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Subject: Economics

  • Central Bank Digital Currency (CBDC): the Digital Rupee

    Reports have said the Reserve Bank of India’s (RBI) digital rupee — the Central Bank Digital Currency (CBDC) — may be introduced in phases beginning with wholesale businesses in the current financial year.

    What is Central Bank Digital Currency (CBDC)?

    • CBDC is a central bank issued digital currency which is backed by some kind of assets in the form of either gold, currency reserves, bonds and other assets, recognised by the central banks as a monetary asset.
    • The present concept of CBDCs was directly inspired by Bitcoin, but a CBDC is different from virtual currency and cryptocurrency.
    • Cryptocurrencies are not issued by a state and lack the legal tender status declared by the government.

    What is Currency chest?

    Currency in India is managed by Currency chest. Currency chest is a place where the Reserve Bank of India (RBI) stocks the money meant for banks and ATMs. These chests are usually situated on the premises of different banks but administrated by the RBI.

    Why India needs a digital rupee?

    • Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
    • High currency in circulation: India has a fairly high currency-to-GDP ratio.
    • Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.

    Why is CBDC preferred over Cryptocurrency?

    • Sovereign guarantee: Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.
    • Market volatility: Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.
    • Risk in security: A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).
    • Malware threats: In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
    • Money laundering: Cryptocurrencies are more vulnerable to criminal activity and money laundering.  They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.
    • Regulatory bypass: A central bank cannot regulate the supply of cryptocurrencies in the economy.  This could pose a risk to the financial stability of the country if their use becomes widespread.
    • Power consumption: Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).

    Features of CBDC

    • High-security instrument: CBDC is a high-security digital instrument; like paper banknotes, it is a means of payment, a unit of account, and a store of value.
    • Uniquely identifiable: And like paper currency, each unit is uniquely identifiable to prevent counterfeit.
    • Liability of central bank: It is a liability of the central bank just as physical currency is.
    • Transferability: It’s a digital bearer instrument that can be stored, transferred, and transmitted by all kinds of digital payment systems and services.

    Key benefits offered

    • Faster system: CBDC can definitely increase the transmission of money from central banks to commercial banks and end customers much faster than the present system.
    • Financial inclusion: Specific use cases, like financial inclusion, can also be covered by CBDC that can benefit millions of citizens who need money and are currently unbanked or banked with limited banking services
    • Monetary policy facilitation: The move to bring out a CBDC could significantly improve monetary policy development in India.
    • Making of a regional currency: In the cross border payments domain, India can take a lead by leveraging digital Rupee especially in countries such as Bhutan, Saudia Arabia and Singapore where NPCI has existing arrangements.

    Others:

    • It is efficient than printing notes (cost of printing, transporting, and storing paper currency)
    • It reduces the risk of transactions
    • It makes tax collection transparent
    • Prevents money laundering

    Issues involved with CBDC

    • Innovation with centralization: The approach of bringing a sovereign digital currency stands in stark contrast to the idea of decentralization.
    • Liability on RBI:  when bank customers wish to convert their deposits into digital rupee, the RBI will have to take these liabilities from the books of banks and onto its own balance sheet.
    • Inflationary risk: Central banks would indulge in issuing more digital currencies which could potentially trigger higher inflation.
    • User adoption: User adoption could also pose a major setback for the smooth roll out of the CBDC in India. The main challenges would always be user adoption and security.
    • Reduced savings: Many, including various central bankers, fear that people may begin withdrawing money from their bank accounts as digital currencies issued by Central banks become more popular.
    • Volatility: the risk is higher and there is more price volatility and lesser acceptance as a money instrument globally, unless the trust factor and investor protection factors change.

    Way forward

    • The launch of CBDCs may not be a smooth affair and still requires more clarity in India. There are still a lot of misconceptions about the concept of digital currency in the country.
    • The effectiveness of CBDCs will depend on aspects such as privacy design and programmability.
    • There is a huge opportunity for India to take a lead globally via a large-scale rollout and adoption of digital currencies.

     

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  • Doubling farmer’s income

    Context

    • By making solar energy the ‘third crop’, promoting this innovation on a mission mode, the government can double farmers’ income.
    • The famous slogan of late Lal Bahadur Shastri, “Jai Jawan, Jai Kisan,” was extended by Atal Bihari Vajpayee to include “Jai Vigyan”. Now, Prime Minister Narendra Modi has extended it to, “Jai Anusandhan”.

    What is doubling farmer’s income scheme

    • Doubling farmers’ income is a target set by the government of India in February 2016 to be achieved by 2022.
    • To promote farmers’ welfare, reduce agrarian distress and bring parity between income of farmers and those working in non-agricultural professions.

    KUSUM Scheme

    • The scheme would provide extra income to farmers, by giving them an option to sell additional power to the grid through solar power projects set up on their barren lands.
    • It was announced in the Union Budget 2018-19.

    Component of KUSUM Scheme

    Component-A

    • Renewable power plants of capacity 500 KW to 2 MW will be setup by individual farmers/ cooperatives/panchayats /farmer producer organisations (FPO) on their barren or cultivable lands.

    Component-B

    • Installation of 17.50 lakh standalone Solar Powered Agriculture Pumps.
    • Individual farmers will be supported to install standalone solar pumps of capacity up to 7.5 HP. Solar PV capacity in kW equal to the pump capacity in HP is allowed under the scheme.

    Component-C

    • Solarization of 10 Lakh Grid-connected Solar Powered Agriculture Pumps is included in this component, Individual farmers will be supported to solarise pumps of capacity up to 7.5 HP.

    Expected outcomes of KUSUM

    • Welfare: By providing greater financial assistance to smaller farmers, instead of a one¬size¬fits¬all approach.
    • Equity: To encourage equitable deployment, the Centre could incentivise States through target linked financial assistance and create avenues for peer learning.
    • Addressing inequity within a State – This is addressed by a share of central financial assistance under KUSUM should be appropriated for farmers with small landholdings and belonging to socially disadvantaged groups.

    Punchline

    Annadata becoming the urjadata – This one policy has the potential to double farmers incomes within a year or two.

    Challenges

    • Awareness challenge: Barriers to adoption include limited awareness about solar pumps.
    • Upfront contribution: The other barrier includes farmers’ inability to pay their upfront contribution.
    • Regulatory hurdle: Progress on the implementation front has been rather poor due to regulatory, financial, operational and technical challenges.

    Constraints in the path of doubling the income

    • Outdated technology: Use of outdated and inappropriate technology is the main reason for low productivity of crops and livestock.
    • Affordability: Given the pre-dominance of small and marginal farmers in Indian agriculture, affordability becomes a significant constraint on technology adoption by farmers.
    • Low research in agriculture: Agricultural research in the country is constrained by resource inadequacy, regulations and intellectual property rights (IPR).

    The Measures Taken by Indian Government

    • Institutional Reforms: Pradhan Mantri Krishi Sinchai Yojana, Soil health card, and Prampragat Krishi Vikas Yojana- Aiming to raise output and reduce cost.
    • Technological Reforms: Various Technology mission like Technology mission on cotton, Technology Mission on Oilseeds, Pulses and Maize etc.

    Way forward

    • To secure future of agriculture and to improve livelihood of half of India’s population, adequate attention needs to be given to improve the welfare of farmers and raise agricultural income.
    • It is essential to mobilize States and UTs to own and achieve the goal of doubling farmers’; income with active focus on capacity building (technology adoption and awareness) of farmers that will be the catalyst to boost farmer’s income.

    Mains question

    Q. By making solar energy the ‘third crop’, promoting this innovation on a mission mode, the government can double farmers’ income. Critically analyse this statement.

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  • Mystery of milk price going up when WPI inflation is down

    Milk prices are rising, as producers and marketers pass on higher costs to consumers.  Amul and Mother Dairy raised milk prices by ₹2 each this week, the second such hike this year.

    Why are milk prices going up?

    • High operating cost: For dairy companies and cooperatives, the cost of operation and production of milk has increased.
    • Fodder price hike: Prices of cattle feed, which includes maize, wheat and soybean, are up 20% over the year.
    • High procurement cost: Given the rise in input costs, its member unions from where it procures milk have increased farmers’ price in the range of 8-9% year-on-year.
    • Cost sharing: In an already inflationary environment, dairies are compelled to pass on price increases to consumers as procurement prices go up.

    Has demand for milk picked up as well?

    • A better rate of vaccination, resumption of offices, schools and even opening up of channels such as hotels and restaurants have led to higher out-of-home consumption of foods and beverages in the last two to three quarters.
    • This has led to greater demand for milk and other dairy beverages.
    • Analysts cited higher skimmed milk prices in the international markets that they said make exports of the commodity out of India more attractive.
    • A combination of these factors is pushing up milk procurement prices, and leading to higher retail prices.

    But isn’t wholesale inflation cooling down nowadays?

    • Yes; India’s wholesale price-based inflation eased to 13.93% in July.
    • In fact, WPI inflation in milk eased in July to 5.45% compared  to  6.35%  in  June,  though it remained high compared to February.
    • However, companies also pass on hikes with a lag to lessen the impact on demand. Amul says the increase is less than 4% — below the food inflation rate of 8-9%.

    When will milk prices cool down?

    • Milk procurement is also dependent on the flush season that runs between September to February.
    • This is the peak lactating period for cattle due to better availability of green fodder and water.
    • As a result, the period in general sees higher milk production and availability.
    • The onset of  the  flush  season  could offer some relief to dairy companies in the second half of the current fiscal year.

    What does this mean for consumers?

    • For households, an  increase  in milk prices obviously means shelling out more money; this in a country that is among largest consumers of milk.
    • In fact,  by July,  dairy companies had raised milk selling prices by 5-8% in a six-month window.
    • Consumer demand typically sees an impact in the first few days after price hikes are initiated. However, recovery happens gradually.
    • Consequently, higher milk procurement prices could also hurt companies that make bakery products or food items that use milk or milk solids.

    Also read

    Concept of Inflation/Deflation/WPI/CPI/IIP

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  • Macrovariable projections in uncertain times

    Context

    The Fed has raised its benchmark interest rate again by a whopping 0.75%. The Reserve Bank of India has also been forced to raise interest rates further but also take other steps.

    Two challenges for policymakers

    • Decisions in the Monetary Policy Committee (MPC) meeting are based on what the members of the MPC see as the likely course of the economy in the months ahead.
    • But, the trajectory of the world economy, and its likely impact on the Indian economy, is imponderable.
    • So, Indian policymakers would face two crucial problems.
    • 1] Uncertainty due to war and Covid-19: First, the main uncertainty is due to Russia’s war on Ukraine and the resultant economic sanctions on Russia, as well as the zero-COVID-19 policy in China that repeatedly implements lockdowns leading to global supply bottlenecks.
    • 2] Uncertainty in data: Policy has to base itself on data.
    • If it is deficient, it introduces additional uncertainty, making projections for the future difficult and causing policies to fail.
    • This will compound the problem that results from the global uncertainty.

    Role of uncertainties related to Covid and Ukraine war

    • Since early 2020, the SARS-COV-2 virus has caused global uncertainty.
    •  In a globalised interdependent world, production was hit resulting in price rise (inflation) and loss of real incomes.
    • This has resulted in decline in demand and, in a vicious cycle, a further slowing down of the economy.
    • As prices have risen globally and economies slowed down, many countries have faced stagflation.
    • Decline in uncertainty: The uncertainty due to the novel coronavirus has declined in spite of waves of attack persisting because the impact of new virus mutants of the virus is milder and there is also immunity due to vaccination.
    • However, China is an exception with its zero-COVID policy.
    •  It has been implementing strict lockdowns in the last six months, even when only a few cases of the disease have been detected.

    The uncertainties due to Ukraine conflict

    • The war in Ukraine and western sanctions on Russia have caused huge uncertainty since February 2022 (when Russia invaded Ukraine) and displaced the disease-related uncertainty, i.e., COVID-19.
    • The reason is that the war is a proxy war between two powerful capitalist blocs.
    • There is needless continuing suffering of the people of Ukraine, with a bombardment of cities, and this could escalate.
    • The war and the sanctions have already affected the world economy and the Europeans in particular.
    • The U.S. economy has entered technical recession with two quarters of GDP decline.
    • As supplies of critical items supplied by Russia and Ukraine have been hit, prices have soared.
    • Europe, the United States and India have experienced or are experiencing high inflation.
    • The biggest disruption is in energy supplies from Russia, impacting production.
    • The availability of food, fertilizers, metals, etc., have been hit as Ukraine and Russia are important sources.
    • To weaken Russia, sanctions may be imposed on countries that carry out trade with it.
    • Many Indian entities may face the heat since India has increased its imports from Russia, which undermines sanctions.
    • China may also face sanctions since it has increased trade with Russia and is backing it.

    Data related uncertainties

    • Indian policymakers also face data-related issues.
    • It is not only available with a big lag on most macroeconomic variables but for many variables, data are either not available or has huge errors.
    • Errors in data: Policymakers rely on high frequency data to proxy for actual data.
    • For example, very little data are available for quarterly GDP data which is used to calculate the growth rate of the economy.
    • First, except for agriculture, unorganised sector data is not available.
    • Second, for the organised sector, very limited data are available.
    • Third, projections from the previous year or proxies are used — both these introduce errors when there are repeated shocks to the economy, such as the pandemic and now the war.
    • Issues with price data: Price data too are problematic.
    • The services sector is under-represented.
    • Prices of many services have risen and expenditures on them have increased dramatically, thus changing their weight in the consumption basket.
    • Common CPI: Further, the consumer price index is common for the upper classes and the poor.
    •  Earlier, there was a different index for various categories of people, which reflected the differential impact of inflation on people.
    • This gave a truer picture of the economy and peoples’ distress.

    Conclusion

    Indian policymakers face the unenviable task of predicting the course of the economy for the next few months and even the year (or years) ahead because of the shocks and faulty and inadequate data. The problem is compounded by international factors.

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  • India as a ‘developed’ country: where we are, and the challenges ahead

    In his Independence Day address, PM asked Indians to embrace the “Panch Pran” — five vows — by 2047 when the country celebrates 100 years of independence.

    What are the Panch Prans?

    • Calling it the ‘panch pran‘ — the five resolutions to help India become a developed nation in the next 25 years — PM said:
    1. Every Indian should focus on developing the country;
    2. 100 per cent freedom from slavery (100% Azadi from Ghulami);
    3. Taking pride in Indian heritage;
    4. Ensuring importance is given to unity and integrity and
    5. Every citizen should be responsible

    What is a “developed” country?

    • Different global bodies and agencies classify countries differently.
    • The ‘World Economic Situation and Prospects’ of the United Nations classifies countries into three broad categories: developed economies, economies in transition, and developing economies.
    • The idea is “to reflect basic economic country conditions”, and the categories “are not strictly aligned with the regional classifications”.
    • So, it isn’t as though all European countries are “developed”, and all Asian ones are “developing”.
    • To categorise countries by economic conditions, the United Nations uses the World Bank’s categorisation, based on Gross National Income (GNI) per capita (in current US dollars).

    Issues with such categorization

    • But the UN’s nomenclature of “developed” and “developing” is being used less and less, and is often contested.
    • Former US President Donald Trump had criticised the categorisation of China as a “developing” country, which allowed it to enjoy some benefits in the World Trade Organization.
    • If China is a “developing” country, then the US should also be “made” one, Donald Trump once said.

    But why is the United Nations classification contested?

    • It can be argued that the UN classification is not very accurate and, as such, has limited analytical value.
    • Only the top three mentioned in chart 3 alongside — the US, the UK and Norway — fall in the developed country category.
    • Today, there are 31 developed countries according to the UN in all.
    • All the rest — except 17 “economies in transition” — are designated as “developing” countries, even though in terms of proportion, China’s per capita income is closer to Norway’s than Somalia’s.
    • China’s per capita income is 26 times that of Somalia’s while Norway’s is just about seven times that of China’s.
    • Then there are countries — such as Ukraine, with a per capita GNI of $4,120 (a third of China’s) — that are designated as “economies in transition”.

    Where does India stand?

    • As chart 2 shows, India is currently far behind both the so-called developed countries, as well as some developing countries.
    • Often, the discourse is on the absolute level of GDP (gross domestic product).
    • On that metric, India is one of the biggest economies of the world — even though the US and China remain far ahead.
    • However, to be classified as a “developed” country, the average income of a country’s people matters more.
    • And on per capita income, India is behind even Bangladesh.
    • China’s per capita income is 5.5 times that of India, and the UK’s is almost 33 times.

    India’s progress

    • India has made a secular improvement on HDI metrics.
    • For instance, the life expectancy at birth (one of the sub-metrics of HDI) in India has gone from around 40 years in 1947 to around 70 years now.
    • India has also taken giant strides in education enrolment at all three levels — primary, secondary, and tertiary.

    What is the distance left to cover?

    • When compared to the developed countries or China, India has a fair distance to cover.
    • Even though India is the world’s third-largest economy in purchasing power parity (PPP) terms, most Indians are still relatively poor compared to people in other middle income or rich countries.
    • Ten per cent of Indians, at most, have consumption levels above the commonly used threshold of $10 (PPP) per day expenditures for the global middle class.
    • Other metrics, such as the food share of consumption, suggest that even rich households in India would have to see a substantial expansion of their total consumption to reach levels of poor households in rich countries.

    How much can India achieve by 2047?

    • One way to make this assessment is to look at how long other countries took to get there.
    • For instance, in per capita income terms, Norway was at India’s current level 56 years ago — in the year 1966.
    • Comparing India to China is more useful. China reached that mark in 2007.
    • Theoretically then, if India were to grow as fast as China did between 2007 and 2022, then, broadly speaking, it will take India another 15 years to be where China is now.
    • But then, China’s current per capita income was achieved by the developed countries several decades earlier — the UK in 1987, the US and Norway in 1979.

    Where does India lag?

    • India’s current HDI score (0.64) is much lower than what any of the developed countries had even in 1980.
    • China reached the 0.64 level in 2004, and took another 13 year to reach the 0.75 level — that, incidentally, is the level at which the UK was in 1980.

    What can India achieve by 2047?

    • The World Bank’s 2018 report had made a mention of what India could achieve by 2047.
    • By 2047 — the centenary of its independence — at least half its citizens could join the ranks of the global middle class.
    • By most definitions, this will mean that households have access to better education and health care, clean water, improved sanitation, reliable electricity, a safe environment, affordable housing, and enough discretionary income to spend on leisure pursuits.

    Way forward

    • Fulfilling these aspirations requires income well above the extreme poverty line, as well as vastly improved public service delivery.
    • To see this in perspective, note that at the last count, as of 2013, India had 218 million people living in extreme poverty — which made India home to the poorest people in the world.

     

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  • Centre restores Modified Interest Subvention Scheme (MISS)

    The Union Cabinet has decided to restore the interest subvention on short-term agriculture loans to 1.5% for all financial institutions, including cooperative banks.

    What is the news?

    • The Union Cabinet has approved to restore Interest Subvention on short term agriculture loans to 1.5% for all financial institutions.
    • Thus, Interest Subvention of 1.5% will be provided to lending institutions for the financial year 2022-23 to 2024-25 for lending short term agri-loans upto Rs 3 lakh to the farmers.

    What is MISS?

    • Kisan Credit Card scheme was introduced for farmers, to empower them to purchase agriculture products and services on credit at any time.
    • To ensure that the farmers have to pay a minimal interest rate to the bank, the GoI introduced Interest Subvention Scheme (ISS), now renamed as Modified Interest Subvention Scheme (MISS).
    • It aims to provide short term credit to farmers at subsidized interest rates.

    Features of MISS

    • Under this scheme, short term agriculture loan upto Rs. 3.00 lakh is available to farmers engaged in Agriculture and other allied activities including Animal Husbandry, Dairying, Poultry, fisheries etc. at the rate of 7% p.a.
    • An additional 3% subvention (Prompt Repayment Incentive – PRI) is also given to the farmers for prompt and timely repayment of loans.
    • Therefore, if a farmer repays his loan on time, he gets credit at the rate of 4% p.a.
    • For enabling this facility to the farmers, GoI provides Interest Subvention (IS) to the Financial Institutions offering this scheme.
    • This support is 100% funded by the Centre, it is also the second largest scheme of DA&FW as per budget outlay and coverage of beneficiaries.

    Benefits of MISS

    • Ensuring hassle-free credit availability at cheaper rate to farmers has been the top priority of GoI.
    • Increase in Interest Subvention will ensure sustainability of credit flow in the agriculture sector as well as ensure financial health and viability of the lending institutions.
    • Banks will be able to absorb increase in cost of funds and will be encouraged to grant loans to farmers for short term agriculture requirements and enable more farmers to get the benefit of agriculture credit.
    • This will also lead to generation of employment since short term agri-loans are provided for all activities including Animal Husbandry, Dairying, Poultry, fisheries.
    • Farmers will continue to avail short term agriculture credit at interest rate of 4% per annum while repaying the loan in time.

    Who gets the subvention?

    • The lending institutions include- Public Sector Banks, Private Sector Bank, Small Finance Banks, Regional Rural Banks, Cooperative Banks and Computerized PACS directly ceded with commercial banks.

     

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  • Curbing inflation in tomatoes, onions and potatoes requires streamlining their value chains

    Context

    The higher the weight of food in the overall CPI, the more difficult it is for the monetary policy squeeze alone to contain inflation.

    Inflation challenge in Indian economy

    • Under the FRBM Act, The RBI has the unenviable task of keeping inflation within the 4+/-2 per cent range.
    • But lately, despite its best efforts, inflation has remained defiant and above its tolerance band.
    • The RBI’s major policy tool, the repo rate has already been hiked by 90 basis points, raising it to 4.9 per cent in June.
    • It is likely to rise to at least 5.5 per cent, if not more, over the course of this financial year.
    • But this will not be enough to tame inflation due to the nature and structure of inflation in India.

    How India’s CPI basket is different

    • The CPI basket in India comprises of 299 commodities grouped into six major categories.
    •  The food and beverages group has a weight of 45.86 per cent (with food at 39.06 per cent, prepared meals at 5.55 per cent and non-alcoholic beverages at 1.26 per cent).
    • High weight of food in overall CPI: It is this overwhelmingly high weight of food in overall CPI, based on the consumer expenditure survey (CES) data of 2011-12, that distinguishes Indian inflation from many other developed countries where the food weight is much smaller.
    • It is much lower in Germany (8.5 per cent), the UK (9.3 per cent), the US (13.42 per cent), Canada (15.94 per cent), France (16.49 per cent), Australia (16.8 per cent), China (19.9 per cent), and Japan (26.3 per cent). Even developing nations like South Africa (17.24 per cent), Brazil (25.5 per cent), and Pakistan (34.83 per cent) have lesser weightage of food in overall CPI than India.
    •  The higher the weight of food in the overall CPI, the more difficult it is for the monetary policy squeeze alone to contain inflation.

    Tomato inflation

    • Interestingly, of the 299 commodities that comprise CPI, the highest contributor to overall inflation was tomatoes at 8.9 per cent.
    • Inflation in tomatoes was stupendously high at 158.8 per cent (year-on-year).
    • One of the prime reasons was the low base effect as inflation in June 2021 was minus 14.4 per cent.
    • Due to low price realisation last year, this year tomato farmers shifted acreage to other crops.
    • On top of that, some tomato growing areas got flooded, while many others faced heat waves that further depressed tomato supplies.
    •  It is for this reason a scheme called TOP (Tomatoes, Onions, and Potatoes) and allocated Rs 500 crore to streamline their value chains.
    •  But the scheme went to the Ministry of Food Processing, and was expanded to TOTAL by including several other vegetables.
    • Without having a champion, like Verghese Kurien was for milk, this scheme (from TOP to TOTAL) got diffused in focus and has not shown any visible impact in improving the value chains of vegetables.
    • Way forward: The real solution to tomato inflation may lie beyond the ambit of the RBI.
    • Processing: It requires linking tomato value chains to processing of at least 10 per cent of tomato production into tomato paste and puree during bumper years and using them when fresh tomato prices spike.
    • Reduce GST: Further, to enhance the affordability of processed tomatoes, its GST rates need to be reduced from 12 per cent to 5 per cent.
    • This would also help farmers to stabilise their incomes and avoid the typical cobweb problem they face in case of perishables.

    Way forward

    • So, monetary policy alone may not be as effective in the Indian case.
    • Revise CPI: India desperately needs to revise its CPI with the latest consumption survey weights.
    • Our parliamentarians must recognise the limitations that the RBI faces in taming inflation.

    Conclusion

    The upshot of all this is that the nature and structure of inflation in India is different than in developed countries.

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  • Centre raises thresholds for prosecution under Customs Act

    The government has raised the thresholds for prosecutions and arrests under the Customs Act to ₹50 lakh from ₹20 lakh for smuggling and illegal imports of goods in baggage, and from ₹1 crore to ₹2 crore for cases involving commercial fraud.

    What is Custom Duty?

    • Customs duty refers to the tax imposed on goods when they are transported across international borders.
    • In simple terms, it is the tax that is levied on import and export of goods.
    • Custom duty in India is defined under the Customs Act, 1962, and all matters related to it fall under the Central Board of Excise & Customs (CBEC).
    • The government uses this duty to raise its revenues, safeguard domestic industries, and regulate movement of goods.
    • The rate of Customs duty varies depending on where the goods were made and what they were made of.

    Types of custom duty

    • Basic Customs Duty (BCD): It is the duty imposed on the value of the goods at a specific rate at a specified rate of ad-valorem basis.
    • Countervailing Duty (CVD): It is imposed by the Central Government when a country is paying the subsidy to the exporters who are exporting goods to India.
    • Additional Customs Duty or Special CVD: It is imposed to bring imports on an equal track with the goods produced or manufactured in India.
    • Protective Duty: To protect interests of Indian industry
    • Safeguard Duty: It is imposed to safeguard the interest of our local domestic industries. It is calculated on the basis of loss suffered by our local industries.
    • Anti-dumping Duty: Manufacturers from abroad may export goods at very low prices compared to prices in the domestic market. In order to avoid such dumping, ADD is levied.

     

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  • Govt incurs revenue loss of ₹1.84 lakh crore

    The opposition has questioned the government over the corporate tax cut that led to a revenue loss of ₹1.84 lakh crore to the public exchequer as per a report of the Parliamentary Committee on Estimates.

    Why in news?

    • The Public Estimates Committee found such a huge revenue loss for the government.
    • The middle class was charged at a peak tax rate of 30% against 22% for the corporates. Quiet antithetical!
    • The centre on the other hand has repeatedly claimed that the corporate tax cut would help increase tax collection.

    What is Corporate Tax?

    • Domestic as well as foreign companies are liable to pay corporate tax under the Income-tax Act.
    • While a domestic company is taxed on its universal income, a foreign company is only taxed on the income earned within India i.e. is being accrued or received in India.
    • For the purpose of calculation of taxes under Income tax act, the types of companies can be defined as under:
    1. Domestic Company is one which is registered under the Companies Act of India and also includes the company registered in the foreign countries having control and management wholly situated in India. A domestic company includes private as well as public companies.
    2. Foreign Company is one which is not registered under the company’s act of India and has control & management located outside India.

    Why has the government slashed Corporate Tax?

    • The corporate tax cut is part of a series of steps taken by the government to tackle the slowdown in economic growth since the start of pandemic.
    • The most immediate reason behind the tax cut may be the displeasure that various corporate houses have shown against the government’s policies.
    • Many investors, for instance, were spooked by the additional taxes on them that were announced by the government during the budget in July and began pulling money out of the country.
    • The government hoped that the new, lower tax rates will attract more investments into the country and help revive the domestic manufacturing sector which has seen lackluster growth.

    Why Corporate Tax?

    • The corporate tax rate is a major determinant of how investors allocate capital across various economies.
    • So there is constant pressure on governments across the world to offer the lowest tax rates in order to attract investors.
    • Tax cuts, by putting more money in the hands of the private sector, can offer people more incentive to produce and contribute to the economy.

    Impact of the rate cut

    • The present cut in taxes can make India more competitive on the global stage by making Indian corporate tax rates comparable to that of rates in East Asia.
    • At the same time, if it manages to sufficiently revive the economy, the present tax cut can help boost tax collections and compensate for the loss of revenue.
    1. Relief to big companies
    • Big companies got a relief of close to 10 percentage points in the effective tax rate including cess and surcharge.
    1. Enhanced competitiveness
    • India was earlier at disadvantage because of a couple of factors and on top of it was the high corporate tax rate.
    • After this cut, base corporate tax rate in India has become competitive and should help boost investment.

    III. Enhanced EoDB

    • Singapore with 17 per cent tax rate, and Vietnam, Thailand, Cambodia and Taiwan with 20 per cent base tax rates are the only countries offering lower rates than India
    • India is now much better than China in terms of rate, transparency, and tax administration so companies can now look at India for setting up new units.

    Criticisms of the move

    • Some see the present tax cut simply as a concession to corporate houses rather than as a structural reform that could boost the wider economy.
    • They believe that the current economic slowdown is due to the problem of insufficient demand which cannot be addressed just through tax cuts and instead advocate greater government spending to boost the economy.
    • Others, however, argue that lacklustre demand faced by sectors like automobiles is merely a symptom of supply-side shocks such as the GST that have affected various businesses and caused job losses.
    • If so, tax cuts and other supply-side reforms can indeed help the economy recover from its slump.

    Back2Basics: Public Estimates Committee

    • The Committee on Estimates constituted for the first time in 1950, is a Parliamentary Committee consisting of 30 members, elected every year by the Lok Sabha from amongst its Members.
    • The Chairperson of the Committee is appointed by the Speaker from amongst its members.
    • A Minister cannot be elected as a member of the Committee and if a member after selection to the Committee is appointed a Minister, the member ceases to be a Member of the Committee from the date of such appointment.

    Term of Office

    • The term of office of the Committee is one year.

    Functions

    • The functions of the Estimates Committee are:
    1. to report what economies, improvements in organisation, efficiency or administrative reform, consistent with the policy underlying the estimates may be effected;
    2. to suggest alternative policies in order to bring about efficiency and economy in administration;
    3. to examine whether the money is well laid out within the limits of the policy implied in the estimates; and
    4. to suggest the form in which the estimates shall be presented to Parliament.

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  • Ethanol Blending

    Prime Minister has announced that India has achieved its target of blending 10% sugarcane-extracted ethanol in petrol, ahead of schedule.

    What is ethanol blending?

    • Blending ethanol with petrol to burn less fossil fuel while running vehicles is called ethanol blending.
    • Ethanol is an agricultural by-product which is mainly obtained from the processing of sugar from sugarcane, but also from other sources such as rice husk or maize.
    • Currently, 10% of the petrol that powers your vehicle is ethanol.
    • Though we have had an E10 — or 10% ethanol as policy for a while, it is only this year that we have achieved that proportion.
    • India’s aim is to increase this ratio to 20% originally by 2030 but in 2021, when NITI Aayog put out the ethanol roadmap, that deadline was advanced to 2025.

    Why need ethanol blending?

    • Ethanol blending will help bring down our share of oil imports (almost 85%) on which we spend a considerable amount of our precious foreign exchange.
    • Secondly, more ethanol output would help increase farmers’ incomes.
    • India’s net import of petroleum was 185 million tonnes at a cost of $55 billion in 2020-21.
    • A successful ethanol blending programme can save the country $4 billion per annum.

    What are first-generation and second-generation ethanols?

    • With an aim to augment ethanol supplies, the government has allowed procurement of ethanol produced from other sources besides molasses — which is first-generation ethanol or 1G.
    • Other than molasses, ethanol can be extracted from materials such as rice straw, wheat straw, corn cobs, corn stover, bagasse, bamboo and woody biomass, which are second-generation ethanol sources or 2G.
    • While inaugurating the Indian Oil Corporation’s (IOC) 2G ethanol plant last week, PM referred to not only the prospect of higher farmer income but also dwelt upon the advantages of farmers selling the residual stubble — left behind after rice is harvested — to help make biofuels.
    • This means lesser stubble burning and therefore, lesser air pollution.

    How have other countries fared?

    • Though the U.S., China, Canada and Brazil all have ethanol blending programmes, as a developing country, Brazil stands out.
    • It had legislated that the ethanol content in petrol should be in the 18-27.5% range, and it finally touched the 27% target in 2021.

    How does it impact the auto industry?

    • At the time of the NITI Aayog report in June last year, the industry had committed to the government to make all vehicles E20 material compliant by 2023.
    • This meant that the petrol points, plastics, rubber, steel and other components in vehicles would need to be compliant to hold/store fuel that is 20% ethanol.
    • Without such a change, rusting is an obvious impediment.

    Are there other alternatives?

    • Auto industry prefer the use of biofuels as the next step, compared to other options such as electric vehicles (EV), hydrogen power and compressed natural gas.
    • This is mainly because biofuels demand the least incremental investment for manufacturers.
    • Even though the industry is recovering from the economic losses bought on by the pandemic, it is bound to make some change to comply with India’s promise for net-zero emissions by 2070.

    What are the challenges before the industry when it comes to 20% ethanol blended fuel?

    • Key challenge is the optimisation of engines for higher ethanol blends and the conduct of durability studies on engines and field trials before introducing E20 compliant vehicles.
    • Storage is going to be the main concern, for if E10 supply has to continue in tandem with E20 supply, storage would have to be separate which then raises costs.

    Sources for ethanol in India

    The plan was to divert its excess sugar production to produce ethanol, 3.5 million tonnes in 2021-22 and 6 million tonnes the next year, in addition to grains like rice, corn, and barley.

    • Using surplus rice: The government’s food department revealed its plans to divert 17 million tonnes of surplus rice from its food stocks of 90 million tonnes to produce ethanol.
    • Sugarcane: This is in addition to the 2 million tonnes of sugar which is already being diverted to produce ethanol.

    How would this benefit the country?

    • Cost saving: A successful biofuels programme can save India $4 billion or about ₹30,000 crore every year by lowering import of petroleum products.
    • Emission cut: Ethanol is also less polluting and offers equivalent efficiency at a lower cost than petrol.
    • Biofuel’s policy boost: Rising production of grains and sugarcane and feasibility of making vehicles compliant to ethanol-blended fuel makes its biofuels policy a strategic requirement.
    • Early rollout: Towards this, govt has put in place interest subsidies for distilleries to expand capacity while auto firms have agreed to make compatible vehicles.

    What are the unintended effects of the policy?

    • Unsustainability of cash-crops: Increasing reliance on biofuels can push farmers to grow more water-intensive crops like sugarcane and rice.
    • Huge water requirement: Currently use 70% of the available irrigation water, negating some positive impact on the environment of using more ethanol.
    • Food and nutrition security: The move could impact India’s hunger situation by limiting the coverage of the food security schemes.
    • Food inflation: Diversion of mass consumption grains can also push food prices up.

    How will it impact crop diversification?

    • Monotonous crops: Although the biofuels policy stresses on using less water-consuming crops, farmers prefer to grow more sugarcane and rice due to price support schemes.
    • Water stress: Growing more of them can lead to an adverse impact in water-stressed areas in states.

    What about food security?

    • It is unethical to use edible grains to produce ethanol in a country where hunger is rampant.
    • India is already a poor performer in Global Hunger Index.
    • Although about 80 crore people are now receiving subsidized food grains, calculations show that over 10 crore eligible households are still excluded.

     

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