There are two aspects to the news- knowing the headline and understanding the intricacies of it. We at The Connectere focus on both. While The First Forum edition gives a brief about the headlines, The Weekly Analysis Edition is meant to educate the reader on what do various news mean and what are their intricacies. This initiative is meant to educate the reader on how to understand the important news. In the Eleventh Edition we are covering the following news:
- RBI’s Repo Rate Cut
- The issue of Nepal Sovereignty
- Are the Indian Chinese still Bhai-Bhai
- Liquor Rolling or State Revenue Rolling
- Domestic Flights resume in India
- Extend Loan without fear of 3C’s – FM
RBI’s Repo Rate Cut
On Friday, the Reserve Bank of India reduced its repo rate by 40 basis points bringing the repo rate down to 4% and the reverse repo rate to 3.35%. The recent rate cut might be to boost consumer sentiment in the market and to boost investment activity. With a lower repo rate the commercial banks would reduce their lending rate by inducing consumers to borrow money from the banks for investment purposes. With the reduction in the reverse repo rate the commercial banks would reduce the interest rate offered on deposits thereby inducing borrowers to not deposit their money in the banks and to invest them for other economic purposes.
One of the many components of aggregate demand is an investment, with a rise in investment, the aggregate demand which represents macroeconomic demand would rise thereby increasing the income of the people and giving a boost to the economy.
With this, it does appear that the central bank may have played out its rate cut card for now as prudence would dictate that it reserves some leverage for the future if economic conditions deteriorate even further. In fact, there are those who believe that the latest cut may be no more than a sentiment booster as economic activity is at its nadir and there are not many investment proposals on the anvil that may benefit from the lower interest rate. Existing borrowers may be the only beneficiaries of the rate cut at this point in time. That said, the RBI deserves a pat on the back for listening to feedback over some of its moves initiated earlier during the lockdown. Thus, the extension of the repayment moratorium on loans is a welcome measure. A large proportion of commercial borrowers have availed themselves of the moratorium but retail borrowers have not taken to it in a big way. Yet, going forward, there may be more opting for it given that the extended lockdown has left many a business in a shambles and salaries have either not been paid or are being disbursed with delays.
These measures come in the wake of the COVID-19 pandemic which has caused a nationwide lockdown and has affected the income of the people. The government and RBI have taken various monetary policy and fiscal policy measures to safeguard the nation from the upcoming recession. The important aspect of the lockdown is that both the supply side and the demand side of the market are equally affected. With the labour returning to their homes, there is no one to produce goods in the factories. All sectors of the economy are equally affected by this lockdown.
The issue of Nepal’s Sovereignty
Nepal has been a friendly neighbour for as long as memory goes. Recently, the cabinet of the mountain nation led by the Nepali Communist Party has released a new political map showing Lipulekh, Kalapani, and Limpiyadhura as part of the Nepali Territory. The Lipulekh pass is a far western point near Kalapani, a disputed border area between Nepal and India. Both India and Nepal claim Kalapani as an integral part of their territory – India as part of Uttarakhand’s Pithoragarh district and Nepal as part of the Dharchula district.
This dispute is over the inauguration of a road linking the Lipulekh pass with Dharchula in Uttarakhand, however, the Indian government claims that the road section is well within India’s territory.
The Nepali cabinet’s decision to adopt a new political map that claims not only Lipulekh but other areas that are in Indian territory that has been claimed by Nepal invoking the 1816 Sugauli treaty with the British, was described by India’s MEA as “artificial”, “unilateral” and “unacceptable”.
This dispute over the territory threatens India and Nepal’s long-standing friendship which has allowed for free movement of people across the borders of the two countries. Such disputes if you look at them have been quite common with counties that share the history and common borders. With India, such issues are more common because most of its neighbouring countries such as Bangladesh and Pakistan were part of a common country before Independence. India has a long-standing history of violence and war with both Pakistan and Bangladesh. There have been problems of illegal immigration into the country due to the porous nature of the border and other terrorist attacks being funded. Land dispute issues have also been pretty common with China and Pakistan both claiming parts of Kashmir.
Given the importance of ties with Nepal, often romanticised as one of “roti-beti” (food and marriage), India must not delay dealing with the matter, and at a time when it already has its hands full with the pandemic and a faceoff with China in Ladakh and Sikkim. This is important to ensure and maintain the country’s influence in the region with China gaining control and influencing decisions in the subcontinent through Pakistan.
Back in the day when India was offered a position in the United Nations Security Council, Jawaharlal Nehru, the then Prime Minister of the country gave the position to China and coined the phrase “Hindu-Chini Bhai-Bhai” this was done to strengthen relations with the neighboring dragon. Amidst escalating tensions, India had provided asylum to Dalai Lama during the Tibetan uprising. As a consequence, China occupied a part of Kashmir and claimed right over it. It felt like an attack over our pride, the brotherly sentiment was now dead, there was a war and we lost.
In 2017, tensions again escalated with a major standoff between the forces of the two nations over the construction of a road by China. It has been three years and once again, tensions have upscaled. There have four incidents along the line of actual control. In the three years since both sides have done remarkably well to keep the peace. Prime Minister Modi and President Xi both agreed differences should not be allowed to escalate into disputes. Also, a clear message was sent to the two militaries to abide by the detailed protocols already in place, such as those agreed to in 2005 and 2013. These regulate the activities of troops in the contested zones that lie in between both sides’ overlapping claim lines of the undefined LAC.
The stand-off in Ladakh appears to have been triggered by China moving in troops to obstruct road construction activity by India. Last year, India completed the Darbuk-Shyok-Daulet Beg Oldi (DBO) road which connects Leh to the Karakoram Pass. India also maintains a key landing strip at DBO at 16,000 feet. The broader context for the tensions is the changing dynamic along the LAC. India has been upgrading its roads as it plays catch-up, with China already enjoying an advantage in both terrain and infrastructure. China now seems to be telling India it has no right to carry out the kind of activity that Beijing has already done. India is well within its right to carry out construction work. Delhi needs to remind Beijing that a fundamental principle that underpins all previous agreements is recognising the right to mutual and equal security of the two sides.
The immediate priority is for both sides to use existing channels and step back. Flag meetings between brigade commanders have so far been unable to break the stalemate. The incidents have underlined how the new LAC situation is placing existing mechanisms under renewed stress. India and China should grasp the current situation as an opportunity to revive the stalled process of clarifying the LAC. China has resisted this as a distraction to the boundary negotiations. But rather than agree on a line, both can instead simply seek to better understand the claims of the other and reach a common understanding to regulate activity in these areas.
Liquor rolling or state revenue rolling?
I’m sure you’re aware of the recent tax hikes in different forms in different states of the country. Delhi government had levied 70% special corona fee on the MRP of liquor bottles. So is an alcohol ban necessary during the lockdown? Let’s answer this. Several states and doctors would prefer a calibrated approach to liquor access rather than a complete ban on the sale.
As the country completes what is possibly its first dry month, the unavailability of liquor has had two major repercussions: on health and government revenue. First, the condition of addicts. Nearly 57 million Indians are addicted to alcohol, according to a 2019 study by the All India Institute of Medical Sciences (AIIMS). Acute withdrawal symptoms can manifest as seizures, delirium, and aggressive behavior, and can even be fatal. In the first week of the lockdown, nine people in Kerala who were reportedly addicted to liquor committed suicide. By the second week, six in Tamil Nadu had died after trying to substitute alcohol with after-shaves and varnish. Media reports suggest the production of home-made liquor like rice beer or toddy has increased in rural areas while a grey market for bottled liquor has mushroomed in urban areas.
Two, states have lost a large chunk of revenue. The alcoholic beverage industry accounts for 15-30% of liquor-selling states’ earnings, according to the International Spirits & Wine Association of India (ISWAI), which represents some of the country’s largest liquor manufacturers. In 2019-20, ISWAI claims, the states earned ₹2.5 trillion in taxes from alcohol sales. In their efforts to get the states to ease restrictions, industry stakeholders argue liquor tax money can be used to fight the pandemic.
To cure both the problem of liquor addicts and state revenue in this pandemic situation, the Government of India opened liquor shops but after seeing such a huge response and the social distancing going at a toss, they imposed heavy taxes on it which helped them both the way round. Firstly, now only the people who could afford those taxes came to buy the liquor making it easy to implement social distancing, and secondly it helped the state to get a revenue push which it lost in the complete lockdown period. Delhi’s tax revenue doubled in one month due to liquor sales. On an average, the states collected about Rs 12,500 crore per month from excise on liquor in 2018-19, which rose to about Rs 15,000 crore per month in 2019-20, and which was further expected to cross Rs 15,000 crore per month in the current financial year. This projection was before the COVID-19 outbreak.
Domestic flights resume in India
In India, the domestic airlines have ceased operation from the 24th of March 2020 due to the Covid-19 pandemic and have resumed operations yesterday that is the 25th of May,2020. That was a complete 2-month closure for the airline industry. This has largely affected many stakeholders in different ways, whether it be the airline industry or its frequent users. The air transport industry, including airlines and its supply chain, is estimated to contribute directly or indirectly to $72 billion of GDP to India. Cash reserves of airline companies are running low and many are almost at the brink of bankruptcy. Moreover, the crisis could lead to the loss of jobs and pay cuts. Some airlines have asked many of their employees to go on leave without pay. Air Deccan has suspended operations and sent employees on unpaid leaves.
The air transport business along with its supply chain may see a near wipeout of approximately 40 percent of business volume in the current financial year. Revenues have been virtually nil since March 25. The two-month-long shutdown has eroded the capital of most airlines. The cost of maintaining Aircraft on Ground (AoG) is extremely high, and with nil revenues, this is a sure-shot recipe for disaster. We have already read reports of some major global airlines filing for bankruptcy.
The impact of this has also been on the oil industry as the Airline industry 6-7% of the total oil consumed around the world. Due to the negligible demand for oil in the airline industry, the prices of oil went down steeply, and as we know the WTI crude was also at a negative rate. The IATA (International Air Transport Association) report says that in India, 29.32 lakh jobs in the aviation sector are at risk.
Now as the industry resumes, we can see a lot of positive impacts. The GDP of India will improve as the airline industry is a big contributor to it. Also the people whose business were solely dependent on air transport will resume bringing a push in the economy. The people working in the airline industry will also get regular salaries who were directly dependent on airlines like the pilot, air hostess, and other crew members working at the ground level and airports. We can also expect a positive impact on oil prices as the demand has already increased due to the movement of passenger vehicles around the country. The civil aviation ministry has issued Standard Operating Procedures (SOPs) for passenger movement also. This resumption also leads to some negative impacts for sure that includes Air pollution, global warming, and a large amount of carbon footprint.
Extend loans without fear of 3C’s: FM
Finance Minister Nirmala Sitharaman on Saturday said banks had been asked to extend loans automatically to eligible borrowers without ‘fear of 3C’s — CBI, CVC, and CAG’. She said clear instructions had been given in a meeting with CEOs and MDs of public sector banks and financial institutions on Friday that the banks should not be scared to extend loans like a 100% guarantee is being given by the government.
As part of the ₹20.97 lakh crore economic package, the government announced the Emergency Credit Line Guarantee Scheme (ECLGS) worth ₹3 lakh crore for the MSME sector, hit hard by the COVID-19 crisis.
When asked about criticism about leaving many critical sectors including hospitality, auto, and civil aviation out of the economic package, Ms. Sitharaman said the government has not taken a sectoral approach but a holistic approach.
This further means that everybody eligible for additional term loans and additional working capital should be given loans from the bank. The government has also emphasized that loans should be sanctioned in a single manner and digitally to avoid any physical contact. This will ensure that liquidity would start flowing from banks without any new collateral. It is based on the understanding that any enterprise “with a certain exposure to the bank and with a certain invested capital, or with a certain turnover if they need additional term loan, additional working capital in order to buy their own material to restart, in order to be able to pay some fixed cost, it can take that route,” she said.
The impact of this decision will be largely on the MSMEs and also any enterprise that needs a push in the form of bank loans to restart their businesses which are deeply hit by the Covid-19 pandemic. This step was much needed when the country is in a financial crisis and providing new collateral can be difficult to raise additional capital. This would further boost the economy as things will start to fall into place due to the ease in capital formation either it is working capital or fixed capital. This boost in the manufacturing sector will also increase the labour demand and hence daily wage earners will get their living. The transportation industry will also resume as to transport the goods to the end consumer and as a result of transportation the oil demand increases bringing an interrelated positive effect in the economy. This step by our Finance Minister is much appreciated and will surely help the economy to recover.