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GS Paper: GS3

  • Unlock India’s food processing potential

    Context

    One of the largest producers of fruits and vegetables in the world to boost processed food in large quantities, India has formulated a unique Production-Linked Incentive Scheme (PLIS) which aims to incentivise incremental sales.

    Progress made so far

    • A sum of ₹10,900 crore has been earmarked for the scheme.
    • Beneficiaries have been obliged to commit a minimum investment while applying for the scheme.
    • Under Category 1, firms are incentivised for incremental sales and branding/marketing initiatives taken abroad.
    • Assuming the committed investment as a fixed ratio of their sales and undertaking execution of at least 75% of the projects, the sector is likely to witness at least ₹6,500 crore worth of investment over the next two years.
    • New alternatives are being explored which have immense potential in replacing the staples of rice and wheat in the form of Nutri-cereals, plant-based proteins, fermented foods, health bars and even fresh fortified foods for pets.
    • By welcoming the new brands in the category, PLIS aims to create an enabling ecosystem for innovation in both food products and processes.

    Way forward

    1] Improve infrastructure

    • A study in the United States concluded that a 1% increase in public infrastructure increased the food manufacturing output by 0.06% in the longer run (https://bit.ly/3rOeE0l).
    • This correlation holds good for India too as a higher investment is being concentrated in States such as Andhra Pradesh, Gujarat, Maharashtra, Tamil Nadu and Uttar Pradesh.
    • These States as reported by the Good Governance Index 2020-21, ranked among the highest in the ‘Public Infrastructure and Utilities’ parameter with ‘Connectivity to Rural Habitations’ showing the highest improvement.

    2] Improve profitability in export

    • For the exports market, it is now established that sales promotion is positively related to increased sales volume, but inversely related to profitability.
    • To bridge this gap, of the 13 key sectors announced under the PLIS, the ‘Food Processing PLIS’ earmarks a dedicated Category 3 for supporting branding and marketing activities in foreign markets. 
    •  This ensures that India’s share of value-added products in the exports basket is improved, and it may leverage on its unique geographical proximity to the untapped markets of Europe, the Middle East/West Asia, Africa, Oceania and Japan.

    3] Access to credit

    •  The access of micro, small, and medium enterprises (MSMEs) to finance is a perennial problem in the country, predominating due to a lack of proper credit history mechanism for MSMEs.
    • Smart financing alternatives such as peer-to-peer (P2P) lending hold potential for micro-food processors.
    • Access to working capital has in theory been addressed by the Trade Receivables Discounting System (TReDS), a platform for facilitating the financing/discounting of trade receivables of MSMEs through multiple financiers.

    Conclusion

    With growing populations, changing food habits and unrestricted use of natural resources, nations must come together and lay out a road map for a common efficient food value chain.

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  • The consequences of an ill-considered green strategy

    Context

    Europe’s push for renewable energy at the cost of conventional fuel may end up causing a global food crisis.

    Consequences of fuel shortage in Western Europe

    • Since August 2021, Western Europe has faced a problem with renewable energy – the wind doesn’t always blow when needed and the sun doesn’t always shine.
    • Commodity markets across the world operate on a balance of demand and supply — even seemingly “small” changes in either side of a few percentage points can push the prices up or down sharply.
    • High energy bills: Higher gas prices have pushed up energy bills for households and are expected to impact household spending and consumption as well.
    • High urea prices: Natural gas is used to produce urea – if gas prices go up, fertiliser also becomes expensive.
    •  Some poor and middle-income countries are already starting to face problems of fertiliser availability — there are reports from several Indian states as well. 
    • High food prices: The impact of expensive fertiliser will be felt some months down the line as expensive fertiliser and reduced harvests push up food prices.
    • India is relatively less affected as the share of natural gas in the country’s energy mix is low but will still face problems due to high food prices.
    • In 2007-08, when oil prices were high, there was a push to use “biofuels” led by the US and Europe.
    •  The effects of the 2008 food price crisis were felt around the world, especially by the poor.

    Lessons for India

    • Cheap and reliable energy sources should not be abandoned until the alternatives have been stringently stress tested.
    • India will be especially hard hit if oil prices spike as it imports close to 1.4 billion barrels of oil annually.

    Consider the question “What are the inherent dangers in rapid transition to the green energy? Suggest the way forward for India.”

    Conclusion

    A blind push to shut down traditional sources of energy and move to less reliable “clean” energy can have second and third order effects.

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  • Specie in news: Spot-billed Pelicans

    A nematode infestation has led to mass mortality of spot-billed pelicans (Pelicanus philippensis) at Telineelapuram Important Bird Area (IBA) in Andhra Pradesh.

    Spot-billed Pelicans

    • The spot-billed pelican (Pelecanus philippensis) or grey pelican is a member of the pelican family.
    • It breeds in southern Asia from southern Iran across India east to Indonesia.
    • It is a bird of large inland and coastal waters, especially large lakes.
    • The breeding population of these pelican species is limited to India, Sri Lanka and Cambodia.
    • In the non-breeding season they are recorded in Nepal, Myanmar, Thailand, Laos and Vietnam.

    Conservation status

    • IUCN status: Near Threatened
    • Wildlife (Protection) Act, 1972: Schedule IV (Hunting prohibited but the penalty for any violation is less compared to the first two schedules)

     

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  • Towards low emissions growth

    Context

    While many developing countries made net-zero pledges at COP26 in Glasgow, they face enormous developmental challenges in their attempts to grow in a climate-constrained world.

    Developmental challenges for India

    • For India, the national context is shaped by high youth unemployment, millions more entering the workforce each year, and a country hungry for substantial investments in hard infrastructure to industrialise and urbanise.
    • Growth with low emission footprint: India’s economic growth in the last three decades, led by growth in the services sector, has come at a significantly lower emissions footprint.
    • But in the coming decades, India will have to move to an investment-led and manufacturing-intensive growth model to create job opportunities and create entirely new cities and infrastructure to accommodate and connect an increasingly urban population.
    •  All of this requires a lot of energy. Can India do all of this with a low emissions footprint?

    What could India do to pursue an industrialization pathway that is climate-compatible?

    • A coherent national transition strategy is important in a global context where industrialised countries are discussing the imposition of carbon border taxes while failing to provide developing countries the necessary carbon space to grow or the finance and technological assistance necessary to decarbonise.
    • What India needs is an overarching green industrialisation strategy that combines laws, policy instruments, and new or reformed implementing institutions to steer its decentralised economic activities to become climate-friendly and resilient.

    Issues with India’s domestic manufacturing of renewable technology components

    • India’s industrial policy efforts to increase the domestic manufacturing of renewable energy technology components have been affected by policy incoherence, poor management of economic rents, and contradictory policy objectives.
    • India managed to create just a third of jobs per megawatt that China has managed to in its efforts to promote solar PV and wind technologies.
    • China has created more jobs in manufacturing solar and wind components for exports than domestic deployment.
    • India could have retained some of those jobs if it were strategic in promoting these technologies.

    Opportunities in decarbonising transport and industry sector

    • Technologies needed to decarbonise the transport and industry sectors provide a significant opportunity for India.
    • However, India’s R&D investments in these emerging green technologies are non-existent.
    • PLI is a step in right direction: The production-linked incentives (PLIs) under ‘Aatmanirbhar Bharat’ are a step in the right direction for localising clean energy manufacturing activities.
    • Focus on R&D: Aligning existing RD&D investments with the technologies needed for green industrialisation is crucial for realising quantum jumps in economic activities.
    • Encourage private entrepreneurship: India also needs to nurture private entrepreneurship and experimentation in clean energy technologies.
    • Besides China, Korea’s green growth strategy provide examples of how India could gain economic and employment rents from green industrialisation without implementing restrictive policies.

    Way forward

    • India should set its pace based on its ability to capitalise on the opportunities to create wealth through green industrialisation.
    • India should follow a path where it can negotiate carbon space to grow, buying time for the hard-to-abate sectors; push against counterproductive WTO trade litigations on decarbonisation technologies; all while making R&D investments in those technologies to ensure that it can gain economic value in the transition.

    Consider the question “What are the challenges India faces as it strives to reach the goal of net-zero emission by 2070. Suggest the strategy India should follow to maximise the developmental gains.”

    Conclusion

    The government should neither succumb to international pressure to decarbonise soon nor should it postpone its investment in decarbonisation technologies and lose its long-term competitiveness in a global low-carbon economy.

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  • Dealing with the macroeconomic uncertainties

    Context

    Macroeconomic uncertainties are mounting.

    Impact of US Fed’s decision

    • Against the backdrop of possible interest rate hikes by the U.S. Federal Reserve and the taper tantrum, there is pressure on the Reserve Bank of India (RBI) to increase its interest rates to prevent capital outflows.
    • The monetary policy corridor is still “accommodative” to support the growth recovery.
    • Globally, central banks have started increasing the interest rates.

    Macroeconomic uncertainties

    1] Inflationary pressure

    •  In India, the wholesale price index (WPI) inflation rose to a record high of 14.32% in November 2021 as per the data released by the Ministry of Commerce and Industry.
    • The consumer price index (CPI) inflation now is 5.03%, though that is still within the comfort zone of the inflation targeting framework envisaged in India’s new monetary framework.
    • The official nominal inflation anchor in India is 4%, with a band of variations of +/- 2. 

    2] Absorbing excess liquidity

    • The RBI Financial Stability Report, published on December 29, 2021, revealed a possible worsening of the gross non-performing asset (GNPA) ratio of scheduled commercial banks — from 6.9% in September 2021 to 9.5% by September 2022.
    • Absorbing the excess liquidity that was injected to stimulate growth as part of the pandemic response is crucial to reversing trends in non performing assets (NPAs).
    • Absorption of excess liquidity was attempted by increasing the cut-off yield rate of variable rate reverse repo (VRRR) to 3.99%, and curtailing the government securities acquisition programme.

    3] Interest rate structure and implications for government borrowing

    •  The call money market rates are below the repo rate.
    • The bond yields are increasing ahead of the Union Budget 2022-23.
    • The rise in bond yields will result in higher borrowing costs for the Government.

    Way forward for fiscal policy

    • Maintain accommodative policy stance: Given these macroeconomic uncertainties, maintaining an accommodative fiscal policy stance in the upcoming Union Budget for FY23 is crucial for a sustainable recovery.
    • Don’t focus on fiscal consolidation: Any attempt at fiscal consolidation at this juncture employing capital expenditure compression rather than a tax buoyancy path can adversely affect economic growth. 
    •  Public investment — infrastructure investment in particular — is a major growth driver through “crowding-in” of private corporate investment.
    • Strengthening investments in the health-care sector is crucial at this juncture as a prolonged lockdown can accentuate the current humanitarian crisis and deepen economic disruptions.
    • When credit-linked economic stimulus has an uneven impact on growth recovery, the significance of fiscal dominance cannot be undermined.
    • Address unemployment: Rising unemployment needs to be addressed through an urgent policy response that strengthens job guarantee programmes.

    Conclusion

    The upcoming Union Budget for 2022-23 should maintain an accommodative fiscal stance in order to support the sustainability of the economic growth process and also for financing human development.

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  • What is a K-shaped Economic Recovery?

    Former RBI Governor Raghuram Rajan has said that the government needed to do more to prevent a K-shaped recovery of the economy hit by the coronavirus pandemic.

    K-Shaped Recovery

    • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
    • This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
    • A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
    • This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

    Try these PYQ:

     

    Q.Economic growth in country X will necessarily have to occur if-

     

    (a) There is technical progress in the world economy

    (b) There is population growth in X

    (c) There is capital formation in X

    (d) The volume of trade grows in the world economy

    Implications of a K-Shaped Recovery

    • Households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts; this will be a recurring drag on demand, if the labour market does not heal faster.
    • To the extent that Covid has triggered an effective income transfer from the poor to the rich, this will be demand-impeding because the poor tend to spend-instead of saving.
    • If Covid-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.

    Also read:

    Shapes of Economic Recovery

     

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  • What are Non-Fungible Tokens (NFTs)?

    A French luxury fashion brand is suing American digital artist who created a series of NFTs (Non-Fungible Tokens), a rapidly growing part of the cryptoworld.

    Non-Fungible Tokens

    • An NFT is a unique, irreplaceable token that can be used to prove ownership of digital assets such as music, artwork, even tweets and memes.
    • The term ‘non-fungible’ simply means that each token is different as opposed to a fungible currency such as money (a ten-rupee note can be exchanged for another and so on).
    • Cryptocurrencies such as Bitcoin and Ethereum are also fungible, which means that one Bitcoin can be exchanged for another.
    • But an NFT cannot be exchanged for another NFT because the two are different and therefore unique.
    • Each token has a different value, depending on which asset it represents.

    How does NFT transaction take place?

    • NFT transactions are recorded on blockchains, which is a digital public ledger, with most NFTs being a part of the Ethereum blockchain.
    • NFTs became popular in 2021, when they were beginning to be seen by artists as a convenient way to monetize their work.

    Why are they in high demand?

    • One of the other attractions is that NFTs are a part of a new kind of financial system called decentralized finance (DeFi), which does away with the involvement of institutions such as banks.
    • For this reason, decentralized finance is seen as a more democratic financial system because it makes access to capital easier for lay people by essentially eliminating the role of banks and other associated institutions.
    • Even so, because NFTs operate in a decentralized system, any person can sell a digital asset as one.
    • This can sometimes create problems. For instance, if you were to sell someone else’s artwork as an NFT, you could essentially be infringing on a copyright.

     

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  • [pib] One District One Product (ODOP) Initiative

    As a major boost to Centre and State collaboration in promoting products under the ODOP Initiative – a State Conference was recently held by the Department for Promotion of Industry and Internal Trade (DPIIT).

    One District One Product (ODOP)

    • ODOP spearheaded by the Uttar Pradesh government in 2018, is an important initiative that is being adopted all over India to realize the true potential of each district.
    • ODOP is an initiative which is seen as a transformational step forward towards realizing the true potential of a district, fuel economic growth and generates employment and rural entrepreneurship.
    • It is operationally merged with ‘Districts as Export Hub’ initiative being implemented by DPIIT as a major stakeholder.
    • The main philosophy is to select, brand and promote one product from each district of India that has a specific characteristic feature to enable profitable trade in that product and generate employment.

    Why need this scheme?

    • India is home to several agricultural and non-agricultural (including manufacturing) products that are region-specific.
    • Every district has products that are unique and provide livelihoods and generate income.
    • This scheme is in tune with the PM’s call to transform every district into an export hub and realize the goal of Atmanirbhar Bharat.

    What needs to be done for its success?

    The important aspect that the policy initiatives in India should thus be mindful of are:

    • Ownership of the initiative should lie at the center of implementation.
    • The stakeholders irrespective of the sector along the value chain need to be identified and provided information and awareness.
    • It is important to streamline other initiatives such as registration of Geographical Indications (GI), formation and development of farmer producer organizations etc.

     

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  • [pib] Sela Pass Tunnel Project

    The final blast for the 980-metre long Sela Tunnel was recently conducted by the Border Roads Organisation (BRO) amidst inclement weather and heavy snowfall.

    Sela Pass Tunnel Project

    • The tunnel covers a total distance of 12.04 kms which consist of two tunnels of 1790 metres and 475 meters.
    • It is being built at an estimated cost of ₹687 crores by the Border Roads Organisation.
    • It aims to provide all weather connectivity to Tawang in Arunachal Pradesh — an area claimed entirely by China — and other forward areas.
    • Once built it will cut travel time to Tawang by at least an hour for Indian troops stationed in adjoining Assam’s Tezpur town — the headquarters of the Indian army’s IV Corps.

    Strategic Importance

    • The lack of motorable roads and rail connections in India’s northeast and Arunachal Pradesh in particular were seen as distinct disadvantages for India vis a vis China in the region.
    • Analysts had been warning of China building infrastructure including access roads right up to the Indian border that would give it a strategic advantage in any conflict with India.
    • Once completed this would result in all weather connectivity to Tawang and forward areas and reduction in more than one hour of travelling time from Tezpur to Tawang.

     

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  • A chance to support growth, fiscal consolidation

    Context

    The adverse effect of the third wave of COVID-19, which is mainly affecting the last quarter of 2021-22, may call for a further downward adjustment in the growth rate to about 9%.

    Growth in FY 2021-22

    •  As per the NSO’s advance estimates, at the end of 2021-22, the magnitude of GDP in real terms is estimated at INR₹147.5-lakh crore that is only a shade higher than INR₹145.7-lakh crore in 2019-20.
    • Thus, due to the three waves of COVID-19 that India has experienced, two years of real growth in economic activities have been wiped out. 
    • As per the advance estimates, the gross fixed capital formation (GFCF) relative to GDP at current prices stands at 29.6% in 2021-22.
    • Capacity utilisation in India continues to have considerable slack.
    • Private final consumption expenditure (PFCE) also shows a low growth of 6.9% in 2021-22.
    • Any pick-up in demand would continue to be constrained by low-income growth in sectors characterised by a high marginal propensity to consume (MPC) such as the trade, transport, et al. sector and the Micro, Small and Medium Enterprise (MSME) sector more broadly.
    • It may thus be prudent to expect a real GDP growth in the range of 6%-7%.
    • Growth in 2022-23 would also continue to be constrained by supply-side bottlenecks and high prices of global crude and primary products.
    • Growth in 2022-23 would depend on the basic determinants such as the saving and investment rates in the economy.

    Suggestions

    • Extend GST compensation period: The GST compensation provision would also come to an end in June 2022.
    • This would cause a major revenue shock at least for some States such as Tamil Nadu, Kerala and Andhra Pradesh.
    • While this matter may be considered by the GST Council, the compensation arrangement should be extended by two years in some modified form.
    • With respect to non-tax receipts, the scope of the National Monetization Pipeline (NMP) may be extended to cover monetisation of government-owned land assets.
    • Disinvestment initiatives may have to be accelerated.
    • Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand.
    • Urban counterpart to MGNREGA: Since consumption demand remains weak, some fiscal support in the form of an urban counterpart to Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) may be considered.

    Focusing on fiscal consolidation

    • It would be appropriate now to consider a graduated return to fiscal consolidation while using fiscal policy to lay the base for faster growth in the years to come.
    • The Fifteenth Finance Commission had suggested a fiscal consolidation path where the Centre’s fiscal deficit was benchmarked at 5.5% of GDP for 2022-23.
    • In their pessimistic scenario, it was kept at 6% of GDP. 
    • It may be prudent to limit the reduction in fiscal deficit-GDP ratio to about 1% point of GDP in 2022-23.
    • This would imply a fiscal deficit in the range of 5.5%-6% of GDP.
    • From here on, a stepwise reduction of 0.5% points per year would enable a level of about 4% of GDP by 2025-26.
    • By this time, as suggested by the Fifteenth Finance Commission, a high-powered inter-governmental group should be constituted to re-examine the sustainability parameters of debt and fiscal deficit of the central and state governments.

    Conclusion

    Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand while aiming for the gradual return to the fiscal consolidation.

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