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GS Paper: GS3-02.Inclusive growth and issues therein

  • Rythu Bandhu: Telangana DBT scheme for farmers’ assistance

    The total funds disbursed under Rythu Bandhu, Telangana government’s direct benefit transfer scheme for farmers, will soon touch Rs 50,000 crore in the coming days.

    What is Rythu Bandhu?

    • Rythu Bandhu is a scheme under which the state government extends financial support to land-owning farmers at the beginning of the crop season through direct benefit transfer.
    • The scheme aims to take care of the initial investment needs and do not fall into a debt trap.
    • This in turn instills confidence in farmers, enhances productivity and income, and breaks the cycle of rural indebtedness.

    DBT under the Scheme

    • Each farmer gets Rs 5,000 per acre per crop season without any ceiling on the number of acres held.
    • So, a farmer who owns two acres of land would receive Rs 20,000 a year, whereas a farmer who owns 10 acres would receive Rs 1 lakh a year from the government.
    • The grant helps them cover the expenses on input requirements such as seeds, fertilizers, pesticides, and labour.

    How much does it cost the state exchequer?

    • Since the Kharif season of 2018, the state government has been crediting Rythu Bandhu assistance to farmers.
    • As of date, it has credited Rs 43,036.64 crore into the bank accounts of beneficiaries.
    • This season, the state government will disburse another Rs 7638.99 crore, taking the total sum disbursed so far to over Rs 50,000 crore.

    Comparing with the PM-KISAN scheme

    • The state government has often said that the Centre’s PM-KISAN (Pradhan Mantri Kisan Samman Nidhi) scheme is a “copy” of Rythu Bandhu.
    • Under PM-KISAN, a land-holding family receives an income support of 6,000 per year in three equal installments.
    • Rythu Bandhu is based on anticipated input expenditure for each acre of land and there is no restriction on the number of acres owned by a farmer.
    • PM-KISAN only provides support to the family and not to the farm units.

    Criticisms of the Rythu Bandhu Scheme

    • The scheme does not cover the landless or tenant farmers.
    • Farmer bodies have been demanding that the state government should extend the agriculture assistance to tenant farmers as well.
    • They have pointed out that those who work on lands taken on lease from landowners also need government assistance at the beginning of a crop season.
    • It is difficult to bring tenant farmers under the ambit of the scheme because of the informal nature of the agreements they enter into.

     

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  • What rising inequality means

    Context

    In the aftermath of Covid-19 pandemic, evaluating the state of inequality serves as an eye-opener on the income/wealth divides prevailing across regions.

    Income and wealth inequality in the world

    • The top 10% of the global population share 52% of the total income, while the bottom half survives with a mere 8.5% of it.
    • This leaves the 40% in the middle with 40% of the income.
    • This distribution shows the tendency of a rising middle class with lower disparity in income, but it also shows that the status of the poor is worsening day by day.
    • Inequality of wealth: In terms of wealth, the top 10% of the global population own 76% of the total wealth, while the bottom 50% share a mere 2%.
    • Some additional features of this exposition of inequality also relate to imbalance of women’s share in income as well as the ecological inequities indicated by the differential carbon emission levels.

    Factors responsible for rising inequality

    [1]  Absence of effective measures of redistribution

    • Inequality varies across regions. It is moderate in Europe and sharp in Africa.
    •  The top 10% have an income share of 36% in Europe vis-à-vis the top 10% with a share of 58% of the total income in West Asia and North Africa.
    • Measures for redistribution: This disparity shows that worsening inequalities are avoidable with appropriate measures in place.

    [2] The absence of measures discouraging undue accumulation

    • Kuznet’s curve not follower everywhere: While there is an argument in literature that inequalities are a manifestation of the average level of income, as explained by the Kuznets’ theory, the prevailing pattern across countries does not follow the same.
    • Average income level is poor predictor of inequality: The average income levels seem to be poor predictors of the levels of inequality, with high-income countries such as the U.S. having higher levels of inequality as against countries such as Sweden, which have moderate levels of inequality.
    • Similar contradictions are also seen when we contrast middle-income nations such as Brazil, India and China as against Malaysia and Uruguay.
    • Hence, emerging inequalities are not necessarily an outcome of rising levels of income in the post-liberalisation era, but a depiction of poor redistributive policies towards discouragement of accumulation by governments with due sensitivity towards inequalities.

    How inequality hurts government finances

    • This prevailing pattern of wealth concentration and differential levels of income around the world has also resulted in rich nations having poor governments.
    • Such a situation has two underpinnings: one, governments have a limited capacity to act on inequality aversion measures and two, private interests overshadow the distributional fairness of wealth. 

    Way forward

    • Focus also needs to be placed on reducing disparities in capability domains like education and differential endowments (tangible and intangible) that have the potential to sustain inequalities.

    Consider the question “How rising income and wealth inequality could harm us in various ways? What are the factors responsible for the rising inequality? Suggest the way forward.”

    Conclusion

    The rising levels of income and wealth need to be addresses by policy measures and reducing disparity in capacity domains.

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  • Co-Lending Model for Banks-NBFCs

    A November 2020 decision by the RBI to permit banks to “co-lend with all registered NBFCs based on a prior agreement” has led to unusual tie-ups between the banks and companies.

     The ‘Co-Lending Model’

    • In September 2018, the RBI had announced “co-origination of loans” by banks and Non-Banking Financial Companies (NBFCs) for lending to the priority sector.
    • The arrangement entailed joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards.
    • Subsequently, based on feedback from stakeholders, the RBI allowed the lenders greater operational flexibility, while requiring them to conform to regulatory guidelines.
    • The primary focus of the revised scheme, rechristened as ‘Co-Lending Model’ (CLM), was to “improve the flow of credit to the unserved and underserved sector of the economy.

    Repercussions of Co-Lending

    (1) Bank-NBFC tie-ups at indiscriminate scale

    • Several banks have entered into co-lending ‘master agreements’ with NBFCs, and more are in the pipeline.
    • SBI, the country’s largest lender, signed a deal with Adani Capital, a small NBFC of a big corporate house, for co-lending to farmers to help them buy tractors and farm implements.

    (2) Greater risk in co-lending

    • NBFCs are required to retain at least a 20 per cent share of individual loans on their books.
    • This means 80 per cent of the risk will be with the banks — who will take the big hit in case of a default.

    (3) Corporates in banking

    • While the RBI hasn’t officially allowed the entry of big corporate houses into the banking space, NBFCs — mostly floated by corporate houses — were already accepting public deposits.
    • They now have more opportunities on the lending side through direct co-lending arrangements.

    Back2Basics: Non-Banking Financial Company (NBFC)

    • An NBFC is a company incorporated under the Companies Act 2013 or 1956.
    • According to section 45-I (c) of the RBI Act, a Non–Banking Company carrying on the business of a financial institution will be an NBFC.
    • It further states that the NBFC must be engaged in the business of Loans and Advances, Acquisition of stocks, equities, debt etc issued by the government or any local authority or other marketable securities.

    NBFC business:

    The NBFC business does not include business whose principal business is the following:

    1. Agricultural Activity
    2. Industrial Activity
    3. Purchase or sale of any goods excluding securities
    4. Sale/purchase/construction of any immovable property – Providing of any services

    Difference between Banks and NBFCs:

    • NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
    1. NBFC cannot accept demand deposits;
    2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
    3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.

     

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  • World Inequality Report, 2022

    As per the ‘World Inequality Report 2022’, India is among the most unequal countries in the world, with rising poverty and an ‘affluent elite.’

    World Inequality Report

    • This report is published by Mr. Lucas Chancel, the co-director of the World Inequality Lab of the Paris School of Economics.
    • It was coordinated by famed French economist Thomas Piketty.

    Key highlights of the report

    (1) Income divide

    • The report highlights that the top 10% and top 1% in India hold 57% and 22% of the total national income respectively while the bottom 50% share has gone down to 13%.
    • The average national income of the Indian adult population is Rs 2,04,200.
    • The bottom 50% earns 20 times more than the top 10%.

     (2) Decline in public wealth

    • The report notes that the share of public wealth across countries has been on a decline for decades now.
    • Public assets typically include public buildings housing administrations, schools, universities, hospitals, and other public services.

    (3) Inequality during Colonial India

    • Going back in time, the report shows that the income inequality in India under the British colonial rule (1858-1947) was very high, with a top 10% income share around 50%.
    • After independence, due to socialist-inspired five-year plans, this share was reduced to 35-40%.
    • Owing to poor post-Independence economic conditions, India embarked upon deregulation and loosening controls in the form of liberalization policies.

    (4) Wealth inequality

    • The average household wealth in India is around Rs 9,83,010.
    • The bottom 50% of the nation can be seen to own almost nothing, with an average wealth of Rs 66,280 or 6% of the total pie.
    • The middle class is relatively poor with an average wealth of Rs 7,23,930 or 29.5% of the total.
    • The top 10% owns 65% of the total wealth, averaging Rs 63,54,070 and the top 1% owns 33%, averaging Rs 3,24,49,360.

    (5) Gender Inequality

    • Gender inequality in India is also considered on the higher end of the spectrum.
    • The share of female labor income share in India is equal to 18% which is significantly lower than the average in Asia (21%, excluding China) & is among the lowest in the world.
    • Although, the number is slightly higher than the average share in the Middle East (15%).
    • However, a significant increase has been observed since 1990 (+8 p.p.) but it has been insufficient to lift women’s labor income share to the regional average.

    (6) Poor States, wealthy population

    • Countries across the world have become richer over the past 40 years, but their governments have become significantly poorer.
    • The report shows that the share of wealth held by public actors is close to zero or negative in rich countries, meaning that the totality of wealth is in private hands.
    • Following the pandemic, governments borrowed the equivalent of 10-20% of GDP, essentially from the private sector.

    (7) Issue over data availability

    • The report goes on to say that over the past three years, the quality of inequality data released by the government has seriously deteriorated.
    • This has made it particularly difficult to assess recent inequality changes.

    Conclusions from the report

    (1) Wealth is mostly inherited and has a snowball effect

    • People accumulate wealth across generations through inheritance.
    • It has a snowball effect, wherein successive generations will gain more, but in their concentrated section.
    • More capital incentivizes banks to lend. This is why the rich section’s wealth grows faster.

    (2) Wealth management is necessary

    • Public wealth has been declining for two reasons:
    1. First, governments have been privatizing assets and natural resources at low costs.
    2. Second, governments contract debt to the private sector, making it richer.
    • Without assets, governments have low resources to invest and to mitigate climate change impacts, particularly in the energy sector.
    • Currently, governments have more debts than assets. This calls for strategic management of the economy.

     

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  • A white touch to a refreshed green revolution

    Context

    November 26, 2021 was celebrated in Anand, Gujarat as the 100th birth anniversary of Verghese Kurien, the leader of India’s ‘white revolution’.

    Analysing the Green revolution

    • Purpose of green revolution: The purpose of the green revolution was to increase the output of agriculture to prevent shortages of food.
    • Technocratic enterprise: The green revolution was largely a technocratic enterprise driven by science and the principles of efficiency.
    • It required inputs, like chemical fertilizers, to be produced on scale and at low cost.
    • Therefore, large fertilizer factories were set up for the green revolution. And large dams and irrigation systems were also required to feed water on a large scale.
    • Monocropping on fields was necessary to apply all appropriate inputs — seeds, fertilizer, water, etc., on scale.
    •  Monocropping increased the efficiency in application of inputs.
    • Thus, farms became like large, dedicated engineering factories designed to produce large volumes efficiently.
    •  Diversity in the products and processes of large factories creates complexity.
    • Therefore, diversity is weeded out to keep the factories well-focused on the outputs they are designed for.

    The contrast between White and Green revolution

    • The contrast between the two revolutions provides valuable insights. Their purposes were different.
    • Purpose of white revolution: The purpose of the white revolution was to increase the incomes of small farmers in Gujarat, not the output of milk.
    • The white revolution was a socio-economic enterprise driven by political leaders and principles of equity.

    Understanding the success of Amul

    • Amul has become one of India’s most loved brands, and is respected internationally too for the quality of its products and the efficiency of its management.
    • The fledgling, farmer-owned, Indian enterprise had many technological problems to solve.
    • That is why they enrolled Kurien, who had studied engineering in the United States.
    • Indigenous solutions: Kurien and his engineering compatriots in the organisation were compelled to develop solutions indigenously when Indian policy makers, influenced by foreign experts, said Indians could not make it.
    • The enterprise achieved its outcome of empowering farmers because the governance of the enterprise to achieve equity was always kept in the foreground, with the efficiency of its production processes in the background as a means to the outcome.

    Increasing productivity and issues with it

    • ‘Productivity’, when defined as output per worker, can be increased by eliminating workers.
    • This may be an acceptable way to measure and increase productivity when the purpose of the enterprise is to increase profits of investors in the enterprise.
    • It is a wrong approach to productivity when the purpose of the enterprise is to enable more workers to increase their incomes, which must be the aim of any policy to increase small farmers’ incomes.
    • The need for new solutions to increase farmers’ incomes has become imperative.
    • Moreover, fundamental changes in economics and management sciences are necessary to reverse the degradation of the planet’s natural environment that has taken place with the application of modern technological solutions and management methods for the pursuit of economic growth.

    Suggestions to increase inclusion and improve environmental sustainability

    • Ensure inclusion and equity: Increase in the incomes and wealth of the workers and small asset owners in the enterprise must be the purpose of the enterprise, rather than production of better returns for investors.
    • Social side: The ‘social’ side of the enterprise is as important as its ‘business’ side.
    • Therefore, new metrics of performance must be used, and many ‘non-corporate’ methods of management learned and applied to strengthen its social fabric.
    • Local solution: Solutions must be ‘local systems’ solutions, rather than ‘global (or national) scale’ solutions.
    • The resources in the local environment (including local workers) must be the principal resources of the enterprise.
    • Practical use of science: Science must be practical and useable by the people on the ground rather than a science developed by experts to convince other experts.
    • Moreover, people on the ground are often better scientists from whom scientists in universities can learn useful science.
    • Sustainable solution through evolution: Sustainable transformations are brought about by a steady process of evolution, not by drastic revolution.
    • Large-scale transformations imposed from the top can have strong side-effects.

    Consider the question “Contrast the differences between the White Revolution and Green Revolution in India. What lessons can be applied to Indian agriculture from the success of the White Revolution in India?”

    Conclusion

    The essence of democratic economic governance is that an enterprise must be of the people, for the people, and governed by the people too.

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  • NITI Aayog’s Multidimensional Poverty Index (MPI)

    The Government think-tank NITI Aayog has released the National Multidimensional Poverty Index (MPI).

    Multidimensional Poverty Index (MPI)

    • This baseline report of India’s first-ever national MPI measure is based on the reference period of 2015-16 of the National Family Health Survey (NFHS)- 4.
    • It uses the globally accepted and robust methodology developed by the Oxford Poverty and Human Development Initiative (OPHI) and the United Nations Development Programme (UNDP).
    • It captures multiple and simultaneous deprivations faced by households.

    Parameters used

    • The NMPI is calculated using 12 indicators — nutrition, child and adolescent mortality, antenatal care, years of schooling, school attendance, cooking fuel, sanitation, drinking water, electricity, housing, assets and bank account,
    • They have been grouped under three dimensions namely, health, education and standard of living.

    Why NFHS-4?

    • Data collected during the NFHS-4 (2015-2016) corresponds to the period before the full roll out of new governments’ flagship schemes.
    • Hence it serves as a useful source for measuring the situation at baseline i.e. before large-scale rollout of nationally important schemes.

    How is the data used?

    • The national MPI 2021 is calculated using the household microdata collected at the unit-level for the NFHS-4 that is used to derive the baseline multidimensional poverty.
    • Further, the country’s progress would be measured using this baseline in the NFHS-5, for which the data was collected between 2019 and 2020.
    • The progress of the country with respect to this baseline will be measured using the NFHS-5 data collected in 2019-20.

    Key highlights NMPI

    • As per the index, 51.91% of the population in Bihar is poor, followed by Jharkhand (42.16%), Uttar Pradesh (37.79%), Madhya Pradesh (36.65%) and Meghalaya (32.67%).
    • On the other hand, Kerala registered lowest population poverty levels (0.71%), followed by Puducherry (1.72%), Lakshadweep (1.82%), Goa (3.76%) and Sikkim (3.82%).
    • Other States and UTs where less than 10% of the population are poor include Tamil Nadu (4.89%), Andaman & Nicobar Islands (4.30%), Delhi (4.79%), Punjab (5.59%), Himachal Pradesh (7.62%) and Mizoram (9.8%).

     

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  • The growth and inclusion potential of India’s telecom sector

    Context

    Shortly after the Cabinet announced nine structural and procedural reforms in September to address the deep financial woes of telcos, Vodafone Idea and Bharti Airtel hiked their tariff.

    About the package for telecom sector

    • The telecom relief package announced by the government in September supports proposals that have been repeatedly presented to the government by the regulator, industry associations and think tanks.
    • Risk of duopoly: With the risk of a duopoly looming large, the government was pushed to take up these long-pending decisions that included nine key changes.
    • Provisions in the package: Besides providing immediate relief on payment of licence fee and penalties due to the government, the package increased FDI limits, extended licence tenure to 30 years from 20, removed charges on spectrum-sharing and proposed timelines for spectrum auctions.
    • The package will undoubtedly have a positive short-term impact and perhaps safeguard competition in the future.

    Reforms and  challenge of addressing the inequality

    • From socialist to market-oriented economy: In July this year, we celebrated three decades of India’s 1991 reforms, one that catapulted India from being a socialist economy with a heart but no trickle-down, to a market-oriented economy with a mind but also very little trickle-down.
    • Inequality has been a feature of both models.
    • The 2018 Oxfam report showed that 10 per cent of the richest Indians took home 77.4 per cent of wealth (compared to 73 per cent the year before).
    • Moreover, 58 per cent of India’s wealth was in the hands of 1 per cent of the country’s population.
    • Changes in the modes of distribution: In the pre-1991 period, the principal modes of redistribution were taxation and public sector operations.
    • In the post-1991 period, it has been a combination of taxation, technology, smartphones and the associated direct benefit transfers.

    Role of telecom sector in addressing the challenge of achieving growth and inclusion

    • High growth dividend of telecom sector: Every 10 per cent increase in investment in telecom, for example, leads to a 3.2 per cent increase in GDP growth for India.
    • Not only is the growth dividend positive, it is large.
    • Mobile as a mean of financial integration: At the same time, the mobile phone has become a means for sophisticated financial integration, as shown by the expanding usage of pre-paid payment instruments and mobile banking.
    • The Jan-Dhan Yojana (JDY) attempts to include the marginalised and unbanked through technology.
    • As of October 2021, a total of 440 million bank accounts have been opened and more than 310 million RuPay cards have been issued under the latter, indicating the large unmet demand for banking services.
    • Making transfers predictable and targeted: The Jan-Dhan-Aadhaar-Mobile (JAM) trinity ties the Aadhaar number to an active bank account, making income transfers predictable and targeted.
    • There is already evidence that payments through Aadhaar-linked bank accounts have increased efficiency and reduced leakages.

    Way forward

    • Predictable and less erratic telecom policy: The benefits of digitalisation could have been much larger and more widespread had telecom policy been more predictable and less erratic.
    • That Indian reforms more often than not happen on the back of a crisis is true for the telecom sector.
    • The principal motive of the New Telecom Policy of 1999 was to rescue the deeply indebted sector of its own reckless bidding by replacing the fixed licence fee system with a revenue-sharing regime.
    • In hindsight, it was the right thing to do since it threatened business continuity.
    • The move to auction spectrum “for all times to come” in 2008 was necessitated by the administrative bungling in spectrum assignment.
    • Quick adaptation: A question we pose is why did it take a crisis — a grave one at that — to push the needle on policy change?
    • It is a a reasonable expectation of policy to adapt quickly and not wait for a crisis to emerge.

    Consider the question “Telecom sector could play an important role in achieving the growth with inclusion. In context of this, examine the challenges facing the sector and suggest the measures to deal with these challenges.”

    Conclusion

    The seemingly naïve question about the adaptation in policies may not be as credulous for the intensely dynamic digital markets. For there is no point shutting the stable door after the horse has bolted.

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  • Co-op Societies are not banks, RBI cautions

    The Reserve Bank of India (RBI) has cautioned members of the public not to deal with cooperative societies undertaking banking business by adding ‘bank’ to their names.

    What is the news?

    • It has also come to the notice of RBI that some co-operative societies are accepting deposits from non-members/nominal members/ associate members.
    • This is tantamount to conducting banking business in violation of the provisions.

    Who can use ‘Bank’ title?

    • The Banking Regulation Act, 1949 was amended by the Banking Regulation (Amendment) Act, 2020, which came into force on September 29, 2020.
    • Accordingly, co-operative societies cannot use the words “bank”, “banker” or “banking” as part of their names, except as permitted under the provisions of BR Act, 1949 or by the RBI.

    What is Cooperative Banking?

    • Cooperatives are people-centred enterprises owned, controlled and run by and for their members to realise their common economic, social, and cultural needs and aspirations.
    • Cooperative bank is an institution established on the cooperative basis and dealing in ordinary banking business.
    • Like other banks, the cooperative banks are founded by collecting funds through shares, accept deposits and grant loans.
    • They are regulated by the Reserve Bank of India (RBI) and governed by the
    1. Banking Regulations Act 1949
    2. Banking Laws (Co-operative Societies) Act, 1955

    Features of Cooperative Banks

    • Cooperative banks are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities.
    • Such banking in India is federal in structure. Primary credit societies are at the lowest rung.
    • Then, there are central cooperative banks at the district level and state cooperative banks at the state level.
    • Cooperative credit societies are mostly located in villages spread over the entire country.

    History of Cooperative Banking in India:

    • The cooperative movement in India was started primarily for dealing with the problem of rural credit.
    • The history of Indian cooperative banking started with the passing of Cooperative Societies Act in 1904.
    • The objective of this Act was to establish cooperative credit societies “to encourage thrift, self-help and cooperation among agriculturists, artisans and persons of limited means.”
    • Many cooperative credit societies were set up under this Act.
    • The Cooperative Societies Act, 1912 recognised the need for establishing new organisations for supervision, auditing and supply of cooperative credit.

    Structure of Cooperative Banking

    • The whole structure of cooperative credit institutions is shown in the chart given.
    • There are different types of cooperative credit institutions working in India.
    • These institutions can be classified into two broad categories- agricultural and non-agricultural.
    • Agricultural credit institutions dominate the entire cooperative credit structure.

    Various facets of cooperatives in India

    • Cooperatives in India have grown exponentially.
    • In the banking sector, according to the RBI, their contribution to rural credit increased from 3.1 percent in 1951 to an impressive 27.3 percent in 2002.

    Importance of Cooperative Banks:

    • The cooperative banking system has to play a critical role in promoting rural finance and is especially suited to Indian conditions.
    • Various advantages of cooperative credit institutions are given below:

    (1) Alternative Credit Source:  The main objective of the cooperative credit movement is to provide an effective alternative to the traditional defective credit system of the village moneylender.

    (2) Cheap Rural Credit: Cooperative credit system has cheapened the rural credit by charging comparatively low-interest rates, and has broken the money lender’s monopoly.

    (3) Productive Borrowing:  The cultivators used to borrow for consumption and other unproductive purposes. But, now, they mostly borrow for productive purposes.

    (4) Encouragement to Saving and Investment: Instead of hoarding money the rural people tend to deposit their savings in cooperative or other banking institutions.

    (5) Improvement in Farming Methods: Cooperative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc.

    (6) Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to the masses in rural areas.

     

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  • Why India’s pro-rich, anti-poor taxation policies must change

    Context

    To develop their renewable energy capacities poor countries may well have to help themselves to make the transition that society urgently needs. One source of funding could well be the well-off citizens of India, who are getting richer and richer.

    Growing inequality in India

    • A 2018 Oxfam report revealed that 10 per cent of the richest Indians garnered 77.4 per cent of the nation’s wealth.
    •  In fact, according to the report, 58 per cent of India’s wealth was in the hands of one per cent of the country’s population.
    • The combined income of this handful of people in 2017 was almost as much as India’s budget that year.
    • In 2017, the fortune of India’s 100 richest tycoons leaped by 26 per cent.
    •  According to Crédit Suisse, the number of dollar millionaires in India has jumped from 34,000 in 2000 to 7,59,000 in 2019 — in other words, the country has one of “the world’s fastest-growing population of millionaires”.
    • The average wealth of these millionaires has increased by 74 per cent over this period.

    Issues with taxation policies

    • The taxation policy of the government, instead of making the exchequer benefit from this trend, has actively strengthened the trend of growing millionaires.
    • Replacing wealth tax by increasing income tax: The government replaced the wealth tax by an income tax increase of two per cent for households that earned more than 10 million rupees annually.
    • Corporate tax was reduced: The corporate tax was lowered, for existing companies from 30 per cent to 22 per cent, and for manufacturing firms incorporated after October 1, 2019 that started operations before March 31, 2023, from 25 to 15 per cent — the biggest reduction in 28 years.
    • Increase in income tax exemptions: In the 2019-20 budget, the income tax exemption limit jumped from Rs 2,00,000 to 2,50,000 and the tax rate for incomes up to Rs 5 lakh was reduced from 10 to 5 per cent.

    Impact of pro-rich taxation policy

    • Deprives the state of resources: This taxation policy deprived the state of important resources.
    • Increase in indirect taxes: To (partly) compensate for the decline of direct taxes, the government has increased indirect taxes, unfairly so, because they affect all Indians irrespective of their income.
    • The share of indirect taxes in the state’s fiscal resources has increased to reach 50 per cent of total taxes in 2018.
    • Taxes on petroleum products are a case in point.

    High taxes on petroleum products

    • About two-thirds of the cost of a litre of petrol now goes towards taxes.
    • The tax collected on petrol and diesel has increased by 459 per cent in the past seven years — from Rs 52,537 crore in 2013 to Rs 2.13 lakh crore in 2019-2020.
    • Given that petrol is a less elastic good, people are bound to consume it even at higher prices.
    • This also explains why the government sees fuel sale in India as a safe “revenue collection” medium.
    • In 2018-19, excise duty on petroleum products alone accounted for roughly 24 per cent of the indirect tax revenue.

    Consider the question “India’s taxation policies are criticised for being pro-rich. In the context of this, discuss the issues with the taxation system and suggest the measure to deal with these issues.”

    Conclusion

    The government’s taxation policy will probably continue to prevail depriving the exchequer of some of the resources it needs for dealing with issues as important as climate change.

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  • Formal sector and fine print

    Context

    A recent study by SBI has reported that the Indian economy witnessed accelerated formalisation under the distressed conditions of the pandemic and the lockdown last year. The study estimates that the share of the informal economy has fallen to a mere one-fifth of GDP — a figure comparable to many advanced economies.

    Understanding informality

    • ILO definition: The ILO’s globally accepted framework for definitions is as follows: Informal sector enterprises are defined as private unincorporated enterprises owned by individuals (or households) that are not constituted as separate legal entities independently of their owners.
    • They are not registered under specific national legislation (such as Factories’ or Commercial Acts).
    • Definition of a formal worker in India: Formal workers in India, on the other hand, are defined as those having access to at least one social security benefit such as a provident fund or healthcare benefits.

    What explains the decline of informal sector in GDP

    • Significance of informal sector: In 2017-18, as per the latest official statistics, India’s informal sector accounted for approximately 52 per cent of its GDP, employing 82 per cent of the total workforce.
    • These ratios have broadly remained unchanged over the last decade.
    • Most affected due to pandemic: As the informal (unorganised) sector bore much of the brunt of the economic contraction during 2020-21, a decline in its share in GDP is unsurprising.
    • Lack of financial strength: The sector had neither the financial strength nor the technical wherewithal to face the Covid shock.
    • Inadequate policy support: Additionally, policy support, mostly supply-side measures, was mainly focused on firms in the formal sector, with the informal sector left to fend for itself.

    Issues with decline

    • Undeniably, the informal sector’s share in GDP is likely to have shrunk due to the Covid shock.
    • However, alarmingly, the purported decline in the informal sector’s share in GDP has not been accompanied by an expected reduction in its employment share. 
    • Data from the official annual Period Labour Force Survey (PLFS) 2017-18 and 2019-20, where the latter includes the period of the Covid shock from April to June 2020, shows that the employment share in non-agricultural informal enterprises has increased from 68 per cent in 2017-18 to 69.5 per cent in 2019-20.
    • These figures do not include the agricultural sector, where employment is almost entirely in the informal sector.
    • The increasing share of the formal sector in terms of GDP but declining share in employment only widens the schism (or dualism) between the two sectors.
    • The increasing share of the formal sector in terms of GDP but declining share in employment only widens the schism (or dualism) between the two sectors.

    Implications

    • Impact on investment and growth: The lack of remunerative jobs for the vast majority of Indian consumers implies that eventually the lack of growth in demand will adversely impact investment and economic growth.
    • After all, a mere 17-18 per cent of the workforce in the organised sector cannot sustain growth of the economy in the long run.
    •  Squeezing out informal enterprises: The increase in the formal sector’s share in GDP due to Covid-19 is a result of large, formal enterprises squeezing out informal enterprises.
    • It is important to note here that the increase in formalisation is not a consequence of micro and small informal firms transitioning to formality.

    Increasing productivity: A way forward to formalisation

    • Promoting formalisation: Over the last five years, the economy has officially witnessed a significant drive towards formalisation.
    • Multiple reasons for avoiding formalisation: It is crucial to recognise that firms exist in the informal sector for various reasons and not simply to evade regulations and taxation.
    • Significance of productivity: Many own account enterprises and MSMEs cannot afford to survive in the formal sector due to their low productivity.
    • It is essential to view the process of formalisation as a development strategy that requires stepping up investment in physical and human capital to boost productivity and the extension of social security benefits for all workers, not just a registration strategy on myriad portals.

    Consider the question “Informal sector has been affected disproportionately in the wake of the pandemic. What are the implications of this for the economy? Suggest the way forward for the formalisation.”

    Conclusion

    The informal sector will come back to life as much of it represents the survival efforts of the working poor. Celebrating formalisation based on the misery and devastation of poor informal workers (and their meagre productive assets) is not just misplaced but also callous.

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