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GS Paper: GS3

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

    Context

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

    About the package for telecom sector

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

    Reforms and  challenge of addressing the inequality

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

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

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

    Way forward

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

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

    Conclusion

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

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  • Risks involved in over-valued unicorns

    Context

    The biggest-ever initial public offering (IPO) in India fell flat on its face on the first day of its listing in the stock exchange, with shares being traded at prices less than 27% of the IPO price.

    Rise of unicorns in India and factors driving it

    • Unicorns in diverse sectors: There has been a unicorn gale in India in recent years, covering diverse sectors from fintech to cloud kitchen.
    • Growth in digital payment is reflected in the fintech sector that has contributed the most to the unicorn list.
    • Factors driving growth: An ecosystem which combines thriving digital payments, a growing smartphone user base and digital-first business models adopted by many start-ups has driven expectations of investors, resulting in large-scale fund flows into new business ventures.
    • Growing smartphone user: Expectations are high as the country has around 640 million Internet users, of which 550 million are smartphone users.
    • Growing digital payments: Digital payment has seen a growth of 30.19% as of March 31, 2021 and by the end of September 30, the unified payments interface (UPI) registered 3.5 billion transactions amounting to ₹6.54 trillion.

    FinTech and EdTech leading unicorns

    • American investment firms Tiger Global and Sequoia Capital have been the major investors, providing very quick follow-up rounds of funds across all stages and sectors.
    • Fundamental financial performance of the business is not factored in these decisions which could lead to biased valuations.
    • Idea of disruptive technologies: The idea of disruptive technologies has become a buzzword for characterising start-ups.
    • The idea was that start-ups with limited resources can aim at technology disruption by inventing an entirely new way of getting something done.
    • The story is similar in educational technologies (EdTech) as well.
    • The novel coronavirus pandemic has been a blessing in disguise for EdTech firms, as it is this external environment that is pushing the industry, giving it an acceleration by four to five years.
    • Too many acquisitions with big ambitions to grow inorganically puts pressure on the balance sheet in the years to come as some of the new acquisitions are likely to fail.
    • Even, EdTech firms with reasonably good business models are highly overvalued due to abundant liquidity.
    • Cost of achieving behaviour change: Almost every second advertisement on primetime television is either of a digital payment firm or EdTech platform.
    • New firms in services will have to indulge in this process for a longer period than firms in other industries such as transportation as these firms have to bring about a particular kind of change that customers are significantly comfortable using the service.
    • Firms burn cash to give massive discounts to customers in the hope that people will get so habituated to these platforms that they will remain active even when the prices are hiked.
    • To some extent this worked in the context of mobile telephone services as Indians have got hooked to mobile phones and reoriented spending to buy more sophisticated smartphones and data.
    • But in other services this does not seem to work so easily.
    • The projection flaw: Data by the Centre for Monitoring Indian Economy (CMIE) points to this flaw of over-optimistic demand projections as there are just about 23 million households which earn more than ₹5 lakh per year i.e., less than ₹42,000 a month, which is about 7% of all Indian families.
    • It is only this class which can be coaxed to behavioural changes — i.e. people who can afford various kinds of goods and services.
    • If firms want to go beyond this 7% of households they have to offer bigger discounts, burning more cash, with the possibility that once the discounts are reduced, customers drop off.

    Consider the question “India is witnessing the unicorn boom in the starts-ups. However, valuation of these unicorns has raised concerns. In light of this, examine the factors driving the rise of unicorns in India and why their valuation raises concerns?”

    Conclusion

    We are witnessing new unicorns emerging every month, which are products of inflated valuations to tap more funds to burn more cash. These valuations are solely on the basis of future earnings, with virtually no profits to show in the present.

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  • Bharat Gaurav Scheme to promote Tourism

    To tap the huge potential of tourism, the Railways has announced the ‘Bharat Gaurav’ Scheme.

    Bharat Gaurav Scheme

    • Under this Scheme, theme-based tourist circuit trains, on the lines of the Ramayana Express, can be run either by private or State-owned operators.
    • Till now, the Railways had passenger segments and goods segments.
    • Now, it will have a third segment for tourism under the Bharat Gaurav.
    • The scheme has been developed after extensive stakeholder discussions and a lot of State Governments, including Odisha, Rajasthan, Karnataka and Tamil Nadu, have shown interest.

    Key features

    • Service providers, who can be an individual, company, society, trust, joint venture or consortium will be free to decide themes/circuits.
    • They will offer an all-inclusive package to tourists including rail travel, hotel accommodation and sightseeing arrangement, visit to historical/heritage sites, tour guides etc.
    • They have full flexibility to decide the package cost.
    • The service providers will also be able to design/furnish the interior of the coaches based on the theme and put branding or advertising inside and outside of the train.

     

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  • Facial Recognition Technology

    Context

    According to police officials, more than six lakh CCTV cameras have already been deployed in the city, with the very real possibility that this number will continue to increase. These all-pervasive cameras will soon be connected in a real-time network managed by Hyderabad’s Command and Control Centre.

    Facial Recognition

    It is a biometric technology that uses distinctive features of the face to identify and distinguish an individual. Over a period of almost 6 decades, it has evolved in many ways- from looking at 3D contours of a face to recognizing skin patterns.

    How does it work?

    • The facial recognition system works primarily by capturing the face & its features through the camera and then using various kinds of software to reconstruct those features.
    • The captured face along with its features is stored into a database, which can be integrated with any kind of software that may be used for security purposes, banking services, etc.
    • In the Automated Facial Recognition System (AFRS), the large database (containing photos and videos of peoples’ faces) is used to match and identify the person. The image of an unidentified person, taken from CCTV footage, is compared to the existing database using Artificial Intelligence technology, for pattern-finding and matching.

    What are the uses?

    • Authentication: It is used for identification and authentication purposes with a success rate of almost 75%.
      • For instance, the NCRB’s Crime and Criminal Tracking Network & Systems (CCTNS) managing crime data for police, use automated facial recognition to identify criminals, missing people, and unidentified dead bodies, as well as for “crime prevention”.
      • The project is aimed at being compatible with other biometrics such as iris and fingerprints.
      • The integration of fingerprint databases, face recognition software and iris scans will massively boost the police department’s crime investigation capabilities.
    • Force Multiplier: In India, where there are just 144 constables per 1 lakh citizens, this can act as a force multiplier. It neither requires too much manpower nor regular up-gradation. Hence, this technology coupled with the present manpower in place can act as a game-changer.
    • Varied applications: It is increasingly being used for everything from unlocking mobile phones to validating the identity, from auto-tagging of digital photos to finding missing persons, and from targeted advertising to law enforcement.

    Opposition to facial recognition technologies

    • How it works: Facial recognition technology identifies the distinctive features of a person’s face to create a biometric map, which an algorithm then matches to possible individuals.
    • The system searches across databases of millions of images scraped without knowledge or consent and often fails.
    • Severe scrutiny: The use of facial recognition technology is already under severe scrutiny around the world, with some jurisdictions, including Belgium and Luxembourg, have already banned its use.
    • Ban by EU: The European Union is in the process of finalizing and passing one of the most comprehensive bans on facial recognition technology yet, while in the United States, multiple cities- and state-level bans and moratoria have been imposed.
    • More than 200 organizations have called for a global ban on the use of biometric surveillance technologies that enable mass and discriminatory surveillance, while even Facebook announced that it would be shutting down its facial recognition program.

    Issues with the use of facial recognition technologies in India

    • Violation of the right to privacy: The right to privacy was recognized as a fundamental right, included under the right to life and liberty by the Supreme Court of India in 2017.
    • Absence of legal framework: Without a law in place to regulate data collection and to act as an oversight mechanism, valid concerns about privacy and other rights violations continue to arise.
    • High Infrastructural Costs: Technologies like Artificial Intelligence and Big Data are costly to implement. The size of stored information is extremely large and requires huge network & data storage facilities, which are currently not available in India.
    • Image Collection: The sources from which images will be collected to create a repository/database need to be known.
    • The concern of Data Leakage: In today’s world of cybercrime, it is important to put appropriate safeguards in place in order to ensure the integrity of the repository/database, so that it doesn’t leak out the information and is not privatized or monetized.
    • Required Expertise: Experts are needed to verify and authenticate data collected before storing them who should be provided proper training to protect & avoid abuse and misuse of the collected data & database.
    • Reliability & Authenticity: As the data collected may be used in the court of law during the course of a criminal trial, the reliability and the admissibility of the data along with standards and procedures followed would be taken into consideration. Hence, the authenticity of the data is crucial.
    • Huge amounts of public money are being spent on these technologies with no evidence of their effectiveness, further squandering precious public funds.

    The National Automated Facial Recognition System

    • To empower the Indian police with information technology, India approved the implementation of the National Automated Facial Recognition System (NAFRS).
    • On its implementation, it will function as a national-level search platform that will use facial recognition technology.
    • It will help to facilitate investigation of crime or for identifying a person of interest regardless of face mask, makeup, plastic surgery, beard, or hair extension.

    Way Forward

    • Save the time of police: This is a compare and contrast tool meant for identification based on existing information. The process of identification can be accelerated by its use.
    • Proper Legal safeguards are a must: With proper safeguards, this technology is much needed for India. Having the biggest IT workforce in the world, state-of-the-art technology can act as a game-changer for India.
    • Need to learn from Global examples: Police departments in London are under pressure to put a complete end to the use of facial recognition systems following evidence of discrimination and inefficiency.
      • Hence, it is necessary to make use of such technology, but it cannot act as the silver bullet for all the police reforms that we need.

    Conclusion

    Government programs such as Safe City, Smart City, and the Nirbhaya Fund have been utilized to bankroll these projects — yet the human rights violations that occur as a result of their use far outweigh any purported benefit that these technologies claim to provide.

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  • Reforming the fertilizer sector

    Context

    Since 1991, when economic reforms began in India, several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill, promote the efficient use of fertilizers, achieve balanced use of N, P, and K (nitrogen, phosphorus, and potassium), and reduce water and air pollution caused by fertilizers like urea.

    Several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill.

    Background

    • After years of unchanged prices, the budget of 1991 raised the issue prices of fertilizers by 40% on average. This rise was rolled down to 30% in a few months, with exemption to small and marginal farmers from the price increase.
    • Due to opposition, the increase in Urea price was further rolled back to 17% over the pre-reform price.
    • It resulted in a big shift in the composition of fertilizers used in the country in favor of urea and thus Nitrogen (N).
    • The government started Nutrient Based Subsidy in 2010 to address the growing imbalance in fertilizer use, which was skewed towards urea (N).
    • However, only non-nitrogenous fertilizers P and K (phosphorus and potassium) were included in NBS; urea was left out.

    Need for reforms on three fronts

    Reforms are needed to promote in three key areas:

    1) The efficient use of fertilizers.

    2) To achieve balanced use of N, P, and K (nitrogen, phosphorus, and potassium).

    3) To reduce water and air pollution caused by fertilizers like urea.

    Challenges in the fertilizer sector

    A] Distortion in use due to price difference

    • The Union Budget of July 1991 raised the issue prices of fertilizers by 40% on average.
    • Due to opposition to increasing fertilizer prices, the increase in the price of urea was rolled back to 17% a year later over the pre-reform price.
    • The shift in the composition of fertilizer used: This change disturbed the relative prices of various fertilizers and resulted in a big shift in the composition of fertilizers used in the country in favor of urea and thus N.
    • Farmers tended to move towards balanced use, but policy and price changes reversed the favorable trend a couple of times in the last three decades.
    • In 2019-20, fertilizer use per hectare of cultivated area varied from 70 kg of NPK in Rajasthan to 250 kg in Telangana
    • Further, the composition of total plant nutrients in terms of the N, P, K ratio deviated considerably from the recommended or optimal NPK mix.
    • It was 33.7:8.0:1 in Punjab and 1.3:0.7:1 in Kerala.

    2] Increasing fertilizer subsidy

    • Fertilizer subsidy has doubled in a short period of three years. For 2021-22, the Union Budget has estimated fertilizer subsidy at ₹79,530 crores (from ₹66,468 crores in 2017-18).
    • The subsidy is likely to reach a much higher level due to the recent upsurge in the prices of energy, the international prices of urea and other fertilizers, and India’s dependence on imports.
    • In order to minimize the impact of rising in prices on farmers, the bulk of the price rise is absorbed by the government through enhanced fertilizer subsidy.
    • This is likely to create serious fiscal challenges.
    • At current prices, farmers pay about ₹268 per bag of urea and the Government of India pays an average subsidy of about ₹930 per bag.
    • Thus, taxpayers bear 78% of the cost of urea and farmers pay only 22%. This is expected to increase and is not sustainable.

    3] Import dependence

    • Total demand for urea: The total demand for urea in the country is about 34-35 million tonnes (mln t) whereas the domestic production is about 25 mln t.
    • The requirement of Diammonium Phosphate (DAP) is about 12 mln t and domestic production is just 5 mln t.
    • This leaves the gap of nearly 9-10 mln t for urea and 7 mln t for DAP, which is met through imports.
    • The use of Muriate of Potash is about 3 mln t.
    • This is entirely imported.
    • The international prices of fertilizers are volatile and almost directly proportional to energy prices.

    Need to shift our focus to Bio-fertilizers

    • Bio-fertilizers are cheap, renewable, and eco-friendly, with great potential to supplement plant nutrients if applied properly. However, they are not a substitute for chemical fertilizers.
    • They improve the health of the soil. Since it provides nutrients to the soil in a small and steady manner, its immediate effects are not very visible.
    • Sales of biofertilizers in the country have not picked up because of a lack of knowledge and its slow impact on the productivity of the soil.
    • The use of biofertilizers is necessary to maintain soil health as more and more use of chemical fertilizers kills all the microorganisms available in the soil, which are so essential for maintaining soil health.
    • Supplementary use of biofertilizers with chemical fertilizers can help maintain soil fertility over a long period.
    • The overall strategy for increasing crop yields and sustaining them at a high level must include an integrated approach to the management of soil nutrients, along with other complementary measures.

    Way forward

    • Self-reliance: we need to be self-reliant and not depend on the import of fertilizers.
    • In this way, we can escape the vagaries of high volatility in international prices.
    • In this direction, five urea plants at Gorakhpur, Sindri, Barauni, Talcher, and Ramagundam are being revived in the public sector.
    • Extend NBS model to urea: The government introduced the Nutrient Based Subsidy (NBS) in 2010 to address the growing imbalance in fertilizer use.
    • However, only non-nitrogenous fertilizers (P and K) moved to NBS; urea was left out.
    • We need to extend the NBS model to urea and allow for price rationalization of urea compared to non-nitrogenous fertilizers and prices of crops.
    • Develop alternative sources of nutrition for plants: Discussions with farmers and consumers reveal a strong desire to shift towards the use of non-chemical fertilizers as well as a demand for bringing parity in prices and subsidy given to chemical fertilizers with organic and biofertilizers.
    • This also provides the scope to use large biomass of crop that goes waste and enhance the value of livestock by-products.
    • We need to scale up and improve innovations to develop alternative fertilizers.
    • Improve fertilizer efficiency:  India should pay attention to improving fertilizer efficiency through need-based use rather than broadcasting fertilizer in the field.
    • The recently developed Nano urea by IFFCO shows promising results in reducing the usage of urea.

    Consider the question “What are the challenges facing the fertiliser sector in India? How subsidies lead to distortion in the use of various types of fertilisers.”

    Conclusion

    These changes will go a long way in enhancing the productivity of agriculture, mitigating climate change, providing an alternative to chemical fertilizers and balancing the fiscal impact of fertilizer subsidy on the Union Budgets in the years to come.

    Back2Basics: Nutrient Based Subsidy

    • Under the NBS regime – fertilizers are provided to the farmers at subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.
    • Also, the fertilizers which are fortified with secondary and micronutrients such as molybdenum (Mo) and zinc are given additional subsidy.
    • The subsidy on Phosphatic and Potassic (P&K) fertilizers is announced by the Government on an annual basis for each nutrient on a per kg basis – which are determined taking into account the international and domestic prices of P&K fertilizers, exchange rate, inventory level in the country etc.
    • NBS policy intends to increase the consumption of P&K fertilizers so that optimum balance (N:P:K= 4:2:1) of NPK fertilization is achieved.

    [pib] Nutrient Based Subsidy (NBS) for Phosphatic & Potassic (P&K) Fertilizers

  • Co-op Societies are not banks, RBI cautions

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

    What is the news?

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

    Who can use ‘Bank’ title?

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

    What is Cooperative Banking?

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

    Features of Cooperative Banks

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

    History of Cooperative Banking in India:

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

    Structure of Cooperative Banking

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

    Various facets of cooperatives in India

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

    Importance of Cooperative Banks:

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

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

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

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

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

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

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

     

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  • Farm distress and the demand for guaranteed MSP

    Despite the announcement to repeal the three farm laws, farmers have decided to continue protesting for a legal mandate for Minimum Support Prices (MSP).

    What is the Minimum Support Price (MSP) system?

    • MSP is a form of market intervention by the Govt. of India to insure agricultural producers against any sharp fall in farm prices.
    • MSP is price fixed by GoI to protect the producer – farmers – against excessive falls in price during bumper production years.

    Who announces it?

    • The govt. announces MSPs for 22 mandated crops and fair and remunerative prices (FRP) for sugarcane.
    • MSP is announced at the beginning of the sowing season for certain crops on recommendations by Commission for Agricultural Costs and Prices (CACP).
    • It is announced by Cabinet Committee on Economic Affairs (CCEA) chaired by the PM of India.

    Why MSP?

    • The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
    • They are a guaranteed price for their produce from the Government.
    • In case the market price for the commodity falls below the announced MSP due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced MSP.

    Need for Guaranteed MSPs

    • No legal protection: While the government does announce MSPs every year, it is not required to do so by law. The compulsion to procure on MSP is political, not legal.
    • Discretion of procurement: But if there were to be a law backing the MSP regime, the government would lose its existing discretion in choosing not to procure.
    • Compulsion: A legal mandate for MSP would force the government to purchase all the products that any farmer wants to sell at the declared MSP.
    • State-wide procurement: It would also have to procure from all states, and all crops for which MSPs are announced.

    Failures of MSPs

    • A legally mandated MSP regime is likely to be neither feasible nor sustainable in the long run since Demand-side constrains are never accounted while procuring.
    • Already grain stocks lying with the government are more than twice its buffer requirement, and sometimes end up rotting.
    • At a fundamental level, the problem is there are just too many people involved in Indian agriculture for it to be truly remunerative.
    • To a great extent, the solution to the economic distress of Indian farmers lies outside agriculture — in boosting India’s industrial and services sectors.

    Possible way forward

    • It seems logical that instead of bypassing the market by using MSPs, the government should make efforts to enable farmers to participate in the market.
    • The way forward is to ramp up investment in the agriculture sector.
    • This means better irrigation facilities, easier access to credit, timely access to power, and ramping up warehouse capacity and extension services, including post-harvest marketing.
    • The approach has to be to raise the farmers’ bargaining ability and choices before them.

     

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  • Matosinhos Manifesto for accelerated use of space in Europe

    The European Space Agency (ESA) has approved a Matosinhos Manifesto to accelerate the use of space in Europe.

    Matosinhos Manifesto

    • At the Intermediate Ministerial Meeting that was held in Matosinhos, Portugal.
    • The Council of Ministers unanimously adopted this resolution that lays down a vision for the continent in terms of maintaining and expanding its activities in space.
    • The large-scale nature and fast pace of the climate crisis and other challenges means that no European nation will be able to effectively address them alone.

    The manifesto defines three “accelerators” to further advance Europe’s space ambitions:

    1. The first of these accelerators is for the ESA to start working towards the “Space for a Green Future”
    2. The second accelerator is called “Rapid and Resilient Crisis Response” to support governments to act decisively on crises facing Europe, from flooding and storms to wildfires
    3. The third accelerator mentioned in the resolution is “Protection of Space Assets”, whose objective is to safeguard ESA astronauts and assets from interference by space debris and space weather

    A brief history of the ESA

    • The ESA is an intergovernmental organization that was formed in 1975 with the aim of developing Europe’s space capabilities.
    • The organization has 22 member states — Austria, Belgium, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Spain, Sweden, Switzerland and the UK.
    • Slovenia, Latvia and Lithuania are Associate Members.

     

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  • Tackling the problem of bad loans

    Context

    The newly-created National Asset Reconstruction Company (NARCL) in the public sector offers hopes for the faster clean up of lenders’ balance sheets.

    Features of National Asset Reconstruction Company (NARCL)

    • The newly-minted ARC, NARCL is not a bank, but a specialised financial institution to help resolve the distressed assets of banks.
    • Faster aggregation: Its greatest virtue lies in the faster aggregation of distressed assets that lie scattered across several lenders.
    •  Soverign assurance: Its securitised receipts (SRs) carry sovereign assurance.
    • This is of particular comfort to PSU banks as price discovery would not be subject to later investigations.
    • Focus on large accounts: It would initially focus on large accounts with debts over Rs 500 crore.
    • IDRCL: All eyes will be focused on IDRCL (Indian Debt Resolution Company), the operating arm, which would be in the private sector.

    Past policy measures to resolve the bad debts

    • Institutional measures include BIFR (Board for Industrial and Financial Reconstruction, 1987), Lokadalat, DRT (Debt Recovery Tribunal, 1993), CDR (Corporate Debt Restructure, 2001), SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement, 2002), ARC (Asset Recovery Company, 2002).
    • The RBI has also launched a slew of measures during 2013-14 to resolve, reconstruct and restructure stressed assets.

    Why the measures to resolve the bad debt failed?

    • Of the 28 ARCs (private sector) in operation, many are bit players.
    • Dominance of few ARC: The top five ARCs account for over 70 per cent of the asset under management (AUM) and nearly 65 per cent of the capital.
    • Restructuring as an exception: Financial and business restructuring appears to be more an exception than the norm.
    • Nearly one-third of debts are rescheduled.
    • This is not much value addition to what lenders would have otherwise done at no additional cost.
    • Success and shortcomings of IBC: The IBC, introduced in 2016, was landmark legislation and marked a welcome departure from the earlier measures, with a legally time-bound resolution.
    • The focus is on resolution rather than recovery.
    •  It nearly put an end to evergreening.
    • Even though there are delays under this newfound promise, they are counted in terms of days and not years and decades.
    • The NCLT (National Company Law Tribunal)  is the backbone of the IBC, but lamentably is starved of infrastructure and over 50 per cent (34 out of 63) of NCLT benches were bereft of regular judges.
    •  Even the parliamentary committee has expressed indignation on a large number of positions left vacant.
    • This lack of adequate infrastructure, coupled with the poor quality of its decisions, has proved to be the IBC’s Achilles’ heel.
    • We need judicial reforms for early and final resolutions.
    • Issue of delayed recognition and resolution: Forty-seven per cent of the cases referred to the IBC, representing over 1,349 cases, have been ordered for liquidation.
    • Against the aggregate claims of the creditors of about Rs 6.9 lakh crore, the liquidation value was estimated at a paltry Rs 0.49 lakh crore.

    Suggestions to make IBC more effective

    • Delayed recognition and resolution: Lenders and regulators need to address the issue of delayed recognition and resolution.
    • Business stress and/or financial stress needs to be recognised even prior to regulatory norms on NPA classification.
    • Dealing with anchoring bias: The tendency to make decisions on the basis of first available information is called “anchoring bias”.
    •  The first available information in bidding for distressed assets is the cost of acquisition to ARCs.
    • Potential bidders would quote prices nearer to this anchor.
    • Nobel Laureate Daniel Kahneman has suggests a three-step process to mitigate anchor bias: One, acknowledge the bias; two, seek more and new sources of information, and three, drop your anchor on the basis of new information.

    Way forward for NARC

    • Forbid wilful defaulters from taking back distressed asset: The IBC has made considerable progress in bringing about behavioural change in errant and wilful defaulters by forbidding them to take back distressed assets.
    • Otherwise, the credit culture suffers.
    • The NARC should uphold this principle, not dilute it
    • Introduce Sunset clause: It should have a sunset clause of three to five years.
    • This will avoid the perpetuation of moral hazard and also encourage expeditious resolution.
    • Deal with anchor bias: Anchor bias needs to be mitigated by better extrinsic value discovery.
    • Avoid selling to other ARCs: It should avoid selling to other ARCs.

    Conclusion

    The RBI has recently released (November 2) a report on the working of ARCs and makes 42 recommendations to improve the performance of ARCs. This article incidentally makes an effort to identify some constraints and offer solutions to improve the performance of ARCs.

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  • Semiconductor Shortage and the tech industry

    Chips or processors power every possible product on the market from high-end cars to washing machines. There is a worldwide shortage of semiconductor chips.

    What are Semiconductors?

    • A semiconductor sits between a conductor and an insulator and is commonly used in the development of electronic chips, computing components, and devices.
    • It’s generally created using silicon, germanium, or other pure elements.
    • Semiconductors are created by adding impurities to the element.

    Giants of global chip industry

    • Semiconductor manufacturing is now dominated by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Samsung Electronics in South Korea.
    • American chipmaker Intel now plans to spend $20 billion to build two new chip factories in Chandler, Arizona.
    • These new fabs will also manufacture chips designed by Amazon, Qualcomm, and other customers.

    Why is there a semiconductor shortage?

    • During the pandemic, manufacturing came to a standstill impacting the supply chains of products that need one or more of these.
    • As the automotive sector almost shut down last year, chip makers shifted capacity to cater to increased demand for electronics items such as cell phones and laptops.
    • Since orders for advanced chips are placed well in advance, manufacturers have not yet been able to come back to pre-pandemic production schedules to cater to all sectors.
    • The automotive chips are of medium-level complexity, compared to the really small and extremely complicated ones on smartphones and personal computers.
    • Building something this small, featuring billions of transistors is an expensive process.

    Has India missed the bus in setting up chip factories?

    • There is a lot of risks involved in setting up a chip plant.
    • Past initiatives to set up chip manufacturing units in the country never took off due to lack of long-term vision, lack of government incentives, and poor planning.
    • Now the government is keen to promote manufacturing and has even proposed tax incentives under Production Linked Incentive Scheme.
    • Things are progressing slowly, but the recent announcement of Tata Group entering semiconductor manufacturing is being seen positively.

    How is the chip crisis playing out in geopolitics?

    • The global chip crisis and geopolitical tensions with China have shifted focus back on semiconductors.
    • The US, which was once a leader in chip manufacturing, wants the crown back.
    • The protectionist US is looking to bring manufacturing back to America and reduce its dependency on a handful of chipmakers mostly concentrated in Taiwan and South Korea.
    • China’s renewed aggression on Taiwan is also being seen in light of the chip crisis.

    Impact

    • The crisis is expected to cost the global automotive industry $210 billion in revenue in 2021.
    • The global semiconductor shortage has affected many industries for more than a year and because of that, they are either forced to pay more for products or being asked to wait a little more.
    • The consumption of integrated circuits in products is ever increasing and a large manufacturing sector for these kinds of integrated circuits are a part of the supply chain.
    • The shortage has affected smartphones, personal computers, game consoles, automobiles, and medical devices.

     

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