📰 The ‘nowhere people’ of COVID-19 need better legal safeguards
The migrant workers’ plight during lockdown is a trigger to ensure they aren’t left high and dry again during tough situations
•Post-COVID-19, whenever that happens, one of the most enduring images of it would be that of the multitudes of migrant workers who became, all of a sudden, nowhere people, no one’s people. For the policymakers, it would be a trigger to rework a strategy for them and to ensure a better legal framework which doesn’t leave them high and dry yet again during tough situations.
•It is in this context that we need to revisit the Inter-State Migrant Workmen Act, 1979. It was drawn up after repealing The Orissa Dadan Labour Act, 1975. Based on a very specific background, it couldn’t perhaps see much beyond the then-existing migrant workmen system. The ISMW Act defines inter-State migrant workman as any person who is recruited by or through a contractor. This definition keeps away any migrant workman out of the ambit if he is not brought in through a licensed contractor.
•It is common knowledge that most of the migrant workmen are not routed through licensed contractors. This small catch, in the definition, has been sufficient to exclude bulk of the migrant workmen from getting any benefit out of the Act.
•Furthermore, the Act is only applicable to any establishment in which five or more inter-State migrant workmen are employed. In reality, only a miniscule proportion of migrant workmen are placed under such establishments these days. So, if the establishment doesn’t come under the purview of the Act, its migrant employees, numbering less than five, cease to be migrants, legally, even though they may actually be one!
‘Inadequacy of Act’
•The current crisis has comprehensively exposed the inadequacy of the ISMW Act. While it has become anachronistic, the need for legal safeguards and welfare measures for migrants has become even more pressing and urgent.
•The Unorganised Workers’ Social Security (UWSS) Act, 2008 was enacted to provide for social security and welfare of unorganised workers. The Act defines unorganised workers as home-based worker, self-employed worker or wage worker in the unorganised sector.
•The Government of India has, in the recent past, introduced a host of social security schemes. Pradhan Mantri Shram Yogi Maan-dhan Yojana is meant to ensure old age protection for unorganised workers. Atal Pension Yojana has been launched under the National Pension System. Pradhan Mantri Jeevan Jyoti Bima Yojana is a life insurance scheme. Pradhan Mantri Suraksha Bima Yojana is an accident insurance scheme. Pradhan Mantri Jan Arogya Yojana aims at providing health cover. The UWSS Act itself has two very vitally useful features, viz., (a) Registration of unorganised workers, and (b) Portable smart I-card with a Unique Worker’s Identification Number. The coverage of these useful provisions and schemes, however, is still sub-optimal.
•The entitlements and benefits for the migrant workers have an unquestionable economic, legal and moral basis. In the present context, the following suggestions may require urgent consideration:
•Repealing of the ISMW Act, 1979 forthwith and replacing it with a new Act, or alternatively, enlarging the scope of UWSS Act to include legal entitlements, to define the migrant workman as a subset, to provide for contingencies of livelihood loss and to make the Act legally enforceable.
•Universalisation of registration and issuance of Aadhaar-based UWIN (Unique Worker’s Identification No.) ought to be done. It will serve multiple objectives.
•Schemes like MNREGA, PDS and Ujjwala need to be made portable. Geofencing of different benefits can be done so that a migrant workman can choose location-wise benefits for himself and his family from a matrix available.
•A comprehensive database of the migrant workers’ source and destination, demography, employment patterns and skill sets would not only help in skill development and providing for social security benefits, but would also be useful in planning for mass transit of migrant labour, and preparing for any contingency plan in abnormal situations.
•Issues related to migrant workmen have complex Centre-State and inter-State dimensions. The Inter-State Council, set up under Article 263 of the Constitution, may be a more appropriate forum to effectively and comprehensively deal with larger issues related to migrant workmen.
•It’s time to initiate a legal lattice that means business to the migrant workmen, and say goodbye to the antiquated law of 1979 that seems to have outlived its utility. It is better late than never.
RBI, however, will levy penalty if funds are not deployed within 30 days
•The Reserve Bank of India has allowed banks to exclude loans extended to non-banking finance companies from the funds availed under the Targeted Long Term Repo Operations ((TLTRO) for determining priority sector targets. This is intended to incentivise banks to lend to NBFCs.
•Securities kept in the held-to-maturity category will now be excluded from computation of adjusted non-food bank credit,
•The banking regulator had announced TLTRO worth ₹50,000 crore for banks on April 17.
•The funds availed of under the facility should be deployed in investment-grade bonds, commercial papers (CPs) and non-convertible debentures (NCDs) of NBFCs, the RBI had said. At least 50% of the total funds availed should be invested in mid and small-sized NBFCs, including micro finance institutions, the RBI had mandated.
•The central bank had further clarified that if banks failed to deploy the funds availed within 30 days, there will be steep penalties.
•“However, if a bank fails to deploy funds within the specified time frame, the interest rate on undeployed funds will increase to the prevailing policy repo rate plus 200 bps (basis points) for the number of days such funds remain undeployed.
•This incremental interest will have to be paid along with regular interest at the time of maturity,” the RBI said.
•The first tranche of ₹25,000 crore in the next round of TLTRO will be made on April 23.
📰 Why are oil futures in negative terrain?
Negative prices mean sellers have to pay buyers to get rid of their crude, an unprecedented situation even in the volatile oil market.
•Story so far: Prices of West Texas Intermediate (WTI), the American benchmark for crude oil, fell to less than zero in Monday’s trade. The price of a barrel of WTI fell to minus, yes, that’s right, minus $37.63 a barrel. What this means is that sellers have to pay buyers to get rid of their crude! This is unprecedented in the oil market, even accounting for its notoriety for being volatile.
Why did prices fall like this?
•We need to understand a bit of oil market and trading dynamics here. WTI oil is traded as futures contracts in the NYMEX (New York Mercantile Exchange) where traders buy and sell monthly futures such as, for instance, May futures, June futures and so on. The sellers of such futures will have to deliver a barrel of crude oil at the contracted price in the contracted month just as buyers will have to take delivery at the contracted date.
•As with all trading in commodities, there’s a huge speculative participation in oil futures trading too. So speculators buy and sell contracts with no intention of taking delivery (in the case of buyers) or offering delivery (in the case of sellers) of the physical oil, on the contracted date. These speculators have to unwind their “positions” on the contract expiry date. If they fail to do so, they will have to take physical delivery of the crude oil on the contracted date.
•What happened on Monday was that speculators who had taken large bets on May futures began to unwind their “positions”. This was because the futures contracts are set to expire today, Tuesday. Those not intending to take physical delivery have to square off their contracts before the expiry date. So, speculators who did not want to take delivery in May proceeded to unwind their “positions,” leading to the massive fall in prices.
•It could be that these were financial speculators who never take physical delivery and hence closed their contracts. Or, these could also be delivery-based traders backing out as the bottom has fallen off demand for oil. In reality, it would be a combination of both categories of traders. The bottomline, though ,is that prices fell as demand for oil is falling and the world, especially America, is running out of storage space.
May WTI futures prices went negative but June futures prices are still at $20.43 a barrel. Why?
•This could be due to two reasons. Traders expect demand to recover by June as lockdowns are lifted across the world and economic activity resumes. Second, traders also expect that storage space may be created as existing inventory is drawn down. America is also talking of adding to their strategic storage by taking advantage of the low prices. This could create demand for oil. Finally, contract expiry for June contracts is still a few weeks away, giving speculators that much more time to speculate.
Market reports talk about contango trades in the oil market. What do they mean?
•Simply put, contango kicks in when prices of a commodity in the futures market are considerably higher for deliveries many months later, compared to prices for immediate delivery. For instance, while May oil futures are negative and June is at $20.43 a barrel, November futures for the same grade of oil ended at a hefty $31.66 a barrel on Monday. Contango trades happen when traders anticipate a surge or rise in demand and hence value the commodity higher for the future.
So, why can’t traders buy cheap oil now and store them for release in future when demand and prices rise?
•That’s exactly what traders are now doing. Such a practice became famous during Iraq’s invasion of Kuwait in 1990 when a trader took massive positions at cheap prices ahead of the invasion and sold them when prices rose after the invasion. Oil was stored in tankers floating on the sea and unloaded at considerably higher prices.
•Traders are doing the same now. Year-long hiring contracts for VLCC (very large crude carriers) that can store up to 2 million barrels of oil are soaring through the roof. According to a report in the Wall Street Journal, VLCC hiring charges for year-long contracts are now at $72,500 a day, compared to $30,500 a day a year ago.
•This shows rising demand for such floating storage to take advantage of low prices now. These tankers are moored off the South African coast, which is equidistant to the American and Asian markets. But the problem is that such floating storage is also fast running out of capacity; land storage in America is already overflowing. This would explain why oil prices are falling without support. According to some estimates, over 140 million barrels of oil are now floating in the high seas. The world consumed, at its heyday, about 90 million barrels of oil a day. This should now be considerably lower.
The prices of Brent grade are still at $25.70 a barrel for May futures. What’s the reason for the difference?
•Brent oil has traditionally quoted higher than WTI, with the gulf being about $6-7 a barrel between the two. Brent is a superior grade produced in the North Sea off the British coast and is the accepted benchmark for this part of the world. The market that it serves is considerably larger than that of the United States and demand is, therefore, higher. Transporting oil from the U.S. to Asia is not economical, thus limiting the scope for the WTI grade. Refineries in Europe are configured for Brent, rather than WTI. Prices of Brent are, therefore, always higher than those of WTI.
How is India benefiting from this price crash?
•In two ways. First, the oil import bill will fall sharply this fiscal year, giving tremendous relief to the government on the external account front. With merchandise exports from India badly hit due to the lockdown in the West, foreign exchange earnings are under pressure. With oil prices falling and foreign exchange outgo reducing, the pressure on the current account balance is off. In fact, we may be looking at a positive balance in the current account if global economic recovery is quick and our exports recover.
•Second, India is quietly building up its strategic reserves, taking advantage of the cheap prices. India has a capacity to hold over 39 million barrels of oil at its strategic reserves in Vishakhapatnam, Mangalore and Padur, near Udupi. These are underground salt caverns converted and built to store crude oil. The strategic storage capacity is now being increased even as the existing caverns are being filled.
📰 Putting the SAGAR vision to the test
As observer, India could learn from as well as support the Indian Ocean Commission
•In March 2015, Prime Minister Narendra Modi visited three small but significant Indian Ocean island states — Seychelles, Mauritius, and Sri Lanka. During this tour, he unveiled India’s strategic vision for the Indian Ocean: Security and Growth for All in the Region (SAGAR). SAGAR seeks to differentiate India’s leadership from the modus operandi of other regionally active major powers and to reassure littoral states as India’s maritime influence grows. As External Affairs Minister S. Jaishankar signalled at the fourth Indian Ocean Conference in September last year, India’s SAGAR vision is intended to be “consultative, democratic and equitable”. India’s recent admission as observer to the Indian Ocean Commission (IOC) will put this vision to the test.
IOC, a trusted regional actor
•Following a request from New Delhi, the IOC granted observer status to India on March 6 at the Commission’s 34th Council of Ministers. Founded in 1982, the IOC is an intergovernmental organisation comprising five small-island states in the Western Indian Ocean: the Comoros, Madagascar, Mauritius, Réunion (a French department), and Seychelles. Though Réunion brings a major power, France, into this small-state equation, decisions in the IOC are consensus-based, and while France’s foreign policy interests are represented, the specifics of Réunion’s regional decision-making emerge from its local governance structures. Over the years, the IOC has emerged as an active and trusted regional actor, working in and for the Western Indian Ocean and implementing a range of projects.
•More recently, the IOC has demonstrated leadership in the maritime security domain. Since maritime security is a prominent feature of India’s relations with Indian Ocean littoral states, India’s interest in the IOC should be understood in this context. However, India has preferred to engage bilaterally with smaller states in the region. What India will not find in the IOC is a cluster of small states seeking a ‘big brother’ partnership. The IOC has its own regional agenda, and has made impressive headway in the design and implementation of a regional maritime security architecture in the Western Indian Ocean.
•In 2012, the IOC was one of the four regional organisations to launch the MASE Programme — the European Union-funded programme to promote Maritime Security in Eastern and Southern Africa and Indian Ocean. Under MASE, the IOC has established a mechanism for surveillance and control of the Western Indian Ocean with two regional centres. The Regional Maritime Information Fusion Center (RMIFC), based in Madagascar, is designed to deepen maritime domain awareness by monitoring maritime activities and promoting information sharing and exchange. The Regional Coordination Operations Centre (RCOC), based in Seychelles, will eventually facilitate joint or jointly coordinated interventions at sea based on information gathered through the RMIFC. These centres are a response to the limitations that the states in the region face in policing and patrolling their often enormous Exclusive Economic Zones (EEZs). They deliver an urgently needed deterrent against unabating maritime crime at sea, only partly addressed by the high-level counter-piracy presence of naval forces from the EU, the Combined Maritime Forces, and Independent Forces. Seven states in the region have signed agreements to participate in this multilateral maritime security architecture, and once ratified, will provide its legal foundation. Many major powers have expressed interest in accessing the RMIFC.
•The IOC has also wielded a disproportionate degree of convening power. In 2018 and 2019, it served as Chair of the Contact Group on Piracy off the Coast of Somalia (CGPCS). Leveraging the CGPCS Chair, the IOC held ministerial meetings in 2018 and 2019 on maritime security in the Western Indian Ocean, drawing state representations from the region plus major powers such as India, the EU, the U.S., the U.K., Australia, and Russia. These meetings, resulting in formal declarations, facilitated convergence around common, sub-region-specific definitions of maritime security threats and the legal way of dealing with them.
•The IOC’s achievements offer an opportunity for India to learn, and also to support. The IOC style of ‘bottom-up regionalism’ has produced a sub-regional view and definition of maritime security problems and local ownership of pathways towards workable solutions. A 2019 policy brief published by the IOC (with inputs from this author), ‘Strengthening Maritime Security in the Western Indian Ocean’, sets out how the counter-piracy response off the coast of Somalia delivered unprecedented regional and international cooperation in the domain of maritime security. However, it resulted in multiple players, the duplication of actions, and regional dependence on international navies. The IOC has been seeking more sustainable ways of addressing maritime security threats in the region, with the RMIFC and RCOC as part of this response. Its regional maritime security architecture is viewed locally as the most effective and sustainable framework to improve maritime control and surveillance and allow littoral States to shape their own destiny. Moreover, with proper regional coordination, local successes at curbing maritime threats will have broader security dividends for the Indian Ocean space.
How can India contribute?
•The IOC’s maritime security activities have a strong foundation, but they require support and buy-in from additional regional actors. India has already signalled a strong interest in the work of the IOC through its request to be admitted as an observer. The view from Ebène, where the IOC is headquartered, and from where its maritime security strategy is directed, is that major powers are warmly invited to support its initiatives. Nearly all littoral states in the Western Indian Ocean need assistance in developing their maritime domain awareness and in building capacity to patrol their EEZs. All would benefit from national information fusion centres that can link to those of the wider region. With its observer status, India will be called upon to extend its expertise to the region, put its satellite imagery to the service of the RMIFC, and establish links with its own Information Fusion Centre.
•If India seeks to calibrate its Indian Ocean strategy away from outdated, neoimperialist conceptions of great power and spheres of influence that are costly to regional followership, one route will be to learn from and support sub-regional efforts such as those of the IOC. As a major stakeholder in the Indian Ocean with maritime security high on the agenda, India will continue to pursue its interests and tackle maritime security challenges at the macro level in the region. However, as an observer of the IOC, a specific, parallel opportunity to embrace bottom-up regionalism presents itself. There are those in the Western Indian Ocean who are closely watching how India’s “consultative, democratic and equitable” leadership will take shape.
📰 A change in migrant policy
Besides addressing the immediate distress conditions of migrants, the state needs to think of long-term solutions
•Seasonal migration is one of the most critical issues of our time. The condition of seasonal migrants has emerged as no less an important issue than the novel coronavirus itself. The COVID-19 crisis has, for the first time, brought migration to the centre stage of public health and disaster response in India.
Why migrants occupy centre stage
•In the past, a mass exodus would take place because of a disaster such as a famine, drought, flood, or regional conflict. An exodus would be from the area where such a calamity was unfolding. While we continue to see episodes of such exodus, now there are new narratives of mass exodus caused by demonetisation, violence against migrants, and the lockdown imposed to contain the spread of COVID-19. What is common in these narratives is the decisive role played by the state or the lack of it. It is in the context of state action that migrants have drawn sharp attention in debates over public health and political economy for at least five reasons.
•First, the numbers involved are very high. Let’s take the example of Bihar which has a population of about 123 million. The number of migrants in Bihar is estimated to be close to 10 million, of which three million may be inter-State migrants. An estimate based on NSSO 64th Round and Census 2011 data and a look at monthly per capita expenditure data suggest that there are approximately 2 million daily wage workers. The months of February and March are a lean season for rural-to-rural migration, yet the current figure of inter-State seasonal migrants stands at about 1.4 million. Further, if we take the example of the National Capital Region, where, as the data suggest, 20% of Bihari migrants are working, we are referring to 0.28 to 0.3 million seasonal migrants. Even if half of them try to return home during a crisis, facilitating their journey can be a logistical improbability.
•Second, India’s economy, particularly of the growth centres, depends on the services of migrant workers. Sectors such as construction, garment manufacturing, mining, and agriculture would come to a standstill without them. One of the biggest challenges after the lockdown is lifted will be to bring back the migrants to kickstart these sectors.
•Third, the return of migrants brings to the source States an economic shock as there are no compensatory sources of livelihood. The poor States may find it difficult to sustain themselves without the remittances. This will not only cause demand side setbacks but also impact nutrition, health, education and the well-being of the older population.
•Fourth, in the case of epidemics, the exodus of seasonal migrants creates apprehensions about the spread of the disease and runs counterproductive to the very purpose of a lockdown. Working from home or getting paid leave is largely a middle-class luxury. Daily-wage earners do not have the capacity to stay at a destination without work. Their families back home depend on their daily savings. A considerable number of workers live within the manufacturing units or at work sites. Any lockdown results in loss of their accommodation too.
•Fifth, the pathetic working and living conditions of migrants defy the very idea of decent work and general security. Slums and slum-like colonies are breeding grounds of ailments and communicable diseases. People living in these areas simply cannot practise social distancing. Lack of sanitation, hygiene, safe drinking water, health services, social security measures, and affordable housing have resulted in a low quality of life.
Delivering relief packages
•Some amelioration may be in sight with the Rs. 1.70 lakh crore relief package announced by the Central government. However, despite the government’s good intentions, the package will not benefit seasonal migrants. Those migrants who are unable to return home and are not ration cardholders in the cities where they are stationed will not benefit from additional free foodgrains under the PDS. They cannot avail of increased MGNREGA wages until they go back home. As many seasonal migrants are landless or marginal farmers, they will not benefit from the grant to landholders. Neither will they get benefits under the Building and Other Construction Workers Welfare Board because of low registration. Thus, this workforce will remain largely deprived of the benefits under the present package at their destination places. The State needs to think out of the box in delivering relief packages.
•Disasters provide opportunities to correct structural wrongs. The state could work out a strategy of addressing immediate distress conditions and simultaneously initiating long-term measures to bring structural changes in the policy towards migrants and the informal sector.
📰 The key strategy is fiscal empowerment of States
The Centre must recognise that winning the war on COVID-19 is linked to the States being armed with enough resources
•The scale of disruption caused by the COVID-19 pandemic has never been seen before. Even as we are in the midst of the second phase of the national lockdown, there is no clarity on the time it will take to come out of the crisis, the extent of damage it will inflict, and the cost of relief and rehabilitation required. At a time when governments, both at the Centre and in the States, are fiscally stressed, the pandemic has forced them to undertake huge expenditures to save lives, livelihoods and reduce distresses and even more, to create a stimulus to revive the economy as we map the exit strategy.
Need for relief
•The speed of economic revival will depend on how long it will take to revive economic activities and the volume of stimulus through public spending the government is able to provide. It now appears that the lockdown will be lifted in stages and the recovery process will be prolonged. The country is literally placed in financing a war-like situation and the government will have to postpone the fiscal consolidation process for the present, loosen its purse strings and finance its deficits substantially through monetisation. This is also the time for the government to announce relaxation in the States’ fiscal deficit limit to make them effective participants in the struggle. It is also important for the States to realise the importance of health and prioritise spending on health-care services.
•Being closer to the people, the States have a much larger responsibility in fighting this war. Public health as well as public order are State subjects in the Constitution. In fact, some States were proactive in dealing with the COVID-19 outbreak by involving the Epidemic Diseases Act, 1897, even before the Government of India declared a universal lockdown invoking the Disaster Management Act, 2005. Of course, the Centre under Entry 29 of the Concurrent List has the powers to set the rules of implementation which states, “Prevention of the extension from one State to another of infectious or contagious diseases or pests affecting men, animals or plants”. While Central intervention was done to enable, “consistency in the application and implementation of various measures across the country”, the actual implementation on the ground level will have to be done at the State level. Furthermore, States are better informed to decide the areas and activities where relaxations should be done as the coronavirus curve is flattened. Hopefully, there will be better coordination between the Union and State governments instead of claiming credit and apportioning blame (see https://bit.ly/3bDauiF).
Focus on health and economy
•The acute shortage of protective gear, testing kits, ventilators and hospital beds has been a major handicap and the immediate task of States is to ramp up their availability and supply. In addition, the disruption caused by the lockdown has caused untold misery, and providing relief and rehabilitation to migrant labourers and informal sector workers had to the focus. The pandemic has underlined the historical neglect of the health-care sector in the country. The total public expenditures of Centre and States works out to a mere 1.3% of GDP. In 2017-18, in per capita terms, the public expenditure on medical and public health varied from an abysmal Rs. 690 in Bihar and Rs. 814 in Uttar Pradesh to the highest of Rs. 2,092 in Kerala. The centrally sponsored scheme, the National Health Mission, is inadequately funded, micromanaged with grants given under more than 2,000 heads and poorly targeted. The focus of “Ayushman Bharat” has been to advocate insurance rather than building wellness centres.
•Besides protecting lives and livelihoods, States will have to initiate and facilitate economic revival, and that too would require substantial additional spending. Hand holding small and medium enterprises which have completely ceased production, providing relief to farmers who have lost their perishable crops and preparing them for sowing in the kharif season are other tasks that require spending. In fact, States have been proactive. Kerala came out with a comprehensive package allocating Rs. 20,000 crore to fight the pandemic. Almost all States have taken measures to provide food to the needy besides ramping up health-care requirements.
Extensive revenue losses
•While the requirement of States for immediate expenditures is large, they are severely crippled in their resources. In the lockdown period, there has virtually been no economic activity and they have not been able to generate any revenue from State excise duty, stamp duties and registration fees, motor vehicles tax or sales tax on high speed diesel and motor spirit. The revenue from Goods and Services Tax is stagnant and compensation on time for the loss of revenue has not been forthcoming. In Karnataka for example, it is reported that as against the estimated Rs. 12,000 crore every month, the State may not be able to generate even Rs. 300 crore in April. As the recovery process will be staggered, it is doubtful whether tax revenues will register any positive growth in 2020-21. Not surprisingly, the State has decided to monetise land through auctions to get money besides regularising unauthorised constructions by paying high fees.
•The position regarding tax devolution from the Centre is even more precarious. To begin with, the tax devolution in the Union Budget estimate is lower than the Commission’s estimate by Rs. 70,995 crore. In fact, the Budget estimate for 2020-21 itself is a huge overestimate when seen against the 11-month actual collections in 2019-20. The required growth to achieve the Budget estimate is 33.3% over the annualised actual collection. The projections are that the growth of nominal GDP in 2020-21 will be just about 4% and if the tax revenue increases by the same rate, devolution to the States would be lower by Rs. 2.2-lakh crore than the Finance Commission’s estimate. This results in a loss of Rs. 9,173 crore for Tamil Nadu, Rs. 9,000 crore for Andhra Pradesh, Rs. 8,000 crore for Karnataka, Rs. 4,671 crore for Telangana, and Rs. 4,255 crore for Kerala. There is a strong case for the States to go back to the Finance Commission with a request to make and give a supplementary report.
•The war on COVID-19 can be effectively won only when the States are armed with enough resources to meet the crisis. But as mentioned earlier, they are faced with stagnant revenues while their expenditure commitments are huge. There is only limited scope for expenditure switching and reprioritisation now. Their borrowing space too is limited by the fiscal responsibility and budget management limit of 3% of Gross State Domestic Product (GSDP). Faced with an acute fund crunch, Kerala floated 15-year bonds but was faced with a huge upsurge in the yield to 8.96%. The announcement by the Reserve Bank of India on the increase in the limit of ways and means advances by 60% of the levels prescribed in March 31 could help States to plan their borrowing better; but that is too little to provide much relief. Therefore, it is important for the Central government to provide additional borrowing space by 2% of GSDP from the prevailing 3% of GSDP. This is the time to fiscally empower States to wage the COVID-19 war and trust them to spend on protecting lives, livelihoods and initiate an economic recovery.
📰 Futures shock
The steep fall in oil prices isnot all good news for India
•Five decades after the oil shock of 1973, when an Arab embargo on the supply of oil to some western powers including the United States sent the price of crude skyrocketing fourfold to $12 a barrel, the global economy faces a fresh shock from a free-fall in oil prices. On Monday, May futures for the West Texas Intermediate (WTI) U.S. crude plunged below zero to touch a historic low of -$40.32 a barrel. A negative price implies that a seller would have to pay the buyer to hold the oil to be supplied. While the unprecedented plunge in the particular futures contract could be partly explained away as a technical anomaly given that the May contract was set to expire on Tuesday, beyond which buyers would need to be ready to take physical delivery,the reality is that oil prices are desperately in search of a bottom. A perfect storm of a supply glut exacerbated in March by a price war that saw key producers Saudi Arabia and Russia ramp up output even as demand continued to contract on account of the COVID-19 outbreak sent prices into a steeper slide. Brent crude futures have tumbled more than 67% in 2020 to about $21 a barrel as of Tuesday afternoon in London trading, while the WTI futures have plunged about 110% to -$5.78. The International Energy Agency observed this month, that the confinement measures instituted worldwide have resulted in a dramatic decline in transportation activity which will erase at least a decade of demand growth.
•With storage for crude — on land or offshore in supertankers — nearing capacity or becoming prohibitively expensive, oil producers are going to have little option but to curtail output. Saudi Arabia is reported to be considering output cuts even before a 9.7 million barrels per day deal it had struck with Russia to cut production takes effect from May. Still, merely closing the tap a notch or two is not going to redress the oversupply in the market at a time when the ‘Great Lockdown’ has destroyed demand on an unprecedented scale. India has prudently been using the sharp fall in both crude prices and domestic demand to accelerate the build-up of its strategic reserve. While the sliding oil prices would help significantly pare India’s energy import bill, a protracted demand drought would end up hurting the government’s tax revenues severely, especially at a time when it badly needs every additional rupee it can garner. Also, rock-bottom oil prices risk damaging the economies of producer countries including those in West Asia, hurting inward remittances. After the lockdown, the Centre ought to consider using this opportunity to cut retail fuel prices sharply by foregoing some excise revenue for a while in order to tease back momentum into the wider economy.
