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Subject: Economics

MSP: Must be Effective
Context
- The CACP recommendations on Minimum Support Prices (MSP) for the mandated six Rabi crops wheat, barley, gram, lentil, rapeseed and mustard, and safflower are arrived by considering several factors.
What is MSP?
- MSP is a part of India’s Agriculture Price Policy. The MSP for various crops is announced by the central government at the beginning of every crop season on the recommendation of CACP.
- MSP is price at which the government purchases crops from the farmers. It is the guaranteed ‘minimum floor price’ that farmer must get from the government in case the market price of the crops falls below the MSP.
- The Rationale behind MSP is to support the farmer from excess fall in the crop prices, it is like an insurance policy for the farmers to save them from price falls.
- The most important aim of the MSP policy is to save the Indian farmer from making distress sales. In the event of glut and bumper harvest, when market prices fall below the announced MSP, the government through its agencies buys the entire stock offered by the farmers at the MSP.
What are the factors included in MSP calculation?
- Factors taken into consideration are as follows:
1. Cost of production,
2. Supply and demand situation of various crops in domestic and global markets,
3. Domestic and world prices along with trade opportunities,
4. Terms of trade between agriculture and non-agriculture sector,
5. Optimal utilization of land, water and other production resources,
6. A minimum of 50 per cent mark-up over the cost of production.
Why the relook at MSP calculation is necessary?
- Though on the surface the list looks comprehensive, there are two missing concerns given the present-day challenges, necessitating a change in the MSP formula.
1. Acreage
2. Water usage
- Rising MSP leads to water conflict: There is ample data-based evidence to show the causal relation between acreage and MSP movements. Rising MSPs of water-intensive crops has resulted in some of the water conflicts over river basins as shown by recent studies in the Cauvery and the Teesta River basins.
- MSP for rice and wheat: This is also because MSP for rice and wheat, where government agencies like Food Corporation of India play a role in procurement, has created a reference for market prices. Ever since the MSP was introduced in the late 1970s, it became the “floor” price-setter for rice and wheat.
- Higher MSP for water consuming cereals: Between 1980 and 2000, the MSPs of rice and wheat increased at a much faster rate than those of the “coarse” cereals (like jowar, bajra and ragi) which eventually led to movement of the terms-of-trade (defined as ratio of prices of competing crops, e.g., rice and millets) in Favour of the water-consuming cereals.
- Shifting of High acreage to High MSP crop: This led to acreages moving largely in Favour of water consuming staples, whose crop-water requirements are many times of that of the drier millets. In the case of Cauvery and Teesta, the introduction of dry season paddy and its expansion created reliance on irrigation thereby Fuelling demand for water.
- Non promotion of rabi millets: Though the MSP formula claims to take into account land and water use, it needs to be noted here that there is a need for Rabi millets (e.g., ragi) to be promoted through MSPs. This is because the millets are less water-consuming as compared to many other alternatives including wheat. However, there does not seem to be any MSP announced for Rabi millets.
- Higher MSP for less water consuming crop is needed: In the process, it will be crucial to take into consideration the estimates of irrigation water need for specific crops, redefine the Rabi basket by including millets, and declare a higher MSP for less water-consuming crops vis-à-vis the high-water consuming crops.
Nutritional security in MSP calculation
- Nutritional security is not included in MSP calculation: The other consideration that is missing from the MSP formula is the consideration of the nutritional security. Ideally, the MSP regime should remunerate those crops that have a higher nutritional value per unit of resource use.
- Rabi crops are more water efficient: Ragi is the most efficient water user in producing calories. Bajra followed by wheat and ragi are the better performers in terms of water efficiency in producing iron. For the case of fiber, ragi is the most water efficient crop followed by barley and maize demonstrating the same water efficiency.
- Rabi crops are nutrition rich: Maize is the most efficient water user in producing carbohydrates with ragi being second and wheat third. With reference to fat production, bajra takes the first position followed by ragi and wheat. Ragi is the best performer in the case of calcium production. Wheat and ragi do equally well with phosphorus production per unit of water at the margin.
- Missing MSP estimate: However, so far, the MSP formula has not taken into consideration the health and the nutritional aspect. Irrespective of the season, the nutritional aspect needs to be figured into the MSP recommendations, and more nutritional crops should command higher support prices.
Conclusion
- Present MSP regime is biased in Favor of rice and wheat. MSP can be utilized as great tool to achieve crop diversification by incentivizing cultivation of water efficient and nutrition rich millets. India can achieve the regional as well as financial balance in distribution of MSP by proper estimation of MSP and promotion accordingly.
Mains Question

How is MSP calculated? Analyse the linkages of MSP and water conflict and suggest the solution to overcome the water inefficiency by MSP.

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October 27, 2022
Why Private Investment is Lagging in India?
Context
- Last month, Finance Minister asked captains of industry what was holding them back from investing in manufacturing. She likened industry to Lord Hanuman from the Ramayana by stating that industry did not realize its own strength and that it should forge ahead with confidence. She said, “This is the time for India, we cannot miss the bus”.
What is present situation of private investment?
- Tax cut rate of domestic companies: In the hope of revitalizing private investment, the government had in September 2019 cut the tax rate for domestic companies from 30% to 22% if they stopped availing of any other tax SOP (standard operating procedure).
- Weak private investment: Expert says that Indian private sector investment has been weak for almost a decade now. If we look at drivers of economic growth right now, there are amber lights flashing. The export story will be under threat because of the global slowdown, the government’s ability to support domestic demand would also be limited as the fiscal deficit comes down.
- Impact of k-shaped recovery: Because of the K-shaped recovery, private consumption is only concentrated in some parts of the income pyramid.
Analyzing the investment scenario
- Investment to GDP ratio: As in the June edition of the Ministry of Finance’s Monthly Economic Review, the fixed investment to GDP ratio was 32% in 2021-22. However, there is need for caution in reading the most recent data, as they are subject to revision.
- The National Accounts Statistics: It provides disaggregation of gross capital formation (GCF) by sectors, type of assets and modes of financing; over 90% of GCF consists of fixed investments.
- No change in investment distribution: The investment distribution has hardly changed over the last decade, with the public sector’s share remaining 20%.
- Fall in share of agriculture and industry: Between 2014-15 and 2019-20, the shares of agriculture and industry in fixed capital formation/GDP fell from 7.7% and 33.7% to 6.4% and 32.5%, respectively.
- Rise in service sectors: Services’ share rose to 52.3% in 2019-20 compared to 49% in 2014-15.The rise in the services sector is almost entirely on transport and communications. The share of transport has doubled from 6.1% to 12.9% during the same period. Within transportation, it is mostly roads.
- Decline in the share of investment: Its share in the investment ratio (column 2.1) fell from 19.2% in 2011-12 to 16.5% in 2019-20. This indicates that ‘Make in India’ failed to take off, import dependence went up, and India became deindustrialised. Import dependence on China is alarming for critical materials such as fertilizers, bulk drugs (active pharmaceutical ingredients or APIs) and capital goods. Instead of boosting investment and domestic technological capabilities, the ‘Make in India’ campaign frittered away time and resources to raise India’s rank in the World Bank’s Ease of Doing Business Index.
- Decline in foreign capital in GFC: The contribution of foreign capital to financing GCF fell to 2.5% in 2019-20 from 3.8% in 2014-15 (or 11.1% in 2011-12). With declining investment share, industrial output growth rate fell from 13.1% in 2015-16 to a negative 2.4% in 2019-20, as per the National Accounts Statistics.
What is Consumer’s demand situation?
- Average Consumer sentiment index: Private companies invest when they are able to estimate profits, and that comes from demand. The Centre for Monitoring Indian Economy’s (CMIE) consumer sentiment index is still below pre-pandemic levels but is far higher than what was seen 12-18 months ago.
- Buoyant Aggregate demand: RBI’s Monetary policy report dated September 30 says, Data for Q2 (ended Sept) indicate that aggregate demand remained buoyant, supported by the ongoing recovery in private consumption and investment demand. It shows that seasonally adjusted capacity utilization rose to 74.3% in Q1 the highest in the last three years.
- High household savings: Along with household savings intentions remaining high, might hold the key to the investment cycle kicking in.
Conclusion
- Both public and private investment is necessary for sustainable growth trajectory of any economy. Global uncertainty, Ukraine war, oil prices have added to the skepticism of private investors. However, India’s macroeconomic performance is much better than those of developed and developing economies. Private investors must take these into account before holding back their investment.
Mains Question

Q. What role private investment plays in Indian economy? Analyse the post-pandemic private investment situation in India?

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October 27, 2022
EV firms divided over Battery-Swapping Policy
Battery Swapping could only be leveraged up to a certain limit and was not a complete solution to push electric vehicle (EV) adoption says some auto industry.

What is Battery Swapping?
- Battery swapping is a mechanism that involves exchanging discharged batteries for charged ones.
- This provides the flexibility to charge these batteries separately by de-linking charging and battery usage, and keeps the vehicle in operational mode with negligible downtime.
- Battery swapping is generally used for smaller vehicles such as two-wheelers and three-wheelers with smaller batteries that are easier to swap, compared to four-wheelers and e-buses, although solutions are emerging for these larger segments as well.
What is BaaS?
- Battery-as-a-service (BaaS) is seen as a viable charging alternative.
- Manufacturers can sell EVs in two forms: Vehicles with fixed or removable batteries and vehicles with batteries on lease.
- If you buy an electric scooter with battery leasing, you do not pay for the cost of the battery—that makes the initial acquisition almost 40% cheaper.
- Users can swap drained batteries for a fully charged one at a swap station. The depleted batteries are then charged on or off-site.
- The advantages of swapping include low downtimes for commercial fleets, reduced space requirements, and lower upfront costs.
- It is also a viable solution for those who don’t have parking spots at home.
Draft Battery Swapping Policy 2021: Key Proposals
- Rationalizing taxes on battery: The draft policy has suggested that the GST Council consider reducing the differential across the tax rates on Lithium-ion batteries and electric vehicle supply equipment. Currently, the tax rate on the former is 18 per cent, and 5 per cent on the latter.
- Incentivization for swapping enabled vehicles: The policy also proposes to offer the same incentives available to electric vehicles that come pre-equipped with a fixed battery to electric vehicles with swappable batteries. The size of the incentive could be determined based on the kWh (kilowatt hour) rating of the battery and compatible EV.
- Terms of contracts for battery providers: The government will specify a minimum contract duration for a contract to be signed between EV users and battery providers to ensure they continue to provide battery swapping services after receiving the subsidy.
- Public battery charging stations: The policy also requires state governments to ensure public battery charging stations are eligible for EV power connections with concessional tariffs. It also proposes to install battery swapping stations at several locations like retail fuel outlets, public parking areas, malls, kirana shops and general stores etc.
- Tariff rationalization: It also proposes to bring such stations under existing or future time-of-day (ToD) tariff regimes, so that the swappable batteries can be charged during off-peak periods when electricity tariffs are low.
- Registration ease: Transport Departments and State Transport Authorities will be responsible for easing registration processes for vehicles sold without batteries or for vehicles with battery swapping functionality.
- Unique identification number (UIN): The policy also proposes to assign a UIN to swappable batteries at the manufacturing stage to help track and monitor them. Similarly, a UIN number will be assigned to each battery swapping station.
- Locations: The NITI Aayog has proposed that all metropolitan cities with a population of more than 40 lakh will be prioritized for the development of battery swapping networks under the first phase, which is within 1-2 years of the draft policy getting finalized.
Why hasn’t BaaS taken off yet?
- Hefty taxes: There are economic and operational constraints. Energy service providers offering swapping solutions have to charge 18% goods and services tax (GST) for swapping, compared to 5% GST on the purchase of an EV.
- No incentives yet: Additionally, the government’s FAME-II incentives are not offered to vehicles sold with BaaS or swap station operators.
- Lack of interoperability infrastructure: While these are economic disadvantages compared to direct charging solutions, the lack of a dense and interoperable battery swap infrastructure has also hindered the roll-out.
Issues highlighted by industry
- Swapping will require a great deal of battery standardisation which may reduce innovation and would curb investments.
- Other concerns include accountability for a sub-optimal battery brought in to a swapping station or if it caught fire.
- Battery swapping has reduced initial investments by EV owners.
Issues with BaaS
- Standardization of specifications: There is a need for standardization of safety specifications as well as the battery.
- Safety hazard: Swapping in the various permutations and combinations of batteries at a station where they have not been tested for compatibility could lead to safety hazards.
- Non-competitive nature: Also, mandating only one type of battery to be eligible for concessions would be disadvantageous to many players.
Significance of battery swapping
- High Cost of EVs: An EV, by industry standards, is 1.5-2x costlier than IC Engine counterpart and at least half the cost is from the battery pack.
- Cost reduction: Many manufacturers are offering batteries separately from a vehicle, reducing the cost. In that case, a fleet owner can buy vehicles without battery and utilize battery swapping.
- Range Anxiety: Another major reason stopping people from buying EVs is range anxiety, or in simple terms, the fear of battery getting empty without finding a charging station.
- Inadequate charging infrastructure: Unlike petrol pumps, EV charging stations are rare to spot and that further increases the range anxiety exponentially, especially while going on a road trip.
- Hazard management: In case of a Swapping Station, one can simply locate a station, go and replace the empty battery with a new one.
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October 27, 2022
Oil and Dollar, Rising Prices and Impact on India
Context
- The two major irritants for India this year have been oil and the dollar. The two are a heady cocktail that has distorted all economic forecasts creating volatility that has never been witnessed earlier. Their impact is being felt across bond and stock markets, affecting the entire system. As a result, the RBI and the government have had to work overtime to mitigate the adverse effects on the economy.
What is the current oil prices situation?
- Unpredictable Prices: When the Ukraine war broke out, oil crossed the $120 mark (in April and again in June). It was expected that $150 was not far off. However, the range of $100-110 was restored and soon enough the price was back to the Nineties as all global commodity prices cooled off, even as the Ukraine war continued.
- Rising requirement of Europe: With the winter months approaching and Europe dependent on natural gas for heating, which now appears to be in jeopardy due to Russia turning off the taps, oil has received a boost even though the continent is looking more at coal.
- Reduction in production by OPEC: Add to this the fact that OPEC and its allies have decided to lower production by 2 million barrels a day and there is panic again. This shock is external over which neither the government nor RBI have any control.
- Growing Import Bills: High oil prices mean many things. Crude has a share of 30-33 per cent in total imports and any hike in prices increases the import bill. With exports declining due to the slowdown in global growth and imports increasing due to oil, the trade deficit and current account deficit will widen further. The trade deficit for the first half is $150 billion and can touch $300 billion this year at this strike rate.
- Possibility of Balance of Payment: This creates a problem for the current account deficit with components like software and remittances slowing down due to the recession in the west. Therefore, a balance of payments problem will surface. Ultimately it depends on how high oil will go. The RBI has assumed a $100/barrel. This looks reasonable at this point, but anything higher can create problems on the currency front.
- Increasing Inflation: Inflation per se will be an issue when prices are left to the market like ATF or LPG. But in the case of petrol and diesel, it will be a conundrum for the government. If the status quo prevails on price transmission, then oil marketing companies will have to bear the losses. If the government allows the market to correct, inflation will increase as it will also feed into intermediary costs such as freight.
- Higher input cost: User industries of oil like chemicals, plastics and fertilizers will face a problem again. Higher input costs will put pressure on profit margins and any pass through will be inflationary.
- Windfall tax may increase: The government would probably once again revisit the windfall tax on crude (as has been recently done) to examine if there is any additional revenue to be garnered. Such an environment always tends to spook markets.
- Rising bond yields: Bond yields move up every time oil prices rise while stock markets turn volatile normally in the downward direction.
How rising dollar prices affects India?
- Rupee is weakening: There is the dollar conundrum which should be seen in conjunction with the oil. The dollar has been strengthening against all currencies. As the Fed tightens rates, which will carry on through 2023, the dollar will become stronger. Other countries are already in a weak economic zone and are tightening rates with a lag. The rupee is bearing the brunt of this development. There is no escape as the RBI intervention in any form can only temporarily support the decline in the rupee. In the last month or so, since the rupee crossed the 80 mark and gone past 83.
- Negative sentiment of market: Another factor that will complicate matters is expectations. The recent news, for example, of global players deciding not to include Indian bonds in global indices might add to the negative sentiment in the market and exert pressure on the rupee.
- Imported inflation: The rupee depreciation also leads to importing inflation. All goods imported will come in at a higher rupee cost which will in turn push the RBI to act further.
- Less possibility of high export: The weak rupee may not quite help exports because the competitive advantage that normally comes along with such depreciation would be low given that other currencies are also declining.
- Trade deficit will rise: Imports are unlikely to slow down as a growing economy requires inputs and raw materials. This will mean further pressure on the trade deficit. The government will gain at the margin as customs collections increase.
- Volatile investors: The critical reaction will be that of investors. If foreign portfolio investors withdraw then there will be further pressure on the rupee while inflows would help to cushion the rupee.
- Centre may lose on revenue: State governments will be better off as their VAT collections would increase automatically. However, the Centre may not gain as the excise duty is a fixed rate.
Conclusion
- One can never tell as almost all forecasters have been proved wrong this year. The theory that RBI can intervene and protect certain levels of currency has its limitations. These travails have to be responded to as they cannot be controlled.
Mains Question

Q. How rising dollar and oil prices affects the macroeconomic stability in India? What are the steps taken by RBI and GOI to manage the macroeconomic stability?

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October 26, 2022
What is FCRA and its recent amendments?
Recently, the Ministry of Home Affairs amended certain provisions of the Foreign Contribution (Regulation) Act (FCRA).
- The Ministry had made the FCRA rules tougher in November 2020, making it clear that NGOs (Non-Government Organizations) which may not be directly linked to a political party but engage in political action like bandhs, strike or road blockades will be considered of political nature if they participate in active politics or party politics. According to the law, all NGOs receiving funds have to registered under the FCRA.
- The move comes after the government enhanced the import duty on gold import from 7.5 % to 12.5 % in a bid to discourage import of gold that leads to increase in trade deficit and puts pressure on the currency and forex reserves.
  - An increase in import duty on gold will lead to increase in cost of import and discourage its import and consumption.
What is the FCRA?
- About:
  
  The FCRA was enacted during the Emergency in 1976 in an atmosphere of apprehension that foreign powers were interfering in India’s affairs by pumping in funds through independent organisations.
  
  These concerns had been expressed in Parliament as early as in 1969.
  
  The law sought to regulate foreign donations to individuals and associations so that they functioned “in a manner consistent with the values of a sovereign democratic republic”.
- Objectives:
  
  It requires every person or NGO wishing to receive foreign donations to be registered under the Act, to open a bank account for the receipt of the foreign funds and to utilise those funds only for the purpose for which they have been received and as stipulated in the Act.
  
  The Act prohibits receipt of foreign funds by candidates for elections, journalists or newspaper and media broadcast companies, judges and government servants, members of legislature and political parties or their office-bearers, and organisations of a political nature.
- Amendments:
  
  It was amended in 2010 to “consolidate the law” on utilisation of foreign funds, and “to prohibit” their use for “any activities detrimental to national interest”
  
  The law was amended again by the current government in 2020, giving the government tighter control and scrutiny over the receipt and utilisation of foreign funds by NGOs.
What are the Key Changes?
- It allows Indians to receive up to Rs 10 lakh annually from their relatives abroad under FCRA.
  - The limit earlier was Rs 1 lakh.
  - If the amount exceeds, the individuals will now have 90 days to inform the government instead of 30 days earlier.
- It has given individuals and organisations or NGOs 45 days for the application of obtaining ‘registration’ or ‘prior permission‘ under the FCRA to receive funds.
  - Earlier it was 30 days.
- Organisations receiving foreign funds will not be able to use more than 20 % of such funds for administrative purposes.
  - This limit was 50 % before 2020.
- Made five more offences under the FCRA “compoundable”, making 12, instead of directly prosecuting the organisations or individuals.
  - Earlier, only seven offences under the FCRA were compoundable.
What are Compoundable Offences?
- Compoundable offences are those offences where, the complainant (one who has filed the case, i.e., the victim), enter into a compromise, and agrees to have the charges dropped against the accused. However, such a compromise should be a “Bonafide,” and not for any consideration to which the complainant is not entitled to.
- The FCRA violations which have become compoundable now include failure to intimate about receipt of foreign funds, opening of bank accounts, failure to place information on website, etc.
What is the Significance of the Move?
- Enhances Remittances:
  
  It will curb the outflow of funds and on the other hand enhancing inward Remittances.
- Stabilise forex Reserves:
  
  It will lead to an increase in inflow of funds into India which will stabilise the forex reserves and also the currency.
  
  Similarly, an increase in import duty on gold from 7.5 % to 12.5 % will discourage gold import as it will result in an increase in the price of gold in India.
- Reduces Trade Deficit:
  
  An increase in inflow of funds and reduction in outflow of funds on account of gold imports will help reduce the trade deficit.
  
  The trade deficit in the month of April and May 2022 stood at a high of USD 20.1 billion and USD 24.6 billion respectively making an aggregate of USD 44.7 billion in two months.
  
  By comparison the trade deficit in April and May 2021 stood at USD 21.8 billion.
October 26, 2022
Why freight trains are switching to aluminium wagons?
The Union Railway Minister has recently flagged off the country’s first freight train with an all-aluminium wagon rake.

What is the news?
- This move is a part of the country’s ambitious plan to modernize rail transportation and facilitate large carbon savings.
Aluminium-bodied trains
- Indian Railways proposes to shift its passenger and freight operations gradually to aluminium-bodied trains.
- A blueprint for its production and introduction was finalized even before the onset of the covid-19 pandemic.
- The Modern Coach Factory (MCF) at Rae Bareli has signed a transfer of technology contract with South Korea’s Dawonsys for such passenger coaches in early 2020.
- The execution of the project was held back because of the pandemic and its fallout.
- These coaches will be rolled out now.
What is the plan for their introduction?
- At present, India’s high-speed trains, including the Rajdhanis and the Shatabdis, use Linke Hofmann Busch (LHB) coaches that are made of stainless steel.
- Only the interiors use aluminium, which makes them lighter as compared to conventional rakes.
- The Indian Railways plans to procure 400 new generation Vande Bharat train sets with better energy efficiency and passenger riding experience.
- The use of aluminium body coaches in these new generation trains will be considered.
Will aluminium trains reduce carbon footprint?
- Aluminium trains consume less energy.
- Besides, the metal is recyclable.
- It is estimated that switching to aluminium will save 1,500 tonnes of carbon emissions a year.
- With the Railways planning to deploy over 100,000 wagons in the coming years, the potential annual CO2 reduction could be to the tune of over 5 million tonnes with a 15-20% shift to aluminium wagons.
Material advantages of aluminium
- These coaches, being lighter than stainless steel ones, are preferred for higher speed systems.
- They are lighter by up to 30% compared to stainless steel coaches.
- They offer low haulage cost and higher payload, better fuel efficiency and lower pollution levels.
- Also, aluminium trains take less time to manufacture and thus can help speed up capacity for production.
- The new metal trains will help the Railways hike its share in overall freight transportation from the current 18%.
What about the cost of building?
- An all-aluminium passenger coach and wagon system would raise the cost of manufacturing rolling stocks by about 35% since the price of aluminium, globally, is far higher than that of steel.
- However, the advantages of the metal outscore its high price. It is estimated that as the metal is recyclable, the new coaches would have up to 80% resale value.
- The recyclability will also help in times of global volatility in metal prices.
- This is why aluminium trains command a lion’s share in the US, Europe and Japan.
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October 26, 2022
When does RBI step in to monitor a Bank?
The Reserve Bank of India (RBI) has placed a private bank under tight monitoring and greater public scrutiny.

What is the news?
- The XYZ Bank’s capital to risk weighted assets ratio (CRAR) dropped to around 13% at the end of March this year from 14.5% a year ago.
- This has dropped below the Basel III in the past and it has even been placed under the prompt corrective action framework (PCA) by the RBI to deal with serious deteriorations in its financial position.
- Under Basel-III norms banks are supposed to maintain their CRAR at 9% or above.
What is Capital Adequacy Ratio (CAR)?
- Capital adequacy ratio is an indicator of the ability of a bank to survive as a going business entity in case it suffers significant losses on its loan book.
- The CRAR is a ratio that compares the value of a bank’s capital (or net worth) against the value of its various assets weighted according to how risky each asset is.
- It is used to gauge the risk of insolvency faced by a bank.
How do it affects bank functioning?
- A bank cannot continue to operate if the total value of its assets drops below the total value of its liabilities as it would wipe out its capital (or net worth) and render the bank insolvent.
- So, banking regulations such as the Basel-III norms try to closely monitor changes in the capital adequacy of banks in order to prevent major bank failures which could have a severe impact on the wider economy.
- The capital position of a bank should not be confused with cash held by a bank in its vaults to make good on its commitment to depositors.
Alternatives for bank
- The said Bank has been trying to issue additional shares in the open market through a rights issue in order to deal with its capital adequacy woes.
- Through a rights issue, the bank will be able to raise more equity capital from existing shareholders.
- This is in contrast to an initial public offering where shares are issued to new shareholders.
Back2Basics: Basel Norms
- Basel is a city in Switzerland. It is the headquarters of the Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
- Basel guidelines refer to broad supervisory standards formulated by this group of central banks – called the Basel Committee on Banking Supervision (BCBS).
- The set of the agreement by the BCBS, which mainly focuses on risks to banks and the financial system is called Basel accord.
- The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
- India has accepted Basel accords for the banking system.
Basel I
- In 1988, BCBS introduced a capital measurement system called Basel capital accord, also called as Basel 1.
- It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks.
- The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).
- RWA means assets with different risk profiles.
- For example, an asset-backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1999.
Basel II
- In June ’04, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.
- The guidelines were based on three parameters, which the committee calls it as pillars:
- Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
- Supervisory Review: According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks.
- Market Discipline: This needs increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.
Basel III
- In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.
- A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding.
- Also, the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk.
- Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
- The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
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October 25, 2022
Impact of the Covid-19 pandemic on global poverty
Context
- A recent World Bank report, titled “Correcting Course”, captures the impact of the COVID-19 pandemic on global poverty. The economic mismanagement we were witness to in India resulted in 5.6 crore people slipping into extreme poverty in 2020.
Do You Know?
- 17 October is observed as International Day for the Eradication of Poverty
- The theme for International Day for the Eradication of Poverty 2022-2023 is “Dignity For All in Practice: The commitments we make together for social justice, peace, and the planet”
What is the Impact of COVID-19?
- Rapid rise in extreme poverty: The number of people living in extreme poverty rose by seven crores million in 2020, as the global poverty rate rose from 8.4% in 2019 to 9.3%in 2020.
- Increased Inequality: This is the first time in two decades that the poverty rate has gone up. Global inequalities have widened, evident in the relative impacts felt on incomes in the richest countries as opposed to the poorest; and, unsurprisingly, economic recovery has been similarly uneven.
What the World Bank report says on fiscal policy of developing Nations?
- The report focuses on fiscal policy as an instrument for governments in dealing with crises such as the pandemic.
- Poorer countries were unable to use fiscal policy as effectively and thus unable to offset the impact of the pandemic to a much lesser degree than richer countries.
What is the status of India’s Fiscal Policy and Poverty?
- Sluggish state of Indian Economy: India’s economy continues to be sluggish in 2022, and one should look back at the policy choices that were made back in 2020.
- Absence of official poverty data: The World Bank report relies on the Consumer Pyramids Household Survey (CPHS) by the Centre for Monitoring Indian Economy (CMIE), in the absence of official poverty data since 2011.
- Poverty and fall in GDP: By the estimate, 5.6 crore people are likely to have slipped into poverty as India’s GDP fell by7.5% in FY2020-21.
- India’s Population below poverty line: The population below poverty line in India stood at 10% in 2020.
- Marginal Incremental spending: Refusal to provide a fiscal stimulus to consumption the Government announced a fiscal stimulus worth Rs.2 lakh crore, or 1% of GDP. However, only a small fraction therein reflected incremental spending.
- Inadequate increase in MGNREGA wage: The minor increase to the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) wage by Rs.20 per day was a long-pending correction and quite inadequate to say the least.
- No money in the hands of households: The majority of India’s stimulus package took the form of credit lines and refinancing schemes to private enterprises, which are an inefficient mechanism to realise the goal of putting money in the hands of people to boost household-level consumption.
The relationship between India’s Tax policies and Poverty
- Reduced corporate tax: Through the pandemic and beyond, India persisted with the reduced corporate tax rate that had been announced in September 2019. The reduction of corporate tax from 30% to 22% cost the exchequer Rs.1.84 lakh crore over the last two fiscal years, according to the Parliamentary Committee on Estimates.
- Rise in corporate profit: India has refused to reintroduce wealth tax, or indeed, an inheritance tax. At the same time, corporate profits soared, as reported by the CMIE.
- Rise in inequality: Through all of this, and in spite of the World Inequality Report terming India as a ‘poor and very unequal country’.
- GST as regressive tax regime: India has repeatedly increased the rates on a wide range of products covered by the Goods and Services Tax as well as increased the prices of cooking and transport fuels. While indirect taxes may help prop up public finances, they place a disproportionate burden on the poor.
Food aid through PMGKAY and the problem associated with it
- Pradhan Mantri Garib Kalyan Ann Yojana: The announcement of 80-crore people in India would get food aid through the Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY), a scheme that continues mainly because of the undeniable household-level distress. PMGKAY is currently estimated to cost about Rs.3.90 lakh crore. Started in April 2020, it has been extended till the upcoming Assembly elections are over.
- PMGKAY is not a long-term solution: food aid is not a long-term solution, and certainly does not solve the problem of chronic malnutrition.
World Bank Suggested priorities for Post pandemic recovery
- The World Bank report identifies three priorities for fiscal policy for governments to aid with post-pandemic recovery:
1. Targeted subsidies that benefit the poor

2. Public investment to build resilience in the long term;

3. Revenue mobilisation that should rely on progressive direct taxation rather than indirect taxes

Conclusion
- India’s fiscally prudent policies had ensured the wealthy state but poor people. However, we must not see India’s story in isolation. Despite the good fiscal packages developed country like UK, USA are heading towards recession. Though sluggish, India has done well to maintain positive growth trajectory but this positive growth must include the growth of the poor as well.
Mains Question

Q.How fiscal policy can impact the poverty? What are the government initiatives to uplift the poor?

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October 24, 2022
Rejuvenating the Indian coffee industry
Context
- Coffee cultivation is becoming an increasingly loss-making proposition in India. Already weighed down by the high cost of inputs and production as well as labor shortage, the industry is now also affected by changes in climate patterns, reports from Karnataka’s coffee heartland.
All you need to know about Coffee plantation
- Coffee is a tropical plantation crop.
- 16° – 28°C temperature, 150-250cm rainfall and well-drained slopes are essential for its growth.
- It grows on hilly slopes at the height of 900-1800m.
- Low temperature, frost, dry weather for a long time and harsh sunshine are harmful for its plant.
The status Coffee in India
- India contributes about 4% of the world’s total coffee production. It ranks 6^thin the world in coffee production.
- At present, more than half of the total coffee production in India is produced by Karnataka alone, followed by Kerala and Tamil Nadu.
- Coffee plants grow better in the laterite soils of Karnataka in India.
- The Arabica variety initially brought from Yemen is produced in the country.
- Indian coffee is highly rated and commands premium prices in the global coffee markets.
- Indian coffee offering innumerable flavors, aromas and blends. The commodity, for several decades, enjoyed a special position in India’s export lists.
- Coffee has high value and high imagery potential at home and overseas market. From being handled and sold as a berry, a green bean, a processed bean, a roasted bean and now a roasted and ground offering, coffee has climbed the hierarchy of value-addition.
- Coffee was an important export item for the Union government, when the commodity’s exports were in the range of ₹4,000-₹5,000 crore annually.
Do you know the history of Coffee in India?
- The history of Indian coffee dates back to around 1600 AD with the planting of Seven Seeds of Mocha by legendary saint Baba Budan in the courtyard of his hermitage in Chikmangalur, Karnataka. The coffee plants remained a garden curiosity before they gradually spread as backyard plantings, and later on to the hills of what is now known as Baba Budan Hills.
- However, it wasn’t until the 18th century the British entrepreneurs started taking coffee cultivation properly and turned forests in Southern India into commercial coffee plantations
What are Challenges faced by Coffee cultivation in India?
- Impact of Climate Change: Drastic changes in climate patterns over the last few years have adversely impacted India’s coffee production and the quality of the crop. There were dry spells between 2015 and 2017 and unseasonal heavy rains, floods and landslides between 2018 and 2022. According to the Coffee Board of India’s post-blossom estimate, production for the 2022 crop is anticipated to be some 30% lower than the estimated production due to the extreme climatic conditions.
- Impact of heavy rains: Destruction caused by heavy rains between July and September. The impact of the rains continues, with diseases affecting plants, and estate infrastructure suffering long-term damage. Plantations in Wayanad in Kerala and Palani in Tamil Nadu have also suffered similar losses. fruit rot, stalk rot and root rot and other irreparable damage due to heavy rainfall and landslides, berries turned black and dropped.
- Emergence of New diseases: Erratic weather conditions are helping pests to breed and new diseases to emerge, further stressing coffee plantation.
Crisis in Coffee Industry of India
- No adequate fund support by government: Sturdy and weather-resistant varieties of coffee may help and stand against climate change, but sadly the government is not providing adequate funds to coffee research stations to develop these.
- The volatility in market prices marginalizing producers: The volatility in market prices and the reduced influence of producers in the value chain render coffee cultivation an increasingly loss-making proposition. Producers are getting marginalized. This is rapidly turning out to be a buyer-driven commodity market.
- Impact of Exports on cost competitiveness: More than 75% of Indian coffee production is exported. This has an impact on the cost competitiveness of Indian coffee vis-à-vis the coffee that is exported from other producer regions, especially since those growers get their finances at very low interest rates.
- High Cost of financing: Most private banks insist that growers provide collateral for financing. Since small and medium-size growers are invariably not in a position to provide collateral, the interest rates are high, at around 12%. International interest rates, on the other hand, are negligible, mostly in single digits. This is an advantage for competing coffee-producing region.
- Increasing cost of Inputs: Due to the rise in the cost of inputs year on year and the increase in the cost of labor and benefits, which constitute 60% to 70% of total plantation expenditure, coffee growers are left with very little money in hand which is not adequate to repay loans. The cost of inputs around coffee such as fertilizers and agrochemicals has increased by almost 20% in a year.
- No pricing mechanism: There is no official price setting mechanism even in the domestic market. So, traders and curers are calling the shots and fixing prices, and growers are at their mercy.
- Identity crisis for Indian coffee: On the brand front, Indian coffee is still facing an identity crisis in global markets, although the country started exporting coffee actively before the 19th century. The fact that India sells Robusta and Arabic at a price higher than the hugely advertised Colombia is an indication of the brand building done by the Indian exporter and the quality of Indian coffee. Yet, Indian coffee does not have an individual brand identity in the international markets, Indian coffee was never considered a separate origin coffee. It was always used as filler.
What are the reasons behind the High cost of production?
- Rising labor charges: In India, production of coffee is low while the cost of production is on the rise compared to other coffee countries such as Vietnam and Brazil. In Brazil, labour charges account for 25% of the entire production cost, but in India, planters say they account for about 65%
- Hard terrain and topography: It is possible to bring down the cost of production to some extent through mechanization, but India’s coffee terrains and topography limit this possibility. At the same time, Indian coffee has a unique positioning as it is shade-grown and grown at elevations, while other major producing countries grow coffee in flat lands.
- High cost of Irrigation: Power cuts makes irrigation expensive as the cost of diesel is high. The high cost of inputs leads to the high cost of production which is the main problem for coffee growers. It makes coffee cultivation unviable. Earlier, the cost of production would go up by 4% to 5% annually, but now it goes up at least 20% annually.
- Unskilled migrant labour and wage costs: There is increasingly a shortage of labor while the cost of labour is on the rise in the coffee sector. The children of workers in all the three coffee-growing States Karnataka, Tamil Nadu and Kerala prefer to move to urban areas. This means plantations are forced to depend heavily on migrant labours who are unskilled. A lot of effort, time and energy has to be invested in training migrant labours. As wage costs are not linked to productivity, growers are mandated to pay the usual wage along with other social costs such as housing and medicines, which adds up some 30% more to the wages. Most plantations simply don’t find skilled labour, especially for tasks such as shade-lopping, pruning, and borer tracing.
Way forward
- Alternative source of revenue: Finding alternative sources of revenue and increasing domestic consumption on the one hand and branding and promoting Indian coffee better in the global market on the other.
- Creating in addition revenue streams: Growers should create additional revenue streams through inter-cropping or through innovative measures. In addition to traditional inter-cropping of pepper and cardamom, coffee growers could try planting exotic fruit-bearing trees, food crops, or getting into fish farming, dairy farming, apiary or green tourism to increase incomes from their coffee gardens. For instance, progressive farmers from Thandikudi in Dindigul district in Tamil Nadu, and from Sakleshpur in Chikkamagaluru district, are growing avocados, mangosteens, oranges, guavas and other fruit bearing trees, amid their coffee plants. In some seasons they say they have even earned more money from these than from coffee and pepper.
- Government should permit to plant alternate crops: Considering the change in land use, the government could permit growers to plant alternate crops in a land not suitable for coffee cultivation. Timely conversion will prevent growers from going financially sick.
- Coffee Act and the new Coffee (Promotion and Development Bill), 2022: India’s share in the global coffee market may be less than 5%, but the coffee sector is hopeful that the Coffee Act and the new Coffee (Promotion and Development Bill), 2022, will do away the 80-year-old coffee regulation and usher in change.
Conclusion
- The coffee community in India, comprising close to 4 lakh coffee growers, hundreds of large planters, associations that represent growers, planters, curers and exporters, and over a dozen Fair Trade Organizations, hopes to boost coffee in the domestic and international markets and counter the problems the industry faces.
Mains Question

Q. Even after getting out of the shackles of the pooling system in 1996, the bean maintained a special status as a valuable export commodity for a long time. Discuss the problems of coffee industry taking a back seat in India and suggest solutions.

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October 22, 2022
What are Gift Taxes?
The Supreme Court recently ruled that shares within the lock-in period are not ‘quoted shares’, and thus they need to be valued as ‘unquoted shares’ to determine the gift tax liability.

What are quoted and unquoted shares?
- According to the Wealth Tax Act, ‘quoted share’ in relation to an equity share or a preference share means a share quoted on any recognised stock exchange with regularity from time to time.
- The quotations of such shares are based on current transactions made in the ordinary course of business.
- An ‘unquoted share’ is simply a share that is not a quoted share.
- So according to the SC order, if the locked-in shares of the promoter falls in the ‘unquoted share’ category, their price treatment can’t be that of the ‘quoted shares’, and so gift tax will not be applicable.
What are Gift Taxes?
- Gift tax is a provision introduced by the Parliament of India in 1958.
- It was introduced to impose tax on giving and receiving gifts under certain circumstances which is specified under the act.
- These gifts can be in any form including cash, jewellery, property, shares, vehicle, etc.
Gift Tax on Transfers
- The gift tax is also applicable on certain transfers that is not considered as a gift.
- The transfer of existing movable or immovable property in money or money’s worth qualifies for gift tax.
Certain exemptions
- Though gift tax is applicable on gifts whose value exceeds Rs.50,000, the gift is exempted from tax if it was given by a relative.
- The income tax rule specifies who can be considered as a relative and the list is mentioned below.
1. Parent
2. Spouse
3. Siblings
4. Spouse’s siblings
5. Lineal descendants
6. Lineal descendants of the spouse
Listed below are other situations in which the gift will be exempted from tax.
1. Gifts received during weddings are usually exempted from tax.
2. Gifts received as part of inheritance is exempted from tax.
3. Cash or rewards received by local authorities or educational institutions on the basis of merit is exempted from tax.
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October 21, 2022