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Insights SECURE SYNOPSIS: 3 July 2021

 

NOTE: Please remember that following ‘answers’ are NOT ‘model answers’. They are NOT synopsis too if we go by definition of the term. What we are providing is content that both meets demand of the question and at the same time gives you extra points in the form of background information.


General Studies – 2


 

1. The NCT of Delhi (Amendment) Bill balances the proper functioning of the Delhi Assembly and the cooperative federalism in India.DO you agree? Analyse. (250 words)

Reference: The Hindu

 

Introduction

The National Capital Territory of Delhi is a Union Territory with a legislature and it came into being in 1991 under Article 239AA of the Constitution inserted by the Constitution (Sixty-ninth Amendment) Act, 1991. As per the existing Act, the Legislative Assembly has the power to make laws in all matters except public order, police and land.

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Article 239AA of the Constitution of India

  • It granted Special Status to Delhi in 1991 through the 69th constitutional amendment (CAA).
  • The 69th CAA provided Delhi with a Legislative Assembly and a Council of Ministers (CoM). The CoM was made responsible to the legislative Assembly and empowered to deal with matters of concern to the common man.
  • The recently introduced Government of NCT of Delhi (Amendment) Bill, 2021 is against Article 239AA.
  • The Bill gives discretionary powers to the L-G of Delhi even in matters where the Legislative Assembly of Delhi is empowered to make laws.
  • The Delhi state govt. has criticized the bill saying that it seeks to drastically curtail powers of the elected government”, which is “against” the Supreme Court judgment of 2018.

Major provisions of NCT of Delhi (Amendment) Bill, 2021:

  • Among the major proposed amendments, one makes it explicitly clear that the term “government” in any law made by the Legislative Assembly shall mean the L-G.

This, essentially, gives effect to the former L-G 2015 assertion that “Government means the Lieutenant Governor of the NCT of Delhi appointed by the President under Article 239 and designated as such under Article 239 AA of the Constitution”.

  • The Bill adds that the L-G’s opinion shall be obtained before the government takes any executive action based on decisions taken by the Cabinet or any individual minister.

Implications of NCT of Delhi (Amendment) Bill upon Indian Federalism:

  • Equating the L-G with the government simply undermines the legitimacy of the elected government thereby disrespecting representative democracy.
  • The bill goes against the spirit of the 2018 verdict. The provisions such as getting the compulsory opinion from the L-G are against the verdict.
  • The NCT of Delhi (Amendment) Bill restricts the Delhi government from inquiring into executive matters. The Delhi assembly at present is examining multiple issues ranging from riots to the environment. This disregards the ideal of democracy conceived for the NCT of Delhi by Article 239AA of the Constitution.
  • The NCT of Delhi (Amendment) Bill if passed would be a huge setback for Delhi’s quest for full statehood. As the L-G gets precedence to the Delhi government.
  • The bill empowers L-G to specify certain matters on which his opinion must be taken. This can curtail the autonomy that any elected government legitimately requires for governance.
  • Providing excess powers to L-G can also distort the federal equilibrium. The centre can use this bill as a precedent to curtail the powers of other states in the future.

Suggestions

  • The new bill should be reconsidered in the light of Justice D Y Chandrachud’s note in the 2018 verdict: “In a democratic form of government, the real power must subsist in the elected arms of the state”.
  • A cautious discussion and deliberation should take place between the Centre and Delhi government on the ambiguous provision of the bill. This will help in the eradication of unconstitutional and undemocratic provisions.
  • Apart from that, the government at the centre and state must cooperate to make sure that L-G can discharge its constitutional function. At the same time, they need to avoid L-G doesn’t become a hindrance to development.

Conclusion

The government must reconsider the NCT of Delhi (Amendment) Bill as per the advice of the Supreme Court. The revamped provisions should enable L-G to act as a facilitator for upholding the law of the land and constitutional provisions.

 

2. Discuss in what way New Education Policy through integration of vocational and formal education emphasizes on creation of an institutional framework with holistic approach towards of development skills. (250 words)

Reference: The Hindu

Introduction

The success of any endeavour is an interplay of capital, collaboration, regulatory mechanisms and, most importantly, the scientific and technological know-how, put simply, skills. In India, many initiatives have been undertaken in the skills sector by governments in the last decade. However, outcomes are still elusive. According to the UNDP’s Human Development Report-2020, only 21.1 per cent of the labour force was skilled in the period 2010-2019 in India.

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The National Education Policy 2020 aims to bring transformational reforms in school and higher education and thus shape India into a global knowledge superpower.

Issues in Skill Development

  • Piecemeal Approach:The piecemeal approach to skilling can be seen in this year’s Budget which has allocated ₹3,000 crore to realign the National Apprenticeship Training scheme but has restricted it to only engineering stream and not to other science and arts streams.
  • Overburdened Responsibility: Phase III of Pradhan Mantri Kaushal Vikas Yojana, launched to impart skills development to over 8 lakh persons in 2020-21.
  • However, it suffers from excessive reliance on the District Skills Development Committees, chaired by District Collectors, who would not be able to prioritise this role, given their other assignments.
  • Discontinuity in Policy Process:The National Skill Development Agency (NSDA), created in 2013 for resolving the inter-ministerial and inter-departmental issues and eliminating duplicates of efforts of the Centre.
  • However, it has been now subsumed as part of the National Council for Vocational Training (NCVT).
  • This reflects not only discontinuity in the policy process, but also some obfuscation among policy makers.
  • Humongous Number of New Entrants:According to a 2019 study by the National Skills Development Corporation (NSDC), 7 crore additional people in the working-age of 15-59 years are expected to enter the labour force by 2023.
  • Given the sheer magnitude of youth to be skilled, it is paramount that the policy efforts are adequate in all respects.
  • Employers’ Unwillingness:India’s joblessness issue is not only a skills problem, it is representative of the lack of appetite of industrialists and SMEs for recruiting.
  • Due to limited access to credit because of Banks’ NPAs, investment rate has declined and thus has a negative impact on job creation.

NEP as a Solution

  • Ending Separation Between Education & Skills:There is a need to end the artificial separation of the education system into formal and vocational shall end with such enabling frameworks allowing seamless integration.
  • The New Education Policy (NEP) 2020envisaged a right policy as it emphasises on integration of vocational and formal education both at school and higher education levels.
  • The NEP also proposed a pilot ‘hub-n-spoke’ model with the conceptual framework of ITI becoming a ‘Hub’ for providing VET related training and exposure to students of adjoining 5-7 schools.
  • Skills survey:Surveys can help to find the exact skill requirements from the employers.
  • Vocational education beginning from class 6 with internships (As per NEP) will help in better mapping of the skill sets and interests of children and help in fostering the same.
  • Analysis of such surveys would help in designing course structures of the training programs and thus standardized course curriculum or training delivery systems can be developed.
  • Enhanced Expenditure on Education and Training:In the long run, Skill India will also not be enough if government expenditures in education remain low and if, therefore, the ground isn’t prepared for proper training.
  • In this case, the proposal of NEP to enhance public expenditure on education to 6% of GDP is a step in the right direction.
  • Imbibing International Success Models:India needs to learn from technical and vocational training/education models in China, Germany, Japan, Brazil, and Singapore, who had similar challenges in the past, along with learning from its own experiences to adopt a comprehensive model that can bridge the skill gaps and ensure employability of youths.

Conclusion

To make Bharat Aatmanirbhar, all the skilling efforts need to be brought under one platform to eliminate silos and duplications. A sturdy institutional framework with practical and real pathways to change course between mainstream and vocational programmes needs to be put in place.

 

3. What makes the Rule of Law different from the Rule by Law? Explain the principles that emerge as the basis of the Rule of law and the role of the judiciary in ensuring their constitutionality. (250 words)

Reference: Indian Express

Introduction

Rule of Law is derived from the French phrase ‘la Principe de legality’ which means ‘Government based on the principles of law’.

Rule by Law is based on the Latin term ‘Rex is Lex’ which means ‘King is Law’. it is the tool of tyrants and dictators to oppress and subjugate people. It is also known as ‘Rule by Men’. Thus, any law which is laid down by the supreme law making authority of the land is Rule by Law. For example, Nazi Germany put Jews in concentration camps and thereafter sent them to the gas chambers. The act is said to be backed by laws.

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The Rule of Law is to control the unlimited exercise of the power by the supreme law making authority of the land while the Rule by Law is laid down by the supreme law making authority of the land.

Concept of Rule of Law includes:

  • Supremacy of Law: This means that no one can be arrested, punished or be lawfully made to suffer in body or in goods except by the due process of law and for breach of a law established in the ordinary legal manner before the ordinary courts of the land.
  • Equality before Law:This means that all men are equal before the law of land administered by the ordinary courts.
  • Predominance of Legal Spirit:This means that the rights exercised by the people such as the right to personal liberty, freedom from arrest, freedom to hold public meetings, etc. are the result of juridical decisions in cases between the parties. Thus, the courts of law must act as the guarantors of liberty.

Rule of Law and Role of Judiciary:

  • The Preamble to the Indian Constitution mentions Justice, Liberty, and Equality. As per Article 13 (1) of the Indian Constitution, the constitution shall be the supreme law of the land & all other laws in order to be legally valid shall conform to the constitution and upheld by judiciary.
  • As per Article 21 of the Indian Constitution, no person shall be deprived of his life or personal liberty except according to procedure established by law, nor shall any person be denied equality before the law or the equal protection of the laws within the territory of India.
  • As per Article 14 of the Indian Constitution, the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India and discrimination on grounds of religion, race, caste, sex or place of birth is prohibited.
  • All the laws mentioned under the constitution are strengthened only when Judiciary acts as active watchdog of Rule of Law. As B.R Ambedkar had stated article 32 as the heart and soul of constitution as it gives substantial power to judiciary to uphold Rule of Law.

Conclusion

The judiciary cannot be controlled, directly or indirectly, by the legislature or the executive, or else the Rule of Law would become illusory. At the same time, judges should not be swayed by the emotional pitch of public opinion either, which is getting amplified through social media platforms.

 


General Studies – 3


 

4. How far do you think technologies like Geoengineering and nature based solutions have the potential to counterbalance the impact of climate change? Examine. (250 words)

Reference: Indian Express

Introduction:

Geoengineering interventions are large-scale attempts to purposefully alter the climate system in order to offset the effects of global warming. Most geoengineering proposals can be divided into two types: solar radiation management (SRM) and carbon dioxide removal (CDR).

Climate engineering offers the hope of temporarily reversing some aspects of global warming and allowing the natural climate to be substantially preserved whilst greenhouse gas emissions are brought under control and removed from the atmosphere by natural or artificial processes. One such technology is inspired by volcanoes that entails spewing sulphate aerosols into the upper atmosphere to deflect sunlight and artificially cool the planet.

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Negatives of geoengineering:

  • A recent study shows that rapid application, followed by abrupt termination of this temporary tech-fix can in fact accelerate climate change.
  • The increase in temperature from the abrupt termination is so quick that most species, terrestrial or marine, may not be able to keep up with it and eventually perish.
  • The increase in temperature is two to four times more rapid than climate change without geoengineering. This increase would be dangerous for biodiversity and ecosystems.
  • Reptiles, mammals, fish and birds that have been moving at 1.7 km/year on average will now have to move faster than 10 km/year to remain in their preferred climatic zones. This raises serious concerns, especially for less-mobile animals like amphibians and corals.
  • Not just species but entire ecosystems could collapse by suddenly hitting the stop button on geoengineering.
    • For example, temperate grassland and savannahs, which are maintained by specific combinations of temperature and rainfall, may experience increasing rates of temperatures, but an opposing trend in rainfall, after 2070.
  • Ineffectiveness
    • The effectiveness of the techniques proposed may fall short of predictions.
    • In ocean iron fertilization, for example, the amount of carbon dioxide removed from the atmosphere may be much lower than predicted, as carbon taken up by plankton may be released back into the atmosphere from dead plankton, rather than being carried to the bottom of the sea and sequestered.
  • Model results from a 2016 study, suggest that blooming algae could even accelerate Arctic warming.
  • Moral hazard or risk compensation
    • The existence of such techniques may reduce the political and social impetus to reduce carbon emissions
  • Albedo modification strategies could rapidly cool the planet’s surface but pose environmental and other risksthat are not well understood and therefore should not be deployed at climate-altering scales.
  • In the case of environmental risks, the offsetting of greenhouse gases by increasing the reflection of sunlight is not going to be perfect. Some people, potentially a small minority, will get less rainfall. There is concern about what particles might do to the ozone layer. 
  • The drop off of tropical storms in one area would actually lead to a spike in drought in parts of Africa, according to the data.

Positives of geoengineering:

  • As expected, the climate would begin to cool once geoengineering commences. This initial cooling phase, would provide relief, particularly for species that were unable to keep up with past warming.
  • Also birds and fish which may have moved in response to elevated temperatures in the past  will possibly turn back.
  • If solar geoengineering were ramped up slowly to half the rate of warming over the coming decades, then it seems likely it would reduce many climate risks. Solar geoengineering deployment can be ended without the impacts of a termination shock if it is gradually ramped down over decades.
  • The climate models reveal that the large-scale action would indeed calm things down a bit and potentially reduce the number of North Atlantic cyclones.

 Some geoengineering techniques and its drawbacks:

 carbon capture and storage technologies:

  • This carbon dioxide removal approach focuses on removing greenhouse gases from the atmosphere and locking them away.
  • The process starts with the capture of generated CO2 which undergoes a compression process to form a dense fluid. This eases the transport and storage of the captured CO2.
  • The dense fluid is transported via pipelines and then injected into an underground storage facility.
  • Captured CO2 can also be used as a raw material in other industrial processes such as bicarbonates.
  • The CCS has significant backing from the International Energy Agency and the IPCC.
  • However, it still is hanging in uncertainty due to high upfront costs in the instalment of such plants.
  • A growing number of corporations are pouring money into so-called engineered carbon removal techniques.
  • However, these technologies are at a nascent stage and need an overhaul to be exploited.
  • Carbon dioxide may be stored deep underground. Reservoir design faults, rock fissures, and tectonic processes may act to release the gas stored into the ocean or atmosphere leading to unintended consequences such as ocean acidification etc.

solar radiation modification:

  •  This process does not affect atmospheric greenhouse gases but aims to reflect the solar radiation coming to the earth.
  • The science of the method is, however, largely model-based, and the impacts of deflecting the solar radiations could be unpredictable.
  • Additionally, due to the thermal inertia of the climate system, removal of the radiation modification could result in the escalation of temperature very quickly, giving significantly less time to adapt.
  • Another side effect of the radiation modification process could be natural vegetation.
  • Since solar radiation is responsible for photosynthesis, sudden masking of solar radiation could significantly affect the process.
  • While these questions remain unanswered, the futures of these technologies remain uncertain.

 Way forward:

  •  The potential of natural systems as an effective solution for sequestering carbon dioxide has led to several efforts to scale nature-based solutions to mitigate climate change.
  • These proliferating efforts, however, must take cognisance of the fact that these solutions are effective only when applied while protecting the already existing forest.
  • Additionally, we must not run blindly after planting trees; instead, we must back reason with science.
  • Trees should be planted where they belong, that too with native species, and in consultation with local communities.

Conclusion:

In any case in the meantime, two aspects are certain: under no scenario could climate engineering serve as a substitute to reduced greenhouse gas emissions, and it would be better to implement such technologies with more nuanced research.

 

5. Elaborate upon the security threats emerging from drones and suggest some measures to counter hostile drones. (250 words)

Reference: The Hindu

Introduction:

A Drone is an unmanned aerial vehicle (UAV), an aircraft without a human pilot aboard. Besides combat use, drones are used for a range of purposes like package delivery, in agriculture (spraying pesticides etc), monitoring environmental changes, aerial photography, and during search and relief operations, among others.

Increasing the use of drones in warfare and other areas has brought into focus the potential the use of drones holds and the other issues related to its misuse (Rogue Drones). India has an estimated over 6 lakh rogue or unregulated unmanned aerial vehicles (UAVs).

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 Recent events featuring drones

  • Recently, Drones were used for the first time to drop explosive devices, triggering blasts inside the Air Force Station’s technical area in Jammu.
  • Recently, the BSF detected weapons dropped by a suspected Pakistan drone in Jammu. One AK-47 assault rifle, one pistol, one magazine, and 15 rounds for a 9 mm weapon were recovered 250 m inside Indian territory.
  • On June 20 last year, the BSF shot down a drone in Hiranagar, Jammu. The hexacopter’s payload included a US-made M4 semi-automatic carbine, two magazines, 60 rounds and seven Chinese grenades.
  • Sources said in recent years there have been an estimated 100-150 sightings of suspected drones near India’s western border annually. Most of these are suspected to be surveillance drones.
  • A drone was used by the U.S. to fire the missile at Qassem Soleimani to assassinate him.
  • A few days before that, less-lethal drones monitored crowds of student protesters rocking India.

 Security threats posed by drones:

  • National Security Issues:Drones have demonstrated the potentials for their threat to the security of a country. Drones are operated remotely and can strike where it wants it to strike. Raising serious security issues.
  • Terrorism:Drones have been used by various terrorist organisations like ISIS in Syria and Iraq to hit their targets.
  • Conflict Zones: Drones are becoming security threats particularly in conflict zones where non-state actors are active and have easy access to the technology. For example: 2019 twin drone attacks on Aramco crude oil production in Saudi Arabia.
  • Potential weapons of mass destruction: What makes combat drones in the hands of non-state actors most dangerous is the threat of them being used to deliver weapons of mass destruction.
  • Aviation safety: Drones flying too close to commercial aircraft has called for regulations.
  • Privacy:Drones have been used by the paparazzi to take the images of individuals breaching their privacy.
  • Critical infrastructure: unregulated drones, UAVs and remotely-piloted aircraft system are a “potential threat” to vital installations, sensitive locations and specific events
  • Cross border smuggling: Over the past two years, drones have been deployed regularly by Pakistan-based outfits to smuggle arms, ammunition and drugs into Indian territory. Drones fly low and therefore cannot be detected by any radar system.

 Way forward:

  •  Security agencies should work on developing more modern anti-drone weapons like ‘sky fence’ and ‘drone gun’ to counter terror or similar sabotage bids by these aerial platforms.
  • The Tokyo police have been using ‘flying nets’ attached to legal drones to capture and neutralise rogue UAVs. the Taiwanese police have been testing RF jammer guns to bring down rogue drones.
  • The other anti-drone technology is through geofencing agreements with commercial drone manufacturers, a technique that will prevent UAVs from flying near critical infrastructure by pre-programmed codes put in by manufacturers.
  • India needs to invest more in counter-drone research and technology and procure them in a planned manner to address the security concerns arising from rogue operations the unmanned aerial vehicles.
  • There is a need to develop partnerships between counter-drone companies and public sector units (PSUs), government organisations like Defence Research and Development Organisation (DRDO) and other private organisations.
  • The Ministry of Civil Aviation could potentially look at making the existing regulations for unmanned aircraft systems more stringent.
  • The answer to the emerging threat of rogue drones, though serious, is not over-regulation but smart regulation, creating a balance between the evolving drone sector and the emerging security concerns.
  • This needs to be done with investing in cutting-edge technologies for countering drones and indigenous R&D, with the support of government grants besides private investments.
  • ‘National Counter Rogue Drone Guidelines’ is a step in the right direction outlining ‘procedural means’ of prevention, deterrence and denial and ‘active means’ of detection, interruption and destruction. This must be coupled with ‘Counter Rogue Drone Deployment Plan’ based on vulnerability analysis

 Conclusion:

Regulation on use of drones in India should be effectively implemented to foster technology and innovation in the development of drones and improve the ease of doing business, by side-lining unnecessary requirements and creating a single-window process. The government should ensure protection of privacy of citizens by limiting the use of drones for surveillance. It is important to use drones responsibly to minimize negative impacts on wildlife, including birds. Possibilities of drone-related accidents should be minimized by strict enforcement of regulations.

 

6. What is the ‘Heat Dome’ causing record temperature in USA in the recent times? Elaborate upon the rising events of heatwave. (250 words)

Reference: India Today

Introduction

According to the US-based National Oceanic and Atmospheric Administration (NOAA), a heat dome is created when strong high-pressure atmospheric conditions combine with weather patterns like La Niña, creating vast areas of sweltering heat that get trapped under the high-pressure “dome”. Heat Dome also prevents clouds from forming, allowing for more radiation from the sun to hit the ground.

Recently, the Pacific Northwest and some parts of Canada recorded temperatures around 47 degrees, causing a “historic” heat wave. It has been established that rising temperatures would lead to hotter weather and human-made climatic changes are leading to dangerous weather trends across the world.

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In the process known as convection, the temperature difference causes more warm air, heated by the ocean surface, to rise over the ocean surface. That temperature difference creates winds that blow dense, tropical, western air eastward. Eventually that warm air gets trapped in the jet stream—a current of air spinning counter clockwise around the globe—and ends up on the U.S. West Coast, resulting in heatwaves. This strong change in ocean temperature from the west to the east is the reason for the heat dome. The western Pacific ocean’s temperatures have increased in the past few decades and are relatively more than the temperature in the eastern Pacific. A Heat dome is more likely to form during La Niña years like 2021, when waters are cool in the eastern Pacific and warm in the western Pacific.

Impact of a heat dome:

  • Temperatures beyond wet bulb temperature can cause heat related illnesses including heat stroke, heat exhaustion, sunburn and heat rashes. Sometimes these can prove fatal.
  • Trapping of heat can also damage crops, dry out vegetation and result in droughts.
  • The heat wave will also lead to rise in energy demand, especially electricity, leading to pushing up rates.
  • Heat domes can also act as fuel to wildfires, which destroys a lot of land area in the US every year.
  • Heat dome also prevents clouds from forming, allowing for more radiation from the sun to hit the ground.

Measures needed:

  •  There is a need to formulate action plans for the prevention and management of heat waves, outlining four key strategies:
    • Forecasting heat waves and enabling an early warning system
    • Building capacity of healthcare professionals to deal with heat wave-related emergencies
    • Community outreach through various media
    • Inter-agency cooperation as well as engagement with other civil society organizations in the region.
  • Scientific Approach:
    • Climate data from the last 15-20 years can be correlated with the mortality and morbidity data to prepare a heat stress index and city-specific threshold.
    • Vulnerable areas and population could be identified by using GIS and satellite imagery for targeted actions.
  • Advance implementation of local Heat Action Plans, plus effective inter-agency coordination is a vital response which the government can deploy in order to protect vulnerable groups.
  • The Local Cooling Action Plans must emphasize the urgency and need for better planning, zoning and building regulations to prevent Urban Heat Islands
  • This will require identification of “heat hot spots”, analysis of meteorological data and allocation of resources to crisis-prone areas.
  • Provision of public messaging (radio, TV), mobile phone-based text messages, automated phone calls and alerts.
  • Promotion of traditional adaptation practices, such as staying indoors and wearing comfortable clothes.
  • Popularisation of simple design features such as shaded windows, underground water storage tanks and insulating housing materials.

 

7. The current account deficit (CAD) of India is widening, in this pretext, do you think it is a piece of mixed news for India? Does it signify economic recovery? Comment. (250 words)

Reference: Live Mint

Introduction:

Current account deficit (CAD) refers to a situation when the value of goods and services imported by a country exceeds the value of goods and services exported by it. It measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad.

India’s current account deficit (CAD) has widened. As per the latest data, it is around 1% of gross domestic product (GDP). It is a relief for the Indian economy because 19% growth in imports is the main factor behind that.

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A current account can be harmful to the economy:

  • Unsustainable:If a current account deficit is financed through borrowing it is said to be more unsustainable. This is because borrowing is unsustainable in the long term and countries will be burdened with high-interest payments. E.g. Russia was unable to pay its foreign debt back in 1998. Other developing countries such as Brazil, African countries have experienced similar repayment problems. Countries with large interest payments have little left over to spend on investment.
  • Risk of capital flight. A very high balance of payments deficit may, at some point, cause a loss of confidence by foreign investors. Therefore, there is always a risk, that investors will remove their investments causing a big fall in the value of your currency (devaluation). This can lead to a decline in living standards and lower confidence for investment.
    • A factor behind the Asian crisis of 1997 was that countries had run up large current account deficits by attracting capital flows (hot money) to finance the deficit. But, when confidence fell, these hot money flows dried up, leading to a rapid devaluation and crisis of confidence. When confidence fell and the exchange rate fell, there was a degree of capital flight as foreign investors sought to return assets.
  • Foreign ownership of assets. If you run a current account deficit, it means you need to run a surplus on the financial/capital account. This means foreigners have an increasing claim on your assets, which they could desire to be returned at any time. For example, if you run a current account deficit, it could be financed by foreign multinationals investing in your country or the purchase of assets. There is a risk that your best assets could be bought by foreigners, reducing long-term income.
  • An indication of an unbalanced economy. A persistent current account deficit may imply that you are relying on consumer spending, and the economy is becoming unbalanced between different sectors and between short-term consumption and long-term investment.
    • For example, the UK has had a high share of GDP focused on consumer spending and relatively low levels of investment – especially in the manufacturing sector.  This focus on domestic consumption can have adverse effects in the long-term with less investment in productivity. The UK experience might be contrasted with Germany which has a current account surplus and generally considered to have better levels of investment in the economy.
  • An indication of an uncompetitive economy. A current account deficit may imply the economy is becoming uncompetitive and the exchange rate relatively overvalued.
    • For countries with floating exchange rate – e.g. Pound Sterling, this is not so serious because market forces will cause a depreciation to restore competitiveness.
    • However, a current account deficit can be a real problem for countries in the Euro – who cannot devalue to restore competitiveness. For example, 2000-2007, a divergence in inflation rates caused very large current account deficits in southern Eurozone economies. This lack of competitiveness and low level of export demand was a factor behind the weak domestic demand 2008-13 of Greece, Portugal, Spain during the Eurozone recession of 2008-13.
  • Risk of depreciation. A country running large current account deficit is always at risk of seeing the value of the currency fall. If there is insufficient capital flows to finance the deficit, the exchange rate will fall to reflect the imbalance of foreign flows of funds. A depreciation in the exchange rate will cause imported inflation for consumers and firms who rely on imports of raw materials.

A current account deficit is not necessarily harmful

  •  A current account deficit could occur during a period of inward investment (surplus on financial account). This inward investment can create jobs and investment. E.g. the US ran a current account deficit for a long time as it borrowed to invest in its economy. This enabled higher growth and so it was able to pay its debts back and countries had confidence in lending the US money. Japanese investment has been good for the UK economy – not only did the economy benefit from increased investment but the Japanese firms also helped bring new working practices in which increased labour productivity.
  • With a floating exchange rate, a large current account deficit should cause a devaluation which will help automatically reduce the level of the deficit.
  • A current account deficit may just indicate a strong economy, which is growing rapidly. For example, the rise in deficit on UK primary incomes (2015-16) is a reflection that investment in the UK was giving a good return to foreign investors.

CAD Significance for India:

  • Positives: CAD has increased mainly due to an increase in imports, especially non-oil and non-gold. It indicates that economic recovery is picking up the pace. As per experts, faster vaccination would increase the growth rate that would reflect in the CAD by an increase in imports.
  • Negatives: However, this increase in imports is also accompanied by a surge in key global commodity prices. From crude oil to steel, prices of most commodities have galloped in the past few months.
  • It would result in an increase in domestic inflationary pressures. It would complicate the work of RBI because retail inflation surged to over 6% in April.
  • A faster rise in the consumer price index (CPI) inflation momentum compared to the wholesale price index (WPI) shows that producers have begun to pass on their costs to consumers.

Way forward:

  • The Current Account Deficit could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.
  • Currency hedging and bringing easier rules for manufacturing entities to raise foreign funds could also help.
  • The government and RBI could also look to review debt investment limits for FPIs, among other measures.
  • The imbalance in trade is now to be resolved by boosting exports.
  • The blockage of funds under GST and uncertainties has left little or no working capital at the disposal of exporters.
  • Focussing on manufacturing in the labour-intensive sectors would bring the double benefits of boosting exports and generating employment.
  • Efforts are needed to reduce paperwork and costly over-regulation so as to make exporting easier.
  • Besides, RBI should keep a check on the external commercial borrowings to keep debt under control.

 


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