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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • Decoupling pharmaceutical industry from China should be strategic

    Abrupt ban on import from China would harm the India pharmaceutical industry and disrupt the supply of several essential medicines. Any attempt at reducing the dependence on China for APIs should be strategies, argues the author.

    Dependence of Indian pharma industry on China

    •  India is the third-largest producer of finished drugs in the world.
    • However, India relies significantly on China for supplies of active pharmaceutical ingredients APIs.
    • An estimated 70 per cent of API requirements of India’s pharmaceutical industry are sourced from China.
    • For some drugs, such as paracetamol and ibuprofen, this dependence is almost 100 per cent.
    • This import reliance has been fuelled by environmental controls in India and competition with China, which has higher volumes of production and lower costs.

    Implications of banning import from China

    • Restricting or banning the import of APIs would cause significant disruption to the Indian pharmaceutical industry
    • The pharmaceutical industry had $40 billion in revenues in 2018-19, according to Pharmexcil.
    • Such a prospect is especially of concern to potential patients.
    •  Indian pharmaceutical industry annually exports $20 billion worth of medicine.
    • An ad hoc or reactive decoupling could disrupt the production of a wide range of medicines in India and globally.
    • Such disruption could affect the availability of Dexamethasone and painkillers, such as paracetamol and ibuprofen, as well as antibiotics, such as penicillin.
    • The impacts would be especially high in low and middle-income countries.
    • In many African countries, in fact, India supplies almost 50 per cent of the medicines in value terms.

    Lessons from the past: Policy initiative matters

    • Market share of foreign-owned multinationals in India was 80-90 per cent in 1970 in the pharmaceutical industry.
    • It fell to 50 per cent by the early 1980s, and down to 23 per cent today.
    • The prices of medicines in India fell from being amongst the highest in the world to amongst the lowest.
    • But this did not happen through sudden decoupling from foreign multinationals or a complete boycott or ban on imports.
    •  The 1970 Indian Patent Act removed product patent protection in pharmaceuticals.
    • So, the 1970 Patent Act is widely lauded for facilitating the growth of India’s industry.
    • India also benefited from the 1973 Foreign Exchange Regulation Act (FERA) and the subsequent New Drug Policy (1978).
    • Thus, a series of policy initiatives succeeded in tilting the balance in favour of Indian-owned firms.

    But does it mean we have to depend on China forever?

    • No, but reducing dependence on China will not be easy to achieve.
    • In India, any decoupling from China must be strategic, with significant policy support.
    • It will take time for a paced indigenisation.

    Government moves to reduce dependence for API

    • In March, the government announced Rs 3,000 crore to develop three bulk drug parks.
    • The government also announced Rs 6,940 crore to manufacturers of 53 bulk drugs over the next eight years.
    • Planning ahead towards greater domestic production of APIs, as well as reduced dependence on China, is an understandable and sensible policy objective.
    • Despite a decline in recent decades, India has a stronger starting point than most countries given the continued presence of some API production capabilities.
    • Indian firms have capacities, for instance, to produce COVID-19 treatments, including Remdesivir.

    Consider the question “What are the APIs? Why India depends on other countries for it and what are implications of it? Suggest ways to reduce this dependence.”

    Conclusion

    In the short run, boycotts or bans would be counter-productive for the Indian industry, while also affecting access to much-needed medicines to India’s citizens and beyond. In the long run, however, reducing dependence on China would be strategically prudent.

    Back2Basics: What are APIs?

    • Active pharmaceutical ingredient (API), is the term used to refer to the biologically active component of a drug product (e.g. tablet, capsule).
    • Drug products are usually composed of several components.
    • The API is the primary ingredient.
    • Other ingredients are commonly known as “excipients” and these substances are always required to be biologically safe, often making up a variable fraction of the drug product.
    • The procedure for optimizing and compositing this mixture of components used in the drug is known as “formulation.”

  • IN-SPACe: Future forerunner for India’s space economy

    • The government approved the creation of Indian National Space Promotion and Authorisation Centre (IN-SPACe) to ensure greater private participation in India’s space activities.
    • This decision is described as historic being part of an important set of reforms to open up the space sector and make space-based applications and services more widely accessible to everyone.

    Practice question for mains:

    Q. What is IN-SPACe? Discuss how it would benefit ISRO and contribute to India’s space economy.

    What is IN-SPACe?

    • IN-SPACe is supposed to be a facilitator, and also a regulator.
    • It will act as an interface between ISRO and private parties and assess how best to utilise India’s space resources and increase space-based activities.
    • IN-SPACe is the second space organisation created by the government in the last two years.
    • In the 2019 Budget, the government had announced the setting up of a New Space India Limited (NSIL), a public sector company that would serve as a marketing arm of ISRO.

    Confusion over NSIL and ANTRIX

    • NSIL’s main purpose is to market the technologies developed by ISRO and bring it more clients that need space-based services.
    • That role, incidentally, was already being performed by Antrix Corporation, another PSU working under the Department of Space, and which still exists.
    • It is still not very clear why there was a need for another organisation with overlapping function.
    • The government now had clarified the role of NSIL that it would have a demand-driven approach rather than the current supply-driven strategy.
    • Essentially, what that means is that instead of just marketing what ISRO has to offer, NSIL would listen to the needs of the clients and ask ISRO to fulfil those.

    Then, why was IN-SPACe needed?

    (1) ISRO and its limited resources

    • It is not that there is no private industry involvement in India’s space sector.
    • In fact, a large part of the manufacturing and fabrication of rockets and satellites now happens in the private sector. There is increasing participation of research institutions as well.
    • Indian industry, however, is unable to compete, because till now its role has been mainly that of suppliers of components and sub-systems.
    • Indian industries do not have the resources or the technology to undertake independent space projects of the kind that US companies such as SpaceX have been doing or provide space-based services.

    (2) India and the global space economy

    • Indian industry had a barely three per cent share in a rapidly growing global space economy which was already worth at least $360 billion.
    • Only two per cent of this market was for rocket and satellite launch services, which require fairly large infrastructure and heavy investment.
    • The remaining 95 per cent related to satellite-based services, and ground-based systems.

    (3) Catering to domestic demands

    • The demand for space-based applications and services is growing even within India, and ISRO is unable to cater to this.
    • The need for satellite data, imageries and space technology now cuts across sectors, from weather to agriculture to transport to urban development and more.
    • If ISRO is to provide everything, it would have to be expanded 10 times the current level to meet all the demand that is arising.

    (4) Promoting other private players

    • Right now, all launches from India happen on ISRO rockets, the different versions of PSLV and GSLV.
    • There were a few companies that were in the process of developing their own launch vehicles, the rockets like ISRO’s PSLV that carry the satellites and other payloads into space.
    • Now ISRO could provide all its facilities to private players whose projects had been approved by IN-SPACe.

    How ISRO gains from all these?

    • There are two main reasons why enhanced private involvement in the space sector seems important.
    • One is commercial, and the other strategic. And ISRO seems unable to satisfy this need on its own.
    • Of course, there is a need for greater dissemination of space technologies, better utilization of space resources, and increased requirement of space-based services.
    • The private industry will also free up ISRO to concentrate on science, research and development, interplanetary exploration and strategic launches.
    • Right now too much of ISRO’s resources are consumed by routine activities that delay its more strategic objectives.

    A win-win situation for all

    • ISRO, like NASA, is essentially a scientific organisation whose main objective is the exploration of space and carrying out scientific missions.
    • There are a number of ambitious space missions lined up in the coming years, including a mission to observe the Sun, a mission to the Moon, a human spaceflight, and then, possibly, a human landing on the Moon.
    • And it is not that private players will wean away from the revenues that ISRO gets through commercial launches.
    • The space-based economy is expected to “explode” in the next few years, even in India, and there would be more than enough for all.
    • In addition, ISRO can earn some money by making its facilities and data available to private players.

  • Tale of two economies

    China began heavy investment in infrastructure. This was a key policy decision as it provided employment to millions of people improving their economic status and purchasing power, which was the essential ingredient for industrial progress.ajya Sabha TV programs like ‘The Big Picture’, ‘In Depth’ and ‘India’s World’ are informative programs that are important for UPSC preparation. In this article, you can read about the discussions held in

  • ‘Country of Origin’ on GeM Portal

    The government has made it mandatory for sellers on the Government e-Marketplace (GeM) portal to clarify the country of origin of their goods when registering new products.

    Practice question for mains:

    Q. India’s quest for self-reliance is still a distant dream. Critically comment in light of the popular sentiment against the Chinese imports in India.

    What is Government e-Marketplace?

    • The GeM is a one-stop National Public Procurement Portal to facilitate online procurement of common use Goods & Services required by various Government Departments / Organizations / PSUs.
    • It was launched in 2016 to bring transparency and efficiency in the government buying process.
    • GEM aims to enhance transparency, efficiency and speed in public procurement.
    • It is a completely paperless, cashless and system driven e-marketplace that enables procurement of common use goods and services with minimal human interface.
    • It provides the tools of e-bidding, reverses e-auction and demand aggregation to facilitate the government users to achieve the best value for their money.
    • The purchases through GeM by Government users have been authorized and made mandatory by the Ministry of Finance by adding a new Rule No. 149 in the General Financial Rules, 2017.
    • It has been developed by Directorate General of Supplies and Disposals (Ministry of Commerce and Industry) with technical support of National e-governance Division (MEITy).

    What is the new move?

    • Sellers on the GeM portal will now have to disclose the origins of their products.
    • The portal also has a ‘Make in India’ filter, and government offices will be able to ascertain which products have a higher content of indigenously produced raw materials.

    Why need ‘Country of Origin’ tag?

    • The tag would help bidders choose products that meet the ‘minimum 50 per cent local content’.
    • This is the new procurement norm amended by the government earlier this month categorise suppliers based on the level of local content in their goods.
    • The GeM portal now allows buyers to reserve a bid for Class I local suppliers, or suppliers of those goods with more than 50 per cent local content.
    • For bids below Rs 200 crore, only Class I and Class II (those with more than 20 per cent local content) are eligible.

    Why is all of this happening?

    • The decision comes in the backdrop of the government’s push for self-sufficiency which intends to promote self-reliance by boosting the use of locally produced goods.
    • At $ 70.32 billion in 2018-19 and $ 62.38 billion between April 2019 and February 2020, China accounts for the highest proportion of goods imported into India (around 14 per cent in 2019-2020 so far).
    • It also follows the deadly clashes between Indian and Chinese troops in Galwan Valley which have prompted several government departments to launch an offensive against imports from China.

    How will ordinary consumers in India be impacted?

    • The announcement may over time filter out imported goods from use in government offices and facilities.
    • This might provide an opportunity to Indian manufacturers across industries to push their products in government facilities.
    • A more direct impact may be seen if the proposal to mandate the country of origin for products on private platforms is implemented.

  • Why trade openness and national security go together

    Protectionism involves the use of one or more restrictions on free trade between countries. What are the main reasons why this should be avoided?

    The main arguments against protectionism are outlined below:

    Market Distortion and loss of Economic Efficiency

    Protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth:

    Higher Prices for Consumers

    Import tariffs in particular push up prices for consumers and insulate inefficient domestic sectors from genuine competition. They penalise foreign producers and encourage an inefficient allocation of resources both domestically and globally.

    Reduction in Market Access for Producers

    Export subsidies depress world prices and damage output, profits, investment and jobs in many lower and middle-income developing countries that rely heavily on exporting primary and manufactured goods for their growth.

    Extra Costs for Exporters

    For goods that are produced globally, high tariffs and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather than protecting them. For example, a tariff on imported steel can lead to higher costs and lower profits for car manufacturers and the construction industry.

    Adverse Effects on Poverty

    Higher prices from tariffs tend to hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that lower income families spend a higher share of their income. Tariffs can therefore lead to a rise in relative poverty.

    Retaliation & Trade Wars

    There is the danger that one country imposing import controls will lead to retaliatory action by another.

  • Initial Public Offer (IPO) of LIC

    The government has started the process to launch the initial public offer (IPO) of Life Insurance Corporation (LIC) within this year.

    Read the complete thread here at:

    [Burning Issue] Divestment of LIC

    Try this question from CSP 2019:

    Q.In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?

    1. Ad Hoc Committees set up by the Parliament
    2. Parliamentary Department Related Standing Committees
    3. Finance Commission
    4. Financial Sector Legislative Reforms Commission
    5. NITI Aayog

    Select the correct answer using the code given below:

    (a) 1 and 2

    (b) 1, 3 and 4

    (c) 3, 4 and 5

    (d) 2 and 5

    About LIC

    • LIC is an state-owned insurance group and investment corporation owned by the Government of India.
    • It was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India.
    • Over 245 insurance companies and provident societies were merged to create the state-owned LIC.

    Why LIC IPO?

    • LIC is the largest investor in government securities and stock markets every year.
    • On an average, LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
    • LIC also has huge investments in debentures and bonds besides providing funding for many infrastructure projects according to its Annual Report for 2017-18.

    Biggest IPO in Indian markets

    • The finance ministry has invited bids from transaction advisors, including consulting firms, investment bankers, and financial institutions, for assisting the government in the preparatory processes leading to the IPO.
    • The IPO is expected to be the biggest in the Indian capital markets given the size and scale of LIC, the country’s oldest and largest life insurer.

    What is the size and position of LIC in the insurance market?

    • Even if the government decides to sell 5-10 per cent of its equity in LIC through an IPO, the share sale of LIC, which was set up in 1956, is expected to be the largest.
    • The insurer’s total assets had touched an all-time high of Rs 31.11 lakh crore in 2018-19, an increase of 9.4 per cent.
    • The Corporation realized a profit of Rs 23,621 crore from its equity investment during 2018-19, down 7.89 per cent from Rs 25,646 crore in the previous year.
    • LIC would have at least one transaction of IPO of a size of at least Rs 5,000 crore, or a capital market transaction of at least Rs 15,000 crore.

    How does LIC fit into the overall disinvestment roadmap?

    • In the Budget 2020-21, the finance ministry had announced plans for IPO of LIC and a proposal to sell the government’s equity in the stressed IDBI Bank.
    • The government expects to raise Rs 90,000 crore through stake sale in LIC and IDBI Bank, and another Rs 1.2 lakh crore through other disinvestments.
    • LIC is also a majority shareholder in IDBI Bank.
    • The government had earlier listed the shares of General Insurance Corporation and New India Assurance through IPOs three years ago.

    What benefits can be expected through the IPO?

    • An IPO will certainly bring in transparency into affairs of LIC since it will be required to inform financial numbers and other market-related developments on time to the stock exchanges.
    • Investors can benefit from picking up equity in the insurer, which has been making underwriting profit as well as profits on its investments.
    • LIC’s investment in various equity and bond instruments will come under greater scrutiny after its lists on the exchanges.

    Back2Basics: IPO

    • IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
    • Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc.
    • A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares.
    • Through the IPO, the company gets its name listed on the stock exchange.

    Also read:

    Disinvestment Policy in India.

  • CHAMPIONS Platform to empower MSMEs

    Recently PM has launched the technology platform CHAMPIONS as a one-stop-shop solution of MSME Ministry.

    At the very first sight, the name CHAMPIONS creates a delusion. It looks more of an HRD initiative. Here lies the risk! Please cautiously make a personal note here. Demarcate all such initiatives on an A4 page.

    CHAMPIONS Platform

    • CHAMPIONS stand for Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength.
    • The portal is basically for making the smaller units big by solving their grievances, encouraging, supporting, helping and handholding.
    • It is a technology-packed control room-cum-management information system.
    • It is also fully integrated on a real-time basis with GOI’s main grievances portal CPGRAMS and MSME Ministry’s own other web-based mechanisms.
    • This ICT based system is set up to help the MSMEs in a present difficult situation and also to handhold them to become national and international champions.

    Detailed objectives

    • Grievance Redressal: To resolve the problems of MSMEs including those of finance, raw materials, labour, regulatory permissions etc particularly in the COVID created a difficult situation;
    • To help them capture new opportunities: including manufacturing of medical equipment and accessories like PPEs, masks, etc and supply them in National and International markets;
    • To identify and encourage the sparks:e. the potential MSMEs who are able to withstand the current situation and can become national and international champions.

  • R&D: Path to self-reliant India

    What does it take to be self-reliant? (Hint: R&D!) This is the question this article tries to answer.  After independence, we had a good start in R&D. But what went wrong? What was the role played by globalisation? Did the globalisation deliver on its promise of technology transfer? And finally, what lies on the way forward for India? This article answers all such question.

    What went wrong: historical perspective

    • India chose the path of self-reliance in state-run heavy industries and strategic sectors after independence.
    • In the decades following independence, this choice of self-reliance had placed India ahead of most developing countries.
    • In the 1970s and 80s, however, India did not modernise these industries to climb higher up the technological ladder.
    • The private sector, which had backed the state-run core sector approach in its Bombay Plan, stayed content with near-monopoly conditions in non-core sectors in a protected market.
    • Little effort was made to modernise light industries or develop contemporary consumer products.
    • India’s industrial ecosystem was thus characterised by low productivity, poor quality and low technology, and was globally uncompetitive.

    What did India lose in the ‘lost decades’?

    • India completely missed out on the ‘third industrial revolution’.
    • Third industrial revolution comprised electronic goods, microprocessors, personal computers, mobile phones and decentralised manufacturing and global value chains during the so-called lost decade(s).
    • Today, India is the world’s second-largest smartphone market.
    • However, it does not make any of these phones itself.
    • India manufactures only a small fraction of solar photovoltaic cells and modules currently used, with ambitious future targets.

    What happened to ‘self-reliance’ after India embraced globalisation?

    • At the turn of the millennium, when India embarked on liberalisation, privatisation and globalisation.
    • So, the very concept of self-reliance was rubbished.
    • This happened in the belief that it was like reinventing the things already invented and wasting money on it.
    • And when advanced technologies could simply be bought from anywhere at lower costs. 
    • Two related ideas have prevailed since then, and neither delivered the desired results.

    So, what are these two basic ideas?

    1. Unsuitability of PSUs in the globalised world

    • The first idea was that public sector undertakings (PSUs) are, by definition, inefficient and sluggish for the competitive globalised scenario.
    • No effort was made to engender either real autonomy or a transition to new technological directions.
    • Instead, PSUs with capability and scale were undermined or abandoned, along with many nascent research and development (R&D) efforts, for instance, in photovoltaics, semiconductors and advanced materials.

    So, what was the result of this attitude towards PSUs?

    • The private sector displayed little interest in these heavy industries and showed no appetite for technology upgradation.
    • With entry of foreign corporations, most Indian private companies retreated into technology imports or collaborations.
    • Even today, most R&D in India is conducted by PSUs.
    • And much of the smaller but rising proportion of private sector R&D is by foreign corporations in information technology and biotechnology/pharma.
    • Conclusion: Given the disinclination of most of the private sector towards R&D and high-tech manufacturing, significant government reinvestment in PSUs and R&D is essential for self-reliance.

    2. Foreign companies were expected to bring new technologies in India

    • The second idea was that inviting foreign direct investment and manufacturing by foreign majors would bring new technologies into India’s industrial ecosystem.
    • This was thought to obviate the need for indigenous efforts towards self-reliance.

    So, what happened on the ground?

    • But mere setting up of manufacturing facilities in India is no guarantee of absorption of technologies.
    • There is no evidence from any sector that this has taken place or has even been attempted.
    • The fact is, foreign majors jealously guard commercially significant or strategic technologies in off-shore manufacturing bases.
    • Conclusion: The key problem of self-reliance is therefore neither external finance nor domestic off-shore manufacturing, but resolute indigenous endeavour including R&D.

    Let’s look at experience of other Asian countries towards self-reliance

    Three models emerge from Asian countries.

    1. Focus on technology and industries

    •  Japan’s post-war success, was seen as a template by some countries to follow.
    • These include countries like South Korea, Taiwan, Singapore and Hong Kong
    • These countries took huge technological and industrial strides in the 1970s and 80s.
    • South Korea emerged as a global powerhouse in manufacturing, but also in indigenously developed technologies.
    • Taiwan developed technologies and manufacturing capacities in robotics and micro-processors.
    • While Singapore and Hong Kong adapted advanced technologies in niche areas.
    • These self-reliant capabilities were enabled, among other factors, by planned state investments in R&D including basic research (3-5% of GDP), technology and policy support to private corporations, infrastructure and, importantly, education and skill development (4-6% of GDP).

    2. Focus on off-shore manufacturing and not on self-reliance

    • Countries like Thailand, Malaysia, Indonesia and Vietnam have focused on off-shore manufacturing lower down the value chain and without the thrust on self-reliance.
    • This is useful for job creation but is an unsuitable model for a country of India’s size and aspirations.

    3. China: Transition from low-end manufacturing to dominant role in supply chains

    • China is, of course, unique in scale and in its determination to become a superpower not just geopolitically but also in self-reliant S&T and industrial capability.
    • China advanced purposefully from low-end mass manufacturing to a dominant role in global supply chains.
    • It has now decided on shifting to advanced manufacturing.
    • It has set itself a target of becoming a world leader by 2035 in 5G, supercomputing, Internet of Things (IoT), artificial intelligence (AI), autonomous vehicles, biotech/pharma and other technologies of the ‘fourth industrial revolution’.

    Way forward for India

    • India may well have missed the bus in many of technologies in which the U.S., Europe and China have established perhaps insurmountable leads.
    • Yet, self-reliant capabilities in electric and fuel cell vehicles, electricity storage systems, solar cells and modules, aircraft including UAVs, AI, robotics and automation, biotech/pharma and others are well within reach.
    • Large-scale concerted endeavours would, however, be required, since self-reliance will not happen by itself.
    • State-funded R&D, including in basic research, by PSUs and research institutions and universities needs to be scaled-up significantly, well above the dismal 1% of GDP currently.
    • Upgraded and reoriented PSUs would also be crucial given their distinctive place in the ecosystem.
    • Private sector delivery-oriented R&D could also be supported, linked to meaningful participation in manufacturing at appropriate levels of the supply chain.
    • India’s meagre public expenditure on education needs to be substantially ramped up including in skill development.

    Consider the question “The path to the self-reliance of any country goes through robust capabilities in the R&D. Comment”

    Conclusion

    Self-reliance would need a paradigm shift in our approach toward many things. First and foremost is the R&D. Potential of the PSUs has to be tapped to their fullest in the realms of R&D. The second area of focus should be education. These two areas are the key to achieve self-reliance and should be the focus of policymakers.

    Back2Basics: Bombay Plan

    • The Bombay plan was a set of proposal of a small group of influential business leaders in Bombay for the development of the post-independence economy of India.
    • This plan was published in two parts or volume- first in 1944 and second in 1945.
    • The prime objectives of the plan were to achieve a balanced economy and to raise the standard of living of the masses of the population rapidly by doubling the present per capita income within a period of 15 years from the time the plan goes into operation.

     

  • Explained: Contract Farming and its benefits

    The Odisha government has promulgated an ordinance allowing investors and farmers to enter into an agreement for contract farming in view of the continuing uncertainties due to the pandemic.

    Practice question for mains:

    Q. What is Contract Farming? Examine its potentials and feasibility from the perspective of farmers’ interests.

    Moving on with Odisha’s law

    • The Odisha ordinance is aimed at facilitating both farmers and sponsors to develop mutually beneficial and efficient contract farming system.
    • It is argued that the new system will lead to improved production and marketing of agricultural produce and livestock while promoting farmers’ interest.
    • The agreement will be entered into between the contract farming sponsor, who offers to participate in any component or entire value chain including preproduction, and the contract farming producer (farmers), who agree to produce the crop or rear the livestock.
    • Both the loans and advances given by the sponsor to the producer can be recovered from the sale proceeds of the produce.
    • And in no case realized, recovery can be through the sale or mortgage or lease of the land in respect of which the agreement has been entered into.

    What is Contract Farming?

    • Contract farming (CF) can be defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products.
    • Typically, the farmer agrees to provide agreed quantities of a specific agricultural product.
    • These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser.
    • In turn, the buyer commits to purchase the product and, in some cases, to support production through, for example, the supply of farm inputs, land preparation and the provision of technical advice.

    Some business models in CF

    1) Informal model – This model is the most transient and speculative of all contract farming models, with a risk of default by both the promoter and the farmer. However, this depends on the situation: interdependence of contract parties or long-term trustful relationships may reduce the risk of opportunistic behaviour.

    2) Intermediary model – In this model, the buyer subcontracts an intermediary (collector, aggregator or farmer organisation) who formally or informally contracts farmers (a combination of the centralised/ informal models).

    3) Multipartite model – This model can develop from the centralised or nucleus estate models. It involves various organisations such as governmental statutory bodies alongside private companies and sometimes financial institutions.

    4) Centralized model – In this model, the buyers’ involvement may vary from minimal input provision (e.g. specific varieties) to control of most production aspects (e.g. from land preparation to harvesting). This is the most common CF model.

    Advantages of Contract Farming:

    To the farmers:

    • It helps in skilling of farmers as they learn to use various resources efficiently like fertilizer, pesticides and get in touch with new technology in some cases.
    • Farmers get the opportunity for diversification of crops.
    • Price risk is drastically reduced as many contracts specify prices in advance.
    • Contract farming can open up new markets which would otherwise have been unavailable to small farmers. The farmers can also get easy credit from the Bank under contractual agreements.
    • In the case of agri-processing level, it ensures a consistent supply of agricultural produce with quality, at the right time and lesser cost.

    To the Client:

    • They get uninterrupted & regular flow of raw material of high quality which helps in protection from fluctuation in market pricing.
    • Long term planning of business is possible as they have a dedicated supplier base of raw material.
    • Concept of contract farming can be extended to other crops also which helps to generate goodwill for the organisation.

    Limitations

    • Contract farming arrangements are often criticized for being biased in favour of firms or large farmers while exploiting the poor bargaining power of small farmers.
    • Problems faced by growers like an undue quality cut on produce by firms delayed deliveries at the factory, delayed payments, low price and pest attack on the contract crop which raised the cost of production.
    • Contracting agreements are often verbal or informal in nature, and even written contracts often do not provide legal protection in India that may be observed in other countries. Lack of enforceability of contractual provisions can result in a breach of contracts by either party.
    • Single Buyer – Multiple Sellers (Monopsony).
    • Adverse gender effects – Women have less access to contract farming than men.

    Also read

    What is contract farming? Critically analyze the features of the draft “Model Contract Farming Act – 2018”. (150 W)

    With inputs from Vikaspedia

  • [pib] Emergency Credit Line Guarantee Scheme (ECLGS)

    The Union Cabinet has given its approval for the Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs and MUDRA borrowers.

    Practice question for Mains :

    Q. Discuss how the nationwide lockdown to control the coronavirus outbreak has led to the resurfacing of inherent bottlenecks in India’s MSME Sector.

    About ECLGS

    • Under the Scheme, 100% guarantee coverage to be provided by National Credit Guarantee Trustee Company Limited (NCGTC) for additional funding of up to Rs. 3 lakh crore to eligible MSMEs and interested MUDRA borrowers.
    • The credit will be provided in the form of a Guaranteed Emergency Credit Line (GECL) facility.
    • The Scheme would be applicable to all loans sanctioned under GECL Facility during the period from the date of announcement of the Scheme to 31.10.2020.

    Aims and objectives

    • The Scheme aims at mitigating the economic distress faced by MSMEs by providing them additional funding in the form of a fully guaranteed emergency credit line.
    • The main objective is to provide an incentive to Member Lending Institutions (MLIs), i.e., Banks, Financial Institutions (FIs) and NBFCs to increase access to, and enable the availability of additional funding facility to MSME borrowers.
    • It aims to provide a 100 per cent guarantee for any losses suffered by them due to non-repayment of the GECL funding by borrowers.

    Salient features

    • The entire funding provided under GECL shall be provided with a 100% credit guarantee by NCGTC to MLIs under ECLGS.
    • Tenor of the loan under Scheme shall be four years with a moratorium period of one year on the principal amount.
    • No Guarantee Fee shall be charged by NCGTC from the Member Lending Institutions (MLIs) under the Scheme.
    • Interest rates under the Scheme shall be capped at 9.25% for banks and FIs, and at 14% for NBFCs.

    Benefits of the scheme

    • The scheme aims to mitigate the distress caused by COVID-19 and the consequent lockdown, which has severely impacted manufacturing and other activities in the MSME sector.
    • The scheme is expected to provide credit to the sector at a low cost, thereby enabling MSMEs to meet their operational liabilities and restart their businesses.
    • By supporting MSMEs to continue functioning during the current unprecedented situation, the Scheme is also expected to have a positive impact on the economy and support its revival.

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