eminent scholar from other research institutions of national importance as vice chairman. Similarly, to cover all segments of the system, it would be ideal to have directors from institutes of repute and two/three industry leaders. These people should have proven record in upholding the ethos and principles of natural and social justice. There should also be secretaries from the Department of Higher Education, Skill Development and Entrepreneurship, Science and Technology and Social Justice and Empowerment.

The objective of the HECI is to be a “think tank” that guides the course of higher-education administration. It should pave the way for achievement of social objectives like inclusiveness and enhancing enrolment. It should work holistically to bring back universities to their traditional role as centres of knowledge production, knowledge dissemination and teaching centres, rather than centres for breeding casteist politics.

So, the proposed commission should stand to achieve, among other things, common national curriculum for Central and State universities; compulsory revision of the curriculum every five years; multi-disciplinary approach in curriculum design, with advanced academic knowledge, research component and industry requirement for each discipline; and regular and frequent teachers’ training.

Govt embraces net neutrality

Even as the US gets set to roll back laws protecting net neutrality, the Telecom Regulatory Authority of India (TRAI) released comprehensive recommendations that experts say signal a clear commitment to the principle of neutrality and could count as some of the strongest regulations in the world. Net neutrality is the idea that internet service providers must treat all data on the internet equally, which means they cannot choose to speed up or slow down a particular service or charge different rates for different kinds of data. The regulator has recommended that no internet provider should be allowed to slow down or speed up a website or service. A fast lane would allow an internet provider to load, say, Hotstar faster than another service like Netflix. Conversely, allowing this would be equivalent to letting providers slow down certain websites. Thus, there can be no fast lanes.

The Central Govt has taken its first stab at framing net neutrality rules. The Telecom Commission accepted all the recommendations that the telecom regulator had made in a report submitted in Nov 2017. The move caps three years of contentious debate on a somewhat slippery concept on which no two people can ever agree on an acceptable definition. In May 2015, a committee established by the Department of Telecommunications (DoT) had drafted a report on the subject which suggested that there was no need to ‘hard code’ the definition of net neutrality, but instead to embrace its core principle that all internet traffic should be treated equally. The ball was then lobbed to TRAI, which came out with its recommendations that effectively prohibited internet access service licensees from entering into any arrangement that would promote discriminatory treatment of content. On the face of it, it now looks all hunky-dory. The new net neutrality rules will ban data throttling, blocking and zero-rating like Facebook’s Free Basics.

 But this will not solve a deeper, technological problem. In its report, the DoT committee had identified two problems: first, bandwidth is not an infinite resource and, therefore, users must expect some choking in data flow. Second, data packets that flow through the dump pipes of the internet are not equal. A packet of data for an email has different characteristics from that carrying video information, and the network will handle them differently. That is why the regulator said content delivery networks – a system of servers that is designed to deal with data congestion – have also been left out of the scope of net neutrality restrictions. Telecom service providers also use certain traffic management practices to improve network performance. TRAI has said it will come up with separate regulations for reasonable deployment of such network-enhancing practices. It remains to be seen whether such exclusions will undermine the concept of net neutrality altogether.

Trump’s trade war

After four months of negotiation and tit-for-that threats, US President Donald Trump’s trade war on China finally broke out on Jul 7, when a 25 per cent tariff began to be levied on $34 bn worth of Chinese goods. The US administration has threatened another $200 bn worth of Chinese imports with a 10 per cent tariff.

Will Donald Trump’s  trade war trip the economy into a recession? The White House has initiated a rapidly escalating global tit for tat, with thousands of products from the US, China, Canada, Mexico, and Europe now affected or threatened by tariffs. The price of imported goods is increasing. The demand for exported goods is falling. American businesses are laying workers off, and some are warming of bankruptcy.

On the surface, the trade war was directly initiated with a US Trade Representative (USTR) investigation into China’s theft of US companies’ intellectual property (IP). However, the picture is much more complex. As early as Jan 2018, when the IP theft problem had not fully come to the media’s attention, the Trump administration imposed a 30 per cent tariff on imported solar panels, which were mostly made in China. In Feb, the US Commerce Department initiated investigations on pipe fittings imported from China and anti-dumping duties went into effect. Two weeks later, China’s aluminum foil faced the same fate. These measures eventually led to Trump’s biggest tariff declaration in Mar. Since then, tension between the world’s two largest economies has escalated.

In order to fully understand the current trade war between the two sides, it’s also critical to put it in the larger context of US-China relations. Ever since China began its rise, the “China threat debate” has persisted, with engagement or containment as the two strategic options for the US. The Clinton administration took the engagement approach. As former President Bill Clinton once explained, to engage China can push it to “accelerate its internal reforms and propel it toward acceptance of the rule of law.” After China gained WTO membership in 2000, Clinton further claimed China “is agreeing to import one of democracy’s most cherished values: economic freedom.”

However, after decades of engagement, China has not reached the level of economic and political liberalization many had expected. All the while, it has become the second largest economy in the world, thus fuelling the China threat perception. Against this backdrop, the trade war can be viewed as a paradigm shift of Washington’s China policy. Along with other recent developments in the US policy, such as the Taiwan Travel Act passed in Feb, the trade war is part of a much larger strategy of hedging. Once we realize that it is not merely a trade war, we can appreciate the very real potential for the large-scale conflict.

Erdogan re-elected in Turkey

Recep Tayyip Erdogan, who was re-elected as President of Turkey in Jun, is among those leaders, such as Vladimir Putin of Russia and Viktor Orban of Hungary, who are using the levers of democracy to vastly expand their authority. Against a backdrop of widespread repression and a weakened economy, President Erdogan was reelected, while his alliance won a majority in the parliament.

Formerly the Prime minister, Erdogan was elected President in 2014 and, after a failed coup in 2016, persuaded voters to change the constitution to transform the once-ceremonial job into a position with executive control of the govt. In the days since, he has issued several equally length decrees and presidential decisions, centralizing power and giving him the ability to exert control in nearly all areas of life with almost unchecked authority. None of the amendments Erdogan decreed were subjected to public debate before becoming law.

The vast accumulation of power fulfils Turkey’s shift to the presidential one. The voluminous decrees, analysts say, promise months of administrative upheaval as agencies are abolished and govt employees reassigned. In practice, however, the nature of Erdogan’s role will change little, since he already informally exerted far more power than his position had technically allowed.

When he first came to power in 2003, Erdogan brought Turkey closer to Europe – by accelerating membership negotiations with the EU – and sought a historic settlement with the country’s Kurdish minority. But to maintain the support of nationalist voters in recent years, he has increasingly picked fights with European politicians, led a campaign of repression in Kurdish areas, and drawn increasingly close to Putin.

Erdogan has always been very anti-Syrian regime, anti-Assad. He is not going to change that position. However, partially because of deteriorating relations with the US, Erdogan has gotten closer to the Russians – and the Russians have played a very good game with Turkey. The Russians know how to create, take advantage of, or deepen fissures between the US and Turkey. Moreover, Putin has included Erdogan in the Astana peace process, which means Erdogan is essentially one of the three important figures in the future of Syria.

Erdogan’s victory was partly the outcome of his alliance with a far-right party, the Nationalist Movement Party, with anti-western and anti-Kurdish views Erdogan must continue to accommodate. It is also bad news for the US-backed Syrian Kurdish forces that have carved out an independent enclave in northern Syria, which Erdogan regards a threat to Turkish security. Emboldened by his Victory, Erdogan may see no reason to abandon his strategy of chasing the Syrian Kurds away from key areas of northern Syria.

Thailand cave rescue

On 23 Jun, a group of twelve boys aged 11 to 17 from a local junior football team, Wild Boars, and their 25-year-old assistant coach, Ekapol Chantawong, went missing after setting out to explore the Tham Lunag Nang Non caves in Chiang Rai, near the Myanmar border. The lush forests of northern Thailand are home to hundreds of caves that attract visitors, but Tham Luang Nang Non is deeper and more dangerous than most, and especially treacherous during the rainy season.

Park officials and police began a major search operation on Jun 24 even as heavy rain fell. Thai navy Seal divers entered the cave the next day searching for the boys, carrying oxygen tanks and food. On Jun 27, more than 30 US military personnel from the US Pacific Command arrived at the site, joined by three British diving experts. The rescue operation finally became successful when the boys and their coach were rescued on Jul 10.

Before the rescue operation, the situation had seemed impossible. The boys and their coach were trapped deep in a flooded cave, their oxygen supplies dwindling and torrential rain on the way. After mission accomplishment, Thailand was jubilantly celebrating the rescue of all 13, an audacious undertaking that swelled national pride – but also gratitude and humility for an operation that was an international effort. The Thai Govt called it a model for global cooperation.

It had been a daring operation, in which children equipped with diving gear – some of the boys had to be taught to swim – were ushered through a dangerous tunnel system that would challenge the most experienced divers. Rescue mission chief Narongsak Osottanakorn said the operation offered a lesson to the world – the lesson of loving each other.

After the boys went missing, there was alarm they might never be found in the labyrinthine cave complex. Once they were located, authorities thought the children might have to be supported underground until the end of the monsoon season, months away, amid fears about the difficulties of teaching them how to swim through jagged rock tunnels filled with rapidly flowing water with near-zero visibility. The go-slow plan had to be abandoned as the oxygen levels in the underground cave depleted dangerously.

One of the keys to the success of the mission was a vast pumping operation with the help of Indian experts from Kirloskar that saw millions of gallons of water removed from the cave, flooding nearby farmland. As soon as the rescue mission was complete, the teams were deployed to pump the water away from the farms. The coach, who earlier apologized to families for his role leading the children into the caves so close to the monsoon season, was among the last to leave.

World Cup football

It has been a successful event of celebration of football with the Russia World Cup reaching new heights as the country has been most welcoming to all, creating an atmosphere of festivity, which has been backed by some great on-field action. The tournament, a resounding off-field success, has also witnessed a European domination with two traditional South American powerhouses knocked out in the last-16 and the quarterfinal, while Japan was the only Asian country to make it to the knockouts.

The 2018 FIFA World Cup was the 21^st edition of the international football tournament contested by the men’s national teams of the member associations of FIFA once every four years. It took place in Russia from 14 June to 15 July. It was the first World Cup to be held in Eastern Europe, and the 11^th time that it had been held in Europe. At an estimated cost of over $14.2 bn, it was the most expensive World Cup ever.

It was also the first World Cup to use the video assistant referee (VAR) system. VAR is a football assistant referee who reviews decisions made by the head referee with the use of video footage and a headset for communication. In 2018, VARs were written into the Laws of the Game by the International Football Association Board (IFAB).

The finals involved 32 teams, of which 31 came through qualifying competitions, while the hosts qualified automatically. Of these, 20 had also appeared in the last tournament in 2014, while both Iceland and Panama made their first appearances at a FIFA World Cup. A total of 64 matches were played in 12 venues across 11 cities. For the first time in the history of the FIFA World Cup, all eligible nations – the 209 FIFA member associations minus automatically qualified hosts Russia – applied to enter the qualifying process.

There were 169 goals scored in 64 matches, for an average of 2.64 goals per match. Twelve own goals were scored during the tournament, doubling the record of six set in 1998. The Golden Ball was won by Croatia’s Luka Modric and the Golden Boot by England’s Harry Kane for scoring six goals in the tournament. The final took place on 15 July at the Luzhniki Stadium in Moscow between France and Croatia. France won the match 4-2 to claim their second World Cup title, marking the fourth consecutive title won by a European team.

As for Russia, despite the blip on the final day, the host of the 2018 edition will stand out for setting new standards of organization. The Putin administration’s decision to waive the visa fee and make public transport free for visiting fans was, ironically, among the most democratizing moves ever seen in the context of a World Cup. The World Cup is about the host and a consolidation of its interests. The agendas of those on the outside matter, but are secondary; as Russia has shows, even the pan-global force that is FIFA can be made to dance to a tune.

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