News 1: Rupee slides to new low of 80.79 on Fed rate increase, stance
Background:
- The Indian rupee on Thursday weakened sharply against the dollar to a new record low in the wake of the U.S. Federal Reserve increasing interest rates by 75 basis points and signaling more such steep increases in the future.
- The rupee depreciated by 83 paise to close at 80.79, suffering its biggest single day fall since February 24, when Russia invaded Ukraine.
Reason behind the fall:
- Due to rise in dollar index, rupee and other major currencies will come under pressure
- Depreciating rupee is unattractive to foreign portfolio investors
Steps that can be taken to arrest the slide:
- Curbs on imports of non-essential goods
- Reduction in thresholds on aggregate overseas investments by resident Indians
- Mandates for exporters to quicken their remittances
- Asking importers to sell dollars directly to oil marketing companies
- Easing norms for foreign portfolio investment in debt market
- Increasing the external commercial borrowing limits under automatic route
- Temporarily abolishing interest-rate caps for banks to attract deposits from non-resident Indians.
News 2: Telecom bill moots licensing of OTT apps, dues waiver
Background:
- The government has released the draft of ‘The Indian Telecommunication Act, 2022’ wherein it has proposed several significant changes, including provisions for waiving off dues for financially stressed operators, bringing over-the-top (OTT) platforms (such as WhatsApp, Zoom, Netflix) within the ambit of telecom services that require a license to operate, and provisions for message interception in case of public emergency.
- The Bill, released late on Wednesday inviting comments from stakeholders, seeks to replace the existing framework comprising the Indian Telegraph Act, 1885, the Wireless Telegraphy Act, 1933, and the Telegraph Wires (Unlawful Possession) Act, 1950, that govern the sector.
The Indian Telecommunication bill:
- The explanatory note said the Bill aims to consolidate and amend laws governing provision, development, expansion and operation of telecom networks and infrastructure, and spectrum assignment.
- The Bill proposes a framework to address defaults in payment by a licencee, whereby under “extraordinary circumstances”, the government may allow for deferred payment, conversion of a part or all of it into shares in the licencee or even write-offs.
- The Bill also simplifies the framework for mergers, demergers and acquisitions, for which the entities would need to comply with norms under the Companies Act, 2013, and only need to inform the telecom department.
- Noting that telecom users wish to know who was calling them, the Centre said it had included provisions related to identity to help prevent cyberfrauds using telecom services.
- The draft Bill had provided clarity on two critical aspects: insolvency proceedings for stressed telecom companies and bringing OTT platforms and Internet Service Providers (ISPs) under the umbrella of the Ministry of Telecommunications.
News 3: Central govt. signs ₹1,700-cr. deal for BrahMos missiles
Background:
- The Defence Ministry on Thursday signed a ₹1,700-crore contract with BrahMos Aerospace Pvt Ltd for 35 combat and three practice BrahMos supersonic surface-to-surface cruise missiles for two P-15B class of stealth guided missile destroyers of the Indian Navy.
BrahMos missiles:
- BrahMos is a joint venture between the DRDO and Russia’s NPO Mashinostroyeniya and the missile derives its name from Brahmaputra and Moskva rivers.
- Flight range of missile: 290 km with supersonic speed all through the flight
- BrahMos is a two-stage missile with solid propellant booster engine as its first stage and liquid ramjet in second stage which takes the missile closer to 3 Mach speed in cruise phase.
- It operates on Fire and Forget principle, adopts varieties of flights on its way to the target and due to its large kinetic power n impact has increased its destructive power. It can carry a conventional warhead weighing between 200 – 300 kgs.
News 4: NCC and UNEP sign MoU on tackling plastic pollution
Background:
- The National Cadet Corps (NCC) and United Nations Environment Programme (UNEP) in New Delhi on Thursday signed a Memorandum of Understanding (MoU) to tackle the issue of plastic pollution and achieve the universal goal of clean water bodies through Puneet Sagar Abhiyan and ‘Tide Turners Plastic Challenge programme’.
- The aim is to synergise and collate efforts towards engaging youth for promoting clean water bodies.
UNEP:
- Established: 1972
- Headquarter: Nairobi, Kenya
- Members: 193
- United Nations Environment Programme (UNEP) has been the global authority that sets the environmental agenda, promotes the coherent implementation of the environmental dimension of sustainable development within the United Nations system and serves as an authoritative advocate for the global environment.
- Objective:
- UNEP works on delivering transformational change for people and nature by drilling down on the root causes of the three planetary crises of climate change, nature and biodiversity loss, and pollution and waste.
- UNEP employs seven interlinked subprogrammes for action: Climate Action, Chemicals and Pollutions Action, Nature Action, Science Policy, Environmental Governance, Finance and Economic Transformations and Digital Transformations.
- Through its campaigns, particularly World Environment Day, UNEP raises awareness and advocates for effective environmental action.
UNEP hosts the secretariats of several multilateral environmental agreements and research bodies, including
- The Convention on Biological Diversity (CBD),
- The Minamata Convention on Mercury,
- The Convention on Migratory Species and The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES).
In 1988, the World Meteorological Organization and UNEP established the Intergovernmental Panel on Climate Change (IPCC).
UNEP is also one of several Implementing Agencies for the Global Environment Facility (GEF) and the Multilateral Fund for the Implementation of the Montreal Protocol
News 5: What US Fed’s latest rate hike means, and what to expect in the future
Background:
- “My colleagues and I are strongly committed to bringing inflation back down to our 2% goal. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses,” a sombre US Federal Reserve chair Jerome Powell.
- Powell also signalled a further intensification of the American central bank’s fight against runaway inflation in the coming months.
Relation between Inflation and interest rate hikes:
- Interest rate hikes are the primary monetary policy tool used by central banks to tackle sporadic spurts in inflation.
- When interest rates go up in an economy, it becomes more expensive to borrow; so households are less inclined to buy goods and services, and businesses have a disincentive to borrow funds to expand, buy equipment or invest in new projects.
- A subsequent lowering of demand for goods and services ends up depressing wages and other costs, in turn, bringing runaway inflation under control.
- Even though the linkages of monetary policy to inflation and employment are not direct or immediate, monetary policy is a key factor in tackling runaway prices.
Impact across markets:
- The Fed’s primary tool of monetary policy is the federal funds rate, changes in which influence other interest rates — which in turn influence borrowing costs for households and businesses, as well as broader financial conditions.
- Theoretically, a signal to hike policy rates in the US should be a negative for emerging market economies, especially from a debt market perspective.
- Emerging economies such as India tend to have higher inflation and, therefore, higher interest rates than in developed countries. As a result, investors, including Foreign Portfolio Investors, tend to borrow in the US at lower interest rates in dollar terms and invest that money in the bonds of countries such as India in rupee terms to earn a higher rate of interest.
- When the Fed raises its policy rates, the difference between the interest rates of the two countries narrows, thus making countries such as India less attractive for the currency carry trade.
- A high-rate signal by the Fed would also mean a lower impetus to growth in the US, which could be yet negative news for global growth, especially when China is reeling under the impact of a real estate crisis and a lockdown-induced downturn.
- Higher returns in the US debt markets could also trigger a churn in emerging market equities, tempering foreign investor enthusiasm. There is also a potential impact on currency markets, stemming from outflows of funds.
Other important news
5G:
- 5G is the 5th generation mobile network. It is a new global wireless standard after 1G, 2G, 3G, and 4G networks.
- 5G enables a new kind of network that is designed to connect virtually everyone and everything together including machines, objects, and devices.
- 5G wireless technology is meant to deliver higher multi-Gbps peak data speeds, ultra low latency, more reliability, massive network capacity, increased availability, and a more uniform user experience to more users.
- Higher performance and improved efficiency empower new user experiences and connects new industries.
- While earlier generations of cellular technology (such as 4G LTE) focused on ensuring connectivity, 5G takes connectivity to the next level by delivering connected experiences from the cloud to clients. 5G networks are virtualized and software-driven, and they exploit cloud technologies.
- The 5G network will also simplify mobility, with seamless open roaming capabilities between cellular and Wi-Fi access. Mobile users can stay connected as they move between outdoor wireless connections and wireless networks inside buildings without user intervention or the need for users to reauthenticate.
- 5G technology should improve connectivity in underserved rural areas and in cities where demand can outstrip today’s capacity with 4G technology.
- New 5G networks will also have a dense, distributed-access architecture and move data processing closer to the edge and the users to enable faster data processing.
Evolution from 1G to 5G:
- The 1G era was defined by briefcase-sized phones and short conversations between a relatively small number of professional people.
- In the lead up to 2G, the demand for mobile services grew and never slowed down.
- Phones that could fit in your pocket, SMS and mobile internet access were hallmarks of the 3G world.
- Thanks to 4G, we have smartphones, app stores and YouTube.
- Now, 5G is completely reshaping both our professional and personal lives by enabling new use cases like connective vehicles, Augmented Reality and enhanced video and gaming.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.