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Subject: Economics

  • Centre forms panel for Minimum Support Price (MSP)

    The Centre has finally constituted a committee headed by former Union Agriculture Secretary Sanjay Agrawal here to look into the issues of Minimum Support Price (MSP), as promised to protestant farmers after the repeal of three farm laws.

    Panel on MSP: Terms of reference

    • The panel will consist of representatives of the Central and State governments, farmers, agricultural scientists and agricultural economists.
    • This panel will be constituted:
    1. To promote zero budget-based farming,
    2. To change crop patterns keeping in mind the changing needs of the country
    3. To make MSP more effective and transparent
    • It also says that the committee will discuss methods to strengthen the Agricultural Marketing System as per the changing requirements of the country
    • It would ensure higher value to the farmers through remunerative prices of their produce by taking advantage of the domestic output and export.
    • On natural farming, the committee will make suggestions for programs and schemes for value chain development, protocol validation, and research for future needs.
    • It would support area expansion under the Indian Natural Farming System through publicity and through the involvement and contribution of farmer organizations.

    What is MSP?

    • The MSP assures the farmers of a fixed price for their crops, well above their production costs.
    • MSP, by contrast, is devoid of any legal backing. Access to it, unlike subsidized grains through the PDS, isn’t an entitlement for farmers.
    • They cannot demand it as a matter of right. It is only a government policy that is part of administrative decision-making.
    • The Centre currently fixes MSPs for 23 farm commodities based on the Commission for Agricultural Costs and Prices (CACP) recommendations.

    Fixing of MSPs

    • The CACP considered various factors while recommending the MSP for a commodity, including the cost of cultivation.
    • It also takes into account the supply and demand situation for the commodity; market price trends (domestic and global) and parity vis-Ă -vis other crops; and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors.

    What changed with the 2018 budget?

    • The Budget for 2018-19 announced that MSPs would henceforth be fixed at 1.5 times of the production costs for crops as a “pre-determined principle”.
    • Simply put, the CACP’s job now was only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula.

    How was this production cost arrived at?

    • The CACP projects three kinds of production cost for every crop, both at the state and all-India average levels.
    • ‘A2’ covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilizers, pesticides, hired labor, leased-in land, fuel, irrigation, etc.
    • ‘A2+FL’ includes A2 plus an imputed value of unpaid family labor.
    • ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.

    How much produce can the government procure at MSP?

    • The MSP value of the total production of the 23 crops worked out to around Rs 10.78 lakh crore in 2019-20.
    • Not all this produce, however, is marketed. Farmers retain part of it for self-consumption, the seed for the next season’s sowing, and also for feeding their animals.
    • The marketed surplus ratio for different crops is estimated to range differently for various crops.
    • It ranges from below 50% for ragi and 65-70% for bajra (pearl millet) and jawar (sorghum) to 75% for wheat, 80% for paddy, 85% for sugarcane, 90% for most pulses, and 95%-plus for cotton, soybean, etc.
    • Taking an average of 75% would yield a number of just over Rs 8 lakh crore.
    • This is the MSP value of production that is the marketable surplus — which farmers actually sell.

    Nature of MSP

    • There is currently no statutory backing for these prices, nor any law mandating their enforcement.

    Farmers demand legalization

    • Legal entitlement: There is a demand that MSP based on a C2+50% formula should be made a legal entitlement for all agricultural produce.
    • Private traders’ responsibility: Some says that most of the cost should be borne by private traders, noting that both middlemen and corporate giants are buying commodities at low rates from farmers.
    • Mandatory purchase at MSP: A left-affiliated farm union has suggested a law that simply stipulates that no one — neither the Government nor private players — will be allowed to buy at a rate lower than MSP.
    • Surplus payment by the govt.: Other unions have said that if private buyers fail to purchase their crops, the Government must be prepared to buy out the entire surplus at MSP rates.
    • Expansion of C2: Farm unions are demanding that C2 must also include capital assets and the rentals and interest forgone on owned land as recommended by the National Commission for Farmers.

    Government’s position

    • The PM has announced the formation of a committee to make MSP more transparent, as well as to change crop patterns — often determined by MSP and procurement.
    • The panel will have representatives from farm groups as well as from the State and Central Governments, along with agricultural scientists and economists.

    Issues with legal backing

    • Demand-supply dynamics: Economic theory, as well as experience, indicates that the price level that is not supported by demand and supply cannot be sustained through legal means.
    • States responsibility: The Centre has suggested that the States are free to guarantee MSP rates if they wish, but also offers two failed examples of such a policy:

    [I] Sugar FRP

    • In the sugar sector, private mills are mandated to buy cane from farmers at prices set by the Government.
    • Faced with low sugar prices, high surplus stock, and low liquidity, mills failed to make full payments to farmers, resulting in an accumulation of thousands of crores worth of dues pending for years.

    [II] Withdrawal of traders

    • The other example is a 2018 amendment to the Maharashtra law penalizing traders with hefty fines and jail terms if they bought crops at rates lower than MSP.
    • As open market prices were lower than the (legalized) MSP levels declared by the State, the buyers withdrew from the market and farmers had to suffer.

    Will a legal backing for MSP solve all the ills that plague the Agriculture sector?

    • Only one side of the coin: Actually, no. Remunerative price or MSP is only one part of the problems farmers face.  Farmers face many other issues other than price, which itself is not guaranteed given the influence of politicians and cartels in mandis.
    • Information deficit: They lack information on which crop to grow, when to sow, apply plant nutrients and which pest is attacking their crop.
    • Lack of technology: Farmers are also short of post-harvest technologies to ensure a better shelf life for their produce.
    • Irrigation and storage problem: They do not get adequate facilities to irrigate their lands, with nearly 50 percent of the land being rain-fed and lacking ample warehouses to store their produce at the village level, besides proper roads to connect them to the mandis.
    • Threat of new loopholes: Legal backing for the MSP could also lead to the danger of the trade keeping away from places where the law is implemented vigorously.

    Fiscal cost of making the MSP legally binding

    • The MSP value of the total output of all the 23 notified crops worked out to about Rs 11.9 lakh crore in 2020-21.
    • Taking an average of 75% yields a number – the MSP value of production actually sold by farmers – just under Rs 9 lakh crore.
    • The government is further, as it is, procuring many crops. The MSP value of the 89.42 mt of paddy and 43.34 mt of wheat alone bought during 2020-21 was around Rs 253,275 crore.
    • All in all, then, the MSP is already being enforced, directly or through fiat, on roughly Rs 3.8 lakh crore worth of produce.
    • Providing a legal guarantee for the entire marketable surplus of the 23 MSP crops would mean covering another Rs 5 lakh crore or so.

    Conclusion

    • A growing consensus among economists for guaranteeing minimum “incomes”, as against “prices”, to farmers.
    • That would essentially entail making more direct cash transfers either on a flat per-acre (as in the Telangana government’s Rythu Bandhu scheme) or per-farm household (the Centre’s PM-Kisan) basis.
    • The resource requirement of such interventions will be so huge that no government will be left with resources to help farmers through other means like investment in public infrastructure, irrigation, and other incentives.
    • The danger of over-reliance on MSP is already visible in the state of Punjab. Agriculture has reached an almost static stage there.
    • The state is unable to diversify away from crops like paddy, which is destroying its natural resources and environment, marring long-term prospects of farming.

     

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  • India’s Defence Exports have grown up 7x: PM

    Our defence exports have increased seven times in the last eight years, informed the Prime Minister. We had achieved defence exports worth â‚č13,000 crore and of this 70% was from the private sector.

    Why in news?

    • The Indian Defence sector, the second largest armed force is at the cusp of revolution.

    India’s Defence Exports

    • India has put out a range of military hardware on sale which includes various missile systems, Light Combat Aircraft (LCA), helicopters, warship and patrol vessels, artillery guns, tanks, radars etc.
    • From 2016-17 to 2018-19, the country’s defence exports have increased from â‚č1,521 crore to â‚č10,745 crore, a staggering 700% growth.

    Steps taken by the Centre to boost defence production

    • Licensing relaxation: Measures announced to boost exports since 2014 include simplified defence industrial licensing, relaxation of export controls and grant of no-objection certificates.
    • Lines of Credit: Specific incentives were introduced under the foreign trade policy and the Ministry of External Affairs has facilitated Lines of Credit for countries to import defence product.
    • Policy boost: The Defence Ministry has also issued a draft Defence Production & Export Promotion Policy 2020.
    • Indigenization lists: On the domestic front, to boost indigenous manufacturing, the Government had issued two “positive indigenization lists” consisting of 209 items that cannot be imported.
    • Budgetary allocation: In addition, a percentage of the capital outlay of the defence budget has been reserved for procurement from domestic industry.
    • Defence Industrial Corridors: The government has also announced 2 dedicated Corridors in the States of TN and UP to act as clusters of defence manufacturing that leverage existing infrastructure, and human capital.
    • Long-term vision: The vision of the government is to achieve a turnover of $25 bn including export of $5 bn in Aerospace and Defence goods and services by 2025.
    • Push for self-reliance: The govt has identified the Defence and Aerospace sector as a focus area for the ‘Aatmanirbhar Bharat’ or Self-Reliant India initiative.

    Issues retarding defence exports

    • Excess reliance on Public Sector: India has four companies (Indian ordnance factories, Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL) and Bharat Dynamics Limited (BDL)) among the top 100 biggest arms producers of the world.
    • Policy delays: In the past few years, the government has approved over 200 defence acquisition worth Rs 4 trillion, but most are still in relatively early stages of processing.
    • Lack of Critical Technologies: Poor design capability in critical technologies, inadequate investment in R&D and the inability to manufacture major subsystems and components hamper the indigenous manufacturing.
    • Long gestation: The creation of a manufacturing base is capital and technology-intensive and has a long gestation period. By that time newer technologies make products outdated.
    • ‘Unease’ in doing business: An issue related to stringent labour laws, compliance burden and lack of skills, affects the development of indigenous manufacturing in defence.
    • Multiple jurisdictions: Overlapping jurisdiction of the Ministry of Defence and Ministry of Industrial Promotion impair India’s capability of defence manufacturing.
    • Lack of quality: The higher indigenization in few cases is largely attributed to the low-end technology.
    • FDI Policy: The earlier FDI limit of 49% was not enough to enthuse global manufacturing houses to set up bases in India.
    • R&D Lacunae: A lip service to technology funding by making token allocations is an adequate commentary on our lack of seriousness in the area of Research and Development.
    • Lack of skills: There is a lack of engineering and research capability in our institutions. It again leads us back to the need for a stronger industry-academia interface.

    Way forward

    • Reducing import dependence: India was the world’s second-largest arms importer from 2014-18, ceding the long-held tag as the largest importer to Saudi Arabia, says 2019 SIPRI report.
    • Security Imperative: Indigenization in defence is critical to national security also. It keeps intact the technological expertise and encourages spin-off technologies and innovation that often stem from it.
    • Economic boost: Indigenization in defence can help create a large industry which also includes small manufacturers.
    • Employment generation: Defence manufacturing will lead to the generation of satellite industries that in turn will pave the way for a generation of employment opportunities.

     

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  • Poverty reduction lessons from China

    Context

    The United Nations latest report, “Population Prospects” forecasts that India will surpass China’s population by 2023, reaching 1.5 billion by 2030 and 1.66 billion by 2050.

    Poverty eradication: Lessons from China

    • China’s story since 1978 is unique – the country has achieved the fastest decline in poverty.
    • Its experiences hold some important lessons for India, especially because in 1978, when China embarked on its economic reforms, its per capita income at $156.4 was way below that of India at $205.7.
    • Today, China is more than six times ahead of India in terms of per capita income – China’s per capita income in 2021 was $12,556, while that of India was $1,933 in 2020.
    • China started its economic reforms in 1978 with a primary focus on agriculture.
    • Contribution of agriculture: It broke away from the commune system and liberated agri-markets from myriad controls.
    • Increase in agri-GDP: As a result, during 1978-84, China’s agri-GDP grew by 7.1 per cent per annum and farmers’ real incomes grew by 14 per cent per annum with the liberalisation of agri-prices.
    • Creation of demand: Enhanced incomes of rural people created a huge demand for industrial products, and also gave political legitimacy for pushing further the reform agenda.
    • The aim of China’s manufacturing through Town and Village Enterprises (TVEs) was basically to meet the surging demand from the hinterlands.
    • Population factor: China introduced the one-child per family policy in September 1980, which lasted till early 2016.
    • It is this strict control on population growth, coupled with booming growth in overall GDP over these years, that led to a rapid increase in per capita incomes.
    • Chinese population growth today is just 0.1 per cent per annum compared to India’s 1.1 per cent per annum.

    Growth story of Indian agriculture

    • Over a 40-year period, 1978-2018, China’s agriculture has grown at 4.5 per cent per annum while India’s agri-GDP growth ever since reforms began in 1991 has hovered at around 3 per cent per annum.
    • Market and price liberalisation in agriculture still remains a major issue, and at the drop of any hint of food price rise, the government clamps down exports, imposes stock limits on traders, suspends futures markets, and pushes other measures that strangle markets.
    • Implicit taxation of farmers: The net result of all this is reflected in the “implicit taxation” of farmers to favour the vocal lobby of consumers, especially the urban middle class.

    Way forward

    •  Population control: The only way is through effective education, especially that of the girl child, open discussion and dialogue about family planning methods and conversations about the benefits of small family size in society.
    • Effective education: As per the National Family Health Survey-5 (2019-21), of all the girls and women above the age of 6 years, only 16.6 per cent were educated for 12 years or more.
    • Based on unit-level data of NFHS5 (2019-21), it is found that women’s education is the most critical determinant of the status of malnutrition amongst children below the age of five.
    • Unless a focused and aggressive campaign is launched to educate the girl child and provide her with more than 12 years of good quality education, India’s performance in terms of the prosperity of its masses, and the human development index may not improve significantly for many more years to come
    • If  government can take up this cause in sync with state governments, this will significantly boost the labour participation rate of women, which is currently at a meagre 25 per cent, and lead to “double engine” growth.
    • Nutrition interventions: The NFHS-5 data shows that more than 35 per cent of our children below the age of five are stunted, which means their earning capacity will remain hampered throughout life. They will remain stuck in a low-level income trap.

    Conclusion

    From a policy perspective, if there is any subsidy that deserves priority, it should be for the education of the girl child. This policy focus can surely bring a rich harvest, politically and economically, for many years to come.

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  • How to increase production of coal

    Context

    With inflation at unprecedented levels in many countries, concerns over energy security have gained centre stage.

    National Coal Index to factor in the increased price of imported coal

    • This index was created to provide a benchmark for revenue-sharing contracts being executed after the auctions for commercial mining of coal.
    • The NCI had to be introduced as the wholesale price index (WPI) for coal has no component of imported coal.
    • For the last six months, the WPI for Coal has been stable at around 131.
    • Over the same period, the NCI has jumped from about 165 to about 238 reflecting the sharp increase in international coal prices.

    Needs to increase domestic coal production

    • High prices of coal and coal-based generation will only encourage imported coal and expose the country to price risks from international energy prices.
    • The domestic coal industry has responded to increasing internation prices with an increase of over 30 per cent in coal production from April to June this year.
    • Anticipating these problems, a big effort toward permitting commercial mining has been made to get the private sector to produce more coal.
    • Gradual transition: Looking at coal from a singular focus on GHG emissions will give a myopic view of energy requirements for a growing economy like India.
    • The path to achieving 500 GW of renewables needs to be gradual, ensuring an orderly transition as coal is unavoidable in the near future.
    • Reducing coal imports and increasing domestic production of coal needs focused attention

    Suggestions to increase domestic production of coal

    1] Sensitising the financial community

    • The financial community has to be sensitised to the need of increasing domestic coal production to meet the growing energy demand.
    • The draft National Electricity Policy released in May 2021, recognised the need to increase coal-based generation.
    •  This policy has not yet been finalised.
    • It should clearly articulate the importance of domestic coal-based generation.
    • Holistic approach in ESG criteria: Apart from the government, the industry should also take up this issue with the financial community in adopting a more holistic approach toward environmental, social, and governance (ESG) criteria.

    2] The regulator needs to facilitate  greater role of private sector

    • There is the need for a regulator to address the issues arising from a greater role of the private sector.
    • The current arrangements were put in place at a time when the public sector dominated.
    • There are several issues where new private commercial miners would need help.
    • Single point of contact: A single point of contact for the industry in the form of a dedicated regulator would give great comfort to private players and would help to overcome problems that could arise in due course.

    3] Diversifying the production base

    • Increasing domestic production of coal and diversifying the production base are both needed.
    • This must be complemented with efforts to improve the quality of the coal produced.

    4] Remove financial burden due to cross subsidies

    • The undue financial burden on the coal sector due to various cross subsidies needs attention.
    • The regime needs to be reformed.

    Conclusion

    Action on the issues discussed above will only help to deepen and strengthen these reforms which are needed to overcome the challenges that have resurfaced over the past few months.

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  • What are External Commercial Borrowings (ECBs)?

    The Reserve Bank of India has relaxed norms for companies raising external commercial borrowings (ECBs), as part of a set of measures to stem the slide in the rupee.

    What are ECBs taken by Indian companies?

    • ECBs are commercial loans that eligible resident entities can raise from outside India, i.e. from a recognized non-resident entity.
    • ECBs can be buyer’s credit, supplier’s credit, foreign currency convertible bonds, foreign currency exchangeable bonds, loans etc.
    • ECBs can be raised via the automatic route where cases are examined by the Authorized Category Dealer, or the approval route where borrowers are mandated to forward their request to RBI through their authorized dealers.
    • Borrowers must follow norms on minimum maturity period, maximum all-in-cost ceiling, end-uses etc.

    What is the relaxation offered by the RBI?

    • RBI earlier had raised borrowing limit under the automatic route from $750 million or its equivalent per financial year to $1.5 bn up till up to 31 December, 2022.

    Why such move?

    • The objective was to increase the supply of foreign exchange reserves.
    • This in turn would thereby prevent the fast depreciation of the rupee witnessed over the last few months.

    What clarity do foreign lenders want from RBI?

    • Lenders want to know whether the investment grade needs to be rated by domestic or international agencies.
    • If it is only by global agencies, it would limit the number of potential borrowers.
    • This is because companies which might be rated high domestically might not necessarily have made the investment grade when rated by international agencies.

    Why do Indian firms go for ECBs?

    • Low cost: ECBs give companies the benefit of borrowing abroad at lower interest rates.
    • Long term repayment: They are also an avenue to borrow a large volume of funds for a relatively long period of time.
    • Surpassing exchange fluctuation: Also, borrowing in foreign currencies enables companies to pay for their machinery import etc., thereby nullifying the impact of varying exchange rate.
    • Long term profitability: ECBs can help diversify the investor base and funds available at lower cost, helping improve profitability of companies.
    • Better credit ratings: ECB interest rates are also a function of their ratings in the international market.

    What are the risks for firms raising ECBs?

    • Though companies get attracted to ECBs due to lower interest rates, the comfort level of the borrower depends on how stable the rate of exchange is.
    • Depreciation of the rupee will raise debt servicing burden as compared to what has been worked out at the time of availing of the ECB facility.
    • Thus, the companies might need to incur hedging costs (amount equal to the aggregate costs, fees, and expenses) to cover the exchange rate risk.

     

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  • Key terminologies in news: Yield Inversion, Soft-Landing and Reverse Currency Wars

    This article provides a quick summary of what has been happening in the global economy. These are few key terms that one is likely to hear repeatedly in the coming days and weeks:

    1. Yield Inversion
    2. Soft-landing and
    3. Reverse Currency War

    Here’s a quick look at what they mean and why they are significant at present.

    (1) Bond Yield Inversion

    What is Bond Yeild?

    • Bonds are essentially an instrument through which governments (and also corporations) raise money from people.
    • Typically government bond yields are a good way to understand the risk-free interest rate in that economy.
    • This 2019 piece provides an introduction to government bonds and explains how yields are calculated.

    What is Yield Curve?

    • The yield curve is the graphical representation of yields from bonds (with an equal credit rating) over different time horizons.
    • In other words, if one was to take the US government bonds of different tenures and plot them according to the yields they provide, one would get the yield curve.

    The chart below provides a sense of the different types of yield curves one could have.

    How to see this?

    • Under normal circumstances, any economy would have an upward sloping yield curve.
    • That is to say, as one lends for a longer duration — or as one buys bonds of longer tenure — one gets higher yields. This makes sense.
    • If one is parting with money for a longer duration, the return should be higher.
    • Moreover, a longer tenure also implies that there is a greater risk of failure.
    • An inversion of the yield curve essentially suggests that investors expect future growth to be weak.

    Inversion of bond yield

    • However, there are times when this bond yield curve becomes inverted.
    • For instance, bonds with a tenure of 2 years end up paying out higher yields (returns/ interest rate) than bonds with a 10 year tenure.
    • Such an inversion of the yield curve essentially suggests that investors expect future growth to be weak.

    Here’s how to make sense of this?

    • When investors feel buoyant about the economy they pull the money out from long-term bonds and put it in short-term riskier assets such as stock markets.
    • In the bond market, the prices of long-term bonds fall, and their yield (effective interest rate) rises.
    • This happens because bond prices and bond yields are inversely related.
    • However, when investors suspect that the economy is heading for trouble, they pull out money from short-term risky assets (such as stock markets) and put them in long-term bonds.
    • This causes the prices of the long-term bonds to rise and their yields to fall.

    Why use inversion curve?

    • Over the years, inversion of the bond yield curve has become a strong predictor of recessions. Of course, for it to be taken seriously, such an inversion has to last for several months.
    • Over the past few weeks, such inversion is happening repeatedly in the US, suggesting to many that a recession is in the offing.
    • In the current instance, the US Fed (their central bank) has been raising short-term interest rates, which further bumps up the short-end of the yield curve while dampening economic activity.

    (2)  Soft-Landing

    • The process of monetary tightening that the US is currently unveiling involves not just reducing the money supply but also increasing the cost of money (that is, the interest rate).
    • US is doing this to contain soaring inflation.
    • Ideally, the US Fed or any central bank doing this would like to bring about monetary tightening in such a manner that slows down the economy but doesn’t lead to a recession.
    • When a central bank is successful in slowing down the economy without bringing about a recession, it is called a soft-landing — that is, no one gets hurt.
    • But when the actions of the central bank bring about a recession, it is called hard-landing.

    (3) Reverse Currency War

    • A flip side of the US Fed’s action of aggressively raising interest rates is that more and more investors are rushing to invest money in the US.
    • This, in turn, has made the dollar become stronger than all the other currencies. That’s because the dollar is more in demand than yen, euro, yuan etc.
    • On the face of it, this should make all other countries happier because a relative weakness of their local currency against the dollar makes their exports more competitive.
    • For instance, a Chinese or an Indian exporter gets a massive boost.
    • In fact, in the past the US has often accused other countries of manipulating their currency (and keeping its weaker against the dollar) just to enjoy a trade surplus against the US.
    • This used to be called the currency war.

    What explains this reverse currency war unfolding at the moment?

    • The important thing to understand is that a stronger dollar has had a key benefit — importing cheaper crude oil.
    • A currency which is losing value to the dollar, on the other hand, finds that it is getting costlier to import crude oil and other commodities that are often traded in dollars.
    • But raising the interest rate is not without its own risks.
    • Just like in the US, higher interest rates will decrease the chances of a soft-landing for any other economy.

     

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  • GST Slab Changes

    Customers will have to pay a 5% Goods and Services Tax (GST) on pre-packed, labelled food items such as atta, paneer and curd, besides hospital rooms with rents above â‚č5,000.

    What is GST?

    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
    • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

    What are GST Slabs?

    • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
    • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
    • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
    • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
    • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

    Why rationalize GST slabs?

    • From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs taxed more than the final product.
    • These are far too many rates and do not necessarily constitute a Good and Simple Tax.
    • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
    • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.

     

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  • Public Capex Plan key to long-term growth: FM

    Finance Minister said India’s long-term growth prospects were embedded in public capital expenditure programs.

    What is the news?

    • FM has raised capital expenditure (capex) by 35.4% for the financial year 2022-23 to â‚č7.5 lakh crore to continue the public investment-led recovery of the pandemic-battered economy.
    • The capex last year was â‚č5.5 lakh crore.

    What is Capital Expenditure (Capex)?

    • The government’s expenditure is categorized into two:
    1. The one which results in asset development or acquisition known as CAPEX,
    2. Another is utilized to cover operating costs and obligations but does not result in asset creation known as Revenue expenditure.
    • Capex is defined the as money spent on the acquisition of assets such as land, buildings, machinery, and equipment, as well as stock investments.

    What attributes to capex?

    • The portion of government payments that goes toward the construction of assets such as schools, colleges, hospitals, roads, bridges, dams, railway lines, airports, and seaports amounts to capex.
    • The acquisition of new weaponry and weapon systems, such as missiles, tanks, fighter planes, and submarines, necessitates a significant financial outlay.
    • The defense sector receives over a third of the central government’s capital spending, primarily for armament acquisitions.
    • Despite the fact that defense spending is classified as a capital expenditure, it does not result in the development of infrastructure to support economic growth.
    • Also includes investments that will produce earnings or dividends in the future.

    Significance of Capex

    • Economic recovery: This action is crucial in light of the economic slowdown induced by the Covid-19 epidemic, as well as a dip in the employment ratio.
    • Value creation: Capital asset formation provides future cash flows for the economy and contributes to value creation.
    • Multiplier Effect: Capex is expected to have a Multiplier Effect (a change in rupee value of output with respect to a change in rupee value of expenditure).
    • Increased employment: Capital spending creates jobs and improves labor productivity as a result of the multiplier effect.
    • Macroeconomic Stabilizer: Capital Expenditure serves as a macroeconomic stabilizer and is an excellent instrument for countercyclical fiscal policy.

     

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  • Pradhan Mantri Fasal Bima Yojana (PMFBY)

    Andhra Pradesh has decided to rejoin the crop insurance scheme Pradhan Mantri Fasal Bima Yojana (PMFBY) from the ongoing kharif season.

    Why in news?

    • Andhra Pradesh was one of six states that have stopped the implementation of the scheme over the last four years.
    • The other five, which remain out, are Bihar, Jharkhand, West Bengal, Jharkhand, and Telangana.

    What is PMFBY?

    • The PMFBY was launched in February 2016. It is being administered by Ministry of Agriculture.
    • It provides a comprehensive insurance cover against failure of the crop thus helping in stabilising the income of the farmers.
    • It is implemented by general insurance companies.

    Its functioning

    • PMFBY insures farmers against all non-preventable natural risks from pre-sowing to post-harvest.
    • Farmers have to pay a maximum of 2 per cent of the total premium of the insured amount for kharif crops, 1.5 per cent for rabi food crops and oilseeds as well as 5 per cent for commercial / horticultural crops.
    • The balance premium is shared by the Union and state governments on a 50:50 basis and on a 90:10 basis in the case of northeastern states.

    Farmers covered

    • All farmers growing notified crops in a notified area during the season who have insurable interest in the crop are eligible.
    • Earlier to Kharif 2020, the enrolment under the scheme was compulsory for following categories of farmers:
    1. Farmers in the notified area who possess a Crop Loan account/KCC account (called as Loanee Farmers) to whom credit limit is sanctioned/renewed for the notified crop during the crop season. and
    2. Such other farmers whom the Government may decide to include from time to time.

    Risks covered under the scheme

    • Comprehensive risk insurance is provided to cover yield losses due to non-preventable risks, such as Natural Fire and Lightning, Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado.
    • Risks due to Flood, Inundation and Landslide, Drought, Dry spells, Pests/ Diseases also will be covered.
    • Post-harvest losses coverage will be available up to a maximum period of 14 days from harvesting for those crops which are kept in “cut & spread” condition to dry in the field.
    • For certain localized problems such as loss/damage resulting from the occurrence of identified localized risks like hailstorm, landslide, and Inundation affecting isolated farms in the notified area would also be covered.

    Why many states has opted out?

    The opting-out states had mentioned several reasons:

    • The scheme should be voluntary.
    • States should be given options to choose the risks covered and the scheme should be universal.
    • State should be given option to use their own database of E-crop, an application used by the state government to collect information about crops.
    • Many state government wanted zero premium for farmers (meaning the entire premium should be paid by the government.
    • The non-payment of the State Share of premium subsidy within the prescribed timelines as defined in the seasonality discipline lea to the disqualification of the State Government.
    • The reason for West Bengal not implementing the PMFBY is purely “political” as it wants to implement the scheme without mentioning Pradhan Mantri in the name.

    How was the scheme structured, and what has changed since?

    • Initially, the scheme was compulsory for loanee farmers; in February 2020, the Centre revised it to make it optional for all farmers.
    • Now states and UTs are free to extend additional subsidy over and above the normal subsidy from their budgets.
    • In February 2020, the Centre decided to restrict its premium subsidy to 30% for unirrigated areas and 25% for irrigated areas (from the existing unlimited). Earlier, there was no upper limit.
    • Food crops (cereals, millets and pulses); oilseeds; and annual commercial / annual horticultural crops are broadly covered under the scheme.

     

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  • Increase in Current Account Deficit (CAD)

    The Finance Ministry has asserted that the current account deficit (CAD) could, however, deteriorate this year mainly due to rising trade deficits.

    What is Current Account Deficit (CAD)?

    • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
    • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
    • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

    Components of Current Account

    Current Account Deficit (CAD) = Trade Deficit + Net Income + Net Transfers

    (1) Trade Deficit

    • Trade Deficit = Imports – Exports
    • A Country is said to have a trade deficit when it imports more goods and services than it exports.
    • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
    • A trade deficit represents an outflow of domestic currency to foreign markets.

    (2) Net Income

    • Net Income = Income Earned by MNCs from their investments in India.
    • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
    • This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.
    • Net income is measured by the following things:
    1. Payments made to foreigners in the form of dividends of domestic stocks.
    2. Interest payments on bonds.
    3. Wages paid to foreigners working in the country.

    (3) Net Transfers

    • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.
    • It Includes Remittances, Gifts, Donation etc

    How Current Account Transaction does takes place?

    • While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.
    • Current account transactions are transactions that require foreign currency.
    • Following transactions with from which component these transactions belong to :
    1. Component 1 : Payments connection with Foreign trade – Import & Export
    2. Component 2 : Interest on loans to other countries and Net income from investments in other countries
    3. Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

    What has been the recent trend?

    • In Q4 FY 2021-22, CAD improved to 1.5% of GDP or $13.4 billion from 2.6% of GDP in Q3 FY 2021-22 ($22.2 billion).
    • The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22.
    • However, based on robust performance by computer and business services, net service receipts rose both sequentially and on a year-on-year basis.
    • Remittances by Indians abroad also rose.

    What are the reasons for the current account deficit?

    • Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.
    • A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.
    • However, with global demand picking up, merchandise exports have also been rising.

    How will a large CAD affect the economy?

    • A large CAD will result in demand for foreign currency rising, thus leading to depreciation of the home currency.
    • Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments (FDI).
    • However, worsening CAD will put pressure on inflow under the capital account.
    • Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

     

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