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Subject: Economics

  • Tackling agricultural reforms after farm laws repeal

    Context

    In the run-up to the repeal of the three farm laws, the potential cost of MSP to the taxpayers became a matter of debate.

    Issue of MSP

    • Large variation: Experts and agricultural economists quoted numbers about the cost of MPS.
    • There is a large variation in the quoted numbers.
    • The enormity of the variance in estimates is astounding.
    • No consensus on the number of beneficiaries of MSP: There is also a dissonance between the NSSO data and the administrative data on the number of farmers who enjoy MSP.
    • No consensus on a formula to calculate MSP: Further, there is no consensus on the formulae for the calculation of MSP.

    Suggestions on land reforms

    [1] Reduce high domestic prices

    • That India is an agri-surplus country.
    • That domestic prices of agri-commodities are often higher than in the international market and therefore, there is a need to bring them down.
    • How to achieve cost reduction: Cost reduction can happen either by creating efficiencies by plugging leakages or, by cost-cutting — including reducing farmers’ margins.
    • In the recently-reached understanding with the farmers, the government has agreed to constitute a committee on MSP.
    • Hopefully, a formula can be arrived at by which costs of domestic agricultural produce can be reduced while ensuring a “remunerative price” for the farmers.

    [2] Protecting landholdings

    • There is also a need to protect landholdings.
    • Farmers’ fears in this regard are not exaggerated.
    • Under the erstwhile laws, orders of payment made by an SDM/Collector could be recovered as “arrears of land revenue”.
    • While agricultural lands were protected from such recovery, non-agricultural (immovable and movable) assets appeared to be fair game.
    • Further, circumstances such as sustenance and payment of debts could force a farmer to sell their agricultural landholdings.
    • Large-scale loss of landholdings could lead to their consolidation in the hands of a few.
    • This could have the impact of turning the clock back, reminiscent of the Zamindari system.

    [3] Need to reconsider the dispute resolution mechanism

    • The government should also reconsider the dispute resolution mechanism provided in the erstwhile laws.
    • In an MSP driven regime, the government is likely to be a party in any potential dispute.
    • Conflict of interest: There will be a direct conflict of interest since the SDM/Collector is an arm of the government.
    • Land records are within the jurisdiction of the patwari and tehsildar, who report to the SDM/Collector.
    • Fast track courts: It would be advisable to think in terms of fast-track courts, and remove the provision of recovery through arrears of land revenue.
    • It would also be advisable to have only one dispute resolution mechanism for all farm laws.

    [4] Avoid over-corporatisation without the creation of the requisite efficiencies

    • We should not ask our farmers to brave corporatisation without levelling the playing field and enough jobs in the non-agricultural sector.
    • Over-corporatisation without the creation of the requisite efficiencies could lead us to become heavily import-dependent, killing the benefits of the Green Revolution.

    Conclusion

    Perfunctory reforms and those that don’t work for all constituents — corporates as well as farmers — could have long-term deleterious effects for not only the agricultural sector, but the economy as a whole.

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  • The WTO’s challenge to MSP

    Context

    Amid the demand for legal backing to MSP, the question remains about whether India can provide a legal guarantee violating its international law obligations enshrined in the Agreement on Agriculture (AoA) of the World Trade Organization (WTO)?

    Classification of subsidies under AoA: Trade distorting and non-trade distorting

    • The objective of AoA: One of the central objectives of the AoA is to cut trade-distorting domestic support.
    • Three categories: In this regard, the domestic subsidies are divided into three categories: ‘green box’, ‘blue box’ and ‘amber box’ measures.
    • Non-trade distorting: ‘Green box’ subsidies (like income support to farmers de-coupled from production) and ‘blue box’ subsidies (like direct payments under production limiting programmes subject to certain conditions) are considered non-trade distorting.
    • Countries can provide unlimited subsidies under these two categories.
    • Trade-distorting subsidies: Price support provided in the form of procurement of crops at MSP is classified as a trade-distorting subsidy and falls under the ‘amber box’ measures, which are subject to certain limits.

    So, how do countries measure ‘amber box’ support?

    • Compute AMS: To measure ‘amber box’ support, WTO member countries are required to compute Aggregate Measurement of Support (AMS).
    • AMS is the total of product-specific support (price support to a particular crop) and non-product-specific support (fertilizer subsidy).

    Understanding the  de minimis limit

    • Under Article 6.4(b) of the AoA, developing countries such as India are allowed to provide a de minimis level of product and non-product domestic subsidy.
    • This de minimis limit is capped at 10% of the total value of production of the product, in case of a product-specific subsidy; and at 10% of the total value of a country’s agricultural production, in case of non-product subsidy.
    • Subsidies breaching the de minimis cap are trade-distorting.

    Possibility of India overshooting the de minimis limit

    • Relation between MSP and AMS: The procurement at MSP, after comparing it with the fixed external reference price (ERP) — an average price based on the base years 1986-88 — has to be included in AMS.
    • Widening gap between ERP and MSP: Since the fixed ERP has not been revised in the last several decades at the WTO, the difference between the MSP and fixed ERP has widened enormously due to inflation.
    • According to the Centre for WTO Studies, India’s ERP for rice, in 1986-88, was $262.51/tonne and the MSP was less than this.
    • However, India’s applied administered price for rice in 2015-16 stood at $323.06/tonne, much more than the 1986-88 ERP.
    • Procuring all the 23 crops at MSP, as against the current practice of procuring largely rice and wheat, will result in India breaching the de minimis limit making it vulnerable to a legal challenge at the WTO.
    • Even if the Government does not procure directly but mandates private parties to acquire at a price determined by the Government, as it happens in the case of sugarcane, the de minimis limit of 10% applies.

    Way forward

    • Peace clause: Although a permanent solution is nowhere in sight, the countries have agreed to a peace clause.
    • The peace clause forbids bringing legal challenges against price support-based procurement for food security purposes even if it breaches the limit on domestic support.
    • The peace clause is applicable only for programmes that were existing as of the date of the decision and are consistent with other requirements.
    • India’s procurement for rice and wheat, even if it violates the de minimis limit, will enjoy legal immunity.
    • However, India will not be able to employ the peace clause to defend procuring those crops that are not part of the food security programme (such as cotton, groundnut, sunflower seed).
    • Move from MSP to income-based support: Arguably, India can move away from price-based support in the form of MSP to income-based support, which will not be trade-distorting under the AoA provided the income support is not linked to production.
    • Supplement price-based support with income-based support: Alternatively, one can supplement price-based support (keeping the de minimis limit in mind) with an income-based support policy.

    Conclusion

    The Government needs to engage with the farmers and create an affable environment to convince them of other effective policy interventions, beyond MSP, that are fiscally prudent and WTO compatible.

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  • Growth of India’s Defence Exports

    India’s defense exports have increased manifold from ₹1,521 crore in 2016-17 to ₹8,434.84 crore in 2020-21.

    Note: This newscard provides substantial data about India’s defense exports and imports, which is highly relevant for mains and interview. Kindly bookmark this article.

    India’s defense exports

    • India has the strength of low-cost, high-quality production.
    • The Government has set an ambitious target to achieve exports of about ₹35,000 crore ($5 billion) in aerospace and defense goods and services by 2025.
    • The Defense Ministry has clarified that the names of the major defense items exported cannot be disclosed due to strategic reasons.
    • To boost indigenous manufacturing, the govt had issued two “positive indigenization lists” consisting of 209 items that cannot be imported and can only be procured from domestic industry.

    A significant achievement

    • According to the latest report of the Swedish think tank Stockholm International Peace Research Institute (SIPRI), three Indian companies figure among the top 100 defence companies in the 2020 rankings.
    • These include Hindustan Aeronautics Limited (HAL), Ordnance Factory Board and Bharat Electronics Ltd (BEL).

    Yet India is a top importer

    • While India remained among the top importers, it was also included in the Top 25 defence exporters.
    • There was an overall drop in India’s arms imports between 2011-15 and 2016-20, according to another SIPRI report of 2020.

    Items that India export

    • India has supplied different types of missile systems, LCA/helicopters, multi-purpose light transport aircraft, warships and patrol vessels etc.
    • It is also willing to export artillery gun systems, tanks, radars, military vehicles, electronic warfare systems and other weapons systems to IOR nations.

    Major partners: South Asian Countries

    • Vietnam is procuring 12 Fast Attack Craft under a $100 million credit line announced by India.
    • It is also interested in Advanced Light Helicopters and Akash surface-to-air missiles.
    • HAL has pitched its helicopters and the Tejas LCA to several Southeast Asian and West Asian nations and is in the race to supply the LCA to Malaysia.
    • Discussions on the sale of BrahMos supersonic cruise missiles, jointly developed by India and Russia, are at an advanced stage with some Southeast Asian nations.

    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.

    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 satellites industries that in turn will pave the way for a generation of employment opportunities.

     

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  • Extension for PM Krishi Sinchai Yojana

    The Cabinet has given its approval to extend its umbrella scheme Pradhan Mantri Krishi Sinchayee Yojana for irrigation, water supply, groundwater and watershed development projects for another five years till 2026.

    PM Krishi Sinchai Yojana

    • The PMKSY was launched on 1st July, 2015 with the motto of “Har Khet Ko Paani”.
    • It is being implemented to expand cultivated area with assured irrigation, reduce wastage of water and improve water use efficiency.

    The scheme has basically combined three active projects under various ministries which is as follows:

    1. Accelerated Irrigation Benefit Program (Ministry of Water Resources)
    2. Integrated Watershed Management Program (Ministry of Rural Development)
    3. Farm Water Management Project of the National Mission on Sustainable Agriculture

    Components of PMKSY

    PMKSY seeks to provide a complete solution to farm level irrigation and assured irrigation for every farm

    • It aims to integrate irrigation with the latest technological practices and cover more cultivable areas under assured irrigation
    • Increase the implementation of water-saving technologies and precision irrigation which in other words can be said as More Crop Per Drop.
    • PMKSY also targets the promotion of micro-irrigation in the form of sprinklers, rain-guns, drips, etc.

    Advantages of Micro Irrigation

    • Higher Profits
    • Water Saving & Water Use Efficiency (WUE)
    • Less Energy Costs
    • Higher fertilizer-use efficiency (FUE)
    • Reduced Labour Costs
    • Reduce Soli Loss
    • Marginal Solis & Water
    • Efficient & Flexible
    • Improved Crop Quality
    • Higher Yields

    Implementation of PMKSY

    • Everything from planning and execution of plans is regionalized in PMKSY.
    • District Irrigation Plans (DIPs) will identify the areas that require improved facilities in irrigation at block levels and district levels.
    • State Irrigation Plan consolidates all the DIPs and it oversees the agricultural plans developed under the Rashtriya Krishi Vikas Yojana.

    Funding pattern

    • Funds will be allocated by the centre only if the state has prepared the district irrigation plans and the state irrigation plans.
    • The state government’s share under PMKSY is 25% and rest is borne by the centre, with an exception for north-eastern states where contribution by the state government is 10%.

     

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  • The price of food must figure in the policy

    Context

    The essential challenge of public policy for agriculture- the high price of food remains unsolved.

    Implications of high food prices

    • Increases poverty: A higher price of food increases poverty, especially as the rice and wheat supplied through the PDS constitute only a part of the total expenditure on food of the average Indian household.
    • Reduces the expenditure on other item: For the household, a high price of food crowds out expenditure on other items ranging from health and education to non-agricultural goods.
    • This prevents the market for non-agricultural goods from expanding.
    • This was one of the first discoveries in economics, made by the English economist David Ricardo about two centuries ago.

    Rising food prices in India

    • An indication of the elevation of the price of food in an economy is the share of food in a household’s budget.
    • In a global comparison we would find that this share is very large for India.
    • Data from the U.S. Department of Agriculture (2016) show that this share ranges from over 30% for India to less than 10% for the U.S. and the U.K.
    • This is in line with Ricardo’s understanding of how economies progress i.e., as food gets cheaper, growth in the non-agricultural economy is stimulated.
    • Agricultural policy in India has remained quite unaccountable in the face of a rising relative price of food.
    • Impact on manufacturing sector: Arguably, the high price of food has been a factor in the disappointing lack of expansion of the manufacturing sector in India despite repeated efforts to bring it about.

    Changes needed in agricultural policy

    • Both from the point of view of food security for low-income households and the dynamism of the non-agricultural sector, agricultural policy cannot ignore the price at which food is produced.
    • Focus on improving the yield: The fact of low agricultural yield in India by comparison with the rest of the world has been known for long, and little is done about it.
    • Management of soil nutrients and moisture: A superior management of soil nutrients and moisture, assured water supply and knowledge inputs made available via an extension service would be crucial.
    • Raising yields will ensure profitability without raising producer prices, which will inflate the food subsidy bill.

    How government intervention created problems

    • Given the importance of food for our survival, this justifies public intervention in agriculture.
    • The issue is the design and scale of this intervention.
    • In the mid-sixties, when India was facing food shortage that could not be solved through trade, a concerted effort was made to raise domestic agricultural production.
    • Profitability through MSP: It introduced the strategy of ensuring farm profitability though favourable prices assured by the state.
    • Further, it entrenched the belief that it is the farmer’s right to have the state purchase as much grain as the farmer wishes to sell to the state agency.
    • Created grain stockpile: This has resulted in grain stockpiles far greater than the officially announced buffer-stocking norm.
    • These stocks have often rotted, resulting in deadweight loss, paid for by the public though taxes or public borrowing.
    • Supply more than demand: Finally, with all costs of production reimbursable and all of output finding an assured outlet, supply has outstripped demand. 
    • Damage to natural environment: This has led to unimaginable pressure on the natural environment, especially water supply.

    Consider the question “India faces the challenge of high food prices. Examine the ways in which high food prices affects the overall economy. How far is the India’s agriculture policy responsible for the problem?”

    Conclusion

    India needs an agricultural policy that ensures that farming is profitable but this cannot be at the cost of a high price of food. The ‘food problem’ should no longer be seen only in terms of the availability of food from domestic sources.

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  • The NMP is hardly the panacea for growth in India

    Context

    As the government seeks to monetise core assets through National Monetisation Pipeline (NMP), it needs to investigate the key reasons and processes which led to once profit-making public sector assets becoming inefficient and sick businesses.

    Background of the MNP

    • The National Monetisation Pipeline (NMP) envisages an aggregate monetisation potential of ₹6-lakh crore through the leasing of core assets of the Central government.
    • These assets are in sectors such as roads, railways, power, oil and gas pipelines, telecom, civil aviation, shipping ports and waterways, mining, food and public distribution, coal, housing and urban affairs etc. over a four-year period (FY2022 to FY2025).
    • Strategic objective of NMP: According to NITI Aayog, the strategic objective of the asset monetisation programme is to unlock the value of investments in public sector assets by tapping private sector capital and efficiencies.
    • Unlocking idle capital: The NMP policy advocates unlocking idle capital from non-strategic/underperforming government owned assets
    • Contribution of core sectors: Eight core industrial sectors that support infrastructures such as coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity have a total weight of nearly 40% in the Index of Industrial Production (IIP).

    Reasons for the decline of PSU and why the government should introspect the decline

    • Cost overruns, inter alia, is one of the major reasons.
    • Exceeding project completion time: In some cases, project completion time is exceeded, leading to elevated project cost so much so that either the project itself becomes unviable at the time of its launching or delays its break even point.
    • Lack of optimum input-output ratio: Optimum input-output ratio is seldom observed in a majority of government infrastructural projects leading to their overcapitalisation.
    • A reluctance to implement labour reforms, a lack of inter-ministerial/departmental coordination, poor decision-making, ineffective governance and excessive government control are other reasons for the failure of public infrastructural assets.
    • Need for introspection: It is quite likely that the nation may find itself in a vicious cycle of creating new assets and then monetising the same when they become liabilities for the Government at a later stage.

    Importance of public sector enterprises

    • Going by the annual report (2020-2021) of the Department of Public Enterprises there are 256 operationally-run central public sector undertakings (CPSUs), employing about one million people.
    • They posted a net profit of ₹93,294 crore (FY 2019-20).
    • Ratna Status: Out of these, 96 have been conferred the Ratna status (72, 14, and 10 are Miniratnas, Navaratnas, and Maharatna companies, respectively).
    • As India needs to invest about $1.5 trillion on infrastructure development in order to aspire to become $5 trillion economy by the year 2024-25, according to the Economic Survey 2019-20, public enterprises should be in focus.

    Steps to strengthen public sector businesses

    • Gati Shakti National Master Plan: Recently, the “Pradhan Mantri Gati Shakti National Master Plan” for multi-modal connectivity was launched.
    • It is essentially a digital platform for information sharing among different Ministries and departments at the Union and State levels.
    • Seamless planning and coordinated execution: The plan aims ‘to synchronise the operations of different departments of 16 Ministries including railways and roadways.
    •  Revamping corporate governance structure of PSUs: As enunciated in the Economic Survey 2020-21, an important step for the Government to take to strengthen public sector businesses would be to completely revamp their corporate governance structure in order to enhance operational autonomy augmented with strong governance practices including listing on stock exchange for greater transparency and accountability.
    • Initiative to boost domestic production of steel: The Economic Survey also highlights the Government’s initiatives as part of the Atmanirbhar Abhiyaan in order to boost domestic production in the steel sector.
    • Under it, four different types of steel are included for incentives under the production linked incentive (PLI) scheme; selling steel to Micro, Small and Medium Enterprises (MSMEs), affiliated to Engineering Export Promotion Council of India at export parity price under the duty drawback scheme of the Directorate General of Foreign Trade (DGFT);
    • It also include measures to provide preference to domestically produced iron and steel in government procurement, where aggregate estimate of iron and steel products exceeds ₹25 crore;
    • Protection of domestic industry from unfair trade practices: Protecting industry from unfair trade through appropriate remedial measures including imposition of anti-dumping duty and countervailing duty on the products on which unfair trade practices were adopted by the other countries.

    Conclusion

    More such out-of-the-box policy initiatives are needed to rule out public asset monetisation schemes such as the NMP in future.

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  • The stepping stones in the post-pandemic world

    Context

    The COVID-19 pandemic has profoundly impacted lives and livelihoods across the world. Governments, global institutions, industry, academia and non-profit organisations around the world have joined hands to tackle the global challenge and help countries rebuild their economies.

    Criticality of international cooperation and role for India

    • The novel coronavirus pandemic has once again highlighted the criticality of international cooperation in combating current and future challenges.
    • Areas of cooperation: Key among these include economic growth, building competitiveness of the investment climate, ensuring sustainable development paths and adapting to technology acceleration.
    • Strengthening global partnership: Building resilience to cope with the threats posed by pandemics and other man-made and natural disasters has necessitated strengthening global partnerships now more than ever.
    • Global partnerships help in building mutual trust and understanding by agreeing upon common rules and standards and sharing of best practices.

    Areas to focus on

    [1] Challenge of long term sustainability of growth process

    • While the world economy is rebounding strongly, the long-term sustainability of the growth process needs to be strengthened.
    • Exit from the massive stimulus packages itself may pose risks of economic and financial instability.

    [2] Challenges of supply chain management:

    • The pandemic severely disrupted global supply chains and set the global trade trajectory on a downward path.
    • Even as the world emerges from the pandemic, facilitating medical supplies and essentials will continue to remain a top priority and for this, supply chains will need to be kept flowing.
    • For this year, the United Nations Conference on Trade and Development (UNCTAD) indicates an increase of 22.4% in the value of global merchandise trade compared with 2020.
    • World trade is expected to stand about 15% higher than before the COVID-19.
    • FDI flows in developing economies also increased significantly, totalling $427 billion in the first half of 2021.
    •  Cooperation on trade facilitation for enhancing open and transparent markets, technical assistance and reduction of complex process and arrangements must be promoted.

    [3] Increasing competitiveness

    • Competitiveness will be key in facilitating growth and inclusive development.
    • New opportunities and avenues across potential high growth sectors such as manufacturing and start-ups must be leveraged.
    • An ecosystem of entrepreneurship and innovation with targeted policies and interventions will contribute to enhancing productivity and generating employment.

    [4] Structural changes with the emergence of digital economy

    • Certain structural changes are likely to become permanent in the future and this is especially true of the digital economy
    • Equitable adaptation: The rise of telemedicine, remote work and e-learning, delivery services, etc. necessitates equitable adaptation to advanced technologies and tools, building robust infrastructure, and occupational transitions.
    • Skill development and worker training, investments in education and vocational training, and capacity building would be some key areas of focus for filling technology gaps and nurturing new and existing talent.
    • Investment in innovation: At the same time, investments in innovation will be crucial, especially during a crisis.

    [5] Climate change

    • Matter of urgency: Climate change has now acquired urgency from policymakers around the world, as seen in the recent COP26 at Glasgow.
    • International alliances and cooperation on building sustainable solutions, green technology, resource efficiency, sustainable finance, etc., must be promoted to fast-track meeting the sustainable development goals and for ensuring all-round development.

    Opportunities for India

    • Attaining faster growth path: India’s recent reforms, role in combating the pandemic, and startup vibrancy, among other factors, have attracted global attention and can help it attain a faster growth path, provided its integration with the world economy and trade gains strategic intensity.
    • Reliable and trusted player: With multiple strategic shifts, India’s role as a reliable and trusted player in the comity of nations stands enhanced.

    Way forward

    • In the post-pandemic world, it will be critical for India to improve on its investment climate and systematically target its export capabilities across sectors and regions.
    • Ease of doing business and new free trade agreement with major markets will help it integrate closely with the world through trade and investment partnerships.

    Conclusion

    The time for India is here and it must leverage international partnerships for ensuring a robust and sustained economic growth path.

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  • The challenges in being a chip hub

    Context

    India is aiming to manufacture silicon semiconductor chips.

    Efforts to set up chip fabrication plant

    • India has intensified efforts to set up a semiconductor fabrication plant with the help of Taiwan, the market leader.
    • For this the government is investing over $7.5 billion.
    • The Tata Group is in talks with three States — Tamil Nadu, Telangana and Karnataka — to invest over $300 million to set up a semiconductor manufacturing facility.
    • In 2014, NASSCOM wanted to promote a National Technology Corridor along coastal A.P. stretching through the Visakhapatnam, Rajahmundry and Vijayawada region.
    • Given the abundance of water, sand (raw material for making silicon ingots), road, rail, ports and airport connectivity, the industry body wanted to push and promote the design and manufacturing of electronic chips.

    Challenges

    • IP and design: While welcoming such moves by the government and technology experts, local players in the segment say that chip making itself will not be enough.
    • Other aspects such as designing and Intellectual Property are required to make a mark.
    • Designing is what brings value to the chips.
    • If the Intellectual Property lies with the foreign entity, we end up manufacturing the basic material which does not serve the purpose.
    • Need to promote SoCs: Rather, we need an ecosystem to promote SoCs (System on a Chip) which makes more sense.”
    • There are several firms in India which are now making SoCs, which is a good sign.
    • Connect related industries: The bigger challenge and immediate need for the Indian government is to connect related industries in India to create the ecosystem, industry players say.

    Consider the question “What are the challenges India may face as it aims to manufacture silicon semiconductor chips?”

    Conclusion

    The initiative is an uphill task as many factors need to come together for India to make a mark in the niche chip making and designing industry. Also, upcoming firms should be able to sustain themselves in the market when subsidies from the government are withdrawn.

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  • What is Q-Commerce Model?

    Online grocer Grofers has rebranded itself “Blinkit”, in line with its new focus on “quick commerce”, which essentially involves delivering customer orders much faster than it does currently.

    Q-Commerce Model

    • Q-commerce (‘quick commerce’) – sometimes used interchangeably with ‘on-demand delivery’ and ‘e-grocery’ – is e-commerce in a new, faster form.
    • It combines the merits of traditional e-commerce with innovations in last-mile delivery.
    • The premise is largely the same, with speed of delivery being the main differentiator. Delivery is not in days but minutes – 30 or less, to be competitive.
    • This has in turn expanded the breadth of what individuals can order, with perishable goods – like groceries – being a large niche q-commerce companies speak to.
    • It tends to focus on the micro – smaller quantities of fewer goods.

    Features of this model

    • Countering pandemic: The supply chain disruptions triggered by the Covid-19 pandemic led to the emergence of a new sub-vertical in the online grocery segment.
    • Quickest delivery: It is the unique selling proposition (USP) of which was the promise of delivery within 10-30 minutes of ordering.
    • Micro-warehousing : The focus of most of these ventures is on setting up micro-warehouses located closer to the point of delivery, and of restricting stocks of high-demand items.

    Back2Basics:  Marketplace and Inventory-Based Model

    (1) Marketplace Model

    • It provides an IT platform by an e-commerce entity on a digital & electronic network to act as a facilitator between the buyer and seller. Ex. India Mart, Amazon, Flipkart.
    • The e-commerce firm does not directly or indirectly influence the sale price of goods or services and is required to offer a level playing field to all vendors.

    (2) Inventory-Based Model

    • Inventory based model of e-commerce means an e-commerce activity where the inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly.
    • Ex. Alibaba

     

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  • Co-Lending Model for Banks-NBFCs

    A November 2020 decision by the RBI to permit banks to “co-lend with all registered NBFCs based on a prior agreement” has led to unusual tie-ups between the banks and companies.

     The ‘Co-Lending Model’

    • In September 2018, the RBI had announced “co-origination of loans” by banks and Non-Banking Financial Companies (NBFCs) for lending to the priority sector.
    • The arrangement entailed joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards.
    • Subsequently, based on feedback from stakeholders, the RBI allowed the lenders greater operational flexibility, while requiring them to conform to regulatory guidelines.
    • The primary focus of the revised scheme, rechristened as ‘Co-Lending Model’ (CLM), was to “improve the flow of credit to the unserved and underserved sector of the economy.

    Repercussions of Co-Lending

    (1) Bank-NBFC tie-ups at indiscriminate scale

    • Several banks have entered into co-lending ‘master agreements’ with NBFCs, and more are in the pipeline.
    • SBI, the country’s largest lender, signed a deal with Adani Capital, a small NBFC of a big corporate house, for co-lending to farmers to help them buy tractors and farm implements.

    (2) Greater risk in co-lending

    • NBFCs are required to retain at least a 20 per cent share of individual loans on their books.
    • This means 80 per cent of the risk will be with the banks — who will take the big hit in case of a default.

    (3) Corporates in banking

    • While the RBI hasn’t officially allowed the entry of big corporate houses into the banking space, NBFCs — mostly floated by corporate houses — were already accepting public deposits.
    • They now have more opportunities on the lending side through direct co-lending arrangements.

    Back2Basics: Non-Banking Financial Company (NBFC)

    • An NBFC is a company incorporated under the Companies Act 2013 or 1956.
    • According to section 45-I (c) of the RBI Act, a Non–Banking Company carrying on the business of a financial institution will be an NBFC.
    • It further states that the NBFC must be engaged in the business of Loans and Advances, Acquisition of stocks, equities, debt etc issued by the government or any local authority or other marketable securities.

    NBFC business:

    The NBFC business does not include business whose principal business is the following:

    1. Agricultural Activity
    2. Industrial Activity
    3. Purchase or sale of any goods excluding securities
    4. Sale/purchase/construction of any immovable property – Providing of any services

    Difference between Banks and NBFCs:

    • NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
    1. NBFC cannot accept demand deposits;
    2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
    3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.

     

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