Daily Prelims Notes 3 April 2024

April 3, 2024
Posted by: OptimizeIAS Team
Category: DPN

Daily Prelims Notes

3 April 2024

Table Of Contents

1. Securities and Exchange Board of India (SEBI) – commented on high P/E ratio

Subject: Economy

Section: Capital Market

Securities and Exchange Board of India (SEBI), commented on the high price-to-earnings (PE) ratio in the Indian capital markets. Despite the expensive valuation, SEBI noted that overseas investors are still attracted to the Indian markets due to the country’s economic momentum and growth prospects.

Key Points:

High PE Ratio:
- The Indian market currently has a PE ratio of 22.2, indicating relatively high valuations.
- Despite this, overseas investors continue to invest in Indian markets.
Reasons for Investment:
- Influx of investment reflects the optimism, trust, and faith that the world has in India’s economy.
- India’s current high multiples in the market are a testament to the positive sentiment towards the country.
Velocity of the Economy:
- Buch used the metaphor of a “hockey stick effect” to describe the rapid growth trajectory of India’s economy.

The high PE ratio, while indicating expensive valuations, is seen as a reflection of the trust and optimism surrounding India’s growth prospects. This sentiment aligns with the broader narrative of India’s emergence as a key player in the global economy, attracting significant investment interest.

About Price-to-Earnings (P/E) ratio

The Price-to-Earnings (P/E) ratio is a valuation metric used to assess the relative value of a company’s stock price compared to its earnings per share (EPS).

It is one of the most widely used tools by investors and analysts to gauge the attractiveness of a stock or the overall market.

Calculation: The P/E ratio is calculated by dividing the current market price of a stock by its earnings per share (EPS). The formula is:

P/E Ratio=Market Price per ShareEarnings per ShareP/E Ratio=Earnings per ShareMarket Price per Share

Market Price per Share: This is the current price at which the stock is trading in the market.

Earnings per Share (EPS): This is the portion of a company’s profit allocated to each outstanding share of common stock. It is calculated by dividing the company’s net income by the number of outstanding shares.

High P/E Ratio: A high P/E ratio suggests that investors are willing to pay a premium for the company’s stock relative to its earnings. It may indicate that the stock is overvalued, but it could also suggest strong growth expectations.

Low P/E Ratio: Conversely, a low P/E ratio might indicate that the stock is undervalued or that the company is experiencing some challenges.

About Worldwide Governance Indicators:

2. Rating agencies oligopoly should be dismantled: CEA

Subject: Economy

Section: External Sector

Context: The oligopoly of the three global rating agencies, Moody’s, Standard & Poor, and Fitch, needs to be dismantled

Concept:

What is credit rating?

A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.
A credit rating can be assigned to any entity that seeks to borrow money—an individual, corporation, state or provincial authority, or sovereign government.
A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.
Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
Investors use sovereign credit ratings as a way to assess the riskiness of a particular country’s bonds.
Obtaining good sovereign credit rating is usually essential for developing countries in order to access funding in international bond markets.

What are Rating Agencies

A rating agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts.
The rating assigned to a given debt shows an agency’s level of confidence that the borrower will honour its debt obligations as agreed.
The Big Three Credit Rating Agencies: Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) are the big three international credit rating agencies controlling approximately 95% of global ratings business.
In India, there are six credit rating agencies registered under SEBI namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.

Role of Rating Agencies in Capital Markets

Rating agencies assess the credit risk of specific debt securities and the borrowing entities. In the bond market, a rating agency provides an independent evaluation of the creditworthiness of debt securities issued by governments and corporations.
Rating agencies also give ratings to sovereign borrowers, who are the largest borrowers in most financial markets.
Sovereign borrowers include national governments, state governments, municipalities, and other sovereign-supported institutions. The sovereign ratings given by a rating agency shows a sovereign’s ability to repay its debt.
The ratings help governments from emerging and developing countries to issue bonds to domestic and international investors.
Governments sell bonds to obtain financing from other governments and Bretton Woods institutions such as the World Bank and the International Monetary Fund.

Issue:

According to Chief Economic Advisor V. Anantha Nageswaran there were many problems with the methodology of the rating agencies, such as “qualitative parameters” (which bring in an element of subjectivity) and the sources of information.

The rating agencies take inputs from the World Bank’s World Governance Index, which itself is “extremely problematic” because its own sources of information do not come from the countries assessed but from “think-tanks or research bodies sitting in some European countries.”

WGI is “opaque” and does not take due note of the stage of development of a country.

As countries reach a particular stage of development, they discover the need for different institutions for governance.

For them (rating agencies) to compare the institutions of developing countries and developed countries, where such institutions took several centuries to evolve, is not a fair comparison.

World Bank’s World Governance Index

It is released by the World Bank.
It is based on six dimensions of governance:

Voice and Accountability
Political Stability and Absence of Violence
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption

These indicators are designed to help researchers and analysts assess broad patterns in perceptions of governance across countries and over time.
The World Bank compiles the Worldwide Governance Indicators using data from more than 30 think tanks, international organisations, non-governmental organisations, and private firms deemed credible.
The WGI was developed in 1999 by two World Bank researchers, Daniel Kaufmann and Aart Kraay.

3. How has Daniel Kahneman’s work in psychology withstood the test of time?

Subject: Economy

Section: Msc

Context:

Daniel Kahneman (passed away on March 27, 2024) was a psychologist who spent a large part of his career at Princeton University. He did some of his best-known work with Amos Tversky, a mathematical psychologist who passed away in 1996.

Work of Kahneman and Tversky:

Kahneman and Tversky significantly influenced the field of judgment and decision-making, merging psychological insights with economics to understand human behaviour.
Their work in the 1980s laid the foundation for behavioral economics, even though they did not initially aim to contribute to the economic sphere.
Kahneman gained popularity outside academia, especially with his 2011 book ‘Thinking, Fast and Slow,’ and his partnership with Tversky was highlighted in Michael Lewis’ book ‘The Undoing Project’.
Before focusing on decision-making, Kahneman studied attention and perception, fundamental aspects of human cognition leading to action or inaction.

Attention and decision-making:

Kahneman’s initial work focused on attention and mental effort, as detailed in his 1973 book ‘Attention and Effort’, covering aspects like divided, focused, and selective attention.
Collaborating with Anne Treisman, his spouse and a renowned cognitive psychologist, he also explored attention, memory, and perception, contributing significantly to these fields until Treisman’s passing in 2018.
Kahneman’s 1982 book ‘Judgement Under Uncertainty’ bridged his early research with decision-making, highlighting their seminal 1974 paper which is highly cited for its contribution to psychology.

Loss aversion theory:

This work introduced prospect theory, particularly the concept of loss aversion, demonstrating through experiments that individuals are more affected by losses than equivalent gains, challenging previous notions of decision-making that viewed outcomes in absolute terms.
Limits on Loss aversion:
- Kahneman and Tversky‘s initial experiments on loss aversion didn’t explore the context or scale of decisions in depth.
- Later research, such as Zeif and Yechiam in 2022, indicated that loss aversion mainly occurs with significant losses (over $40 or Rs 3,300), suggesting it’s somewhat context-specific and more pronounced in specific areas like automobile purchases and household finances.
- Despite these nuances, Kahneman’s Nobel Prize in Economics in 2002, shared with Vernon L. Smith, acknowledged the impact of psychological insights on economics.
- Kahneman dedicated his share of the Nobel Prize to Tversky, honouring their collaborative work, despite the prize not being awarded posthumously.

Measuring happiness:

Kahneman significantly contributed to happiness and well-being research, introducing innovative methods to measure happiness.
- One notable method, the day reconstruction method, involves participants reflecting on their previous day in segments and rating their happiness levels by contrasting positive feelings against negative emotions, thereby applying principles from hedonic psychology.
- This approach underlines the importance of experiences over mere outcomes.
His work, emphasizing the limitations of assessing well-being solely in economic terms, aligns with studies like Anna Alexandrova’s in 2005, which argued that economic metrics capture only a portion of subjective well-being.
Kahneman’s research also distinguished between the effects of income on life satisfaction and actual happiness, highlighting that while high income might influence life satisfaction, it does not necessarily equate to increased happiness.

Rethinking thinking:

Kahneman is renowned for differentiating between two types of thinking:
- System 1, which is fast, intuitive, and automatic, and System 2, which is slower, more deliberate, and cautious.
This dichotomy has been widely studied and validated within psychology.
However, further research suggests this framework may not universally apply, particularly in non-WEIRD (Western, educated, industrialized, rich, and democratic) cultures.
Despite these limitations, Kahneman’s contributions significantly impact psychology, behavioural economics, public policy, and beyond.
His work, while not universally applicable in every context, has nonetheless laid foundational principles that continue to guide and inspire ongoing research and application in understanding human cognition and decision-making.

Source: TH

4. 7.4 magnitude quake in Taiwan; Japan issues tsunami warning for Okinawa & other Ryukyu islands

Subject: Geography

Section: Geomorphology

In the news:

A 7.4 magnitude earthquake hit Taiwan on April 3, 2023, as reported by the USGS.

Details:

The epicentre was south-southwest of Hualien, on Taiwan’s east coast with effects felt in Taipei.
Japan issued a tsunami alert for the Ryukyu islands, extending from Taiwan to Kyushu, including the strategically significant island of Okinawa.
A tsunami of at least 30 centimetres was recorded reaching Yonaguni Island, close to Taiwan.
Tsunami arrival times for Iriomote and Ishigaki were around 9:30 am, and for Miyakojima and Okinawa around 10 am, as reported by NHK.
This earthquake is the strongest to strike Taiwan since 1999.
Taiwan is located on the Pacific Ring of Fire, known for frequent seismic activity.
The Philippines also issued a tsunami warning for its Batanes island group, indicating the broader regional impact of the earthquake.

Places in the news:

Ryukyu islands:
- The Ryukyu Islands, also known as the Nansei Islands, are a chain of Japanese islands that stretch southwest from Kyushu to Taiwan: the Ōsumi, Tokara, Amami, Okinawa, and Sakishima Islands (further divided into the Miyako and Yaeyama Islands), with Yonaguni the westernmost.
- The larger are mostly volcanic islands and the smaller are mostly coral. The largest is Okinawa Island.

Batanes island group:
- Batanes is an archipelagic province in the Philippines, administratively part of the Cagayan Valley region.
- The island group is located about 190 kilometres (120 miles) south of Taiwan (Pingtung County).

Source: DTE

5. Rwanda: Genocide Archives Released

Subject: IR

Section: Places in news

Context:

Human Rights Watch announced that it is releasing a series of archives highlighting the extraordinary efforts of human rights defenders in Rwanda and abroad, to warn about the planned 1994 genocide and attempt to stop the killings. The documents painfully illustrate leading international actors’ refusal to acknowledge the slaughter of more than half a million people and act to end it.

About Rwanda genocide:

On April 6, 1994, the assassination of Rwandan President Juvénal Habyarimana and Burundian President Cyprien Ntaryamira triggered a three-month genocide in Rwanda.
Hutu extremists killed approximately three-quarters of the Tutsi population and moderate Hutus, resulting in over half a million deaths.
The Rwandan Patriotic Front (RPF) ended the genocide in mid-July 1994 but also committed killings, primarily targeting Hutu civilians.
Human Rights Watch and Alison Des Forges documented the genocide and the failure of the international community to intervene.
Despite warnings of a planned genocide, international and UN efforts to prevent or stop the killings were insufficient.

Hutu tribe:

The Hutu also known as the Abahutu, are a Bantu ethnic or social group which is native to the African Great Lakes region. They mainly live in Rwanda, Burundi and the eastern Democratic Republic of the Congo, where they form one of the principal ethnic groups alongside the Tutsi and the Great Lakes Twa.

Tutsi tribe:

The Tutsi, also called Watusi, Watutsi or Abatutsi, are an ethnic group of the African Great Lakes region.
They are a Bantu-speaking ethnic group and the second largest of three main ethnic groups in Rwanda and Burundi (the other two being the largest Bantu ethnic group Hutu and the Pygmy group of the Twa).
Historically, the Tutsi were pastoralists and filled the ranks of the warriors’ caste.
Before 1962, they regulated and controlled Rwandan society, which was composed of Tutsi aristocracy and Hutu commoners, utilizing a clientship structure.
They occupied the dominant positions in the sharply stratified society and constituted the ruling class.

Missed opportunities to prevent the genocide:

Human Rights Watch is releasing archives from 1993 to 1994, highlighting advocacy efforts to prevent and stop the genocide.
The archives reveal missed opportunities for international intervention that could have halted the genocide.
The genocide led to the adoption of the “Responsibility to Protect” doctrine in 2005 and continues to influence foreign policy and perceptions of Rwanda.
Most genocide prosecutions have occurred in Rwandan courts, the International Criminal Tribunal for Rwanda, and under universal jurisdiction in various countries.
The 30th anniversary prompts reflection on the progress in holding perpetrators accountable and the ongoing need for justice for victims.

6. What is Kallakkadal, which has flooded houses in Kerala’s coastal areas?

Subject: Geography

Section: Indian Physical Geo

Context:

Hundreds of houses have been flooded in several coastal areas of Kerala due to high sea waves, also known as swell waves, since Sunday.

More on news:

The worst affected regions include Alappuzha, Kollam, and Thiruvananthapuram districts.
Such flooding events are called swell surge or Kallakkadal in Malayalam.

What is Kallakkadal?

Kallakkadal is essentially coastal flooding during the pre-monsoon (April-May) season by swell waves on the southwest coast of India.
Kallakadal/Swell surge are flash flood events that take place without any noticeable advance change in local winds or any other apparent signature in the coastal environment.
The term Kallakkadal, used by local fishermen, is a combination of two Malayalam words, including Kallan and Kadal.
“Kallan means thief and Kadal means sea.
In spoken language, these words were combined and pronounced as Kallakkadal, meaning ocean that arrives as a thief.
In 2012, the term was formally approved by the United Nations Educational, Scientific and Cultural Organization (UNESCO).

Characteristics of kallakadal:

This phenomenon occurs mostly during pre-monsoon season and sometimes during post monsoon.
It continues for a few days and inundates the low lying coasts.
During high tide the run-up, water level can reach as much as 3–4 m above Maximum Water Level (MWL).

What causes Kallakkadal?

Kallakkadal is caused by waves that are formed by an ocean swell, hence the name swell surge.
Kallakkadal events are caused by swells propagating from the Southern Indian Ocean of 30°S, from the region between Africa and Australia.
Ocean swells occur not due to the local winds, but rather due to distant storms like hurricanes, or even long periods of fierce gale winds.
During such storms, huge energy transfer takes place from the air into the water, leading to the formation of very high waves.
Such waves can travel thousands of kilometers from the storm center until they strike shore.
Usually, Kallakkadal is a consequence of the strong winds in the southern part of the Indian Ocean, where an ocean swell is generated, and the waves then travel north to reach the coast in two or three days.
Kallakkadal occurs without precursors or any kind of local wind activity and as a result, it has been very difficult for the coastal population to get an advance warning.
However, early warning systems like the Swell Surge Forecast System —launched by the Indian National Centre for Ocean Information Services (INCOIS) in 2020 — give forewarning seven days in advance.

Why is Kallakkadal different from tsunami?

Kallakkadal came under the spotlight after the 2004 tsunami that killed more than 10,000 people.
Kallakkadal is often mistaken to be a tsunami, which is a series of enormous waves created by an underwater disturbance usually associated with earthquakes occurring below or near the ocean.
Tsunamis are caused by landslides or earthquakes in the ocean bottom, whereas Kallakkadal are caused by meteorological conditions in the Southern Ocean, 30° South.

7. Government approves E-Vehicle policy to Promote India as a Manufacturing Destination for e-vehicles

Subject: Schemes

Section: Economy

Context:

The Government of India has approved a scheme to promote India as a manufacturing destination so that e-vehicles with the latest technology can be manufactured in the country.

The policy entails the following:

Minimum Investment required: Rs 4150 Cr (∼USD 500 Mn)
No limit on maximum Investment
Timeline for manufacturing: 3 years for setting up manufacturing facilities in India, and to start commercial production of e-vehicles, and reach 50% domestic value addition (DVA) within 5 years at the maximum.
Domestic value addition (DVA) during manufacturing: A localization level of 25% by the 3rd year and 50% by the 5th year will have to be achieved
The customs duty of 15% (as applicable to CKD units) would be applicable for a period of 5 years
Vehicle of CIF value of USD 35,000 or above will be permissible
The total number of EV allowed for import would be determined by the total duty foregone or investment made, whichever is lower, subject to a maximum of ₹6,484 Cr (equal to incentive under PLI scheme).
Not more than 8,000 EVs per year would be permissible for import under this scheme.
The carryover of unutilized annual import limits would be permitted.
The Investment commitment made by the company will have to be backed up by a bank guarantee in lieu of the custom duty forgone
The Bank guarantee will be invoked in case of non-achievement of DVA and minimum investment criteria defined under the scheme guidelines.

Benefits of the policy:

This will provide Indian consumers with access to the latest technology.
It will boost the Make in India initiative.
It will promote economies of scale, lower cost of production, reduce imports of crude Oil, lower trade deficit, reduce air pollution, particularly in cities, and will have a positive impact on health and environment.
The policy is designed to attract investments in the e-vehicle space by reputed global EV manufacturers.
Companies that set up manufacturing facilities for e-vehicles will be allowed limited imports of cars at lower customs duty.

8. Defence Indigenisation

Subject: Economy

Section: National Income

Capital procurement of defence equipment are undertaken from various domestic as well as foreign vendors, based on threat perception, operational challenges and technological changes so as to keep the Armed Forces in a state of readiness and to meet the entire spectrum of security challenges.

Defence Procurement Procedure (DPP) and Defence Acquisition Procedure (DAP 2020) with a focus on ‘Aatmanirbhar Bharat’ and ‘Make in India’ introduced major policy initiatives for boosting indigenous defence capability and reduction of reliance on imports. Further, DAP-2020 provides the highest preference to ‘Buy Indian (IDDM)’ category of acquisition and ‘Buy Global’ is only permitted in exceptional situations with specific approval of Defence Acquisition Council (DAC)/Raksha Mantri.

To achieve self-reliance in defence sector and to provide impetus to design, development and manufacture of defence equipment/platforms in India, the following initiatives/policies have been taken/made by the Government:

A new category of ‘Buy (Global- Manufacture in India)’ has been introduced to enable ab-initio indigenisation of spares. This category encourages Foreign OEMs to set up ‘Manufacturing/maintenance entities’ through its subsidiary in India.
The Government has introduced Make III categories with the objective of self-reliance through import substitution.
Notification of the ‘Positive Indigenisation lists” of weapons/platforms banned for import to be indigenously manufactured.
Reservation of Cases with AoN cost ≤100 Crs, extendable to Cases of AoN cost ≤ 150 Crs if annual cash flow based on deliveries is below Rs. 100 Crs for MSMEs.
Launch of innovations for Defence Excellence (iDEX) scheme involving start-up & Micro, Small and Medium Enterprises (MSMEs).
Reforms in Offset policy with thrust on attracting investment and transfer of Technology of Defence manufacturing by assigning higher multipliers.
Launch of indigenisation portal namely SRIJAN to facilitate indigenisation by Indian Industry including MSMEs.
Establishment of two Defence Industrial Corridors, one each in Uttar Pradesh and Tamil Nadu.
Opening up of Defence Research & Development (R&D) for industry, start-ups and academia with 25 percent of defence R&D budget earmarked to promote development of defence technology in the country.
Progressive increase in allocation of Defence Budget of military modernisation for procurement from domestic sources.
In line with Government of India’s initiative of Aatmanirbhar Bharat, MoD has earmarked funds amounting to Rs. 84,598 Cr (68% of the total Capital Acquisition Budget) for the domestic capital procurement in 2022-23.