Editorials/Opinions Analysis For UPSC 24 September 2022
- The banking system’s liquidity has entered “deficit mode”
- Growing India-Russia Problem
The Banking System’s Liquidity Has Entered “Deficit Mode”
Liquidity in India’s banking system has fallen into deficit for the first time in nearly 40 months. The Reserve Bank of India (RBI) recently made the largest financial infusion into the banking system in response to the development.
GS Paper 3: Government Budgeting.
What effect does the fiscal deficit have on the Indian economy? Propose solutions to the fiscal deficit caused by the pandemic’s impact. (250 words)
Liquidity in the banking system:
- Liquidity refers to readily available cash that banks require to meet short-term business and financial needs in the banking system.
- The banking system’s liquidity is said to be in deficit on any given day if it is a net borrower from the RBI under the Liquidity Adjustment Facility (LAF), and it is said to be in surplus if it is a net lender to the RBI.
- The RBI operations that inject or absorb liquidity into or out of the banking system are referred to as the LAF.
Current liquidity deficit in India’s banking system:
o The banking system’s liquidity situation entered a deficit mode on September 20, 2022, for the first time since May 2019.
o By contrast, the liquidity surplus in November 2021 was Rs 8 lakh crore, as the RBI provided liquidity support to the economy dealing with the aftermath of the Covid pandemic.
What has caused this shortfall?
- A variety of factors are at work here, including an increase in bank credit, advance tax payments by corporations, and incremental deposit growth that is outpacing credit demand.
- Furthermore, the RBI is constantly intervening to keep the rupee from falling in value against the US dollar.
- According to recent RBI data, outstanding bank credit on August 26, 2022 was Rs 124.58 lakh crore, up 4.77% (Rs 5.7 lakh crore) from Rs 118.9 lakh crore on March 25, 2022.
- However, deposit growth was only 3.21% (Rs 5.3 lakh crore) between March 25, 2022 and August 26, 2022, from Rs 164.65 lakh crore to Rs 169.94 lakh crore.
The effect on consumers:
- A banking system liquidity deficit means that banks do not have enough funds to meet customer credit demands.
- A lack of liquidity could lead to a rise in the yields on government securities, which would then lead to an increase in consumer interest rates.
- For example, the 10-year government bond yield increased to 7.23% on September 21, 2022, from 7.18% on August 20, 2022.
- Because the RBI is expected to raise interest rates by another 50 basis points (bps) this cycle, an increase in the repo rate will increase the cost of funds.
- Banks will raise repo-linked lending rates as well as the MCLR, which is linked to all loans.
- As a result of this increase, consumers will face higher interest rates.
RBI’s future prospects:
- Experts believe that the nature of the liquidity situation will determine the RBI’s actions.
- If the current liquidity deficit is short-term and primarily due to advance tax payments, the RBI may not need to intervene because the funds will eventually return to the system.
- If the problem is long-term, the RBI may be forced to take measures to improve the system’s liquidity situation.
- For example, the central bank has injected Rs 21,800 crore into the Indian banking system to ensure that it can continue to meet customers’ credit demands.
Growing India-Russia Problem
Russia has recently ordered its first mobilisation since WWII to support its invasion of Ukraine. Military mobilisation is the process by which a country gathers and prepares military troops and supplies for war. Ukraine’s Prime Minister recently stated that Russia has spent nearly half of its weaponry arsenal and has only “four dozen” hypersonic missiles remaining due to sanctions and a shortage of microchips. However, Russia’s reliability as a supplier to India is concerning in this scenario, as Russia’s defence production capabilities will continue to deteriorate long after the ongoing conflict in Ukraine is over.
GS Paper 3: Science and Technology
The growing importance of semiconductors or chips/integrated circuits (ICs), as well as China’s experience with manufacturing and design of the same, makes a compelling case for India to focus on chip design. Comment. (150 Words)
Delays in delivery due to a chip shortage
- Delay in delivery: Russia has put two Talwar-class stealth frigates on hold for up to six months. Short-term supply delays also exist for S-400 Triumf missile systems and spares for Kilo-class submarines, MiG-29 fighters, and Kamov Mi-17 military transport helicopters.
- These setbacks point to a larger issue, namely Russia’s inability to obtain semiconductor chips for future defence platforms.
- As a result, there will be delays and cost overruns, with supply chains disrupted, financial systems in shambles, and Russian manufacturers shuttering their doors.
- Ukraine move: Ukraine allegedly released a shopping list of semiconductors, connectors, transformers, and other items that Russia is desperate to obtain.
- Classification: Politico, a US-based media company, obtained access to a shopping list of semiconductors and components indicating the items most desired by Russia and classified this list of semiconductors into three categories: critical, important, and not-so-important.
- The Critical list: It includes chips with low complexity, such as connectors and memory chips, as well as digital signal processors and Field Programmable Gate Arrays (FPGAs), which are slightly more complex.
- Russian equipment concerns: There are no cutting-edge chips on the list, and these items can be mass-produced in most cases. The simplicity of Russian equipment has also surprised the US.
- It has been claimed that electrical engineering students could reverse engineer and build the majority of the electronics used.
- There have also been reports of Russian-guided missiles missing their targets due to outdated navigation systems.
High-tech sanctions are starting to bite.
- US ban: Following Russia’s invasion of Ukraine, the US immediately prohibited the sale of semiconductors used in defence systems to Russia. For Russia’s defence industry, the new controls target chips, encryption software, lasers, sensors, and so on.
- Ban by other semiconductor majors: The other three pillars of the semiconductor industry, namely Taiwan, South Korea, and Japan, have also prohibited the export of items via the US export control list.
- Consequences: These controls essentially mean that Russia will not be able to use any of the high-end chips. Because of the scarcity of microchips, it is running low on hypersonic weapons.
- Evidence: An examination of the remnants of Russia’s missiles launched against Ukraine revealed the use of older technology parts with basic GPS systems and even chips taken from dishwashers and refrigerators.
- Lack of indigenous infrastructure: Russia lacks the infrastructure to manufacture these chips on its own.
- According to reports, only two Russian companies, Angstrem-T and Mikron Group, have basic production-grade chip manufacturing capabilities.
India’s perilous situation
- Western stance: It is unlikely that the West will lift the high-tech sanctions imposed on Russia even after the war is over.
- With these constraints to work with, Russia could go one of two ways, neither of which bodes well for India, the world’s largest importer of Russian weapons.
- Indirect procurement: Russia could use chips from Western manufacturers by sourcing them indirectly, as seen in most Ukrainian weapons and similar to armaments purchased by the Soviet Union during the Cold War, where a complex and large network of suppliers was established to avoid sanctions.
- There are also third-party firms that source chips and then sell them directly to Russia.
- Tracking chips after they leave the foundry is difficult because there may be multiple unregulated second-hand markets for them.
- From an Indian standpoint, even if Russia continues to supply, India should think twice before using chips obtained from these dark markets.
- Equipment at risk as a result of China’s involvement: Russia’s defence industry could also approach China and obtain the chips from them. This could work for Russia and benefit China by putting Russia in debt.
- However, India must be wary of Chinese chips being used in defence equipment sent to India.
- Regardless of Russia’s intentions, its ability to meet India’s defence needs has been severely harmed. Whatever option Russia chooses, India must brace itself for a significant reduction in Russia’s ability to fulfil defence purchase orders.
- Given the realities of Russia’s defence industry, India must diversify its weaponry in the short term while focusing on domestic manufacturing in the long term.
- To secure defence equipment and chip supplies, India must form alliances with the United States, Japan, Australia, France, and Israel.