Note4Students
From UPSC perspective, the following things are important :
Prelims level: Development Finance Institution
Mains level: Paper 3- Crucial misses in the Budget 2021-22
The article highlights the key aspects of the budget and also mention the failure to address the challenge of employment and rising inequality.
Significance of the Budget
- At its simplest, is the government’s tentative income and expenditure statement.
- At its broadest, the Budget is a pious statement of the government’s policy and ideological intentions.
- It is also the government’s statement of how it seeks to tackle the immediate political (electoral) and economic challenges.
Stepping up public investment and challenge of financing
- The present Budget’s focus on stepping up public investment by 34.5% in the coming fiscal year (compared to the current year) is a welcome sign.
- The government will borrow an additional ₹80,000 crore for the purpose in the next two months.
- Realisation of these investments would crucially depend on tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the government’s ability to raise resources from the market, without raising interest rates for the private sector.
- There is no mention of the government’s recourse to debt monetisation.
- While the investment intentions are evident, its financing efforts seem to have too many loose ends.
Development Finance Institution
- To deal with the poor industrial and infrastructure investment during the last decade the Budget proposed setting up of Development Finance Institution.
- One of the reason for poor investment was a lack of long-term credit for infrastructure,which yields low rates of return spread over a long period of time.
- Commercial banks, whose deposits are for short to medium term, find it difficult to lend for long term (more than five years) for the fear of maturity mismatch.
- Moreover, as banks were laden with rising non-performing assets on account of poor corporate sector performance during the last decade.
- Also, most successful industrialising economies have relied on DFIs for providing long-term credit.
Financing challenge DFI could face
- Weakness of DFI lies in securing stable long-term, low cost sources of finance.
- The proposed DFI will be financed by foreign portfolio investments (FPI), which is a cause for concern.
- By definition, FPI represents short term inflows with exchange rate risks, while infrastructure investment is for long term whose revenues will be mostly in rupees.
- Such an investment will inevitably lead to currency and maturity miss-match, raising cost of capital.
- Hence, there is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies.
Health infrastructure
- A substantial annual fixed investment in improving urban sanitation, drinking water and sewage facilities, it is indeed a welcome step.
- A lessons from rural Swachh Bharat Abhiyan is that complementary facilities need to be constructed in a coordinated manner to maximise the effectiveness of such investments.
No effort to address rising inequality
- There is no targeted employment programme to alleviate the immediate crisis is a matter of concern.
- There is no mention of the stupendous rise in economic inequality during just the last year.
- While the poor lost their jobs and livelihoods in 2020, corporate India’s profits increased.
- The Budget could have consider a special tax on the super-rich — as many countries are now mooting.
Consider the question “What necessited the Development Finance Institution? Examine the challenge it would face in its functionig?”
Conclusion
In summary, if the capital expenditure plan outlined in the Budget speech is credible, and implemented with assured financial backing, it could revive the investment cycle. The proposed development bank for term lending for infrastructure is welcome, provided its sources of finance are cheap, long term and mostly domestic. Investments in urban public health infrastructure — sanitation, water supply and sewage — are in the right direction if implemented in a coordinated manner.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Union Budget
Mains level: Paper 3- Transparency in the Budget, bias towards subsidies and neglect of RD in allocation to agriculture sector
The article analyses the Union Budget and highlights the emphasis on transparency by showing the borrowing of the FCI and arrears of the fertiliser companies in the Budget.
Transparency in food subsidy and arrears of fertiliser industry
- Year after year, a substantial part of the food subsidy was being put under the carpet by increasing the Food Corporation of India’s (FCI) borrowings.
- The amount had crossed Rs 3 lakh crore.
- The revised estimate (RE) for FY 2020-21 is 3.66 times the budgeted figure, indicating that almost all borrowings of FCI have been cleared.
- This is indeed a historic step towards introducing transparency in the Union Budget.
- The Budget also cleared off the fertiliser industry’s arrears.
- Against the budgeted figure of Rs 71,309 crore for FY 2020-21, the revised estimate is Rs 1,33,947 crore, an increase of Rs 62,638 crore.
Neglect of R&D
- From a policy perspective one must point to the huge bias towards subsidies as compared to investments, especially research and development.
- The allocation for agri-R&D is a meagre Rs 8,514 crore in FY 2021-22 against a RE of Rs 7,762 crore in FY 2020-21.
- The marginal returns in terms of agri-growth from expenditures on agri-R&D are almost five to 10 times higher than through subsidies.
- India spends not even half of what a private global company like Bayer spends on agri-R&D — almost Rs 20,000 crore every year.
- This is why growth momentum in agriculture remains subdued and India keeps spending on freebies with sub-optimal results.
Subsidies needs a rethink
1) Food subsidy
- The FCI’s economic cost of rice is Rs 37/kg and of wheat about Rs 27/kg.
- This economic cost is roughly 40 per cent higher than the procurement price.
- This calls for giving the public distribution system’s beneficiaries the choice of direct cash transfers.
- This could create a more diversified demand which, in turn, will support diversification in agriculture.
- Further, in food subsidy, it is time to revise the issue prices for beneficiaries except for the antyodaya (most marginal) category.
- Percentage of population covered by the food subsidy should be brought down to 40 per cent.
2) Fertiliser subsidy
- Massive subsidisation of urea, to the tune of almost 70 per cent of its cost, is leading to its sub-optimal usage.
- It is time to move towards direct cash transfers to farmers based on a per hectare basis and free up prices of fertilisers.
- This will help reduce leakages and imbalance in NPK (nitrogen, phosphorus, potassium) usage and lead to efficiency, equity and environmental sustainability.
Consider the question “If one looks at India’s Union Budget, it is easy to notice huge bias towards subsidies and neglect of the research and development in agriculure in the allocation for agriculture sector. What are the implications of such bias?”
Conclusion
Overall, the expenditure on agri-R&D needs to be doubled or even tripled in next three years, if growth in agriculture has to provide food security at a national level and subsidies on food and fertilisers need to be contained. At the same time, food subsidy and fertiliser subsidy needs rationalisation.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Budget
Mains level: Paper 3- Lack of income support in the Budget
The article takes broad overview of the Budget and highlight the recovery led by the goverment spending.
Faster and sharper recovery
- The economy has been recovering sharply and faster in the last two quarters than suggested by official growth numbers.
- Official growth number remain based on antiquated year-on-year comparisons.
- Comparisons from a year ago have a serious problem in that they depend on what happened four quarters earlier and tell us very little about growth momentum.
- J.P. Morgan estimates suggest that, on a quarterly basis, India’s GDP plunged 25 per cent in the second quarter of 2020 and grew 21.5 per cent in the third quarter of the same fiscal year.
- This is a narrative markedly different from that portrayed by the official numbers.
What is the basis of optimis
- The economy is likely to have grown another 10.5 per cent in the fourth and is expected to deliver a growth rate of negative 6.5 per cent for the full fiscal year and then rise by 13.5 per cent in FY 2022.
- The basis of this optimism is two-fold.
- First, by accident or design, India has managed to break the link between infection and mobility.
- The second is the recent shift in the government’s fiscal stance.
- After delaying for nearly six months, the government began to speed up spending in September.
Government spending to boost economy
- With the economy recovering and the equity market surging, taxes and privatisation would reasonably be expected to rise.
- The revenue increase could be used to reduce the deficit while keeping spending broadly at its current share of the Gross Domestic Product (GDP).
- This would allow spending to grow 17-18 per cent, in line with the nominal GDP.
- The choice really boiled down to where to spend.
Higher fiscal deficit
- For this year, the Budget pegged the deficit at 9.5 per cent of GDP, much higher than market estimates of around 7 per cent and a 5 per cent-point rise over the previous year.
- Instead of funding food procurement through off-balance-sheet borrowing by the Food Corporation of India (FCI), as has been the case in the last few years, this year’s Budget has rightly brought some of that spending back on its accounts.
- Excluding subsidies and interest payments, the increase in the deficit is just 2 percentage points of GDP.
Continues lack of income support
- In the details, while there is a welcome emphasis on public health, infrastructure projects, and on privatisation, the glaring omission is the continued lack of income support.
- This lack of income support is important.
- Underlying the strong headline recovery in growth, imbalances in the economy have widened significantly.
- The scarring in the labour market is extensive and the likely damage to household and SME balance sheets substantial.
- While a debt moratorium and other regulatory forbearance have concealed the extent of the damage, these measures simply postpone the eventual reckoning.
- A key risk is that not only is medium-term growth impaired because of the scarring, but also that banks turn risk-averse and do not extend credit exactly when the recovery is expected to gather strength once mobility fully normalises.
Consider the question “While the Budget for 2021-21 rightly health, infrastructure and privatisation, the lack of income support could threaten the prospects of recovery. Comment.”
Conclusion
While the Budget is constructive and has helped to allay fears of excessive fiscal tightening, it did not go far enough to mitigate the tail risk that the current economic recovery does not turn into a “dead cat bounce”.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: BNO visa
Mains level: Hong-Kong/ Taiwan Issue
Hong Kong residents can apply for a new visa offering them an opportunity to become British citizens after Beijing’s imposition of a national security law last year.
What is the news?
- The move comes as China and Hong Kong have said they will no longer recognise the British National Overseas (BNO) passport as a valid travel document from Sunday, January 31.
- Britain and China have been arguing for months about what London and Washington say is an attempt to silence dissent in Hong Kong after pro-democracy protests in 2019 and 2020.
What is the British move for citizenship?
- The scheme, which was first announced last year, allows those with BNO status to live, study and work in Britain for five years and eventually apply for citizenship.
- BNO is a special status created under British law in 1987that specifically relates to Hong Kong.
- Britain says it is fulfilling a historic and moral commitment to Hong Kong people after Beijing imposed the security law on the semi-autonomous city.
- Britain says breaches the terms of agreements under which the colony was handed back to China in 1997.
- The U.K. government forecasts the new visa could attract more than 300,000 people and their dependants to Britain.
Chinese stance on the move
- China says the West’s views on its actions over Hong Kong are clouded by misinformation and an imperial handover.
- Beijing also said that it would no longer be recognising BN(O) passports, saying that the citizenship offer “seriously infringed” on China’s sovereignty.
- It is unclear, however, how this could deter Hong Kongers from leaving since city residents are usually known to use Hong Kong passports while leaving for another country.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Stardust-1, Biofuels
Mains level: Not Much
Stardust 1.O was recently launched from Maine, the US has become the first commercial space launch powered by biofuel.
UPSC may puzzle you with the following type of MCQ asking:
Q.Which of the following is the unique feature of the Stardust 1.0 Spacecraft recenlty seen in news?
(a) It is propelled by Bio-fuels.
(b) It has the largest payload capacity.
(c) It is re-usable launch vehicle.
(d) All of the above
What is Stardust 1.O?
- Stardust 1.O is a launch vehicle suited for student and budget payloads.
- The rocket is manufactured by bluShift, an aerospace company based in Maine that is developing rockets that are powered by bio-derived fuels.
- The rocket is 20 feet tall and has a mass of roughly 250 kg.
- The rocket can carry a maximum payload mass of 8 kg and during its first launch carried three payloads.
- The payloads included a cubesat prototype built by high-school students, a metal alloy designed to lessen vibrations.
Why such missions are important?
- Such efforts are a part of a growing number of commercial space companies that are working to provide easier and cheaper access to space to laypeople.
- It also makes access to space cost-effective for purposes of academic research, corporate technology development and entrepreneurial ventures among others.
Back2Basics: Biofuel
- Biofuels are obtained from biomass, which can be converted directly into liquid fuels that can be used as transportation fuels.
- The two most common kinds of biofuels in use today are ethanol and biodiesel and they both represent the first generation of biofuel technology.
- Ethanol, for instance, is renewable and made from different kinds of plant materials.
- Biodiesel on the other hand is produced by combining alcohol with new and used vegetable oils, animal fats or recycled cooking grease.
Categories of biofuels
Biofuels are generally classified into three categories. They are
- First-generation biofuels – First-generation biofuels are made from sugar, starch, vegetable oil, or animal fats using conventional technology. Common first-generation biofuels include Bioalcohols, Biodiesel, Vegetable oil, Bioethers, Biogas.
- Second-generation biofuels – These are produced from non-food crops, such as cellulosic biofuels and waste biomass (stalks of wheat and corn, and wood). Examples include advanced biofuels like biohydrogen, bioethanol.
- Third-generation biofuels – These are produced from micro-organisms like algae.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: MITRA scheme
Mains level: Textile sector of India
The Finance Minister has proposed setting up of a scheme of Mega Investment Textiles Parks (MITRA) Scheme in her budget speech.
Do not get confused over Sahakar Mitra Scheme and this one.
MITRA Scheme
- MITRA aims to enable the textile industry to become globally competitive, attract large investments, and boost employment generation and exports.
- It will create world-class infrastructure with plug and play facilities to enable create global champions in exports.
- It will be launched in addition to the Production Linked Incentive Scheme (PLI).
- It will give our domestic manufacturers a level-playing field in the international textiles market & pave the way for India to become a global champion of textiles exports across all segments”.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Forest produces, MSP
Mains level: MSP for MFPs
14 new Minor Forest produce items have been included under the Mechanism for Marketing of Minor Forest Produce through Minimum Support Price scheme.
Which are the 14 new MFP?
Tasar Cocoon, Cashew Kernel (Anacardiumoccidentale), Elephant Apple Dry, Bamboo Shoot (Phyllostachys edulis), Malkangani Seed, Mahul Leaves, Nagod (Vitex negundo), Gokhru (Tribulus terrestris), Pipla/ Uchithi, Gamhar/ Gamari (dry bark), Oroxylumindicum, Wild Mushroom dry, Shringraj (Eclipta Alba), Tree Moss (Bryophytes).
Now try this PYQ from CSP 2018:
Q. Consider the following:
- Areca nut
- Barley
- Coffee
- Finger millet
- Groundnut
- Sesamum
- Turmeric
The Cabinet Committee on Economic Affairs has announced the Minimum Support Price for which of the above?
(a) 1, 2, 3 and 7 only
(b) 2, 4, 5 and 6 only
(c) 1, 3, 4, 5 and 6 only
(d) 1, 2, 3, 4, 5 and 7
About MSP for MFP Scheme
- Under the scheme, Minimum Support Price for Minor Forest Produce (MFP) has been fixed for select MFP.
- The scheme is designed as a social safety net for improvement of livelihood of MFP gatherers by providing them fair price for the MFPs they collect.
- The Scheme has been implemented in eight States having Schedule areas as listed in the Fifth Schedule of the Constitution of India.
- From November 2016, the scheme is applicable in all States.
Back2Basics: Forest Produce in India
- Forest produce is defined under section 2(4) of the Indian Forest Act, 1927.
- Its legal definition includes timber, charcoal, catechu, wood-oil, resin, natural varnish, bark, lac, mahua flowers, trees and leaves, flowers and fruit, plants (including grass, creepers, reeds and moss), wild animals, skins, tusks, horns, bones, cocoons, silk, honey, wax, etc.
- Forest produce can be divided into several categories.
- From the point of view of usage, forest produce can be categorized into three types: Timber, Non-Timber and Minor Minerals.
- Non-timber forest products [NTFPs] are known also as minor forest produce (MFP) or non-wood forest produces (NWFP).
- The NTFP can be further categorized into medicinal and aromatic plants (MAP), oilseeds, fibre & floss, resins, edible plants, bamboo, reeds and grasses.
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