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GS Paper: GS3

  • Oil palm

    Context

    Supply disruptions during the pandemic and the Russia-Ukraine war have led many nations to think about “self-sufficiency” in critical food items or at least reduce their “excessive dependence” on imports of essential food products.

    Challenges facing global trade

    • The World Trade Organisation’s (WTO) recently concluded12th Ministerial Conference in Geneva, struggled to find answers to some of the complex questions pertaining to global trade.
    • The Ministerial Conference is the top decision-making body of the agency whose basic goal is to ensure that trade flows as smoothly, predictably and freely.
    • Trading rules for dire situations: As far as agriculture, trade and food security are concerned, the challenge is to figure out the most appropriate trading rules in dire situations like pandemics, wars, social/political disruptions or natural disasters.
    • Export bans: Recent examples include Russia’s export ban on wheat and sunflower oil, Ukraine’s ban on exports of food staples, Indonesia’s ban on palm oil exports, Argentina’s ban on beef exports, Turkey, Kyrgyzstan and Kazakhstan’s ban on a variety of grain products, and India’s wheat export ban.
    • Sudden actions such as these exacerbate the pressure on global trade leading to a spike in the prices.

    India’s import dependence for edible oil

    • India imports 55 to 60 per cent of its edible oil requirements.
    • India’s edible oil import bill in 2021-22 (FY22) crossed $19 billion (for more than 14 MMT of imports) (see figure).
    • Palm oil comprises more than 50 per cent of India’s edible oil imports, followed by soybean and sunflower.
    • Atmanirbharta in edible oil: The “excessive dependence” on imports has raised the pitch for “atmanirbharta” in edible oil. 
    • The Prime Minister launched the National Edible Oil Mission-Oil Palm (NEOM-OP) in 2021.

    Self-reliance Vs Self-sufficiency

    • “Self-sufficiency” and “self-reliance” are two different concepts with very different policy implications.
    • What is self-sufficiency? Self-sufficiency would imply replacing all imports of a commodity (say edible oils in India’s case) at any cost (thus raising import duties exorbitantly).
    • What is self-reliance? Self-reliance would continue to embed the principle of “comparative advantage” in the endeavour to reduce dependence on imports.
    • Case of India’s agriculture: The country’s agri-exports in FY22 touched $ 50.3 billion against its agri-imports of $ 32.4 billion.
    • This means that Indian agriculture is largely globally competitive. 
    • But its biggest agri-import item, edible oil, accounts for 59 per cent of India’s agri-import basket.

    Way forward

    • 1] Develop oil palm: Given the way international prices of edible oils have surged in the last year or so (by more than 70 per cent), it may be time for India to ramp up its efforts in developing oil palm.
    • Why oil palm? The Prime Minister launched the National Edible Oil Mission-Oil Palm (NEOM-OP) in 2021.
    • Challenges in traditional oilseed: Achieving atmanirbharta in edible oils through traditional oilseeds such as mustard, groundnuts and soya would require an additional area of about 39 million hectares under oilseeds.
    • Danger to food security: Such a large tract of land will not be available without cutting down the area under key staples (cereals) – this could endanger the country’s food security even more.
    • So, a rational policy option to reduce import dependence in edible oils is to develop oil palm at home and ensure that it gives productivity comparable to that in Indonesia and Malaysia — about four tonnes of oil per hectare, which is more than 10 times mustard can give at existing yields.
    • India has identified 2.8 million hectares of area where oil palm can be grown suitably.
    • So far the objective of NEOM-OP is to bring in at least 1 million hectare under oil palm by 2025-26.
    • 2] Declare oil palm as a plantation crop: The other option is to declare oil palm as a plantation crop and allow the corporate players to own/lease land on a long-term basis to develop their own plantations and processing units.
    • This does not seem plausible in the current socio-political context.

    Challenges

    • Long gestation period: It takes four to six years to come to maturity; during this period, smallholders need to be fully supported.
    • The support (subsidy) could be the opportunity cost of their lands, say profits from paddy cultivation, which is largely the crop oil palm will replace in coastal and upland areas of Andhra, Telangana and Northeast India.
    • Pricing formula: Further, the pricing formula of fresh fruit bunches (FFB) for farmers has to be dovetailed with a likely long-run average landed price of crude palm oil with due flexibility in the import duty structure.
    • Appropriate import duty: One needs to identify trigger points when import duties need to be raised as global prices come down, and when to reduce these duties in case of rising global prices.
    • Oil recovery: Besides this, the processing industry needs to ensure an oil recovery of at least 18 to 20 per cent – that must be built into the pricing formula.

    Conclusion

    Overall, unless India thinks holistically and adopts a long-term vision, the chances of reducing India’s imports of edible oils from 14MMT in FY22 to 7MMT by FY27 look bleak.

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  • The Cyber factor in the Russia-Ukraine war

    Context

    After 100 days of Ukraine crisis, Russia is yet to achieve what can be termed as a decisive victory in any sector of the current conflict.

    Reasons for the lacklustre performance of Russia

    • Several reasons have been adduced by experts in the West for the lacklustre performance of the Russian army.
    • Lack of motivation: There is a lack of motivation and the poor morale of the Russian forces sent to Ukraine.
    • Outdated weaponry: Russian weaponry being outdated and ineffective to fight an informationalised war under modern conditions.
    • Leadership issue: Russian commanders have also proved inept in devising plans and taking appropriate decisions in battlefield conditions against a determined enemy.

    Important role of cyber warfare

    • Given that cyber is often touted as the Fifth Dimension of warfare, it may be worthwhile to examine whether this indeed is the first major conflict in which ‘cyber’ is playing a crucial role, allowing a weaker nation with cyber capabilities to use it to its advantage.
    • A former Chief of the National Security Agency of the U.S., in his memoirs had said that although cyberspace is a man-made domain, it had become critical to military operations on land, sea, air and in space.
    • A former U.S. Secretary of Defence a few years ago,, even talked of a possible ‘cyber Pearl Harbour to paralyze nations and create a profound sense of vulnerability’.
    • The Russian military oligarchy is indeed among the world leaders in digital disruption and cyber-methodology.
    • One could have reasonably presumed that even before the conflict commenced, Russia would have swamped Ukraine with an avalanche of digital attacks.
    • Ukraine, for its part, has its own digital army, including a corps of digital weapons.

    Limits of cyber warfare

    • There are several publicised instances earlier, of alleged Russian operatives waging a cyberwar against Ukraine.
    • Both sides now possess and use malware such as data-wipers which have proved highly effective.
    • On the day the Russian invasion of Ukraine began, Russian cyber units are believed to have successfully deployed destructive malware against several Ukrainian military targets.
    •  A series of distributed denial-of-service (DDoS) attacks against Ukrainian banking and defence websites occurred simultaneously.
    • As far as the conduct of the war is concerned, the string of small-scale cyberattacks cannot be said to have had any material impact on the conduct or outcome of the conflict.
    • Hence, the cardinal question is why given that Ukraine has put up such a heroic defence — and to a considerable extent stalled the Russian offensive — Russia has not embarked on a massive all-out cyber-offensive.
    • If that be the case, then much of the speculation that cyberattacks in the event of a war provide a perpetrator the capability to enact another ‘Pearl Harbour’ seems highly unrealistic.

    Conclusion

    It is very likely, and possibly a fact, that there are major difficulties in planning and executing massive cyberattacks on a short timeline to ensure higher efficacy of kinetic attacks.

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  • Analysing the Agnipath scheme

    Context

    Recently, the Agnipath scheme for recruitment of short-term contracted soldiers was announced.

    About Agnipath Scheme

    • This will be the only form of recruitment of soldiers into the three defence services from now.
    • The scheme aims at strengthening national security and for providing an opportunity to the youth to serve in the armed forces.
    • Recruits under the scheme will be known as ‘Agniveers’.
    • After completing the four-year service, they can apply for regular employment in the armed forces.
    • They may be given priority over others for various jobs in other government departments.
    • The move is expected to decrease the average age profile of armed forces personnel from the current 32 to 24-26 years over a period of time.

    Benefits of the Agnipath Scheme

    • Lower the average age: The average age in the forces is 32 years today, which will go down to 26 in six to seven years, the scheme envisions.
    • Youthful armed forces will allow them to be easily trained for new technologies.
    • Employment opportunities: It will increase employment opportunities and because of the skills and experience acquired during the four-year service such soldiers will get employment in various fields.
    • High-skilled workforce: The scheme will also lead to the availability of a higher-skilled workforce to the economy which will be helpful in productivity gain and overall GDP growth

    Financial constraints and challenges

    • Directing funds towards modernisation: It has been argued that the savings in the pensions bill — which will show up on the books only after a couple of decades — would be directed towards the modernisation of defence forces.
    • The armed forces do not have that kind of time available to them to postpone their already long-delayed modernisation.
    • Shortage: The Indian Air Force is already down to 30 squadrons of fighter jets against the 42 squadrons it needs, and the Indian Navy is at 130 ships when its vision was to be a 200-ship navy; the Indian Army is already short of 1,00,000 soldiers.
    •  Instead of expanding the economy to support the military, the Government has resorted to shrinking the military.

    Issues with the short-term recruitment

    • No theoretical modelling: As the short-term recruitment policy has neither been theoretically modelled nor tried out as a pilot project, the exact consequences of the move will only be known as they play out.
    • Adverse effect on professional capabilities: But its adverse effect on the professional capabilities of the armed forces is certain.
    • It starts with the very high turnover of young soldiers, the increase in training capacities and infrastructure and the augmentation of the administrative setup for greater recruitment, release, and retention of soldiers.
    • An armed forces boasting of a poor teeth-to-tail ratio is further increasing the tail.
    • Impact on operational capabilities: The tooth-to-tail ratio (T3R), in military jargon, is the amount of military personnel it takes to supply and support (“tail”) each combat soldier (“tooth”).
    • The Indian Air Force and the Indian Navy employ their airmen and sailors in very specialised roles, which require technical skills, and a high degree of training and experience.
    • Because the short-term contractual soldier model (the Agniveer scheme) is going to take a few years to fully play out at an organisational level, the actual degradation of operational capability will only be known then.
    • Class-based recruitment abolished: In the Agnipath proposal, the class-based recruitment has been replaced with an all-India all-class recruitment.
    • It will strike at the core of the organisational management, leadership structures and operating philosophy of the Indian Army.
    • Even though the soldiers in the Indian Army are professionally trained, they also draw their motivation from their social identity  — where each soldier cares for his reputation among the peers in his caste group or his village or his social setting.
    • To replace that with a pure professional identity of a soldier will bring its own challenges in a tradition-bound army.
    • Training challenges: There will be major problems in training, integrating and deploying soldiers with different levels of experience and motivations.
    • An organisation which depends on trust, camaraderie and esprit de corps could end up grappling with rivalries and jealousies amongst winners and losers, especially in their final year of contract.
    • Legal challenges: Even though the Government has kept the contract at four years to deny the Agniveer gratuity and is not counting the contractual period towards regular service, these provisions are bound to be challenged legally.
    •  Over time, this will lead to the salary and pension budget creeping back up again.
    • Political imbalance: The Agnipath scheme also does away with the idea of a State-wise quota for recruitment into the Army, based on the Recruitable Male Population of that State which was implemented from 1966.
    • This prevented an imbalanced army.
    • Academic research shows that the high level of ethnic imbalance has been associated with severe problems of democracy and an increased likelihood of civil war.
    • Impact on motivation: A short-term contractual soldier, without earning pension, will be seen as doing jobs after his military service that are not seen to be commensurate in status and prestige with the profession of honour.
    • Impact on motivation: It will reduce the motivation of those joining on short-term contracts while diminishing the “honour” of a profession which places extraordinary demands on young men.
    • Social unrest: There are numerous examples of demobilised soldiers leading to increased violence against minorities.
    • This could happen in India as the youth who are not given regular recruitment after four year’s service would turn to violence.

    Conclusion

    The Government’s yearning for financial savings runs the risk of reducing the honour of a profession, the stability of a society and the safety of a country.

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  • Pak. may get off FATF ‘grey list’ after on-site check

    Pakistan got a reprieve from the Financial Action Task Force (FATF) as it announced that the country could be removed from the “grey list” after a visit by a fact-finding team.

    What is the news?

    • FATF noted Pakistan’s constructive claims of actions to curb terror funding.
    • It would formally be taken off the “grey list” in October.
    • China is working relentlessly to get Pakistan off FATF ‘grey list’.

    India’s stance

    • New Delhi has been sceptical of Pakistan’s commitment to completely end terror safe havens in the country.
    • Infiltration in J&K continues and small arms and IEDs are being habitually pushed across the LoC.

    What is the FATF?

    • The FATF is an international watchdog for financial crimes such as money laundering and terror financing.
    • It was established at the G7 Summit of 1989 in Paris to address loopholes in the global financial system after member countries raised concerns about growing money laundering activities.
    • In the aftermath of the 9/11 terror attack on the US, FATF also added terror financing as a main focus area.
    • This was later broadened to include restricting the funding of weapons of mass destruction.
    • The FATF currently has 39 members.

    Working of FATF

    • The decision-making body of the FATF, known as its plenary, meets thrice a year.
    • Its meetings are attended by 206 countries of the global network.
    • It includes members, and observer organisations, such as the World Bank, some offices of the UN, and regional development banks.

    Functions of FATF

    • The FATF sets standards or recommendations for countries to achieve in order to plug the holes in their financial systems and make them less vulnerable to illegal financial activities.
    • It conducts regular peer-reviewed evaluations called Mutual Evaluations (ME) of countries to check their performance on standards prescribed by it.
    • The reviews are carried out by FATF and FATF-Style Regional Bodies (FSRBs), which then release Mutual Evaluation Reports (MERs).
    • For the countries that don’t perform well on certain standards, time-bound action plans are drawn up.
    • Recommendations for countries range from assessing risks of crimes to setting up legislative, investigative and judicial mechanisms to pursue cases of money laundering and terror funding.

    What are the Black List and the Grey List?

    • The words ‘grey’ and ‘black’ list do not exist in the official FATF lexicon.
    • They however designate countries that need to work on complying with FATF directives and those who are non-compliant.
    1. Black List: The blacklist, now called the “Call for action” was the common shorthand description for the FATF list of “Non-Cooperative Countries or Territories” (NCCTs).
    2. Grey List: Countries that are considered safe haven for supporting terror funding and money laundering are put in the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist.

    Consequences of being:

    (1) In the grey list:

    • Economic sanctions from IMF, World Bank, ADB
    • Problem in getting loans from IMF, World Bank, ADB and other countries
    • Reduction in international trade
    • International boycott

    (2) In the black list:

    • High-risk jurisdictions subject to call for action
    • Countries have considerable deficiencies in their AML/CFT (anti-money laundering and counter terrorist financing) regimens
    • Enhanced due diligence
    • Members are told to apply counter-measures such as sanctions on the listed countries

    Note: Currently, North Korea and Iran are on the black list.

    Pakistan and FATF

    • Pakistan, which continues to remain on the “grey list” of FATF, had earlier been given the deadline till the June to ensure compliance with the 27-point action plan against terror funding networks.
    • It has been under the FATF’s scanner since June 2018, when it was put on the Grey List for terror financing and money laundering risks.
    • FATF and its partners such as the Asia Pacific Group (APG) are reviewing Pakistan’s processes, systems, and weaknesses on the basis of a standard matrix for anti-money laundering (AML) and combating the financing of terrorism (CFT) regime.

    Why is Pakistan on the grey list?

    • Pakistan has found itself on the grey list frequently since 2008, for weaknesses in fighting terror financing and money laundering.
    • It never addressed concerns on the front of terror financing investigations and prosecutions targeting senior leaders and commanders of UN-designated terrorist groups.
    • However, now steps had been taken in this direction such as the sentencing of terror outfit chief Hafiz Saeed, prosecution of Masood Azhar and seizure of their properties.
    • India meanwhile, a member of FATF, suspects the efficacy and permanence of Pakistani actions.

    How FATF impacts Pakistan?

    • The FATF grey list made it more difficult for Pakistan to get financial aid from the International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and the European Union (EU).
    • This will further create an economic crisis for Pakistan which is already struggling to control its financial position.
    • Bearing the cost of global politics the impact of FATF grey-listing on Pakistan’s economy has claimed that FATF’s decision has led to a loss of USD 38 billion for Pakistan so far.

    Steps taken by Pakistan

    • Pakistan is currently banking on its potential exclusion from the grey list to help improve the status of tough negotiations with the International Monetary Fund to get bailout money.
    • Pakistan is now making a high-level political commitment to the FATF and APG to address its strategic AML/CFT deficiencies.

     

     

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  • [pib] BIS develops an Standard for ‘Non-electric Cooling Cabinet made of Clay’

    Bureau of Indian Standards (BIS), the National Standards Body of India, has developed an Indian Standard, IS 17693: 2022 for ‘non-electric cooling cabinet made of clay’.

    IS 17693: 2022

    • BIS standard specifies the construction and performance requirements of a cooling cabinet made out of clay, which operates on the principle of evaporative cooling.
    • These cabinets may be used to store perishable foodstuff without the need of electricity.
    • This standard helps BIS in fulfilling 6 out of 17 UN Sustainable Development Goals (SDGs) like No poverty, Zero hunger, Gender equality, Affordable and clean energy, Industry, innovation, and infrastructure, and Responsible consumption and production.

    Why such move?

    • Named as ‘Mitticool refrigerator’, Mansukh Bhai Prajapati from Gujarat is the innovator behind the refrigerator which projects an eco-friendly technology.
    • It is a natural refrigerator made primarily from clay to store vegetables, fruits, milk, and also for cooling water.
    • It provides natural coolness to foodstuffs stored in it without requiring any electricity.
    • Fruits, vegetables, and milk can be stored reasonably fresh without deteriorating their quality.

    Back2Basics: Bureau of Indian Standards (BIS)

    • BIS is the National Standards Body of India working under the aegis of the Ministry of Consumer Affairs, Food & Public Distribution.
    • It is established by the Bureau of Indian Standards Act, 1986 which came into effect on 23 December 1986.
    • The organization was formerly the Indian Standards Institution (ISI), set up under the Resolution of the Department of Industries and Supplies in September 1946.
    • The ISI was registered under the Societies Registration Act, 1860.
    • A new Bureau of Indian standard (BIS) Act 2016 has been brought into force with effect from 12 October 2017.
    • The Act establishes the Bureau of Indian Standards (BIS) as the National Standards Body of India.

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  • Issues with Agnipath Scheme

    Massive protests are occurring against the Agnipath scheme all across the nation.

    What is the Agnipath Scheme?

    • This will be the only form of recruitment of soldiers into the three defence services from now.
    • The scheme aims at strengthening national security and for providing an opportunity to the youth to serve in the armed forces.
    • Recruits under the scheme will be known as ‘Agniveers’.
    • After completing the four-year service, they can apply for regular employment in the armed forces.
    • They may be given priority over others for various jobs in other government departments.
    • The move is expected to decrease the average age profile of armed forces personnel from the current 32 to 24-26 years over a period of time.

    Why are aspirants protesting?

    • Contractualisation of armed forces: The foundation of this scheme is a four-year contract.
    • Jobs for the majority: States such as Bihar, Jammu & Kashmir, Punjab, Himachal Pradesh, Haryana, Uttar Pradesh, Uttarakhand and Rajasthan, are where the bulk of the Army recruitment takes place.
    • Perks and benefits: Many of these people value job stability, which includes retirement benefits and pensions over competitive salaries.
    • Uncertainty after end of commission: Most of them will be forced to leave the job within four years, which doesn’t fit into their hopes and aspirations.
    • Casualization of Training: It reportedly takes two to three years to train a member of the army, but as a part of the Agnipath, soldiers will only be trained for six months.
    • Threats to national security: Defence analysts have allegedly pointed out that the Russian soldiers who were trained for a limited amount of time before they went to war have performed disastrously.
    • Conflicts of interest: Apprehensions have been voiced against how the new recruits will be adjusted in the existing system under which most of the Army units are region, caste or class based.

    Reasons behind aspirants’ frustration

    • Unemployment: Analysts always cite the crunch of gazetted officers in the Armed forces and there has been no recruitment for the last two years.
    • Pandemic impact: Many aspirants lost their chance to join the Armed forces as they are now overage.’
    • Unanticipated reforms: In guise of a push for “major defence policy reform”, the scheme is a fuss.

    What is the official explanation?

    • Once retired, aspirants will be free to pursue other careers, with several departments and governments.
    • Aspirants will get preference, educational credits, skill certificates, to help them rehabilitate in other fields.
    • Those wishing to be entrepreneurs will get a financial package and bank loans and those wishing to study further will be given 12 class equivalent certificate.
    • For job-seekers, the government has already said they will get priority in the Central Armed Police Forces.

    Way forward

    • The modalities of how this will happen are still being worked out.
    • But one thing is very clear, poorly crafted schemes are on the rise.
    • For making any scheme a success, pre-legislative consultation and discussion in the public domain is a must.

     

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  • India better placed to avoid Risks of Stagflation: RBI

    India’s economy is better placed than many other countries to avoid the risk of potential stagflation worldwide, said the Reserve Bank of India Deputy Governor.

    Why in news?

    • Stagflation remains a risk to the US economy, and there are similarities between the situation in the 1970s and today, a/c to World Bank.
    • Surging prices for oil and food are pushing up the cost of living, and business executives are voicing concerns about the outlook for the economy.

    What is Stagflation?

    • Stagflation is a stagnant growth and persistently high inflation. It, thus, describes a rather rare and curious condition of an economy.
    • Iain Macleod, a Conservative Party MP in the United Kingdom, is known to have coined the phrase during his speech on the UK economy in November 1965.

    What happens in Stagflation?

    • Typically, rising inflation happens when an economy is booming — people are earning lots of money, demanding lots of goods and services and as a result, prices keep going up.
    • When the demand is down and the economy is in the doldrums, by the reverse logic, prices tend to stagnate (or even fall).
    • But stagflation is a condition where an economy experiences the worst of both worlds — the growth rate is largely stagnant (along with rising unemployment) and inflation is not only high but persistently so.

    Possible reasons behind

    • Volatility due to war: Global economic conditions continued to deteriorate as commodity prices and financial market volatility have led to heightened uncertainty.
    • Monetary tightening: In advanced economies, the war against inflation would entail significant monetary tightening, complicating the growth-inflation outlook.
    • Global slowdown: Emerging market economies grapple with the global trade slowdown, capital outflows and imported inflation.

    Why is it so unpopular?

    • The combination of slow growth and inflation is unusual, because inflation typically rises and falls with the pace of growth.
    • The high inflation leaves less scope for policymakers to address growth shortfalls with lower interest rates and higher public spending.

    Back2Basics: Inflation and its impact

    • Depression: It is Economic depression is a sustained, long-term downturn in economic
    • Deflation: It is the general fall in the price level over a period of time.
    • Disinflation: It is the fall in the rate of inflation or a slower rate of inflation. Example: a fall in the inflation rate from 8% to 6%.
    • Reflation: It is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation.
    • Skewflation: It is the skewed rise in the price of some items while remaining item prices remain the same. E.g. Seasonal rise in the price of onions.
    • Stagflation: The situation of rising prices along with falling growth and employment, is called stagflation. Inflation is accompanied by an economic recession.

     

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  • What is Black Death?

    In a study published in the Science journal, researchers have claimed that the bubonic plague was originated in modern day northern Kyrgyzstan around 1338-1339 – nearly 7-8 years before it ravaged large parts of the world.

    What is Black Death?

    • The term Black Death refers to the bubonic plague that spread across Western Asia, Northern Africa, Middle East and Europe in 1346-53.
    • Most scholars agree that the Black Death, which killed millions, was caused by bacterium Yersinia pestis and was spread by fleas that were carried by rodent hosts.
    • The microorganism Y. pestis spread to human populations, who at some point transmitted it to others either through the vector of a human flea or directly through the respiratory system.

    Why this plague was called the Black Death?

    • It is commonly believed that the term Black Death gets its name from the black marks that appeared on some of the plague victims’ bodies.
    • In the 14th century, the epidemic was referred to as the ‘great pestilence’ or ‘great death’, due to the demographic havoc that it caused.
    • The world black also carried a dark, gloomy emotional tone, due to the sheer amount of deaths generated by the plague.

    Why is the new discovery significant?

    • The geographical origin point of the plague has been debated for centuries.
    • Some historians have argued that the plague originated in China, and spread across Europe by Italian merchants who first entered the continent in trading caravans through Crimea.
    • Another story argues that Mongol army hurled plague-infested bodies into the city during the siege of Caffa (Crimea) and led to the spread of the disease.

     

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  • The uneven toll of inflation

    Context

    This upsurge of inflation is affecting the poor more than any other social group because some of the commodities whose prices are increasing the most (like petrol and certain food items) represent a larger fraction of the budget of the most vulnerable sections of society.

    Factors fueling inflation in India

    • The Wholesale Price Index (WPI) and the Consumer Price Index (CPI) show an upward rising trend, annually, at 13.11 per cent and 6.07 per cent respectively.
    • Falling rupee: Inflation is here to stay because it has much to do with the decline in value of the rupee that has fallen to its lowest, which makes imports of oil and gas more expensive.
    • Ukraine crisis: The war in Ukraine has the same effect and pushes the price of some food items upward.

    Rising inequality

    • Impact on the poor: This upsurge of inflation is affecting the poor more because some of the commodities whose prices are increasing the most represent a larger fraction of the budget of the most vulnerable sections of society.
    • Rising inequality: As a result, inequalities — which were already on the rise — are increasing further.
    • Recently, the State of Inequality in India report showed that an Indian making Rs 3 lakh a year belonged to the top 10 per cent of the country’s wage earners. 
    •  Inequalities are also increasing among salaried people, who are privileged compared to those of the informal sector: The bottom 50 per cent account for only 22 per cent of the total salary income.
    • The situation of the lower-middle class and poor is deteriorating.
    • The Reserve Bank of India shows slow farm wage growth in nominal terms: From an average of 6.6 per cent in fiscal 2021 to 5.7 per cent in fiscal 2022 (April-November average). This is below the inflation rate.

    Inequality in healthcare

    • India’s spending on healthcare is among the lowest in the world.
    • A decent level of healthcare is available only to the ones who can afford it because of increasing out-of-pocket expenditure — the payment made directly by individuals for the health service, not covered under any financial protection scheme.
    •  Overall, these out-of-pocket expenses on healthcare are 60 per cent of the total expenditure on public health in India, which is one of the highest in the world.

    How policies are contributing to the increasing inequality?

    • High indirect taxes: The share of indirect taxes in the state’s fiscal resources has increased from 2014 to 2019 to reach 50 per cent of the total taxes in 2019.
    • Higher indirect taxes are the most unfair as it affects everyone, irrespective of their income.
    • Taxes on alcohol and petroleum products are cases in point.
    • In contrast, the big companies are flourishing, again, partly because of certain fiscal policies. 
    • Low corporate taxes: The government’s budget in 2015 substantially lowered the corporate tax.
    • Withdrawal of enhanced surcharge: In addition to these tax cuts, the government withdrew the enhanced surcharge on long- and short-term capital gains for foreign portfolio investors (FPIs) as well as domestic portfolio investors.
    • These government policies are clearly promoting the supply side at the expense of demand.
    • The central bank has raised interest rates and CRR in an attempt to curb demand, but demand in the country is already choking.

    Way forward

    • Higher allocation for MGNREGA: A higher allocation of funds for MGNREGS in rural areas, as well as the introduction of similar employment generation schemes in urban areas, should, therefore, be a priority.
    • Municipal bonds at state level: At the state level, the development of municipal bond markets could be a plausible alternative.
    • Reduction on excise duty on fuel: A reduction in the excise duty on fuel prices and easing the fuel tax burden could also supplement the disposable income and reduce the input cost burden for producers.

    Conclusion

    Though the government is opting for market-based economics, currently, India needs a mixed solution that comprises price stability via government channels and subsidies.

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    Back2Basics: Long and short-term capital gain

    • When you buy and sell assets, the profit that you earn is called a Capital Gain.
    • Long Term Capital Gains are those that you earn when you sell an asset after 36 months (3 years) from the date on which you acquired the asset.
    • Short Term Capital Gains are those that you earn when you sell an asset in under 36 months (3 years) from the date on which you acquired the asset.

  • Freebie model of Governance

    Context

    The newly elected Punjab government’s announcement of providing up to 300 units of free power to every household has raised questions: What constitutes “freebies”?

    Two categories for providing support

    • In India government provides two types of support.
    • 1] support to low-income households for augmenting their consumption of selected goods and services.
    • 2] Government also provides incentives to support selected categories of investors and producers.
    • Different objectives: The economic objectives in these two categories are quite different.
    • The first category would include the free or subsidised provision of foodgrains and services such as health and education.
    • Examples of the second group include the central government’s recent initiative for production-linked incentives to various sectors and tax concessions.
    • In the past, incentives in the form of reduction of corporate taxes have been offered to promote investment in general, or in certain regions such as backward areas.

    What commodities should be distributed free?

    • The key question is to decide what commodities should be distributed free or at a subsidised level and what the level of subsidy should be.
    • Essential goods: The provision of foodgrains at a heavily subsidised price to target groups has found general acceptance, particularly among political parties, even though there are some critics of the measure.
    • The distribution of commodities which are considered “essential”, primarily foodgrains, faces no criticism.
    • Merit goods: There is also a category of goods which are called “merit” goods where significant positive externalities are associated with their consumption — for instance, health and education-related provisions, including mid-day meals and breakfast.
    • In such cases, subsidisation is justified: If only market prices prevail, the community will consume less than what is socially desirable.

    What should be the suitable mode of providing support?

    • The question of a suitable model for providing budgetary support arises in the context of both consumption and production-supporting initiatives.
    • 1] In the first case, budgetary support to a targeted segment of the population for augmenting their consumption of essential items may be provided either through direct income support or by a free or highly subsidised provision. 
    • Procurement set up and distribution system: When the provision of subsidised goods is involved, there may, in general, be a requirement of a procurement set-up and a public distribution system.
    • Managing procurement and distribution by government agencies involves additional costs which tend to be higher than the corresponding supply through the market because of leakages and avoidable administrative costs.
    • 2] Production-related incentives: In the case of production-related incentives, alternative methods include direct budgetary support and indirect support through tax concessions.
    •  Both have a differential impact.
    • These schemes also require to be carefully designed to avoid their misuse and minimise their costs. The provision of free power to farmers was often misused.
    • In the case of tax concessions, there have not been any convincing studies as to whether the stated initial objectives were achieved in line with the large budgetary costs.
    • The magnitudes involved amounted to 1.9 per cent and 2.5 per cent of the GDP in 2018-19 and 2019-20 respectively.

    What should be a prudent fiscal limit for funding such programmes?

    • Let us consider the case of distribution of commodities that are meant to support consumption.
    • Limited budgetary resources: This question should be considered in light of our limited budgetary resources.
    • Stagnating revenue to GDP ratio: In India, the revenue to GDP ratio has been stagnating over a long period of time.
    • During 2010-11 to 2019-20, combined revenue receipts of central and state governments, relative to GDP, have languished in the narrow range of 18.4 per cent to 20.3 per cent.
    • In contrast, in many developed and emerging market economies, this ratio tends to be much higher.
    • In 2019, these ratios were 36 per cent and 30.1 per cent for the UK and USA.

    Suggestions

    • It is advisable to limit the distribution of commodities and services at highly subsidised levels to essential and merit goods.
    • Infrastructure expansion: Production may be incentivised more effectively by other methods such as infrastructure expansion.
    • Determining the total quantum of support: In respect of production-related incentives also, greater care is required for determining the total quantum of support as well as the specific forms of such support.
    • Limit of 10 %: It would be prudent to limit overall fiscal support for the distribution of commodities to less than 10 per cent of the total expenditure of the central government and state governments until their revenue GDP or GSDP ratios are successfully increased in a sustained way.

    Conclusion

    Governments that do not pay adequate attention to the strength of their fisc eventually become exposed to the cost of the choices that they make.

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    Back2Basics: Merit goods

    • Merit goods are the goods that are provided generally by the government to certain sections of the society.
    • Unlike in the case of pure public goods, the merit goods are not provided to the entire society; rather they are given to certain targeted people.
    • The government here believe that the deserving people may under-consume such goods and hence provides these to them at low cost or no cost.

    Positive externalities

    • A positive externality exists if the production and consumption of a good or service benefits a third party not directly involved in the market transaction.
    • For example, education directly benefits the individual and also provides benefits to society as a whole through the provision of more informed and productive citizens.