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GS Paper: Indian Economy

  • Liberalizing Trade in Agriculture Machinery

    Context

    On July 15, the Centre issued a notification moving power tillers (PT) and their components from the “free” to “restricted” category indicating a clear intent to provide protection to the domestic industry.

    How heterodox opening policies affects farming

    Heterodox opening policies, being open on the export side while being closed on the import side, have long-term unintended consequences.

    • Productivity loss: One impact of heterodox policies is subpar mechanisation and productivity loss in agriculture.
    • India’s mechanisation coverage is around 40-45 per cent, compared to 90 per cent in developed countries.
    • At present, only Punjab, Haryana and western UP have mechanisation rates between 70 and 80 per cent whereas in eastern and southern states it is between 35 and 45 per cent, with even smaller coverage in North-Eastern states.
    • Comparatively high tariffs on agricultural machinery, placement under restricted trade hits the cog in the wheel of mechanisation.
    • Uncertainty and lower trade: A shift to restricted category and frequently changing tariffs engenders uncertainty and lowers trade.
    • Disincentivise innovation: Such policies also disincentivises domestic machine manufacturers to invest and innovate — the perils of protection.

    What India can learn from Bangladesh on farm mechanisation

    • Starting lower, Bangladesh overtook India in mechanisation by 2006.
    • A perfect example of orthodox opening in the late 1980s, Bangladesh removed import bans on Power Tiller and other machinery like diesel engines.
    • By 1995, PT were made duty free and credit support was provided for purchases.
    • Studies have credited PT in increasing the rice yield in Bangladeh, which grew 2.1 per cent annually from 1990, compared to 1.6 per cent between 1960 and 1989.

    Way forward

    If productivity in agriculture and incomes of farmers were to go up significantly, Indian agriculture must hit the mechanisation frontier.

    • Liberal and Stable trade policies: Liberal and stable trade policies will increase access, competition will expand varieties and bring down the prices.
    • New trade economics teaches us that farmers would be successful in trading or accessing markets only when highly productive, which beckons large scale and intensive mechanisation.
    • Credit support: Bangladesh also shows the role of complementary policies such as credit support.
    • Once the farmers achieve sufficiently high productivity, they can access markets and even integrate with global value chains (GVC) if allowed by policy as intended in the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020.

    Conclusion

    Liberal trade in machinery presents an opportunity to access distant and international markets. The key is to be both ways open.

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  • What India’s informal sector needs right now

    Context

    Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts.

    Significance of informal sector

    • India’s large informal sector, which employs around 80 per cent of the labour force and produces about 50 per cent of GDP.
    • Of the 384 million employed in the informal sector, half work in agriculture, living mostly in rural India, and the other half are in non-agricultural sectors.
    • Of those, about half live in rural India and the remaining in urban areas.
    • Ignoring problems in the informal sector can be costly as it can lead to job and wage losses, higher inflation and even risk the livelihood of migrant workers.

    Impact of pandemic on informal sector workers

    • Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts.
    • Such disruptions can be inflationary too.
    • India was one of the few countries with high inflation throughout pandemic-stricken 2020.
    • The 40 per cent in the informal non-agricultural sector is the most affected by the pandemic.
    • These workers are most vulnerable as they have borne the brunt of the economic disruption that the pandemic has unleashed.

    Impact on the informal sector

    • Nominal GDP growth has been a good indicator of the formal sector corporate sales.
    • But during the pandemic and also during events like demonetisation, formal corporate sales have exceeded nominal GDP growth.
    • This means that some demand, which was previously supplied by the informal sector, began to be supplied by the formal sector.
    • Several surveys over this time also show a rise in urban unemployment and self-employment, with the latter category seeing the highest earnings loss.

    Way forward

    • Formalisation on the back of policy changes: While traditionally associated with efficiency gains, if it comes at the cost of putting small informal firms out of business.
    • Formalisation that comes only on the back of external pressure or leads to deep distress in the informal sector, may not be sustainable.
    • By contrast, formalisation that happens on the back of policy changes that help small and informal firms grow over time into medium or larger formal sector firms is more sustainable.
    • Social welfare scheme: We need protection for informal sector workers via social welfare schemes so that the disruption they are facing does not lead to a permanent fall in demand.
    • There is a case for remaining generous with programmes such as the rural MGNREGA scheme for longer.
    • India doesn’t have an MGNREGA equivalent urban social welfare scheme.
    • Reforms: Steps to promote reforms that are needed to help small businesses grow are critical.
    • For example, lowering the regulatory burden associated with growing firms.

    Conclusion

    Bringing the informal sector to the forefront of policy decisions can lead to a significant payoff for the entire economy for years to come.

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  • Emergency award

    Context

    The judgment delivered by the Supreme Court in the legal tussle between Amazon and the Future Group has laid the foundation for recognition and enforcement of emergency awards under the Indian arbitration law.

    What is an emergency award?

    • It is an award rendered by an emergency arbitrator, appointed prior to the formal constitution of an arbitral tribunal by an arbitral institution.
    • It is a recent mechanism introduced by arbitral institutions to encourage parties to seek urgent interim relief from an arbitral institution rather than from a court.
    • Many leading arbitral institutions such as SIAC, ICC, and LCIA have provisions for the appointment of an emergency arbitrator.
    • As far as India is concerned, the 246th Law Commission Report had recommended an amendment in the Arbitration and Conciliation Act, 1996 (‘Indian Arbitration Act’) to grant statutory recognition to an emergency award.
    • Some of the indigenous arbitral institutions though, such as the Delhi International Arbitration Centre, have made provisions for emergency arbitration.

    What is the tussle between Amazon and Future Group about?

    • In August 2020, Biyani Group and the Reliance Industries Group decided to amalgamate Future Retail Ltd. (FRL) with Reliance Industries and complete disposal of its retail assets in favor of the Group.
    • However, prior to the said transaction, Amazon had invested an amount of Rs 1,431 crores in Future Coupons Pvt. Ltd. (FCPL) based on rights granted to FCPL with regard to FRL.
    • So, Amazon initiated arbitration against the Biyani Group, including FRL, under Singapore International Arbitration Centre (SIAC) Rules.
    • Amazon made an application seeking urgent interim reliefs under SIAC rules and the appointment of an emergency arbitrator.
    • The emergency arbitrator appointed, made an award in favor of Amazon in October 2020, restricting the Biyani Group from proceeding ahead with the disputed transaction.
    • However, the Biyani Group proceeded with the disputed transaction, construing the emergency award as a nullity.

    Issue of enforcement of the emergency award in India

    • Amazon filed an application before the Delhi High Court for enforcement of the award.
    • The court had the task of answering two novel legal questions —
    • 1) Whether the emergency award is an interim order under section 17(1) of the Indian Arbitration Act,
    • 2) Whether it can be enforced under section 17(2).
    • The Delhi High Court gave judgment in March 2021 against the Biyani Group.
    • The case eventually reached the Supreme Court.
    • Party autonomy: The Supreme Court judgment emphasized party autonomy in arbitration, which includes the right of the parties to choose institutional rules as the governing rules of arbitration.
    • Once chosen, the parties are bound by such rules.
    • The Supreme Court also held that the Indian Arbitration Act does not prohibit the parties from agreeing to a provision providing for an emergency arbitrator.
    • The Supreme Court also held that the term “during the arbitral proceedings” is wide enough to encompass emergency arbitration proceedings.
    • The Court ultimately held the emergency award to be an interim order under section 17(1) of the Indian Arbitration Act and enforceable under section 17(2).

    Significance of the judgment for arbitration in India

    • This judgment has contributed to the development of Indian arbitration law.
    • In the broader scheme of things, it is a victory for Indian arbitration and a sigh of relief for arbitral institutions.

    Conclusion

    The judgment is a reaffirmation of the fact that India is gradually stepping towards being an “arbitration-friendly” jurisdiction.

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  • Getting the perfect haircut from the IBC

    Understanding the role of IBC 2016

    • For reasons sometimes a company may experience stress, that is, is unable to repay the debt in time — implying that it has assets less than claims against it.
    • So, when a company has inadequate assets, the claim of an individual creditor may be consistent with its assets while claims of all creditors put together may not.
    • In such a situation, creditors may rush to recover their claims before others do, triggering a run on the company’s assets.
    • The IBC provides for reorganisation that prevents a value-reducing run on the company.
    • It aims to rescue the company if its business is viable or close it if its business is unviable, through a market process.
    • Restructuring: The claims of creditors are restructured, which may be paid to them immediately or over time.
    •  In case of closure, the assets of the company are sold, and proceeds are distributed to creditors immediately as per the priority rule.
    • Reorganisation by financial creditor: The IBC entrusts the responsibility of reorganisation to financial creditors as they have the capability and the willingness to restructure their claims.

    Why so much variation in haircut?

    • Where the company does not have adequate assets, realisation for financial creditors, through a rescue, may fall short of their claims known as haircut.
    • The IBC process yields a zero haircut (100% recovery of claimed amount) in one case and 100 per cent haircut (i.e. 0% recovery) in another.
    • Factors: It depends on several factors, including the nature of business, business cycles, market sentiments, and marketing effort.
    • It critically depends on at what stage of stress, the company enters the IBC process.
    • If the company has been sick for years, and its assets have depleted significantly, the IBC process may yield a huge haircut or even liquidation.
    • A haircut is typically the total claims minus the amount of realisation/amount of the claims.
    • But this formulation may not tell the complete story.
    • The realisation often does not include the amount that would be realised from equity holding post-resolution, and through the reversal of avoidance transactions and the insolvency resolution of guarantors — personal and corporate.
    • It also does not include realisations made in other accounts.
    • The amount of claim often includes NPA, which may be completely written off, and the interest on such NPA.
    • These understate the numerator and overstate the denominator, projecting a higher haircut.

    Significance of IBC

    • A haircut should be seen in relation to the assets available and not in relation to the claims of creditors.
    • The market offers a value in relation to what a company brings on the table, not what it owes to creditors.
    • Value maximisation: So, the IBC maximises the value of existing assets, not of assets that probably existed earlier.
    • Market determined value: The IBC enables and facilitates market forces to resolve stress as a going concern.
    • Resolution applicants, who have many options for investment, including in stressed companies, compete to offer the best value.
    • If the best value offered by the market is not acceptable to creditors, the company is liquidated.
    • Maximum realisation: In addition to rescuing the company, the IBC realises, of the available options for creditors, the highest in percentage terms.

    Conclusion

    It is a tool in the hands of stakeholders to be used at the right time, in the right case, in the right manner.

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    Back2Basics: Avoidable Transactions in IBC 2016

    • The UNCITRAL Legislative Guide on Law of Insolvency defines avoidance proceedings as “provisions of the insolvency law that permit transactions for the transfer of assets or the undertaking of obligations prior to insolvency proceedings to be cancelled or otherwise rendered ineffective and any assets transferred, or their value, to be recovered in the collective interest of creditors.”
    • It is very important for the Resolution Professional (RP) or the liquidator to identify such transaction and file applications to avoid it so that creditors can collect their claims.
    • The Insolvency and Bankruptcy Code, 2016 (IBC) contains four types of avoidable transactions- preferential, undervalued, defrauding creditors and extortionate transactions.
    • Usually, the avoidable transactions should be made within the prescribed relevant time or look back period.
    • Look back period is the relevant time up to which an RP or a liquidator can go back to scrutinize an expected avoidable transaction.

  • [pib] International Bullion Exchange

    The International Financial Services Centres Authority (IFSCA) has inaugurated the pilot run/soft launch of the International Bullion Exchange scheduled to go live on October 1, 2021.

    What is Bullion?

    • Bullion is gold and silver that is officially recognized as being at least 99.5% and 99.9% pure and is in the form of bars or ingots.
    • Bullion is often kept as a reserve asset by governments and central banks.
    • To create bullion, gold first must be discovered by mining companies and removed from the earth in the form of gold ore, a combination of gold and mineralized rock.
    • The gold is then extracted from the ore with the use of chemicals or extreme heat.
    • The resulting pure bullion is also called “parted bullion.” Bullion that contains more than one type of metal, is called “unparted bullion.”

    The Bullion Market

    • Bullion can sometimes be considered legal tender, most often held in reserves by central banks or used by institutional investors to hedge against inflationary effects on their portfolios.
    • Approximately 20% of mined gold is held by central banks worldwide.
    • This gold is held as bullions in reserves, which the bank uses to settle the international debt or stimulate the economy through gold lending.
    • The central bank lends gold from their bullion reserves to bullion banks at a rate of approximately 1% to help raise money.
    • Bullion banks are involved in one activity or another in the precious metals markets.
    • Some of these activities include clearing, risk management, hedging, trading, vaulting, and acting as intermediaries between lenders and borrowers.

    What is International Bullion Exchange?

    • This shall be the “Gateway for Bullion Imports into India”, wherein all the bullion imports for domestic consumption shall be channelized through the exchange.
    • The exchange ecosystem is expected to bring all the market participants to a common transparent platform for bullion trading.
    • It would provide efficient price discovery, assurance in the quality of gold, enable greater integration with other segments of financial markets and help establish India’s position as a dominant trading hub in the World.

    Answer this PYQ:

    What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

    1. To bring the idle gold lying with India households into the economy
    2. To promote FDI in the gold and jewellery sector
    3. To reduce India’s dependence on gold imports

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”5rcyrnbgpy” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

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  • Why banks want inspection reports by RBI to be kept confidential?

    The contentious issue of whether banks should disclose inspection reports by the Reserve Bank of India (RBI) is back in the news once again after a division bench of the Supreme Court referred writ petitions filed by banks to another bench for reconsideration.

    What is RBI’s inspection on banks?

    • The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect and supervise commercial banks.
    • These powers are exercised through on-site inspection and off-site surveillance.
    • RBI carries out dedicated and integrated supervision overall of credit institutions, i.e., banks, development financial institutions, and non-banking financial companies.
    • The Board for Financial Supervision (BFS) carries out this function.
    • Banks currently disclose the list of wilful defaulters and names of defaulters against whom they have filed suits for loan recovery.

    Note: CAMELS is an international rating system used by regulatory banking authorities to rate financial institutions, according to the six factors represented by its acronym. The CAMELS acronym stands for “Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity.”

    Why in news now?

    • In 2015, the Supreme Court had come down on the RBI for trying to keep the inspection reports and defaulters list confidential.
    • This was aimed for the public disclosure of such reports of the RBI, much against the wishes of the banking sector.
    • The SC had said the RBI has no legal duty to maximize the benefit of any public sector or private sector bank, and thus there is no relationship of ‘trust’ between them.
    • It added that the RBI was duty-bound to uphold the public interest by revealing these details under RTI.

    What is the issue?

    • The RBI was allowed to make such reports public following the Supreme Court order.
    • The SC had wanted full disclosure of the inspection report.
    • However, the court agreed that only some portions on bad loans and borrowers would be made public.
    • Banks have been refusing to disclose inspection reports and defaulters’ lists.

    Issues with report publication

    • Bank defamation: As banks are involved in dealing in money, they fear any adverse remarks — especially from the regulator RBI — will affect their performance and keep customers away.
    • Trust of the account holder: Banks are driven by the “trust and faith” of their clients that should not be made public.
    • The invalidity of RTI: On the other hand, private banks insisted that the RTI Act does not apply to private banks.
    • Right to Privacy: Banks also argued that privacy is a fundamental right, and therefore should not be violated by making clients’ information public.

    Why are banks against disclosing inspection reports?

    • Many feel that the RBI’s inspection reports on various banks, with details on alleged malpractices and mismanagement, can open up a can of worms.
    • As these reports have details about how the banks were manipulated by rogue borrowers and officials, banks want to keep them under wraps.
    • Obviously, banks don’t want inspection reports and defaulters’ lists to be made public as it affects their image.
    • Customers may also keep out of banks with poor track records.

    Try this PYQ now:

    Q.In the context of the Indian economy non-financial debt includes which of the following?

    1. Housing loans owed by households
    2. Amounts outstanding on credit cards
    3. Treasury bills

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 1 and 2 only

    (c) 3 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”76mcrds1cs” question=”Please leave a feedback on this” opened=”1″]Post your answers here (You need to sign-in for that).[/wpdiscuz-feedback]

  • Startup ecosystem can help India become powerhouse of global economy

    Context

    With 62 per cent of the population in the working-age group and 54 per cent below the age of 25, we have the advantage of leveraging the skill and ability of our youth to drive the nation forward through productive output and innovation.

    Significance of startup ecosystem in the country

    • In 2021 alone, Indian startups have so far raised upward of $20 billion in funding.
    • Today, India is home to more than 40,000 startups and is building a robust tech and internet infrastructure.
    • The last decade-and-a-half has witnessed a significant change in the landscape — from the founding of new startups, to global investor interest, to the advances made in infrastructure and policies.
    • Global investors too are realising the potential upside in India’s huge, under-penetrated market as the country steadily makes a place for itself as a leading R&D hub for many Silicon Valley companies.
    • Amid the Covid-19 pandemic, Indian startups have rapidly innovated to provide indigenous, tech-enabled solutions to combat challenges from testing kits and ventilators to remote monitoring, and preventive technologies, as well as innovations in supply chain management, logistics, and education.

    Factors driving startup economy in India

    • The steady rise of Indian IT companies in the 2000s, a large talent pool of a skilled workforce, increased expendable income, and rising capital inflows have collectively contributed in large part.
    • Young generation: Moreover, the ability of the young generation to take risks, move fast, and disrupt things without fear, has become our biggest asset today.
    • Increasing internet use: In the next five years and likely to have an estimated 850 million internet users by 2030, the country stands at the cusp of unprecedented economic growth.

    How it helps economy

    • The proliferation of this startup economy has brought with it new business opportunities, innovation, tech-centric approaches and job creation across sectors.
    • A mature startup ecosystem, with seasoned entrepreneurs and technology-led solutions, paves the way for innovation and expanding its global footprint.
    • While value creation lies at the centre of entrepreneurship, Indian startups are also taking big strides in building synergies and partnerships with global entities, further demonstrating the evolution of the startup ecosystem and its appetite for innovation, collaboration and disruption.
    •  In fact, one of the paradigm shifts brought about through technology during the pandemic has been systemic shift to online education and remote learning at scale.
    • Solutions built by Indian startups saw widespread adoption not just domestically but also on a global scale, firmly establishing the country as a cornerstone of tech and innovation in the world.

    Suggestions

    • Educations and reskilling: In order to transition beyond the current capabilities and achieve the demographic dividend, education, and reskilling, and upskilling of our workforce is crucial.
    • Policy environment: Apart from the domestic policy environment, the global environment and technological advances are also changing, and it is imperative that India is prepared for this revolution.
    • Foster entrepreneurship: Apart from policy-level decisions that promote entrepreneurship, the onus is also on India’s corporate sector to foster entrepreneurialism, and create synergies to build impactful technology solutions, sustainable and resource-efficient growth.
    • Inclusion and sustainability: As country stands at the cusp of unprecedented economic growth, speed, inclusion, and sustainability are key elements in this mission.
    • Tap the potential of rural and semi-urban India: The collective future efforts of the public and private sectors to improve physical and digital connectivity will also help unlock the untapped potential of rural and semi-urban India to truly lead Industry 4.0 and beyond.
    • Focus on goals of national importance: In view of achieving this transformation at scale, the Indian startup ecosystem must focus on developing solutions that allow businesses in key sectors to meet goals of national importance.

    Conclusion

    Coupled with the nation’s focus on strengthening digital infrastructure in healthcare and education, and boosting employment in manufacturing, there is little doubt that India@100 will be a powerhouse of the global economy.

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  • Positive Pay System for high-value cheques

    Banks have been informing customers about making mandatory, the positive pay system, a process of reconfirming the key details of high-value cheques.

    What is the Positive Pay System?

    • The Positive Pay System, developed by the National Payments Corporation of India, is a process of reconfirming the key details of large value cheques.
    • Under this system, a person issuing the high-value cheque submits certain essential details of that cheque like date, name of the beneficiary/payee amount etc. to the drawee bank.
    • The details can be submitted through electronic means such as SMS, mobile app, internet banking, ATM etc.
    • The details are cross-checked while issuing the cheque and any discrepancy is flagged.

    Try answering this PYQ:

    Q.Which one of the following links all the ATMs in India? (CSP 2018)

    (a) Indian Banks’ Association

    (b) National Securities Depository Limited

    (c) National Payments Corporation of India

    (d) Reserve Bank of India

    (Note: You need to sign-in to answer this PYQ)

    [wpdiscuz-feedback id=”vno3efazhv” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

    What is the limit on the amount for the system?

    • RBI has told banks to enable the facility for all account holders issuing cheques for amounts of ₹50,000 and above.
    • It has also been said that while availing of the facility is at the discretion of the account holder, banks may consider making it mandatory in case of cheque values of ₹5 lakh and above.

    Why is this system important for customers?

    • Some banks have been telling customers that if the details of large-value cheques are not pre-registered, the cheque will be returned.
    • On issuance of a high-value cheque, customers should ensure that details are provided within the timeframe prescribed by the banks for hassle-free clearance.
    • RBI has said only cheques that are registered in the Positive Pay System will be accepted under the dispute resolution mechanism.
    • Customers would get an SMS on whether the cheque is accepted or rejected for any reason.

    What are the details of the cheque that must be submitted?

    • Account number, cheque number, date of the cheque, amount, transaction code, beneficiary name, MICR CODE.

    How can these details be submitted?

    • These details can be submitted through the respective bank’s website, internet banking, or mobile banking.
    • In case a customer does not use electronic banking services, they can submit the details by visiting bank branches.

  • Learning from China

    Context

    As we look back on our own journey after independence and feel proud of our achievements, wisdom lies in also looking around to evaluate how other nations have performed, especially those which started with a similar base or even worse conditions than us.

    How India’s neighbouring countries have performed?

    • Independent India has done better than Pakistan if measured on a per capita income basis:
    • Comparison with Pakistan: India’s per capita income stood at $1,960 (in current PPP terms, it was $6,460) in 2020, as per the IMF estimates, while Pakistan’s per capita income was just $1,260 (in PPP terms $5,150).
    • Comparison with Bangladesh: Bangladesh, whose journey as an independent nation began in 1971, had a per capita income of $2,000 (though $5,310 in PPP terms), marginally higher than India, and certainly much higher than Pakistan in 2020.
    • Comparison with China: The real comparison of India should be with China, given the size of the population of the two countries and the fact that both countries started their journey in the late 1940s.
    • By 2020, China’s overall GDP was $14.7 trillion ($24.1 trillion in current PPP terms), competing with the USA at $20.9 trillion.
    • India, however, lags way behind with its overall GDP at $2.7 trillion ($8.9 trillion in PPP terms).
    • The quality of life, however, depends on per capita income in PPP terms, with the USA at $63,420, China at $17,190 and India at $6,460.

    What made the difference between India and China?

    • India adopted a socialist strategy while China took to communism to provide people food, good health, education, and prosperity.
    • China, having performed dismally on the economic front from 1949 to 1977, started changing track to more market-oriented policies, beginning with agriculture.
    • Agriculture reforms: Economic reforms that included the Household Responsibility System and liberation of agri-markets led to an annual average agri-GDP growth of 7.1 percent during 1978-1984.
    • Reform in the non-Agri sector: Success in agriculture reforms gave political legitimacy to carry out reforms in the non-agriculture sector.
    • Manufacturing revolution: The success of reforms in agriculture created a huge demand for manufactured products, triggering a manufacturing revolution in China’s town and village enterprises.
    • Population control measures: China adopted the one-child norm from 1979-2015.
    • As a result, its per capita income grew much faster.
    • India’s attempts to control its population succeeded only partially and very slowly.
    • India’s sluggish performance when compared to China raises doubts about its flawed democratic structure that makes economic reforms and implementation of policy changes more challenging, unlike China.

    Way forward for India

    • Liberating agri-markets is part of the reform package that China followed. That’s the first lesson.
    • Increase purchasing power of rural areas: Even for manufacturing to grow on a sustainable basis, we have to increase the purchasing power of people in rural areas.
    • This has to be done by raising their productivity and not by distributing freebies.
    • Investment in various areas: Increasing productivity requires investments in education, skills, health and physical infrastructure, besides much higher R&D in agriculture, both by the government as well as by the private sector.
    • Create institutional setup: This requires a different institutional setup than the one we currently have.

    Conclusion

    India’s sluggish performance when compared to China raises doubts about its flawed democratic structure that makes economic reforms and implementation of policy changes more challenging, unlike China. But India has lessons to learn from China.

  • How e-RUPI can transform government’s welfare schemes

    Context

    Recently e-RUPI was launched by the Prime Minister.

    About e-RUPI

    • It is a digital prepaid, purpose, and person-specific payment utility. 
    • Built on the UPI platform, e-RUPI is easy to scale by the issuer.
    • At the point of presence, the verification code received by the beneficiary is shared with the service provider to authenticate and authorize the transaction: Contactless, real-time payment, and online settlement of funds into the service provider’s bank account.
    • Fourteen leading banks have already integrated it with their systems.
    • e-RUPI is almost custom-designed for school voucher programs.
    • The efficacy of these programs is well established in many countries. 

    Advantages

    The adoption of e-RUPI in various government programs will enhance business efficiency, simplicity, transparency, and accountability in these programs.

    1) e-RUPI can make cash transfer purpose and person-specific

    • Policymakers have debated whether direct cash transfers deliver benefits more efficiently than in-kind transfers like the Public Distribution System (PDS) and fertilizers.
    • e-RUPI could break the policy logjam with the following advantages:
    • 1) It will make cash transfers purpose- and person-specific.
    • 2) Freeing them from dependence on bank accounts.
    • 3) Providing visibility from the time of issue until redemption.

    2) e-RUPI can make PDS more efficient

    • The inefficiency of PDS is rooted in high overhead costs, leakages, exclusion, and inefficiencies.
    • A food-specific e-RUPI voucher will allow beneficiaries to buy rations from an outlet of their choice.
    • It will also help promote the One Nation, One Ration Card.
    • The move will also help in removing price distortion and the redemption of the voucher at market price by merchants within and outside the PDS network.

    3) Streamline fertilizer subsidy

    • e-RUPI will enable farmers to buy fertilizer at nominal prices with direct credit of the subsidy amount into the account of the authorised dealers.
    • As far back as 2011, a task force on direct transfer of subsidies on kerosene, LPG and fertilisers headed by Nandan Nilekani had suggested a roadmap for direct cash transfer of fertiliser subsidies in a phased manner.
    • The e-RUPI will allay apprehensions about creating an IT infrastructure, managing nearly 3,00,000 fertilizer sale points, the collapse of dealer network due to liquidity squeeze in the event of subsidy payments getting delayed, and a complex system of timely credit of subsidy into an estimated 129 million Aadhaar-linked bank accounts of farm households.

    4) Basic income support

    • The Covid-19 pandemic has revived interest in Universal Basic Income (UBI).
    • The lockdowns to contain the pandemic exposed the poor to acute distress, due to loss of means of livelihood.
    • e-RUPI can mitigate their stress by rapidly distributing food and cash vouchers at scale.

    5) Ayushman Bharat

    • In the Ayushman Bharat healthcare initiative beneficiaries can be given e-RUPI vouchers of designated value tenable at empanelled healthcare facilities, providing them portability and facility choice.
    • The service provider will benefit from the immediate payment.

    Way forward

    • Ownership agency: The Aadhaar experience suggests ownership must vest with a specific agency.
    • Make distribution and acceptance compatible: Making the distribution and acceptance of e-RUPI incentive-compatible is recommended, as demonstrated by the popularisation of prepaid telephony by the telecom industry.
    • Light regulation and competition promotion: Light regulation and the opening of e-RUPI to the competition will spur innovation and adoption.
    • All banks, small and big, NBFCs, non-bank PPI issuers, and telcos may be allowed to issue it later.

    Conclusion

    e-RUPI opens up a world of opportunities to the government, people, and businesses to provide, avail, and pay for services seamlessly.