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GS Paper: GS3

  • An MSP scheme to transform Indian agriculture

    Context

    The MSP must look especially into the requirements of farmers and the landless.

    Background of price stabilisation for food grain

    • The Essential Commodities Act in 1955 sought to counter price rise due to speculative private trading and then MSP in the 1960s.
    • A buffer stock policy was developed over time to involve different kinds of mechanisms such as:
      a) setting cost-based minimum procurement price, paying the difference between procurement price and market price.
      b) storing the procured surplus for sale through the Public Distribution System (PDS) at issue price, and market intervention to stabilise price when deemed necessary.
    • This task required interlinking procurement, storage and distribution with more centralised investment and control of each of these tasks.

    3 Purposes MSP could serve

    MSP could serve, in principle, three purposes:

    • Price stabilisation in the food grains market.
    • Income support to farmers, and
    • As a mechanism for coping with the indebtedness of farmers.

    Advantages of wide coverage

    • Fulfilling three objectives: In this way, the objectives of income support to farmers, price stabilization, food security, and inducing more climate-friendly cropping patterns can be combined to an extent.
    • Solution to debt problem: A real breakthrough in the recurring problem of agricultural debt can be made by the linking of selling of grains under MSP to the provision of bank credit particularly for small farmers.
    • The farmer can get a certificate selling grains at MSP which would be credit points proportional to the amount sold; this will entitle them to a bank loan as their right, and calibrate the fluctuations between good and bad harvest years by storing the certificates for later use.

    Issues with MSP in current form

    • Low accessibility and awareness of the MSP regime: A survey highlighted that 81% of the cultivators were aware of MSP fixed by the Government for different crops and out of them only 10% knew about MSP before the sowing season.
    • Arrears in payments: More than 50% of the farmers receive their payments of MSP after one week.
    • Poor marketing arrangements: Almost 67% of the farmers sell their produce at MSP rate through their own arrangement and 21% through brokers.
    • Partial coverage resulting in skewed cropping pattern: This partial MSP coverage skewed the cropping pattern against several coarse grains and millets particularly in rain-fed areas.

    Way forward

    • Flexible arrangement of MSP: Each crop within a band of maximum and a minimum price depending on harvest conditions i.e. higher price in a bad and lower price in a good harvest year in general will have its price set in the band.
    • High MSP for coarse grains: The price of some selected coarse grains can be fixed at the upper end of its band to encourage their production in rain-fed areas.

    Conclusion

    Greater coverage of all 23 crops under MSP is a way of improving both food security and income support to the poorest farmers in rain-fed regions.

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  • What is a Ratings Agency and why do they matter?

    Finance Secretary has accused rating agencies of “double standards” when assessing emerging markets and developing economies.

    What is the news?

    • Fitch, a rating agency, has termed India as the most indebted emerging market.
    • It claimed that the latest budget did not provide clarity on fiscal consolidation plans.

    What is a Rating Agency?

    • Rating agencies assess the creditworthiness or potential of an equity, debt or country.
    • Their reports are read by investors to make an informed decision on whether or not to invest in a particular country or companies in that geography.
    • They assess if a country, equity or debt is financially stable and whether it at a low/high default risk.
    • In simpler terms, these reports help investors gauge if they would get a return on their investment.

    What do they do?

    • The agencies periodically re-evaluate previously assigned ratings after new developments geopolitical events or a significant economic announcement by the concerned entity.
    • Their reports are sold and published in financial and daily newspapers.

    What grading pattern do they follow?

    • The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.
    • Standard & Poor’s accord their highest grade, that is, AAA, to countries, equity or debt with the exceedingly high capacity to meet their financial commitments.
    • Its grading slab includes letters A, B and C with an addition a single or double letter denoting a higher grade.
    • Moody’s separates ratings into short and long-term definitions. Its longer-term grading ranges from Aaa to C, with Aaa being the highest.
    • Fitch, too, rates from AAA to D, with D being the lowest. It follows the same succession scheme as Moody’s and Fitch.

    Criticism of rating agencies

    • Popular ratings agencies publicly reveal their methodology, which is based on macroeconomic data publicly made available by a country, to lend credibility to their inferences.
    • However, credit rating agencies were subjected to severe criticism for allegedly spurring the financial crisis in the United States, which began in 2017.
    • The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions.
    • They were charged for methodological errors and conflict of interest on multiple counts.

    Do countries pay attention to ratings agencies?

    • Lowered rating of a country can potentially cause panic selling or offloading of investment by a foreign investor.
    • In 2013, the European Union opted for regulating the agencies.
    • Over reliance on credit ratings may reduce incentives for investor to develop their own capacity for credit risk assessment.
    • Ratings Agencies in the EU are now permitted to issue ratings for a country only thrice a year, and after close of trade in the entire Union.

     

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  • Species in news: White-Cheeked Macaque

    In an important discovery, scientists have recorded presence of White-Cheeked Macaque (Macaca leucogenys) from central Arunachal Pradesh.

    White-Cheeked Macaque

    • White- Cheeked Macaques are distinct from other macaques found in the region by displaying white cheeks, long and thick hairs on the neck area, and a longer tail.
    • The species was discovered in 2015 by a group of Chinese scientists from the Modog region in southeastern Tibet.
    • This discovery was considered a significant breakthrough as far as primates are concerned.

    Existence in India

    • From India, the species has not been sighted or reported after a single incidence of photographic capture from Anjaw district, Arunachal Pradesh in 2015.
    • The number of these mammals reported from India stands at 434.
    • The significance of the discovery is that it marks a new addition to mammals of India.

    Protection status

    • It has NOT been yet included in the Wildlife (Protection) Act, 1972 of India.
    • The potential threat to all species of macaques in the landscape is due to hunting by locals for consumption and habitat degradation due to urbanization and infrastructure development.

     

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  • What is SWIFT?

    As tensions peaks over Ukraine the United States could exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

    What is SWIFT?

    • SWIFT is an international network for banks worldwide to facilitate smooth money transactions globally.
    • It is basically a messaging network used by banks and financial institutions globally for quick and faultless exchange of information pertaining to financial transactions.
    • The Belgium-headquartered SWIFT connects more than 11,000 banking and securities organization in over 200 countries and territories.
    • First used in 1973, it went live in 1977 with 518 institutions from 22 countries, its website states.

    What exactly is it?

    • SWIFT is merely a platform that sends messages and does not hold any securities or money.
    • It facilitates standardized and reliable communication to facilitate the transaction.

    How does it facilitate banking?

    • Each participant on the platform is assigned a unique eight-digit SWIFT code or a bank identification code (BIC).
    • If a person, say, in New York with a Citibank account, wants to send money to someone with an HSBC account in London, the payee would have to submit to his bank the London-based beneficiary’s account number along with the eight-digit SWIFT code of the latter’s bank.
    • Citibank would then send a SWIFT message to HSBC. Once that is received and approved, the money would be credited to the required account.

    How is the organization governed?

    • SWIFT claims to be neutral. Its shareholders, consisting of 3,500 firms across the globe, elect the 25-member board, which is responsible for oversight and management of the company.
    • It is regulated by G-10 central banks from Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, the UK, the US, Switzerland, and Sweden, alongside the European Central Bank.
    • Its lead overseer is the National Bank of Belgium.
    • The SWIFT oversight forum was established in 2012.
    • The G-10 participants were joined by the central banks of India, Australia, Russia, South Korea, Saudi Arabia, Singapore, South Africa, the Republic of Turkey, and the People’s Republic of China.
    • Europe, Middle East, and Africa are highest contributors to SWIFT.

    What happens if one is excluded from SWIFT?

    • US excluding Russia from SWIFT could have serious repercussions on how Russian banks carry out international financial transactions.
    • If a country is excluded from the most participatory financial facilitating platform, its foreign funding would take a hit, making it entirely reliant on domestic investors.
    • This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
    • An alternative system would be cumbersome to build and even more difficult to integrate with an already expansive system.

    Are any countries excluded from SWIFT?

    • Iranian banks were ousted from the system in 2018 despite resistance from several countries in Europe.
    • This step, while regrettable, was taken in the interest of the stability and integrity of the wider global financial system, and based on an assessment of the economic situation.

     

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  • What is a Solar Storm?

    Spacex’s newest fleet of satellites is tumbling out of orbit after being struck by a solar storm.

    Solar Storm

    • A solar storm or a Coronal Mass Ejection as astronomers call it is an ejection of highly magnetized particles from the sun.
    • These particles can travel several million km per hour and can take about 13 hours to five days to reach Earth.
    • Earth’s atmosphere protects us, humans, from these particles.
    • But the particles can interact with our Earth’s magnetic field, induce strong electric currents on the surface and affect man-made structures.

    How did they impact SpaceX satellites?

    • The issue came up due to increased drag created by the solar storm in the upper reaches of the Earth’s atmosphere.
    • These storms cause the atmosphere to warm and atmospheric density at our low deployment altitudes to increase.
    • In fact onboard GPS suggests the escalation speed and severity of the storm caused atmospheric drag to increase up to 50 percent higher than during previous launches.

    History of solar storms

    • The first recorded solar storm occurred in 1859 and it reached Earth in about 17 hours.
    • It affected the telegraph network and many operators experienced electric shocks.
    • A solar storm that occurred in 1921 impacted New York telegraph and railroad systems and another small-scale storm collapsed the power grid in Quebec, Canada in 1989.
    • A 2013 report noted that if a solar storm similar to the 1859 one hit the US today, about 20-40 million people could be without power for 1-2 years, and the total economic cost will be $0.6-2.6 trillion.

    Why are they a cause of concern?

    • The Sun goes through an 11-year cycle – cycles of high and low activity.
    • It also has a longer 100-year cycle.
    • During the last three decades, when the internet infrastructure was booming, it was a low period.
    • And very soon, either in this cycle or the next cycle, we are going towards the peaks of the 100-year cycle.
    • So it is highly likely that we might see one powerful solar storm during our lifetime.

     

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  • International Thermonuclear Experimental Reactor (ITER)

    Scientists in the United Kingdom have achieved a new milestone in producing nuclear fusion energy or imitating the way energy is produced in the Sun. The record and scientific data from these crucial experiments are a major boost for ITER.

    ITER Project

    • ITER is international nuclear fusion research and engineering megaproject, which will be the world’s largest magnetic confinement plasma physics experiment.
    • The goal of ITER is to demonstrate the scientific and technological feasibility of fusion energy for peaceful use.

    Project details

    • The project is funded and run by seven member entities—the European Union, India, Japan, China, Russia, South Korea and the United States.
    • The EU, as host party for the ITER complex, is contributing about 45 per cent of the cost, with the other six parties contributing approximately 9 per cent each.
    • Construction of the ITER Tokamak (doughnut-shaped apparatus) complex started in 2013 and the building costs were over US$14 billion by June 2015.

    How does it work?

    • Hydrogen plasma will be heated to 150 million degrees Celsius, ten times hotter than the core of the Sun, to enable the fusion reaction.
    • The process happens in a doughnut-shaped reactor, called a tokamak, which is surrounded by giant magnets that confine and circulate the superheated, ionized plasma, away from the metal walls.
    • The superconducting magnets must be cooled to -269°C (-398°F), as cold as interstellar space.
    • Scientists have long sought to mimic the process of nuclear fusion that occurs inside the sun, arguing that it could provide an almost limitless source of cheap, safe and clean electricity.
    • Unlike in existing fission reactors, which split plutonium or uranium atoms, there’s no risk of an uncontrolled chain reaction with fusion and it doesn’t produce long-lived radioactive waste.

    Back2Basics: Nuclear Fusion

    Major breakthrough on nuclear fusion energy - BBC News

    • Nuclear fusion is the process of making a single heavy nucleus (part of an atom) from two lighter nuclei. This process is called a nuclear reaction.
    • The nucleus made by fusion is heavier than either of the starting nuclei. It releases a large amount of energy.
    • Fusion is what powers the sun. Atoms of Tritium and Deuterium (isotopes of hydrogen, Hydrogen-3 and Hydrogen-2, respectively) unite under extreme pressure and temperature to produce a neutron and a helium isotope.
    • Along with this, an enormous amount of energy is released, which is several times the amount produced by fission.
    • Scientists continue to work on controlling nuclear fusion in an effort to make a fusion reactor to produce electricity.

    How it is different from nuclear fission?

    • Simply put, fission is the division of one atom into two (by neutron bombardment), and fusion is the combination of two lighter atoms into a larger one (at a very high temperature).
    • Nuclear fission takes place when a large, somewhat unstable isotope (atoms with the same number of protons but a different number of neutrons) is bombarded by high-speed particles, usually neutrons.

     

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  • Privatisation and Related issues

    Context

    There is a consensus that privatization is the panacea. Policymakers often cite the private sector’s ability to grow faster. This may not always be true.

    Meaning of Privatisation

    It means the transfer of ownership, management, and control of the public sector enterprises to the private sector. India adopted a mixed economy model, where the Public Sector Enterprises (PSEs) were established on a socialistic pattern of development. However, due to the poor performance of several PSEs and the consequent huge fiscal deficits, privatization was pursued. 

    Privatization can suggest several things-

    • Migration of something from the public sector to the private sector.
    • It is also used as a metonym for deregulation when a massively regulated private firm or industry becomes less organized.
    • Government services and operations may also be (denationalised) privatised. In these circumstances, private entities are tasked with the application of government plans or the execution of government assistance that had earlier been the vision of state-run companies. Some instances involve law enforcement, revenue collection, and prison management.
    • Privatization of the public sector companies by selling off parts of the equity of PSEs to the public is known as disinvestment.

    Objectives of Privatisation

    1. Providing strong momentum for the inflow of FDI

    2. Improving the efficiency of public sector undertakings (PSUs)

    • The efficiency of PSUs is improved by giving them the autonomy to make decisions.
    • Some companies were given special categories of Navratna and Miniratna.

    3. Reduce the fiscal burden on the government in maintaining PSEs.

    Ways of Privatisation

    Government companies are transformed into private companies in two ways.

    Transfer of ownership

    Government companies can be converted into private companies in the following two ways:

    • By the withdrawal of the government from the ownership and management of public sector companies
    • By the outright sale of public sector companies.

    Disinvestment

    • Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU.
    • The rationale for disinvestment is that the government has no business to be in a business. Thus, the government continues to disinvest in sectors where private companies are already the dominant player.

    However, there are six methods of privatization.

    • Public sale of shares
    • Public auction
    • Public tender
    • Direct negotiations
    • Transfer of control of enterprises that were controlled by the state or by municipalities
    • Lease with a right to purchase

    Benefit of Disinvestment

    • Improves corporate governance: It would result in the introduction of corporate governance in the privatized companies by freeing the PSEs from Government control and giving more scope to innovation. Enhanced corporate and with the introduction of independent Directors.
    • Develops and deepens the capital market through the spread of equity culture: The disinvestment would benefit the small investors and employees as it would lead to a wider distribution of wealth in the form of public offerings of privatized companies.
    • Disinvestment funds can be utilized for long-term goals such as:
      • Financing large-scale infrastructure development.
      • Investing in the economy to encourage spending
      • Expansion and Diversification of the firm
      • Repayment of Government Debts: Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest
      • Investing in social programs like health and education
    • Fiscal space for the relocation of resources locked with CPSEs: Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of the value of the public assets making it critical to disinvest early to realize a high value.
    • Resources locked in sectors developed enough to raise money from the market are channelized into areas of the economy that are less likely to access resources for the market because of their stage of economic development. Letting go of these assets is best in the long-term interest of the taxpayers as the current yield on these investments is abysmally low.
    • Unlocking of shareholder value: It is done with the help of issuing IPO. IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time. Offering an IPO is a money-making exercise. Every company needs money for expansion, to improve their business, to better the infrastructure, to repay loans, etc.
    • Employees: Employees of a firm are benefitted by disinvestment through:
      • Pay rises, which has been done in past disinvestments.
      • Greater opportunities and avenues for career growth and further employment generation through capacity expansion.

    Is privatization a solution?

    • No significant difference in performance: Studies indicate that the gap in growth (and service) between public sector undertakings (PSUs) with autonomy and private firms is not significant.
    • Experience of the privatization in the UK: One study highlighted that the famed British privatization initiative of British Airways, British Gas, and the Railways led to no systemic difference in performance.
    • Evidence on performance after privatization is even more mixed in developing countries.
    • Multiple factors: Growth post-privatization is often due to multiple factors, for example, better funding under a private promoter versus a starved government budget, a better business cycle.

    Failure of Privatisation

    • Privatization as a revenue source:  As a state, we have sought to hock our generational wealth in PSUs for the past two decades, with limited success.
    • Failure to raise funds: Actual receipts from disinvestment have always fallen significantly short of targets.
    • In total, between FY11 and FY21, about ₹5 lakh crore was raised (that is, about 33% of just FY22’s projected fiscal deficit (PRS India, 2021) – some of this, notably through stake sale to other PSUs.
    • Considering social and institutional constraints, it is a slow process. For instance, BPCL’s long-awaited journey.

    Challenges

    • Challenge of valuation: For instance, about 65% of about 300 national highway projects have been recording significant toll collection growth; any valuations of such assets will need to ensure they capture potential growth in toll revenue, as NHAI’s highway expansion bears fruit and the economy recovers.
    • Social consequences: There were about 348 CPSUs in existence in 2018, with a total investment of ₹16.4 trillion and about 10.3 lakh employees in Central Public Sector Enterprises (in 2019). Push for massive privatization resulting in mass layoffs in a period of low job creation.
    • Concentration of wealth: A greater concentration of public assets in select private hands is also a medium-term concern. About 70% of all profits generated in the corporate sector in FY20 were with just 20 firms.
    • Across sectors, a whiff of oligopoly is emerging – cigarettes continue to be dominated by a single player, paints have one entity with ~40% in FY21, airports now have a new operator with about six airports plus a 74% stake in Mumbai’s international airport, while telecom has just three players left.
    • Such concentration, mixed with the privatization of public assets, is likely to lead to higher usage fees (already being seen in telecom) and inflation, coupled with a loss of strategic control.

    Way forward

    • Outright privatization is not a solution: Selective PSU Reform must be considered.
    • The Maruti model is instructive – the government had a joint venture with the Suzuki Corporation, but ceded control, despite Suzuki having only 26% shareholding, in return for a push by Suzuki for greater exports from India and manufacture of global models in India
    • Stake sale route: Empirical evidence highlights that stake sales are considered a preferred route (about 67% of all PSUs sales in about 108 countries between 1977 and 2000 were conducted via this route), as it gives time to ensure price discovery, allowing improved performance to raise valuations over time.
    • Global Experience: In China, for the past few decades, growth has been led by corporatized PSUs, all of them held under a holding company (SASAC), which promotes better governance, appoints leadership, and executes mergers and acquisitions.
    • In Singapore, the Ministry of Finance focuses on policymaking, while the holding firm is focused on corporatizing and expanding its PSUs on a global scale.
    • PSUs with greater autonomy, with the government retaining control via a holding firm, can also be subject to the right incentives.

    Conclusion

    The time has come to take a relook at privatization. Simply pursuing this path, while utilizing such proceeds for loan write-offs or populist giveaways in the election cycle will not do.

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  • Agriculture finance in India

    Context

    While the overall budgetary allocation towards the agricultural sector has marginally increased by 4.4% in the Union Budget 2022-23, the rate of increase is lower than the current inflation rate of 5.5%-6%.

    Agricultural Finance in India – A brief history

    Phase 1 (1951-69):

    • Thrust on developing primary sector since 1st FYP in 1951.
    • National Credit Council in 1968 emphasized that commercial banks must increase financing to small scale industries and agriculture
    • Nationalization of banks in 1969 put thrust on the opening of rural/semi-urban bank branches

    Phase 2 (1970-1990)

    • The decade of 1970s marked the entry of commercial banks into agricultural credit with the Lead Bank Scheme and regulatory prescription of Priority Sector Lending (PSL).
    • Regional Rural Bank Act, 1976 enacted to specifically provide banking and credit facilities for agriculture and
      other rural sectors.
    • National Bank for Agriculture and Rural Development (NABARD) was established in 1982 to promote agricultural and rural development, particularly by financing SHGs and MFIs.
    • RBI introduced in 1989 service area approach (SAA) & Annual Credit Plan (ACP) system to increase outreach
      to rural areas.

    Phase 3 (1991-onwards)

    • Implementation of Narasimham Committee Report of 1991 to increase the operational efficiency of banks.
    • 1st major nationwide farm loan waiver in 1990.
    • Establishment of the Rural Infrastructure Development Fund (RIDF) with NABARD mainly meant for funding rural infrastructure projects.
    • NABARD started a pilot project SHG-Bank Linkage Programme in 1992.

    Mechanisms of Agriculture Credit in India

    • Priority Sector Lending: PSL was introduced to ensure that vulnerable sections of the society get access to credit and that there is an adequate flow of credit to employment-intensive sectors like agriculture and MSME.
    • Interest Subvention Scheme (ISS) was launched for short-term crop loans in 2006-07. 2% interest subvention is given to farmers, which is reimbursed to banks (through RBI and NABARD). Additionally, a 3% prompt repayment incentive (PRI) is provided for good credit discipline.
    • Kisan Credit Card (KCC) Scheme, introduced in 1998, aimed at providing adequate and timely credit with flexible and simplified procedures for agriculture-related and also consumption requirements of farmer households.
    • Self Help Group- Bank Linkage Programme (SHG-BLP) aimed at harnessing the flexibility of an informal system with the strength and affordability of a formal system. The SHG-BLP model accepted informal groups as clients of banks – both deposit and credit linkage & allowed collateral-free lending to groups.
    • Joint Liability Groups (JLG) Scheme was initiated by NABARD in 2006 to enhance credit flow to share croppers/tenant farmers who do not have land rights.

    Issues with India’s low spending in agriculture

    • The UN Food and Agriculture Organization (FAO) report for 2001 to 2019 shows that, globally, India is among the top 10 countries in terms of government spending in agriculture, constituting a share of around 7.3% of its total government expenditure.
    • However, India lags behind several low-income countries such as Malawi (18%), Mali (12.4%), Bhutan (12%), Nepal (8%), as well as upper-middle-income countries such as Guyana (10.3%) and China (9.6%).

    Low budgetary allocation

    a) Low allocation for important schemes

    • Drastic slashing of funds towards the allocation towards important schemes like Market Intervention Scheme and Price Support Scheme (MIS-PSS)- ₹1,500 crores (62% less than the previous allocation of ₹3,959.61 crores in the revised estimates (RE) of FY 2021-22).
    • Similarly, the Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA) was allocated just ₹1 crore for the year as against an expenditure of ₹400 crores in 2021-22.

    b) Low Capital Investment

    • Allocation for the promotion of rural development was 5.59% in the previous budget which has been further reduced to 5.23% for the present financial year

    Other issues

    a) Institutional vis-à-vis Non-Institutional Agricultural Credit: Traditionally, rural agrarian credit needs were met primarily through money-lenders, which led to large-scale indebtedness.

    • According to National All India Rural Financial Inclusion Survey (NAFIS 2015), the share of non-institutional credit still persists at around 28%.
    • Unavailability of credit for consumption purposes and to tenant farmers, sharecroppers, and landless labourers, who are not able to offer collateral security, further pushes them towards non-institutional sources.

    b) Skewed agency share in institutional credit: Dependency on scheduled commercial banks in agricultural & allied credit is still large (~78-80% of the credit). Though co-operative institutions (~15%) and Regional Rural Banks (~5%) play a significant role in extending agricultural credit, their share is highly skewed geographically.
    c) Regional Disparity in Agricultural Credit: States falling under central, eastern, and northeastern regions are getting very low agri-credit as % of their agri-GDP.
    d) Poor deployment of agricultural credit to allied sectors (~6-7%) despite a share of 38-42% in the agricultural output indicates neglect of allied sectors by the banks.
    e) Issues with Priority Sector Lending (PSL): Though at the aggregate level banks have been able to achieve the overall PSL target of 40%, so far they have failed to achieve the agriculture target of 18% at the system-wide level. Moreover, ~60% of Small & Marginal Farmers (SMFs) have not been covered by SCBs.
    f) Interest Subvention Scheme (ISS) on short-term loans have skewed the distribution of agricultural credit in favor of production credit against crop-related investment credit, which is important for the long-term sustainability of the agriculture sector.
    g) Kisan Credit Card: As per Agricultural Census 2015-16, only 45% of the farmers possess operative KCCs. Agricultural households are unable to get credit for their consumption requirements and hence, they are compelled to go-to money lenders.
    h) Diversion of agriculture loans for non-agriculture purposes:     In many states like Tamil Nadu, Andhra Pradesh, Kerala, etc, agri-credit is far higher than their agri-GDP, indicating the possibility of diversion of
    credit for non-agricultural purposes. Diversion accentuates the problem of debt overhang, fuels a high level of indebtedness, and deteriorates credit culture in long run.

    Way forward

    a) Improve the Reach of Institutional Credit:

    • Complete the digitization process and update land records in a time-bound manner.
    • Reforming of land leasing framework by adopting policies like the Model Land Leasing Act proposed by NITI Aayog, which intends to make all lease agreements formal and enhance access to formal credit.
    • Establish a federal institution in agriculture on the lines of GST Council to enable consultation with states during formulation & implementation of reforms.

    b) Addressing regional disparity: PSL guidelines should be revisited for improving the credit off-take in central, eastern, and northeastern states.
    c) Increasing Credit Flow to Allied Activities: Set separate targets for loans towards allied activities under Ground Level Credit (GLC) & Priority Sector Lending (PSL) guidelines.
    d) Enhancing the sub-target of SMFs under PSL- Considering that the total operated area held by SMFs would amount to 51.85% by the year 2020-21, increase the share of agricultural credit under PSL to SMFs to 10% from the current 8%.
    e) Agricultural Loans against Gold as Collateral: Banks should develop an MIS to flag agricultural loans sanctioned against gold as collateral in CBS in order to segregate such loans for effective monitoring of end-use of funds.
    f) Utilizing Farmer Producer Organisations (FPOs): NABARD should promote women-oriented FPOs by identifying successful women SHGs. Government should expand the scope of its credit guarantee program through Small Farmers’ Agribusiness Consortium (SFAC).
    g) Database for Indian Agriculture sector: Develop a centralized database capturing details related to crops cultivated, cropping pattern, output, sown/irrigated area, the health of the soil, natural calamity, etc. Besides, farmer-wise details like identity, land records, loan availed, subsidy given, insurance and details of crop cultivated, etc. should also be captured.
    h) Convergence of National Highways development, Rural infrastructure, rural facilities, and increase the number of markets as recommended by the National Commission on Farmers. 

     

    Consider the question “What explains India’s low score on Agriculture Orientation Index which is the ratio between government spending towards the agricultural sector and the sector’s contribution to GDP? Suggest the way forward.”

    Conclusion

    The intensification in government spending towards the agricultural sector is the key to attaining the sustainable development goals of higher agricultural growth and farm income.

     

  • BrahMos Deal and India’s Defence Exports

    On January 28, the Philippines signed a $374.96 million deal with BrahMos Aerospace Pvt. Ltd. for the supply of shore-based anti-ship variant of the BrahMos supersonic cruise missile.

    Details of the contract

    • The Philippines contract includes delivery of three BrahMos missile batteries, training for operators and maintainers as well as the necessary Integrated Logistics Support (ILS) package.
    • The coastal defence regiment of the Philippine Marines, which is under the Navy, will be the primary employer of the missile system.

    What makes the deal special?

    • This is the first export order for the missile which is a joint product between India and Russia and also the biggest defence export contract of the country.
    • This adds impetus to meet the ambitious target set by the Government to achieve a manufacturing turnover of $25 billion in aerospace and defence goods and services by 2025.

    What is the BrahMos Missile System?

    • BrahMos is a joint venture between India’s Defence Research and Development Organisation (DRDO) and Russia’s NPO Mashinostroyeniya.
    • The missile derives its name from the Brahmaputra and Moskva rivers.
    • Beginning with an anti-ship missile, several variants have since been developed.
    • It is now capable of being launched from land, sea, sub-sea and air against surface and sea-based targets and has constantly been improved and upgraded.

    Its range

    • The range of the BrahMos was originally limited to 290 kms as per obligations of the Missile Technology Control Regime (MTCR) of which Russia was a signatory.
    • Following India’s entry into the club in June 2016, plans were announced to extend the range initially to 450 kms and subsequently to 600 kms.
    • BrahMos with extended range upto 450 kms has been tested several times since.

    Deployments in India

    • The missile has been long inducted by the Indian armed forces.
    • The Army has recently deployed the system along the Line of Actual Control (LAC) in Arunachal Pradesh.

    Which other countries are in discussion for the BrahMos missiles?

    • While the first export order for BrahMos took a long time, the next order is likely to be concluded soon with negotiations with Indonesia and Thailand in advanced stages.
    • Philippines is also looking at several other military procurements from India and South East Asia as the region has emerged as a major focus area for India’s defence exports.
    • For instance, the HAL has received interest from Philippines Coast Guard for procurement of seven Dhruv Advanced Light Helicopters and eight Dornier Do-228 aircraft under the $100mn Line of Credit.
    • In addition, maritime domain and ship building is another potential area for Indian companies in the Philippines.

    What is the status of defence exports?

    • India has put out a range of military hardware on sale which includes various missile systems, Light Combat Aircraft (LCA), helicopters, warship and patrol vessels, artillery guns, tanks, radars etc.
    • From 2016-17 to 2018-19, the country’s defence exports have increased from ₹1,521 crore to ₹10,745 crore, a staggering 700% growth.

    Steps taken by the Centre to boost defence production

    • Licensing relaxation: Measures announced to boost exports since 2014 include simplified defence industrial licensing, relaxation of export controls and grant of no-objection certificates.
    • Lines of Credit: Specific incentives were introduced under the foreign trade policy and the Ministry of External Affairs has facilitated Lines of Credit for countries to import defence product.
    • Policy boost: The Defence Ministry has also issued a draft Defence Production & Export Promotion Policy 2020.
    • Indigenization lists: On the domestic front, to boost indigenous manufacturing, the Government had issued two “positive indigenization lists” consisting of 209 items that cannot be imported.
    • Budgetary allocation: In addition, a percentage of the capital outlay of the defence budget has been reserved for procurement from domestic industry.

    Issues retarding defence exports

    • Excess reliance on Public Sector: India has four companies (Indian ordnance factories, Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL) and Bharat Dynamics Limited (BDL)) among the top 100 biggest arms producers of the world.
    • Policy delays: In the past few years, the government has approved over 200 defence acquisition worth Rs 4 trillion, but most are still in relatively early stages of processing.
    • Lack of Critical Technologies: Poor design capability in critical technologies, inadequate investment in R&D and the inability to manufacture major subsystems and components hamper the indigenous manufacturing.
    • Long gestation: The creation of a manufacturing base is capital and technology-intensive and has a long gestation period. By that time newer technologies make products outdated.
    • ‘Unease’ in doing business: An issue related to stringent labour laws, compliance burden and lack of skills, affects the development of indigenous manufacturing in defence.
    • Multiple jurisdictions: Overlapping jurisdiction of the Ministry of Defence and Ministry of Industrial Promotion impair India’s capability of defence manufacturing.
    • Lack of quality: The higher indigenization in few cases is largely attributed to the low-end technology.
    • FDI Policy: The earlier FDI limit of 49% was not enough to enthuse global manufacturing houses to set up bases in India.
    • R&D Lacunae: A lip service to technology funding by making token allocations is an adequate commentary on our lack of seriousness in the area of Research and Development.
    • Lack of skills: There is a lack of engineering and research capability in our institutions. It again leads us back to the need for a stronger industry-academia interface.

    Way forward

    • Reducing import dependence: India was the world’s second-largest arms importer from 2014-18, ceding the long-held tag as the largest importer to Saudi Arabia, says 2019 SIPRI report.
    • Security Imperative: Indigenization in defence is critical to national security also. It keeps intact the technological expertise and encourages spin-off technologies and innovation that often stem from it.
    • Economic boost: Indigenization in defence can help create a large industry which also includes small manufacturers.
    • Employment generation: Defence manufacturing will lead to the generation of satellites industries that in turn will pave the way for a generation of employment opportunities.

    Back2Basics: Missile Technology Control Regime (MTCR)

    • MTCR is an informal political understanding between countries to limit the spread of missiles and missile technology.
    • MTCR was started by like-minded countries to prevent nuclear proliferation.
    • In 1992, the original focus of the MTCR was to prevent the proliferation of missiles capable of carrying chemical, biological and nuclear warheads and as a threat to international peace and security.

    Also read:

    Growth of India’s Defence Exports

     

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  • What is Cartelization?

    The Competition Commission of India (CCI) issued its final order in an alleged case of cartelization involving four Japanese shipping firms, asking them to desist from avoiding competition with each other.

    What is a Cartel?

    • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
    • The three common components of a cartel are:
    1. an agreement
    2. between competitors
    3. to restrict competition

    What is Cartelization?

    • Cartelization is when enterprises collude to fix prices, indulge in bid-rigging, or share customers, etc. But when prices are controlled by the government under law, that is not cartelization.
    • The Competition Act contains strong provisions against cartels.
    • It also has the leniency provision to incentivize a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
    • This has proved a highly effective tool against cartels worldwide.

    How do they work?

    • Four categories of conduct are commonly identified across jurisdictions (countries). These are: price-fixing, output restrictions, market allocation and, bid-rigging
    • In sum, participants in hard-core cartels agree to insulate themselves from the rigors of a competitive marketplace, substituting cooperation for competition.

    How do cartels hurt?

    • They not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
    • A successful cartel raises the price above the competitive level and reduces output.
    • Consumers choose either not to pay the higher price for some or all of the cartelized product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

    Are there provisions in the Competition Act against monopolistic prices?

    • There are provisions in the Competition Act against abuse of dominance.
    • One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in the purchase or sale of goods or services.
    • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
    • However, where pricing is a result of normal supply and demand, the Competition Commission may have no role.

    What is the penalty for cartelization?

    • The Competition Act calls for a penalty on each member of the cartel, which is up to three times its profit for each year of anti-competitive behavior, or 10% of turnover for each year of its continuance, whichever is higher.
    • However, in case of a leniency petition, CCI can waive the penalty depending on the timing and usefulness of the disclosure  and  full cooperation  in  the  probe.

    How might cartels be worse than monopolies?

    • Monopolies are bad for both individual consumer interests as well as society at large.
    • Monopolist completely dominates the concerned market and, more often than not, abuse this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

    How to stop the spread of cartelization?

    • Strong deterrence to those cartels that are found guilty of being one.
    • Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel and it is not always easy to ascertain the exact gains from cartelization.
    • The threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

    Back2Basics: Competition Commission of India (CCI)

    • The CCI is the chief national competition regulator in India.
    • It is a statutory body within the Ministry of Corporate Affairs.
    • It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

     

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