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  • Neglect of demand side

    What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.

    Why stakeholders are not happy with the package?

    • Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
    •  Marketing reforms and infrastructure creation are distant promises.
    • MSME sector:  The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
    • In their experience, lenders are not always supportive in extending loans.
    • While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
    • What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
    • Corporate sector: There is nothing for the corporate sector in manufacturing or services.
    • The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
    • Ironically, there is little for public health, already in a dilapidated state.
    • Even stock markets, characterised by irrational exuberance in the past month, have dropped.

    Government expenditure in the fiscal stimulus

    • The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
    • This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
    • Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
    • The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
    • Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

    Focus of the package: supply side

    • It is clear that the design of this relief package seeks to focus on the supply side.
    • Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
    • Focus is not on the demand side by stepping up government expenditure.
    • This is done with the aim of minimising the cost to the government.
    • The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.

    So, let’s understand why focus on supply side is flawed strategy

    • This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
    • Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
    • Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
    • At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
    • In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
    • For this reason, the fiscal stimulus should have been much larger.

    Excessive concerns over fiscal deficit

    • The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
    • Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
    • The conclusion drawn, wrongly, is that there is no fiscal space.
    • The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
    • In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.

    Monetising the deficit  and issues involved in doing so

    • This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
    • Such market borrowing would simply drive up interest rates and nip recovery in the bud.
    • It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
    • Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
    • In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
    • Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
    • For one, their ethics and integrity have seen steady erosion.
    • Moreover, how many sovereign governments will they downgrade?
    • In fact, we might be better off without the footloose and volatile portfolio investment inflows.

    Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”

    Conclusion

    If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.

  • Focus on supply side

    Whether to focus on supply side or demand side is the dilemma governments often face while deciding the measures to cure the ailing economy. This article explains using basic economics and evidence from across the world to make the case for a focus on the supply side. In doing so, it explains the problems with demand side measures such as cash transfers and tax rebets.

    Issue of neglect of demand side

    • The Union government is often criticised for its apparent neglect of the demand side and its excessive focus on the supply side.
    • Structural reforms — the COVID-19 package was no exception.
    • Low credit growth, weak inflation, and flat wage growth are the factors focused by demand-side proponents.
    • The deand side proponents suggest measures such as cash transfers, income tax cuts, and cheap credit to consumers.

    So, let’s focus on Demand vs. Supply side debate

    Low growth in credit to MSME

    • A demand shock typically leads to a rise in both volume and the price.
    • A supply shock not only hurts the volume but also leads to price rise.
    • In banking, a good proxy for the price of credit is the spread.
    • Spread is difference between lending rate and the funding rate  repo rate or deposit rates for the banks.
    • The spread reflects the risk premium banks charge to their customers.
    • The spread has consistently risen from just below 4 per cent at the start of 2018 to around 6 per cent in January 2020.
    • That means, the banks charged 4-6 per cent more on loan than it paid to its depositor or to RBI on the funds it got from them.
    • The fact that spreads are rising was highlighted by the 2019 Economic Survey as well.
    • At the same time, the credit growth — especially for public banks and to the MSME sector — has been sluggish for the previous two to three years.
    • The MSME sector witnessed sub-zero credit growth for the whole of 2017 and even now, the credit growth is very tepid at around 2 per cent Y-o-Y.
    • Rising spreads with lower credit volume provide a clear sign that credit supply is broken.

    What a paper by Nobel laureates on MSME says?

    • Paper by Nobel laureates Abhijit Banerjee and Esther Duflo examines the reasons for MSME problems.
    • The paper amply highlights the fact that the MSME sector suffers from lack of credit availability to finance investments rather than the lack of demand for credit.
    • They showed that when the government changed the definition of small firms, the firms newly covered by the priority sector lending programme used the extra credit to increase production and investment.
    • If there was no demand for credit, cheaper credit under the priority sector programme should have been used to repay the older expensive sources of borrowings.

    So, how will the recently announced package help MSEs?

    • Consistent with this view, we think that the government’s approach of guaranteeing SME credit by resolving the risk-sharing problem for banks will expand credit to credit-starved SMEs at lower credit spreads.
    • Similarly, expansion of the universe of small/medium firms will bring fresh investments from the firms, which are newly covered under priority sector programme as they will be able to get cheaper credit.

    2 Measures to increase consumer demand and issues involved

    1. Direct transfers schemes

    • No doubt that cash-transfers are superior to distortive subsidies and the “Garib Kalyan” package was a step in this direction.
    • In fact, the government has already transferred close to Rs 40,000 crore to bank accounts including Rs 10,000 crore to women under PMJDY.

    But is cash-transfers the ultimate solution to recovery?

    • In fact, the PMJDY account balance has increased.
    • The increase is from close to Rs 1,17,000 crore before the advent of COVID-19 to Rs 1,35,911 crore as of May 13 .
    • This is a massive jump of close to Rs 18,000 crore.
    • Recent research by Prasanna Tantri and co-authors shows that PMJDY account holders actively use the accounts — 1.12 transactions per quarter compared to the World Bank standard of one transaction.
    • In fact, PMJDY accounts see withdrawals when account holders are in distress, according to the study.
    • So the rise in balances is not mechanical.

    So, why are they not spending?

    • It’s not that people covered under PMJDY are comfortable financially.
    • A number of papers show that tax rebates boost demand in the short-run, but the quantum is limited.
    • For example, Sumit Agarwal and his co-authors show that the 2001 tax rebate programme in the US led to an average spending of only $60 on $500 rebate over nine months.
    • A recent study at the Kellogg Business School by Christian Borda and co-authors shows that tax rebates after the 2008 crisis in the US led to rise in spending, but by only 3.5 per cent in the first month of the rebates.
    • The crux is that no rational consumer goes on a consumption spree when he is facing job uncertainty!

    2. What about providing cheap credit to customers?

    • Trying to boost demand by providing cheap credit to consumers is not a good idea either as evidenced by the debt-financed housing boom in the US, which led to the 2008 crisis.
    • In fact, Atif Mian and Amir Sufi, using a large panel of 30 countries, uncover a more general pattern — an increase in household debt to GDP ratio leads to a sustained drop in future GDP, investments, and unemployment.
    • On the other hand, the economic cycles are much more muted when the initial growth is caused by structural reforms as pointed in a recent IMF study covering over 80 countries.

    Consider the question “Whenever governments decide on the stimulus package amid financial crises, supply side vs. demand side debate flares up. This has also been the case in India as the government announced the stimulus package recently. In light of this, examine the issues involved in demand side measures.”

    Conclusion

    To put the burden of recovery on risk-averse consumers, incentivising them to spend rather than save when there is employment uncertainty, is against any reasonable risk-sharing principle. Risk should be borne by those who have the appetite — the firms and government.

  • How China is seeking more control on Hong Kong?

    China has started pushing for an “improvement” in the Basic Law — the mini-constitution that defines ties between Hong Kong and Beijing — signalling a fundamental change in the way the highly autonomous city-state is run. The Chinese parliament is debating a controversial national security law for Hong Kong.

    Practice question for mains:

    Q. Democracy and authoritarianism cannot co-exist in the same country. Comment in context to the situation generated in Taiwan. How is the situation different from the withdrawl of special category status of Jammu and Kashmir.

    Chinese authoritarian grip on Hong Kong

    Hong Kong’s ‘Basic Law’

    • Hong Kong is a Special Administrative Region (SAR) of China.
    • It has observed a “one country, two systems” policy since Britain returned sovereignty to China on July 1, 1997, which has allowed it certain freedoms, the rest of China does not have.
    • It is governed by a mini-constitution called the Basic Law — which affirms the principle of “one country, two systems”.
    • The constitutional document is a product of the 1984 Sino-British Joint Declaration.
    • Under this, China promised to honour Hong Kong’s liberal policies, the system of governance, an independent judiciary, and individual freedoms for a period of 50 years from 1997.

    Uproar in Hong Kong

    • China accuses that the Hong Kong SAR has not acted out its constitutional duty for national security in line with China’s Constitution and the Basic Law.
    • Since the handover, Hong Kong residents have time and again taken to the streets to protect their Basic Law freedoms, with the first major pro-democracy protest taking place in 2003.
    • In 2014, over one lakh city residents took part in the ‘Umbrella Revolution’ to protest against China’s denial of democratic reforms.

    Impact of the 2019 protests

    • The largest protests since the 1997 handover took place last year in 2019 when for months tens of thousands of Hong Kongers agitated against a proposed extradition law.
    • The protest continued with pro-democracy marches even after the legislation was withdrawn.
    • These protests were seen as an affront by mainland China, which under President Xi Jinping has increasingly adopted a more hardline approach to foreign policy and internal security issues in recent years.

    Rise of Taiwanese aspirations

    • The Hong Kong unrest is also believed to have left its mark on Taiwan, another prickly issue for Beijing which considers the island state as its own.
    • In this year’s presidential election, Taiwanese voters brought to power the Democratic Progressive Party, which openly opposes joining China.

    The National Security Law

    • Under Article 23 of the Basic Law, Hong Kong has to enact a national security law “to prohibit any act of treason, secession, sedition, and subversion against the Chinese government.
    • When the Hong Kong government first tried to enact the law in 2003, the issue became a rallying point for the city-wide protests which occurred that year.
    • Since then, the government has steered clear of introducing the legislation again.
    • Beijing could now make the law applicable to Hong Kong by another route — by inserting the legislation in Annex III of the Basic Law.
    • The Chinese parliament is expected to vote on a resolution that will make way for the new law, which could be promulgated in Hong Kong.

    What could happen if such a law takes effect?

    • The new law would ban seditious activities that target mainland Chinese rule, as well as punish external interference in Hong Kong affairs.
    • Many expect a revival of the protests that rocked the city last year.
    • China, on the other hand, has sought support and understanding of India and other countries for its controversial decision as a precautionary measure.

  • U.S. set to exit the ‘Open Skies Treaty’ Copy

    The U.S. has given notice that it will exit the Open Skies Treaty (OST) in response to Russia who had allegedly violated the treaty.

    The New START, INF and now the OST …. Be clear about the differences of these treaties. For example- to check if their inception was during cold war era etc.

    Open Skies Treaty (OST)

    • OST is an agreement that allows countries to monitor signatories’ arms development by conducting surveillance flights over each other’s territories.
    • The idea behind the OST was first proposed in the early years of the Cold War by former U.S. President Dwight Eisenhower.
    • It came to existence decades later and was signed in 1992, during the George H.W. Bush presidency and after the Soviet Union had collapsed.
    • The OST came into effect in 2002 under the George W. Bush administration and it allows its 34 signatories to conduct unarmed reconnaissance flights over the territory of treaty countries.

    Issues with the OST

    • The U.S. has used the treaty more intensively than Russia.
    • Between 2002 and 2016, the U.S. flew 196 flights over Russia (in addition to having imagery from other countries) compared to the 71 flights flown by Russia.

    Significance

    • The U.S.’s exit last year from other arms deal the West had signed with Russia — the Intermediate-Range Nuclear Forces (INF) treaty — as well as its imminent departure from the OST has raised the strong possibility that the Trump administration may not renew the New Start Treaty.
    • The New START Treaty was signed by the Obama administration with Russia that caps Russian and U.S. nuclear arsenal. The New Start Treaty is due to expire in February 2021.
    • The Trump administration has been worried that extending New START would negatively impact an arms deal with China and Russia.
    • It is concerned that China’s nuclear stockpile could be doubled if the New Start Treaty continued as is, without including China.

    Back2Basics: New START pact

    • The New Strategic Arms Reduction Treaty (New START) pact limits the number of deployed nuclear warheads, missiles and bombers and is due to expire in 2021 unless renewed.
    • The treaty limits the US and Russia to a maximum of 1,550 deployed nuclear warheads and 700 deployed missiles and bombers, well below Cold War caps.
    • It was signed in 2010 by former US President Barack Obama and then-Russian President Dmitry Medvedev.
    • It is one of the key controls on superpower deployment of nuclear weapons.
    • If it falls, it will be the second nuclear weapons treaty to collapse under the leadership of US President Donald Trump.
    • In February 2019, the US withdrew from the 1987 Intermediate-Range Nuclear Forces Treaty (INF), accusing Moscow of violating the agreement.

    INF Treaty

    • Under the INF treaty, the US and Soviet Union agreed not to develop, produce, possess or deploy any ground-based ballistic and cruise missiles that have a range between 500 and 5,500 km.
    • It exempted the air-launched and sea-based missile systems in the same range.
    • The INF treaty helped address the fears of an imminent nuclear war in Europe.
    • It also built some trust between Washington and Moscow and contributed to the end of the Cold War.

  • [pib] UMANG Mobile App

    To further enhance the initiatives of Digital India Programme, the India Meteorological Department (IMD) services have been brought on the “UMANG App”.

    UPSC may puzzle you by asking a question such as: Which of the following services are included under UMANG App?  It would provide some ambiguous 5-6 options.

    UMANG App

    • The UMANG is an acronym for Unified Mobile Application for New-age Governance.
    • It is an all-in-one single, unified, secure, multi-channel, multi-platform, multi-lingual, multi-service mobile app, powered by a robust back-end platform providing access to high impact services of various organizations.
    • It was in 2017 to bring major government services on a single mobile app, with a larger goal to make the government accessible on the mobile phone of our citizens.
    • About 660 services from 127 departments & 25 states and about 180 utility bill payment services are live and more are in pipeline.
    • UMANG user base has crossed 2.1 Crore including Android, iOS, Web and KaiOS.
    • Citizens can also access their Digilocker from UMANG and give their feedback after availing any service through Rapid Assessment System (RAS) which has been integrated with UMANG.

    Key features

    • Unified Platform: It brings together all government departments and their services on a single platform to provide better and easier services to citizens.
    • Mobile-First Strategy: It aligns all government services with the mobile-first strategy to leverage mobile adoption trends.
    • Integration with Digital India Services: It provides seamless integration with other Digital India Services like Aadhaar, DigiLocker, and PayGov. Any new such service will automatically be integrated with the platform.
    • Uniform Experience: It is designed to enable citizens to discover, download, access, and use all government services easily.
    • Secure and Scalable: It supports Aadhaar-based and other authentication mechanisms for service access. The sensitive profile data is saved in an encrypted format and no one can view this information.

    Benefits for Citizens

    • Single-Point Ubiquitous Access: All government services are available for citizens on a unified platform for easy access through multiple online and offline channels (SMS, email, app, and web).
    • More for Less: Only a single mobile app needs to be installed instead of each app of each department.
    • Convenience: Citizens do not even need to install or update the app again to avail government services if more services are added to the platform.
    • Saving of Time and Money: Citizens can anytime and anywhere avail these services through their mobile phones, desktops, and laptops without any need for visiting the department office and standing in queues.
    • Uniform Experience: All the government services including payment-based transactions provide secure and uniform experience.

  • [pib] Initiatives launched on International Day of Biodiversity

    In a virtual celebration of the International Day for Biological Diversity 2020, Union Minister of Environment, Forest and Climate Change (MoEFCC) has launched key initiatives towards conservation of biodiversity.

    Possible prelim question:

    The ‘Not all Animals Migrate by Choice’ campaign recently seen in news is an initiative by __________.

    About the International Day for Biological Diversity

    • This Day is a United Nations-sanctioned international day for the promotion of biodiversity issues.
    • It is currently held on May 22.
    • The year 2020 is also the “Super Year for Biodiversity”, as the Strategic Plan for Biodiversity with 20 global Aichi targets adopted in 2010 ends in 2020.

    1) Biodiversity Samrakshan Internship Programme

    • The program proposes to engage 20 students with postgraduate degrees for a period of one year through an open, transparent, online competitive process.
    • It has the National Biodiversity Authority (NBA) and the UN Development Programme (UNDP) as a nodal agency.

     2) ‘Not all Animals Migrate by Choice’ campaign

    • It is a United Nations Environment Programme (UNEP) Campaign launched by the Wildlife Crime Control Bureau on Illegal Trafficking of Endangered Species.
    • It aims to curb illegal trade in wildlife which carries the risk of spreading dangerous pandemics.

    Back2Basics: Aichi Targets

    • The ‘Aichi Targets’ were adopted by the Convention on Biological Diversity (CBD) at its Nagoya conference.
    • The short term plan provides a set of 20 ambitious yet achievable targets, collectively known as the Aichi Targets.
    • The IUCN Species Programme provides advice to Parties, other governments and partners on the implementation of the Strategic Plan for Biodiversity and it’s Aichi Biodiversity Targets (2011 – 2020) and is also heavily involved in work towards the Target.

  • What are General Financial Rules (GFR)?

    The union government has notified amendments to General Financial Rules (GFR) to ensure that goods and services valued less than Rs 200 crore are being procured from domestic firms, a move which will benefit MSMEs.

    Possible mains question:

    Q. Discuss how the nationwide lockdown to control the coronavirus outbreak has led to the resurfacing of inherent bottlenecks in India’s MSME Sector.

    What are the General Financial Rules (GFRs)?

    • The GFRs are a compilation of rules and orders of the Government of India to be followed by all while dealing with matters involving public finances.
    • They are instructions that pertain to financial matters.
    • They lay down the general rules applicable to Ministries / Departments, and detailed instructions relating to the procurement of goods.
    • They are issued by the procuring departments broadly in conformity with the general rules while maintaining the flexibility to deal with varied situations.

    Also read:

    [Burning Issues] Fiscal Push for MSME Sector of India (Part I)

  • In news: International Tea Day

    The ‘International Tea Day’ gets thumbs up from the UN. Tea is the most consumed drink in the world, second only to water.

    It would be no surprise to expect a question based on worldwide tea production:

    Q. Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

    (a) China

    (b) India

    (c) Myanmar

    (d) Vietnam

    International Tea Day

    • While the UN has been aware of the popularity of the drink, May 21, 2020, became the first time when it recognized and gave an official nod to International Tea Day.
    • The UN General Assembly proclaimed May 21 as International Tea Day.
    • The day is aimed at promoting sustainable production, consumption and trade of tea.
    • As part of the celebrations, key players in tea production come together and make systematic plans for expansion of demand for tea, particularly in tea producing countries where per capita consumption is relatively low.
    • This day also reminds all actors at global, regional and national levels to ensure that the tea sector continues to play a role in reducing extreme poverty, fighting hunger and safeguarding natural resources.

    Tea

    • Tea is an aromatic beverage commonly prepared by pouring hot or boiling water over cured leaves of the Camellia sinensis, an evergreen shrub native to East Asia.
    • After water, it is the most widely consumed drink in the world.
    • There are many different types of tea; some, like Darjeeling and Chinese greens, have a cooling, slightly bitter, and astringent flavour.
    • Tea has a stimulating effect in humans primarily due to its caffeine content.
    • China is the leading producer of tea in the world. (Ref.)

    Its significance

    • In 2018, over 50 lakh tonnes of tea was consumed globally, according to Food and Agriculture Organization (FAO) of the UN.
    • The origin of tea plantations dates back to 5,000 years. Like many cultures, tea enjoys a special space in Indian culture.
    • With more than 100 varieties being consumed in the country, India is among the top four producers of tea.
    • Currently, tea is grown in more than 35 countries and supports 1.3 crore people including smallholder farmers around the globe.

    Back2Basics: Tea cultivation in India

    • India is the second producer of tea in the world and second in terms of land devoted to tea growing as well.
    • Much of India’s tea production is concentrated in the areas of Darjeeling, Nilgiri, Dooars, and Assam, which is the single largest tea growing region in the world. The top 5 growing states in India, ranked by production, are:

    1) Assam

    2) West Bengal

    3) Tamil Nadu

    4) Kerala

    5) Karnataka

  • [Burning Issues] Atmanirbhar Abhiyan Package

     

    Today we decode parts of the “20 lakh crore” Economic Package.

    Fair warning though. It’s a long  journey to walk!

    • The COVID-19 pandemic and the prolonged national lockdown have brought the Indian economy to a standstill.
    • The various announcements made by the Finance Minister concluded the relief measures undertaken in five tranches by the government as part of the economic package announced by PM Modi for ‘Atmanirbhar Bharat’.

    Impacts of COVID-19 on Economy: Broad Picture

    Given an uncertain future for the rest of the year, it can be clearly seen that the Indian economy is contracting.

    • That is, it will produce less in 2020-21 than it did in 2019-20. This means the Gross Value Added across sectors — agriculture, industry and services — will fall.
    • As incomes fall, three things will happen.
    • One, individuals will cut down their expenditure. In particular, all discretionary expenditure — be it an additional pack of cigarettes or a new car or a house — will come down sharply.
    • Two, seeing overall demand fall, businesses, which were already not investing, will likely postpone their investments further.
    • Three, the government revenues will take a massive hit. This means that if the government wants to maintain its level of fiscal deficit (the gap between what it earns as revenues and what it spends), it will have to cut its overall expenditure this year.
    • These three types of “expenditures” — by individuals, businesses and government — essentially make up the GDP of India.
    • There is a fourth component called net exports (that is, the net of exports and imports), but with the global demand plummeting as well, this too is unlikely to help matters.

    Atmanirbhar Bharat: With a special package

    • PM has announced a special economic package and gave a clarion call for Self-reliant India.
    • This package, taken together with earlier announcements by the government during COVID crisis and decisions taken by RBI, is to the tune of Rs 20 lakh crore, which is equivalent to almost 10% of India’s GDP.
    • The package will also focus on land, labour, liquidity and laws. It will cater to various sections including cottage industry, MSMEs, labourers, middle class, and industries, among others.

    Complete details of the package

    First Tranche: Rs 5,94,550 crore

    • The first set of relief measures announced by Nirmala Sitharaman focused on enabling the Indian economy’s backbone – MSMEs that employ around 11 crore people and have a GDP share of approximately 29 per cent.
    • Out of the 16 announcements made by the minister, six were dedicated to the MSME segment to infuse liquidity.
    • This included Rs 3 lakh crore collateral-free loans and Rs 50,000 crore equity infusions for MSMEs through Fund of Funds.
    • Liquidity relief measures worth Rs 30,000 crore were also announced for NBFCs, HFCs etc. and Rs 90,000 crore for power distribution companies.
    • The minister also advised states and regulatory authorities for extending the registration and completion date of real estate projects under RERA to de-stress developers and ensure completion of projects for home buyers to get their booked houses on time.

    Second tranche – Rs 3,10,000 crore

    • FM’s second tranche of measures catered to migrant workers and street vendors.
    • The minister introduced ‘one nation one ration card’ to allow migrant workers to buy ration from any depot in the country.
    • A special credit facility of Rs 5,000 crore was announced to support around 50 lakh street vendors who will have access to an initial Rs 10,000 working capital.
    • The minister also said that close to Rs 2 lakh crore will be given to farmers through Kisan credit cards while 2.5 crore farmers, including fishermen and animal husbandry farmers, would be able to get institutional credit at a concessional rate.
    • The government allowed states to fund the food and shelter facilities to migrant workers from the disaster response fund that would cost Rs 11,000 crore to the centre.

    Third tranche – Rs 1, 50,000 crore

    • The third tranche of the measures worth Rs 1.5 lakh crore focused on the agriculture and allied sectors including dairy, animal husbandry and fisheries as the government announced steps to strengthen the overall farm sector.
    • Sitharaman announced Rs 1 lakh crore agriculture infrastructure funds for farm-gate infrastructure including using it for setting up cold chains and post-harvest management infrastructure.
    • Other key announcements made by the minister included Rs 20,000 to be provided to fishermen through PM Matsya Sampada Yojana, and Rs 10,000 crore to formalize micro food enterprises.
    • Rs 4,000 crore for herbal cultivation, a Rs 15,000 crore Animal Husbandry Infrastructure Development Fund, Rs 500 crore for bee-keeping related infrastructure development were other packages announced by the minister.

    Fourth and fifth tranches – Rs 48,100 crore

    • The fourth instalment comprised of reforms for sectors including coal, minerals, defence production, air space management, airports, MRO, distribution companies in UTs, space sector, and atomic energy.
    • She announced easing utilization of the Indian air space to reduce air travel cost.
    • The minister also announced the commercial mining in the coal sector and privatizing discoms in metros to streamline their functions for better accountability.

    • The minister allocated an additional Rs 40,000 crore for the MGNREGA for job creation in India’s hinterland. The government had earlier allocated Rs 61,000 crore in the budget for this financial year.
    • She also announced the formulation of a new Public Sector Enterprises Policy that would allow for consolidation of the PSU firms in strategic sectors.
    • Each sector would have up to four such firms while state-owned enterprises will be privatized.

    Is this a new package?

    • The PM did not give the details, but he specified that this calculation of Rs 20 lakh crore includes what the government has already announced and the steps taken by the RBI.
    • This means the total amount of additional money — that is over and above what the government would have spent even in the absence of a COVID crisis — will not be Rs 20 lakh crore. It would be substantially less.
    • PM has included the actions of RBI, India’s central bank, as part of the government’s “fiscal” package, even though only the government controls the fiscal policy and not the RBI (which controls the ‘monetary’ policy).
    • A rough estimate suggests that the RBI’s decisions have provided additional liquidity of Rs 5-6 lakh crore since the start of the Covid-19 crisis.

    What is the approach adopted?

    • The measures taken up are largely in line of –

    1) Giving a strong supply-side push by boosting the availability of capital on easy terms

    2) Keeping income and wage support schemes to the minimum

    3) Empowering constituencies ranging from farmers and workers to businesses

    • Above all, the government seems to be keen on keeping the damage to the fiscal as low as possible.
    • The fiscal impact of the Rs. 20-lakh crore packages is estimated by economists at between 2-3% of GDP.
    • This includes withdrawals from provisions already made in the Budget for this fiscal.

    Idea behind the Atmanirbhar

    • The pillar on which the package rests is liquidity support so that businesses can be revived. This, in turn, is expected to set the economic cycle back in motion.
    • The option of a demand-side stimulus through a resort to deficit financing seems to be reserved for a future date.
    • This could be in case if the infection does not subside or a second wave begins prompting another lockdown.

    Significance of self-efficiency and self-reliance

    • Global supply chains have been disrupted and all nations have become preoccupied with meeting their own challenges.
    • The importance of local manufacturing, local market and local supply chains was realized during the pandemic time. All our demands during the crisis were met ‘locally’.
    • Now, it was a ripe time to be vocal about the local products and help these local products become global.
    • For instance, the supply chain and global manufacturing controlled by Chinese economy got disrupted due to COVID. Thus there is a need to become self-reliant for essential goods and service like N95 masks, ventilators etc.
    • Restrictions on travel and mobility have meant tight controls over the flow of goods, services and labour across international, state and district borders.
    • The international economic order is changing; the possibility of greater economic cooperation is diminishing. So the emphasis should be on the need to leverage India’s inner potential.
    • The Self-Reliance neither signifies any exclusionary or isolationist strategies but involves the creation of a helping hand to the whole world.
    • This is neither an economic nationalism or a rejection of globalization, but a call for a new form of globalization — from profit-driven to people-centric which takes into account the needs of labours, vulnerable and have nots.

    Positives of the package

    In the numbers provided, the government has tried to project a ‘maximum bang for minimum buck’ approach.

    Most support measures have translated into forms of regulatory relief, broader liquidity support or are reflected in its contingent liabilities, rather than in the form of explicit budgetary support.

    It seems the Union government has very craftily used the COVID-19 pandemic crisis to plough through long pending, deep-rooted structural reforms. That should be welcomed.

    Other welcome moves

    • The government has done well in increasing the budget for MGNREGA by two-thirds, adding another Rs. 40,000 crore.
    • With migrants now returning to their villages, MGNREGA can be leveraged to keep them occupied with meaningful work.
    • The demand of States for higher borrowings limit has also been granted but with clear reform milestones that they have to meet.
    • The government has also used the opportunity to unleash some much-needed reforms in agriculture marketing.
    • The measures also include –

    1) opening up more sectors for private participation

    2) enhancing foreign direct investment in defence

    3) corporatizing the monolith Ordnance Factory Board, and so on

    On contract farming

    • ‘The Centre is considering introducing a law on contract farming under the Contract Act of 1872 to enable farmers to directly engage with processors, aggregators, large retailers and exporters in a fair and transparent manner.
    • It would allow private players to invest in inputs and technology in the agricultural sector.

    Criticisms of the package

    • Yet, many have openly questioned the ability of this economic package to either provide adequate immediate relief to the most distressed sections of the economy or indeed stem the rapid decline in India’s GDP growth.
    • There are multiple fronts where this package is seen as inadequate. Let us discuss that-

    1) Old demand met with conditions

    • The package contains several generic announcements which should ideally, has been a part of a normal economic agenda.
    • The industry has been demanding a package to the tune of 7% to 8% of India’s GDP of over $2.8 trillion since a long time.
    • There was nothing unusual given that similar packages have been announced by other countries to mitigate the damage done to their economies.
    • So, a package of the size of almost 10% of the GDP was offered like a masterstroke but without coming clear on the source of funding and oversight provision.

    2) Bluff over MSMEs

    • Since MSMEs have been the hardest hit, being the main employers of industrial workers, their plight is grim.
    • It is small businesses that give traction to entrepreneurial activities in the unorganised sector where migrants from rural India mostly work.
    • The redefinition of MSMEs has been long-pending and cannot be called a reform.
    • There is nothing for the States to look forward to that can serve the immediate purpose.

    3) No stakeholders consulted

    • Ideally, after the first round of an insufficient package, the government should have begun consultations with parliamentarians, states and industry representatives to prepare a well-thought-out relief package.
    • States which have been at the forefront of the war against COVID-19 have not been given the required funds to help them cope with the public health emergency.
    • They have however shouldered the high influx of returning migrant labourers from industrial locations.

    4) Job losses unaddressed

    • India’s great middle class, which is also suffering, has found no solace either; nor is it likely that they will get anything substantial from this package.
    • A large number of workers in the organised sector are facing heavy pay cuts, job losses, a sharp fall in income, and uncertainty.
    • The expansion of MGNREGA, has a negative aspect, as it could impact labour availability, as rural migrants may not rush back for jobs (construction, transport most impacted).

    5) Farmers’ plight ignored

    • The package nowhere mentions resuming normal procurement operations.
    • Farmers are finding it difficult to get the minimum support price (MSP) for their produce; a majority of them are in debt and face many obstacles.
    • Many APMCs are shut with no signs to begin normal operations. Middlemen and Adhatiyas are plunging in to purchase the produces far below the MSP.

    6) Migrant workers ignored

    • The first national lockdown was announced in the most dramatic manner late in the evening and without adequate notice.
    • This created panic among migrants and painful displacement began which could have been avoided by offering the industry a timely financial package on the eleventh hour.
    • Economic desperation might leave poor workers with no choice but to return to work. But many of them are truly worried about getting infected.
    • Though Shramik Express trains were flagged off from certain destinations to take back migrant workers to their home States, but there was another shock — the charges levied by the Indian Railways.
    • Now India faces the loss of lives and livelihoods against the backdrop of the ruling dispensation’s apathy towards the poor and the disadvantaged.

    7) Healthcare needs more attention

    • Our healthcare delivery system in most States is extremely fragile.
    • One wonders, for instance, whether Bihar can handle the consequences if the virus begins to spread with the return of millions of migrant workers back to the State.
    • Many other States also face a similar plight given the poor state of primary healthcare facilities.
    • The pandemic has exposed a hard truth: most private healthcare providers seem to be incapable of and unwilling to help even during a national crisis.

    8) Undue pressure on Banks

    • Indian MSMEs have little access to risk capital, and hence raise it from banks, calling it loans. RBI has lent billions to banks to refinance those loans.
    • It will never get its money back. The FM has, for the first time, showing some awareness of the problem.
    • But the solution is weird. GoI will facilitate— whatever that means — provision of Rs 20,000 crore as subordinate debt. That is debt that does not have to be paid until all other loans have been repaid.
    • In other words, banks will be asked to give loans with an informal guarantee that they are gifts unless the bankrupt firm starts making huge profits someday.

    9) Broader reforms lack the spark

    • India’s self-reliance package to match global stimulus numbers is perhaps the driver for the claim of a large package (USD 280bn, 10% of GDP).
    • India does not have fiscal buffers hence a large fiscal stimulus would have been a bold bet – as that could have impacted ratings and currency, if not executed properly.
    • Not much was discussed on land, labour reforms, tax rationalization or on any coherent plan to invite foreign manufacturing.
    • The government’s defence indigenization plan is not new and has been poorly executed in the past and that is also the case with commercial mining for coal.

    10) Ignoring demand stimulus

    • The problem with this approach is that there is now a desperate need for demand stimulus; the government has focussed on supply-side push.
    • A strategy to drive consumption may have worked better under prevailing conditions.
    • The options could have been suspending GST for a couple of months or at least cutting rates temporarily, combined with a liquidity boost.

    What needs to be done at this immediate hour?

    1) Food and cash transfers first

    • The immediate need is to provide free food and cash transfers to those rendered incomeless.
    • Putting money in the hands of the poor is the best stimulus to economic revival, as it creates effective demand and in local markets.
    • Hence, an immediate programme of food and cash transfers must command the highest priority.

    2) Revamp MGNREGA work

    • Millions of migrant workers have endured immense hardships to trudge back home, and are unlikely to return to towns in the foreseeable future.
    • Employment has to be provided to them where they are, for which the MGNREGS must be expanded greatly and revamped with wage arrears paid immediately.
    • And permissible work must include not just agricultural and construction work, but work in rural enterprises and in care activities too.
    • The revamped MGNREGS could cover wage bills of rural enterprises started by panchayats, along with those of existing rural enterprises, until they can stand on their own feet.

    3) The urban focus

    • In urban areas, it was absolutely essential to revive the MSMEs.
    • Simultaneously, the vast numbers of workers who have stayed on in towns have to be provided with employment and income after our proposed cash transfers run out.
    • The best way to overcome both problems would be to introduce an Urban Employment Guarantee Programme, to serve diverse groups of the urban unemployed, including the educated unemployed.
    • Urban local bodies must take charge of this programme and would need to be revamped for this purpose.

    4) The ‘care’ economy

    • The pandemic has underscored the extreme importance of a public health-care system, and the folly of privatization of essential services.
    • The post-pandemic period must see significant increases in public expenditure on education and health, especially primary and secondary health including for the urban and rural poor.
    • The “care economy” provides immense scope for increasing employment. Vacancies in public employment, especially in such activities, must be immediately filled.
    • Anganwadi and Accredited Social Health Activists/workers who provide essential services to the population, including during this pandemic, are paid a pittance and treated with extreme unfairness.

    5) Increasing revenue

    • All the tasks mentioned in the package could be financed by printing money. But in the medium term, public revenues must be increased.
    • This is not because there is a shortage of real resources which, therefore, has to take from other existing uses through taxation.
    • Rather, since much-unutilized capacity exists in the economy, the shortage is not of real resources; the government has to just get command over them.
    • A combination of wealth and inheritance taxation and getting multinational companies to pay the same effective rate as local companies through a system of unitary taxation will garner substantial public revenue.

    6) Looping in foreign capital

    • It would be argued that this might cause large financial outflows, which the country can ill-afford.
    • Contrarily, even foreign capital is more likely to be attracted to a growing economy than one in sharp decline because of a lack of stimulus.
    • Also, a fresh issue of special drawing rights by the IMF (which India has surprisingly opposed along with the United States) would provide additional external resources.

    Conclusion

    • The coronavirus disease pandemic has offered India a valuable lesson on the importance of self-reliance and self-sufficiency that we must aspire to attain the twin goals.
    • Self-reliance will prepare the country for tough competition in the global supply chain, and it is important that the country wins this competition.
    • It will not only increase efficiency in various sectors but also ensure quality.
    • In sum, the package has several notable features not all of which are COVID-19 relief. But, the government has clearly refused to borrow and spend more on boosting demand.
    • If the strategy of boosting supply works, it is fine. However, if it does not work on expected lines, the government will be faced with a bigger problem down the line.

    Way Forward

    • Several bold reforms are needed to make the country self-reliant so that the impact of crisis such as COVID can be negated in future.
    • These reforms include supply chain reforms for agriculture, rational tax system, simple and clear laws, capable human resource and a strong financial system.
    • These reforms will promote business, attract investment, and further strengthen Make in India.
    • Local Governments should be playing a key role in supporting the government’s outreach in vast belts of rural India to spread awareness about the coronavirus disease.
    • Local governments can undertake door-to-door campaigns; stitched masks; made hand sanitisers for local populations; and provided support to the local administrative and security machinery in both providing basic services to residents and enforcing the lockdown.

    Try this:

    Q. The palpable unsustainability of the earlier globalisation surfaced after the COVID outbreak means that growth in India in the coming days will have to be sustained by the home market. Examine.

     

    References

    https://www.hindustantimes.com/india-news/stimulus-package-a-lost-opportunity-bernstein/story-dedaae4OQjenIjk9oLjm7H.html

    https://indianexpress.com/article/explained/explainspeaking-why-the-atmanirbhar-bharat-abhiyan-economic-package-is-being-criticised-6414905/

    https://www.thehindu.com/opinion/op-ed/where-is-health-in-the-stimulus-package/article31609611.ece

    https://www.thehindu.com/news/national/coronavirus-package-will-migrant-workers-benefit-from-the-centres-measures/article31603590.ece

    https://www.thehindu.com/opinion/editorial/a-matter-of-relief-on-economic-stimulus-package/article31617547.ece

    https://www.financialexpress.com/economy/breakup-of-the-rs-20-lakh-crore-economic-stimulus-package-by-fm-sitharaman/1961843/

    https://thewire.in/political-economy/modis-stimulus-package-is-a-gigantic-confidence-trick-played-on-the-people-of-india

    https://economictimes.indiatimes.com/news/economy/policy/why-india-needs-to-go-vocal-for-local-stores/articleshow/75812730.cms?from=mdr

    https://www.thehindu.com/opinion/editorial/local-motif-the-hindu-editorial-on-modis-call-for-self-reliance/article31577225.ece

  • Structural issues in agri-marketing

    The article discusses the structural issues that may not go away with the reforms announced by the government recently. Issues like inadequacies in APMC infrastructure, regulation of APMCs need are discussed in detail.

    What is the issue?

    • The Union government signalled the intention to enact a new central law.
    • The new law would override existing state regulations that restrict the farmer from legally selling to anyone other than a buyer licensed by the local Agricultural Produce Marketing Committee (APMC).
    • The decision to push for a central law comes after dissatisfaction with two decades of partial and uneven reforms by different states.

    So, will the change in the law solve the marketing problem?

    •  This will be overstating the power of legal reform in guaranteeing economic freedom and outcomes.
    • The problems farmers face are of two type-
    • 1) Problems that are a result of vested, monopolistic interests.
    • 2) Problems that are rooted in larger structural conditions that significantly weaken their terms of engagement in agricultural markets.
    • Type 1 may be addressed by regulatory intervention.
    • But type 2 will need location-specific policies, well-directed investment, and well-functioning agricultural institutions.
    • So, solving either of these problems require consensus, coordination and capacity in which the states will need to play a major role.

    Why do farmers sell their produce outside APMC mandis?

    • The dominant narrative is that farmers are forced to sell their produce only to licensed APMC traders.
    • But the reality is that even today the majority of Indian farmers sell their produce to small-scale and largely unlicensed traders and intermediaries.
    • This is true, especially of small and marginal cultivators.
    • But, if farmers are bound by law to sell in APMC mandis, why are so many of them selling outside?

    But, do we have enough mandis?

    • At least part of the answer to the question of why farmers sell outside mandis is that India still doesn’t have enough mandis.
    • Over the decades, most states in general, and specific regions in particular, have hugely under-invested in the basic infrastructure required to create viable, primary wholesale markets within easy physical reach of farmers.
    • The 2017 Doubling Farmers Income Report estimates that in addition to the current 6,676 principal and sub-market yards under APMCs India needs over 3,500 additional wholesale markets.
    • Approximately 23,000 rural periodic markets (or haats) have also suffered long-standing neglect.
    • So, the new allocation towards market infrastructure must be fully utilised to build up an appropriately designed physical marketing ecosystem, especially in remote regions.
    • Most importantly, unlike in the past, this process should engage deeply with farmers and traders in each location to avoid misdirected and misplaced infrastructure and assets.

    Regulatory reforms in mandis needed

    • Where APMC mandis do exist and have established themselves as dominant market sites, mandi committees have typically done everything in their power to restrict competition.
    • Obtaining a licence for a new entrant — has most often proved to be a bureaucratic nightmare and a costly affair.
    • This is where regulatory reform to remove conflicts of interests, enable the entry of new buyers, and facilitate the flow of trade both within and outside the mandi system is absolutely crucial.
    • No state has done enough in this direction, but here too there are cautionary lessons.

    Perils of complete deregulation: Example of Bihar

    • Complete deregulation, as we have seen in the decade following Bihar’s repeal of its APMC Act in 2006, does not necessarily transform agricultural markets and spur competition.
    • Even after all restrictions were lifted, there was little uptake in direct procurement by formal players in the state.
    • When corporations entered the maize market in a big way, they chose to buy from larger traders and aggregators and not from farmers.
    • Most farmers have seen little change in marketing practice and continue to sell to village traders as they had done before the repeal.
    • Where private markets have emerged — mainly for horticultural produce — they are constituted and run by local traders and commission agents.
    • But across the system, traders complain about deteriorating infrastructure.
    • And the regulatory vacuum has led to the proliferation of brokers to deal with counter-party risk in growing and dynamic commodity markets such as maize.

    Benefits of limited degree of regulation: MP and Karnataka example

    • Madhya Pradesh and Karnataka have undertaken some degree of regulatory reform instead of repeal.
    • In these states, we do observe, at least to some extent, the fruits of competition.
    • In the early 2000s, MP granted ITC a licence to set up procurement hubs outside mandi yards.
    • Establishment of ITC procurement hubs not only resulted in price competition, but also from electronic weighing and quick payments, as mandis upgraded in response.
    • But ITC’s procurement channel was understandably restricted to select commodities (and qualities), seasons and farms within its own commercial strategy.
    • These limitations revealed the mandi’s comparative advantage as a permanent multi-buyer, multi-commodity market for all local producers.
    • The key lesson to draw from studies of direct procurement and contracting is the need for a regulatory architecture that enables both new and existing systems to respond, adapt, and compete.

    Issue of intermediation

    •  Small traders and intermediaries exist — and persist — because they are able to respond — in cash, credit, time and place — to the multiple needs of farmers and firms across the interconnected domains of production, marketing, processing and consumption.
    • This is not to say that they do not exploit farmers when the opportunity arises.
    • So, the organised and technologically driven procurement and marketing systems will only work if they manage to address the real constraints that farmers face on the ground, especially access to credit, inputs, storage, transport, and timely payments.
    • Most of these constraints originate in the relations of land ownership and access and the limits and exclusions they impose on smallholding farmers and landless cultivators.
    • Simply put, farmers will not be in a position to exercise any newly granted regulatory freedom in the market if they cannot overcome these constraints.
    • Equally, while increasing competition for intermediaries is desirable, their elimination is a misguided — and indeed dangerous — objective if one does not respect or replace the roles and risks that they cover.

    Issue of re-regulation and new barriers to entry

    • Agriculture is at the very heart of the essential economy and our food system runs on the backs of small-scale producers, traders, commission agents, processors, wholesalers, retailers, and labourers.
    • Regulatory reform to increase competition must not degenerate into re-regulation that unduly favours large-scale consolidation and channel control by erecting new barriers to entry and operation for agro-commercial MSMEs.

    The UPSC asked a direct question about the APMC Act in 2014- ” There is also a point of view that Agriculture Produce Market Committees (APMCs) set up under the State Acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine.”

    Conclusion

    While going for the reforms government must consider the issues underlying the problems and try to address them. We must recognise and strengthen the diversity, dynamism, enterprise, and resilience of India’s agricultural markets.

     

     

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