News 1: OECD flags global recession risk on energy, inflation crisis
Background
Global economic growth is slowing in the wake of Russia’s invasion of Ukraine, as energy and inflation crisis risk snowballing into recession in major economies.
While global growth this year was still expected at 3%, it is now projected to slow to 2.2% in 2023, according to Organization for Economic Cooperation and Development (OECD).
OECD
- Established: 1961
- Headquarters: Paris
- Members: 38 countries (India is not a member of OECD)
- The majority of OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries.
- OECD is an official UN Observer
Base Erosion Profit Shifting (BEPS)
Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
Developing countries rely highly on corporate income tax and hence suffer more due to BEPS.
Recession
Recession is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession.
“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Main drivers of recession
A sudden economic shock: In the 1970s, OPEC doubled the oil prices without warning in India, causing an economic crisis. The coronavirus outbreak, which shut down economies worldwide, is a more recent example of a sudden economic shock.
Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills. Growing debt defaults and bankruptcies then capsize the economy. The housing bubble that led to the Great Recession is a prime example of excessive debt causing a recession.
Asset bubbles: Investors can become too optimistic during a strong economy. Former Fed Chair Alan Greenspan famously referred to this tendency as “irrational exuberance,” in describing the outsized gains in the stock market in the late 1990s. Irrational exuberance inflates stock market or real estate bubbles—and when the bubbles burst, panic selling can crash the market, causing a recession.
Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. Central banks control inflation by raising interest rates, and higher interest rates depress economic activity. Out-of-control inflation was an ongoing problem in the U.S. in the 1970s. To break the cycle, the Federal Reserve rapidly raised interest rates, which caused a recession.
Too much deflation: Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets out of hand, people and business stop spending, which undermines the economy. Central banks and economists have few tools to fix the underlying problems that cause deflation. Japan’s struggles with deflation throughout most of the 1990s caused a severe recession.
Technological change: In the 19th century, there were waves of labor-saving technological improvements. The Industrial Revolution made entire professions obsolete, sparking recessions and hard times. Today, some economists worry that AI and robots could cause recessions by eliminating whole categories of jobs.
Recession vs Depression
Recessions and depressions have similar causes, but the overall impact of a depression is worse. There are greater job losses, higher unemployment and steeper declines in GDP.
Most of all, a depression lasts longer—years, not months—and it takes more time for the economy to recover. Routine recessions can cause the GDP to decline 2%, while severe ones might set an economy back 5%, according to the IMF.
News 2: A push for the semiconductor industry
Background
In a bid to make India’s $10 billion chip-making initiative more attractive to investors, the Centre on September 21, approved changes to the scheme for the development of a semiconductor and display manufacturing ecosystem.
What are semiconductors?
A semiconductor has an electric conductivity of more than insulator but less than of conductor. The ability to conduct electricity goes up as the temperature rises.
The basic component of a semiconductor chip is a sliver of silicon, which is etched with billions of microscopic transistors, forming patterns to control the flow of current while following different computational instructions.
How big is the industry?
- Semiconductors are the thumbnail-sized building blocks of almost every modern electronic device from smartphones to connected devices on the Internet of Things (IoT). They help give computational power to devices. The global semiconductor industry is currently valued at $500-$600 billion.
- The chip-making industry is a highly concentrated one, with the big players being Taiwan, South Korea and the U.S. among others. In fact, 90% of 5nm (nanometre) chips are mass-produced in Taiwan, by the Taiwan Semiconductor Manufacturing Company (TSMC).
- Therefore, the global chip shortage, U.S.-China tensions over Taiwan, and the supply chain blockages owing to the Russia-Ukraine conflict have led major economies to enter the chip-making sector with a renewed push.
- For example, the U.S. announcement of $52.7 billion in government funding for the CHIPS and Science Act and the EU’s Chips Act that will mobilise €43 billion for public and private investments.
What are the changes to India’s chip-making scheme?
- In December 2021, India announced its’ roughly $10 billion dollar production-linked incentive (PLI) scheme to encourage semiconductor and display manufacturing in the country.
- It also announced fiscal support for a design-linked initiative (DLI) scheme to drive global and domestic investment related to design software, IP rights etc.
- According to the Electronics and IT Ministry, semiconductor demand in India would increase to $70-$80 billion by 2026 with the growing demand for digital devices and electronic products.
- So far, Vedanta and Taiwanese chipmaker Foxconn have signed an MoU to set up a ₹1,54,000 crore semiconductor plant in Gujarat.
- Two other projects have also been announced — a $3 billion plant in Karnataka by the International consortium ISMC and a $3.5 billion plant in Tamil Nadu by Singapore’s IGSS Ventures.
- The modified scheme also emphasized the production of the 45nm chip, which is fairly less time-consuming and economical in terms of production.
Challenges
- While the scheme is an encouraging move, chip production is a resource-intensive and expensive process.
- While the new scheme provides equal funding for all steps of the process, the outlay of the scheme remains $10 billion. Notably, just the setting up of one semiconductor fab requires an investment of anywhere between $3 and $7 billion.
- Analysts are concerned that not much of the current scheme outlay would be left to support other elements including display fabs, packaging and testing facilities, and chip design centers.
- They also argue that the initial funding should focus on areas like design and R&D, for which India already has an established talent pool.
- Chip-making also requires gallons of ultrapure water in a single day, which experts say, could be a task for the government to provide to factories, compounded also by the drought conditions which often prevail in large parts of the country.
News 3: NavIC System (Navigation with Indian Constellation)
Background
The Union government is pushing tech giants to make smartphones compatible with its home-grown navigation system within months, worrying the likes of Samsung, Xiaomi and Apple who fear elevated costs and disruptions as the move requires hardware changes.
NavIC (Navigation with Indian Constellation)
- The govt. wants to reduce dependence on foreign navigation systems, such as U.S. Global Positioning System (GPS), and use ingrown NavIC system which provides more accurate domestic navigation, and its use would benefit the economy.
- Operational since 2018, NavIC’s uptake is minimal; it is mandated in public vehicle location trackers.
- IRNSS is an independent regional navigation satellite system being developed by India. It is designed to provide accurate position information service to users in India as well as the region extending up to 1500 km from its boundary, which is its primary service area.
- The system currently consists of a constellation of seven satellites, with two additional satellites on ground as stand-by.
- IRNSS will provide two types of services, namely, Standard Positioning Service (SPS) which is provided to all the users and Restricted Service (RS), which is an encrypted service provided only to the authorized users.
- The IRNSS System is expected to provide a position accuracy of better than 20m in the primary service area.
Some applications of IRNSS are
- Terrestrial, Aerial and Marine Navigation
- Disaster Management
- Vehicle tracking and fleet management
- Integration with mobile phones
- Precise Timing
- Mapping and Geodetic data capture
- Terrestrial navigation aid for hikers and travelers
- Visual and voice navigation for drivers
News 4: NASA is about to crash into asteroid
Background
NASA’s Double Asteroid Redirection Test Spacecraft (DART) is set to collide with Dimorphos, a small asteroid that is the moon of a larger space rock, Didymos. These two near earth objects do not pose an immediate threat to our world.
Why is NASA crashing into an asteroid?
Blowing up an asteroid generally would not be a good thing to do. Rather, the mission is a proof-of-principle demonstration that hitting an oncoming asteroid with a projectile can nudge it into a different orbit. For a dangerous incoming asteroid, the nudge could be enough to change the trajectory from a direct hit to a near miss.
Double Asteroid Redirection Test (DART)
- The objective of the mission is to test a planetary defense to near earth objects.
- DART will be the first demonstration of the kinetic impactor technique to change the motion of an asteroid in space. It is a suicide mission, and the spacecraft will be completely destroyed.
- It also carries about 10 kg of xenon which will be used to demonstrate the agency’s new thrusters called NASA Evolutionary Xenon Thruster–Commercial (NEXT-C) in space.
- NEXT-C gridded ion thruster system provides a combination of performance and spacecraft integration capabilities that make it uniquely suited for deep space robotic missions.
- The spacecraft carries a high-resolution imager called Didymos Reconnaissance and Asteroid Camera for Optical Navigation (DRACO). Images from DRACO will be sent to Earth in real-time and will help study the impact site and surface of Dimorphos (the target asteroid).
- DART will also carry a small satellite or CubeSat named LICIACube (Light Italian CubeSat for Imaging of Asteroids). LICIACube is expected to capture images of the impact and the impact crater formed as a result of the collision.
Other important news
World Tourism Day
- September 27 was chosen to celebrate World Tourism Day
- Theme: Rethinking Tourism
- Host country: Indonesia
Port of Odesa:
- The Port of Odesa or Odesa Sea Port, located near Odesa, is the largest Ukrainian seaport and one of the largest ports in the Black Sea basin.
- The Port of Odesa is a major freight and passenger transportation hub of Ukraine
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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.