Daily Prelims Newsletter for upsc 05 Mar 2022

Daily Prelims Newsletter For UPSC
| RaghukulCS

05 Mar 2022-Saturday

Table Of Contents

Table of Contents

RBI Monetary Policy Committee

Why in the news?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) recently noted that the central bank’s accommodative policy stance may fail to meet the inflation target (upper limit of 6 percent ).

An accommodative stance indicates the central bank’s willingness to increase the money supply and lower interest rates.

In India, the MPC sets the benchmark interest rate, also known as the base or reference rate, which is used to set other interest rates.

What exactly is monetary policy?

Monetary policy refers to the central bank’s policy regarding the use of monetary instruments under its control to achieve the Act’s goals.

The primary goal of the RBI’s monetary policy is to maintain price stability while also pursuing growth.

Price stability is a prerequisite for long-term growth.The amended RBI Act, 1934 also provides for the Government of India, in consultation with the Reserve Bank, to set the inflation target (4 percent + -2 percent) once every five years.

What is the purpose of the Monetary Policy Committee (MPC)?

The central government is empowered to form a six-member Monetary Policy Committee under Section 45ZB of the amended (in 2016) RBI Act, 1934. (MPC).

Objective: Section 45ZB also specifies that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target.” The Monetary Policy Committee’s decision is binding on the Bank.

Composition: According to Section 45ZB, the MPC shall be composed of six members: the RBI Governor as its ex officio chairperson, the Deputy Governor in charge of monetary policy, the Deputy Governor in charge of fiscal policy, the Deputy Governor in charge of fiscal policy, and the Deputy Governor in charge of fiscal policy.

The Central Board will nominate one officer of the bank, and the central government will appoint three others.

What exactly is the Monetary Policy Framework?

The RBI Act was amended in May 2016 to give the central bank a legislative mandate to run the country’s monetary policy framework.

Objective: The framework aims to set the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation, as well as to modulate liquidity conditions in order to anchor money market rates at or near the repo rate.

The following are the reasons why the repo rate is used as the policy rate: Changes in repo rates are transmitted through the money market to the entire financial system, influencing aggregate demand.

As a result, it is a major determinant of inflation and growth.

FDI Policy Reforms in Advance of the LIC IPO

Why in the news?

Recently, the Union Cabinet approved an amendment to the FDI Policy that would allow Foreign Direct Investment (FDI) of up to 20% in Life Insurance Corporation (LIC) through the “automatic route” ahead of its proposed Initial Public Offering (IPO) (IPO).

The government expects the proposed share sale to raise Rs 63,000-66,000 crore, which will help it meet its disinvestment target of Rs 78,000 crore for fiscal year 2021-22.

The government owns the entire LIC. It was founded in 1956. It controls the majority of the Indian insurance market.

In most cases, disinvestment refers to the sale of a government-owned enterprise, either partially or entirely, by the government. A corporation or a government agency

What are the most important points?

At the moment, the FDI policy makes no specific provision for foreign investment in LIC, a statutory corporation established under the LIC Act of 1956.

The policy allows for foreign direct investment in insurance companies and intermediaries or insurance intermediaries in the insurance sector.

On the government approval route, the FDI ceiling for public sector banks is 20%.

While the government raised the FDI limit in the insurance sector to 74 percent from 49 percent last year, it did not apply to LIC, which is governed by separate legislation.

What are the most important points?

At the moment, the FDI policy makes no specific provision for foreign investment in LIC, a statutory corporation established under the LIC Act of 1956.

The policy allows for foreign direct investment in insurance companies and intermediaries or insurance intermediaries in the insurance sector.

On the government approval route, the FDI ceiling for public sector banks is 20%.

While the government raised the FDI limit in the insurance sector to 74 percent from 49 percent last year, it did not apply to LIC, which is governed by separate legislation.

What is the Importance of this Change?

The FDI policy reform will facilitate foreign investment in LICs and other corporate bodies, for which the government may impose a disinvestment requirement.

The change in LIC’s FDI policy will ensure that foreign investors face no obstacles when subscribing to the public offer.

The reform will also make doing business easier and lead to increased FDI inflows, while also ensuring alignment with the overall intent or goal of FDI policy.

Increased FDI inflows will supplement domestic capital, technology transfer, and skill development for accelerated economic growth and development across sectors, thereby supporting Atmanirbhar Bharat implementation.

What is the current state of FDI inflows into India?

FDI inflows into India stood at USD 45.15 billion in 2014-2015 and have increased to USD 81.97 billion in 2020-21, despite the Covid 19 pandemic, which is 10% higher than USD 74.39 billion in the previous fiscal year 2019-20.

Procedure for Defense Acquisition

Why in the news?

Under the Defence Acquisition Procedure, the Ministry of Defence approved projects involving the design and development of military hardware such as light tanks, airborne stand-off jammers, communication equipment, and simulators (DAP).

The defence ministry has approved nine such projects, four under the DAP 2020’s ‘Make-I’ and five under the DAP 2020’s ‘Make-2’ categories.

In the Union Budget 2022, India set aside Rs 84,598 crore – 68 percent of the military’s capital acquisition budget —- for purchasing locally produced weapons and systems to boost self-reliance in the defence sector, as well as 25 percent of the defence R&D budget for private industry, startups, and academia to encourage them to pursue military platform design and development.

What exactly is the ‘Make’ Category?

The ‘Make’ capital acquisition category is the cornerstone of the Make in India initiative, which seeks to build indigenous capabilities through the participation of both the public and private sectors.

‘Make-I’ projects are government-funded, whereas ‘Make-II’ programmes are industry-funded.

Make-I is involved in the development of high-value platforms such as light tanks and communication equipment that adhere to Indian security protocols.

The Make-II category includes the development of prototype military hardware or its upgrades for import substitution, for which no government funding is provided.

The five projects approved through the industry-funded Make-II procedure are simulators for Apache attack helicopters and Chinook multi-mission choppers, wearable robotic equipment for aircraft maintenance, an autonomous combat vehicle, and an integrated surveillance and targeting system for mechanised forces.

Another sub-category under ‘Make’ is ‘Make-III,’ which covers military hardware that may not be designed and developed in-house but can be manufactured in the country for import substitution, with Indian firms working with foreign partners to manufacture these.

What exactly is DAP 2020?

It allows for the notification of a list of weapons or platforms that will be prohibited from importation.

It focuses on Foreign Direct Investment (FDI) in defence manufacturing and price indigenization.

It also introduces several new concepts, such as the need for artificial intelligence in platforms and systems, the use of indigenous software in defence equipment, and ‘innovation’ by start-ups and MSMEs (Micro, Small, and Medium Enterprises) as a new category of defence acquisition.

It includes the procurement categories Buy (Indian – Indigenously Designed, Developed, and Manufactured), Buy (Indian), Buy and Make (Indian), Buy (Global – Manufacture in India), and Buy (Global – Manufacture in India) (Global).

It raises the Indigenous Content (IC) requirement for all projects from 40% to 50% earlier, depending on the category, to 50% to 60% now.

Only under Buy (Global) procurement can foreign vendors receive 30 percent IC from Indian companies.

Iran Nuclear Agreement

Why in the news?

Iran’s and world powers’ diplomats recently reconvened in Vienna (Austria) to seek a deal to resurrect Iran’s (Tehran’s) 2015 Nuclear Accord.

President Barack Obama signed the 2015 Iran nuclear deal, which President Donald Trump dismantled in 2018.

The US has stated that it will rejoin the agreement if Iran follows the terms of the original agreement and addresses other issues concerning alleged ballistic missile stockpiles and proxy conflicts in the region.

What was the Iran nuclear deal of 2015?

The agreement is formally known as the Joint Comprehensive Plan of Action (JCPOA).

The JCPOA was the result of lengthy negotiations between Iran and the P5+1 (China, France, Russia, the United Kingdom, the United States, and Germany) between 2013 and 2015.

Iran agreed to significantly reduce its stockpiles of centrifuges, enriched uranium, and heavy water, all of which are critical components of nuclear weapons.

Iran also agreed to implement a protocol that would allow International Atomic Energy Agency (IAEA) inspectors access to its nuclear sites, ensuring that Iran would not be able to develop nuclear weapons covertly.

While the West agreed to lift sanctions related to Iran’s nuclear proliferation, other sanctions relating to alleged human rights violations and Iran’s ballistic missile programme remained in place.

The US has committed to lifting sanctions on oil exports, but has continued to restrict financial transactions, discouraging international trade with Iran.

Nonetheless, after years of recessions, currency depreciation, and inflation, Iran’s economy stabilised significantly after the deal went into effect, and exports skyrocketed.

Israel, America’s closest Middle Eastern ally, strongly opposed the agreement, and other countries, including Iran’s main regional rival Saudi Arabia, complained that they were excluded from the talks, despite the fact that Iran’s nuclear programme posed security risks to every country in the region.

Following Trump’s withdrawal from the agreement and the reinstatement of banking and oil sanctions, Iran resumed its nuclear programme in earnest, returning to roughly 97 percent of its pre-2015 nuclear capabilities.

What happened after the United States backed out of the agreement?

The United States announced its intention to lift sanctions in April 2020. The other partners, however, objected to the move, claiming that because the US was no longer a party to the agreement, it could not unilaterally reimpose sanctions.

Following the withdrawal, several countries continued to import Iranian oil under Trump administration waivers. After much international criticism, the US ended the waivers a year later, significantly reducing Iran’s oil exports.

In an effort to keep the deal alive, the other powers established the INSTEX barter system to facilitate transactions with Iran outside of the US banking system. INSTEX, on the other hand, only covered food and medicine.

After the US assassinated Iran’s top general, Qasem Soleimani, in January 2020, Iran announced that it would no longer limit its uranium enrichment.

What are the Obstacles to Restoring the JCPOA?

The regional cold war between Saudi Arabia and Iran is a significant impediment to restoration.

The United States and Saudi Arabia have strengthened their relationship in accordance with the United States’ Middle East policy and to counter Iran.

The traditional Shia vs. Sunni conflict between these countries has made negotiating peace in the region difficult.

Iran is currently in breach of several key commitments, including limits on enriched uranium stockpiles, and the further it goes, the more difficult the deal becomes.

Iran is blaming US sanctions for its economic losses as a result of the Trump administration’s withdrawal from the deal and re-imposition of sanctions.

What is the Importance of the JCPOA for India?

Regional Connectivity: The removal of sanctions may rekindle India’s interest in the Chabahar port, the Bandar Abbas port, and other regional connectivity plans.

This would help India further neutralise China’s presence in Pakistan’s Gwadar port.

Aside from Chabahar, India’s interest in the International North-South Transit Corridor (INSTC), which runs through Iran and will improve connectivity with five Central Asian republics, may be strengthened.

Energy Security: As a result of the US’ Countering America’s Adversaries Through Sanctions Act (CAATSA), India is required to reduce its oil imports to zero.

The re-establishment of relations between the United States and Iran will assist India in obtaining cheap Iranian oil and will contribute to energy security.

The Way Forward

Not only would the US have to consider Iran’s nuclear programme, but also its increasingly hostile behaviour in the region. It would also have to consider the realities of the new multipolar world, in which unilateral leadership is no longer guaranteed.

Given that Israel has recently rebalanced its relations with several Middle Eastern Arab countries, Iran would have to consider the rapidly changing dynamics in the Middle East.

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