Daily Prelims Notes 11 November 2023
- November 11, 2023
- Posted by: OptimizeIAS Team
- Category: DPN
Daily Prelims Notes
11 November 2023
Table Of Contents
- Tremors reveal gaps in emergency alert system
- A plan to join the Red Sea with Mediterranean — an alternative to the Suez Canal
- Rare Discovery in Goa: Cashew Farmer Unearths 832 Copper Coins from Portuguese Era
- Seeding cloud to clean the air
- Millet song on which PM Modi, Falu collaborated nominated for Grammy:
- Stubble Trouble
- Governors cannot sit on Bills passed by House: SC
- Rupee’s decline
- NHAI’s Use of Insurance Surety Bond in Monetisation Bid
Subject : Geography
Section: Physical geography
- When tremors hit Delhi and surrounding areas following the 6.4 magnitude earthquake in Nepal and the 5.6 magnitude aftershock, the government and private early alert systems did not reach many of the people who could feel palpable tremors.
Emergency alert systems:
- National Disaster Management Authority (NDMA)’s Cell Broadcast Alert System (CBAS):
- A joint effort of the Department of Telecommunication (DOT) and
- It represents a cutting-edge technology that empowers us to disseminate critical and time-sensitive disaster management messages to all mobile devices within specified geographical areas, regardless of whether the recipients are residents or visitors.
- This ensures that crucial emergency information reaches as many individuals as possible promptly.
- Government agencies and emergency services employ Cell Broadcasts to keep the public informed about potential threats and to provide vital updates during critical situations.
- Common applications of Cell Broadcast include delivering emergency alerts such as severe weather warnings (eg, Tsunamis, Flash Floods, Earthquakes), public safety messages, evacuation notices, and other critical information.
- Google’s Android Earthquake Early Warning System:
- It is a free service that detects earthquakes around the world and can alert Android users before shaking starts.
- To receive alerts, users must have Wi-Fi and/or cellular data connectivity, and both Android Earthquake Alerts and location settings enabled.
- The gov.in website operated by the Ministry of Earth Science’s National Centre for Seismology crashed moments after the tremors.
Measurement of the earthquake:
- Richter Scale:
- This scale, developed by Charles Richter, measures the magnitude of the energy released during the Earthquake.
- This scale is open-ended i.e. there is not any end of the scale but, it has never measured any Earthquake of magnitude greater than 8.9.
- The Richter scale, in nature, is logarithmic based on 10.
- Mercalli Scale:
- The Mercalli Intensity Scale, developed by Giuseppe Mercalli, and expanded to include 12 degrees of intensity by Adolfo Can It was further modified again by Harry O. Wood and Frank Neumann and is today known as the Modified Mercalli Intensity Scale.
- It measures the intensity of an earthquake based on its actual impacts on people, the environment and the Earth’s surface.
- It is a closed-ended linear Scale, scaled from 1-12 or I-XII with zero effect in the Intensity 1 Earthquake and total destruction in the Intensity 12 Earthquake.
Source of this article: The Hindu
Section: Places in news
Ben Gurion Canal Project:
- First envisioned in the 1960s.
- Named after Israel’s founding father David Ben-Gurion (1886-1973).
- Aim: To develop an alternate canal system that ends the monopoly of the Suez Canal.
- It is over 100 km longer than the Suez Canal.
- The idea is to cut a canal through the Israeli-controlled Negev Desert from the tip of the Gulf of Aqaba — the eastern arm of the Red Sea that juts into Israel’s southern tip and south-western Jordan — to the Eastern Mediterranean coast, thus creating an alternative to the Egyptian-controlled Suez Canal that starts from the western arm of the Red Sea and passes to the southeastern Mediterranean through the northern Sinai peninsula.
Challenges in developing this canal project:
- Huge logistical, political, and funding challenges
- Israel- Palestine conflict
- The estimated cost of such a project may be as high as $ 100 billion.
About the Suez Canal:
- Opened in 1869.
- It revolutionised global maritime trade.
- By connecting the Mediterranean and Red Seas through the Isthmus of Suez, it ensured that ships travelling between Europe and Asia would not have to travel all the way around the continent of Africa.
- The canal cut the distance between London and Mumbai by more than 41 per cent.
- In the 2022-23 fiscal year, around 26,000 vessels crossed the Suez Canal, accounting for approximately 13 per cent of global shipping.
Challenges with the Suez Canal:
- The 193 km-long, 205 m-wide, and 24 m-deep Suez Canal is the world’s biggest shipping bottleneck.
- In March 2021, the mammoth cargo ship Ever Given got stuck in the canal, blocking passage for more than a week.
- It was estimated that the resulting “traffic jam” held up an estimated $ 9.6 billion of goods every day.
- In 1956, after President Gamal Abdel Nasser (1918-70) decided to nationalise the canal, war broke out, with the UK, France, and Israel attacking Egypt in order to regain control. In the end, Egypt got control over the canal.
- It was also the focal point of both the 1967 and 1973 Arab-Israeli wars and was shut from 1967-75.
- Egypt collects all the toll revenue generated, in addition to the benefits it brings to its local economy.
- In the 2022-23 fiscal year, Egypt’s Suez Canal Authority saw toll revenues reach a record $ 9.4 billion — accounting for nearly 2 per cent of Egypt’s GDP of $ 476.8 billion.
Source of this article: Indian Express
Section: Art and Culture
Context: Rare Discovery in Goa as Cashew Farmer Unearths 832 Copper Coins from Portuguese Era
More about the news:
- A Goan cashew farmer, Vishnu Shridhar Joshi, accidentally discovered a buried pot containing 832 copper coins dating back to the 16th or 17th century, believed to be from the Portuguese era.
- The find, now part of an archaeological study, may provide insights into Goa’s economic history, trade relations, and commerce during the early Portuguese rule.
- The state’s Department of Archaeology is examining the coins to determine their origin, circulation period, and metal composition.
- The coins will eventually be displayed in the state museum after a thorough examination.
Some facts about Portuguese rule of Goa:
- In 1510, under the leadership of Afonso de Albuquerque, the Portuguese launched a military expedition to seize control of Goa from the ruling Sultanate of Bijapur.
- The Portuguese established a viceroyalty in Goa in 1530, which oversaw Portuguese possessions in India, Africa, and Southeast Asia.
- Goa remained the capital of Portuguese India until 1961.
- The Portuguese also introduced many new crops and technologies to Goa, such as potatoes, tomatoes, and chilies.
- The Portuguese constructed forts, churches, and other structures, leaving an architectural legacy that blends European and Indian influences.
- Manuel António Vassalo e Silva was the 128th and the last Governor-General of Portuguese India.
Some prominent Portuguese-influenced structures in Goa:
- Basilica of Bom Jesus: Recognized as a UNESCO World Heritage Site, this structure stands as a prominent illustration of Portuguese-influenced architecture in Goa. The magnificent facade, intricate reliefs, and lavish interiors vividly portray the splendor and richness of the Portuguese colonial period.
- Se Cathedral: Positioned in Old Goa, the Se Cathedral ranks among the largest churches in Asia, showcasing architectural brilliance. Constructed in the Portuguese Manueline style, it seamlessly blends Gothic, Renaissance, and Portuguese design elements.
- Church of St. Francis of Assisi: Located in Old Goa, this church’s adorned entrance, decorative motifs, and tranquil interiors serve as a testament to Portuguese influences on Goan religious architecture.
- Fort Aguada: Situated in North Goa, this Portuguese fort is a fusion of military and architectural prowess. Its imposing presence and strategic positioning underscore the defensive architectural concepts introduced by the Portuguese.
- Fontainhas: Renowned for its well-preserved Portuguese colonial architecture, Fontainhas provides a glimpse into the architectural allure of Goa’s Portuguese heritage.
Section: Art and Culture
Context: Delhi govt plans ‘cloud seeding’ to induce rains amid pollution
What is cloud seeding:
- Cloud seeding involves injecting clouds with substances like silver iodide, potassium iodide, or sodium chloride to accelerate cloud microphysical processes.
- These substances serve as nuclei around which cloud droplets can form.
- The process aims to create larger droplets that can reach the Earth’s surface without evaporating.
- Different salts are used to provide cloud condensation nuclei and ice nuclei, essential for forming cloud droplets and ice crystals, respectively.
- Cloud seeding is intended to enhance precipitation by promoting the growth of droplets and increasing the likelihood of rainfall.
What are the conditions required for cloud seeding to be done:
- Cloud seeding is dependent on the presence of a sufficient number of clouds and specific cloud types.
- Effective cloud seeding requires clouds with an adequate depth and an ample number of cloud droplets.
- The process aims to increase the size of cloud droplets, leading to their growth and eventual precipitation.
- In winter, clouds typically form over Delhi when influenced by western disturbances originating in the Caspian or Mediterranean Sea.
- While radar systems can help assess the likelihood of cloud formation, the height and liquid water content of the clouds also need to be considered for successful cloud seeding.
Has cloud seeding been done before in India, and has it been successful:
- Cloud seeding experiments in India have primarily been conducted during the monsoon season in states like Karnataka, Maharashtra, and Tamil Nadu.
- A notable experiment, CAIPEEX-IV, conducted in drought-prone Solapur, Maharashtra, during the 2018 and 2019 monsoon seasons, showed a relative enhancement of 18% in rainfall.
- While there have been attempts in pre-monsoon months, such as IIT Kanpur’s trials in April and May 2018, the success of cloud seeding remains uncertain and complex due to various factors influencing precipitation, making further research necessary for potential applications in winter or other seasons.
How it is expected to help with pollution levels
- Cloud seeding in India has primarily focused on addressing drought conditions, and there haven’t been attempts specifically aimed at reducing pollution.
- While China has explored weather management options, the complex and non-linear nature of cloud processes makes it challenging to predict the outcomes of cloud seeding accurately.
- The impact of cloud seeding on pollution reduction would require dedicated studies, considering India’s unique conditions.
- The initiative to use cloud seeding for air pollution control is a novel approach, aiming to induce rainfall that can temporarily wash away pollutants, although the long-term effectiveness remains uncertain.
Context: Millet song on which PM Modi, Falu collaborated nominated for Grammy
More about the news:
- The song “Abundance in Millets,” a collaboration between Indian-American singer Falu and Prime Minister Narendra Modi, has been nominated for a Grammy award in the best global music performance category.
- The song, released in June to promote the benefits of millets, coincided with the designation of 2023 as the “International Year of Millets.”
- Falu expressed her excitement, noting that Prime Minister Modi had agreed to write the song with her.
- The nomination recognizes the creative effort to highlight the importance of millets and their nutritional benefits.
Some facts about Grammy:
- Popularly known as Grammy Award, it is originally named Gramophone Award, presented annually in the United States by the National Academy of Recording Arts & Sciences (NARAS; commonly called the Recording Academy) to honour artistes in the music industry for their exceptional work in a year.
- It was started in 1959 to respect the performers for the year 1958.
- Once it was made, the committee decided to call it Grammy as a tribute to Emile Berliner’s gramophone.
- The “General Field” are four awards that are not restricted by genre:
- Album of the Year
- Record of the Year
- Song of the Year
- Best New Artiste
- Winners are selected from more than 25 fields, which cover such genres as pop, rock, rap, R&B, country, reggae, classical, gospel, and jazz, as well as production and postproduction work, including packaging and album notes.
- The honorees receive a golden statuette of a gramophone.
- The Grammys are the first of the Big Three networks’ major music awards held annually and are considered one of the four major annual American entertainment awards with the Academy Awards (for films), the Emmy Awards (for television), and the Tony Awards (for theater).
- Every year, in October November, pollution levels spike in north India. While many factors come together to create smog, stubble burning remains a significant one, despite fewer incidents being recorded this year.
What is stubble burning?
- A Practice of removing agricultural waste from the field by setting on fire the straw stubble (parali) that is left on the land after harvesting of grains like paddy, wheat etc.
- Region: Mainly in the Indo-Gangetic plains of Punjab, Haryana, and Uttar Pradesh.
- A Crime: Burning crop residue is a crime under Section 188 of the IPC and under the Air (Prevention and Control of Pollution) Act.
Problems related to stubble burning
- Air Pollution: Each year, air pollution levels rise due to stubble burning and the Air Quality Index (AQI) reaches a ‘severe’ and ‘hazardous’ level.
- Heat Penetration: Stubble burning generates heat that penetrates the soil, causing an increase in soil erosion, loss of useful microbes and moisture, leading to soil degradation and its fertility.
- Lack of Political Will: As farmers are an important political constituency, the state government adopted a soft approach.
- Lack of Viable Alternatives: Although farmer outfits in Punjab are against the burning of stubble, they would continue it without a viable alternative or financial incentive.
- Harmful Health Impacts: Stubble burning emits toxic pollutants in the atmosphere containing harmful gasses like Carbon Monoxide (CO), methane (CH4), carcinogenic polycyclic aromatic hydrocarbons, and volatile organic compounds (VOC).
- Global Warming: Pollution and greenhouse gas emissions (GHG) lead to global warming. These are also responsible for the haze in Delhi and the melting of Himalayan glaciers.
Solution for stubble burning issue
- Need to subsidize innovative farm technologies like happy seeder, rotavator, baler, paddy straw chopper, etc. are costly but they could help farmers to manage crop residues effectively.
- It’s time to use new and improved seed varieties like Pusa Basmati-1509 and PR-126, which mature quickly and also improve the quality of the soil. Using Bio-Waste Decomposers which increase the Feed Conversion Ratio (FCR).
- Sustainable farm management practices, which could not only manage the crop residues but also help control GreenHouse Gases emissions.
- Educating and Empowering the Stakeholders is important for better utilization of agricultural waste for financial and environmental gains.
- Need to adopt best practices of other state governments like:
- The Punjab government instructed brick kiln owners to replace at least 20 percent of coal with paddy straw pellets for fuel.
- In Chhattisgarh Gauthans Model, the paddy growers donate the crop residues in thousands of Gauthans (cattle shed premises for conservation and augmenting livestock) where it is used as fodder.
Government’s action to tackle the problems associated with stubble burning?
- National Policy for Management of Crop Residues for control of burning of crop residue by promotion of in-situ management (incorporation in soil, mulching) of crop residue.
- Waste to Energy Programme under the National Bioenergy Programme for the generation of biogas, bioCNG, power, and syngas from urban, industrial and agricultural residues.
- Crop Residue Management Guidelines for efficient ex-situ management of paddy straw e.g. Pusa bio-decomposer.
|What is the ‘Pusa Decomposer’?|
It is essentially a fungi-based liquid solution that can soften hard stubble to the extent that it can be easily mixed with soil in the field to act as compost. This would then rule out the need to burn the stubble, and also help in retaining the essential microbes and nutrients in soil that are otherwise damaged when the residue is burned.
How long does it take for the decomposer to work?
The window of time required for the solution to work, which is currently the main concern of farmers, is around 20 to 25 days, as per the IARI. Farmers argue that this window is too long for them, as they ideally wait about a week or 10 days after harvesting the non-basmati variety of rice — which leaves hard stubble — to sow the wheat crop. IARI scientists, however, say that farmers do not necessarily have to plant the next crop in a rush — and that 20-25 days is enough waiting time.
- Addressing the challenge of stubble burning requires a collaborative effort, emphasizing innovative technologies, government initiatives, and sustainable farming practices.
Subject : Polity
- The Supreme Court on Friday laid down that a Governor cannot sit on key Bills passed by a State Legislature after casting doubts on the validity of the Assembly session in which the proposed laws were passed with overwhelming majority by the elected representatives of the people.
The process of granting assent to Bills:
- Article 200 of the Constitution covers the options before the Governor when a Bill passed by both Houses of the Legislature is presented to him.
- The first provision to the Article says the Governor could either:
- declare his assent to the Bill or
- withhold the assent (if it is not a Money Bill) or
- reserve the law for the consideration of the President if he thinks the Bill derogates from or endangers the power of judicial review of the High Court.
- In case the Governor chooses to withhold assent, he should return the Bill as soon as possible with a message requesting the Legislative Assembly to reconsider the proposed law or any specified provisions or suggest amendments.
- The Assembly would reconsider and pass the Bill, and this time, the Governor should not withhold his assent.
- In short, the constitutional head of the State would bow to the considered decision of the elected representatives of the people.
Do Governors have discretion?
- Governors did have a discretion to return Bills before the first provision in the draft Article 175 (now Article 200).
- This was amended by the Constituent Assembly in 1949.
- The first provision to Article 200 is thus a saving clause and retains the discretion over the fate of the Bill solely in the hands of the State Cabinet.
- Article 163 makes it clear the Governor is not expected to act independently.
- The Supreme Court in the Shamsher Singh case verdict has held that a Governor exercises all his powers and functions conferred on him by or under the Constitution on the aid and advice of his Council of Ministers save in spheres where the Governor is required by or under the Constitution to exercise his functions in his discretion.
- The assent or return of the Bill does not involve the discretion of individuals occupying the Governor’s post.
By when should Bills be returned?
- The first provision of Article 200 says it should be “as soon as possible”.
- The Constitution is silent on the time duration of the bills to be returned to state legislative assembly by the Governor.
- The Supreme Court has interpreted “as soon as possible” in the provision to mean “as early as practicable without avoidable delay” in a 1972 judgment.
- The SC in its 2020 judgment in the Keisham Megha Chandra Singh case, said a ‘reasonable time’ would mean three months.
MSME Economic Activity Index – Sumpoorn
The collaboration between Jocata and SIDBI has resulted in the launch of the MSME Economic Activity Index – Sumpoorn.
This high-frequency indicator is designed specifically for MSMEs (Micro, Small, and Medium Enterprises) and aims to provide insights into India’s economic growth engine.
MSMEs contribute significantly to the country’s Gross Value Added (GVA) and total exports.
Key features of the MSME Economic Activity Index – Sumpoorn:
- MSME Focus: This index is tailored to capture the state of India’s MSMEs, which play a crucial role in the economy.
- High-Frequency Indicator: The index is a high-frequency indicator, allowing for more timely and frequent insights into the performance of MSMEs.
- Data Source: It utilizes consent-led and anonymized monthly sales data from over 50,000 credit-seeking MSMEs, reflected in official GSTN returns.
- Relative Amplitude-Adjusted Composite Diffusion Index: The index is described as a relative amplitude-adjusted composite diffusion index, suggesting a comprehensive measure that considers various factors.
- Development Team: A team of credit experts, data scientists, and senior economists have been involved in building and tracking the index over the past four years to ensure its accuracy in representing the MSME economy.
The MSME Economic Activity Index – Sumpoorn aims to provide a more accurate and timely reflection of the MSME sector’s performance, capturing the impact of macroeconomic conditions.
Small Industries Development Bank of India (SIDBI):
- Establishment: SIDBI was established in 1990 as a wholly-owned subsidiary of the Industrial Development Bank of India (IDBI).
- Statutory Body: It operates as a statutory body under the Department of Financial Services, Ministry of Finance, Government of India.
- Headquarters: The headquarters of SIDBI is located in Lucknow, Uttar Pradesh, India.
- Mandate: SIDBI’s primary mandate is to promote and develop Micro, Small, and Medium Enterprises (MSMEs) in India. It plays a crucial role in the growth and development of the MSME sector by providing various financial and support services.
- Facilitating the flow of credit to MSMEs.
- Acting as a principal financial institution for coordinating the functions of institutions engaged in the financing of MSMEs.
- Implementing various promotional and developmental measures to strengthen the MSME sector.
- Programs and Initiatives: SIDBI runs several programs and initiatives to support MSMEs, including credit guarantee schemes, refinancing schemes, and venture capital programs.
- Regulatory Role: SIDBI is involved in the overall licensing and regulation of Micro, Small, and Medium Enterprise finance companies in India.
SIDBI’s efforts are crucial for the inclusive economic development of India by fostering the growth of small and medium-sized enterprises, which play a significant role in employment generation and industrialization.
GDP v/s GVA
Gross Value Added (GVA) and Gross Domestic Product (GDP) are key indicators used to measure the economic performance of a country.
- Gross Value Added (GVA):
- Definition: GVA is the total value of goods and services produced in an economy minus the cost of goods and services used up in production.
- Calculation: GVA = Gross Output – Intermediate Consumption
- Purpose:GVA provides a measure of the contribution of individual sectors (agriculture, manufacturing, services, etc.) to the overall economy. It is often used to analyze the performance of specific industries.
- Gross Domestic Product (GDP):
- Definition: GDP is the total value of all goods and services produced in a country within a specific period. It includes the production by both domestic and foreign entities within the country’s borders.
- Calculation: GDP can be calculated using three approaches:
- Production Approach: GDP = GVA + Taxes on Products – Subsidies on Products
- Expenditure Approach: GDP = Consumption + Investment + Government Spending + (Exports – Imports)
- Income Approach: GDP = Compensation of Employees + Gross Operating Surplus + Gross Mixed Income + Taxes on Production and Imports – Subsidies
- Purpose:GDP is a comprehensive measure of a country’s economic performance. It reflects the total economic output and is widely used to compare the economic health of different countries.
In summary, while GVA focuses on the value generated by different sectors of the economy, GDP provides a broader measure of the overall economic activity within a country.
Section: Monetary Policy
Context: RBI probing Refinitiv’s forex outage
- The Indian rupee plunging to a life-time low of ₹83.33 against the US dollar may partly be on account of massive volatility caused by an outage in Refinitiv, an electronic trading platform authorised to offer forex products.
- Refinitiv is a subsidiary of LSEG or London Stock Exchange Group. It is among the five non-bank entities authorised by the RBI to operate electronic trading platforms for spot foreign exchange market.
- The Indian rupee experienced a significant drop to a lifetime low of ₹83.33 against the US dollar.
- The brief outage on Refinitiv is reported to have caused disruptions in the currency market.
- Market participants were reportedly unable to log in to the platform during the outage, leading to a drying up of orders and volume on the trading terminal.
Volatility and Investigation:
- The incident resulted in increased uncertainty in the money market, contributing to excess volatility in the movement of the rupee.
- The central bank, RBI, is said to be investigating the matter, seeking information on the circumstances of the disruption and whether standard operating procedures for business continuity were followed.
- The rupee opened at 83.28 against the US dollar on the day of the incident and touched a high of 83.49 during intraday trading.
- Possible intervention from the central bank influenced the closing rate, with the rupee ending at Rs 83.33 against the US dollar.
- The RBI has reportedly sought an explanation from Refinitiv regarding the disruption.
- The regulator is seeking information on the circumstances of the outage, adherence to standard operating procedures, and the root cause analysis to determine whether the disruption resulted from a system failure or human error.
- In summary, the Refinitiv outage is identified as a factor contributing to increased volatility in the rupee’s exchange rate, leading to regulatory scrutiny and investigation by the RBI.
- Currency appreciation refers to an increase in the value of a country’s currency relative to other currencies in the foreign exchange market.
- Higher Demand: If there is an increased demand for a country’s currency, its value tends to rise.
- Economic Strength: A strong and growing economy, coupled with positive economic indicators, can lead to currency appreciation.
- Interest Rates: Higher interest rates in a country can attract foreign capital, leading to an appreciation of its currency.
- Trade Surplus: If a country consistently exports more than it imports, it creates higher demand for its currency, contributing to appreciation.
- Import Prices: Appreciation makes imports cheaper for domestic consumers.
- Inflation: It may contribute to lower inflation due to cheaper imports.
- Exports: It can negatively impact exports as they become more expensive for foreign buyers.
- Central Bank Intervention:
- Central banks may intervene to manage the currency’s value through buying/selling in the foreign exchange market.
- Currency depreciation occurs when a country’s currency loses value compared to other currencies.
- Lower Demand: Reduced demand for a currency can lead to depreciation.
- Economic Weakness: Economic downturns, high unemployment, or weak economic indicators can contribute to depreciation.
- Low Interest Rates: Lower interest rates may discourage foreign investment, leading to currency depreciation.
- Trade Deficit: Persistent trade deficits can result in a depreciation as more of the currency is needed to pay for imports.
- Export Competitiveness: Depreciation can boost exports by making them more affordable for foreign buyers.
- Import Prices: Imports become more expensive, potentially contributing to higher domestic inflation.
- Debt: Countries with significant foreign debt may face increased repayment costs.
- Managed Depreciation:
- In some cases, countries intentionally allow or manage depreciation to support exports and economic growth.
- Floating Exchange Rates vs. Fixed Exchange Rates:
- Floating Rates: Most major currencies have floating exchange rates that fluctuate based on market forces.
- Fixed Rates: Some countries peg their currency to another (or a basket of) currency, aiming to maintain a stable exchange rate.
Capital Account Convertibility:
- Capital account convertibility (CAC) refers to the freedom to convert local financial assets into foreign financial assets and vice versa. It involves the ability to conduct transactions related to capital flows without restrictions.
- Foreign Direct Investment (FDI): Unrestricted flow of investment in physical assets in another country.
- Foreign Portfolio Investment (FPI): Unrestricted flow of investment in financial assets like stocks and bonds.
- Borrowing and Lending: Freedom for residents to borrow and lend money internationally.
- CAC allows for greater flexibility in managing capital flows.
- It attracts foreign investment and enhances the integration of a country into the global financial system.
- While CAC offers benefits, it also exposes a country to risks such as sudden capital outflows, which can impact exchange rates and financial stability.
Current Account Convertibility:
- Current account convertibility (CAC) involves the freedom to convert local currency for international trade in goods and services. It ensures that transactions related to the trade of goods, services, income, and transfers can be conducted without restrictions.
- Trade Transactions: Unrestricted movement of funds for importing and exporting goods and services.
- Income Transactions: Unrestricted flow of income earned from investments and labor.
- Transfer Transactions: Unrestricted movement of gifts, remittances, and other transfers.
- CAC facilitates international trade and ensures smooth transactions related to income and transfers.
- It promotes economic openness and fosters international economic relations.
- Excessive current account deficits may lead to external debt accumulation and vulnerability to external shocks.
- Nature of Transactions:
- Capital Account deals with capital flows, including investments and borrowing.
- Current Account deals with transactions related to the current account, such as trade and income.
- Capital Account provides flexibility in managing capital movements.
- Current Account provides flexibility in conducting transactions related to the current account.
- Risks associated with Capital Account include financial instability due to rapid capital movements.
- Risks associated with Current Account include the accumulation of external debt and potential imbalances.
Both convertibilities are crucial aspects of a country’s economic policies. Striking a balance between liberalizing capital flows and ensuring stability in the current account is essential for sustainable economic growth and stability. Central banks and policymakers often implement convertibility measures gradually, taking into account the country’s economic conditions and vulnerabilities.
Current Account Balance:
- The current account is a part of a country’s balance of payments that records its transactions with the rest of the world in goods, services, primary income, and secondary income.
- Goods and Services: Includes exports and imports of tangible goods and services.
- Primary Income: Represents income earned and paid on investments (e.g., interest, dividends).
- Secondary Income: Involves transfers of money, such as foreign aid or remittances.
- Surplus and Deficit:
- A current account surplus occurs when a country exports more goods and services and receives more income than it imports and pays out. It indicates a net inflow of funds.
- A current account deficit occurs when a country imports more goods and services and pays more income than it exports and receives. It indicates a net outflow of funds.
- A surplus contributes to an accumulation of foreign assets, while a deficit leads to increased foreign liabilities.
- Persistent deficits may require financing through capital account transactions.
Capital Account Balance:
- The capital account is another component of the balance of payments that records financial transactions. It includes capital transfers and the acquisition or disposal of non-produced, non-financial assets.
- Foreign Direct Investment (FDI): Investments in physical assets, such as factories or real estate, in another country.
- Foreign Portfolio Investment (FPI): Investments in financial assets like stocks and bonds in another country.
- Changes in Reserves: Movements in a country’s official reserves, including gold and foreign exchange reserves.
- Surplus and Deficit:
- A capital account surplus occurs when a country receives more financial resources from other countries than it invests abroad.
- A capital account deficit occurs when a country invests more abroad than it receives from other countries.
- A surplus in the capital account means the country is a net lender to the rest of the world.
- A deficit implies the country is a net borrower.
Section: Monetary Policy
- The National Highways Authority of India (NHAI) has adopted an innovative approach by accepting an insurance surety bond for the Toll Operate Transfer (TOT) Bundle 14 monetisation program.
- Nature of Instrument:
- An insurance surety bond serves as a form of bank guarantee (BG) in the road infrastructure sector for the monetisation of bids.
- This marks the first instance of utilizing this innovative financial instrument in the road infrastructure sector for monetisation purposes.
- Collaboration and Implementation:
- NHAI collaborated with the Highway Operators Association of India (HOAI), SBI General Insurance, and AON India Insurance to implement this initiative.
- The insurance surety bond has been issued for NHAI’s monetisation bid of TOT Bundle 14 at a rate of 0.25%, and it does not require any margin money.
- Benefits and Savings:
- The use of an insurance surety bond at a low rate translates into significant cost savings for concessionaires.
- These savings enhance liquidity in the market and create a favorable environment for the growth and development of the road sector.
- Industry Benchmark:
- NHAI’s adoption of insurance surety bonds sets a new benchmark for the industry, emphasizing the importance of innovative financial solutions in the evolving landscape of road infrastructure development.
- Encouraging Private Participation:
- The move is expected to encourage greater private participation in the highway sector, contributing to the overall “Ease of Doing Business.”
- NHAI’s BG Statistics:
- NHAI has received a substantial volume of Bank Guarantees (BGs) since 2022, amounting to ₹15,000 crore.
- The large volume of BGs offers significant potential for insurance companies, and the wider adoption of surety bonds is poised to boost capital availability for road projects.
- Additional Security and Adoption Appeal:
- NHAI has urged insurance companies and contractors to consider insurance surety bonds as an additional mode of submitting bid security and/or performance security.
- Over 40 surety bonds have already been issued for various NHAI contracts, showcasing the appeal and adoption of this financial instrument.
- Government Recognition:
- The Ministry of Finance has equated electronic Bank Guarantees (eBG) and insurance surety bonds with bank guarantees for all government procurements.
- Impact on Infrastructure Development:
- Instruments like insurance surety bonds contribute to strengthening national highway infrastructure development, with positive cascading effects on the economy.
- A surety bond is a written agreement that guarantees the compliance, payment, or performance of a specified act.
- It operates as a unique form of insurance involving three parties: Principal, Surety, and Obligee.
- Three Parties Involved:
- Principal: The entity purchasing the bond and committing to performing a promised act.
- Surety: The insurance company guaranteeing the performance, assuming liability if the principal fails.
- Obligee: The party requiring and benefiting from the surety bond, often a government organization.
- Purpose and Provider:
- Surety bonds are provided by insurance companies on behalf of contractors to the entity awarding a project.
- It facilitates financial closure for contractors, offering an alternative to bank guarantees.
- Aim in Infrastructure Development:
- Aimed at infrastructure development to reduce indirect costs for suppliers and contractors, diversifying options.
- Acts as a substitute for bank guarantees, enhancing efficiency in project financial closure.
- Protects the beneficiary against acts or events that compromise the principal’s obligations.
- Ensures the performance of various obligations, from construction contracts to licensing agreements.
- Boost to Infrastructure Projects:
- Framing rules for surety contracts addresses liquidity and funding needs in infrastructure.
- Creates a level playing field for contractors of different sizes.
- Assists in developing an alternative to bank guarantees, optimizing working capital and reducing collateral requirements.
- Encourages collaboration between insurers and financial institutions for risk information sharing.
- Issues with Surety Bonds:
- New concept in India; insurers lack expertise in risk assessment.
- Lack of clarity on pricing, recourse against defaulting contractors, and reinsurance options.
- Requires extensive reinsurance support, and primary insurers cannot issue policies without proper backup.
- Legal enforcement of tripartite contracts and recognition of insurers’ rights under Indian Contract Act and Insolvency and Bankruptcy Code are challenges.
- Overall Impact:
- Despite challenges, surety bonds have the potential to release liquidity in the infrastructure space while managing risks effectively.
- Addressing issues and building expertise can make surety bonds a valuable tool for contractors and project stakeholders.
About National Highways Authority of India (NHAI)
National Highways Authority of India (NHAI) is an autonomous agency under the Ministry of Road Transport and Highways (MoRTH), Government of India.
Established in 1988, NHAI is responsible for the development, maintenance, and management of national highways and road networks in India.
Key Functions of NHAI:
- Highway Development: NHAI is involved in the planning and implementation of highway development projects across the country. This includes the construction of new highways, widening and improvement of existing highways, and the development of expressways.
- Monetization of Highways: NHAI explores various models for monetizing operational highways, such as Toll-Operate-Transfer (TOT) and Infrastructure Investment Trusts (InvITs). These initiatives aim to attract private investment and generate revenue for further infrastructure development.
Different models related to infrastructure development and public-private partnerships (PPP)
- Lease Contract Model:
- Asset is leased to either the private or public entity.
- The private entity can earn revenue from operations.
- Build-Lease-Transfer Model:
- The private entity owns the asset and leases it to the public entity.
- Public entity makes the capital investment.
- Build-Operate-Transfer (BOT) Model:
- Public entity retains ownership.
- Private entity is responsible for construction (typically greenfield projects).
- BOT Annuity:
- Adopted for highway projects with limited revenue potential.
- Private entity designs, builds, manages, and maintains the asset.
- Receives a fixed annuity from the public entity at regular intervals.
- Engineering-Procurement-Construction (EPC) Model:
- Private entity designs, finances, and builds the asset.
- Ownership is transferred to the public entity.
- Private entity does not handle operations and management.
- Hybrid Annuity Model (HAM):
- Public entity finances 40%, private entity finances 60% of the project cost.
- Ownership and operations remain the responsibility of the public entity.
- Private entity provide engineering expertise.