Contract Farming

Contract Farming

This article deals with ‘Contract Farming.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .

Introduction

It is a forward agreement between farmers & buyers  in which

Buyer – Agrees to buy produce from farmer at predetermined price &
– Usually provides inputs (Seeds, fertilizers, pesticides), technology and production practices so that final produce meets his desired quality.
Farmer – Agrees to grow and supply the produce to the buyer at predetermined quality, quantity and prices.

But problem is,  this is prevalent in only few states where APMC laws allow this  

Punjab 1. PepsiCo doing contract farming with Potato farmers of Hoshiarpur district.
2. ITC doing contract farming for Soyabean.
3. Mahindra Shubhlabh doing contract farming for Basmati rice.
Karnataka Himalaya doing contract farming with Ashwagandha producers.
Madhya Pradesh Hindustan Unilever doing contract farming with wheat farmers.

In news because

  • Model Contract Farming Act was released by the government.
  • It is Important component  in doubling farmers income .

Benefits of Contract Farming

  • Improving Farmer’s Productivity : It provides  access to better inputs, scientific practices and credit facilities .
  • Insurance to post harvest price fluctuations : Prices are fixed, hence farmers are saved from price fluctuations .
  • Crop Diversification : Otherwise farmers grow only wheat and rice which is procured by Government .
  • Helps in promoting Food Processing Industry .
  • Company can get desired quality of agro products .
  • Consumers Benefit : Elimination of intermediaries can  reduce food price inflation.

Challenges with Contract Farming

  • Stockholdings limits on contracted produce under Essential Commodities Act, 1955  .
  • Not benefiting Small Farmers: Buyers have no incentive for contract farming with a large number of small and marginal farmers due to high transactions and marketing costs, creating socio-economic distortions and preference for large farmers
  • It is a capital-intensive and less sustainable pattern of cultivation as it promotes increasing use of fertilizers and pesticides which have detrimental impact on natural resources, environment, humans and animals.
  • Encourages Monoculture Farming: This will not only impact soil health but also pose risk to food security .
  • Monopsony: Product is generally special crop and for that company is the only buyer. Hence, farmer can be price taker only because company is the sole buyer .
  • Predetermined prices denies farmer the  benefits of higher prices  prevailing in the market  .

Key Features of Contract Farming Act

  • Mainly to address issue of breach of contract by the company (because company can breach contract if they are getting goods at cheap price and then afford lawyer to fight case) .
  • It sets up Contract Farming Authority and Recording Committees to register the contracts and implement them effectively .
  • It provides to keep contract farming outside the ambit of APMC act .
  • The produce will be insured under the existing agriculture insurance schemes.
  • It makes provisions for making farmer producer Companies (FPCs).

Income Inequalities

Income Inequalities

This article deals with ‘Income Inequalities.’ This is part of our series on ‘Economics’ which is important pillar of GS-2 syllabus . For more articles , you can click here .

Introduction

  • Income inequality is the degree to which income is unevenly distributed throughout the population.
  • It is measured statistically using Gini Coefficient.
  • Apart from that, Oxfam also releases a report every year showing the income inequality in the world and India.

Gini Coefficient

  • Gini Coefficient is a statistical measure to gauge income inequality or wealth divide .
  • It’s value vary between 0 to 1 ; 0 indicating perfect inequality and 1 indicating perfect equality.
  • An increase in value of Gini Coefficient means that inequality in an economy is increasing and government policies are not inclusive and benefitting richer .

Calculation of Gini Coefficient

  • Gini Coefficient is a statistical measure to gauge income inequality or wealth divide .
  • It’s value vary between 0 to 1 ; 0 indicating perfect inequality and 1 indicating perfect equality.
  • An increase in value of Gini Coefficient means that inequality in an economy is increasing and government policies are not inclusive and benefitting richer .

Calculation of Gini Coefficient

  • Gini Coefficient = A / (A+B)
Gini Coefficient

In the graph shown above

  • Horizontal axis on this chart represents cumulative shares of the population.
  • Vertical axis is cumulative shares of income.
  • A+ B is constant and if
    • A is higher, it means inequality is higher .
    • A is smaller, it means inequality is lower.
    • If A = 0 , then no income inequality.
  • Hence, Gini Coefficient is measured from 0 to 1 and lower value means low inequality and higher means more inequality .

Kuznet Curve on Inequality

  • Famous US Economist Simon Kuznet showed that as an economy develops, market forces will first increase inequality and then decrease inequality among people.
  • This happens because the initial phase of economic growth boosts the income of workers and investors who participate in first wave of innovation . But this inequality is temporary as other workers and investors soon catch-up resulting in improvement of their incomes as well.
Kuznet Curve

India and Income Inequality  

  • Piketty the world famous economist have cautioned India for rising levels of Income inequalities and its consequences. In country like India where other forms of inequalities are present too most important being caste system, income inequalities exacerbates the situation .
  • India grew at average rate of 7.5% since 2011 but growth is not equally distributed (rich are growing more)  . Gini Coefficient shows that income inequality is continuously increasing in India . The following data corroborates this 
Gini Coefficient of India
  • According to Oxfam Report (2020) , India’s top 1% wealthy people hold 42.% of the National Wealth  while the bottom 60% own less than 5%.
Income Inequalities
  • According to Oxfam head , it is morally outrageous that a few wealthy individuals are collecting growing share of India’s wealth , while the poor are struggling to find their next meal . If this obscene inequality continues, it will lead to complete collapse of social and democratic structure of this country.

Causes of Income Inequality

Historical Causes Caste System : Due to exclusion of lower caste from ownership of land and education , people belonging to lower caste are poor .  
Social Causes Caste System is the main reason.
Due to patriarchal and patrilineal nature of Indian society, Women don’t own factors of production in India.
 
Frequent Global Economic Crisis Economic Crisis like that happened in 2008 accentuate income inequality by making richer rich and poorer poor . 

(How= Central Bank cant allow big houses to fell . Due to this, they get large cuts . Currency devaluate and Amount of loans that companies have to pay decrease in reality. On the other hand, households who have deposited their money loose value of their money)  
Faulty taxation system In India , there is more reliance on Indirect Tax which is regressive in nature . Apart from that, government has removed wealth tax in India.  
India relied on  trickle down approach India relied on ‘Trickle Down Approach’ which benefitted the industrial houses and rich businessmen. In order to reduce inequality, India should have followed  redistributive justice principles of John Rawls, Gandhian trusteeship principles or Amartya Sen’s capability approach.    
Technological Change Rapid technological changes is leading to automation of industries . As a result, few people with high skills are getting high packages while large number of workers are losing their jobs .  
Capture of power by elites Due to Crony Capitalism , political leaders and government is working as agents of elites . Policies of government are made in such a way that it benefits elite sections of the society.    

Consequences of Inequalities

Conflicts  and Insurgency – Arab Spring of 2011 in the Middle-East  was result of high inequalities in that region .
Earlier in India, Naxalbari Movement was result of inequality (in land holding)  
Crimes It has been observed that unequal societies have higher crime rates. Poverty force people to earn via illegal means .  
Political Impacts In case of higher income inequalities, political democracy and government starts to loose its legitimacy.  
Effects on Growth Income distribution matters for growth. If income is more equally distributed, it means more potential buyers of goods creating bigger markets.

Steps Taken by India

Tax Reforms  Piketty has suggested India to improve its Tax : GDP which is abysmally low .
Indian Government is taking steps to bring more people in tax net. Taxation system helps in ‘redistribution of money’ from richer to less well off.  
Skill Development Improving education quality, eliminating financial barriers to higher education, and providing support for apprenticeship programmes .  
Social Security The high cost of healthcare and medicines drives a hundred million people into poverty every year.  For the very poorest and most vulnerable there must be a universal and permanent safety net that is there for them in the worst times. Government has taken various measures in this regard like starting Ayushman Bharat Scheme.  
Various steps against Black money Steps like demonetization have been taken by the government to control black money .

Humidity, Condensation, Clouds and Precipitation

Humidity, Condensation, Clouds and Precipitation

This article deals with ‘Humidity, Condensation, Clouds and Precipitation’ This is part of our series on ‘Geography’ which is important pillar of GS-1 syllabus . For more articles , you can click here

Humidity

  • Water vapour present in the air is known as humidity. 
  • It is expressed quantitatively in different ways like 
Actual Humidity Actual amount of the water vapour present in the atmosphere.
Relative Humidity The ability of the air to hold water vapour depends entirely on its temperature. The percentage of moisture present in the atmosphere as compared to its full capacity at a given temperature is known as the relative humidity .
Specific Humidity Ratio of weight of water vapour to weight of dry air.
Vapour pressure Part of barometric pressure that is caused by water vapour alone.
  • The air containing moisture to its full capacity at a given temperature is said to be saturated. It means that the air at the given temperature is incapable of holding any additional amount of moisture at that stage.
  • The temperature at which saturation occurs in a given sample of air is known as dew point.

Evaporation & Condensation

1 . Evaporation

  • Evaporation is a process by which water is transformed from liquid to gaseous state.
  • It can occur in three conditions
    • High temperature
    • Low Pressure conditions
    • Fast moving wind

2. Condensation

  • Condensation is process of conversion of water vapours present in air into water droplets .
  • Condensation is caused by the loss of heat. When moist air is cooled, it may reach a level when its capacity to hold water vapour ceases. Then, the excess water vapour condenses into liquid form.
  • Condensation takes place:
    • When the temperature of the air is reduced to dew point  or When moisture is added to the air  
    • Surface : Which may be natural like grass etc (making dew) or Hygroscopic Surface/ Nuclei

3. Sublimation

  • If water vapour directly condenses into solid form, it is known as sublimation.

Dew, frost, fog and clouds

After condensation, the water vapour or the moisture in the atmosphere takes one of the following forms — dew, frost, fog and clouds.

1 . Dew

  • When the moisture is deposited in the form of water droplets on cooler surfaces of solid objects such as stones, grass blades and plant leaves, it is known as dew.
  • The ideal conditions for its formation are calm air, high relative humidity, and cold and long nights.
  • For the formation of dew, it is necessary that the dew point is above the freezing point (otherwise frost will form) .

2. Frost

  • Frost forms on cold surfaces when condensation takes place below freezing point (0 C).

3. Fog

  • When temperature of an air mass containing a large quantity of water vapour falls all of a sudden below dew point, condensation happens and subsequent cloud  is formed at ground level. This is known as fog.
  • Fogs are mini clouds in which condensation takes place around nuclei provided by the dust, smoke, and the salt particles.
Radiation fog Associated with temperature inversion & formed at cold night when temperature of air near ground falls below dew point .
Most common type in winter season.
Frontal fog When cold air masses converge against warm humid air masses , cold air being heavy remains at bottom while warm air is pushed over leading to cooling & formation of fog
Famous fog of Newfoundland is formed like this.
  • In fog, visibility is less than 1 km.

4. Smog

  • Fog + Smoke = Smog.
  • In urban and industrial centres, smoke provides plenty of nuclei which help in the formation of fog . Such a condition when fog is mixed with smoke, is described as smog.
  • It is associated with very low visibility and health hazard.

There are two type of Smog

a . Sulphurous Smog

  • Aka London Smog
  • Results from high concentration of Sulphur Oxides in the air caused by use of Sulphur containing fossil fuels , particularly Coal .
  • Occur in cool humid climate
  • Chemically reducing hence called reducing smog
  • Characterised by blue coloured skies aka blue haze.

b. Photochemical Smog

  • Occurs in warm, dry & sunny climate
  • Results from the action of sunlight on unsaturated Hydrocarbons & oxides of Nitrogen produced from factories and automobiles.
  • Chemically Oxidising and hence called Oxidising Smog
  • Ozone, PAN (Peroxyacetyl Nitrate), Acrolein & Formaldehyde are produced in it which can cause serious health problems .

5. Mist

  • The only difference between the mist and fog is that mist contains more moisture than the fog.
  • In mist, each nuclei contains a thicker layer of moisture.
  • Mists are frequent over mountains as the rising warm air up the slopes meets a cold surface.
  • Visibility is more than 1 Km but less than 2 km.

Visibility Comparison : Mist > Haze  > Fog > Smog.

6. Cloud

  • Cloud is a mass of minute water droplets formed by the condensation of the water vapour in free air at considerable elevations.
  •  As the clouds are formed at some height over the surface of the earth, they take various shapes

Clouds

  • Clouds are tiny water droplets suspended in the air formed due to the condensation.
  • To understand the nomenclature of Clouds, one must be aware of the meaning of some Latin words.
Cirrus Curl of hair/ high .
Cumulus Heap or pile of cotton.
Strato Sheet or layer.
Nimbo Rain.
Alto Middle altitudes.

Classification of Clouds

The clouds can be classified based on their form, height and appearance as follows:

Classification of Clouds

1 . High Clouds

Different types of Cirrus clouds are present above height of 6Km

1.1 Cirrus Clouds

  • They look like curl of hair
  • It indicates fair weather and gives brilliant sun set.

1.2 Cirro Cumulus 

  • This appears as white globular masses, forming a mackerel sky.

1.3 Cirro Stratus 

  • This resembles a thin white sheet. The sky looks milky and the sun and moon shines through this clouds and form a ‘halo’

2. Middle Clouds

Different types of  Alto clouds  are found between 2 km to 6 km above the ground.

2.1 Altocumulus

  • These are woolly, bumpy clouds arranged in layers appearing like waves in the blue sky.
  • They indicate fine weather.

 2.2 Altostratus

  • These are denser and have watery look.

3. Low Clouds

Mainly Stratus or sheet clouds below 2 km height.

3.1 Stratocumulus

  • This is rough and bumpy clouds with wavy structure.

3.2 Stratus

  • This is very low cloud, uniformly grey and thick, appears like highland fog.
  • It brings dull weather and light drizzle. It reduces the visibility and is a hindrance to air transportation.

3.3 Nimbostratus

  •  This is dark dull cloud, clearly layered, as it brings gentle rain, snow and sleet and it is called as rainy cloud.

4. Clouds with vertical extend

These are mainly cumulus clouds whose  height extend from 2 km to 10 km approximately.

4.1 Cumulus

  •  This is vertical cloud with rounded top and horizontal base, associated with convectional process in the tropical region.

4.2 Cumulonimbus

  • This is over grown cumulus cloud with great vertical extent, with black and white globular mass.
  • This is formed due to heavy convection in the tropical regions. It is accompanied by lightning, thunder and heavy rainfall

Precipitation

Precipitation is the process by which all forms of water particles fall from the atmosphere and reach the ground.

Conditions necessary for precipitation

  • Air parcel must be cooled below dew point.
  • Presence of condensation nuclei(i.e. minute hygroscopic particles serving as nuclei for water particles) in the air . Eg salt, smoke & dust particles=> if they aren’t present, precipitation will not occur even if relative humidity is above 100% .
  • Condensation must occur rapidly & for fairly long time . If occur for small time  , then it may not reach to earth as it would be absorbed by unsaturated air present in lower parts .

Forms of precipitation

1 . Rainfall

  • Most common type of precipitation in temperate & tropical regions.
  • When water droplets of more than 0.5 mm diameter falls from the atmosphere to the ground it is called as ‘Rainfall’.
  • If the diameter is less than 0.5mm, it is called as ‘Drizzle’.

2. Hail

  • When condensed moisture in form of raindrops is carried to great heights by strong convection currents & they get frozen due to low temp at greater heights=> when they come down they gather more water around them & size of pellets become large.
  • Ice pellets has size of 5 to 50 mm or some times more. 

3. Snowfall

  • Precipitation occurs at below freezing point and falls as thin ice flakes or powdery ice, called  ‘Snow’.

4. Sleet

  • Precipitation in the form of mixture of raindrops  & ice pellets less than 5 mm in diameter.
Forms of precipitation

Types of  Rainfall

Since rainfall is the major type of precipitation, we will look of type of rainfalls. It can be of various types depending upon process of rising up of air

1 . Convectional Rainfall

  • As a result of heating of the surface air, the warm moist air expands and is forced to rise to a great height. As the air rises, it cools, reaches dew point and condenses to form clouds.
  •  Cumulonimbus clouds are formed in this .
  • This type of rainfall occurs
    1. Throughout the year near the equator in the afternoon. It is called as 4 ‘O’ clock rainfall region.
    2. In middle latitudes, convectional rainfall occurs in early summer in the continental interiors
Convectional Rainfall

2. Orographic Rainfall

  • Air is forced to move up by landform features like   mountain, plateau , escarpment etc and air thus rising may cool below dew point causing rain.
  • Windward side gets heavy rain whereas leeward side is rain shadow area.
  • Most of rain occurring in India and world is orographic . In India, Western coast & North East India gets rainfall by this process.
Orographic Rainfall

3. Cyclonic Rainfall

  • This type of precipitation is associated with a cyclonic activity (Tropical and Temperate cyclones)
  • Cyclonic rainfall is associated with Cumulo-Nimbus  clouds. The rainfall is very heavy and accompanied with lightning and thunder and high speed winds which has the potential to cause damage.

4. Frontal Rainfall

  • ‘Frontal rainfall’ is associated with fronts which form due to collision of different air masses.
  • It can be of two types
    1. Warm Air Front Rainfall : In this , warm air invades cold air leading to formation of Nimbostratus clouds and gentle rainfall.
    1. Cold Air Front Rainfall : In this, cold air invades warm air leading to formation of Cumulonimbus cloud and violent rainfall with lightening.

Wind Systems

Wind Systems

This article deals with ‘Wind Systems’ This is part of our series on ‘Geography’ which is important pillar of GS-1 syllabus . For more articles , you can click here

Winds

  • Wind is the horizontal movement of air molecules from areas of high pressure to areas of low pressure to maintain the atmospheric equilibrium.
  • Nomenclature of Winds
    • Winds are named easterly, westerly, northerly etc on basis of direction of their origin.
    • Easterly wind is that which originate in east & blow from east to west.
  • Wind direction is identified by an instrument called Wind Vane and wind speed is measured by Anemometer.

Factors affecting direction & velocity of wind

1 . Pressure Gradient

  1. If pressure gradient is more, velocity will be more in magnitude because differences in atmospheric pressure produces a force.
  2. The wind always moves perpendicular to isobars.

2. Frictional Force

  • Lower is frictional force, greater will be the speed .
  • Over the sea surface the friction is minimal.

3. Coriolis Force

  • If the earth did not rotate, the winds would blow in a straight path. Then the rotation of the earth results in Coriolis effect and it deflects the direction of the wind.
Northern Hemisphere Deflect towards Right or Clockwise (NCR)
Southern Hemisphere Towards Left or Anticlockwise.
  • Coriolis force is directly proportional to the angle of latitude. It is maximum at the poles and is absent at the equator.

Type of Winds

Type of Winds

1 . Primary / Global/ Permanent Winds

Pressure belts lead to the formation of primary wind system resulting in Trade Winds, Westerlies and Polar Easterlies

1.1 Trade Winds

  • The winds blow from the sub tropical high pressure belt towards the equatorial low pressure belt.
  • Due to Coriolis Effect, these winds are deflected to the right in the northern hemisphere and to the left in the southern hemisphere.
  • As winds are named after the direction from which they originate they are called as the North East and South east trade winds.
  • As the winds favoured trading ships they are called as ‘Trade winds’.

Side Topic : Tropic Deserts & Trade Winds (aka Trade Wind Deserts or Trade Deserts)

  • Tropical easterlies/ Trade Winds flow from east to west  . Hence, windx becomes dry when they reaches the western coast of continent as all the moisture  is already shed in form of rainfall on eastern coast .As a result, in tropical region, deserts are found on western coasts of continents .They are also known as Trade Deserts.
  • Apart from that, Cold Currents near the western coasts of continents also provides desiccating imapct on the surrounding lands leading to more dryness .

1.2 Westerlies

  • Westerlies flow towards the Sub Polar High from Sub-Tropic Low
  • They turn towards right and left in northern and southern hemisphere respectively due to Coriolis force.
  • As they flow from West to East, they are called Westerlies
  • Ocean is dominant in the southern hemisphere between the latitudes 40º and 60ºS. Hence the westerlies are so powerful and persistent that the sailors used such expressions as “Roaring Forties”, “Furious Fifties” and “Screeching Sixties” for these high velocity winds in the latitudes of 40º, 50º and 60º respectively.

1.3 Polar Easterlies 

  • Polar Easterlies  flow towards the Sub Polar High from Polar High .
  • They turn towards right and left in northern and southern hemisphere respectively due to Coriolis force.
  • As they flow from East to West, they are called Easterlies

2 . Secondary / Regional / Seasonal Winds

Monsoon and Cyclones are considered to be Secondary or Seasonal Wind

2.1 Monsoons

  • Monsoons are seasonal winds which reverse their direction due to various reasons .
  • These winds bring rainfall in India and are the major climatic feature of climate of Indian Sub-continent.
  • We will detail with these winds in Indian Climate .
Monsoons

2.2 Cyclones

  • Wind blowing in circular manner around an area of low pressure 
  • Due to Coriolis effect – blow in anticlockwise direction in Northern hemisphere & clockwise direction in southern hemisphere.
  • Cyclones are of two types.
Tropical cyclones Develop over oceans in summers in tropical regions . Eg : in Bay of Bengal, China sea , Caribbean sea etc.
Temperate / Extra tropical Develop in middle latitudes in winter season

More about cyclones in separate article

3. Tertiary / Local Winds

Tertiary winds are formed due to pressure gradients which may develop on a local scale because of differences in the heating and cooling of the earth’s surface.

3.1 Sea and Land Breezes

  • Sea Breeze :  During daytime, land heats up much faster than water. The air over the land warms and expands leading to formation of low pressure. At the same time, the air over the ocean remains cool because of water’s slower rate of heating and results in formation of high pressure. Air begins to blow from high pressure over ocean to the low pressure over the land. This is called as ‘Sea breeze’.
  • Land Breeze : During night time, the wind blows from land to sea and it is called as ‘Land breeze’
Sea and Land Breezes

Note :  Sea breeze and land breeze influence the movement of boats near the coastal region and fisher men use these winds for their daily fish catching. Fishermen go for fishing at early morning along the land breeze and return to the shore in the evening with the sea breeze.

Sea and Land Breezes

3.2 Mountain and Valley Breezes

  • Valley Breeze / Anabatic Winds  : During the day, mountain hillslopes are heated intensely by the Sun, causing the air to expand and rise. This draws in air from the valley below, creating a valley breeze.
  • Mountain Breeze / Katabatic Winds  :  During the night the hillslopes get cooled and the dense air descends into the valley as the mountain wind

3.3 Warm and Cold Local  Winds

Warm and Cold Local  Winds

Cold Local Winds

  • High Pressure  conditions are created in areas situated in high latitudes due to cold weather. As a result,   air starts to come down and diverge into different directions (forming anti-cyclones) blowing as ‘Cold and Dry Local Winds’ and reducing temperature of surrounding regions as well.
  • In Siberia such anti cyclonic winds are created and diverge in different directions  . These winds are called Buran
Buran Explained above
Mistral (Europe) Cold northerly from central France and the Alps to Mediterranean
Bora (Eastern Europe) North easterly wind from eastern Europe to north eastern Italy
Blizzard (USA & Canada) Cold and dry snowy winds blowing in USA and Canada
Pampero (Argentina) Cold and dry wind blowing in Pampas of Argentina
Southern Bursters Cold and dry wind blowing in  Australia

Warm Local Winds

  • Low  pressure develops  over Deserts and low latitudes in summers due to excessive heating of land . The air starts to move upward and diverges in different directions blowing as upper tropospheric wind. They carry sand and dust with them and raises temperature of regions over which they flow. These winds are known with different names in different regions like
Loo India (Punjab, Haryana, Rajasthan, UP, Delhi etc)
Sirocco From Sahara desert to Italy and Spain after crossing Mediterranean Sea
Khamsin Egypt
Harmattan From Sahara desert to Gulf of Guinea
  • Other  type of warm and local winds like Chinook winds develop when warm, moist air blows from the adjoining ocean ( Pacific Ocean in this case) towards the Mountain range situated near the coast (Rockies in this case). In such situation, dry and warm air over the mountain will descend in the adjoining valley on the leeward side of wind .  Other such type of winds are Fohn and Zonda
Chinook US and Canada Rockies
Fohn Europe Alps
Zonda Argentina & Uruguay Andes
Santa Ana California Santa Ana Mountains
Chinook , Fohn , Conda

Upper Atmospheric / Meridional  Circulations

Hadley cycle Air from equator being lighter move up & diverges toward poles & descends at subtropical areas causing higher pressure there. That wind is again carried by trade winds to equator.
Ferrel Cycle Same  thing between subtropical & subpolar pressure belts
Polar cell  Between polar & subpolar pressure belts
Meridional  Circulations

Side Topic : Upper Tropospheric Winds and Geostrophic Winds

To understand formation of Jetstreams, it is important to know what are Geostrophic winds.

  • Unlike air moving close to the surface, an air parcel in the upper troposphere moves without a friction force because it is so far from the source of friction—the surface. So, there are only two forces on the air parcel, the pressure gradient force and the Coriolis force.
  • A useful heuristic (i.e. theoretical model) is to imagine that air parcel in the upper troposphere is starting from rest under the influence of ‘Pressure Gradient Force ”  moving from point of High Pressure to Low Pressure .
  • Due to pressure gradient force and absence of friction force , speed of wind will  keep on increasing . Since, Coriolis force increases with increase in speed and acts perpendicular to Pressure Gradient Force,  situation will be reached when Pressure Gradient Force equals Coriolis Force  & these winds will deflect 90° (clockwise) . At this point, the flow is no longer  from high to low pressure, but parallel to the isobars. Such winds are called Geostrophic winds
Geostrophic Winds
  • These are also known as Upper Tropospheric Westerlies
  • Jetstreams are an example of Geostrophic winds .

Direction of Geo Strophic winds

Always move from WEST TO EAST  (hence called Westerlies)

Northern Hemisphere Geostrophic winds deflect clockwise .
Move from West to East.
Southern Hemisphere Geostrophic winds deflect Anti Clockwise.
Move from West to East.

Jetstreams

  • Jet streams are special type of Geostrophic winds .
  •  These are strong and narrow bands of meandering wind blowing at height of 6 to 14 km ( just below Tropopause) at very high speed of upto 450 Km/hr. They occur at points where atmospheric pressure gradients are strong and friction force acting on moving air is absent.
  • Jetstreams flow in wavy fashion and create alternate   High Pressure & Low Pressure zones .

Location of Jet Streams

  • They aren’t found arbitrarily . They are situated at typical positions like  where two Meridional Circulations meet. (Reason : Point where  two air masses of different temperatures meet, the resulting pressure difference is highest.  Only in such condition, Pressure Gradient Force can increase the speed of wind to such an extend that Coriolis Force can balance the Pressure Gradient Force and rotate it by 90°) (I know it is hard to understand. To properly understand what is happening, you can refer this useful video What is the jet stream and how does it affect the weather?)
  • Hence , 4 permanent Jet streams are always found .
2 Polar Jet  Between Polar cell & Ferrel cell.
2 Sub Tropical Westerly Jet  (STWJ) Between Ferrel cell & Hadley cell.
Jetstreams
Jet Streams

Apart from that, there are some temporary Jet-streams like

  • Tropical Easterly Jetstream
  • Somali Jetstream

Speed of Jetstreams

  • Cause of Jetstreams is the pressure difference (due to temperature difference) in the upper atmosphere. Hence , higher the pressure gradient (or temperature gradient) higher will be speed of Jetstream.
  • Temperature variations are more in winters (lowest ~ -70 C & highest ~ 15 C) compared to summers (lowest ~ 20 C & highest ~ 55 C) . Hence, Jetstreams are faster in winters of the respective hemisphere.

Importance of Jetstreams

1 . Sub Tropical Westerly Jet Stream (STWJ) & Indian Weather

  • It is centred around 25° N & S at altitude of 12 km & is strong in winter season with velocity of 40 mph.
  • It greatly determines the weather of Indian Sub continent .
    1. During summer until it is present over Indian subcontinent , High Pressure is maintained over there & monsoon can’t start. Only when STWJ moves above Himalayas & low pressure is created over Indian subcontinent  , monsoon hits India.
    2. Western Disturbances : STWJ comes to India after passing over Mediterranean Sea where rainfall occurs during  winter. STWJ bring those cyclonic disturbances to north India along with it. This results in winter rain & hailstorms in North India  & occasional high snowfall in hilly areas  .

2. Jetstreams and Frontal / Temperate Cyclones

  • Jetstreams play important role in formation of Temperate Cyclones which are important feature of the climate of temperate regions like Britain etc .

3. Tropical Easterly Jet and Somali Jetstream

  • These Jetstreams play important role in the Indian Monsoon.
  • More about this can be read in (chapter) Indian Climate .

4. Role in Aviation Industry

  • If aeroplanes moves in the direction of Jetstream, it can lead to large fuel savings and vice-versa

Impact of Climate Change on Jetstreams

Due to Climate change and Global warming, Earth’s Polar regions are warming more rapidly than other parts . This has resulted in weakening of Polar Jet Streams because temperature contrast that drives Jetstreams has decreased.

Pressure and Pressure Belts

Pressure and  Pressure Belts

This article deals with ‘Pressure and  Pressure Belts’ This is part of our series on ‘Geography’ which is important pillar of GS-1 syllabus . For more articles , you can click here

Atmospheric Pressure

  • Atmospheric pressure is defined as the force per unit area exerted against a surface by the weight of the air molecules above the earth surface.
  • Atmospheric pressure is measured by an instrument called ‘Barometer’
  • The atmospheric pressure is not distributed uniformly over the earth. The  amount of pressure increases or decreases, according to the amount of molecules, that exerts the force on the surface.
    1. When temperature of air increases, the air expands and reduces the number of molecules over unit area leading to reduction in pressure.
    2. Similarly, when the temperature falls, the air contracts and the pressure increase.
Atmospheric Pressure

Factors affecting Atmospheric Pressure of area

1 . Temperature

  • As the temperature increases, air expands because of which its density decreases resulting in low pressure over area.
  • On the other hand, cold climate makes air denser resulting in high pressure over area.
  • Equatorial regions have low pressure because of high temperatures. On the other hand Polar regions have high pressure due to low temperature.

2. Height from Sea

  • The pressure at sea level is highest and keeps on decreasing rapidly with increasing altitude because of the progressive reduction of the mass above the point where it is measured.
Impact of height on pressure

3. Humidity

  • Water vapours are light in weight therefore pressure of humid air is less compared to dry air.

4. Gravitation of Earth

  • Atmosphere glues around the Earth due to its gravitation
  • Due to shape of earth,  Polar regions are nearer to core of the Earth as compared to Equatorial regions and hence have higher air pressure.

5. Rotation of Earth

  • Rotation of Earth results in centrifugal force.  Centrifugal force pushes things away from its core.
  • Centrifugal force is highest over equator and zero over poles. Hence,  air pressure will decrease in Equatorial regions as compared to that in polar regions.

Distribution of Atmospheric Pressure

Horizontal distribution of pressure is studied by drawing isobars . Isobars are lines connecting places having equal pressure. In order to eliminate the effect of altitude on pressure, it is measured at  sea level. These distributions change with season as well.

Distribution of Atmospheric Pressure

Pressure Belts of Earth

Atmospheric pressure belts envelope on the surface of the earth. They are equatorial low pressure belt, sub tropical high pressure belts, sub polar low pressure belts and polar high pressure belts

Pressure Belts of Earth

1 . Equatorial Low Pressure Belt

  • Region extending between 5° N latitude  to 5° S
  • Following are the reasons creation of low pressure belt over this region :
    1. Rays of sun fall vertically => High temperature creates low pressure.
    2. Owing to high temperature, evaporation process is also very fast => large amount of water vapours decrease the weight and density of air resulting in reduction of air pressure.
    3. Rotation of Earth and resulting centrifugal force has its maximum magnitude on Equator 
  • When air moves upward , it leads  to formation of clouds . Hence, it rains heavily in these  areas  (Cumulonimbus clouds & Convectional rainfall) . There is single  season throughout the year ie high temperature & high rainfall .
  • Advection is absent in this region because gradient of pressure is low  . Hence known as Belt of Calm / Doldrum .

2. Sub-Tropical High Pressure Belt

  • At about 30°N and 30°S latitudes on both sides of equator
  • Air which rises in equatorial region begins to cool when it reaches higher altitude over equatorial region and flows towards the poles. This wind collides with the wind coming from the polar region at higher altitude and subsides down over sub tropical latitudes. This leads to formation of high pressure belt
  • It is said that to avoid the slowing down of ship due to high pressure, the horses were thrown into the sea. So this belt is called as ‘Horse latitude’.

3. Sub Polar Low Pressure Belt

  • These are low pressure belts found at 60°N and 60°S latitudes on both sides of equator
  • The warm westerly wind from sub tropical region moves towards the pole and collide with the cold polar easterly wind from polar high pressure region and raises up to form sub polar low pressure belt.

4. Polar High Pressure Belt

  • Region at poles on both sides of equator
  • In this region, high pressure is formed because temperature remains low for whole of the year.

 Side Note : Basis of formation of pressure belts

Pressure belts can be created because of two reasons

1 . Temperature / Thermally formed

  • The Equatorial Low Pressure Belt and Polar High Pressure Belt are formed due to high and low temperature respectively. Hence, these are ‘thermally formed pressure belts’

2.  Dynamically formed

  • The Sub Tropical High and Sub Polar Low pressure belts are formed due to movement and collision of wind systems. Hence, they are called ‘Dynamically formed pressure belts’.

Temperature and Heat Budget of Earth

Temperature and Heat Budget of Earth

This article deals with ‘Temperature and Heat Budget of Earth’ This is part of our series on ‘Geography’ which is important pillar of GS-1 syllabus . For more articles , you can click here

Air Temperature

  • Air temperature of a particular place denotes the degree of hotness or coldness of air at a given place. It is generally measured in Celsius

Heating  process of Atmosphere

There are different ways of heating & cooling of the atmosphere.

  • Conduction :The air in contact with the land gets heated by conduction . Conduction is important in heating the lower layers of the atmosphere.
  • Convection : The air in contact with the earth rises vertically on heating in the form of currents and further transmits the heat of the atmosphere. This process of vertical heating of the atmosphere is known as convection. The convective transfer of energy is confined only to the troposphere.
  • Advection : The transfer of heat through horizontal movement of air is called advection.  (In northern India, during summer season local winds called ‘loo’ is the outcome of advection process).
  • Radiation (Green House effect)  : The insolation received by the earth is in short wave form and it heats up  surface. The earth after being heated itself becomes a radiating body and it radiates energy to the atmosphere in long wave form. The long wave radiation is absorbed by the atmospheric gases particularly by carbon dioxide & other Green House Gases. Thus, the atmosphere is indirectly heated by the earth’s radiation.
Green House Effect

Heat Budget of Earth

The earth as a whole does not accumulate or loose heat. It maintains its temperature. This can happen only if the amount of heat received in the form of insolation equals the amount lost by the earth through terrestrial radiation. This is known as Heat Budget of Earth

This is done in following way

Suppose 100 units are coming to earth

Heat Budget of Earth
Temperature and Heat Budget of Earth

Factors affecting  Horizontal temperature distribution

1 . Latitude of the place

  • Insolation received by any place depend upon latitude because when we move from equator towards pole, sun-rays become slanted . In slanted sun-rays, same energy is diffused over large area
  • Conclusion : Temperature decreases from the equator to the poles.

2. Distribution of Land and Water

  • Compared to land, the sea gets heated slowly and loses heat slowly. Land heats up and cools down quickly.
  • So more land mass in northern hemisphere leads to higher average temperature than the southern hemisphere

3. Presence of warm & cold current

  • Places located on the coast where the warm ocean currents flow record higher temperature than the places located on the coast where the cold currents flow.

4. Air mass circulation

  • The passage of air masses also affects the temperature. The places, which come under the influence of warm air-masses experience higher temperature and the places that come under the influence of cold airmasses experience low temperature.

5. Cloudiness

  • Cloudy  sky obstructs the solar radiation from the sun to reach earth. Hence, clear sky increases the temperature of place.
  • Due to this, Maximum insolation is received over the subtropical deserts, where the cloudiness is the least. Equator receives comparatively less insolation than the tropics because of clouds.

6. Nature of Surface

  • Albedo ie ability of surface to reflect the sunrays also impact temperature of place.
  • Fresh snow has albedo of upto 90% and  more reflection from the snow surface leads to low temperature accumulation compared to bare land.

7. Local aspects

  • Depend on position to position.

Factors affecting  vertical  temperature distribution

  • The temperature decreases with increasing altitude from the surface of the earth.
  • Reason : Atmosphere is indirectly heated by terrestrial radiation  from below. Therefore, the places near the sea-level record higher temperature than the places situated at higher elevations.
  • The vertical decrease in temperature of troposphere is called as ‘Normal Lapse Rate’ which is 6.5 C per 1000 meter of ascent.

Temperature Inversion

  • Normally , within Troposphere, temperature decreases with increase in  height . But if  reverse happens,  it is called Temperature Inversion .
  • Since cold air is denser/heavier than warm air , in case of temperature inversion, air will not be able to move upward .
temperature inversion

When Temperature Inversion can happen

  • At Tropopause :  Temperature starts to increase from here . As a result,  air  packets reach  till Tropopause & then starts moving downward . There is  no vertical air movement after that
  • A cool winter night with no clouds and stable air : Air above cold surface gets cold but layer  above cold air is still warmer & hence it cant move upward . This phenomenon is prominent till 400 m above earth’s surface.
temperature inversion
  • Valley Inversion/Air Drainage  :  In winter, mountain top becomes cold quickly compared to  valley . As a result, cold air  comes down to occupy valley . This  uplifts warm air of valley & situation is created when lower layer is cold & upper layer is warm 
valley inversion
  • Frontal inversion occurs when a cold air mass undercuts a warm air mass and lifts it 

Implications of Temperature Inversion

1 . Formation of Fog

  • As we have seen in currents ,  where ever warm & cold current meet , fog is created
  • In same way , when warm air & cold air meets , fog is created . This lowers the visibility in region.

2. Atmospheric Stability

  • Temperature Inversion prevents upward & downward movement of air.
  • Hence, it discourages rainfall.

3. Impact on Agriculture

  • Frost formed due to valley inversion damages crops in foothills, whereas trees and vegetation at top of hills and mountains are not damaged. The valley floors in the hills of Brazil are avoided for coffee cultivation because of frequent frosts.
  • (Beneficial Case : Though generally fog (caused due to temperature inversion) is unfavourable for many agricultural crops such as grams, peas, mustard plants, wheat etc. but sometimes they are also favourable for some crops such as coffee plants in Yemen hills of Arabia where fog protect coffee plants from direct strong sun’s rays. )

4. Environmental problem

  • In winters, concentration of pollutants raises to very high levels in cities as due to temperature inversion, air gets trapped . Eg : Delhi’s pollution levels are more in winters than summers.
impact of temperature inversion

Urban Heat Island

An urban heat island is an urban area or metropolitan area that is significantly warmer than its surrounding rural area due to high concentration of high rise concrete buildings, metal roads, sparse vegetation cover and less exposure of soil. These factors cause urban regions to become warmer than their rural surroundings, forming an “island” of higher temperatures.

Urban Heat Island

Composition and Structure of Atmosphere

Composition and Structure of Atmosphere

This article deals with Composition and Structure of Atmosphere’ This is part of our series on ‘Geography’ which is important pillar of GS-1 syllabus . For more articles , you can click here

Introduction

  • Atmosphere is combination of two words ‘Atmo’ and ‘sphere’. It means that region of Earth which has ‘air’.
  • Atmosphere is present as life saving layer between outer space and land surface. It is the source of important gases which are important for the existence and continuity of life. It also filters the harmful rays travelling towards Earth

Composition of Atmosphere

  • Earth’s atmosphere is composed of a mixture of various gases .
  • It is held to earth by gravitational forces
  • Atmosphere is denser at sea level & thins or gets  rarefied rapidly upward . It should be noted that, 99% of the mass of atmosphere is confined to height of 32 km
  • Percentage of different gases (by volume) in atmosphere is as follows :-
Composition of Atmosphere
  • Atmospheric gases don’t interact with each other chemically & don’t lose their own property.
  • These gases can be divided into two groups based on their distribution horizontally
Permanent Gases Nitrogen , Oxygen, Hydrogen & Argon.
Their quantity remain same on all places .
Variable Gases Water Vapour , Carbon dioxide & Ozone
Their quantity vary from region to region. Eg : In coastal areas, there will be more water vapours and in cities, there will be more Carbon dioxide. 
– They can absorb heat & hence known as Green House Gases.
  • Based on vertical distribution, they can also be grouped into two groups. Heavy gases like Nitrogen , Oxygen and Methane have high composition near earths surface. While going up, composition of lighter gases keep on increasing but since there is high turbulence, no effective separation occurs in most of gases except for  two gases.
Water Vapour Near surface of earth, they are upto 2% by volume but no trace present above 10-12km.  
Ozone Found mainly between  10-50 km in stratosphere.

Side Note : Important gases in Atmosphere ( not on basis of percentage but function )

1 . Nitrogen

  • Present in atmosphere in highest proportion (78%)
  • It is very important for living organisms because it is an important element of Amino acids which form protein

2 . Oxygen

  • Second most abundant gas in atmosphere (21%)
  • All the living organisms use it for breathing

3. CO2

  • Meteorologically very important gas .
  • It is transparent to incoming solar radiation but opaque to outgoing terrestrial radiation . Hence, it is mainly responsible for Green House effect.

4. O3

  • Ozone gas is found between 10-50 km
  • It act as filter and absorb UV rays .
  • But scientists are very concerned about the depletion of ozone layer due to action of chlorofloro carbons on Ozone

5. Water Vapour

  • Variable gas
    1. Can be upto 4% by volume in wet tropics
    2. In dry & cold areas of desert & polar deserts it can be less than 1% of air .
  • It also absorbs parts of the insolation from the sun and preserves the earth’s radiated heat.

6. Dust

  • May originate from different sources & include sea salts, fine soil, smoke-soot, ash, pollen, dust & disintegrated particles of meteors.
  • It is concentrated in lower parts , yet convectional air currents can take them to great heights .
  • They perform two very important functions
    1. It provides Hygroscopic nuclei around which water vapour condenses to produce clouds .
    2. They absorb  and reflect small amount of radiation rays of sun.

Structure of Atmosphere

Structure of Atmosphere

Atmosphere can be divided into five distinct layers   based on the thermal characteristics and temperature variations (note : these divisions are based on thermal characteristics)

1 . Troposphere

  • Troposphere is the  lowest layer of atmosphere and it is very important for all the living organisms
  • Name has been derived from Greek word ‘Tropos’ which means mixing  and ‘sphere’ which means ‘region’. Hence, ‘troposphere’ means ‘region of mixing’
  • Troposphere is zone of air turbulence because in this zone,   convectional air currents rise due to heating of earth surface
  • Thermal Characteristic of Troposphere
    1. Temperature decreases with increase in height (reaches  – 60 degree Celsius at tropopause).
    2. In normal conditions,  the rate of decrease of temperature is (ie lapse rate) is 6.5 degree Celsius per kilometre . This happens because of decrease in gases with increase in height 
    3. However, due to local reasons, at some places this phenomena reverses also (called Temperature Inversion).
  • Height of Troposphere
    1. on Equator, it is 18 km (gases are heated up and rises upward from strong convectional currents)
    2. on poles, it is 8 km (gases are cold and settles down)
    3. At average its height is upto 12 kilometre from ground.
  • All weather phenomena occur in this layer as it has dust particles and water vapour. This layer has clouds which produce precipitation on the earth.

Tropopause

  • It is the region between Troposphere and Stratosphere which is 1.5 kilometre high
  • The fall in temperature comes to an end in this region
  • Turbulent mixing of gases, winds, and radiation etc. none of the weather activities take place in this region

2. Stratosphere

  • Stratosphere  extends from  end of Tropopause up to a height of 50 km from the earth’s surface.
  • The lower part of this layer  is highly concentrated with ozone gas which is called as ‘ozonosphere’. It prevents the harmful ultra-violet rays from the Sun to enter into the lower part of the atmosphere
  • Thermal Characteristics of Stratosphere
    1. Temperature increases with height (ie from – 60 degree Celsius at start to 0 degree Celsius at Stratopause) .
    2. Temperature increases because of absorption of ultra violent rays by ozone gas
  • It is turbulence free zone . Hence, it is ideal for flying jet aircraft.(important prelims question)

3. Mesosphere

  • Mesosphere lies above the stratosphere, which extends up to a height of 80 km from earth’s surface .
  • Thermal characteristics of Mesosphere
    1. In this layer, once again, temperature starts decreasing with the increase in altitude
    2. From 0 degree Celsius at start, it reaches up to minus 100°C at the height of 80 km.
  • Most of the shooting stars get burned in Mesosphere .Luminous noctilucent clouds form here due to the presence of cosmic dust. ( important prelims question)
  • It is the coldest layer of earth .

4. Ionosphere /Thermosphere

  • It extends from 80 km to 400 km above Earths Surface  ..
  • It is called ionosphere due to presence of electrically charged ions that reflect radio waves back and thermosphere because it is at very high temperature.
  • Thermal characteristics of Ionosphere
    1. Temperature increases rapidly  with height  .
    2. The temperature increases rapidly up to 1,000 degree Celsius. This is due to absorption of high energy solar radiation and cosmic waves ( which break molecules to ions).
  • How Ionosphere is formed ?
    1. High energy sun rays  and cosmic rays break atoms of gases in this region .
    1. Molecules become ionised (positive charged ).
    2. These are highly energised particles & behave as free particle .
  • Luminous phenomenon called auroras at higher latitudes  when Solar Winds are able to reach ionosphere and collide with ions present in this layer  (Aurora Borealis (Arctic Zone ) & Aurora Australis(Antarctic Zone) )
  • Use of Ionosphere in radio communication : It is useful in radio communication  because ions can reflect radio waves.

5. Exosphere

  • Outermost layer of atmosphere and lies from 400 km  to 1000 km from earth’s surface.
  • This is the highest layer but very little is known about it.
  • It has rarefied contents. It contains mainly oxygen and hydrogen atoms. These atoms can travel hundreds of kilometres without colliding with one another. Hence, matter in exosphere doesn’t behave like gases.
  • It gradually merges with outer space.

Magnetosphere/ Van Allen Radiation Belt

  • Magnetosphere lies above Atmosphere and extends from 1000 km to 36000 km from earth’s surface
  • Although it isn’t  part of atmosphere but plays important part in shielding earth from solar & other cosmic winds .
  • Magnetosphere is formed due to earth’s magnetic field and it prevents most of  solar winds(highly energised particles) from reaching earth .
Magnetosphere

Polar cusps: regions above geomagnetic poles where solar wind can enter relatively easy to earth’s atmosphere.

Magnetospheric Storms

  • Magnetospheric storms are temporary disturbances in earths magnetic field  caused by occurrence of  magnetic flares & sunspot. In this process,  material from solar  coronal mass ejection  hits earth
  • Major effect in such event is global disruption of radio & telegraphic communication.

Aurora

  • Luminous  phenomenon observed in high latitude regions .
  • May appear as rolling lights or coloured streaks .
  • Produced by entry of charged particles from sun into earths atmosphere  &  collision of these charged particles with ionised particles in ionosphere .  They emit energy on interaction leading to formation  of aurora.
  • Entry of these charged particles occur at Cusp . Hence, formed at particular places on earth (& not everywhere)
  • Occur in Ionosphere.
  • Most frequent during intense period / solar minimum of sun spot cycle(sun spots have cycle of 11yr).

Side Topic : Sunspot , Sunspot Cycle & Solar Minimum

  • Sun-spots are the regions on the sun where the solar magnetic field is very strong (and as a result, it doesn’t allow solar streams to escape the sun)
  • Sun-spot cycle is the solar magnetic activity cycle with the average time period of eleven years.
  • Solar minimum is the period of least solar activity in the eleven year solar cycle. During this time, sunspot activity diminishes. According to NASA and other agencies, a solar minimum is about to occur in 2020-21. 

Impact of Solar Minimum

  • During the solar minimum, coronal holes can last for a longer time. Coronal holes are vast regions in the sun’s atmosphere where the sun’s magnetic field opens up and allows streams of solar particles to escape the sun.
  • It could enhance  events of  geomagnetic storms & auroras, potentially disrupting communications and navigation systems.
  • Sun’s magnetic field weakens and provides less shielding from the cosmic rays. This can pose an increased threat to astronauts travelling through space.

External Benchmark System

External Benchmark System

This article deals with ‘External Benchmark System .’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here

Issue

When RBI decreases Repo Rate, Banks don’t decrease their interest rates proportionately.

Incomplete Transmission of Rate Cut by Banks

Why banks don’t transmit Repo Rate cuts to borrowers?

a. Banks don’t depend on RBI

  • In India(& all developing countries ) ,RBI is not the main source of money to banks . Common people are main supplier(mainly because people don’t have much option to invest money in alternate investment facilities eg mutual funds etc )

b. Small saving schemes  rate not reduced

  • Transmission is limited by high small savings rates. Banks worry that if they cut their deposit rates, customers will flee to small savings instruments. 

c. High Statutory Liquidity Ratio

  • Large money has to be kept idle as SLR which banks cant lend
  • This reduces their ability to pass the benefit to consumers .

d. Banks increasing their Spread

  • Due to losses incurred to banks as a result of high NPAs & lowering of Credit Demand , Banks are increasing their Spread  in order to maintain their profits in absolute term.
  • This has reduced the capacity of banks to decrease Lending Rates.

To deal with inadequate transfer of Repo Rate cuts by banks to borrowers , RBI Came up with MCLR and External Benchmark  Rate System 

How Banks decide their Interest Rate

Timeline

How Banks decide their Interest Rate
1969 Government began nationalization of private banks, and ‘administered interest rates’ on them.  
1991 M.Narsimhan suggested deregulation: Government should not dictate / administer individual banks’ interest rates & RBI should only give methodology to banks.  
2003 RBI introduced Benchmark Prime Lending Rate  (BPLR).  
2010 RBI introduced BASE Rate + Spread system; update frequency was on individual banks’ discretion.  
2016-17 RBI introduced Marginal Cost of Funds based Lending Rate  (MCLR) +Spread system.
2019RBI introduced External Benchmark Rate System.

Marginal Cost of Funds based Lending Rate  (MCLR)

  • Banks to calculate lending rate on monthly basis.
  • Lending Rate to be calculated using CRR Cost, Operating Cost, Marginal cost of funds (calculated using Repo Rate) (don’t need to go into detail. Just remember, MCLR has Repo Rate as component)

Lending Rate = MCLR + Spread (to be decided by banks)

Benefits?

  • Better transmission of Monetary Policy
  • Transparency & accountability to borrowers.

RBI’s Janak Raj internal study group(2017) showed MCLR did not yield all benefits . Banks keep on increasing ‘Spread’ based on their discretion .

So new method  was introduced

External Benchmark System

  • Applicable from April 2019 (on recommendations of Dr. Janak Raj Committee)
  • NEW loans to be linked with External Benchmark  system.

In this system

  • Bank will be asked to choose any benchmark like
    • Repo rate   or
    • 91-day T-bill yield  or
    • 182-day T-bill yield   or
    • any other benchmarks by Financial Benchmarks India Pvt. Ltd.
  • It has to be updated atleast every 3 months.
  • Lending Rate of Bank will be External Benchmark + Spread (eg if Bank choose Repo Rate as External Benchmark, then Interest Rate will be Repo Rate + Spread)

Benefits?

  • Better transmission of Monetary Policy
  • Better transparency and accountability

Monetary Policy

Monetary Policy

This article deals with ‘Monetary Policy .’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here

Introduction

In any economy

Financial Intermediaries
  • Monetary Policy is  made by Central Bank of nation to control money supply in the economy.
  • Objectives of monetary policy can be (depending on economy)
    1. Inflation control
    2. Accelerating growth of economy
    3. Exchange rate stabilisation
    4. Balance saving & investments
    5. Generating employment

Monetary policy can be

Expansionary – Increases total money supply in an economy
Eg in 2008, all countries including India used this to beat recession
Traditionally used to combat unemployment in recession by lowering interest rate
Contractionary – Decreases total money supply in economy
Eg 2010 onwards India & many other countries used it
Traditionally to combat inflatory trends in economy

When Monetary policy is announced in India?

a. Till 1988-89

Was announced twice a year according  to agricultural cycles

Slack season policy April -September
Busy season policy October -March

b. After 1989

  • Since monetary policy has become dynamic in nature, RBI reserve its right to alter it from time to time , depending upon state of economy
  • Share of credit toward industry increased  (earlier was agriculture)
  • Major policy was announced in April & review take place every quarter . But within quarter at any time RBI can make any major change in policy depending upon need

c. Presently

Changes can be done at any time when RBI feels it is required but announced  necessarily after two months

Tools used by RBI for Monetary Policy

RBI implements it using two tools

a. Quantitative /Indirect/General Tools

  • Reserve Ratios (CRR,SLR)
  • OMO (Open Market Operation)
  • Rates (Repo, Reverse Repo ,Bank rate, Marginal Standing Facility etc.)

b. Qualitative /Selective/Direct Tools

  • Margin /Loan to Value Ratio
  • Consumer Credit Control
  • Rationing
  • Moral suasion
  • Direct Action

1 . Quantitative tools

Quantitative Tools of Monetary Policy

1.1 Reserve Ratios

a. Cash Reserve Ratio (CRR)

  • It is the Cash that is kept by the Bank with RBI
  • Bank cant lend it to anyone. Bank earns no interest or profit on this
  • RBI get these powers from RBI Act 
  • Presently (July 2020)  –  3% of Net Demand and Time Liabilities
  • Applicable on Scheduled Banks , Non-Scheduled Banks & Cooperative Banks

b. Statutory Liquidity Ratio (SLR)

  • A bank has to set aside this much money in cashgold & government  securities or RBI approved very secure Securities like those of PSUs  (liquid assets)
  • Some profit is earned
  • It is mandated under RBI Act.
  • Although not used as Monetary Policy Tool but if decreased, large amount of capital is infused in economy
  • Presently(July 2020) –  18% of Net Demand and Time Liabilities 
  • SLR is applicable on following Institutions all commercial banks ,  Cooperative Banks and NBFC deposit taking  . RBI can prescribe separate levels for each.

Trends of CRR and SLR

Note – Earlier , CRR & SLR used to be very high (53% combined) . As a result, banks had very less money to lend . This impacted Indian Economy because rate of loans were high and businesses were not expanding as a result. This was one of (the many) reasons of 1990 Balance of Payment Crisis. Narsimhan Committee & other experts asked government to reduce this. As a result it was gradually reduced

CRR Trends

SLR Trends

Use of CRR and SLR

  • CRR and SLR can be used to fight Inflation and Deflation
  Inflation Fight Deflation Fight
Method Tight | Dear Policy Easy | Cheap Policy
CRR,SLR Increase Decrease
  • They also act as security in case of bank run.

Side Topic : CRR Exemption 

  • Feb 2020 : RBI has announced that banks will not have to maintain CRR for all the loans they have given to three sectors namely automobile sector, residential sector and loans to MSME industries for next 5 years.
  • This will boost loans to these sectors.

Side Topic : What are G-Secs

  • Concepts like Repo, Reverse Repo and Open Market Operations involve the concept of G-Secs ( or Government Securities). Hence, we will first deal with the concept of G-Secs
  • When Government wants  extra money for their schemes, they ask RBI to print that much Government Securities (G-Secs) and give equivalent cash in return. G-Secs are the  promissory notes in which it is promised that Government will pay interest of x% to the holder for y years and pay principal at the end of tenure .
G-Secs
  • Now RBI can use these G-Secs for various operations . Eg :  to absorb the excessive liquidity from market etc

1.2 Policy Rates/ Liquidity Adjustment facility (LAF)

  • LAF  includes both Repo Rate & Reverse Repo Rate
  • RBI adjusts the liquidity of market using these tools
  • Repo & Reverse Repo operations can only be done at Mumbai & in securities as approved by RBI (T Bills , Central/state Govt securities)

a. Repo rate

  • Repo Rate is short form for Repurchase Rate
  • In this , Bank borrow immediate funds from the RBI for short term ( upto 14 days) with Government Securities as collateral and simultaneously agrees to repurchase the same Securities after a specified time at a specified price.
  • Amount that can be borrowed : minimum  5 crore to unlimited
  • All  Banks , Central & State Governments and Non Banking Financial Institutions are eligible 
  • When bank borrow, it will give its securities worth say ₹ 100 crore & agree to repurchase it back  at rate of ₹ 104 crore ( if Repo rate is 4)
Repo Rate
  • But during whole operation, bank has to maintain its SLR ie Collateral securities can,t be from SLR quota
  • Present Repo Rate is  4%  (May 2020)

Recent Trends  

RBI is reducing the rates continuously to spur economic activity by providing cheap money to the banks to lend it to public.

Long Term Repo Operations (LTRO)

  • RBI has introduced new instrument called Long Term Repo Rate (LTRO).
  • It is for long tenure of 1 to 3 years .
  • All the concepts are same as Repo Rate but interest is charged annually .
  • Total plan is to loan Rs 1 lakh crore to banks via LTRO which will increase the loanable funds with banks to boost the demand in economy.

b. Marginal Standing Facility (MSF)

  • Marginal Standing Facility introduced in  2010
  • Suppose bank is in dire need of cash but doesn’t have spare securities. Under such conditions, bank can borrow under MSF by pledging SLR securities
  • But they will have to pay 0.25% higher than Repo Rate (as punishment say)

MSF= Repo + 0.25%

  • Only Scheduled Commercial Banks can avail this facility within range of minimum 1 crore  & Maximum 1% of Net Time and Demand Liabilities. 
  • It helps to solve short term crunch
  • It is also necessary because Repo operations are limited to specific period during day

c. Reverse Repo Rate

  • In this RBI takes money from banks & give them securities (opposite of Repo Rate) 
  • RBI borrower & Banks /Union & State Governments / NBFI etc lenders
  • Collateral =  Yes
  • All clients which were eligible in Repo rate are eligible here too
  • Reverse Repo = Repo -0.25%  (Current Rate : 3.75 % (ie Repo (4%) -0.25%))

Policy Corridor

Policy Corridor

Tri-Party Repo Agreement

Until now, such facility was not available to Corporate Houses where they could issue Corporate Bonds to lenders and agree to repurchase these Bonds at later date at pre-determined rate . They also wanted to use this route to raise funds .

But there is issue of trust in this case . Hence, there is need of Intermediary who can assure lenders that Corporate House will surely buy back these bonds at decided rate   . In case, borrowers refuses to pay,  intermediary Custodian will pay that amount to Lender. Custodian will charge fee for providing this service .

Tri-Party Repo Agreement
  • In ordinary repo, there are two parties- borrower vs. lender (RBI).
  • In Tri-party Repo, there are 3 parties 1) borrowers 2) lenders 3) Tri-Party Agent ( presently 2 – BSE and NSE) who, acts as an intermediary between the two parties to facilitate collateral custody, payment and guaranteed settlement.
  • RBI issued guidelines for this in 2017
  • This is not a tool of Monetary Policy. It helps deepening Corporate Bond market.

d. Bank Rate

  • When banks borrow long term funds from RBI , they would pay this interest to RBI
  • Presently-4.25 % (May 2020)  ( although Bank Rate = MSF but both are declared separately)
  • Collateral = Nothing(can borrow without pledging securities)
Bank Rate
  • Although RBI don’t use this tool to control money supply , but if it does, same theory apply here as well
Inflation Fight Increase Bank Rate
Deflation Fight Decrease Bank Rate
  • It is not the main tool to control money supply these days  but act as penal rate charged on banks for shortfalls in meeting their reserve requirements. How it is done?
    • If Bank is not maintaining its SLR or CRR,  then bank is fined penalty on whatever amount is less from amount to be maintained . Rate Charged is  determined as :-
      1. First  time : Bank rate +3%
      2. Second Time : Bank Rate +5% and so on

1.3 Open Market Operations (OMO)

  • In Open Market Operations (OMO) ,  RBI starts buying/selling government securities to control money supply.
  • It is different than Repo and Reverse Repo Rate because here there is no promise by either party to repurchase it back. RBI will pay the interest rate to the holder of Security but there is no repurchase agreement.

How govt use this to control money supply

Case 1 : When there are inflatory trends in market , RBI issue these securities . Banks buy these securities & money supply decreases

 Open      Market Operations

Case 2 : When government wants to increase money supply , it starts buying these securities at high price

 Open      Market Operations

Why banks go for OMO although there are no compulsions on this ??

  • Lot of money keep on lying idle with banks .
  • Banks don’t earn any interest on that . Hence, it is better to invest those in govt securities & earn ~8% interest on it

Dollar-Rupee swap

  • To manage liquidity in the market, RBI has come up with new tool.
  • March -April 2019 : three-year currency swap scheme = RBI will purchase $5 billion from banks in exchange for rupees.

Currently , in Repo and Reverse Repo, RBI uses G-Secs . But there is issue of higher Bond Yields . To address this issue , Dollar –  Rupee Swap comes to scene

  1. Increasing Liquidity = Buy $ from Banks and give them money
  2. Decreasing Liquidity = Give $ to Banks and take ₹ from them
Dollar-Rupee swap

Benefit

  • Issue of higher Bond Yields on G-Secs addressed.
  • Government can increase Forex Reserve via this.
  • Banks can earn some interest out of the forex reserves lying idle in their kitty.
  • Dollar – ₹ exchange rate = ₹ will become strong and fall of ₹ against $ can be arrested

Operation Twist

  • 1961: “Operation Twist” was first used by the USA.
  •  Jan 2020 : RBI also used this route . It is officially called “Special Open Market Operation (OMO) wherein the Central bank simultaneously buys and sells G-sec of varying maturities to adjust their yields. This will help to  reduce interest rates on corporate bonds and they can raise money for their expansion at favourable rates .
Operation Twist

2. Qualitative / Selective / General tools

2.1 Marginal Requirements/LTV(Loan to Value)

  • If Spice Airlines  wants to borrow money from SBI and pledges ₹100 crore collateral but RBI prescribe margin (Loan to Value ration) of say 65%, then SBI can give only 65crore loan.
  • It is obligatory for SBI to obey directives of RBI in this context (unlike base rate)
  • Hence, it is Selective direct tool.

2.2 Consumer Credit Regulation

  • In this, RBI can make various regulations on credit
  •  Eg
    1. Can increase  down payment from say 10% to 30% (it will force some persons to delay their decision to buy vehicles financed through bank loans)
    2. Can decrease  least EMI for automobile sector say from ₹ 5,000 to 3,000

2.3 Selective Credit Control

  • In this , RBI can instruct Banks to not extend loans to particular sector (Negative / Restrictive Tools) or give minimum %age to particular sector (positive) .
  • These are Qualitative and Direct Tools.

2.3.1 Negative  Restrictions

a. Ceiling to big loans

  • From 1965 to 1989
  • Under this, all Commercial Banks had to obtain prior approval of RBI before giving loans greater than ₹ 1 Crore to single borrower.

b. Ceiling on Non Food Loans

  • Started in 1973
  • To boost Green Revolution
  • So that more loans go towards agriculture sector

These tools were used before LPG Reforms, but they weren’t effective because these can be easily flouted using loopholes.

2.3.1 Positive Restrictions

a. Priority Sector Lending (PSL) / Rationing 

  • Rationing is main feature of Communist Economy. Eg In Soviet Union,  they used to make provisions like they will give particular amount of loan to particular sector. PSL is form of Rationing.
  • PSL means Giving specific minimum amount of loans to some Priority Sectors. In India, 40% loans are given to Priority Sector.
  • Government can increase supply of money to that sector by increasing its limit.
  • Dealt in detail in Banking Sector .

2.4 Moral Suasion

  • “Persuasion” without applying punitive measures. RBI governor tries this tactic via conferences, informal meetings, letters, seminars, convocation, panel discussion, memorial lectures. 
  • Eg
    1. Please reduce giving automobile loans, instead invest your money in government securities.
    2. I have reduced repo rate , now you also decrease your base rate.
  • It is not obligatory on part of bank to follow orders but generally  they do follow.

2.5 Direct Action

  • RBI can take direct action against any bank for going against the rules. RBI gets this power under Banking Regulation Act, RBI Act, Foreign Exchange Management Act , Prevention of Money Laundering Act etc.
  • Eg : if bank is not maintaining CRR or SLR , RBI can scrap its license
Direct Action

Money Supply

Money Supply

This article deals with ‘Money Supply .’ This is part of our series on ‘Economics’ which is important pillar of GS-2 syllabus . For more articles , you can click here

Factors affecting Money Supply

Season Nov &  April: Crops harvest and Industries buy their raw material leading to more money in the hands of farmer. Hence, Money supply  will rise.
Trade cycle Boom: Money supply increases
Depression: Money supply falls
Fiscal policy Money supply will decrease if there is higher taxation and sale of G-sec and vice-versa.
 
People’s choice If people deposit higher portion of their income in banks ( instead of storing in their lockers)  , then  bank can expand loans .  Money supply rises in such cases.  
Monetary policy 1. If RBI follows dear money policy = supply decreases
2. If RBI follows cheap money policy = supply rise

Why should we measure money supply?

  • Job of RBI is to control inflation through qualitative & quantitative tools (ie Repo Rate, Cash Reserve Ratio etc)
  • But for this, RBI must first know how much money supply is there in system . Only then RBI can make policy to control money supply.

Side Topic : Why people don’t simply store Value in Bonds, Gold ?

  • Famous Economist John Maynard Keynes( 1883-1946) answered this question in his book – The General Theory of Employment , Interest & Money.
  • He argued that although if person will invest in Bonds or Gold, Value of his assets will surely increase but even after that people don’t invest and keep cash  because of three reasons
    • Transaction motive – Cash acts as medium of exchange
    • Precautionary motive – In case of sudden expenditure, cash is required .
    • Speculative motive – waiting for  price of anything to fall , then using cash  to buy that.

Types of Money

Money Supply

M0 : Reserve money or High Powered Money

  • Mo is base for creating Broad Money supply(M3)
  • Mo is sum of following things
    • Currency held by Public
    • Bankers’ deposits with RBI plus
    • ‘other’ deposits with RBI

Basically it is Total Currency Printed by RBI . RBI prints money equivalent to Bonds it get from Government.

M1 : Narrow Money

  • M1 includes
    1. Currency and Coins with public
    2. Demand deposit in banks

Basically , it denotes situation when person has money , he can do two things to maintain the liquidity of that. Either he can keep that money in its hard form or can deposit in Bank in Current or Saving Account (not Fixed Account) .

M2 : Narrow Money

  • M2= M1 + Demand Deposits in Post Office
  • M2 includes
    1. Currency and Coins with public
    2. Demand deposit in banks
    3. Demand Deposits in Post Office

M3 : Broad Money or Money Aggregate

  • M3 = M1 + Time deposits with Banks
  • M3 inludes
    1. Currency and Coins with public
    2. Demand deposit in banks
    3. Time deposits with banks
  • M3 is most commonly used for measuring money and is regarded as main indicator of money supply in the economy.

M4 : Broad Money

  • M4 = M3 + Total Post office Deposits
  • M4 includes
    1. Currency and Coins with public
    2. Demand deposit in banks
    3. Time deposits with banks
    4. Demand deposit in post-offices
    5. Time deposits with post-offices

Ranking of Liquidity

Liquidity is the ease of converting an asset into cash .

Name Liquidity Liquidity Rank
M1 highest 1
M2 less than M1 2
M3 less than M2 3
M4 lowest liquidity 4

Liquidity Ranking : M1 > M2 > M3 > M4

Money Multiplier

There are two approaches to look into this concept

a. 1st Approach

  • Money Multiplier is Ratio of Broad Money & Reserve  money ie M3 / Mo

 M3 = Mo X Money Multiplier

  • When  Reserve Money increase , Broad money will also increase
  • In 2018 , India’s Money Multiplier was ~ 6

b. 2nd Approach

  • Money Multiplier is 1/R  (R= Cash Reserve Ratio)
  • Every ‘R’ Cash Reserve Ratio generates ‘1/R’ new money.

Explanation of above formula?

  • Consider a situation in which Person deposited ₹ 100 hard currency in Bank. Let’s assume that , Cash Reserve Ratio (CRR) fixed by RBI was 10%. First Bank will keep aside ₹10 & give ₹90 as loan to some person. Then person who got loan again paid some other person through bank by depositing money in person’s bank account . This Bank will  keep ₹9 (10% of 90) aside and gave 81 as Loan to some other person. And this game keeps on going like this .
Money Multiplier
With 100 rupee of "reserve", banking system generates 
Rs.1000..hence money multiplier is (lox)

Hence , Money Multiplier is 1/R (where R is Cash Reserve Ratio).

Money Multiplier

Note : Presently , Money Multiplier is around 6 but if we consider 4% Cash Reserve Ratio, it should be 25.

Reason for low Money Multiplier than theory = for practical purpose , we cant achieve above series upto end.

  • Since Financial Inclusion is low, there might be case that either Banks  have money but people are not available to take loan or people will not be able to keep their money in banks .
  • Along with that, Banks aren’t always willing to give loans
  • Large number of cash in India is stored as Black Money and is never stored in Banking System.

From Economic Survey (2020) : India’s Money Multiplier has been decreasing since 2017

Velocity of Money Circulation

  • Average number of times, money passes from one person  to another during given time period
Velocity of Money

Factors affecting Velocity of Money Circulation

  • Poor people immediately use their money. Hence, money in the hands of poor has higher velocity.
  • Booming period = higher velocity
  • If more people use EMI loans for purchase, then higher velocity
  • Low financial inclusion means less velocity, because banking penetration is low. People tend to save more in physical assets . Hence, money doesn’t change hands much