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GS Paper: GS3

  • Revealing India’s actual farmer population

    Context

    Depending on the source, there is a wide variation in the number of farmers in India.

    What is the extent of variation?

    • The last Agriculture Census for 2015-16 placed the total “operational holdings” in India at 146.45 million.
    • The Pradhan Mantri-Kisan Samman Nidhi (PM-Kisan) scheme has 110.94 million beneficiaries.
    • National Statistical Office’s Situation Assessment of Agricultural Households (SAAH) report for 2018-19 pegs the country’s “agricultural households” at 93.09 million.

    What explains the variation?

    • This wide variation has largely to do with methodology.
    • The Agriculture Census looks at any land used even partly for agricultural production, the land does not have to be owned by that person (“cultivator”), who needn’t also belong to an “agricultural household”.
    • The SAAH report, on the other hand, considers only the operational holdings of agricultural households.
    • Members of a household may farm different lands.
    • The SAAH takes all these lands as a single production unit.
    • It does not count multiple holdings if operated by individuals living together and sharing a common kitchen.
    • Accounting for only “agricultural households”, while not distinguishing multiple operating holdings within them, brings down India’s official farmer numbers to just over 93 million.
    • Expansive definition: SAAH’s definition of “agricultural households” is expansive.
    • It covers households having at least one member self-employed in agriculture and whose annual value of produce exceeds Rs 4,000.
    • Such self-employment needs to be for only 30 days or more during the survey reference period of six months.

    So, what is the actual number of farmers?

    • The estimate of actual number is based on the following methodology.
    • The SAAH report gives data on agricultural household income from farm and non-farm sources, both state-wise and across different land-possessed/operational holding size classes.
    • From the above data, we can categorise “full-time/regular” farmers as those households whose net receipts from farming are at least 50 per cent of their total income from all sources.
    • The SAAH report also has state-wise estimates of agricultural households for each land-possessed size class.
    • By taking only those size classes in which the dependence ratios are higher than (or close to) 50 per cent, and adding up the corresponding estimated number of agricultural households, we are able to arrive at the total “full-time/regular” farmers for each state.
    • Following the above methodology, India’s “serious” farmer population, in turn, adds up to 36.1 million, which is hardly 39 per cent of the SAAH estimate.

    Policy implications of having actual numbers of farmers significantly lower than estimated

    • If the actual number of farmers deriving a significant share of their income from agriculture per se is only 40 million a host of policy implications follow.
    • Targeted policy: One must recognise that farming is a specialised profession like any other.
    • “Agriculture policy” should, then, target those who can and genuinely depend on farming as a means of livelihood.
    • Minimum support prices, government procurement, agricultural market reforms, fertiliser and other input subsidies, Kisan Credit Card loans, crop insurance or export-import policy on farm commodities will matter mainly to “full-time/regular” farmers.
    • Land size matters: The SAAH report reveals that the 50 per cent farm income dependence threshold is crossed at an all-India level only when the holding size exceeds one hectare or 2.5 acres.
    • This is clearly the minimum land required for farming to be viable, which about 70 per cent of agricultural households in the country do not possess.
    • Policy for labourers: What should be done for this 70 per cent, who are effectively labourers and not farmers?
    • Their problems cannot be addressed through “agriculture policy”.
    • The scope for value-addition and employment can be more outside than on the farm — be it in aggregation, grading, packaging, transporting, processing, warehousing and retailing of produce or supply of inputs and services to farmers.

    Consider the question “What explains the wide variation in the estimates of the number of farmers in India? What are the implications of such variations for agriculture policy?”

    Conclusion

    Agriculture policy should aim not only at increasing farm incomes but also adding value to produce outside and closer to the farms. A more sustainable solution lies in reimagining agriculture beyond the farm.

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  • Pandora Papers on Offshore Financial Trusts

    There are at least 380 persons of Indian nationality in the Pandora Papers.

    What are the Pandora Papers?

    • The Pandora papers are the largest trove of leaked data exposing tax haven secrecy in history.
    • They provide a rare window into the hidden world of offshore finance, casting light on the financial secrets of some of the world’s richest people.
    • It includes over 11.9 million leaked files from 14 global corporate services firms which set up about 29,000 off-the-shelf companies and private trusts in not just obscure tax jurisdictions.
    • These documents relate to the ultimate ownership of assets ‘settled’ (or placed) in private offshore trusts and the investments including cash, shareholding, and real estate properties, held by the offshore entities.

    Indians included in these

    • There are at least 380 persons of Indian nationality in the Pandora Papers.
    • There are almost 60 prominent individuals and companies including the most decorated cricketer of India.

    What do these papers reveal?

    • They reveal how the rich, the famous and the notorious, many of whom were already on the radar of investigative agencies, set up complex multi-layered trust structures for estate planning.
    • This is particularly in jurisdictions that are loosely regulated for tax purposes, but characterized by air-tight secrecy laws.
    • The purposes for which trusts are set up are many, and some genuine too.

    But a scrutiny of the papers also shows how the objective of many is two-fold:

    1. Tax Avoidance: to hide their real identities and distance themselves from the offshore entities so that it becomes near impossible for the tax authorities to reach them and,
    2. Tax Evasion: to safeguard investments — cash, shareholdings, real estate, art, aircraft, and yachts — from creditors and law enforcers.

    How is Pandora different from the Panama Papers and Paradise Papers?

    • The Panama and Paradise Papers dealt largely with offshore entities set up by individuals and corporates respectively.
    • The Pandora Papers investigation shows how businesses disguised as Trusts have created a new normal with rising concerns of money laundering, terrorism funding, and tax evasion.

    What is a Trust?

    • A trust can be described as a fiduciary arrangement where a third party, referred to as the trustee, holds assets on behalf of individuals or organizations that are to benefit from it.
    • It is generally used for estate planning purposes and succession planning.
    • It helps large business families to consolidate their assets — financial investments, shareholding, and real estate property.

    A trust comprises three key parties:

    1. Settlor — one who sets up, creates, or authors a trust;
    2. Trustee — one who holds the assets for the benefit of a set of people named by the ‘settlor’; and
    3. Beneficiaries — to whom the benefits of the assets are bequeathed.
    • A trust is not a separate legal entity, but its legal nature comes from the ‘trustee’.
    • At times, the ‘settlor’ appoints a ‘protector’, who has the powers to supervise the trustee, and even remove the trustee and appoint a new one.

    Is setting up a trust in India, or one offshore/ outside the country, illegal?

    • The Indian Trusts Act, 1882, gives legal basis to the concept of trusts.
    • While Indian laws do not see trusts as a legal person/ entity, they do recognise the trust as an obligation of the trustee to manage and use the assets settled in the trust for the benefit of ‘beneficiaries’.
    • India also recognises offshore trusts i.e., trusts set up in other tax jurisdictions.

    If it’s legal, what’s the investigation about?

    • There are legitimate reasons for setting up trusts — and many set them up for genuine estate planning.
    • A businessperson can set conditions for ‘beneficiaries’ to draw income being distributed by the trustee or inherit assets after her/ his demise.
    • For instance, while allotting shares in the company to say, four siblings, the father promoter set conditions that a sibling can get the dividend from the shares and claim ownership of the shares.
    • This could be to ensure ownership of the enterprise within the family.
    • But trusts are also used by some as secret vehicles to park ill-gotten money, hide incomes to evade taxes, protect wealth from law enforcers.

    Why are trusts set up overseas?

    Overseas trusts offer remarkable secrecy because of stringent privacy laws in the jurisdiction they operate in.  From the investigation, some key tacit reasons why people set up trusts are:

    Maintain a degree of separation: Businesspersons set up private offshore trusts to project a degree of separation from their personal assets.

    Hunt for enhanced secrecy: Offshore trusts offer enhanced secrecy to businesspersons, given their complex structures. The Income-Tax Department can get information only with the financial investigation agency or international tax authority.

    Avoid tax in the guise of planning: Businesspersons avoid their NRI children being taxed on income from their assets by transferring all the assets to a trust. Further, the tax rates in overseas jurisdictions are much lower than the 30% personal I-T rate in India plus surcharges, including those on the super-rich (those with annual income over Rs 1 crore).

    Prepare for estate duty eventuality: There is pervasive fear that estate duty, which was abolished back in 1985 when Rajiv Gandhi was PM, will likely be re-introduced soon. Setting up trusts in advance, business families have been advised, will protect the next generation from paying the death/ inheritance tax, which was as high as 85 per cent.

    Flexibility in a capital-controlled economy: India is a capital-controlled economy. Individuals can invest only $250,000 a year under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). To get over this, businesspersons have turned NRIs, and under FEMA, NRIs can remit $1 million a year in addition to their current annual income, outside India.

    The NRI angle: Offshore trusts, as noted earlier, are recognised under Indian laws, but legally, it is the trustees — not the ‘settlor’ or the ‘beneficiaries’ — who are the owners of the properties and income of the trust. An NRI trustee or offshore trustee taking instructions from another overseas ‘protector’ ensures they are taxed in India only on their total income from India.

    Can offshore Trusts be seen as resident Indian for tax purposes?

    • There are certain grey areas of taxation where the Income-Tax Department is in contestation with offshore trusts.
    • After The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, came into existence, resident Indians — if they are ‘settlors’, ‘trustees’, or ‘beneficiaries’ — have to report their foreign financial interests and assets.
    • NRIs are not required to do so — even though, as mentioned above, the I-T Department has been sending notices to NRIs in certain cases.

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  • IAO Hanle: A promising astronomical observatory

    A new study shows that the Indian Astronomical Observatory (IAO) located in Hanle is one of the emerging sites for infrared and optical astronomy studies.

    About IAO Hanle

    • The IAO, located in Hanle at Mount Saraswati near Leh in Ladakh, has one of the world’s highest located sites for optical, infrared and gamma-ray telescopes.
    • It was established in 2001 and is operated by the Indian Institute of Astrophysics, Bangalore.
    • It is currently the ninth highest optical telescope in the world, situated at an elevation of 4,500 meters.

    Note: University of Tokyo Atacama Observatory (TAO) located in the Atacama desert of Chile is the highest at an elevation of 5,640 m.

    Major telescopes at Hanle include:

    1. Himalayan Chandra Telescope (An optical-infrared telescope named after India-born Nobel laureate Subrahmanyam Chandrasekhar)
    2. GROWTH-India Telescope (A robotic optical telescope)
    3. High Altitude Gamma Ray Telescope

    Distinct factors of IAO Hanle

    • IAO Hanle offers a clear view of space among all observatories globally.
    • This is due to its advantages of more clear nights, minimal light pollution, background aerosol concentration, extremely dry atmospheric condition and uninterrupted monsoon.
    • Hanle site is as dry as Atacama Desert in Chile and much drier than Devasthal and has around 270 clear nights in a year and is also one of the emerging sites for infrared and submillimetre optical astronomy.
    • This is because water vapor absorbs electromagnetic signals and reduces their strength.

     

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  • Khadi industry in India

    Context

    The Prime Minister has repeatedly stressed his support for khadi, cottage industries, crafts and handlooms.

    About Khadi

    • Genuine khadi or khaddar is woven from short-stapled organically grown cotton.
    • The beauty is in its uneven texture and colours, as cotton bolls are not all pure white in every region.
    • Fabrics being made today in the name of khadi are modified spin-offs that look more like handloom fabric, with mill-produced yarn, screen printed and often mixed with mill-made polyester.

    Issues

    • Restriction of scope: According to the Khadi Mark Regulations (KMR) of 2013, no textile can be sold or otherwise traded by any person or institution as khadi or a khadi product in any form if the khadi mark tag issued by KVIC is missing.
    • This restricts the scope of trade to a few approved entities, thereby creating recognisable barriers to enter the market for khadi.
    • Restrictive certification process: The certification process described in Chapter V (Clause 20 (a)) of the KMR requires accredited agencies to perform an on-site verification of hand-spinning and hand-weaving processes.”
    • Yarn must be procured only from KVIC depots or the Cotton Corporation of India, descriptions of mechanisation and electrification are ambiguous.
    • There are so many restrictions that most producers have no incentive and many small bodies are unable to pay Rs 50,000 for certification.
    • Multiple authorities: Hand-spinning and weaving are also part of craft skills. Only the hand-spun part is additional in khadi.
    • But today KVIC, on its website and in its catalogue, has visibly non-hand-spun silk-printed saris, polyester fabrics and others that seem clearly machine-printed.
    • The KVIC online catalogue has products like industrially-made suitcases, bags and wallets which are under MSME, but with a “khadi” label.
    • This points to the need for bringing khadi and all handicrafts together in one ministry.

    Conclusion

    Gandhi did not intend to create a police state for the khadi sector, full of acts and rules that put production in a straitjacket. Perhaps, some courageous producers can try circumventing all this by using the word “khaddar” on their labels instead.

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  • GST collections hit 5-month high

    India’s gross Goods and Services Tax (GST) revenues crossed ₹1.17 lakh crore in September, hitting a five-month high.

    Take a look towards the share of GST in government earnings for the previous fiscal:

    UPSC can ask about the majority component of the Revenue Receipts of the govt. See how Corporate tax is nearing the GST revenues.

    Do you think it will surpass GST revenue when the economy is fully recovered?

    What is the news?

    • September’s revenues were 23% higher than a year ago and 27.3% more than collections in the pre-pandemic month of September 2019.
    • Revenues from import of goods were 30% higher while indirect tax collected on domestic transactions, including the import of services, were 20% higher in September, compared to the same month in 2020.
    • Among the major States, GST revenues grew 29% in Karnataka, 28% in Gujarat, followed by 22% in Maharashtra and 21% each in Tamil Nadu and Andhra Pradesh.
    • Telangana recorded a 25% surge in revenues, while Odisha saw a sharper 40% rise.

    Significance

    • This clearly indicates that the economy is recovering at a fast pace.
    • Coupled with economic growth, anti-evasion activities, especially action against fake billers have also been contributing to the enhanced GST collections.
    • It is expected that the positive trend in the revenues will continue and the second half of the year will post higher revenues.

    Issues underlying

    • Though GST revenues are picking up pace after the impact of the Covid-19 pandemic, revenue buoyancy under GST is being seen as a concern.
    • This is especially after the legally mandated compensation to states for revenue shortfall from the GST implementation comes to an end in June 2022.

    Back2Basics: Goods and Services Tax

    • The GST is a value-added tax levied on most goods and services sold for domestic consumption.
    • It was launched into operation on the midnight of 1st July 2017.
    • It subsumed almost all domestic indirect taxes (petroleum, alcoholic beverages, and stamp duty are the major exceptions) under one head.
    • The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.
    • GST is levied at four rates viz. 5%, 12%, 18% and 28%. The schedule or list of items that would fall under these multiple slabs is worked out by the GST council.

    Types

    • The GST to be levied by the Centre is called Central GST (CGST) and that to be levied by the States is called State GST (SGST).
    • Import of goods or services would be treated as inter-state supplies and would be subject to Integrated Goods & Services Tax (IGST) in addition to the applicable customs duties.

    The GST Council

    • It is a constitutional body (Article 279A) for making recommendations to the Union and State Government on issues related to GST.
    • The GST Council is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in charge of Finance or Taxation of all the States.
    • It is considered as a federal body where both the centre and the states get due representation.

  • What is Computer Tomography?

    The first computed tomography image – a CT scan – of the human brain was made 50 years ago, on Oct. 1, 1971.

    A few months back, almost all of us have heard about the High-resolution computed tomography (HRCT) scan being conducted on our relatives for diagnosing the damage of lungs caused due to the Wuhan Virus.

    About Computer Tomography (CT)

    • A CT scan is a medical imaging technique used in radiology to get detailed images of the body noninvasively for diagnostic purposes.
    • The multiple X-ray measurements taken from different angles are then processed on a computer using reconstruction algorithms to produce tomographic (cross-sectional) images (virtual “slices”) of a body.

    How does it work?

    • They use a narrow X-ray beam that circles around one part of your body. This provides a series of images from many different angles.
    • A computer uses this information to create a cross-sectional picture. Like one piece in a loaf of bread, this two-dimensional (2D) scan shows a “slice” of the inside of your body.
    • This process is repeated to produce a number of slices.
    • The computer stacks these scans one on top of the other to create a detailed image of your organs, bones, or blood vessels.
    • For example, a surgeon may use this type of scan to look at all sides of a tumor to prepare for an operation.

    Its development

    • Since its development in the 1970s, CT has proven to be a versatile imaging technique.
    • While CT is most prominently used in diagnostic medicine, it also may be used to form images of non-living objects.
    • The 1979 Nobel Prize in Physiology or Medicine was awarded jointly to South African-American physicist Allan M. Cormack and British electrical engineer Godfrey N. Hounsfield “for the development of computer-assisted tomography”.

    Threats

    • CT scans use X-rays, which produce ionizing radiation.
    • Such radiation may damage your DNA and lead to cancer.
    • The risk increases with every CT scan we get.
    • Ionizing radiation may be more harmful in children.

     

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  • Species in news: Adi Cascade

    Making of check dams on streams and removal of boulders may wipe out the local population of Adi cascade frogs (Amolops adicola), a recently discovered species in Arunachal Pradesh, scientists claimed.

    About Adi cascade

    • The species was discovered while revisiting a century-old Adi expedition in 2018 and named after the land of the Adi tribe where the frogs dwell, particularly post-monsoon.
    • The call of the frog is quite unique with continuous notes almost like a cricket.
    • They are delivered at very short intervals, not long call groups — giving an impression of being continuous: A typical call lasts 485.2 milliseconds.
    • The species is predominantly found in open riverine landscapes and human-inhabited rural areas.
    • Males were mostly observed on tree saplings, fern fronds, and banana plants in and around the cultivated land.
    • Locally known as Juri (stream) Tatik (frog) — is considered a local delicacy.

    What are Cascade Frogs?

    • The nomenclature ‘cascade frogs’ draws on their preference for small waterfalls.
    • Cascade frogs, in general, depend on the flow of water.
    • Both adults and tadpoles of Adi cascade frogs, the species in question, are particularly adapted to fast flowing sections of stream.

    Rich biodiversity of Arunachal

    • Arunachal, a biodiversity hotspot, is home to many endemics, endangered and threatened species as well as to indigenous people who depend on its biological resources.
    • The Forest Survey of India in 2019 estimated that Arunachal had 66,688 sq km of forests — 79.6 per cent of the state’s area.
    • Global Forest Watch, however, estimated the forests cover at 74 per cent of its total land area.

     

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  • GI ecosystem

    This editorial discusses various economic and socio-cultural benefits offered by the Geographical Indication (GI) Tagging.

    What is Geographical Indication?

    • A GI is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
    • India, as a member of the World Trade Organization (WTO), enacted the Geographical Indications of Goods (Registration and Protection) Act, 1999 w.e.f. September 2003.
    • GIs have been defined under Article 22 (1) of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.
    • GI is granted for a term of 10 years in India. As of today, more than 300 GI tags has been allocated so far in India (*Wikipedia).

    Why must we promote GI?

    Several studies show that the patents and copyright protection of products under GIs result in higher economic gains, fostering quality production and better distribution of profits.

    • Lost in history: Most GI are either assigned to the dusty pages of history books or left to rural artisans to propagate and preserve.
    • Source of income: Today, with the emphasis on climate change and sustainability, these products can be ready revenue generators.
    • Demand in e-com market: A modern distribution system exists in India’s robust global e-commerce backbone which will propel the nascent GI industry onto the national and world stage.

    Need for govt support

    • GI products need the support of governments.
    • The Europeans are masters at it, as seen by products such as Brie cheese and sparkling wine from Champagne. The EU has an $87 billion GI economy.
    • China has also done very well by GI, strengthening e-commerce in rural areas and actively promoting agricultural special product brands in lesser developed areas.

    Role of GI in China’s rise

    • A 2017 UNCTAD report on inclusive growth and e-commerce deems China’s e-commerce-driven growth as inclusive.
    • That means China has successfully empowered micro, small and medium enterprises (MSMEs) to compete with large companies on the same stage, with no geographic boundaries.
    • Likewise, despite a globally depressed market for wines, the produce from the Ningxia region of China saw exports surge 46.4 per cent in 2020, benefitting 211 wineries in Ningxia.
    • The output value of GI producers in China totalled $92.771 billion as of 2020.

    Socio-cultural benefits offered by GI

    • GI protection has wider positive benefits, especially for local communities.
    • In particular, it encourages the preservation of biodiversity, local know-how and natural resources. And this is where India can do well.
    • Multiple benefits flows from a strong GI ecosystem, which can be a wellspring of economic and soft power.
    • It will automatically resolve the three fraught India issues of poor pay for talent, low female participation in the labour force, and urban migration.

    How can GI induce economic transformation?

    (1) Promotes Entrepreneurship and ‘Passion Economy’

    • It will convert talent into entrepreneurship with gig workers, and create a “passion” economy, that is, a new way for individuals to monetise their skills and scale their businesses exponentially.
    • It removes the hurdles associated with freelance work to earn a regular income from a source other than an employer.

    (2) Employment generation

    • The labour-intensive nature of GI offers the best solution to boosting the employment-to-population ratio in India.
    • India presently has an abysmal 43 per cent compared with the 55 per cent global average.

    (3) Women Empowerment

    • GI production mostly involves artisanal work-from-home culture.
    • Monetising this artisanal work done at home will increase India’s low female labour force participation rate, which at 21 per cent in 2019 was half the 47 per cent global average.

    (4) Prevents migration

    • The hyper-localised nature of GI offers solutions to reverse urban migration and conserve India’s ancient crafts, culture and food.

    (5) MSME Promotion

    • A rejuvenation of MSMEs, which account for 31 per cent of India’s GDP and 45 per cent of exports, will follow.
    • An estimated 55.80 million MSMEs employ close to 130 million people; of this, 14 per cent are women-led enterprises and 59.5 per cent are rural.

    (6) GI Tourism

    • Another revenue-earner, GI tourism, is typically a by-product of a strong GI ecosystem.

    Hurdles in GIs progress

    (1) Credit Facilities and Capacity Building

    • Since GI businesses are micro, it is necessary to address the challenges of capacity-building, formal or easy access to credit.
    • There is a need for forming marketing linkages, research and development, product innovation and competitiveness in both domestic and international markets.

    (2) Issue of Intermediaries

    • With the shift to digital platforms, the distribution margins of these gate keepers or mandi agents must be competitive.
    • They often act as countervailing agents by getting into similar businesses or product lines which will erode GI producer incomes.

    (3) Ensuring smoother transition

    • As seen from the experience of the new farm laws, this will be a task for the central and state governments; they must ensure the transition without breaking down too many existing linkages.

    Way forward

    • Control: Guardrails like regular audits and consultations with the GI producers must be mandated.
    • Cooperative management: Pulling it together will be local GI cooperative bodies or associations which can be nationally managed by a GI board.
    • Ministerial support: The Department for the Promotion of Industry and Internal Trade (DPIIT) and the Ministry of Commerce department should be tasked with developing this new sector.
    • Digital literacy: Finally, a required skill for GI producers is digital literacy. This should be a priority agenda item for NGOs and stakeholders like the DPIIT.

    Conclusion

    • It is an opportunity for India to redefine the future of work using automation, technology and artificial intelligence while simultaneously enhancing and adorning the country’s talented local work force.
    • The Indian GI economy can be a platform for India to showcase to the world a model for ethical capitalism, social entrepreneurship, de-urbanisation, and bringing women to the workforce, on the back of a robust digital system.
    • It recalls and attributes of multi-cultural ethos, authenticity, and ethnic diversity are potential turbochargers for the country’s economy.
    • It encompasses the concept of trusteeship, as advocated by Mahatma Gandhi and more recently, by our PM at the UN. It is truly Made in India.

     

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  • India’s Current Account Balance sees a spike

    India’s current account balance saw a far lower surplus of $6.5 billion (0.9% of GDP) in the first quarter compared with a surplus of $19.1 billion (3.7% of GDP) a year earlier.

    What is External Sector?

    • The external sector is the portion of a country’s economy that interacts with the economies of other countries.
    • In the goods market, the external sector involves exports and imports.
    • In the financial market it involves capital flows.

    Various terminologies related:

    [A] Balance of Payment (BoP)

    • BoP is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.
    • These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.
    • It consists of two components: the current account and the capital account.
    • The current account reflects a country’s net income, while the capital account reflects the net change in ownership of national assets.

    (1) Current Account

    • Current account of BoP consists of all transactions relating to goods, services and income, it is functionally classified into merchandise and
    • Current account deficit is the situation where payments on the country are more than the payments into the country.
    • In current account surplus, there is a net inward payment into the country on the current.

    (2) Capital Account

    • The capital account records the net flow of investment transaction into an economy.
    • Investments (FDI and FII) and borrowings (ECB) are part of the capital account.

    [B] Balance of Trade

    • Trade “balance” of a country shows the difference between what it earns from its exports and what it pays for its imports.
    • If this number is in negative – that is, the total value of goods imported by a country is more than the total value of goods exported by that country – then it is referred to as a “trade deficit”.
    • If India has a trade deficit with China then China would necessarily have a “trade surplus” with India.

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  • What gives rise to the rural debt trap?

    Context

    The AIDIS report published this month reveals that non-institutional sources have a strong presence in the rural credit market, notwithstanding the high costs involved in borrowing from them.

    Highlights of AIDIS

    • The All-India Debt and Investment Surveys (AIDIS) is carried out by the National Statistical Office.
    • AIDIS is among the most important nationally representative data sources on the rural credit market in India.
    • According to the latest report, the average debt per household in rural India is Rs 59,748, nearly half the average debt per household in urban India.
    • IOI: As per the latest AIDIS report, the incidence of indebtedness (IOI) is 35 per cent in rural India — 17.8 per cent of rural households are indebted to institutional credit agencies, 10.2 per cent to non-institutional agencies and 7 per cent to both.
    • Dependence on institutional source: The share of debt from institutional credit agencies in total outstanding debt in rural India is 66 per cent as compared to 87 per cent in urban India.
    • Dependence on institutional sources is often seen as a positive development, signifying broadening financial inclusion, while reliance on non-institutional sources denotes vulnerability and backwardness.
    • Purpose: Institutional credit is taken mainly for farm business and housing in rural India.
    • A significant portion of debt from non-institutional sources is used for other household expenditures.
    • Socio-economic inequality: The data indicates that better-off households have greater access to formal-sector credit and use it for more income-generating purposes.
    • Access to institutional credit is largely determined by the ability of households to furnish assets as collateral.
    • The report shows that the top 10 per cent of asset-owning households have borrowed 80 per cent of their total debt from institutional sources, whereas those in the bottom 50 per cent borrowed around 53 per cent of total debt from non-institutional sources.
    • Debt-trap: the Debt-Asset Ratio (DAR) of the bottom 10 per cent asset-owning households in rural India is 39, much higher than the DAR of 2.6 estimated for the top 10 per cent households.
    • This, coupled with higher borrowing from non-institutional sources, acts as a debt trap for households with fewer assets.

    Way forward

    • Inadequate access to affordable credit lies at the heart of the rural distress
    • The credit policy needs to be revamped to accommodate the consumption needs of the rural poor and to find alternatives for collateral to bring the rural households within the network of institutional finance.

    Conclusion

    The solution to the problem of lack of access to credit in rural areas lies in policy changes.

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