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OJAANK IAS ACADEMY

𝐈𝐍𝐍𝐎𝐕𝐀𝐓𝐈𝐎𝐍 𝐈𝐍 𝐄𝐃𝐔𝐂𝐀𝐓𝐈𝐎𝐍

OJAANK IAS ACADEMY

Economic & Political Weekly (May 2022)

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1. Surge in Exports

Context

•It is celebration time at the Ministry of Commerce and Industry. The reason is the sudden surge in exports of goods and services in 2021-22 after registering a decline for two consecutive years.
• While the exports of goods zoomed by 43.8% to reach an all-time high of $419.7 billion in 2021–22, that of services rose by 20.9% to touch $249.2 billion. And the total exports of goods and services were valued at a humongous $668.9 billion after posting a 34.3% growth in 2021-22.
• However, these surging growth numbers hide more than they reveal. Because if one takes a three-year average to capture the impact of the fall in exports in the previous two years, the growth of goods, services, and the total exports in 2021-22 slump to 10%, 6.8%, and 8.5%, respectively. These are certainly decent figures, but no cause for any celebration.
• Moreover, the surge in Indian exports is mainly due to global factors rather than the government trade policies.
• For instance, in the case of merchandise or goods exports, the flows initially rose at double-digit levels in the latter half of the last decade and then suddenly plunged in the last two years, with the exports even shrinking by 7.2% in 2020 following the disruptions caused by the pandemic.
• However, global exports then staged a marked recovery in 2021 by surging nearly 27%. This has also been reflected in the Indian goods exports that rose by a substantial 54.6% in 2021 after declining in the previous two years.
• Exports growth of the three largest global exporters—Germany, China, and the United States—was a modest 24.1%, 28.1%, and 23.9%, respectively.

Indian Exports

• Al though Indian goods exports surged the highest among the major economies in 2021, the country’s share in global exports rose by just 0.1% from 2.4% in 2019 to 2.5% in 2021, while that of China rose much faster from 9.6% to 10.5% during the same period.
• Despite this recovery in Indian exports, the share of the Indian exports sector in the larger economy still lags substantially behind the peak levels it attained in the middle of the last decade.
• The surge of goods exports in 2021–22 pushed up the exports share in the gross domestic product (GDP) to 13.5%, while that of services exports rose to 7.3% and thus the share of the total goods and services exports went up to 20.8%.
• This is still far short of the peak shares when goods exports touched 17.2% of the GDP in 2013-14, or when services sector exports share rose to 8.9% of the GDP in 2008-09 and the total share of exports of both goods and services went up to 25.4% of the GDP in 2013–14.
• So, it is amply clear that despite the current surge, the share of the Indian exports sector in the GDP is still almost 5 percentage points below the peak levels clocked around a decade back.
• The other reason for worry is that despite the current exports surge, the trade deficit has once again widened sharply.
• Numbers for 2021-22 show that the merchandise trade deficit almost doubled from $102.6 billion in 2020-21 to $192.2 billion in 2021-22, raising its share from 3.8% to 6.2% of the GDP.
• However, the surplus gained from the services trade, which partially compensates for the merchandise trade deficit, has slowly shrunk over the years, from a peak of 3.9% of the GDP to 3.1% now.
• The shrinkage in trade surplus from services sector, which rose sharply after the start of the reforms in the 1990s, can be traced back to the global financial crisis that shrunk the share of the services sector exports in the GDP from a peak level of 8.9% to just 7.2% now.
• The dwindling share of both goods and services exports in the GDP has together shrunk the total share of the Indian exports sector in the GDP by around 5 percentage points from their peak levels of 25.4% in 2013–14 to just 20.8% now.
• Consequently, the share of services sectors in the total exports, which almost doubled its share from 19.8% to 36.4% between 1990-91 and 2006-07, has largely stagnated since then and even fallen marginally to just 35.1% in 2021–22.
• Although the latest numbers show that the current surge has boosted the share of goods exports in the total Indian exports by 6 percentage points to 64.9% in just one year, it is still too short a period to claim that there has been any significant turnaround in the prospects of merchandise exports and that the current exports gains are sustainable.
• On the contrary, the disaggregated exports numbers in fact show that the current surge in goods exports is unlikely to be sustained as it is rather narrow-based and dominated by a few goods like petroleum products (153.6%), yarn, made-ups and handlooms (55.7%), gems and jewellery (50.3%), and engineering goods (46%).
• Numbers indicate that though agriculture exports have risen to an all-time high of $50 billion, the growth of exports of other important products like drugs and pharmaceuticals, rice, and tea were in single digits, while that of spices and iron ore declined.
• Such marked disparities in the growth of exports of major products also put a big question mark on the sustainability of the current exports surge.
• However, the overall prospects of the external sector remain benign with the foreign exchange reserves still hovering around $618 billion by the end of financial year 2021–22.
• This will ensure that the economy remains cushioned from any adverse trends, at least in the short run, and help maintain greater stability.

2. Cultural Encirclement of Critical Thinking

Context

• Rule of law is a provision envisioned by the makers of the constitutions to morally help the state in maintaining its decent stature within the bounds of conscience. B R Ambedkar saw the promise in the state to seek relief from injustice and inequality, and hence he treated the conscience of the state as central to his constitutional thought.
• It is interesting to note that in recent times, there is an increasing degree of cultural and symbolic association with Ambedkar across several social and political spheres.
• In the Indian context, no political party can afford to miss Ambedkar at least on events that are increasingly undergoing symbolisation.

Ambedkar And Dalit concern

• However, it is also equal ly true that such increasing symbolic association with Ambedkar does not seem to keep pace with transformative politics and constitutional morality, which were among his core concerns.
• Those who seek to commemorate his contribution, use radical songs or pay respect to him through the performative act of bowing before his image and the copy of Constitution that was written with his immense contribution.
• The Constitution, through its intellectual association with Ambedkar, has indeed become a symbol that at the cultural level keeps inspiring several social and political groups, with Dalits being the most prominent of them all.
• Such association that remains at the level of commemoration adversely impinges on his constitutional scholarship and is forgotten by the state and certain social groups who are then encouraged to develop extra constitutional authority to be used to target certain vulnerable groups, especially Dalits and minorities.
• Amongst all, it is the Dalits who are supposed to take the intellectual Ambedkar forward and defend him through the force of arguments that are already available in the text of the Constitution.
• Taking their cue from Ambedkar’s vast arrays of thought, they, in the present context, could have asked this question—and with persistence—about the devastating performance of the bulldozer and why it is important for the executive to abide by the rule of law and procedural justice.
• The executive action needs to be pre ceded by the legal argument informed by the basic tenets of the Constitution.
• It is the time to say rather boldly that the language of the bulldozer does not fit into the constitutional principles for which they commemorate Ambedkar.
• It is the rule of law that performs the balancing act of preventing the state from becoming privy to the recklessness caused by an unruly or lawless mob.
• In a constitutional law-bound society, any extra constitutional recklessness is expected to become the cause for moral concern to be sincerely expressed against. This does not seem to happen in the present context.
• Social groups, who subscribe to Ambedkar’s egalitarian project, ironically find it safe to encircle themselves in the cultural symbolism, which thereupon is taken as a sufficient “intellectual” condition for justifying their social and political presence in these turbulent times.
• Such encirclement that finds its relevance within the logic of symbolism understandably enables its participants to avoid the risk of asking more nudging, edgy, and critical questions that can create a crisis for those socially dominant and politically powerful forces who have no interest in defending the Constitution at the intellectual or moral level.
• Thus, they escape from the responsibility and need for offering publicly defensible descriptions, for example, of constitutional principles that will not allow the state as well as dominant social forces to indulge in recklessness, which now is symbolised in the language of bulldozer.
• Going beyond the politics of symbolism of statues and images and asking more nudging questions do not seem to work to the political advantage of neither the state nor the regressive social forces.
• Because doing so would force them to do some intellectual homework or at least to make preliminary readings of basic tenets of the Constitution in order to defend the executive and their administrative practices in light of the overarching constitutional principles.
• The destructive language of the bulldozer does suggest that the state action and the action of other anomic social groups do not follow from the constitutional ideas but instead its recklessness emanates from extra constitutional considerations.
• Arguably, those who celebrate Ambedkar for his contribution to constitutionalism need such intellectual homework perhaps more than those who only hold rhetorical importance of the Indian Constitution.
• It is intellectual intervention that can creatively and cautiously bind together both the cultural and the political in an enabling way.
• Any disruption of this bind is reflected in the paradox or irony that is characterised by an act of voting for the party that blatantly undermines the Constitution and yet is singing the songs of Ambedkar.
• Thus, while celebrating Ambedkar as the harbinger of the constitutional state, it is time for the masses to move from empty or fetishist symbolism to the active, productive, and argumentative Ambedkar.

3. Backward Class Reservation In Local Bodies

Context

• In the recently concluded budget session of Parliament, Rajya Sabha member P Wilson highlighted a “constitutional deadlock” that had taken place when it came to the reservations of seats for “backward classes” in local bodies.
• The states such as Karnataka and Maharashtra have not held elections for local bodies since they have not been able to comply with the “triple test” laid down by the Supreme Court for such reservations.
• This suggested that the caste data collected in the Socio Economic and Caste Census (SECC), 2011 necessary for states to fulfil the criteria laid down by the Supreme Court, was available with the union government and should be released to break this constitutional deadlock (News Minute 2022).
• While Wilson’s concern about the stalled elections is valid as the impasse damages the grassroots democracy in India, the solution may not necessarily lie in the release of the SECC data.
• Rather, as I argue in this column, the constitutional provisions related to reservations for “backward classes” in the local bodies are poorly drafted and need to be rectified by a constitutional amendment, While courts have attempted to partially address the problem through interpretation, they are trying to guess what the reservation provisions were trying to do and do not offer sufficient clarity to states on how to implement reservations for the backward classes,
• After discussing the constitutional provisions and their judicial interpretations, the source of deadlock is identified and the solution of constitutional amendment suggested.

Reservations in Local Bodies

• The Constitution (73rd and 74th Amendments) Act, 1992 were intended to address (among other things) the inadequate representation of the Scheduled Castes (scs), Scheduled Tribes (sts) and women in panchayati raj institutions (PRIs) and urban local bodies (This was done through the insertion of Article 243-u in the context of PRIS and Article 243-T in the context of ULBS.
• Both articles are more or less identical in their structure insofar as they provide reservations in positions at PRIs and ULBs to the members of the se 1 ST communities as well as women.
• However, somewhat out of the blue clause (6) in both the articles provide that the state may reserve seats for “backward class of citizens.” This clause arrives unexpectedly, since the statement of objects and reasons for either amendment makes no mention of reservations for “backward classes though it explicitly mentions reservations for other communities mentioned in the articles.
• The term “backward classes” used here is the source of confusion. The problem becomes clear when this clause is compared with Articles 15(4) and 16(4), which provide for reservations in education and employment, respectively.
• While similarly structured (they are all clauses aimed at enabling reservations), one key difference is obvious—the criteria for identifying the backward classes for the purpose of reservations are being outlined in the clause itself. In the con text of Article 15(4), classes have to be “socially and educationally backward,” whereas in Article 16(4) such “back ward class” has to be “[in] adequately represented in the services under the State.” No such qualifier is present in Articles 243-D (6) and 243-1(6).
• This distinction is important since the category of “backward classes” is not uniform nationwide.
• Unlike the scs and sts who are identified at the union level through a constitutional mechanism, there was no constitutional mechanism for the identification of “socially and educationally backward classes” until the introduction of Article 342A by the Constitution (102nd Amendment) Act, 2019.
• This was intended only to apply to the preparation of a list of such classes for the purpose of reservation at the union level and did not per se interfere with the states’ power to identify the backward classes for reservations at the state level.
• While the judgment in Indra Sawhney v Union of India and Ors (1992) has laid down certain criteria as to how “socially and educationally backward classes” may be identified for the purpose of reservations, this is only an expansion of the principle laid down in clauses (4) of both Articles 15 and 16, respectively.
• From a plain reading of either Articles 243-D(6) and 243-T(6), it is therefore not clear how the “backward class of citizens” ought to be identified to grant them the benefit of reservations.

Judicial Interpretation

• A constitution bench of the Supreme Court interpreted Articles 243-D(6) and 243-T(6) in K Krishna Murthy & Ors v Union of India (2010) where the two clauses were challenged as being contrary to the basic structure of the Constitution.
• While upholding the two clauses, the then Chief Justice of India K G Balakrishnan also attempted to clarify the scope of these clauses. His judgment, on behalf of the bench, did note the unclear wording of clause (6). Specifically:
• Admittedly, Articles 243-D(6) and 243-T(6) do not provide guidance on how to identify the backward classes and neither do they specify any principle for the quantum of such reservations.
• Instead, discretion has been conferred on state Legislatures to design and confer reservation benefits in favour of the backward classes.
• It is, but natural that, questions will arise in respect of the exercise of discretionary power?
• While saying so, the Court agreed with the argument that reservation in local self-government is distinct from that in educational institutions and employment, and a mechanical application of the interpretation of Articles 15(4) and 16(4) to Articles 243-D(6) and 243-T(6) could not be done.
• While rejecting the “creamy layer” test from Indra Sawhney v Union of India, it did import the 50% cap on reservations applied in the context of reservations under Articles 15(4) and 16(4).
• As regards the criteria as to which classes would be “backward,” the Court leaves it to the states to carry out a “rigorous investigation” into the barriers to political participation for such communities.
• Given that the case only concerned the constitutional validity of Articles 243-D(6) and 243-7(6), the Court did not go into the specific state legislation.
• A decade later, in Vikas Kishanrao Gawali v the State of Maharashtra (2021) the Court subjected the law, providing for reservation of seats in PRIS, that is, the Reservation Notifications under the Maharashtra Zilla Parishads and Panchayat Samitis Act, 1961 to the judgment in Krishna Murthy and struck down the reservations for backward classes in the state as unconstitutional.
• In Gawali, the Court distilled a “triple test” out of the judgment in Krishna Murthy, requiring the state to –
(1) set up a commission to identify the back wardness, in terms of political participation,
(2) have the commission determine the extent of reservation in local bodies, and
(3) limit the reservation to 50% of the positions in the local bodies.

• Finding that the Reservation Notifications under the Maharashtra Zilla Parishads and Panchayat Samitis Act, 1961 fulfilled none of these three, the Court struck it down.
• Given the poor drafting, the Court’s interpretation of Articles 243-D(6) and 243-T(6) in Krishna Murthy is, at best, an educated guess; yet in Vikas Gawali, the Court insists that the states should hold to the full rigour, the best guess of the Court, how they determine the backward classes and the quantum of reservations.
• The states’ attempts to over come Vikas Gawali through ordinances have come to a cropper in Court, and as matters stand, the states are unsure how they ought to identify backward classes for the purpose of reservations under Articles 246-D(6) and 246-T(6), and elections to the local bodies have stalled as a result (Anand 2022).

Conclusions

• The Court’s concerns about the nature and quantum of political reservations in Krishna Murthy and Vikas Gawali are not entirely unfounded.
• A “backward caste” (with adequate representation education ally or employment-wise) enjoying dis proportionate representation in political bodies is not unprecedented or unimaginable.
• In states such as Karnataka and Haryana, it is a reality (Hariss 1999). Reservation in political bodies cannot look to further entrench the power of already well-represented castes.
• Rather, it should look to enhance the representation of the otherwise under represented groups who are also educationally and socially deprived.
• Attempted compliance with the Supreme Court’s ruling may cause further uncertainty as each state looks to set up its own commission that might interpret the requirements of the Krishna Murthy and Gawali judgments in their own way.
• This will lead to additional litigation and further confusion about the law, causing more delay in the conduct of local body elections.
• Given the importance of local body elections in strengthening the grass roots democracy in India, such confusion and delay would only weaken these institutions.
• While the union government should release the data from the SECC, 2011, it will not suffice in addressing the problem. The core of the problem remains the unclear intent and bad drafting of Articles 243-D (6) and 243-T(6).
• The term “backward class” needs to be qualified precisely. If the intent is to give representation to politically under-represented backward classes, two key amendments will be needed-one, to qualify “backward’ classes” as “socially and educationally backward,” and two, to limit the reservations only to such backward classes whose representation in local bodies has been less than their proportion in the total population.
• Such an amendment serves a few purposes:
(i) states need not undertake a fresh survey to identify backward classes;
(ii) it will exclude socially and educationally backward castes that are already well-represented in the local bodies, at or beyond the proportion of their population in the state; and
(iii) it will provide an objective criterion to fix the percentage of reservation for such backward classes.
• If any study is undertaken by a commission, it will only determine the pro portion of the existing backward castes in the population and their representation in the local bodies.
• Such an exercise does not even require a nationwide caste census and can be carried out periodically by the state government itself with a view to fine-tuning the reservations for the backward castes.
• We have seen in the recent past that the union government has been able to get consensus from all political parties to make amendments to the Constitution to address the problems arising out of the faulty interpretation of the Constitution by the Court in the context of reservations of the “Other Backward Classes.”
• The impasse over local body elections affecting multiple states serves no one-a workable solution that will not give rise to further litigation is necessary, and one hopes that the fundamental defects in Articles 243-D (6) and 243-1(6) are addressed forthwith.

4. Equity Stake of Government in Vodafone

Context

• This article analyses the option given to telecom service providers (TSPs) as part of the government’s reform package, announced in September 2021, where the TSPs can turn the interest on their existing liability into equity shares to the government.
• The government realises the need to preserve competition in the Indian telecommunications sector that witnesses an impending concentration due to wrong policies.
• While the government has finally woken up to the imperative of ensuring optimal competition in this growing market, the suggested solution merits scrutiny in terms of its actual effects on the industry.

The Background

• The Indian telecommunications sector is going through a crisis. The adjusted gross revenue (AGR) judgment in 2019 added to the woes of the highly indebted telecom sector.
• The worst-hit of all TSPs was Vodafone Idea, with an estimated additional burden of 58,000 crore, raising its total liabilities to roughly 2 lakh crore.3 Without any policy intervention, Vodafone Idea stared at an impending exit from the Indian market.
• This exit would turn the telecom sector into an Airtel-Jio duopoly with the government-controlled companies Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) on the fringe, given their already precarious financial health.
• This resulting concentration would adversely affect welfare.5 Ensuring Vodafone’s viability was also necessary because its exit from the sector would jeopardise the government’s chances of recovering its massive dues from the company,
• Against this backdrop, the government issued a reform package in September 2021 to provide a much-needed financial relief to the sector. Among its several provisions, the reform package provides a moratorium of four years in the payment of dues arising out of the Supreme Court’s AGR judgment and on the spectrum purchased in past auctions.
• The package gives an “option” to Tips to convert the interest amount on the moratorium period into equity held by the government.
• Vodafone Idea has chosen to exercise this option. Were it to accept the company’s equity offer, the government would own 35.8% of Vodafone Idea. Resultantly, Vodafone Group’s stake dropped to 28.5% from 44.39%, and Aditya Birla Group’s owner ship came down to 17.8% from 27.66%.
• Another TSP, Tata Teleservices (Maharashtra) Ltd (TTML.), also expressed an interest in converting the interest from AGR dues amounting to 850 crore into equity. However, it subsequently decided against the idea.
• Instances of converting debt into equity to aid a sector or a firm burdened with government debt are rare. On the face of it, this appears to be a reasonable way to ensure the viability of Vodafone Idea.
• However, the remedy’s novelty, the sec tor’s complex reality, and the government’s new role in another operating company merit deeper scrutiny.

The Concerns

• The obvious downside to the government entering Vodafone Idea is common ownership problem.
• This problem has garnered much attention in recent times due to its potential anticompetitive effects. Common ownership of minority shares has been argued to raise anticompetitive effects.
• Non-controlling minority share holding, that is, less than 50% shares, falls outside the ambit of merger scrutiny for any adverse impact on competition.
• It has been argued in academic literature that institutional investors with holdings in multiple competing firms may have the incentive to dampen competition either by facilitating collusion or by encouraging unilateral business decisions that may benefit some portfolio firms at the expense of others.
• In such cases, firms’ management may have the incentive to maximise the investor’s total equity portfolio profits.
• Although not yet a standalone theory of harm, the European Commission has noted this concern in its case law.
• However, the present body of research does not conclusively prove any adverse effect of common ownership on competition.
• If common ownership indeed causes adverse effects on competition, it appears, prima facie, that such a possibility is even more amplified when the government is the common owner.
• In such cases, although not wielding voting rights or direct influence, the government may subtly push the board to accede to its demands by interacting with directors. Indeed, the government has several fora (informal meetings, public statements, interviews with media, and so on) to make its “voice” heard.
• Additionally, firms with government equity may align their behaviour independently out of “gratitude” or in the expectation of finding favour in the future.
• Admittedly, there is little fear of “unilateral effects” from the reduced intensity of competition due to common ownership.
• Vodafone Idea will not be able to increase prices/decrease quality or innovation unilaterally. The leading position of competitors (Jio and Airtel) makes this possibility remote.
• For the same reason, even coordination among firms (on prices, quality, and other behaviour), where the government holds equity, although possible, may still bear no effects on the market.
• However, a more concrete issue arising from common ownership is spectrum holdings. Currently, rules bar any company from holding more than 50% of the spectrum in any band below 1 GHz (for example, 700 MHZ, 800 MHZ, and 900 MHz bands) and 35% of the total spectrum available for assignment.
• This issue is complex and the absence of any precedent or prior analysis by the regulators will complicate matters and the enforcement of fair competition.
• In a set of frequently asked questions issued by the Department of Telecommunications, the government has denied that Vodafone Idea would be akin to a new public sector undertaking.
• It has ruled out control or influence over the firms in which it would acquire equity as a part of the reform package.
• The decision is reassuring since there are frequent allegations of government interference in the functioning of BSNL and. MTNL.
• However, this seemingly ideal scenario deprives the government of a say in decisions, such as the level of participation in the imminent auction of 5G spectrum, which have significant financial implications for the company and the public exchequer. Time will soon tell if the government can sustain its stated hands-off approach.
• Post the liberalisation of the telecom sector, the government-controlled companies—BSNL and MTNL—have struggled in the market and systematically lost subscribers to competition.
• However, de regulation has yielded positive results for the sector and the economy, with consumers enjoying a wider range of services at affordable prices.
• The government’s equity holding in private firms will also mean that what was undone in the 1990s would be reinstated through the backdoor.
• The government has clarified that it will sell the shares it will hold in the companies post conversion at an appropriate time to realise the due amounts,
• The government’s public commitment to divest its shares in Vodafone creates an incentive to improve its share price.
• Indeed, the determination of “appropriate time” is subjective and allows for the vicarious presence of the government in the market for uncertain times. Additionally, the proposed divestment creates a new unwelcome conflict for the government: prioritise Vodafone Idea or BSNL and MTNL, the firms it already owns/controls? Arguably, the government now has a greater incentive to support the former. For these reasons, holding equity into firms is not an option without its pitfalls.

Alternatives

• An alternative could be to allow asset sharing through a strategic partnership between BSNL, MTNL, and Vodafone Idea or a merger of the same firms.
• Such a move can be a “fill two needs with one deed” strategy, where creative government action can save Vodafone Idea and improve the competitiveness of BSNL and MTNL.19 The proposal has been echoed subsequently.20
• This partnership offers a unique opportunity to expand access while protecting and strengthening competition in the sector.
• It also provides a credible and inexpensive way to exploit the complementarities of the faltering BSNL and MTNL and the indebted Vodafone Idea.
• For instance, BSNL and MTNL could start their much-delayed 4G services using Vodafone Idea’s network infrastructure -comparable to the best in the market and the combined spectrum holdings.

Conclusions

  • The government’s reform package is a welcome step to rid the telecommunications sector of its woes. The government has demonstrated its commitment to safeguarding optimal competition in this market.
  • Competition in the telecom sector has manifestly generated welfare for users. Yet, the government’s chosen approach—converting its debt into equity is not without its disadvantages.
  • The article has shown that the government’s common ownership in Vodafone Idea and MTNL-BSNL may become problematic in the calculation of existing spectrum caps.
  • If, indeed, the government refrains from exercising any control in Vodafone Idea, it would have no means to correct any missteps by the latter leaving the fate of the exchequer’s money solely on the firm’s decisions.
  • The proposed divestment may also pit the interest of Vodafone Idea against that of MTNL-BSNL.
  • Given the shortcomings of the government’s proposed solution, the article shows that a better option could have been to either allow asset sharing between Vodafone Idea and BSNL and MTNL or a merger of these firms.
  • This solution is superior as it will save Vodafone Idea and improve the ailing MTNL-BSNL—a “fill two needs with one deed” strategy.

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