Mitras Analysis of News : 2-6-2017

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1.Importance of Privatising Air India (Live Mint)

2.USA backs out from Paris deal (The Guardian, Down to Earth)

3.Slowing down (The Indian Express, the Hindu) 

 

1.Importance of Privatising Air India  (Live Mint)

 Synoptic line: It throws light on the the government’s proposal to privatise Air-India. (GS paper III)

Overview

  • The government may look at exiting Air India completely, as the Niti Aayog has proposed total privatisation of the national carrier in a report to the Prime Minister’s Office.
  • To stress its point, the Aayog has cited various international examples of governments selling their entire stakes in airlines and not retaining any shareholding to make them viable. These include British Airways, Japan Airlines and Austrian Air.

Losses in Air India

  • The airline has an annual interest outgo of Rs 4,500 crore, which accounts for about 21 per cent of total turnover. The aviation ministry believes that the merger of erstwhile Air India and Indian Airlines — which operated international and domestic flights, respectively — had defied all logic.
  • Air India, which has accumulated losses of over Rs 50,000 crore, is sitting also on about Rs 55,000 crore of debt — about Rs 22,000 crore of loans taken to finance aircraft purchase and the rest for working capital.
  • It is operationally inefficient and unable to compete with private sector operators. The airline has been grossly mismanaged over the years

Why it is wise to privatise the carrier

  1. The 2012 turnaround plan has not shown the desired results. The government committed itself to infusing Rs42,182 crore of equity between financial years 2011-12 and 2031-32. However, the airline has not been able to achieve the targets set in the turnaround plan.
  • Similarly, it has not been able to meet the operational targets. The company has accumulated debt of about Rs50,000 crore and is struggling to repay.
  1. At a broader level, going by the established norms of market economy, the government should not be in the business of providing goods and services where the private sector has a vibrant presence. And this applies to all businesses run by the government. As has also been elaborated by the 14th Finance Commission, the opportunity cost of such investments should be considered. In the case of Air India, the cost is a lot higher as it is consistently making losses and is dependent on the government for survival.
  • Further, the presence of state-owned enterprise distorts the market. A firm with access to government finances and practically no fear of failing affects price discovery in the market and can hurt private sector operators in the
  1. Divesting the loss-making Air India will send a strong signal to investors that India is serious about reforms and is no longer willing to throw good money after bad. This will also set an example and pave the way for disinvestment of other loss-making companies, such as Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL).

Way ahead

  1. It will not be easy for the government to privatize the debt-laden Air India. It will have to work with professionals and investment bankers to find ways and make the deal reasonably attractive for a prospective buyer.
  1. It will have to bring down the level of debt in the company. This can possibly be done by selling non-core assets. For example, one of its subsidiaries the Hotel Corporation of India runs hotels which can be sold to reduce debt.
  1. The government can infuse equity capital one last time to bring down the debt and make it attractive for potential buyers. If the financial institutions are willing, a part of the debt can be converted into equity.
  1. The government could also choose to start by selling a minority stake in the company and bring in a professional management.

Question: What reforms should be initiated to make the PSU sector vibrant and meaningful in India?

 

2.USA backs out from Paris deal (The Guardian, Down to Earth)

 Synoptic line: It throws light on the implications of USA’s withdrawal from the Paris climate deal. (GS paper III)

Overview

  • The United States, with its love of big cars, big houses and blasting air-conditioners, has contributed more than any other country to the atmospheric carbon dioxide that is scorching the planet.
  • However, President Trump announced the United States would withdraw from a 195-nation agreement on climate change reached in Paris in 2015.

The move by USA

  • The decision to walk away from the accord is a momentous setback, in practical and political terms, for the effort to address climate change.
  • An American exit could prompt other countries to withdraw from the pact or rethink their emissions pledges, making it much harder to achieve the agreement’s already difficult goal of limiting global warming to a manageable level.
  • Moreover, US President sanctioned an Executive Orderon ‘Promoting Energy Independence and Economic Growth’. The Order promotes coal mining on federal land, calls for canceling, revising or revoking any rule or action that can potentially burden the development of domestic fossil fuel resources, revokes carbon pollution standards from the power sector and halts the implementation of the clean power plan that aims at reducing carbon dioxide emissions from US power plants.
  • in his first federal budget, the Trump administration defunded most of the programmes related to lowering domestic GHG emissions and scaling down the scientific missions to study climate.
  • Most importantly, Trump refused to fund the Global Climate Change Initiative, including the Green Climate Fund (GCF). GCF has been set up to help developing countries adapt to climate change and move to low-carbon technologies.
  • One of the key attributes of the Paris Agreement is the commitment by countries like the US to provide financial support to developing nations. With the defunding of GCF and other international climate change-related initiatives, Trump had already reneged on his commitments to UNFCCC and the Paris Agreement

usa

Implications of the decision

  • The US is historically the largest contributor to climate change, responsible for 21 per cent of the carbon stock in the atmosphere. It is currently the second largest polluter in the world, and has one of the highest per capita emissions. The US electricity sector, alone, was responsible for emitting more than two billion tonnes of CO2 in 2015 equal to India’s total emissions.
  • The economy, that is likely to become more fossil fuel-based, has already exhausted its ‘carbon budget’. Without the US taking responsibility for reducing its share of emissions, the world cannot keep warming “well below 2oC”, which is the key objective of the Paris Agreement.
  • Many commentators, especially from the US, have alluded that other countries should step forward and share the burden left by the US. This is not only unfair but also morally repugnant. By doing this the world would continue to mollycoddle the US’ ‘climate rogue’ behaviour.
  • EU, China and Indiamay do far more than what they have committed under the Paris Agreement. But still, it won’t be sufficient to keep the global warming under control. Without deep emission cuts in the world’s largest economy the US it is not possible to tackle climate change.
  • Therefore, the remaining 194 signatories to the Paris Agreement will have to find ways to hold the US accountable for its intransigence.

Way ahead

  • The US failing to accomplish its climate targets would mean that achieving the objective of the Paris Agreement to stay within the safe temperature limits of 2 degrees Celsius and strive for 1.5 degrees Celsius would be next to impossible now. The onus then falls on other countries to heavily scale up their climate efforts and try to save the planet.

Question What are the implications of USA’s leaving from climate negotiations on the island nations such as Maldives? What strategy should be employed to counter such an attitude?

 

 3.Slowing down (The Indian Express, the Hindu)

 Synoptic line: It throws light on slowest growth rate in two years, ceding its status as the world’s fastest-growing major economy to China.(GS paper III)

Overview

  • India’s gross domestic product (GDP) data shocked again as economic growth unexpectedly slumped to its lowest in more than two years in the March quarter, stripping the country of its status as the world’s fastest growing major economy.
  • According to the analysts the 6.1% GDP growth figure for the January to March quarter compared with China’s 6.9% reflected a general economic slowdown in the south Asian giant, compounded by the shock demonetization of 500 and 1,000 rupee banknotes.
  • While gross domestic product (GDP) growth was 6.1%, gross value added (GVA) growth a metric that more economists now favour as it excludes indirect tax collection slowed even more sharply in the fourth quarter to 5.6%, compared to 6.7% in the third quarter.
  • If we leave out the “public administration, defence and other services” component of GVA, comprising mainly government expenditure, then growth slumps to an even lower 4.1% in the fourth quarter.  Even a revision of the base year for the index of industrial production (IIP) and the wholesale price index (WPI) failed to lift growth.

Factors responsible for slow growth

  • According to the Finance minister, there are several factors which can contribute to a GDP (growth) in a particular quarter; there was some slowdown visible given the global situation even prior to demonetisation.
  • Demonetisation can also be relates to slowdown, as stopping issue of higher value banknotes has weakened economy. As the move led to months of acute cash shortages across India, that hit the country’s manufacturing and construction sectors particularly hard, the former recording slower growth than in the same period last year. The construction sector contracted by 3.7%.
  • Private consumption grew at the slowest pace in five quarters, even as construction (with a high dependence on informal, migrant labour) and manufacturing activities dipped sharply. Industry has renewed pleas for the Reserve Bank of India to cut policy rates and shift back to an accommodative stance. While lower inflation and growth may soften the RBI’s outlook, there is little that monetary policy alone can do.
  • Banks, the primary beneficiaries of demonetization, are flush with funds but credit growth is at multi-decade lows and the twin stress on banks’ and their borrowers’ balance sheets is spreading to other sectors such as telecom.
  • Due to overall economic activity, the real crisis today is investment, growth in government spending budgeted to be lower this year compared to last year as the private investment remain virtually absent. In the last two quarters (October-December and January-March), it grew at even lower rates of 1.7 per cent and minus 2.1 per cent, respectively. Without investment reviving, there can be no jobs and incomes to sustain spending.

Way ahead

  • Returning to the 8% growth mark is going to be a big challenge. While the government has vigorously underlined its reform achievements of the last three years, such as the Goods and Services Tax that rolls out in July, a mission-mode reforms reboot is urgently needed. There is need for suitably acknowledged the problem by policymakers.
  • India is preparing to introduce a national goods and services tax in July that is expected to make the country a more attractive destination for foreign investment, cut red tape for business and increase trade between states. But Moody’s has warned the country needs to further reduce debt levels, if it hopes to boost its international credit rating.

Question India’s growth rate is projected to be slow when compared with the performance in recent years. What implications it may have on investment regime in India?

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