Editorial 1: Why India needs stable capital flows
Context:
- As per the RBI’s quarterly statistics, the current account deficit (CAD) widened to 4.4 per cent of GDP in the second quarter of 2022-23, down from 2.2 per cent in the preceding quarter.
- This marks a reversal from an unusual surplus of 0.9 per cent of GDP in 2020-21. In the third quarter of this financial year, while the merchandise trade deficit has widened, the CAD may witness a fall.
- The overall trade deficit has declined to $37.73 billion in the third quarter, from $49.1 billion in the second quarter of 2022-23. The latest statistics also reveal a sharp decline in the trade deficit to $1.27 billion in January on the back of a significant rise in net services exports
Is the current account deficit a cause for concern?
- India’s CADs have both desirable and undesirable components.
- A desirable deficit is a natural reflection of rising investment, portfolio choices and the demographics of the country.
- However, large and persistent CADs can be undesirable if they reflect bigger problems such as poor export competitiveness and are financed by unstable financing.
- The countercyclical nature of India’s CAD is a matter of concern
- Economist suggests that the country’s CAD rises when output falls rather than when demand rises, indicating the dominance of external shocks.
- For instance, if oil prices rise, and as oil is an input in the production process, it raises the cost of production and leads to a fall in economic growth. In this case, CADs rise with falling growth due to both the inelasticity of oil import demand as well as its major share in India’s total imports.
Stable capital flows are desirable for bridging the CAD:
- Large and persistent CADs expose India to the risks associated with its financing.
- Economic theory suggests that if CADs can be financed by stable capital inflows, such as FDI inflows, they are desirable as they are less prone to capital flight.
- However, if deficits are financed by volatile capital flows such as portfolio flows, there may be a cause of concern. Portfolio flows are capricious and more susceptible to reversals in case of any global financial shock.
- Hence, the composition of financing is crucial. While FDI inflows were enough to finance the deficit in 2021-22, these inflows have been weak in the current fiscal year.
- FDI and portfolio inflows each only financed about 18 per cent of CADs in the second quarter of 2022-23.
- So, there is a financing issue. Stable capital flows are desirable as they allow debtor countries, such as India, to utilise and allocate them into sectors that may yield long-term productive gains and foster higher economic growth.
Role of Services and Remittance in balancing the CAD:
- Remittances and services exports have provided a counter-balance to rising merchandise trade deficits.
- India’s services exports grew at 23.5 per cent in 2021-22. In the first half of 2022-23, services exports recorded a growth of 32.7 per cent over the same period last year.
- Alongside, remittances have reached $48 billion in April-September 2022, an increase of 25 per cent. While capital flows are pro-cyclical and react negatively to contractionary monetary policy by the Fed, remittances have exhibited remarkable stability.
Over the medium-term; policy maker should consider the global economic situation:
- Over the medium term, policymakers need to arrest the negative spillovers from the slowdown in global trade on merchandise exports.
- Further rate hikes by the US Fed may lead to capital outflows leading to additional exchange rate market pressures.
- This could be challenging in the current situation as a weaker currency, coupled with a sticky import basket will lead to imported inflation.
- Policy measures thus must facilitate exports by focusing on structural reforms to improve trade competitiveness, alongside which the government must sign free trade agreements.
Conclusion:
- India is currently facing the twin-deficit problem of high fiscal and CADs.
- While aggressive fiscal consolidation may be undesirable in the face of rising fears about a global slowdown, a comfortable external environment can be maintained by ensuring stable financing, along with using exchange rates as a shock absorber to weather the adverse global economic situation.
Editorial 2: National Science Day 2023: The Raman Effect, which CV Raman won the Nobel for
Context:
- In 1986, the Government of India, under then Prime Minister Rajiv Gandhi, designated February 28 as National Science Day to commemorate the announcement of the discovery of the “Raman Effect”. This year’s edition is being celebrated under the theme of “Global Science for Global Wellbeing”, in light of India’s G20 presidency.
- The Raman Effect was the discovery which won physicist Sir CV Raman his Nobel Prize in 1930. Conducting a deceptively simple experiment, Raman discovered that when a stream of light passes through a liquid, a fraction of the light scattered by the liquid is of a different colour.
- This discovery was immediately recognised as groundbreaking in the scientific community, being the subject of over 700 papers in the first seven years after its announcement.
A voyage across the ocean leads to interest in the scattering of light
- By 1921, he made his first journey to England. It was on the return journey that Raman would make an observation that would change his life and science forever.
- While passing through the Mediterranean Sea, Raman was most fascinated by the sea’s deep blue colour. Dissatisfied with the then-accepted answer (“the colour of the sea was just a reflection of the colour of the sky”), his curious mind delved deeper.
- He soon found out that the colour of the sea was the result of the scattering of sunlight by the water molecules. Fascinated by the phenomenon of light-scattering, Raman and his collaborators in Calcutta began to conduct extensive scientific experiments on the matter – experiments that would eventually lead to his eponymous discovery.
The Raman Effect
- Simply put, the Raman Effect refers to the phenomenon in which when a stream of light passes through a liquid, a fraction of the light scattered by the liquid is of a different colour. This happens due to the change in the wavelength of light that occurs when a light beam is deflected by molecules.
- In general, when light interacts with an object, it can either be reflected, refracted or transmitted. One of the things that scientists look at when light is scattered is if the particle it interacts with is able to change its energy.
- The Raman Effect is when the change in the energy of the light is affected by the vibrations of the molecule or material under observation, leading to a change in its wavelength.
- In their first report to Nature, titled “A New Type of Secondary Radiation,” CV Raman and co-author KS Krishnan wrote that 60 different liquids had been studied, and all showed the same result – a tiny fraction of scattered light had a different colour than the incident light. “It is thus,” Raman said, “a phenomenon whose universal nature has to be recognised.”
The importance of the discovery
- CV Raman’s discovery took the world by storm as it had deep implications far beyond Raman’s original intentions.
- As Raman himself remarked in his 1930 Nobel Prize speech, “The character of the scattered radiations enables us to obtain an insight into the ultimate structure of the scattering substance.” For quantum theory, in vogue in the scientific world at the time, Raman’s discovery was crucial.
- The discovery would also find its use in chemistry, giving birth to a new field known as Raman spectroscopy as a basic analytical tool to conduct nondestructive chemical analysis for both organic and inorganic compounds.
- With the invention of lasers and the capabilities to concentrate much stronger beams of light, the uses of Raman spectroscopy have only ballooned over time.
- Today, this method has a wide variety of applications, from studying art and other objects of cultural importance in a non-invasive fashion to finding drugs hidden inside luggage at customs.
