The Hindu Editorial Analysis- 17th January, 2022 | Current Affairs: Daily, Weekly & Monthly - CLAT PDF Download

1. Friend in need: India and Sri Lanka have shown an Ability to Quickly Act on Promises to Each Other

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GS 2- IR

Context: External Affairs Minister S. Jaishankar’s virtual meeting with Sri Lanka’s Finance Minister Basil Rajapaksa on Saturday, with an assurance that India will support Sri Lanka “in all possible ways for overcoming the economic and other challenges posed by COVID-19 pandemic”, was significant and timely.

Major Crisis Faced by Sri Lanka Includes

• Credit crunch - Very close to default: A crucial week lies ahead for the Sri Lankan economy, when President Gotabaya Rajapaksa must make a decision on whether to service debts to bonds with an instalment of $500 million due on January 18, or to default for the first time ever, given the island’s precarious finances.
• A slump in GDP spurred by COVID-19 losses to tourism, exports and remittances,
• Foreign reserves that dwindled from $7.5 bn in 2019 to $1.6 bn in November 2021, and
• Pending debt repayments of more than $7 bn expected in 2022.
• Rising unrest.

Help from India and China

• In the preceding weeks, the Rajapaksa government reached out to India and China, which are most likely to help given their respective interests in the island.
• Chinese Foreign Minister Wang Yi, visited recently, who discussed:
• A full debt restructure of Sri Lankan borrowings.
• Beijing has also extended a currency swap arrangement of $1.5 billion.
• It was to India, however, that Mr. Rajapaksa turned with a humanitarian appeal and SOS. India decided on a “four-pronged” initiative:
• Lines of Credit (LoC) towards the import of fuel, food and medicines - the $1.5 bn LoC for essential imports is reportedly under way.
• Currency swap - India has extended $400 million under the “SAARC currency swap” arrangement .
• Debt deferrals from India to Sri Lanka-  A partial deferral of a $500 million settlement from Sri Lanka by two months;
• Conclusion of the Trinco-oil farms project - it is heartening that the Trincomalee project MoU was signed earlier this month after decades of delays.

Way Forward

• This does not resolve all issues between India & Sri Lanka: It would be naive to assume that New Delhi’s assistance will paper over other problems in the complex relations between India and Sri Lanka.
• Other issues include:
  • The friction over fishermen’s rights and pending political solution for war-torn Tamil areas remain sticking points.
  • Concerns over Colombo’s strategic ties with China have often led to open disagreements.
• However India proves to be a friend in Need: It is important to note that in times of peril, New Delhi and Colombo have established a robust channel of communication and demonstrated an ability to act on promises quickly, proving that adage about friends (and neighbours) in need.

2. Predatory Pricing is Prising Indian Livelihoods a Part: The Economic Dogma of Lower Prices, Regardless of the Means, as a Sole and Worthy Pursuit is Being Challenged

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GS 3- Economy

News: Last week, Local Kirana distributors in various regions of the country had decided to boycott Colgate’s products and not supply them to the kirana stores. All consumer goods distributors in Maharashtra were protesting against Colgate’s alleged unfair treatment of traditional distributors vis-à-vis B2B technology companies such as Reliance’s JioMart, Udaan and others. 

Context

• Nearly half-a-million of India’s distributors pick up goods from consumer companies such as Colgate and deliver them to 13 million small local stores located in 7,00,000 villages and towns across the country through a web of millions of traders and other intermediaries.
• A vast majority of these distributors and traders are small family businesses that have developed relationships with their local stores over many decades.
• The new age technology B2B companies: They have developed technologies to connect directly to the kirana store in Talode through a mobile phone app, bypassing the intermediaries. They supply material at a lower price than what is charged by the distributor.
  • Unable to match such prices and facing the peril of losing business, India’s distributors claim these are unfair practices and want manufacturers to stop supplying goods to the technology companies.
  • Companies such as Colgate has refused to do so and, hence, the distributors have decided to boycott its products.

This is not a ‘creative disruption’ - But an issue of predatory Prising

• The theory of Creative destruction: New innovations disrupting an existing process and rendering incumbents futile is generally a healthy process of ‘creative destruction’, as the Austrian economist, Joseph Schumpeter, postulated.
• But this pricing strategy is not completely Creativity driven:
• Unfair monopoly on the back of huge capital infusion: These technology companies bear a 15%-20% loss on every Colgate toothpaste they sell to the local store. They deliberately offer their product at a price lower than what it costs them, to lure local stores away from the traditional distributors.
• Further, they offer extensive credit terms and working capital to the local stores.
• In other words, these technology companies rely not just on their mobile phone app innovation but also steep price discounting and cheaper financing to win customers.
• The strategy - creating monopoly: They are able to sustain huge losses for several years until they destroy incumbents and gain dominant market share. After which, they will presumably raise their prices to turn profitable. It is similar to what India experienced in the telecom sector with Jio.
• Exclusive exposure to Funding
  • Udaan has suffered total losses of more than ₹5,000 crore in just five years and JioMart reports even greater losses.
  • Source of funds:
• They have access to copious amounts of money.
• These companies are flush with funds from foreign venture capital firms, which in turn are largely funded by American pension funds. To put it cheekily, an American senior citizen is discounting Colgate toothpaste for a Talode villager while displacing the Nandurbar distributor, thanks to what economists call global capital flows.
• Such capital flows foster innovation and yield enormous consumer benefits is the neo-classical economic doctrine.
• Disadvantage for distributors: distributors and intermediaries have no access to such finance. They are typically small businesses built over many decades by pledging their personal assets as collateral in return for meagre bank loans.
  • These small companies are cut off from the endless stream of free foreign money that gushes into new age ‘startups’ and established large corporates.
  • By some estimates, there are more than 20 million families (100 million people) in India whose livelihoods depend on intermediary roles in the consumer goods supply chain.

Legality of Predatory Pricing

• It is illegal in most countries including India.
• Behind the veil of technology innovation of these startups lies a murky abuse of pricing power.
• A global problem: The conventional economic notion that lower prices, regardless of the means adopted, are a sole and worthy pursuit is under severe challenge.
  • Social media companies such as Facebook give away their products for free.
  • E-commerce companies such as Amazon sell at lower prices, benefiting consumers enormously, but also causing immense social strife and disharmony.
• The new Chairperson of the Federal Trade Commission in America, Lina Khan, who is a fierce critic of abuse of pricing power by technology companies, is seeking to frame new rules to check such anti-competitive behaviour.
  • Thus, even erstwhile champions of free capital flows are now cautious about their social implications.

What India faces: Large sums of free money printed in America are finding their way to India’s stock and start-up markets.

• Access to this capital is only available to a tiny proportion of Indian businesses but threatens the livelihoods of millions of Indian families, as in the case of distributors, causing massive income and social disparities.