💥Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

Subject: Economics

  • Reforming the fertilizer sector

    Context

    Since 1991, when economic reforms began in India, several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill, promote the efficient use of fertilizers, achieve balanced use of N, P, and K (nitrogen, phosphorus, and potassium), and reduce water and air pollution caused by fertilizers like urea.

    Several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill.

    Background

    • After years of unchanged prices, the budget of 1991 raised the issue prices of fertilizers by 40% on average. This rise was rolled down to 30% in a few months, with exemption to small and marginal farmers from the price increase.
    • Due to opposition, the increase in Urea price was further rolled back to 17% over the pre-reform price.
    • It resulted in a big shift in the composition of fertilizers used in the country in favor of urea and thus Nitrogen (N).
    • The government started Nutrient Based Subsidy in 2010 to address the growing imbalance in fertilizer use, which was skewed towards urea (N).
    • However, only non-nitrogenous fertilizers P and K (phosphorus and potassium) were included in NBS; urea was left out.

    Need for reforms on three fronts

    Reforms are needed to promote in three key areas:

    1) The efficient use of fertilizers.

    2) To achieve balanced use of N, P, and K (nitrogen, phosphorus, and potassium).

    3) To reduce water and air pollution caused by fertilizers like urea.

    Challenges in the fertilizer sector

    A] Distortion in use due to price difference

    • The Union Budget of July 1991 raised the issue prices of fertilizers by 40% on average.
    • Due to opposition to increasing fertilizer prices, the increase in the price of urea was rolled back to 17% a year later over the pre-reform price.
    • The shift in the composition of fertilizer used: This change disturbed the relative prices of various fertilizers and resulted in a big shift in the composition of fertilizers used in the country in favor of urea and thus N.
    • Farmers tended to move towards balanced use, but policy and price changes reversed the favorable trend a couple of times in the last three decades.
    • In 2019-20, fertilizer use per hectare of cultivated area varied from 70 kg of NPK in Rajasthan to 250 kg in Telangana
    • Further, the composition of total plant nutrients in terms of the N, P, K ratio deviated considerably from the recommended or optimal NPK mix.
    • It was 33.7:8.0:1 in Punjab and 1.3:0.7:1 in Kerala.

    2] Increasing fertilizer subsidy

    • Fertilizer subsidy has doubled in a short period of three years. For 2021-22, the Union Budget has estimated fertilizer subsidy at ₹79,530 crores (from ₹66,468 crores in 2017-18).
    • The subsidy is likely to reach a much higher level due to the recent upsurge in the prices of energy, the international prices of urea and other fertilizers, and India’s dependence on imports.
    • In order to minimize the impact of rising in prices on farmers, the bulk of the price rise is absorbed by the government through enhanced fertilizer subsidy.
    • This is likely to create serious fiscal challenges.
    • At current prices, farmers pay about ₹268 per bag of urea and the Government of India pays an average subsidy of about ₹930 per bag.
    • Thus, taxpayers bear 78% of the cost of urea and farmers pay only 22%. This is expected to increase and is not sustainable.

    3] Import dependence

    • Total demand for urea: The total demand for urea in the country is about 34-35 million tonnes (mln t) whereas the domestic production is about 25 mln t.
    • The requirement of Diammonium Phosphate (DAP) is about 12 mln t and domestic production is just 5 mln t.
    • This leaves the gap of nearly 9-10 mln t for urea and 7 mln t for DAP, which is met through imports.
    • The use of Muriate of Potash is about 3 mln t.
    • This is entirely imported.
    • The international prices of fertilizers are volatile and almost directly proportional to energy prices.

    Need to shift our focus to Bio-fertilizers

    • Bio-fertilizers are cheap, renewable, and eco-friendly, with great potential to supplement plant nutrients if applied properly. However, they are not a substitute for chemical fertilizers.
    • They improve the health of the soil. Since it provides nutrients to the soil in a small and steady manner, its immediate effects are not very visible.
    • Sales of biofertilizers in the country have not picked up because of a lack of knowledge and its slow impact on the productivity of the soil.
    • The use of biofertilizers is necessary to maintain soil health as more and more use of chemical fertilizers kills all the microorganisms available in the soil, which are so essential for maintaining soil health.
    • Supplementary use of biofertilizers with chemical fertilizers can help maintain soil fertility over a long period.
    • The overall strategy for increasing crop yields and sustaining them at a high level must include an integrated approach to the management of soil nutrients, along with other complementary measures.

    Way forward

    • Self-reliance: we need to be self-reliant and not depend on the import of fertilizers.
    • In this way, we can escape the vagaries of high volatility in international prices.
    • In this direction, five urea plants at Gorakhpur, Sindri, Barauni, Talcher, and Ramagundam are being revived in the public sector.
    • Extend NBS model to urea: The government introduced the Nutrient Based Subsidy (NBS) in 2010 to address the growing imbalance in fertilizer use.
    • However, only non-nitrogenous fertilizers (P and K) moved to NBS; urea was left out.
    • We need to extend the NBS model to urea and allow for price rationalization of urea compared to non-nitrogenous fertilizers and prices of crops.
    • Develop alternative sources of nutrition for plants: Discussions with farmers and consumers reveal a strong desire to shift towards the use of non-chemical fertilizers as well as a demand for bringing parity in prices and subsidy given to chemical fertilizers with organic and biofertilizers.
    • This also provides the scope to use large biomass of crop that goes waste and enhance the value of livestock by-products.
    • We need to scale up and improve innovations to develop alternative fertilizers.
    • Improve fertilizer efficiency:  India should pay attention to improving fertilizer efficiency through need-based use rather than broadcasting fertilizer in the field.
    • The recently developed Nano urea by IFFCO shows promising results in reducing the usage of urea.

    Consider the question “What are the challenges facing the fertiliser sector in India? How subsidies lead to distortion in the use of various types of fertilisers.”

    Conclusion

    These changes will go a long way in enhancing the productivity of agriculture, mitigating climate change, providing an alternative to chemical fertilizers and balancing the fiscal impact of fertilizer subsidy on the Union Budgets in the years to come.

    Back2Basics: Nutrient Based Subsidy

    • Under the NBS regime – fertilizers are provided to the farmers at subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.
    • Also, the fertilizers which are fortified with secondary and micronutrients such as molybdenum (Mo) and zinc are given additional subsidy.
    • The subsidy on Phosphatic and Potassic (P&K) fertilizers is announced by the Government on an annual basis for each nutrient on a per kg basis – which are determined taking into account the international and domestic prices of P&K fertilizers, exchange rate, inventory level in the country etc.
    • NBS policy intends to increase the consumption of P&K fertilizers so that optimum balance (N:P:K= 4:2:1) of NPK fertilization is achieved.

    [pib] Nutrient Based Subsidy (NBS) for Phosphatic & Potassic (P&K) Fertilizers

  • Co-op Societies are not banks, RBI cautions

    The Reserve Bank of India (RBI) has cautioned members of the public not to deal with cooperative societies undertaking banking business by adding ‘bank’ to their names.

    What is the news?

    • It has also come to the notice of RBI that some co-operative societies are accepting deposits from non-members/nominal members/ associate members.
    • This is tantamount to conducting banking business in violation of the provisions.

    Who can use ‘Bank’ title?

    • The Banking Regulation Act, 1949 was amended by the Banking Regulation (Amendment) Act, 2020, which came into force on September 29, 2020.
    • Accordingly, co-operative societies cannot use the words “bank”, “banker” or “banking” as part of their names, except as permitted under the provisions of BR Act, 1949 or by the RBI.

    What is Cooperative Banking?

    • Cooperatives are people-centred enterprises owned, controlled and run by and for their members to realise their common economic, social, and cultural needs and aspirations.
    • Cooperative bank is an institution established on the cooperative basis and dealing in ordinary banking business.
    • Like other banks, the cooperative banks are founded by collecting funds through shares, accept deposits and grant loans.
    • They are regulated by the Reserve Bank of India (RBI) and governed by the
    1. Banking Regulations Act 1949
    2. Banking Laws (Co-operative Societies) Act, 1955

    Features of Cooperative Banks

    • Cooperative banks are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities.
    • Such banking in India is federal in structure. Primary credit societies are at the lowest rung.
    • Then, there are central cooperative banks at the district level and state cooperative banks at the state level.
    • Cooperative credit societies are mostly located in villages spread over the entire country.

    History of Cooperative Banking in India:

    • The cooperative movement in India was started primarily for dealing with the problem of rural credit.
    • The history of Indian cooperative banking started with the passing of Cooperative Societies Act in 1904.
    • The objective of this Act was to establish cooperative credit societies “to encourage thrift, self-help and cooperation among agriculturists, artisans and persons of limited means.”
    • Many cooperative credit societies were set up under this Act.
    • The Cooperative Societies Act, 1912 recognised the need for establishing new organisations for supervision, auditing and supply of cooperative credit.

    Structure of Cooperative Banking

    • The whole structure of cooperative credit institutions is shown in the chart given.
    • There are different types of cooperative credit institutions working in India.
    • These institutions can be classified into two broad categories- agricultural and non-agricultural.
    • Agricultural credit institutions dominate the entire cooperative credit structure.

    Various facets of cooperatives in India

    • Cooperatives in India have grown exponentially.
    • In the banking sector, according to the RBI, their contribution to rural credit increased from 3.1 percent in 1951 to an impressive 27.3 percent in 2002.

    Importance of Cooperative Banks:

    • The cooperative banking system has to play a critical role in promoting rural finance and is especially suited to Indian conditions.
    • Various advantages of cooperative credit institutions are given below:

    (1) Alternative Credit Source:  The main objective of the cooperative credit movement is to provide an effective alternative to the traditional defective credit system of the village moneylender.

    (2) Cheap Rural Credit: Cooperative credit system has cheapened the rural credit by charging comparatively low-interest rates, and has broken the money lender’s monopoly.

    (3) Productive Borrowing:  The cultivators used to borrow for consumption and other unproductive purposes. But, now, they mostly borrow for productive purposes.

    (4) Encouragement to Saving and Investment: Instead of hoarding money the rural people tend to deposit their savings in cooperative or other banking institutions.

    (5) Improvement in Farming Methods: Cooperative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc.

    (6) Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to the masses in rural areas.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Farm distress and the demand for guaranteed MSP

    Despite the announcement to repeal the three farm laws, farmers have decided to continue protesting for a legal mandate for Minimum Support Prices (MSP).

    What is the Minimum Support Price (MSP) system?

    • MSP is a form of market intervention by the Govt. of India to insure agricultural producers against any sharp fall in farm prices.
    • MSP is price fixed by GoI to protect the producer – farmers – against excessive falls in price during bumper production years.

    Who announces it?

    • The govt. announces MSPs for 22 mandated crops and fair and remunerative prices (FRP) for sugarcane.
    • MSP is announced at the beginning of the sowing season for certain crops on recommendations by Commission for Agricultural Costs and Prices (CACP).
    • It is announced by Cabinet Committee on Economic Affairs (CCEA) chaired by the PM of India.

    Why MSP?

    • The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
    • They are a guaranteed price for their produce from the Government.
    • In case the market price for the commodity falls below the announced MSP due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced MSP.

    Need for Guaranteed MSPs

    • No legal protection: While the government does announce MSPs every year, it is not required to do so by law. The compulsion to procure on MSP is political, not legal.
    • Discretion of procurement: But if there were to be a law backing the MSP regime, the government would lose its existing discretion in choosing not to procure.
    • Compulsion: A legal mandate for MSP would force the government to purchase all the products that any farmer wants to sell at the declared MSP.
    • State-wide procurement: It would also have to procure from all states, and all crops for which MSPs are announced.

    Failures of MSPs

    • A legally mandated MSP regime is likely to be neither feasible nor sustainable in the long run since Demand-side constrains are never accounted while procuring.
    • Already grain stocks lying with the government are more than twice its buffer requirement, and sometimes end up rotting.
    • At a fundamental level, the problem is there are just too many people involved in Indian agriculture for it to be truly remunerative.
    • To a great extent, the solution to the economic distress of Indian farmers lies outside agriculture — in boosting India’s industrial and services sectors.

    Possible way forward

    • It seems logical that instead of bypassing the market by using MSPs, the government should make efforts to enable farmers to participate in the market.
    • The way forward is to ramp up investment in the agriculture sector.
    • This means better irrigation facilities, easier access to credit, timely access to power, and ramping up warehouse capacity and extension services, including post-harvest marketing.
    • The approach has to be to raise the farmers’ bargaining ability and choices before them.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Tackling the problem of bad loans

    Context

    The newly-created National Asset Reconstruction Company (NARCL) in the public sector offers hopes for the faster clean up of lenders’ balance sheets.

    Features of National Asset Reconstruction Company (NARCL)

    • The newly-minted ARC, NARCL is not a bank, but a specialised financial institution to help resolve the distressed assets of banks.
    • Faster aggregation: Its greatest virtue lies in the faster aggregation of distressed assets that lie scattered across several lenders.
    •  Soverign assurance: Its securitised receipts (SRs) carry sovereign assurance.
    • This is of particular comfort to PSU banks as price discovery would not be subject to later investigations.
    • Focus on large accounts: It would initially focus on large accounts with debts over Rs 500 crore.
    • IDRCL: All eyes will be focused on IDRCL (Indian Debt Resolution Company), the operating arm, which would be in the private sector.

    Past policy measures to resolve the bad debts

    • Institutional measures include BIFR (Board for Industrial and Financial Reconstruction, 1987), Lokadalat, DRT (Debt Recovery Tribunal, 1993), CDR (Corporate Debt Restructure, 2001), SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement, 2002), ARC (Asset Recovery Company, 2002).
    • The RBI has also launched a slew of measures during 2013-14 to resolve, reconstruct and restructure stressed assets.

    Why the measures to resolve the bad debt failed?

    • Of the 28 ARCs (private sector) in operation, many are bit players.
    • Dominance of few ARC: The top five ARCs account for over 70 per cent of the asset under management (AUM) and nearly 65 per cent of the capital.
    • Restructuring as an exception: Financial and business restructuring appears to be more an exception than the norm.
    • Nearly one-third of debts are rescheduled.
    • This is not much value addition to what lenders would have otherwise done at no additional cost.
    • Success and shortcomings of IBC: The IBC, introduced in 2016, was landmark legislation and marked a welcome departure from the earlier measures, with a legally time-bound resolution.
    • The focus is on resolution rather than recovery.
    •  It nearly put an end to evergreening.
    • Even though there are delays under this newfound promise, they are counted in terms of days and not years and decades.
    • The NCLT (National Company Law Tribunal)  is the backbone of the IBC, but lamentably is starved of infrastructure and over 50 per cent (34 out of 63) of NCLT benches were bereft of regular judges.
    •  Even the parliamentary committee has expressed indignation on a large number of positions left vacant.
    • This lack of adequate infrastructure, coupled with the poor quality of its decisions, has proved to be the IBC’s Achilles’ heel.
    • We need judicial reforms for early and final resolutions.
    • Issue of delayed recognition and resolution: Forty-seven per cent of the cases referred to the IBC, representing over 1,349 cases, have been ordered for liquidation.
    • Against the aggregate claims of the creditors of about Rs 6.9 lakh crore, the liquidation value was estimated at a paltry Rs 0.49 lakh crore.

    Suggestions to make IBC more effective

    • Delayed recognition and resolution: Lenders and regulators need to address the issue of delayed recognition and resolution.
    • Business stress and/or financial stress needs to be recognised even prior to regulatory norms on NPA classification.
    • Dealing with anchoring bias: The tendency to make decisions on the basis of first available information is called “anchoring bias”.
    •  The first available information in bidding for distressed assets is the cost of acquisition to ARCs.
    • Potential bidders would quote prices nearer to this anchor.
    • Nobel Laureate Daniel Kahneman has suggests a three-step process to mitigate anchor bias: One, acknowledge the bias; two, seek more and new sources of information, and three, drop your anchor on the basis of new information.

    Way forward for NARC

    • Forbid wilful defaulters from taking back distressed asset: The IBC has made considerable progress in bringing about behavioural change in errant and wilful defaulters by forbidding them to take back distressed assets.
    • Otherwise, the credit culture suffers.
    • The NARC should uphold this principle, not dilute it
    • Introduce Sunset clause: It should have a sunset clause of three to five years.
    • This will avoid the perpetuation of moral hazard and also encourage expeditious resolution.
    • Deal with anchor bias: Anchor bias needs to be mitigated by better extrinsic value discovery.
    • Avoid selling to other ARCs: It should avoid selling to other ARCs.

    Conclusion

    The RBI has recently released (November 2) a report on the working of ARCs and makes 42 recommendations to improve the performance of ARCs. This article incidentally makes an effort to identify some constraints and offer solutions to improve the performance of ARCs.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

     

  • Semiconductor Shortage and the tech industry

    Chips or processors power every possible product on the market from high-end cars to washing machines. There is a worldwide shortage of semiconductor chips.

    What are Semiconductors?

    • A semiconductor sits between a conductor and an insulator and is commonly used in the development of electronic chips, computing components, and devices.
    • It’s generally created using silicon, germanium, or other pure elements.
    • Semiconductors are created by adding impurities to the element.

    Giants of global chip industry

    • Semiconductor manufacturing is now dominated by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Samsung Electronics in South Korea.
    • American chipmaker Intel now plans to spend $20 billion to build two new chip factories in Chandler, Arizona.
    • These new fabs will also manufacture chips designed by Amazon, Qualcomm, and other customers.

    Why is there a semiconductor shortage?

    • During the pandemic, manufacturing came to a standstill impacting the supply chains of products that need one or more of these.
    • As the automotive sector almost shut down last year, chip makers shifted capacity to cater to increased demand for electronics items such as cell phones and laptops.
    • Since orders for advanced chips are placed well in advance, manufacturers have not yet been able to come back to pre-pandemic production schedules to cater to all sectors.
    • The automotive chips are of medium-level complexity, compared to the really small and extremely complicated ones on smartphones and personal computers.
    • Building something this small, featuring billions of transistors is an expensive process.

    Has India missed the bus in setting up chip factories?

    • There is a lot of risks involved in setting up a chip plant.
    • Past initiatives to set up chip manufacturing units in the country never took off due to lack of long-term vision, lack of government incentives, and poor planning.
    • Now the government is keen to promote manufacturing and has even proposed tax incentives under Production Linked Incentive Scheme.
    • Things are progressing slowly, but the recent announcement of Tata Group entering semiconductor manufacturing is being seen positively.

    How is the chip crisis playing out in geopolitics?

    • The global chip crisis and geopolitical tensions with China have shifted focus back on semiconductors.
    • The US, which was once a leader in chip manufacturing, wants the crown back.
    • The protectionist US is looking to bring manufacturing back to America and reduce its dependency on a handful of chipmakers mostly concentrated in Taiwan and South Korea.
    • China’s renewed aggression on Taiwan is also being seen in light of the chip crisis.

    Impact

    • The crisis is expected to cost the global automotive industry $210 billion in revenue in 2021.
    • The global semiconductor shortage has affected many industries for more than a year and because of that, they are either forced to pay more for products or being asked to wait a little more.
    • The consumption of integrated circuits in products is ever increasing and a large manufacturing sector for these kinds of integrated circuits are a part of the supply chain.
    • The shortage has affected smartphones, personal computers, game consoles, automobiles, and medical devices.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Why India’s pro-rich, anti-poor taxation policies must change

    Context

    To develop their renewable energy capacities poor countries may well have to help themselves to make the transition that society urgently needs. One source of funding could well be the well-off citizens of India, who are getting richer and richer.

    Growing inequality in India

    • A 2018 Oxfam report revealed that 10 per cent of the richest Indians garnered 77.4 per cent of the nation’s wealth.
    •  In fact, according to the report, 58 per cent of India’s wealth was in the hands of one per cent of the country’s population.
    • The combined income of this handful of people in 2017 was almost as much as India’s budget that year.
    • In 2017, the fortune of India’s 100 richest tycoons leaped by 26 per cent.
    •  According to Crédit Suisse, the number of dollar millionaires in India has jumped from 34,000 in 2000 to 7,59,000 in 2019 — in other words, the country has one of “the world’s fastest-growing population of millionaires”.
    • The average wealth of these millionaires has increased by 74 per cent over this period.

    Issues with taxation policies

    • The taxation policy of the government, instead of making the exchequer benefit from this trend, has actively strengthened the trend of growing millionaires.
    • Replacing wealth tax by increasing income tax: The government replaced the wealth tax by an income tax increase of two per cent for households that earned more than 10 million rupees annually.
    • Corporate tax was reduced: The corporate tax was lowered, for existing companies from 30 per cent to 22 per cent, and for manufacturing firms incorporated after October 1, 2019 that started operations before March 31, 2023, from 25 to 15 per cent — the biggest reduction in 28 years.
    • Increase in income tax exemptions: In the 2019-20 budget, the income tax exemption limit jumped from Rs 2,00,000 to 2,50,000 and the tax rate for incomes up to Rs 5 lakh was reduced from 10 to 5 per cent.

    Impact of pro-rich taxation policy

    • Deprives the state of resources: This taxation policy deprived the state of important resources.
    • Increase in indirect taxes: To (partly) compensate for the decline of direct taxes, the government has increased indirect taxes, unfairly so, because they affect all Indians irrespective of their income.
    • The share of indirect taxes in the state’s fiscal resources has increased to reach 50 per cent of total taxes in 2018.
    • Taxes on petroleum products are a case in point.

    High taxes on petroleum products

    • About two-thirds of the cost of a litre of petrol now goes towards taxes.
    • The tax collected on petrol and diesel has increased by 459 per cent in the past seven years — from Rs 52,537 crore in 2013 to Rs 2.13 lakh crore in 2019-2020.
    • Given that petrol is a less elastic good, people are bound to consume it even at higher prices.
    • This also explains why the government sees fuel sale in India as a safe “revenue collection” medium.
    • In 2018-19, excise duty on petroleum products alone accounted for roughly 24 per cent of the indirect tax revenue.

    Consider the question “India’s taxation policies are criticised for being pro-rich. In the context of this, discuss the issues with the taxation system and suggest the measure to deal with these issues.”

    Conclusion

    The government’s taxation policy will probably continue to prevail depriving the exchequer of some of the resources it needs for dealing with issues as important as climate change.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Economic, political implications of repeal of farm laws

    Context

    In a surprise move, Prime Minister Narendra Modi announced that the government will repeal the farm laws in the Winter Session of Parliament.

    Economic impact

    • Agri-growth rate to remain constant: The agri-GDP growth has been 3.5 per cent per annum in the last seven years.
    • One expects this trend to continue — there might be minor changes in the agri-GDP depending on rainfall patterns.
    • Cropping pattern to remain skewed: Cropping patterns will remain skewed in favour of rice and wheat, with the granaries of the Food Corporation of India bulging with stocks of grain.
    • Increase in food subsidy: The food subsidy will keep bloating and there will be large leakages.
    • Environmental impact: The groundwater table in the north-western states will keep receding and methane and nitrous oxide will keep polluting the environment.

    Suggestion on increasing farmers income

    • Average agri-household income: The latest Situation Assessment Survey of the NSO reveals that the income of an average agri-household in India was only Rs 10,218 per month in 2018-19.
    • This is not a very happy situation and all out measures need to be taken to increase rural incomes in a sustained manner.
    • How to increase farmers income: Given that the average holding size stands at just 0.9 ha (2018-19), and has been shrinking over the years.
    • Efficient functioning value chain: Unless one goes for high-value agriculture — and, that’s where one needs efficient functioning value chains from farm to fork by the infusion of private investments in logistics, storage, processing, e-commerce, and digital technologies — the incomes of farmers cannot be increased significantly.
    • Reforms: This sector needs reforms, both in the marketing of outputs as well as inputs, including land lease markets and direct benefit transfer of all input subsidies — fertilisers, power, credit and farm machinery.

    Implications

    • Demand for legal status to MSP could strengthen: Farmer leaders are already asking for the legal guarantee of MSPs for 23 agri-commodities.
    • Their demand could increase to include a larger basket of commodities.
    • Demand for privatisation: There could be demands to block the privatisation reforms of public sector enterprises — Air India, for instance — or to scuttle any other reform for that matter.
    • The net result is likely to be slowing down the economic reforms that are desperately needed to propel growth.

    Consider the question “The latest Situation Assessment Survey of the NSO reveal the low average agri-household income in India. All out measures need to be taken to increase rural incomes in a sustained manner. In the context of this, suggest the measures to increase the farmers’ income and challenges in it.

    Conclusion

    The most important lesson from the repeal of the farm laws is that the process of economic reforms has to be more consultative, more transparent and better communicated to the potential beneficiaries. It is this inclusiveness that lies at the heart of democratic functioning of India.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • PM announces repeal of three Farm Laws

    The Prime Minister has announced the withdrawal of the contentious farm laws.

    Daniel Q. Gillion, author of The Political Power of Protest, and a sociologist at the University of Pennsylvania, says to be successful, a protest must be impossible to ignore.

    What were the farm laws that have been repealed?

    1. Farmers Produce Trade and Commerce (Promotion and Facilitation) Act, 2020: It was aimed at allowing trade in agricultural produce outside the existing APMC mandis
    2. Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020: It seeks to provide a framework for contract farming;
    3. Essential Commodities (Amendment) Act, 2020: It was aimed at removing commodities such as cereals, pulses, oilseeds, edible oils, onion and potato from the list of essential commodities.

    Why were these reforms sought?

    • APMC reforms: There has been a long-pending demand for reforms in agricultural marketing, a subject that comes under the purview of state governments.
    • Long pending stagnation: It was in this backdrop that the present government went for reforms in the sector by passing these laws.

    In what circumstances were the laws passed?

    • Ordinance route: The government initially cleared them as ordinances in June 2020, there were token protests with the country’s attention gripped by the first wave of Covid-19.
    • Without consultation and haste: In Parliament, there was no thorough scrutiny of the Bills by a parliamentary panel. The government dismissed these demands and pushed the legislation through.
    • Opposition disregard: The Opposition benches were suspended for a week for their “disorderly conduct” while protesting against the rushed passage of the laws.

    Beginning of the protests

    The protests gained momentum when the Centre pushed the Bills in Parliament in the Monsoon Session.

    • Fear over private mandis: Farmers feared that the existing APMC mandis where they sell their products would be shut down once private players started trading in agri-produce outside the mandi premises.
    • Non-guarantee over MSP: Once the APMC mandi system became redundant, procurement based on minimum support prices (MSP) too would come to an end.

    After sporadic protests against the farm laws, including a nationwide road blockade, the farmers’ unions in Punjab and Haryana gave a call for a ‘Delhi Chalo’ movement.

    How protests could sustain for so long?

    • Unity: The leaders of farmers’ unions were very strategic in their approach to the protest and decided to work together very early in the agitation.
    • Finances: The protest sites at the Delhi border needed a steady injection of resources to keep going. Aware of this need, the unions had begun making monthly collections.
    • People: The unions behind the farm stir are well-organized machinery with committees at the level of villages, blocks, and districts.
    • Communication: Social media has been central to the scale of this agitation.
    • Engagement: The unions kept the stakeholders engaged by ensuring that there was never a dull moment in this agitation.

    In practical terms, what was the status of the three laws until the repeal?

    • The farm laws were in force for only 221 days — June 5, 2020, when the ordinances were promulgated to January 12, 2021, when the Supreme Court stayed their implementation.
    • The Supreme Court stayed the implementation of the three laws on January 12 this year.
    • Since the stay, the laws have been suspended.
    • The government has used old provisions of the Essential Commodities Act, 1955 to impose stock limits, having amended the Act through one of the three farm laws.

    Reasons for the repeal

    There are contrasting suggestions about the timing of the decision to announce the repeal.

    • Forthcoming elections: There are crucial Assembly elections early next year in five states, including Uttar Pradesh and Punjab.
    • Public appeasement: The PM sought to announce this on Guru Nanak Jayanti probably in a move to appease a community, to which a significant segment of protesting farmers from Punjab belongs.
    • Rising anxiety among Public: There was a risk that anxiety among the protesters could lead to tensions as there had been many deaths since the protests began.
    • Fury over year-long protests: The protest had created a ruckus on the streets of capital due to continuous blockades even after the intervention of Supreme Court.
    • Rising political differences: Given that it took the government a year to realise the socio-political costs, the repeal also signals a weakened political feedback mechanism within the party.

    Significance of the repeal

    • Restores faith in the govt: In the immediate term, the repeal exposes the government to charges of being on the wrong path and against popular sentiments, notwithstanding its claims to the contrary.
    • Dedication over farmers’ cause: The govt moves were increasingly perceived as being not in tune with the needs of rural farming communities.
    • Political stewardship: The PM was clearly balancing his political posture that has thrived on the image of strong and decisive leadership.

    Implications of the repeal

    • CAA standpoint: Although the anti-CAA protests were called off, almost two years on, the Home Ministry has not yet framed the rules for implementation of the CAA.
    • Statehood for J&K: There is no such unanimity over Article 370. Most of these parties have largely been united for the restoration of statehood to J&K, and early elections.

    An analysis of the enactment-repeal conundrum

    (1) Reforms are must

    • There may be some deficiencies in the exact design and mechanism of the reforms proposed in the three farm laws.
    • However, most advocates of agricultural reform would agree that they were in the right direction.

    (2) Reforms don’t occur overnight

    • These laws could be a great example for passionate reforms. However, Legislative tapasya (penance) is all about listening to outer world (i.e the farmers), not inner self.
    • It requires listening to those for whose benefit laws and policies are crafted. It can’t be a meditation in isolation and implementation as a divine ordeal.

    (3) Answerability and consultation matters

    • That the government chose to push these reforms through its own set of consultations left many stakeholders feeling left out, and created a backlash.
    • The repeal underlines that any future attempts to reform the rural agricultural economy would require a much wider consultation.

    (4) Success lies in the acceptance of reforms

    • The better design of reforms ensures wider acceptance.
    • The repeal would leave the government hesitant about pursuing these reforms in stealth mode again.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Cryptocurrencies

    With cryptocurrencies such as Bitcoin gaining popularity among citizens, the Centre has been compelled to take a stance on the legal status of cryptocurrencies.

    Background

    • The Union Government is said to be considering a proposal to tax cryptocurrency transactions in the country.
    • The move would bring cryptocurrency trading, which has till date happened outside the ambit of the law, into the formal economy.

    Defying RBI ban

    • RBI has been vehemently opposed to the idea of legalizing cryptocurrencies.
    • It had banned financial institutions such as banks from facilitating transactions involving cryptocurrencies back in 2018.
    • The RBI’s order was overturned by the Supreme Court in 2020, and this led to a tremendous surge in cryptocurrency transactions through exchanges.

    Why did RBI propose a ban?

    • Financial stability: The RBI has characterized private cryptocurrencies as a threat to financial stability.
    • Threat to the sovereignty of Rupee: It perceives cryptocurrencies rise as a threat to the sovereignty of the rupee.
    • Beyond regulatory scope: The widespread acceptance of cryptocurrencies could interfere with the ability of the RBI to conduct monetary policy effectively.
    • Digital currency in the pipeline: It should be noted that RBI and other central banks are also looking to come up with digital versions of their own currencies.
    • Competition of currencies: The rupee or central bank digital currencies may not be able to outcompete cryptocurrencies just because they are digital.

    Legislative opinion on Cryptocurrencies

    • Not in favour of ban: This week, a Parliamentary Standing Committee recommended that cryptocurrencies be regulated rather than banned.
    • Making a legal framework: The Government is also expected to table a bill that clarifies its position on cryptocurrencies in Parliament next year.
    • Taxing cryptocurrencies: There is a proposal to classify cryptocurrency exchanges as e-commerce platforms and tax them under the GST framework comes.

    Why has the Government chosen to regulate rather than ban cryptocurrencies?

    • Popularity amongst Public: The growing popularity of cryptocurrencies among citizens may have played a role in the Government opting for regulation over an outright ban.
    • Lack of evident threat: There is no clear evidence of the misuse of cryptocurrencies and their risks.
    • Boosting with policy: The Union govt may also not want to kill the nascent cryptocurrency industry which many believe can be a hub for financial innovation.
    • Revenue generation: Fiscal revenues can be adversely impacted by the increased tax evasion opportunities that crypto-currencies can facilitate.
    • Capitalizing the market: The govt wants to capitalise on the recent surge in the usage of cryptocurrencies to tax them and shore up its revenues.
    • Financial innovation: Blockchain technology has multiple uses beyond just facilitating cryptocurrency transactions.

    Issues with the ban

    • Brain-Drain: Ban of cryptocurrencies is most likely to result in an exodus of both talent and business from India, similar to what happened after the RBI’s 2018 ban.
    • Capital inflows will be restricted: If cryptos begin to get mined onshore, they will induce capital inflows.
    • Killing financial innovation: A ban will deprive India, its entrepreneurs and citizens of a transformative technology that is being rapidly adopted across the world.

    Other generic concerns:

    • Safety (cyber-attacks and fraud)
    • Financial integrity (money laundering and evasion of capital controls)
    • Energy usage (outsized energy needs to mine cryptos)

    Way forward

    • Thus it can be inferred that cryptocurrency is better classified as an asset rather than as a currency, in order to gain acceptance and avoid a ban.

    Conclusion

    • There is no doubt that the acceptance of cryptocurrencies by the Government is likely to be limited.
    • While cryptocurrencies may be accepted as speculative assets, it is highly unlikely that they will be accepted as full-fledged currencies competing against the rupee.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • RBI panel brings law to regulate Digital Lending

    A Reserve Bank of India (RBI) Working Group (WG) on digital lending has recommended separate legislation to oversee such lending as well as a nodal agency to vet the Digital Lending Apps.

    Digital Lending

    • Digital lending is the process of availing credit online.
    • Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility, and speedy online transactions.

    Significance of Digital Lending

    India has a huge growth potential when it comes to the Digital Lending landscape:

    • Alternate source of finance: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
    • Lender of the last resort: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
    • Financial inclusion: Digital lending is a powerful tool that can be used for financial inclusion.
    • Cost-efficient lending: With new innovations underway, digital lending offers much better products to the masses at a much faster rate which is even more cost-efficient.
    • Exception for red-tapism: Online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting.
    • Preference by MSMEs: The online lending platforms have gained massive popularity among MSMEs post-Covid as they were unable to secure finance through traditional lending.
    • Easy onboarding: The quick turnaround time and onboarding, easy KYC, as well as disbursement within minutes have attracted the cash-crunched MSMEs towards these digital routes to secure credit.

    Issues with Digital Lending

    • No business model: There are many gaps that are existent in this model of digital lending like any new business operation.
    • High interest: Unauthorised lenders provided credit to customers without any collateral and at exorbitant rates coupled with unachievable deadlines to pay off these humongous debts.
    • Coercing and harassment for recovery: Resultantly, borrowers were coerced by the lenders to recollect when they were unable to pay off these debts. We see many cases of suicides due to such harassment.

    Key recommendations by RBI

    • Self-Regulation: RBI has mooted a Self-Regulatory Organisation for participants in the digital lending ecosystem.
    • Developing a Baseline Technology: Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
    • Direct loan disbursement: Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
    • Data collection: With the prior and explicit consent of borrowers with verifiable audit trails.
    • Standardized code of conduct: for recovery to be framed by the proposed SRO in consultation with RBI.

    Way forward

    • There is a growing need for regulation in this space or unauthorized players like pointed out above will keep popping up.
    • Stringent provisions must be formulated which can be enforceable legally.
    • Regulation must be enforced in this industry soon to ensure consumer trust remains unfettered.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)