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

  • Economics Nobel for Natural Experiments

    The 2021 Nobel Prize in Economic Sciences was awarded to three US-based economists.

    Do you know?

    The Nobel Prize is officially called as Sveriges Riksbank Prize!

    Who are the awardees?

    • Nobel Committee awarded half the Prize to David Card for his “empirical contributions to labour economics”
    • Other half to Guido Imbens and Joshua Angrist “for their methodological contributions to the analysis of causal relationships”

    What makes this year’s award special?

    • This is the first time the economic prize has been divided in this fashion with one half going to one awardee and other half divided across two awardees.
    • In the past, prize money was divided equally between the awardees even if the prize was for different topics as is the case this time around.
    • It may appear that the Nobel Prize has been given for two different contributions, but there is a common theme: “natural experiments.”

    What are Natural Experiments?

    • Economists are often interested in causal questions such as the impact of education on incomes, impact of COVID-19 on poverty and so on.
    • They are also interested is understanding the direction of causality.
    • Economists have used two kinds of experiments to study these causality and direction of causality questions: random experiments and natural experiments.

    (I) Random experiments

    • Under randomized experiments, the researchers allocate say medicines to a treatment group and compare the effect of the medicine with the control group which is not given the medicine.
    • In 2019, the Nobel Committee gave awards to three scholars for their contribution to the field of randomized experiments.
    • However, one cannot randomize experiments to study issues such as why certain people and regions are more unequal or have fewer educational opportunities and so on.

    (II) Natural experiments

    • In natural experiments, economists study a policy change or a historical event and try to determine the cause and effect relationship to explain these developments.
    • The trio used such natural experiments to make some landmark contributions to economic development.
    • Natural experiments are more difficult for two reasons. The first is to identify what will serve as a natural experiment.
    • Second, in a random experiment, the researcher knows and controls the treatment and control groups which allows them to study the cause and effect of medicine.
    • But in natural experiments, such clear differentiation is not possible because people choose their groups on their own and even move between the two groups.
    • Despite the limitations, the researchers could use the natural setting to answer some big policy questions.

    Natural experiments conducted by David Card

    • One question of interest for policymakers is to understand the impact of higher minimum wages on employment.
    • Earlier studies showed that increasing minimum wages leads to lower unemployment.
    • Economists were also not sure of the direction of causation between minimum wages and employment.
    • Say a slowdown in the economy leads to higher unemployment amid lower income groups.
    • This could lead to lower income groups demanding higher minimum wages. In such a case, it is higher unemployment which leads higher minimum wages.

    Contribution of Angrist and Imbens

    • Angrist and Imbens showed how natural experiments can be used to identify cause and effect precisely.
    • We have discussed above how natural experiments make it difficult to separate control and treatment groups. This makes it difficult to establish causal relations.
    • In the 1990s, the duo developed a methodology – Local Average Treatment Effect (or LATE) – which uses a two-step process to help grapple with these problems of natural experiments.
    • Say, one is interested in finding the impact of an additional year of schooling on the incomes of people.
    • By using the LATE approach, they showed that effect on income of an additional year of education is around 9%.
    • While it may not be possible to determine individuals in the group, one can estimate the size of the impact.

    What is the importance of the award today?

    • Earlier it was difficult to identify natural experiments and even if one identified them, it was difficult to generate data from these experiments.
    • With increased digitalization and dissemination of archival records, it has not just become easier to identify natural experiments but also get data.
    • Economists have been using natural experiments to help us understand the impact of past policies.
    • As the 2020 pandemic struck, economists used the natural experiments approach extensively to analyse how previous pandemics impacted different regions and tried to draw policy lessons.

    India context

    • The methodology date back to the early and mid-90s and they have already had a tremendous influence on the research undertaken in several developing countries such as India.
    • For instance, in India, too, it is commonly held that higher minimum wages will be counterproductive for workers.
    • It is noteworthy that last year, in the wake of the Covid-induced lockdowns, several states, including UP, had summarily suspended several labour laws.
    • This included the ones regulating minimum wages, arguing that such a move will boost employment.
    • The main learning is that minimum wages can be increased in India without worrying about reducing employment.

     

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  • Seeding a data revolution in Indian Agriculture

    In June this year, two significant documents relating to the Indian agriculture sector were released.

    What are the reports about?

    • The first is a consultation paper on the India Digital Ecosystem of Agriculture (IDEA) and the second on Indian Agriculture: Ripe for Disruption from a private organisation, Bain and Company.
    • Through their work, these reports have depicted the agriculture reforms announced by the union government as a game-changer in the agriculture sector.

    Challenges highlighted

    The major challenges of the agriculture sector are:

    1. Food Sufficiency but Nutrition Deficiency
    2. High import of edible oil and oilseeds
    3. Yield plateaus
    4. Degrading soil, Water stress
    5. Inadequate market infra/linkages
    6. Unpredictable, volatile prices
    7. Post-harvest losses, wastages
    8. Lack of crop planning due to information asymmetry

    Key takeaway: Way for doubling farmers income

    • These reports in short argues that benefiting from the huge investments into the agri-ecosystem, doubling farmers’ income targets can be achieved in near future.
    • The Indian agriculture sector in future will encompass farm to fork and pave the way for a single national market with a national platform with better connection between producer and consumers.

    The forecast

    • The Bain report is a data-based prediction on agri-business scenarios, anchored to the agricultural set-up at present and predicting its future trajectories in another 20 years.
    • It includes targeting the production of alternative proteins, and food cell-based food/ingredients and initiating ocean farming, etc.
    • The report has a ‘today forward– future back approach’ and predicts a drastic investment opportunity development by 2025.
    • The agriculture sector (currently worth $370 billion), is estimated to receive an additional $35 billion investment.

    The two enabling conditions for such investment opportunities are:

    1. Changes in the regulatory framework, especially recent changes in the Farm Acts and
    2. Digital disruption

    The IDEA of integration

    • Digital disruption: The blueprint of “digital agriculture” is similar to the digital disruption mentioned in the Bain report.
    • Integration: Eventually, the farmer and the improvement of farmers’ livelihood is the aim of the IDEA concept and it is proposed to happen through tight integration of agri-tech innovation and the agriculture industry.
    • Enabling conditions: To be precise, the IDEA concept profounds the creation of second enabling conditions (which is described in the Bain report).
    • Openness of data: The IDEA principles explicitly talk about openness of data, which means open to businesses and farmers, indicating the kind of integration it aims at.
    • Value-added innovative services: by agri-tech industries and start-ups are an integral part of the IDEA architecture.
    • Data architecture: The services listed in the document (to be available on the platform) are equally important data for farmers and businesses.

    A thread of digital disruption

    • The IT industry has opposition to IDEA mainly due to the ethics of creating a Unique Farmer ID based on one’s Aadhaar number and also the potential for data misuse.
    • Beyond the news coverage about the prospects of achieving the goal of Doubling Farmers Income on which the present government has almost lost its hope.

    Issues with these reports

    • The Bain report has not been widely discussed — at least in the public domain.
    • The assumptions used by authors especially for its ‘future back approach’, need more or less focusing on widespread food production in controlled environments.
    • The emission, energy, and other resource footprints and sustainability issues around these techniques are not adequately studied.

    Yet these reports are important

    • The report has convincingly demonstrated the business opportunity available in supply chains between farm to APMC mandi and mandi to the customer.
    • This can be realised with the support of digital disruption and the latest agriculture reforms.
    • Both these reports heavily rely on digital disruption to improve farmers’ livelihoods, without discussing how much farmers will be prepared to benefit from the emerging business.

    An unconvincing ‘how’

    • Digital divide: The fact is that a majority of small and marginal farmers are not technology-savvy.
    • No capacity building: That most of them are under-educated for capacity building is ignored amidst these ambitious developments.
    • Unrealistic assumptions: The Bain report relies on the general assumption that more investments into the agriculture sector will benefit farmers; ‘but how’ has not been convincingly answered.
    • Overemphasis on technology: Similarly, how the technology fix will help resolve all the issues of Indian agriculture listed at the beginning of the report is unclear in the IDEA concept.
    • Reluctance by farmers: These reports ignore the protest of farmers against the reforms without considering it as a barrier or risk factor resulting in a repealing of these new farm laws.

    Way ahead: Focus on the farmer

    • A data revolution is inevitable in the agriculture sector, given its socio-political complexities.
    • However, we cannot just count on technology fixes and agri-business investments for improving farmers’ livelihoods.
    • There need to be immense efforts to improve the capacities of the farmers in India – at least until the educated young farmers replace the existing under-educated small and medium farmers.
    • This capacity building can be done through a mixed approach through FPOs and other farmers’ associations where technical support is available for farmers.

    Conclusion

    • Considering the size of the agriculture sector of the country this is not going to be an easy task but would need a separate program across the country with considerable investment.

     

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  • What gives rise to the rural debt trap?

    Context

    The AIDIS report published this month reveals that non-institutional sources have a strong presence in the rural credit market, notwithstanding the high costs involved in borrowing from them.

    Highlights of AIDIS

    • The All-India Debt and Investment Surveys (AIDIS) is carried out by the National Statistical Office.
    • AIDIS is among the most important nationally representative data sources on the rural credit market in India.
    • According to the latest report, the average debt per household in rural India is Rs 59,748, nearly half the average debt per household in urban India.
    • IOI: As per the latest AIDIS report, the incidence of indebtedness (IOI) is 35 per cent in rural India — 17.8 per cent of rural households are indebted to institutional credit agencies, 10.2 per cent to non-institutional agencies and 7 per cent to both.
    • Dependence on institutional source: The share of debt from institutional credit agencies in total outstanding debt in rural India is 66 per cent as compared to 87 per cent in urban India.
    • Dependence on institutional sources is often seen as a positive development, signifying broadening financial inclusion, while reliance on non-institutional sources denotes vulnerability and backwardness.
    • Purpose: Institutional credit is taken mainly for farm business and housing in rural India.
    • A significant portion of debt from non-institutional sources is used for other household expenditures.
    • Socio-economic inequality: The data indicates that better-off households have greater access to formal-sector credit and use it for more income-generating purposes.
    • Access to institutional credit is largely determined by the ability of households to furnish assets as collateral.
    • The report shows that the top 10 per cent of asset-owning households have borrowed 80 per cent of their total debt from institutional sources, whereas those in the bottom 50 per cent borrowed around 53 per cent of total debt from non-institutional sources.
    • Debt-trap: the Debt-Asset Ratio (DAR) of the bottom 10 per cent asset-owning households in rural India is 39, much higher than the DAR of 2.6 estimated for the top 10 per cent households.
    • This, coupled with higher borrowing from non-institutional sources, acts as a debt trap for households with fewer assets.

    Way forward

    • Inadequate access to affordable credit lies at the heart of the rural distress
    • The credit policy needs to be revamped to accommodate the consumption needs of the rural poor and to find alternatives for collateral to bring the rural households within the network of institutional finance.

    Conclusion

    The solution to the problem of lack of access to credit in rural areas lies in policy changes.

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  • RBI unveils Financial Inclusion Index

    The Reserve Bank of India (RBI) has announced the formation of a composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country.

    Financial Inclusion Index

    • The FI-Index will be published in July every year.
    • The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion.
    • It has been conceptualized as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with the government and respective sectoral regulators.
    • It has been constructed without any ‘base year’ and as such it reflects cumulative efforts of all stakeholders over the years towards financial inclusion.

    Parameters of the index

    • The FI-Index comprises three broad parameters viz.,
    1. Access (35%),
    2. Usage (45%), and
    3. Quality (20%)
    • These parameters are the identification of the customer, reaching the last mile, and providing relevant, affordable and safe products.
    • The index is responsive to ease of access, availability and usage of services, and quality of services for all 97 indicators.

    This year’s highlight

    • The annual FI-Index for the period ended March 2021 stood at 53.9 compared with 43.4 for the period ended March 2017.

  • Poverty in India is on rise again

    In the absence of Consumption Expenditure Survey (CES) data, the Periodic Labour Force Survey shows a rise in the absolute number of the poor in India.

    About Consumption Expenditure Survey (CES)

    • A CES is conducted by the National Sample Survey Office (NSO) every five years.
    • But the CES of 2017-18 (already conducted a year late) was not made public by the Government of India.
    • Now, we hear that a new CES is likely to be conducted in 2021-22, the data from which will probably not be available before end-2022.
    • India has not released its CES data since 2011-12.

    Key highlights

    • Unemployment had reached a 45-year high in 2017-18, as revealed by NSO’s Periodic Labour Force Survey (PLFS).
    • While the PLFS’s questions on consumption expenditure are not as detailed as those of the CES, they are sufficient for us to estimate changes in consumption on a consistent basis across time.
    • It enables any careful researcher to estimate the incidence of poverty (i.e. the share in the total population of those below the poverty line), as well as the total number of persons below poverty.

    There is unemployment induced poverty

    • There is a clear trajectory of the incidence of poverty falling from 1973 to 2012.
    • In fact, since India began collecting data on poverty, the incidence of poverty has always fallen, consistently.
    • It was 54.9% in 1973-4; 44.5% in 1983-84; 36% in 1993-94 and 27.5% in 2004-05.
    • This was in accordance with the Lakdawala poverty line (which was lower than the Tendulkar poverty line), named after a distinguished economist, then a member of the Planning Commission.

    Methodology of Poverty Line

    • In 2011, it was decided in the Planning Commission, that the national poverty line will be raised in accordance with the recommendations of an expert group chaired by the late Suresh Tendulkar.
    • That is the poverty line we use in estimating poverty in the table.
    • As it happens, this poverty line was comparable at the time to the international poverty line (estimated by the World Bank), of $1.09 (now raised to $1.90 to account for inflation) person per day.
    • The PLFS also estimates the incidence of poverty. It also collects the household monthly per capita consumption expenditure data based on the Mixed Recall Period methodology.

    Stunning rise in Poverty

    • It is stunning fact that for the first time in India’s history of estimating poverty, there is a rise in the incidence of poverty since 2011-12.
    • The important point is that this is consistent with the NSO’s CES data for 2017-18 that was leaked data.
    • The leaked data showed that rural consumption between 2012 and 2018 had fallen by 8%, while urban consumption had risen by barely 2%.
    • Since the majority of India’s population (certainly over 65%) is rural, poverty in India is also predominantly rural.
    • Remarkably, by 2019-20, poverty had increased significantly in both the rural and urban areas, but much more so in rural areas (from 25% to 30%).

    Why is it intriguing?

    • It is important here to recall two facts: between 1973 and 1993, the absolute number of poor had remained constant (at about 320 million poor), despite a significant increase in India’s total population.
    • Between 1993 and 2004, the absolute number of poor fell by a marginal number (18 million) from 320 million to 302 million, during a period when the GDP growth rate had picked up after the economic reforms.
    • It is for the first time in India’s history since the CES began that we have seen an increase in the absolute numbers of the poor, between 2012-13 and 2019-20.
    • The second fact is that for the first time ever, between 2004-05 and 2011-12, the number of the poor fell, and that too by a staggering 133 million, or by over 19 million per year.

    Fuss over GDP growth

    • This was accounted for by what has come to be called India’s ‘dream run’ of growth: over 2004 and 2014, the GDP growth rate had averaged 8% per annum — a 10-year run that was not sustained thereafter.
    • By contrast, not only has the incidence of poverty increased since then, but the absolute increase in poverty is totally unprecedented.

    Reasons behind this Pauperization

    The reasons for increased poverty since 2013 are not far to seek:

    • GST: While the economy maintained some growth momentum till 2015, the monumental blunder of demonetization was followed by a poorly planned and hurriedly introduced GST.
    • Fall in investments: None of the engines of growth was firing after that. Private investment fell from 31% inherited by the new government, to 28% of GDP by 2019-20.
    • Fall in exports: Exports, which had never fallen in absolute dollar terms for a quarter-century since 1991, actually fell below the 2013-14 level ($315 billion) for five years.
    • Unemployment: Joblessness increased to a 45-year high by 2017-18 (by the usual status), and youth (15-29 years of age) saw unemployment triple from 6% to 18% between 2012 and 2018.
    • Fall in wages: Real wages did not increase for casual or regular workers over the same period, hardly surprising when job seekers were increasing but jobs were not at anywhere close to that rate.
    • Pandemic: Poverty is expected to rise further during the COVID-19 pandemic after the economy has contracted.

    Hence, consumer expenditure fell, and poverty increased.

    Back2Basics:

    Poverty Lines in India: Estimations and Committees

  • Telangana’s Dalit Bandhu Scheme

    Telangana CM has recently been informed to spend Rs 80,000 crore to Rs 1 lakh crore for Dalit Bandhu Scheme, touted as the country’s biggest direct benefit transfer scheme, to empower Dalits across the state.

    Dalit Bandhu Scheme

    • Dalit Bandhu is the latest flagship program of the Telangana government.
    • It is envisioned as a welfare scheme for empowering Dalit families and enable entrepreneurship among them through a direct benefit transfer of Rs 10 lakh per family.
    • This is, once implemented on the ground, going to be the biggest cash transfer scheme in the country.
    • Apart from monetary assistance, the government plans to create a corpus called the Dalit Security Fund permanently to support the beneficiary in the event of any adversities.
    • This fund will be managed by the district collector concerned, along with a committee of beneficiaries.
    • The beneficiary would be issued an identity card with an electronic chip, which will help the government monitor the progress of the scheme.

    Where is the scheme being implemented?

    • The CM decided to implement it on a pilot basis in the Huzurabad Assembly constituency.
    • Based on the experiences of implementation in Huzurabad, the scheme will be rolled out across the state in a phased manner.
    • Officials were asked to visit Dalit colonies and interact with Dalit families to find out their views and opinions before preparing guidelines for the scheme.
    • The pilot project will focus on monitoring the implementation of the scheme, evaluating the results, and also creating a safety fund for the beneficiaries with the government’s participation.

    How is Dalitha Bandhu being implemented?

    • The CM has ensured that the Dalit Bandhu is free.
    • The governments in the past came out with some schemes and asked for bank guarantees.
    • This is not a loan. There is no need to repay it. There is no chance of any involvement of middlemen.
    • To promote Dalit entrepreneurship, the government has decided to start a system of reservations for Dalits in sectors where the government issues licenses.
    • The government will provide reservations for Dalits in issuing licenses for wine shops, medical shops, fertilizer shops, rice mills, etc.

  • Microfinance institutions

    The microfinance institutions (MFI) faced several restrictions by RBI which were not applicable to banks, NBFC and small finance banks. This denied the MFIs level playing field. A recent Consultative document by the RBI frees MFIs from such restrictions. The article explains this in detail.

    Background of regulation of MFI’s  by RBI

    • RBI first allowed informal self-help groups to open savings accounts in banks and bank lending to these groups in 1991-92.
    • In 2000, RBI permitted all types of institutions to offer microcredit and bank loans extended to these institutions for on-lending were treated as part of the priority sector lending.
    • Beyond these, RBI was unwilling to bring in any regulations on the plea that as long as these are not deposit-taking institutions there is no need to regulate them. 
    • That was the stand of various RBI-appointed committees too, including the Vyas Committee of 2004.
    • Based on the Malegam Committee recommendations, RBI came out with detailed guidelines for microfinance institutions (not the microfinance sector) in 2011.
    • These guidelines introduced a new category of NBFCs, viz NBFC-MFIs (microfinance institutions).
    • It also set norms for income criteria for clients of MFIs, repayment period, borrower loan limits, interest rate norms and caps, limits on a number of lenders to a borrower and a host of other norms and criteria.

    How these norms created the issue of a level playing field?

    • After 2015-16, the entry of small finance banks, eight of which were MFIs, into the microfinance space started to create issues.
    • MFIs discovered to their dismay that while they had to adhere to a set of regulations, it was a free-for-all for non-MFIs (banks, SFBs and NBFCs).
    • The main issue was that non-MFIs need not adhere to the norm of number of lenders (two in the case of NBFC-MFIs) and per-borrower loan limits.
    • It prompted non-MFIs to target borrowers identified and nurtured by MFIs with higher loan amounts, leading to high levels of borrower indebtedness.
    • In addition, the interest rate cap (2.75 times the base rate declared quarterly by RBI) was squeezing the margins of small and medium MFIs, as none of them get loans from the biggest banks.

    Way forward

    • The recent Consultative Document by RBI frees MFIs from the restriction imposed by the 2011 regulations and gives them a level-playing field.
    • Another important feature for MFIs is that by doing away with the 50% income generation loans criteria and the repayment period norms.
    • RBI is facilitating credit flow into lifecycle needs like housing, water sanitation, education, health, renewable energy, etc, which are now as important as income generation.
    • On the interest rate front, initially, some upward correction could be there by medium and small MFIs based on their borrowing rates.
    • The document enhances the role for the regulator as the adoption of Board-approved policies to determine the norms of household indebtedness and to fix a transparent rate of interest by each institution and their implementation need a rigorous supervisory oversight

    Conclusion

    Providing a level playing field to the MFI is critical to their development, the document by RBI rightly does that. It will help in providing credit to those who remain outside the formal banking network.

    Source:

    https://www.financialexpress.com/opinion/unfettering-microfinance-recent-rbi-consultative-document-frees-mfis-from-shackles-imposed-by-2011-regulations/2277925/

  • World Employment and Social Outlook: Trends 2021

    The report titled World Employment and Social Outlook was recently released by the International Labour Organization (ILO).

    About the report

    • The report analyses the impact of the crisis on the labour market across the world.
    • It offers projections for recovery and gives details of the unequal impact of the crisis on different groups of workers and enterprises and calls for a broad-based human-centred recovery.

    Findings of the report

    • There has been an unprecedented disruption to labour markets worldwide due to the COVID-19 pandemic, which has affected the lives of the younger generation and brought about disruption to their education.
    • Also made it more difficult for them to enter the labour market and hold on to their jobs.
    • The pandemic worsened long-standing inequalities with many women workers dropping out of the labour force.
    • For informal and low-skilled workers, working from home was not an option.
    • Many had to face huge health risks to keep their jobs, often with no access to social security benefits.

    Major highlights of the report

    • Global unemployment is expected to be at 205 million in 2022, surpassing the 2019 level of 187 million.
    • The jobs shortfall induced by the novel coronavirus disease (COVID-19) pandemic was 75 million in 2021 and is expected to be 23 million in 2022.
    • An estimated additional 108 million workers and their family members now live in poverty.

    The long road to recovery

    • The recovery would remain fragile in many countries due to the uneven rollout of vaccination campaigns and higher levels of public debt and deficits that would make it difficult to tackle the effects of the pandemic.
    • There is an urgent need to build back better — create productive employment opportunities and foster long-term labour market prospects for the most vulnerable.
    • There is a need to strengthen social protection schemes like the MGNREGS in India and make sure nobody is left behind.
    • This would require strong institutions and social dialogue and strong international cooperation to fight global disparities.

  • COVID & Economic Inequality

    Pandemic hit hard the lives, livelihood and the economy. It has also worsened income inequality. The article deals with the issues of impacts of pandemic and suggests ways to revive growth the deal with income inequality.

    Need to address growth and inequality issue

    • The second wave of the pandemic is spreading to rural areas also.
    • It is known that rural areas have poor health infrastructure.
    • Similar to the first wave, inequalities are also increasing during the second wave.
    • The country has to address the issue of rising inequalities for achieving higher sustainable growth and the well-being of a larger population.
    • According to the State of Working in India 2021 report of the Azim Premji University, the pandemic would push 230 million people into poverty.
    • CMIE data shows a decline in incomes and rising unemployment during the second wave.
    • U-shaped impact: The recent RBI Bulletin says that the impact of the second wave appears to be U-shaped.
    • In the well of the U are the most vulnerable — blue collar groups who have to risk exposure for a living and for rest of society to survive.

    K-shaped recovery and rising inequality

    • The recovery seemed to be K-shaped during the first wave.
    • The share of wages declined as compared to that of profits.
    • A large part of the corporate sector managed the pandemic with many listed companies recording higher profits.
    • On the other hand, the informal workers including daily wage labourers, migrants, MSMEs etc. suffered a lot with loss of incomes and employment.
    • The recovery post the second wave is also likely to be K-shaped with rising inequalities.

    Policies needed for higher growth and reduction in inequality

    1) Vaccination and healthcare facilities

    • An aggressive vaccination programme and improving the healthcare facilities in both rural and urban areas is needed.
    • Reducing the health crisis can lead to an economic revival.
    • Vaccine inequality between urban and rural areas has to be reduced.
    • The crisis can be used as an opportunity to create universal healthcare facilities for all, particularly rural areas.
    • Other states can learn from Kerala on building health infrastructure.

    2) Investment in infrastructure

    • The budget offered some good announcements relating to capital investment in infrastructure.
    • The Development Financial Institution (DFI) for funding long-term infrastructure projects is being established.
    • This can revive employment and reduce inequalities.
    • The government has to fast track infra investment.

    3) Safety net for vulnerable

    • The informal workers and other vulnerable sections including MSMEs have been dealt back-to-back blows due to the first and second waves.
    • A majority of workers have experienced a loss of earnings.
    • Therefore, the government has to provide safety nets in the form of free food grains for six more months, expand work offered under MGNREGA in both rural and urban areas.
    • The government also need to undertake a cash transfer to provide minimum basic income.

    Policies for growth

    • Focus on demand: On economic growth, the RBI Bulletin says that the biggest toll of the second wave is in terms of a demand shock as aggregate supply is less impacted.
    • Investment: In the medium term, the investment rate has to be increased from the present 30 per cent of GDP to 35 per cent and 40 per cent of GDP for higher growth and job creation.
    • Export: It is one of the main engines of growth and employment creation.
    • There is positive news on exports as the global economy is reviving.
    • Protectionist trade policy: In recent years India’s trade policy has become more protectionist and the country has to reduce import tariff rates.
    • Role of fiscal policy: In the near term, fiscal policy has to play a more important role in achieving the objectives of growth, jobs and equity by expanding the fiscal space by restructuring expenditure, widening the tax base and increasing non-tax revenue.

    Consider the question “Two waves of the Covid pandemic have worsened the inequality. India has to address the issue of rising inequalities for achieving higher sustainable growth and the well-being of a larger population. Suggest the policies that India should follow for higher growth and reduction in inequality.”

    Conclusion

    Vaccination, expansion in rural healthcare and cash transfers should be part of the strategy to boost demand and address inequalities.

  • Laws that have distorted agriculture and labour markets need to go

    The article suggests the two steps to ensure growth while protecting the poor. The first is the creation of social safety net and next is factor market reforms.

    Issue of farmers’ income

    • An Indian engaged in industry or any aspect of the services sector (this includes a waiter in a restaurant) earns more than an average farmer.
    • This is an anomaly.
    • So, despite all the pro-farmer laws and protection, why do farmers in India earn less?
    • A recent study by RBI showed that across all crops, the farmgate price is 40-60 per cent less than the consumer price.
    • The real challenge is how to encourage growth while protecting the poor.

    Encouraging growth while protecting the poor: 2 steps

    • 1) A social safety net needs to be created to provide direct income transfers to the vulnerable.
    • 2) Factor markets involving labour and agricultural land need to be reformed to ensure productivity-enhancing growth.
    • Only way to ensure growth which benefits the poor is through employment creating in the manufacturing and services sector.

    1) Social safety nets in India

    • Despite a narrow tax base, India has created a comprehensive social safety net, which can cushion growth-enabling market reforms.
    • Accurate targeting under India’s Food Security Act to the bottom 67 per cent through Aadhaar identification and digital ration cards paired with E-POS machines has considerably reduced the leakage of subsidised grains.
    • The National Social Assistance programme intends to provide direct income support to over 40 million elderly landless agricultural workers, poor women-headed households and families with physically-challenged children.
    • India also provides income support annually to 145 million farmers, paying out Rs 75,000 crore.
    • This benefits all farmers while MSP benefits only 6 per cent of farm produce.

    2) Factor market reforms

    • If state support for social safety net has to become sustainable, wide-ranging growth, which will broaden the tax base, is essential.
    • India’s growth itself can be designed to reduce the number of people who need state support.
    • The agriculture and labour reforms recently passed create the conditions for productivity-enhancing growth, benefiting millions of small farmers and unorganised workers.

    Let us take a look at what the farm laws achieve and how they will change the status quo

    1) Amendment to Essential Commodities Act

    • The stock limits under the Essential Commodities Act do not enable large tur or moong and rice processors to procure in bulk for their entire season’s processing requirements.
    • This restricts large-scale processing units which can run throughout the non-harvest season.
    • This draconian anti-farmer rule has now been done away with.
    • This will enable the expansion of agro-processing and supply chains.
    • A larger share of the produce procured for agro-processing increases its shelf life, enabling the farmer to retain a greater value.
    •  30-40 per cent of the post-harvest value, particularly in vegetables and fruits, is lost due to inadequate storage, processing and transportation facilities.
    • Removal of stock limits and the accompanying contract farming act will bring in investments to tap the wasted resource.

    2) APMC regulation

    • The second law, removes another distortion: Only traders registered in APMCs can buy farmers produce.
    • Even though conditions for perfect markets exist, the APMC regulation creates this bottleneck.
    • Intermediaries extract a greater share of value as they are price makers while farmers are price takers.
    • This situation is further aggravated as farmers are restricted to selling within the taluka boundaries or limits of the APMC, and if they have to sell in other APMC, they have to pay the APMC tax.
    • The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill 2020 confines the authority of the APMC to levy fees and give trader licences within the boundary of the market yard.
    • Farmers will continue to have the option to sell in APMCs but any private market/non-APMCs registered trader can also set up an agricultural market and compete with APMCs to buy the same produce.
    • Karnataka implemented the Uniform Market portal in 2014, enabling trade across taluka APMC limits without APMC fees.
    • An analysis by researchers at the MIT Sloan School of Management has shown that prices of many agricultural goods increased by 3.5 to 5.1 per cent.
    • Significantly, profit margins of small farmers increased by more than 36 per cent.

    Labour reforms

    • Apart from agriculture, the abundance of labour is the second greatest comparative advantage of India.
    • However, multiple labour laws instead of encouraging employment, have created disincentives for job creation due to high costs of compliance.
    • While India’s employment elasticity with respect to GDP growth is only 0.2, China’s is at 0.44. Even for Bangladesh, the elasticity is 0.38.
    • India’s path-breaking labour reforms leverage the true comparative advantage of the country’s factor endowments to promote growth with higher employment elasticity.
    • The old labour laws protected existing jobs at the cost of preventing new job creation through creative destruction.
    • Bangladesh has shown the way to increase formal jobs by legalising fixed-term employment and banning union activity in FDI industries.
    • Raising the threshold for seeking prior permission for laying off workers will enable capital and land locked in sunset industries to move freely to new sunrise industries.

    Consider the question “An Indian engaged in industry or any aspect of the services sector earns more than an average farmer. What are the factors responsible for this anomaly? Suggest ways to achieve growth that could ensure sustainable safety net?”

    Conclusion

    The need of the hour is to continuously communicate with those unhappy with the reforms to explain how the current status quo is hurting farmers and informal workers.