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Subject: Economics

  • India’s Pension Reforms: Ensuring Pension Security

    Pension

    Central Idea

    • The issue of government employees’ pension has emerged as a critical political concern, leading several states to consider reverting from the New Pension Scheme (NPS) to the defined-benefit (DB) Old Pension Scheme (OPS). Acknowledging the significance of this matter, the Government of India has established a committee to enhance the NPS.

    What is pension?

    • A pension is a retirement plan that provides a stream of income to individuals after they retire from their job or profession. It can be funded by employers, government agencies, or unions and is designed to ensure a steady income during retirement.

    What is Old Pension Scheme (OPS)?

    • The OPS, also known as the Defined Benefit Pension System, is a pension plan provided by the government for its employees in India.
    • Under the OPS, retired government employees receive a fixed monthly pension based on their last drawn salary and years of service.
    • This pension is funded by the government and paid out of its current revenues, leading to increased pension liabilities.

    What is NPS?

    • NPS is a market-linked, defined contribution pension system introduced in India in 2004 as a replacement for the Old Pension Scheme (OPS).
    • NPS is designed to provide retirement income to all Indian citizens, including government employees, private sector workers, and self-employed individuals

    Pension

    Facts for prelims: Key differences between the two pension schemes

    Parameters The Old Pension Scheme(OPS) The New Pension Scheme (NPS)
    Nature of the schemes OPS offer pensions to government employees on the basis of their last drawn salary NPS pays the employees for their investments in the NPS Scheme during their employment.
    Amount of pension derived 50 per cent of the last drawn salary 60% lump sum after retirement and 40% to be invested in annuities for getting a monthly pension
    Benefits in taxes No tax benefits The employee can claim tax deductions of 1.5 lakh under Section 80C of income tax and up to 50,000 on other investments under 80CCD (1b)
    Tax on pension No tax on pension 60% of the NPS Corpus is tax-free while the remaining 40% is taxable
    Option of Investment No option Two choices: Active and Automatic
    Who can avail? Only government employees Any Indian Citizen between 18-65 years.
    Switching Schemes OPS scheme can be switched to NPS NPS scheme cannot be switched back to OPS in general, but central government employees can switch back to OPS  in case of death and disablement of the employee.

    Reasons behind the growing demand for reverting to OPS

    • Stability and Predictability: One of the primary motivations for the demand to return to OPS is the desire for stability and predictability in pension benefits. Under the OPS, employees receive a fixed pension based on their last drawn salary, which is increased periodically to account for inflation. This offers a sense of security and certainty about post-retirement income, ensuring a stable financial future.
    • Market Risk and Annuity Payouts: The NPS, being a market-linked pension scheme, exposes pensioners to market risks. The returns on the pension fund are subject to market fluctuations, which can impact the overall corpus and subsequently affect annuity payouts. This volatility raises concerns among employees who seek a more secure and reliable pension arrangement.
    • Lower Annuity Prospects: With the NPS, pensioners bear the market risk and face the possibility of lower-than-expected annuity amounts. This uncertainty about future pension prospects prompts many employees to advocate for a return to OPS, which offers a predetermined pension amount.
    • Comparisons with Other Pension Systems: Employees often compare the OPS with pension systems in other countries, particularly those in the Organisation for Economic Co-operation and Development (OECD) economies. These comparisons reveal that OPS provides higher pension replacement rates, lower retirement ages, and covers the entire family. Such favorable aspects of OPS generate a perception of better benefits and incentivize employees to demand its reinstatement.
    • Perception of Unsustainability: While the NPS was introduced to address fiscal strains associated with the unfunded OPS, there are concerns about its long-term sustainability. Some argue that OPS can be sustained through effective fiscal management and reform, rather than completely abandoning it. The perception of unsustainability drives the demand for reverting to OPS as a viable alternative.

    Challenges involved in reverting back to OPS

    • Fiscal Sustainability: The OPS operates on a pay-as-you-go (PAYG) system, where present workers finance the retired. With declining birth rates and increased life expectancy, the burden on the future workforce to fund pensions will intensify. The OPS, being an unfunded scheme, poses challenges in maintaining fiscal sustainability in the long run.
    • Demographic Shifts: The dependency ratio is expected to increase substantially, with fewer workers supporting a larger number of retirees. This demographic shift adds to the challenges of sustaining the OPS, as it puts additional strain on the funding mechanism and the ability to meet pension obligations.
    • Inflationary Pressures: The OPS guarantees periodic increases in pension payouts through dearness allowance (DA) adjustments to account for inflation. However, relying on fixed increments tied to DA can pose challenges during periods of high inflation. Ensuring that pension payments keep pace with inflation without compromising fiscal stability can be a complex task for policymakers.
    • Budgetary Constraints: The financial burden of reverting to OPS can put a significant strain on the government’s budget. Pension liabilities already account for a substantial portion of states’ revenue receipts and own revenues. Increasing pension obligations may lead to a reduction in development expenditure or necessitate additional borrowing, potentially exacerbating the issue of public debt.
    • Inter-generational Equity: Maintaining inter-generational equity is a crucial consideration in pension reforms. Reverting to OPS might fulfill the aspirations of current employees, but it can impose a heavy burden on future generations. Striking a balance between providing reasonable pension security for present employees and ensuring the sustainability of the pension system for future generations is a key challenge that needs to be addressed.
    • Economic Factors: The economic environment, including interest rates and investment returns, can impact the financial viability of OPS. Changes in economic conditions, such as low interest rates or inadequate returns on pension fund investments, can strain the financial resources needed to sustain OPS and meet pension obligations.

    Pension

    Way ahead: Building sustainable and inclusive pension systems

    • Comprehensive Reform: Governments should undertake comprehensive reforms which may involve revisiting the pension architecture, introducing alternative pension models, and exploring hybrid schemes that combine elements of defined-benefit and defined-contribution systems. Reforms should be guided by a thorough analysis of demographic trends, fiscal constraints, and economic conditions.
    • Adequate Funding Mechanisms: Pension systems must establish robust funding mechanisms to ensure that pension obligations can be met. This may involve setting up dedicated pension funds, implementing sound investment strategies, and establishing appropriate contribution rates for both employees and employers.
    • Strengthening Pension Governance: Effective governance is crucial for the success of pension systems. Governments should strengthen the regulatory framework, improve transparency, and enhance accountability in the management of pension funds. Establishing independent oversight bodies and adopting international best practices can help ensure the integrity and efficiency of pension governance.
    • Promoting Financial Literacy: Financial literacy programs should be implemented to educate individuals about the importance of retirement planning, investment strategies, and the risks and benefits associated with different pension options. Empowering individuals with financial knowledge will enable them to make informed decisions and take an active role in securing their retirement income.
    • Encouraging Voluntary Savings: Governments should encourage voluntary retirement savings programs to complement the mandatory pension schemes. Providing incentives, such as tax benefits or matching contributions, can incentivize individuals to save for retirement beyond the mandatory contributions. Voluntary savings options, such as individual retirement accounts or employer-sponsored plans, can offer individuals greater flexibility and control over their retirement savings.
    • Flexibility and Portability: Pension systems should adapt to the changing nature of work and support individuals with diverse employment patterns. Portable pension accounts that allow individuals to carry their accumulated benefits across jobs can ensure continuity of retirement savings. Flexibility in pension payout options, such as lump sum withdrawals or phased withdrawals, can accommodate different financial needs and preferences of retirees.
    • Social Safety Nets: To address the needs of vulnerable populations, social safety nets should be incorporated into pension systems. These safety nets can provide minimum income guarantees or targeted assistance for individuals with limited or interrupted work histories, low-income earners, and those facing economic hardships in retirement.

    Conclusion

    • Amidst the debate between NPS and OPS, it is crucial to devise a pension system that ensures security without compromising fiscal sustainability and inter-generational equity.

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    Must read:

    Contributory Guaranteed Pension Scheme (CGPS): A Considerable Alternative

     

  • Cabinet nod for ₹1.08 lakh crore kharif Fertilizer Subsidy

    Central Idea

    • The Union Cabinet has approved a fertilizer subsidy of ₹1.08 lakh crore for the ongoing kharif or monsoon season.
    • ₹38,000 crore will be allocated for Nitrogen, phosphatic and potassic (NPK) fertilizers, while ₹70,000 crore will go towards the urea subsidy.

    Fertilizer consumption and subsidies

    • The country’s total consumption of urea is approximately 325 to 350 lakh metric tonnes (LMT).
    • Other fertilizers sold in the country include 100 to 125 LMT of DAP, 100 to 125 LMT of NPK, and 50 to 60 LMT of Muriate of Potash (MoP).
    • The fertilizer subsidy per hectare of land is about ₹8,909, and each farmer receives a subsidy of ₹21,223.
    1. DAP: The actual price of a bag of DAP is ₹4,000, but farmers receive it at a subsidized rate of ₹1,350 per bag, with a subsidy of ₹2,461 per bag.
    2. NPK: This subsidy is ₹1,639 per bag, and the MoP subsidy amounts to ₹734 per bag.
    3. Urea: The Centre spends ₹2,196 per bag of urea.

    Fertilizer Subsidy in India

    • Subsidy as a concept originated during the Green Revolution of the 1970s-80s.
    • Fertiliser subsidy is purchasing by the farmer at a price below MRP (Maximum Retail Price), that is, below the usual demand-and-supply-rate, or regular production and import cost.
    • The rate of subsidy is based on the average price of imported fertilizer in the last six months.

    How is the subsidy paid and who gets it?

    • The subsidy goes to fertiliser companies, although its ultimate beneficiary is the farmer who pays MRPs less than the market-determined rates.
    • From March 2018, a new so-called direct benefit transfer (DBT) system was introduced, wherein subsidy payment to the companies would happen only after actual sales to farmers by retailers.
    • With the DBT system, each retailer — there is over 2.3 lakh of them across India — now has a point-of-sale (PoS) machine linked to the Department of Fertilizers’ e-Urvarak DBT portal.

    How does this system work?

    • A popular example of how this system works is that of the neem-coated urea fertiliser.
    • Its MRP is fixed by the government at Rs. 5922.22 per tonne.
    • The average cost of domestic production is at Rs 17,000 per tonne. The difference is footed by the centre in the form of subsidy.

    What about non-urea fertilizers?

    • The non-urea fertiliser is decontrolled or fixed by the companies.
    • The non- urea fertilizers are further divided into two parts, DAP (Diammonium Phosphate) and MOP (Muriate of Phosphate).
    • The government pays a flat per tonne subsidy to maintain the nutrition content of the soil, and ensure other fertilizers are economical to use.

    Issues with such subsidies

    • Low NUE: Indian soil has low Nitrogen use efficiency, which is the main constituent of Urea.
    • Groundwater pollution: Consequently, excess usage contaminates groundwater.
    • Overuse beyond prescription: The bulk of urea applied to the soil is lost as NH3 (Ammonia) and Nitrogen Oxides. The WHO has prescribed limits been breached by Punjab, Haryana and Rajasthan.
    • Health hazards: For human beings, “blue baby syndrome” is a common side ailment caused by Nitrate contaminated water.

     

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  • India’s export of Russian oil to West

    oil

    Central Idea

    • The article discusses India’s increased imports of Russian oil and the potential circumvention of sanctions imposed on Russian oil products.

    Why in news?

    • An EU parliamentarian accused India of profiting from cheaply bought Russian oil and indirectly supporting the Russian economy.
    • India justified its purchase by emphasizing its energy demands and the challenges of higher prices due to its reliance on energy imports and significant poverty levels.

    Reasons: Sanctions against Russian Oil

    • After Russia’s invasion of Ukraine, Western countries and Europe aimed to reduce their dependency on Russian energy imports to weaken the Russian economy.
    • Measures were taken, such as Germany suspending the launch of the Nord Stream natural gas pipeline and Canada and the US banning the import of Russian crude oil.
    • Stricter sanctions were imposed on Russia, including a “price cap” from trading Russian oil above $60 per barrel.
    • The price cap aimed to cripple Moscow’s economy and limit its ability to fund the war in Ukraine.
    • However, Russia increased its oil exports to India and China as a response.

    India’s role in meeting West’s energy demand

    • India, exempt from the sanctions on Russian oil, has seen a significant increase in fuel imports from Russia, which is then refined and supplied to Europe and the US.
    • The refined oil from Russian crude, once processed in India, is not considered of Russian origin.
    • India’s oil imports have helped it meet its own energy demands and also assist Western nations facing energy crises due to the Russia-Ukraine conflict.
    • India has become a net exporter of refined petroleum products, supplying the West to alleviate current energy shortages.

    Impact of Indian imports on Western markets

    • Indian refiners have ramped up exports of refined petroleum products, including diesel and vacuum gas oil (VGO), to Europe and the US.
    • VGO is a feedstock in the refining process that can be further processed to produce gasoline, diesel, and other fuel products.
    • Diesel exports to Europe from India have increased by 12-16% in the last fiscal year.
    • The US has become a major recipient of Indian VGO shipments, receiving 11,000-12,000 barrels per day (bpd) or 65-81% of India’s VGO exports.
    • These exports from India have helped ease the energy tightness and supply constraints in Western markets.

     

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  • Govt doubles outlay on PLI for IT hardware

    Central Idea

    PLI Scheme for IT Hardware

    • The PLI scheme for IT hardware was initially introduced in March 2021.
    • It provides incentives of over 4% for incremental investment in domestic manufacturing for eligible companies, such as Dell and Flextronics.
    • The scheme aims to boost domestic manufacturing, increase exports, and make India a prominent player in the IT hardware sector.
    • The scheme will have a tenure of six years, providing a long-term incentive for eligible companies to invest in domestic IT hardware manufacturing.

    Growth in indigenous IT hardware

    • The government highlighted the growth of electronics manufacturing in India.
    • There is a 17% compound annual growth rate over the past 8 years and a production benchmark of $105 billion, including $11 billion in mobile phone exports.

    New changes introduced

    • The budgetary outlay for the PLI scheme for IT hardware manufacturing has been set at ₹17,000 crore.
    • The incentive rate has been increased to 5%, offering a higher benefit to companies investing in domestic manufacturing.
    • An additional optional incentive has been introduced for using domestically produced components, although the specific rates of these incentives are not specified.
    • If the optional incentives are utilized as intended, the total incentive under the scheme could amount to 8-9%.

    Achievements in Telecom hardware manufacturing

    • Telecom hardware manufacturing has surpassed the projected ₹900 crore and reached ₹1,600 crore.
    • Some Indian companies have become significant exporters of complex radio equipment worldwide.

     

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  • A Social Security Board for Gig Workers: Rajasthan’s Pioneering Step

    Gig Workers

    Central Idea

    • The Chief Minister of Rajasthan recently announced the establishment of India’s first welfare fund, the Rajasthan Platform-Based Gig Workers Social Security and Welfare Fund. This landmark move comes as a significant regulatory step to address the vulnerabilities faced by gig and platform workers since the passage of the Code on Social Security in 2020.

    All you need to know about Platform-Based Gig Workers Social Security and Welfare Fund

    • Social security and welfare benefits to gig workers: It is the country’s first welfare fund specifically designed to address the social security needs of gig and platform workers established by the government of Rajasthan. The fund aims to provide social security benefits and welfare measures to gig workers who operate in the platform economy.
    • Set up in accordance with the Code on Social Security 2020: Code on Social Security recognizes the vulnerabilities faced by gig and platform workers and emphasizes the need for social security measures to protect their rights and well-being. The creation of the welfare fund aligns with the code’s objective of extending social security coverage to workers in the informal sector.
    • Operates as a tripartite institution: The Platform-Based Gig Workers Social Security and Welfare Fund operates as a tripartite institution, comprising representatives from the bureaucracy, employers or clients, and workers’ unions or associations. This structure enables the fund to effectively address the concerns and interests of all stakeholders involved.
    • Funding through revenue-sharing model: The Code on Social Security mandates that platform companies contribute 1%-2% of their revenue towards the fund, ensuring that the financial responsibility is shared between the platforms and the government.

    Who are known as Gig Workers?

    • Gig workers are individuals who engage in temporary, flexible, and on-demand work arrangements, often facilitated through digital platforms or apps.
    • They are part of the gig economy, which is characterized by short-term and project-based work engagements rather than traditional long-term employment contracts.
    • Gig workers encompass a wide range of occupations and industries. They may include freelance writers, drivers for ride-hailing services, delivery personnel, online marketplace sellers, virtual assistants, graphic designers, and many others.
    • These workers typically operate as independent contractors, offering their services or completing tasks on a project-by-project basis.

    Potential challenges in program implementation

    • Lack of Clarity in Definitions: The classification and definition of gig workers can vary, making it challenging to accurately identify and include all eligible individuals in the programs. Determining the scope and coverage of the programs can be complex, especially considering the diverse nature of gig work.
    • Funding Constraints: Allocating sufficient funds for the implementation of social security programs for gig workers can be a significant challenge. Adequate resources need to be allocated to ensure the sustainability of the programs and the provision of comprehensive benefits. Identifying the appropriate funding mechanisms, such as revenue-sharing models or contributions from platforms, can be complex and require careful consideration.
    • Limited Awareness and Outreach: Many gig workers may be unaware of their rights or the existence of social security programs available to them. Effective outreach and awareness campaigns are crucial to ensure that gig workers understand the benefits and are encouraged to participate. Language barriers, digital literacy issues, and the dispersed nature of gig workers can further complicate outreach efforts.
    • Adapting to Technological Platforms: Implementing social security programs within the digital platforms that facilitate gig work can pose technical challenges. Integration with existing platform systems, ensuring secure data management, and addressing potential privacy concerns require careful planning and coordination between government agencies and platform operators.
    • Addressing Cross-Jurisdictional Issues: Gig workers often operate across multiple jurisdictions, which can create complexities in program implementation. Coordination among different states or countries may be required to ensure seamless coverage and avoid gaps or duplications in benefits.
    • Establishing Fair Evaluation Criteria: Determining eligibility criteria and evaluating gig workers’ contributions or income can be challenging. Traditional methods of assessing employment status or income may not align with the dynamic and variable nature of gig work. Developing fair and transparent evaluation mechanisms is crucial to ensure that deserving gig workers receive the appropriate benefits.
    • Balancing Flexibility and Protection: Gig work is characterized by its flexibility, allowing workers to choose when and how much they work. Designing social security programs that provide necessary protections while still accommodating the flexible nature of gig work can be a delicate balance. Ensuring that gig workers can access benefits without compromising their work arrangements is essential.

    Measures to overcome operational challenges

    • Comprehensive Outreach and Awareness Campaigns: Launch targeted and extensive awareness campaigns to inform gig workers about the available social security programs, their benefits, and the application process. Utilize multiple communication channels, including online platforms, mobile apps, social media, and community networks, to reach a wide range of gig workers.
    • Simplified Registration and Enrollment Processes: Streamline the registration and enrollment processes to make them user-friendly and accessible to gig workers. Utilize digital platforms and mobile applications to enable easy and convenient enrollment, reducing paperwork and administrative burdens.
    • Partnerships with Platforms: Collaborate with platform operators to facilitate program implementation. Platforms can play a crucial role in sharing information, reaching out to gig workers, and integrating social security features directly into their platforms. Establish clear guidelines and expectations for platform operators to ensure compliance and seamless integration of social security measures.
    • Tailored Benefit Packages: Design benefit packages that cater to the specific needs of gig workers. Consider their income volatility, irregular work schedules, and diverse occupational risks when determining the types of benefits to offer. Flexibility and customization in benefit packages can help address the unique challenges faced by gig workers.
    • Digital Solutions and Technology Integration: Leverage digital solutions and emerging technologies to streamline processes, enhance efficiency, and improve service delivery. Utilize digital platforms for benefits management, payment systems, and claims processing to ensure a seamless and user-friendly experience for gig workers.
    • Collaborative Governance: Establish tripartite partnerships involving government authorities, gig worker representatives, and platform operators to foster effective governance and decision-making. This collaborative approach ensures that the perspectives and interests of all stakeholders are taken into account and promotes transparency and accountability.
    • Continuous Monitoring and Evaluation: Implement robust monitoring and evaluation mechanisms to assess the effectiveness and impact of social security programs for gig workers. Regularly collect feedback from gig workers, platform operators, and other stakeholders to identify areas for improvement and make necessary adjustments to the programs.
    • International Collaboration and Knowledge Sharing: Engage in international collaboration and knowledge sharing to learn from best practices and experiences of other countries implementing social security measures for gig workers. Exchange ideas, strategies, and lessons learned to enhance program implementation and overcome operational challenges.

    Facts for prelims

    New classification by NITI Aayog: Platform vs. Non-platform Workers

    • The NITI Aayog report broadly classifies gig workers into platform and non-platform-based workers.
    • The consequent platformisation of work has given rise to a new classification of labour — platform labour — falling outside of the purview of the traditional dichotomy of formal and informal labour.
    • While platform workers are those whose work is based on online software applications or digital platforms.
    • Non-platform gig workers are generally casual wage workers and own-account workers in the conventional sectors, working part-time or full time.

     Conclusion

    • The establishment of the Rajasthan Platform-Based Gig Workers Welfare Board represents a significant victory for platform workers and unions who have long advocated for their rights. While many states are yet to take action, Rajasthan sets an example by prioritizing the welfare of these workers, especially with assembly elections looming next year.

  • Managing Inflation and Ensuring Food Security in India

    Inflation

    Central Idea

    • India’s recent decline in consumer price index (CPI) inflation and food price inflation has brought a degree of comfort to the Reserve Bank of India (RBI). However, the challenge lies in managing inflation while aiming for a GDP growth of 6 to 6.5 percent in FY24. Collaborative efforts between the RBI and the Government of India are crucial to achieving this twin objective.

    Current Inflation Scenario

    • The CPI inflation for April 2023 stood at 4.7 percent, with food price inflation even lower at 3.84 percent.
    • Maintaining overall inflation below 5 percent and GDP growth above 6 percent throughout the year would be a commendable achievement.

    Importance of Managing Food Inflation

    • Managing food inflation is crucial due to its significant weightage in the consumer price index (CPI) basket in India. The food and beverages component holds the highest weightage of 45.86% among G20 countries.
    • Food inflation directly impacts the cost of living for the general population, particularly vulnerable sections that spend a significant portion of their income on food.
    • High food inflation can lead to increased household expenses, lower purchasing power, and a decline in the overall standard of living.
    • Food inflation can also have social and political implications, as rising food prices can cause public unrest and dissatisfaction.
    • Effective management of food inflation contributes to maintaining price stability, ensuring food affordability, and supporting macroeconomic stability.

    Implications of Monsoon Season

    • Agricultural Production: The monsoon is crucial for agricultural production as it provides the majority of the water needed for irrigation. A normal or above-normal monsoon season supports adequate water availability, leading to higher crop yields and increased agricultural output. Conversely, a below-normal monsoon can lead to drought-like conditions, affecting crop productivity and agricultural incomes.
    • Food Prices: The monsoon significantly influences food production, particularly for rain-fed crops. Insufficient rainfall can lead to lower agricultural output, resulting in reduced supplies and higher food prices. Inadequate monsoon rains can impact staple crops such as rice, wheat, pulses, and oilseeds, leading to inflationary pressures on food prices.
    • Rural Economy: As agriculture plays a vital role in the rural economy, the monsoon directly impacts rural livelihoods and income levels. A good monsoon season can boost rural incomes, increase agricultural employment opportunities, and stimulate rural consumption. Conversely, a poor monsoon can lead to income losses, lower agricultural wages, and reduced rural demand.
    • Hydroelectric Power Generation: The monsoon contributes to water reservoirs, which are essential for hydroelectric power generation. Adequate rainfall ensures sufficient water levels in reservoirs, supporting electricity generation from hydroelectric plants. Inadequate monsoon rains can result in lower water levels, impacting power generation and potentially leading to electricity shortages.
    • Groundwater Recharge: The monsoon plays a crucial role in replenishing groundwater levels. Adequate rainfall helps recharge aquifers, which are vital sources of water for irrigation, drinking water, and industrial use. Insufficient monsoon rains can lead to depleted groundwater levels, affecting agriculture, water availability, and overall water security.
    • Economic Growth: The performance of the agricultural sector, influenced by the monsoon, has implications for overall economic growth. Agriculture contributes significantly to India’s GDP and employment. A good monsoon season can stimulate rural demand, enhance agricultural productivity, and contribute to higher economic growth. Conversely, a poor monsoon can dampen agricultural output, impacting overall economic performance.
    • Fiscal Impact: The monsoon season also has implications for government finances. Adequate rainfall supports agricultural production and reduces the need for government interventions such as subsidies or price support measures. In contrast, a poor monsoon can strain government resources, necessitating increased spending on irrigation infrastructure, relief measures, or support to affected farmers.

    What are the challenges in milk inflation?

    • Supply-side Factors: Milk inflation is influenced by supply-side dynamics. Factors such as adverse weather conditions, including drought or floods, can impact the availability of fodder and water for cattle, leading to reduced milk production. Any disruptions in the supply chain, such as transportation issues or logistical challenges, can also affect the supply of milk and contribute to inflationary pressures.
    • Disease Outbreaks: Disease outbreaks among cattle, such as lumpy skin disease, foot-and-mouth disease, or other health issues, can affect milk production. These outbreaks may result in a decrease in the number of healthy and productive cattle, leading to a decline in milk output and subsequently driving up milk prices.
    • Fodder Prices: The cost of animal feed, such as fodder, plays a significant role in milk production costs. Fluctuations in fodder prices can impact the overall cost of maintaining dairy cattle. If fodder prices increase due to factors like supply-demand imbalances, weather conditions, or changes in agricultural practices, it can contribute to higher milk prices.
    • Input Costs: Various input costs involved in milk production, such as labor, veterinary services, and energy costs, can affect the overall cost structure. Increases in input costs, including wages, veterinary medicines, or energy prices, can exert upward pressure on milk prices.
    • Import Dependence: In some cases, countries may rely on milk imports to meet domestic demand. If the import costs increase due to factors like changes in international prices, trade policies, or exchange rate fluctuations, it can contribute to higher domestic milk prices.
    • Market Structure and Competition: The market structure and competition within the dairy industry can impact milk prices. If the market is concentrated with a limited number of dominant players, it may lead to less competition, allowing suppliers to exercise greater pricing power. This can contribute to higher milk prices for consumers.
    • Government Policies and Regulations: Government policies and regulations related to milk production, procurement, and pricing can influence milk inflation. Policies such as subsidies, import restrictions, quality standards, or pricing mechanisms can affect the overall supply-demand dynamics and pricing in the milk market

    Way ahead

    • Focus on buffer stocking policy: To tackle cereal inflation, using the buffer stocking policy more proactively is important. Unloading excess stocks in open market operations can be an effective tool in managing cereal inflation.
    • Preemptive policy actions: It is important to implement policy actions in a preemptive manner rather than being reactive to events. This includes timely unloading of excess stocks and adjusting import duties to maintain price stability.
    • Monitor and address external shocks: Given that food price inflation can be triggered by external shocks like droughts and supply chain disruptions, it is crucial to closely monitor such factors and take appropriate measures to mitigate their impact.
    • Strengthen milk production: To address milk inflation, efforts should be made to address factors like the lumpy skin disease and high fodder prices that have strained milk production. Policies supporting the growth and sustainability of the milk industry should be implemented.
    • Lower import duties on fat and skimmed milk powder (SMP): By reducing import duties to around 10 to 15 percent, there could be an increase in imports of fat and SMP, which may help in controlling milk and milk product prices.

    Conclusion

    • By effectively managing inflation, implementing proactive policies, and fostering collaboration between the RBI and the Government of India, India can navigate the challenges of inflation management, ensure economic stability, and promote sustainable development in critical sectors.

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  • Orders on ONDC grow rapidly

    ondc

    Central Idea

    • The Open Network for Digital Commerce (ONDC) is a government-backed modular network for e-commerce, food and grocery delivery, and cabs in India.
    • ONDC has witnessed significant growth, with a rising number of orders and participants.
    • India Post, one of the world’s largest logistics systems, is expected to join ONDC, strengthening the network.

    About ONDC

    • The ONDC is a private non-profit Section 8 company established by the Department for Promotion of Industry and Internal Trade (DPIIT) of the Government of India.
    • It aims to develop open e-commerce by creating a set of specifications designed to foster open interchange and connections between shoppers, technology platforms, and retailers.
    • It was incorporated on December 31, 2021, with an initial investment from Quality Council of India and Protean eGov Technologies Limited (formerly NSDL e-Governance Infrastructure Limited).

    What does one mean by ‘Open-sourcing’?

    • Free for all: An open-source project means that anybody is free to use, study, modify and distribute the project for any purpose.
    • Open licensing: These permissions are enforced through an open-source licence easing adoption and facilitating collaboration.

    What processes are expecting to be open-sourced with this project?

    • Several operational aspects including onboarding of sellers, vendor discovery, price discovery and product cataloguing could be made open source on the lines of Unified Payments Interface (UPI).
    • If mandated, this could be problematic for larger e-commerce companies, which have proprietary processes and technology deployed for these segments of operations.

    What does the DPIIT intend from the project?

    • ONDC is expected to-
    1. Digitize the entire value chain,
    2. Standardize operations,
    3. Promote inclusion of suppliers,
    4. Derive efficiencies in logistics and
    5. Enhance value for stakeholders and consumers

    Processes in the ONDC

    • Seller Onboarding: Sellers can register and onboard their businesses onto the ONDC platform.
    • Vendor Discovery: Buyers can discover relevant vendors and sellers on the ONDC network.
    • Price Discovery: Transparent marketplace for comparing prices across sellers.
    • Product Cataloguing: Sellers can create and manage catalogues of their products on the platform.
    • Transaction Processing: Secure and seamless payment infrastructure for completing purchases.
    • Order Fulfillment: Coordinating delivery or provision of purchased products or services.
    • Customer Support: Assistance for addressing queries and concerns of buyers and sellers.
    • Data Management and Security: Robust practices to protect user data and ensure security.

    Why such a move by the govt?

    • Digital boom: This COVID pandemic has made every business to go digital. India is a country with 700 million internet users of whom large crunch of population are active buyers on e-coms.
    • Promoting competition: ONDC aims to foster a more competitive marketplace by providing opportunities for small retailers and businesses.
    • Fostering inclusivity: It seeks to enable small retailers to access a wider customer base, promoting inclusivity in the digital commerce ecosystem.
    • Curbing monopolistic practices: ONDC addresses potential monopolistic behavior and rent-seeking tendencies by certain e-commerce platforms.
    • Enhancing efficiency: By streamlining operations and standardizing processes, ONDC aims to drive efficiencies in the digital commerce ecosystem.
    • Digital Public Infrastructure: ONDC is part of the government’s efforts to build and support essential digital services and infrastructure.
    • Government support: The government’s involvement in ONDC demonstrates its commitment to supporting small businesses and advancing digital transformation.

    Scope for ONDCs success

    • Government backing: ONDC is a government-backed initiative, indicating strong support and resources from the government to drive its success.
    • Inclusive approach: ONDC aims to create a level playing field for small retailers and businesses, empowering them to compete with larger e-commerce platforms.
    • Industry expertise: The drafting panel of ONDC includes experienced individuals from various sectors, bringing diverse perspectives and expertise to the table.
    • Successful track record: India has previously executed successful public digital platforms like UPI and Aadhaar-linked projects, demonstrating the country’s capability in implementing digital initiatives.
    • Open-Sourcing approach: The open-sourcing of processes within ONDC can foster innovation, collaboration, and widespread adoption, similar to the success of UPI.
    • Growing digital market: India has a large population of internet users, making it a thriving market for digital commerce. ONDC can tap into this market and capitalize on the increasing adoption of online services.
    • Potential for disruption: ONDC’s entry into the digital commerce ecosystem can disrupt existing players and bring about positive changes, offering more choices and opportunities for businesses and consumers.

    Issues that can be raised

    • EODB concerns: They may raise hues over operability and ease of doing business.
    • Compliance burden: MSMEs have already raised the growing compliance burden for e-commerce.

    Other challenges

    • Every platform has its own challenges so would the ONDC may have.
    • While UPI was ruled out (BHIM being the first) people were reluctant in using it due to transaction failures.
    • With subsequent improvements and openness people and businesses are using it in every walks of life. So it would work with ONDC.

    Conclusion

    • While challenges may exist, the combination of government support, industry expertise, and the aim to create a more inclusive and competitive digital commerce landscape provides a strong foundation for the success of ONDC.

     

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  • RBI advises banks to transit away from LIBOR

    Central Idea: The RBI has issued an advisory to banks and other RBI-regulated entities regarding the transition away from London Interbank Offered Rate (LIBOR) July 1.

    What is London Interbank Offered Rate (LIBOR)?

    Explanation
    Definition LIBOR is a benchmark interest rate used in financial transactions such as loans, derivatives, and bonds.

    It is the interest rate at which banks can borrow funds from other banks in the London interbank market.

    It serves as a benchmark rate for various financial transactions worldwide.
    Calculation Method LIBOR rates are calculated based on submissions from a panel of major banks in London.

    These banks estimate their borrowing costs for various currencies and tenors.

    The submissions are used to calculate an average rate, which is published daily by the Intercontinental Exchange (ICE), the administrator of LIBOR.
    Currencies and Tenors LIBOR is calculated for different currencies and tenors ranging from overnight to one year.

    The currencies include USD, EUR, GBP, JPY, CHF, and others.

    The tenors represent the time periods for which the rates are quoted.
    Importance It has been widely used since the 1980s as a benchmark for financial contracts worth trillions of dollars globally.

    It serves as a reference rate for various loans, derivatives, and other financial instruments.

     

    Why is RBI moving away from LIBOR?

    Like many other countries, has been working towards transitioning away from LIBOR. The primary reasons for this transition include:

    • Manipulation risks: Following the global financial crisis in 2008, there were concerns about the reliability and potential manipulation of LIBOR.
    • Discontinuation of LIBOR: The regulatory authority in the UK that oversees LIBOR, announced in 2017 that it will no longer compel banks to submit the necessary data to calculate LIBOR after the end of 2021.
    • Adoption of alternative Reference Rates: Various countries, including India, have identified and adopted alternative reference rates that are more reliable and based on actual market transactions. Ex RBI introduced the Secured Overnight Financing Rate (SOFR).
    • Alignment with International Standards: Many countries have already initiated the shift to alternative reference rates, necessitating India’s alignment to maintain consistency and harmonization in international financial markets.
    • Risk Mitigation: RBI’s move aims to mitigate the potential risks associated with an unreliable or manipulated benchmark rate.

    Related terminologies

    Mumbai Interbank Forward Outright Rate (MIFOR): MIFOR is a benchmark rate used in Indian financial markets. It represents the forward premium or discount on the USD-INR exchange rate based on the LIBOR rate.

    Fallbacks: They are provisions inserted into contracts to establish alternative reference rates if the original benchmark rate (such as LIBOR) becomes unavailable or unreliable.

     

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  • RBI to join Greenwashing TechSprint

    Central Idea: The RBI has announced its participation in the Global Financial Innovation Network’s (GFIN) Greenwashing TechSprint.

    What is Greenwashing?

    • Greenwashing is a term used to describe the practice of making exaggerated, misleading, or unsubstantiated claims about the environmental, social, and governance (ESG) credentials of a product, service, or company.
    • It is a deceptive marketing strategy that aims to portray an organization as environmentally friendly or socially responsible, even when its actions or practices do not align with these claims.
    • It creates the perception that a company is taking steps towards sustainability or social responsibility, but in reality, it may be engaging in practices that are harmful to the environment or society.

    There are various forms of greenwashing that companies may employ to deceive consumers or investors. These include:

    1. Vague or ambiguous claims: Companies may use general statements or buzzwords without providing specific details or evidence to support their environmental or social claims. For example, stating that a product is “eco-friendly” without explaining the specific environmental benefits or certifications.
    2. Irrelevant or misleading labels: Companies may use misleading labels or certifications that give the impression of sustainability or social responsibility but lack meaningful standards or independent verification. This can confuse consumers who rely on such labels to make informed choices.
    3. Hidden trade-offs: Greenwashing can involve emphasizing one positive aspect of a product or company’s operations while ignoring or downplaying other negative impacts. For instance, a company may highlight its use of renewable energy while disregarding other harmful environmental practices.
    4. Lack of transparency: Companies may fail to provide transparent information about their sustainability practices or refuse to disclose relevant data. This lack of transparency makes it difficult for consumers to verify the accuracy of the company’s claims.
    5. Inconsistent messaging: Some companies may adopt green initiatives or promote sustainable products as a public relations exercise, without making substantial changes to their overall operations. This inconsistency between their messaging and actual practices is a form of greenwashing.

    Implications of greenwashing

    • It undermines consumer trust, as people may make purchasing decisions based on misleading information.
    • It also hampers the credibility of genuinely sustainable businesses by creating scepticism in the market.
    • Moreover, it can divert attention and resources away from genuinely sustainable companies and initiatives.

    Back2Basics: Global Financial Innovation Network (GFIN)

    • GFIN was officially launched in January 2019.
    • It was inspired by the successful collaboration between 11 financial regulators during a cross-border pilot project known as the “Global Sandbox” in 2018.
    • The pilot project demonstrated the benefits of regulatory cooperation and information sharing in fostering responsible innovation in the financial sector.
    • GFIN consists of financial regulators and related organizations from around the world.
    • The network includes regulatory authorities, central banks, and supervisory bodies.

     

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  • Chheligada Irrigation Project in Odisha

    Central Idea: Officials recently directed to begin construction of the multipurpose irrigation project at Chheligada, Odisha.

    Chheligada Irrigation Project

    • The project is a multipurpose medium project located near the village of Chheligada in the Gajapati District of Odisha.
    • The project involves the construction of a 250m long and 30m high dam across the River Badjhore, a tributary of the River Vamsadhara.
    • It aims to preserve 5201 hectares of water and provide irrigation to 5760 hectares of land in Ganjam and 500 hectares of land in Gajapati districts.
    • The project will also supply drinking water to Brahampur City.
    • Furthermore, it includes the development of a mini hydel project at Shiali Loti, Kankata, and Dekili in the Gajapati district, with a capacity to generate 36 MW of electricity.

    Salient features of the project

    1. A centrally located Ogee-type gated spillway with a length of 90m.
    2. Construction of a 1.13 km long tunnel connecting the Chheligada reservoir with the Ghodahada river.
    3. Establishment of a canal system to facilitate irrigation in the Gajapati district directly from the dam.
    4. Implementation of a pipeline network for supplying drinking water to Berhampur in the Ganjam district.

     

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