Daily Prelims Notes 20 May 2022

Daily Prelims Notes

20 May 2022

Table Of Contents

1. Currency Hedging
2. GST Council and Fiscal Federalism
3. HIV vaccine
4. Radio Frequency Identification (RFID) tags

1. Currency Hedging

Subject: Economy

Section: External sector

Context: Experts say hedging is the only way for importers to protect themselves from depreciating currency

Concept:

Currency Hedging is the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates. Hedging can be likened to an insurance policy that limits the impact of foreign exchange risk.

An importer or a foreign borrower has payables in foreign currency. Hence, they will be keen to ensure that the INR remains strong so that they can get more dollars for the same number of rupees when their foreign currency payable is due. An importer or a foreign currency borrower will have to hedge his business against a weakening of the rupee.

The exporter, on the other hand, has receivables in foreign currency at a future date. The exporter will have to ensure that the rupee stays weak as that will mean that he gets more INR for each dollar received. The exporter will be happy if the INR weakens but will need to protect himself against a strengthening of the rupee.

How does currency hedging work?

There are two main ways portfolio managers manage foreign currency risk:

• Forward contracts – The portfolio manager can enter into an agreement to exchange a fixed amount of currency at a future date and specified rate. The value of this contract will fluctuate and essentially offset the currency exposure in the underlying assets. Keep in mind that the investment will not benefit if currency fluctuations work in its favour.
• Options – For a fee, options give the holder the right, but not the obligation, to exchange one currency for another at a set rate for a certain period of time. This reduces the potential that a change in exchange rates will affect the return on the investment.

The risk can be hedged either using futures or using options. Let’s take the example of the  US-Rupee pair:

• How can an exporter use currency derivatives to hedge his currency risk?

Assume that Raghav Exports Ltd. has an export inward remittance that is receivable on 30th September for $50,000/-.Currently, the exchange rate is Rs.64/$. That means this will translate into a rupee inflow of INR 32 lakhs on September 30th.

Suppose due to heavy FDI inflow into India, the INR may actually appreciate to 62/$ by September 30th. That will mean that Raghav exports will receive only Rs.31 lakhs in rupee terms.

The company, therefore, needs to hedge its inward dollar risk. 

• Selling 50 lots (each lot is worth $1000) of the USD-INR pair at a price of Rs.64. On the inward date of 30th September, let us assume that the INR has actually appreciated to 62/$. When Raghav Exports receives its remittance of $50,000/- on September 30th, the converted value will be 31 lakhs. However, Raghav has also sold 50 lots of the USD-INR futures at Rs.64. Since the price is now down to 62, Raghav exports will make a profit of Rs.1 lakh on that position.
• The counter question is what happens if the INR depreciates to Rs.68. In the normal course, Raghav Exports would have made a profit but due to the hedge it will be locked in at Rs.64/$. This will result in a notional loss of Rs.4, but the intent here is to protect your downside risk, not to make profits. There are two ways this can be overcome. 
  • Either, one can hold the USD-INR pair with a strict stop loss or
  • The hedging can be done through put options instead of futures so that the maximum risk can be restrained to the extent of the option premium.

• How can an importer use currency derivatives to hedge his currency risk?

An importer or a foreign currency borrower will have a dollar payable at a future date. Therefore, they need to ensure that the INR does not depreciate too much as it will mean that they will require more rupees to get the equivalent amount of dollars. The importer or the foreign currency borrower can hedge their risk by buying the USD-INR futures. When the rupee depreciates, the dollar will appreciate and therefore the value of the USD-INR futures will go up. Any loss on his dollar payable due to weaker INR will be compensated by the long futures on the USD-INR. 

2. GST Council and Fiscal Federalism

Subject: Economy

Section: Fiscal Policy

Context: The recommendations of the Goods and Services Tax (GST) Council are not binding on either the Union government or the states, the Supreme Court ruled on Thursday. “To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the states are conferred equal power to legislate on GST,”

Details:

The recommendation of the GST Council has persuasive value for primary legislation, that is, framing of law, they are binding in so far as subordinate legislation is concerned, that is, issue of notification, framing of rules and prescribing rates and taxes.

If the GST Council were intended to be a constitutional body whose recommendations transform into legislation without any intervening act, there would have been an express provision in Article 246A, which stipulates that both the Parliament and the State legislatures have the power to legislate on GST the court noted.

GST Council:

As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A. The notification for bringing into force Article 279A with effect from 12th September, 2016 was issued on 10th September, 2016.

As per Article 279A of the amended Constitution, the GST Council which will be a joint forum of the Centre and the States, shall consist of the following members:

• Union Finance Minister – Chairperson
• The Union Minister of State, in-charge of Revenue of finance – Member
• The Minister In-charge of finance or taxation or any other Minister nominated by each State Government – Members

As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related to GST, like

•  the goods and services that may be subjected or exempted from GST,
• model GST Laws,
• principles that govern Place of Supply,
• threshold limits,
• GST rates including the floor rates with bands,
• special rates for raising additional resources during natural calamities/disasters,
• special provisions for certain States, etc.

Every decision of the Goods and Services Tax Council shall be taken at a meeting by a majority of not less than three-fourths of the weighted votes of the members present and voting, in accordance with the following principles, namely:

• the vote of the Central Government shall have a weightage of one third of the total votes cast, and
• the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast, in that meeting.

Fiscal federalism:

Fiscal federalism refers to the financial relations between the Union Government and the state governments. It has within its ambit the imposition of taxes as well as the division of different taxes between the Centre and the constituent units. Similarly, in the case of joint collection of taxes, an objective criterion is determined for the fair division of funds between the entities. Usually, there is a constitutional authority (like Finance Commission in India) for the purpose to ensure fairness in the division.

Division of taxing powers

Taxes Exclusively Assigned to the Union

Income from certain subjects like customs and export duties, income tax, excise duty on tobacco, jute,’ cotton, etc., corporation tax, taxes on the capital value of assets of individuals and companies; Estate duty and succession duty in respect of the property and other than agricultural land; and income from the earning departments like the railways and postal departments have been exclusively assigned to the Union Government by the Constitution.

Taxes Exclusively Assigned to States

Income from land revenue, stamp duty except on documents included in the Union List; succession duty and Estate duty in respect of agricultural land; income tax on agricultural lands; taxes on goods and passengers carried by road or inland water; taxes on vehicles used on roads, animals, boats, taxes on the consumption or sale of electricity, tolls, taxes on lands and buildings; taxes on professions, traders, calling and employment; duties on alcoholic liquors for human consumption, opium, Indian hemp, and other narcotic drugs, taxes on the entry of goods into local areas, taxes on luxuries, entertainments, amusements, betting and gambling, etc. has been assigned to the States.

Taxes Levied by Union but Collected and Appropriated by the State

The taxes on the following items are levied by the Union Government but the actual revenue from them is collected and appropriated by the States; (i) stamp duties on bills of exchange, cheques, promissory notes, bills of landing, letters of credit, policies of insurance, transfer of shares, etc.; (ii) Excise duties on medicinal toilet preparation containing alcohol or opium or Indian hemp or other narcotic drugs.

Taxes Levied and Collected by the Union but assigned to States

The taxes in this category are levied and collected by the Union Government although they are subsequently handed over to the states from where they have been collected. Such taxes included duties in respect of succession to property other than agricultural land; state duty in respect of property other than agricultural land terminal taxes on goods or passengers carried by railways, sea or air, taxes on railway freights and fares; taxes other than stamp duties on transactions in stock exchanges and futures markets; taxes on the sale or purchase of newspapers and advertisements published therein; taxes on purchase or sale of goods other than newspapers where such sale or purchases take place in the course of interstate trade or commerce.

Taxes Levied and Collected by the Union but Shared

Taxes on income other than agricultural income and excise duties other than those on medicinal and toilet preparations are levied and collected by the Union Government but shared with the states on an equitable basis. The basis of distribution is determined by the Parliament through a law based on the recommendation of the finance commission .

Distribution of grants in aid:

There are two types of grants-in aid, viz, statutory grants and discretionary grants:

• Statutory Grants:

Article 275 empowers the Parliament to make grants to the states which are in need of financial assistance and not to every state. Also, different sums may be fixed for different states. These sums are charged on the Consolidated Fund of India every year.

Apart from this general provision, the Constitution also provides for specific grants for promoting the welfare of the scheduled tribes in a state or for raising the level of administration of the scheduled areas in a state including the State of Assam.

The statutory grants under Article 275 (both general and specific) are given to the states on the recommendation of the Finance Commission.

• Discretionary Grants:

Article 282 empowers both the Centre and the states to make any grants for any public purpose, even if it is not within their respective legislative competence. Under this provision, the Centre makes grants to the states. The Centre is under no obligation to give these grants and the matter lies within its discretion.

Notably, the discretionary grants form the larger part of the Central grants to the states (when compared with that of the statutory grants).

In a cave in Laos, a tooth that likely belonged to a Denisovan girl from 1,60,000 – 1,30,000 years ago shed new light on Denisovans’ habitat, adaptability and interbreeding with the ancestors of modern humans.

Denisovans

• Scientists have long assumed that Southeast Asia was once home to Denisovans, those ancient cousins of modern humans about whom much remains to be known.
• They lived lakhs of years ago, coexisting with Neanderthals in some regions, and interbreeding with early modern humans in some cases.
• They were first identified as a separate species in 2010, following the discovery of a fragment of a finger bone and two teeth, dating back to about 40,000 years ago, in the Denisovan Cave in Siberia.
• In 2019, another fossil — a mandible with a set of teeth — was found on the Tibetan plateau.
• One reason why Denisovan fossils are so rare is that their population was smaller than that of Neanderthals — plus the fact that they are certainly a number of fossils attributed to the ‘archaic humans’, a group we put fossils into when we don’t really know where to put them.
• Also, Denisovans originated from Far East Asia with certainly less favorable climate conditions to preserve the bones.

Importance of the recent findings

• So far, it was known that Denisovans were only found in cold and high-altitude regions such as in Siberia and the Himalayas.
• The new discovery proves that they were also adapted to a warm environment. Meaning that they had very large flexibility of adaptation.
• It also confirms recent genetic findings that some populations (Negrito from Philippines, Papuans and Australian Aborigines) have 3 to 5% of Denisovan genes compared to Caucasions with 0.001%. Meaning that at some point, their ancestors interbred with some Denisovans in Southeast Asia.

3. HIV vaccine

Subject: Science

Section: Biotechnology

Context: HIV vaccine development has taken a back seat

• With antiretroviral therapy, HIV has become a chronic but manageable disease.
• Still there are challenges that need to be tackled to eliminate AIDS by 2030.

Current status of the HIV disease burden in India

• There are an approximate 2.3 million people living with HIV (PLHIV) in India.
• Of these 76% know their HIV status. Of those aware of their status, 84% are on antiretroviral treatment (ART).
• Among those on ART, the virus has been suppressed in 84% cases.
• New HIV infections in India have declined by 37% between 2010 and 2019 compared to the global average of 23%.
• Similarly, during the same period, AIDS-related deaths have declined in India by almost 66% against the global average of 39%, according to the NACO report of 2020.
• The decline is higher in states like Andhra Pradesh, Maharashtra, Karnataka, Telangana, Tamil Nadu and West Bengal and noticeably among women and children at 73.7% and 65.3% respectively.
• Despite commendable progress, Mizoram (2.32%), Nagaland (1.45%), and Manipur (1.18%) had higher than 1% HIV prevalence in the adult population in 2019.

Vaccines against HIV

• Currently, all are candidate vaccines because there is no finished product which has been commercialized or licensed for human usage.
• Broadly, here are two types of vaccines: One for those who are HIV negative, termed a preventive vaccine or immunoprophylaxis.
• The other one is for PLHIV, to prevent disease progression to clinical stages and that is called a therapeutic vaccine or immunotherapy, akin to treatment.
• There has been a lot of progress in this area after the success of long-acting antiretrovirals, Cabotegravir and Rilpivirine, where the PLHIV needs to be treated with a monthly or bimonthly injectable rather than daily oral medicines.
• After the COVID vaccine success story, there are two specific COVID vaccine platforms, which can be used for HIV – an mRNA and DNA one.
• Broadly neutralizing antibodies (BNAbs) are produced by certain types of B immunity cells, which are rare. Maybe only one in 300,000 B cells have this capability.
• The mRNA vaccine aims to stimulate production of bnAbs that can act against many variants of HIV.
• So, the mRNA vaccine will instigate B-cells and try to produce more neutralizing antibodies.

Challenges with HIV vaccines

• With no commercial vaccine in 35 years, there are very few companies and research laboratories which would invest in vaccine development.
• Moreover, with a very high success rate of ART in India, HIV vaccine development has taken a back seat.
• Even if candidate vaccines against HIV are found successful in phase 2 and can be taken forward to phase 3 of trials, the chances of getting emergency use authorisation or listing are less as HIV is no more an emergency.

4. Radio Frequency Identification (RFID) tags

Subject: Science and Technology

Section: Computer

Context: The government has decided to track all pilgrims for the forthcoming Amarnath Yatra using Radio Frequency Identification (RFID) tags.

The decision was taken amid heightened security threat to the pilgrimage.

RFID

• Radio Frequency Identification: It’s a wireless tracking system that consists of tags and readers.
• Radio waves are used to communicate information/identity of objects or people to nearby readers – devices that can be hand-held or built into fixed positions like poles or buildings.
• The tags can carry encrypted information, serial numbers and short descriptions. There are also high-memory tags like the ones designed for use in the aviation industry.

Types of RFID tags

• There are passive and active RFID tags.

How do RFIDs work?

• RFID tags use an integrated circuit and an antenna to communicate with a reader using radio waves at several different frequencies – low frequency (LF), high frequency (HF), and ultra-high frequency (UHF).
• The message sent back by the tag in the form of radio waves is translated into data and analyzed by the host computer system.
• Unlike Barcodes, RFIDs do not require direct line of sight to identify objects. They also have a bigger range.
• They are used for inventory tracking in retail stores, toll payments, as access keys in labs and also built into credit cards and library books.
• To protect the data from hackers, grades of encryption can be introduced between the tag and the reader to verify credentials.