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Subject: Economics

  • Indian Economic Growth Prospects: A Comprehensive Analysis

    Growth

    Central Idea

    • India has had an established track record of high growth, with an average annual GDP growth of 6.6% in the decade leading up to the Covid-19 pandemic. In fiscal 2023, India is seen growing at 7%, making it the fastest-growing large economy. But with an imminent global slowdown and the full manifestation of the lagged impact of interest rate hikes since May 2022, the economy is expected to decelerate and grow at 6% in fiscal 2024.

    Indian economic growth prospects

    • Growth accounting: Growth accounting provides a useful framework to analyse medium-term prospects by decomposing their drivers into the contribution of capital, labour and efficiency.
    • Economic growth next five years: Indian economy expected to grow at 6.8 per cent per year for the next five years with 52 per cent of it from capital, 38 per cent from efficiency and 10 per cent from labour.
    • Changing growth model: The growth model is changing to an infrastructure and manufacturing-driven one.
    • Capital spending: The Union Budget has raised capital spending by almost a third in high-multiplier infrastructure segments. But such support to capex will moderate in the years to come, given fiscal consolidation pressures.
    • Investment ratio: Investment as a percentage of GDP has already touched a decadal high of 34 per cent in fiscal 2023. So far, the onus to lift the investment ratio has been shouldered by the government. The contribution of the private sector to investments is set to improve, primed as it is with healthier balance sheets, cash reserves and low leverage.
    • Contribution of productivity to growth: The creation of physical and digital infrastructure in conjunction with efficiency-enhancing reforms will raise the contribution of productivity to growth. The economy is expected to continue seeing efficiency gains from reforms such as GST and Insolvency and Bankruptcy Code (IBC).

    What is holding back a swift and broad-based lift in private investments?

    • Economic uncertainty, primarily, and geopolitical events to a lesser extent.
    • Sustainability challenge looms for the manufacturing sector as manufacturing and infrastructure growth are carbon-intensive.
    • Low-quality skilling of the workforce is holding back its contribution to growth.
    • Quality and the skilling of the workforce
    • Falling labour force participation of women

    What is holding back in Labour’s contribution to growth?

    • Labour’s contribution to growth is likely to be low not because India does not have sufficient people in the working-age group, this cohort is 67 per cent of the population and is set to expand by 100 million over the next decade. It is the quality and skilling of the workforce that is holding it back.

    Why private investment is essential for Indian economic growth?

    • Capital formation: Private investment helps in creating capital formation, which is essential for economic growth. It helps in building infrastructure, creating jobs, and generating income, which in turn drives consumer spending and boosts economic growth.
    • Innovation: Private investment is often associated with innovation and technological advancements. Companies that invest in research and development (R&D) can develop new products and processes that can boost productivity and create new markets. This, in turn, can lead to increased profits and more investment in R&D, creating a virtuous cycle of innovation and growth.
    • Employment: Private investment creates jobs, which is critical for economic growth and development. When companies invest in new projects or expand their operations, they often need to hire additional workers, which reduces unemployment and boosts consumer spending.
    • Foreign investment: Private investment is also an important driver of foreign investment. When companies invest in India, they often bring new technology, skills, and expertise that can help boost local industries and drive economic growth.
    • Tax revenue: Private investment can also help increase tax revenues, which can be used by the government to fund public goods and services such as education, healthcare, and infrastructure.

    Steps taken by the government to encourage private investment

    • Investment-Friendly Policies: The Indian government has launched several investment-friendly policies, such as Make in India, Start-up India, and Digital India, to encourage private investment in the country.
    • Infrastructure Development: The government is investing heavily in infrastructure development, including roads, railways, airports, and ports, to create a conducive environment for private investment.
    • Tax Reforms: The Indian government has implemented several tax reforms, such as the Goods and Services Tax (GST), to simplify the tax structure and make it more investor-friendly.
    • FDI Liberalization: The government has liberalized foreign direct investment (FDI) norms in several sectors, including defense, insurance, and retail, to attract more foreign investment.
    • Insolvency and Bankruptcy Code (IBC): The government has implemented the Insolvency and Bankruptcy Code (IBC), which has made it easier for businesses to exit, and has increased investor confidence in the Indian economy.
    • Production Linked Incentives (PLI): The government has launched the Production Linked Incentives (PLI) scheme to encourage manufacturing in India and make it more competitive globally.
    • Easing of Business Regulations: The Indian government has eased several business regulations to improve the ease of doing business in the country and attract more private investment.
    • Skill Development: The government has launched several initiatives, such as Skill India and Pradhan Mantri Kaushal Vikas Yojana, to develop the skills of the Indian workforce and make it more attractive to investors.

    Facts for prelims: Steps taken by the government to encourage labour force participation of women

    Initiatives

    Description
    Maternity Benefit Programme A scheme to provide financial assistance to pregnant women and lactating mothers for their health and nutrition needs.
    Pradhan Mantri Ujjwala Yojana A scheme to provide LPG connections to women from Below Poverty Line households.
    National Urban Livelihood Mission A programme to provide self-employment opportunities and skill development training to urban poor women.
    National Rural Livelihood Mission A scheme to provide self-employment opportunities and skill development training to rural women.
    Mahila E-Haat A digital platform to provide a market for women entrepreneurs to sell their products online.
    Beti Bachao Beti Padhao A campaign to address the declining child sex ratio and to promote education among girls.
    Sukanya Samriddhi Yojana A savings scheme for the girl child to ensure their education and marriage expenses are taken care of.

     Way ahead

    • Focus on green transition: As the manufacturing and infrastructure growth are carbon-intensive, so it’s important to have a significant and simultaneous focus on green transition. Having a high sustainability quotient can only embellish India’s credentials as a production destination.
    • For instance: Research suggests that between fiscals 2023 and 2027, over 15 per cent of India’s capex could be towards green initiatives involving renewable energy, transportation, altering the fuel mix, and green hydrogen. In the fragmented geopolitical milieu, which is shifting towards supply-chain diversification and friend shoring, India can attract foreign investments.
    • Enhancing labour force participation of women: The labour force participation of women is falling. This will have to be reversed through employment policies and investing in the health and education of women.
    • For instance: According to a World Bank report in 2018, India could add 1.5 percentage points to its GDP growth by improving the participation of women in its workforce.

    Growth

    Conclusion

    • India is going to become a $5 trillion economy by fiscal 2029, given the current growth dynamics. However, the impact of climate risk mitigation will be felt across revenue, commodity prices, export markets, and capital spending. To win the growth marathon, India’s focus must be sharp on the drivers of pace.

    Mains Question

    Q. Highlight India’s growth prospects in the next five years? Discuss the significance of private investment for economic growth and enlist factors that holding back the private investment.

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  • Windfall Tax back on local crude oil

    windfall

    The government has revised a windfall tax on domestically-produced crude oil. According to an official notification, the windfall tax rate of Rs 6,400 per tonne.

    What is a Windfall Tax?

    • Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented event — for instance, the energy price-rise as a result of the Russia-Ukraine conflict.
    • These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
    • The US Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income through no additional effort or expense”.
    • One area where such taxes have routinely been discussed is oil markets, where price fluctuation leads to volatile or erratic profits for the industry.

    Features of Windfall Tax

    • Imposed on unanticipated and unearned gains: Windfall tax is imposed on the profits or gains that a company earns from external events or factors beyond their control, which they did not actively seek or pursue.
    • One-time tax: It is typically imposed as a one-time tax retrospectively, over and above the normal rates of tax, and is not a regular or ongoing tax.
    • Imposed on specific sectors or industries: Windfall taxes are usually imposed on specific sectors or industries where there is a significant increase in profits due to external factors such as price fluctuations, supply disruptions, or changes in regulations.
    • Rationale for imposition: The imposition of windfall taxes is based on the rationale of redistributing unexpected gains, funding social welfare schemes, and creating a supplementary revenue stream for the government.
    • Design problems: Introducing windfall taxes may suffer from design problems, given their expedient and political nature.
    • Potential impact on investment: Windfall taxes may lead to uncertainty in the market and negatively impact future investment, as companies may feel uncertain about investing in a sector with an unstable tax regime.

    When did India introduce this?

    • In July 2022, India announced a windfall tax on domestic crude oil producers who it believed were reaping the benefits of the high oil prices.
    • It also imposed an additional excise levy on diesel, petrol and air turbine fuel (ATF) exports.
    • Also, India’s case was different from other countries, as it was still importing discounted Russian oil.

    How is it levied?

    • Governments typically levy this as a one-off tax retrospectively over and above the normal rates of tax.
    • The Central government has introduced a windfall profit tax of ₹23,250 per tonne on domestic crude oil production, which was subsequently revised fortnightly four times so far.
    • The latest revision was on August 31, when it was hiked to ₹13,300 per tonne from ₹13,000.

    Reasons for re-introduction

    • There have been varying rationales for governments worldwide to introduce windfall taxes like:
    1. Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,
    2. Funding social welfare schemes, and
    3. Supplementary revenue stream for the government

    Issues with imposing such taxes

    • Design problems: Windfall taxes may suffer from design problems, given their expedient and political nature. There is also the issue of determining what constitutes true windfall profits and who should be taxed, which raises questions about the threshold for exemption of smaller companies.
    • Potential impact on investment: Windfall taxes may lead to uncertainty in the market and negatively impact future investment, as companies may feel uncertain about investing in a sector with an unstable tax regime.
    • Internalization of potential taxes: Introducing a temporary windfall profit tax may reduce future investment since prospective investors may internalize the likelihood of potential taxes when making investment decisions.
    • Threshold for exemption of smaller companies: Determining the threshold for exemption of smaller companies raises questions about which companies should be taxed and what level of profit is normal or excessive.
    • Difficulty in determining true windfall profits: There is also the issue of determining what constitutes true windfall profits, as it may be challenging to differentiate between profits attributable to external events versus those attributable to a company’s active investment strategy or business expansion.

     

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  • What are Stablecoins?

    stablecoins

    The US Congress (Parliament) has made another attempt to create a legislative framework for the increasingly popular stablecoins, a sort of cryptocurrency that is pegged to a particular commodity or currency.

    What are Stablecoins?

    • Stablecoins are cryptocurrencies designed to maintain a stable value, typically by being pegged to a stable asset such as the US dollar.
    • Investing in stablecoins can help mitigate market volatility because they are less susceptible to price fluctuations than other cryptocurrencies such as Bitcoin or Ethereum or any other.

    Types of stablecoins

    Fiat-backed stablecoins Backed by reserves of fiat currency held in a bank account or other secure location. Example: Tether (USDT)
    Commodity-backed stablecoins Backed by reserves of a physical commodity, such as gold or silver. Example: PAX Gold (PAXG)
    Algorithmic stablecoins Use algorithms or smart contracts to maintain a stable value. Example: Dai stablecoin (DAI)

     

    How can Stablecoin mitigate market volatility?

    Explanation
    Hedging against volatility
    • Help investors hedge against volatility and reduce their risk exposure.
    • Pegged to a stable asset, which can provide a haven during market turbulence.
    • If the value of Bitcoin or Ethereum drops suddenly, investors can move their funds into stablecoins to protect their portfolio from further losses.
    Greater flexibility in transferring funds
    • Greater flexibility and convenience compared to traditional fiat currencies.
    • Quickly and easily transferred between wallets and exchanges, making them ideal for cross-border transactions.
    • Investors take advantage of investment opportunities in other markets and avoid currency exchange fees and delays.
    Arbitrage trading
    • Used for arbitrage trading, which involves buying an asset in one market and selling it in another market for a higher price.
    • As stablecoins are pegged to a stable asset, investors can quickly move funds between exchanges without worrying about price fluctuations, making arbitrage trading easier and potentially more profitable.

     

    What are the risks?

    Explanation
    Stability of the asset
    • Stablecoins are reliant on the stability of the asset they are pegged to.
    • If the value of that asset drops, it can lead to a drop in the stablecoin’s value as well.
    • This could result in losses for investors who hold the stablecoin.
    Transparency and regulation
    • There are concerns over the transparency and regulation of stablecoin issuers.
    • This could result in a loss of trust in the stablecoin and a subsequent drop in its value.
    • There is no proper regulation and oversight.
    • There is a risk that stablecoin issuers may engage in fraudulent or unethical behaviour, which could lead to losses for investors.
    • It is important for investors to carefully assess the reputation and credibility of the stablecoin issuer before investing in a stablecoin.

     

     

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  • What is the Consumer Confidence Index (CCI)?

    confidence

    Central idea

    • The Consumer Confidence Survey was conducted in the first half of March 2023 across 19 cities.
    • This article analyses the survey results, released this month, and breaks down the findings under different sections.

    What is Consumer Confidence Survey?

    • The Reserve Bank of India (RBI) conducts a Consumer Confidence Survey to measure consumers’ perceptions of the prevailing economic situation.
    • The survey is conducted across various cities and measures consumer confidence on parameters such as the economy, employment, price, income, and spending.
    • The survey consists of questions regarding consumers’ sentiments over various factors in the current situation and future.

    Here are a few parameters that help aggregate overall confidence:

    1. Spending: The consumer is asked about the willingness to spend on major consumer durables, purchasing vehicles, or real estate. This measures the overall spending scenario on necessities as well as luxuries for the next quarter.
    2. Employment: The consumer is asked about current and future ideas on employment situations, joblessness, job security, which reflects the sentiments of the current or expected employment in the country.
    3. Inflation: The consumer is asked about interest rates and levels of prices of all goods, tracking the price expected by consumers and their spending on basic necessities.

    About the Consumer Confidence Index (CCI)

    • CCI is a survey that is conducted every two months to measure how optimistic or pessimistic the consumers are regarding their financial situation.
    • The index measures the change in consumer perception on the financial situation in the last year and the future expectations index measures what the consumer thinks about his financial situation in the coming one year.
    • The main variables of the survey are: Economic situation, Employment, Price Level, Income and Spending.

    Current perceptions of the survey

    • The survey estimates current perceptions and a year-ahead expectations on the economy, employment, price, income, and spending.
    • The results show that consumer confidence continues to recover from its historic low of mid-2021, but still remains pessimistic at 87.0, a 2.2 point increase from previous results.
    • The assessment of inflation conditions improved for the current period reflecting a higher confidence in prevailing economic conditions.
    • With regards to spending, sentiments were positive with signs of improvement compared to the last round conducted in January 2023.

    What does this imply?

    • The survey shows that while consumer confidence is slowly recovering, it still remains pessimistic.
    • The survey results indicate positive sentiments on employment and spending, but a marginal dip in the country’s future economic situation.
    • Credit growth numbers indicate a rise in consumer spending.
    • The upcoming state and general elections could have an impact on the economy, and it remains to be seen how it will play out.

     

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  • Mapping India’s Export Hotspots

    export

    Central idea: The article discusses the top exporting districts in India and their contribution to the country’s overall exports. It also provides information on the top exported commodities in each district.

    Top Exporting Districts in India

    Rank District State Share of India’s Exports
    1 Jamnagar Gujarat 24%
    2 Surat Gujarat 4.5%
    3 Mumbai Suburban Maharashtra 4.5%
    4 Dakshina Kannada Karnataka –
    5 Devbhumi Dwarka, Bharuch, Kachchh Gujarat –
    6 Mumbai Maharashtra –
    7 Kancheepuram Tamil Nadu –
    8 Gautam Buddha Nagar Uttar Pradesh –

     

    Top Exporting Districts in Each State

    • Map 1 shows the district that formed the highest share of a State’s exports in FY23.
    • The size of the circle in the map corresponds to the value of exports.
    • Most top exporting districts in the north-eastern States formed as much as 90% of a State’s exports, while some top exporting districts formed only around 20% of a State’s exports.

    Top Exported Commodities

    • Jamnagar’s dominance can be attributed to the fact that it formed a lion’s share of India’s surging petroleum exports, while Kancheepuram’s most exported commodity was smartphones.
    • Map 1 also lists the top exported commodity of the top exporting districts in each State.

    Top Exporting Districts for Each Commodity

    • Maps 2A-2F show the top five exporting districts for the top six commodities exported by India.
    • They include petroleum products, precious stones and jewellery, rice, wheat and other cereals, smartphones and electronic parts, vehicles other than railways, and pharmaceutical products.

    Share of Top Exporting Commodity

    • Table 3 shows the share of the top exporting commodity of the top exporting district in India’s total exports.
    • For instance, Jamnagar’s petroleum products export formed 67% of India’s total exports for that commodity, while Surat’s precious stones and jewellery exports formed 36% of India’s total exports for that commodity.

     

  • WTO panel rules against India in IT tariffs dispute

     

    A World Trade Organization (WTO) panel has ruled that India has violated global trading rules in a dispute with the European Union (EU), Japan, and Taiwan over import duties on IT products.

    About World Trade Organization (WTO)

    Details
    Purpose Regulate and facilitate international trade between nations
    Establishment 1995
    Headquarters Geneva, Switzerland
    Membership 164 member countries as of 2023, representing over 98% of global trade
    Goal Promote free and fair trade by negotiating and enforcing rules and agreements governing international trade
    Agreements Administers a number of agreements, including GATT, SPS Agreement, and TRIPS Agreement
    Dispute Resolution Operates a dispute settlement system to resolve conflicts between member countries
    Technical Assistance Provides technical assistance and training to help developing countries participate more effectively in international trade
    Decision-Making Body Ministerial Conference, which meets every two years
    Director-General Chief executive responsible for overseeing the organization’s operations and activities
    Criticisms Some criticize the WTO for being undemocratic, favoring developed countries, and not doing enough to promote labor and environmental standards in international trade

     

    What was the case?

    • The case involved a dispute over India’s introduction of import duties ranging from 7.5% to 20% on a wide range of IT products, including mobile phones, components, and integrated circuits.
    • The EU, Japan, and Taiwan challenged these import duties in 2019, arguing that they exceeded the maximum rate allowed under global trading rules.
    • The recent ruling by the WTO panel found that India had violated these rules and recommended that India bring its measures into conformity with its obligations.

    WTO Panel’s Ruling

    • The WTO panel has ruled that India violated global trading rules by imposing these import duties.
    • The panel recommended that India bring these measures into conformity with its obligations.
    • While the panel broadly backed the complaints against India, it rejected one of Japan’s claims that India’s customs notification lacked “predictability”.

    Implications of the ruling

    • The EU is India’s third-largest trading partner, accounting for 10.8% of total Indian trade in 2021, according to the European Commission.
    • The ruling could have implications for trade relations between India and the EU, as well as Japan and Taiwan.
    • India may be required to lower or eliminate the challenged import duties.
    • It remains to be seen whether India will appeal against the ruling.
    • If it does, the case will sit in legal purgatory since the WTO’s top appeals bench is no longer functioning due to US opposition to judge appointments.

    Conclusion

    • The panel recommended that India bring such measures into conformity with its obligations, and it remains to be seen whether India will appeal against the ruling.
    • The case highlights the importance of complying with global trading rules and the role of the WTO in resolving trade disputes between countries.

     

  • India’s Forex Reserves rise $6.30 bn to $584.75 bn

    forex

    India’s forex reserves increased by $6.306 billion to $584.755 billion last week, according to the Reserve Bank of India (RBI).

    Why discuss this?

    • In October 2021, India’s forex reserves reached an all-time high of $645 billion.
    • Since then, the reserves have been declining.

    What is Foreign Exchange (Forex) Reserve?

    • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
    • They are commonly used to support the exchange rate and set monetary policy.
    • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
    • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
    • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

    India’s forex reserves cover:

    1. Foreign Currency Assets (FCAs)
    2. Special Drawing Rights (SDRs)
    3. Gold Reserves
    4. Reserve position with the International Monetary Fund (IMF)

    Countries with the highest foreign reserves

    • Currently, China has the largest reserves followed by Japan and Switzerland.
    • India earlier overtook Russia to become the fourth-largest country with foreign exchange reserves. (Data from August 2022)
    1. China – $3,349 Billion
    2. Japan – $1,376 Billion
    3. Switzerland – $1,074 Billion
    4. Russia – $597.40 Billion

    Why are these reserves so important?

    • All international transactions are settled in US dollars and, therefore, required to support India’s imports.
    • More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
    • It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.
    • Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.

    Initiatives taken by the government to increase forex

    • To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
    • Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
    • Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.

  • Dabba Trading and its impact on the Economy

    dabba

    Central idea

    • The National Stock Exchange (NSE) has issued a series of notices warning retail investors about entities involved in ‘dabba trading’.
    • The NSE cautioned investors not to subscribe or invest using these products offering indicative, assured or guaranteed returns in the stock market as they are prohibited by law.
    • The entities involved in dabba trading are not recognized as authorized members by the exchange.

    What is Dabba Trading?

    • Dabba (Box) trading refers to informal trading that takes place outside the purview of the stock exchanges.
    • It involves betting on stock price movements without incurring a real transaction to take physical ownership of a particular stock as is done in an exchange.
    • In simple words, it is gambling centred around stock price movements.

    How does it work?

    • In dabba trading, investors place bets on stock price movements at a certain price point.
    • If the price point rises, they make a gain, and if it falls, they have to pay the difference to the dabba broker.
    • The broker’s profit from the investor’s loss, and vice versa.
    • Transactions are facilitated using cash and unrecognised software terminals or informal records, which helps traders stay outside the regulatory mechanism.

    What are the problems with dabba trading?

    • Since dabba traders do not maintain proper records of income or gain, they are able to escape taxation, which results in a loss to the government exchequer.
    • The use of cash also means that they are outside the purview of the formal banking system.
    • Investors in dabba trading do not have formal provisions for investor protection or grievance redressal mechanisms available within an exchange, which exposes them to the risk of broker defaults or insolvency.
    • Dabba trading also perpetuates a parallel economy, potentially encouraging the growth of black money and criminal activities.

    What is the current scenario?

    • Industry observers have reported that dabba brokers harass clients for default payments and refuse payments upon profit.
    • Potential investors are lured by aggressive marketing, ease of trading using apps with quality interfaces, and lack of identity verification.
    • Brokers keep their fees and margins open to negotiation depending on an individual’s trading profile.
    • The mechanism could potentially induce volatility and cause losses for the regulated bourse when dabba brokers look to hedge their exposures.

    What are the legal implications?

    • Dabba trading is recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956.
    • Upon conviction, it can invite imprisonment for a term extending up to 10 years or a fine up to ₹25 crore, or both.

     

  • What is MUDRA Scheme?

    mudra

    PM hit out at people ridiculing the Pradhan Mantri Mudra Yojana (PMMY) and said those who gave loans to big businessmen “over phone” never understood the power of microfinance.

    MUDRA Scheme

    • MUDRA (Micro Units Development and Refinance Agency) Scheme is a financial initiative launched by the Government of India in April 2015 to provide financial support to micro-enterprises in India.
    • The scheme is designed to cater to the financial needs of the non-corporate, non-farm sector enterprises in the country.
    • The objective of the scheme is to promote entrepreneurship, employment generation, and to provide access to finance to small and micro-businesses in India.

    Range of loans

    • The MUDRA scheme provides loans ranging from Rs. 50,000 to Rs. 10 lakhs to small and micro-businesses.
    • These loans are provided through various financial institutions such as banks, microfinance institutions, and non-banking financial companies (NBFCs).
    • The scheme also offers refinance support to these institutions.
    Category Loan Amount
    Shishu Up to Rs. 50,000
    Kishore Rs. 50,001 to Rs. 5 lakhs
    Tarun Rs. 5 lakhs to Rs. 10 lakhs

    Key features of the MUDRA scheme

    • Refinance support: The scheme offers refinance support to various financial institutions, such as banks, microfinance institutions, and non-banking financial companies (NBFCs), to provide loans to small and micro-businesses.
    • Employment generation: The scheme aims to promote entrepreneurship and employment generation in the country.
    • Digitalization of financial transactions: The scheme has helped in promoting the digitalization of financial transactions.
    • Focus on underprivileged and marginalized sections: The scheme aims to provide financial assistance to underprivileged and marginalized sections of the society, especially those belonging to the non-corporate, non-farm sector enterprises in the country.
    • Simplified loan processing: The loan processing under the scheme is simplified and requires minimal documentation.
    • No collateral requirement: The loans provided under the scheme do not require any collateral or security.
    • Competitive Interest rate: The interest rate for the loans provided under the scheme is competitive and affordable.

     

  • Inflation in India is Driven by Food Prices

    Inflation in India

    Central Idea

    • The recent trajectory of inflation in India is attributed to the pricing power of five big corporates or ‘Big 5’ according to former Deputy Governor of Reserve Bank of India, Viral Acharya. However, the argument is flawed as the Indian inflation is different from the rest of the world, and it is driven by food price inflation. While corporate pricing power does exist, it is limited, and the extent to which it drives overall inflation is still debatable.

    The factor of food price inflation

    1. Divergence between Indian and Western inflation rates is not new:
    • Sudden surge of Inflation in India: After the global financial crisis of 2008, Indian inflation surged higher than the economies of the US and UK due to food price inflation caused by negative agricultural shocks and high procurement price hikes.
    • Core inflation: Food-price inflation tends to feed into core inflation, so it would be hasty to conclude that Indian inflation is higher than the West today due to corporate pricing power.
    • Food price inflation: Evidence suggests that in India, food price inflation affects core inflation, and food price inflation enters costs of the non-agricultural sector.
    1. Corporate pricing power in India:
    • Corporate pricing power and overall inflation: Corporate pricing power exists in Indian industry, but the extent to which it drives overall inflation in India is debatable. The question is how much corporate power is driving inflation beyond its obvious role in elevating the price level.
    • Prices of food: To measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
    • Inflation control strategy: India’s inflation control strategy needs to address the challenge of ensuring the production of food at affordable prices.
    1. Comparing WP inflation with CP inflation
    • Comparing WP inflation with CP inflation is to acquiesce in a mismatch.
    • The commodity basket corresponding to CP includes items that do not enter the wholesale price index, so we would be comparing apples with oranges.

    Inflation in India

    The argument is based on a short time period

    • WP inflation has eased considerably in the six months preceding March 2023, but CP inflation has not. However, a mismatch between WP and CP inflations is not new.
    • So, the maintenance of high price increases by firms in the retail sector even after wholesale price inflation has declined in 2022-23 may just be a compensating mechanism, i.e., the rising input cost of the retail sector is being passed on with a lag.

    Facts for prelims: WP inflation VS CP inflation

    Aspect Wholesale Price (WP) Inflation Consumer Price (CP) Inflation
    Definition Measures the change in average price level of goods sold by producers at the wholesale level Measures the change in average price level of goods and services purchased by households
    Captures Changes in prices of goods before they reach the retail market Changes in prices of goods and services at the retail level
    Indicator of Early indicator of changes in overall price level of economy Inflation that households experience in their day-to-day lives
    Impact Affects production cost and supply chain Affects purchasing power of consumers
    Calculation Based on price changes of goods sold in bulk to retailers or other businesses Based on price changes of goods and services purchased by households
    Usage Used by policymakers to monitor changes in cost of production and production-level inflation Used by policymakers to monitor inflation and make decisions related to monetary policy
    Examples Wholesale prices of raw materials, oil, and other commodities Retail prices of food, clothing, transportation, and other consumer goods and services

    Rising food prices driving current inflation

    • Over 75% of the direct contribution to inflation in the first three quarters of the financial year came from sectors in which the Big 5 are unlikely to be represented in a big way.
    • The contribution of food products alone was close to 50% in most time periods.
    • Rising food prices are driving current inflation in India.

    The current inflation control strategy

    • Considerable rise in food prices: In India, food prices have only risen, and in recent years their rate of inflation has been very high. For all the reforms since 1991, the real price of food, i.e., its price relative to the general price level, has risen considerably.
    • What matters most to public must be considered: In the context, to measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
    • Current strategy restricted to using the interest rate to dampen aggregate demand: India’s inflation control strategy is currently restricted to using the interest rate to dampen aggregate demand. This strategy avoids addressing the challenge of ensuring the production of affordable food.
    • Question mark on RBI’s ability to control inflation: The RBI has been unable to control even the core inflation which central banks are assumed to be able to control. A recent intervention explaining core inflation in India has highlighted the RBI’s inability to control inflation.

    Conclusion

    • Inflation is being discussed only in terms of core inflation, which excludes the inflation in food and fuel prices because these prices tend to fluctuate and even out the changes, so it is assumed that they do not require a policy response. However, this assumption is flawed in the context of India’s economy, as food and fuel prices have a significant impact on the economy and people’s livelihoods. Therefore, limiting the discussion to core inflation ignores the role of corporate pricing power and the impact of food and fuel prices on the economy.

    Mains Question

    Q. What is the factor that primarily drives inflation in India? Highlight the relationship between food price inflation and overall inflation in India?