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Subject: Economics

  • How not to deal with recession

    Context

    The Centre is facing a serious financial crisis because of the exigencies created by the pandemic and its own policies. However, monetising assets and cutting down funds to states could aggravate the crisis.

    3 Policies aggravating the crisis

    1) NMP and disinvestment

    • Union Finance Minister, while announcing the National Monetisation Pipeline (NMP), said that asset monetisation is based on the philosophy of creation through monetisation and is aimed at “tapping private sector investment for new infrastructure creation”.
    • Loss of dividend: Disinvestment of profitable Navratna companies will result in a loss of dividend, a major source of income for the Centre.
    • Loss due to tax exemptions: Tax exemptions to the investors will take away another major share of income.
    • Central funds will be squeezed and this, in turn, will have a bearing on state finances.
    • NMP will seriously hurt the interests of the country.

    2) Cutting down funds to States

    • Kerala’s case: The state was getting about 3.92 per cent from the divisible pool in the 1970s and 1980s.
    • It came down to 2.66 per cent and 2.34 per cent in the awards of the 12th and 13th Finance Commissions.
    • The 14th Finance Commission award increased it to 2.45 (2.50) per cent.
    • Now, the 15th Finance Commission has reduced it to 1.92 per cent.
    • This arbitrary cut is a result of the adoption of certain new yardsticks by the commission without considering the state government’s views
    • The 15th Finance Commission’s special grant (RD grant) of Rs 19,800 crore for this year will no longer be available in the coming years.
    • Karnataka and many other states have also suffered because of the policy to reduce the divisible pool share.

    3) Tax exemptions and surcharge

    • Exemptions amounting to Rs 99,842.06 crore were extended to corporate houses in 2019-20.
    • Many taxes on goods were reduced because of electoral compulsions. This reduced central revenues.
    • Along with such tax exemptions, the increased use of cesses and surcharges is responsible for the shrinking of the shareable pool.
    • The shareable resources with the Centre was around Rs 6.8 lakh crore in 2019-20 which has come down to Rs 5.5 lakh crore in 2020-21.
    • All the cesses and surcharges that are not shared with states come to about 20 per cent of the total revenues of the Centre.
    • States have been demanding that this money should be shared with them, particularly while fighting a pandemic.
    • States complaining for resources does not augur well for cooperative federalism.

    Way forward

    • Developing basic infrastructure and the production sector is the only way to face an economic crisis.
    • That should not be done by selling or handing over public assets to private individuals and corporations.
    • We need massive public investment that will help people to form cooperatives and collectives in agriculture and industrial production.
    • Parliament, the National Development Council and the GST Council should discuss this unprecedented situation.

    Conclusion

    We need to find a way out collectively. Handing over the rights on public properties to private individuals will take the country back to the colonial era. This must not be allowed.

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  • Centre and states must strike bargain on GST

    Context

    After one and a half years of dispute, and with the economy showing signs of recovery, a path forward for the GST finally seems visible. This opportunity needs to be seized to strike the Centre-State bargain.

    How GST performed so far

    •  The contributors are many but the critical one has been simply a lack of revenues.
    • Initially, the GST performed well, with collections soaring to Rs 11.8 lakh crore in the first full year of implementation in 2018-19.
    • But in 2019-20, the growth rate decelerated sharply. And in 2020-21, collections actually fell.
    • As future collections became uncertain, a gap opened up between the amount that the Centre felt it could afford to promise and the minimum that the states felt they needed and were entitled to.
    • More recently, however, confidence in GST has improved.
    • Collections have revived, averaging Rs 1.1 lakh crore in the first five months of the current fiscal year, exceeding even pre-pandemic levels.

    What explains the weak revenue performance of the GST?

    • Slowing economy: The GST’s past performance now seems much better than it once did.
    • We now know that after 2018-19, nominal GDP growth slowed from 10.5 per cent in 2018-19 to 7.8 per cent the next year and -3 per cent in 2020-21.
    • Effective rate cuts: The RBI has pointed out, the effective tax rate has fallen by nearly 3 percentage points because of rate cutting in 2019, in which both the Centre and states were complicit.
    • Thus the weak revenue performance of the GST now seems attributable to wider economic difficulties and policy actions, rather than problems with the tax itself.

    Necessary changes: Opportunity for striking bargain for Centre and States

    1) Principle of compensation must be re-cast: Create revenue buffer

    • As the GST was a new tax, so states were guaranteed against the teething troubles that would inevitably arise for the next five years.
    • Five years on, this logic is less compelling.
    • The GST as tax reform has reached maturity, well understood by producers, consumers, and tax officials.
    • At the same time, the last few years have exposed the vulnerability of the states to shocks such as Covid-19 pandemic.
    • Way forward: To prevent this situation from recurring, the authorities should create a revenue buffer that could be tapped in a time of need.
    • In sum, there is a bargain waiting to be struck: The states give up their demand for an extension of the compensation mechanism, while the Centre offers a new counter-cyclical buffer.
    • As the figure shows, in good economic times, GST revenues will be robust but it is against downturns that states need protection.
    • The shift to revenue insurance, in turn, should allow the compensation cess to be abolished. 

    2) The GST structure needs to be simplified and rationalised

    • The GST structure needs to be simplified and rationalised, as recommended by the Fifteenth Finance Commission and the Revenue Neutral Rate report.
    • New rate structure: A new structure should have one low rate (between 8 and 10 per cent), one standard rate (between 16 and 18 per cent) and one rate for all demerit goods.
    • The single rate on demerit goods also requires eliminating the cesses with all their complexity.

    3) The GST Council’s working needs changes

    • Consensus-based decision making in GST Council can be sustained only if there is a shared sense of participatory and inclusive governance. 
    • Nearly two decades ago, when the VAT was being introduced, Yashwant Sinha established a culture of consensual discussions on indirect taxes.
    • He did this by requiring the Empowered Committee of State Finance Ministers to be headed by a finance minister from an Opposition-run state government.
    • The spirit of this idea could be translated to the GST Council.

    Consider the question “Inherent importance of GST and its significance for the cooperative federalism underline the necessity for the Centre and the States to strike the win-win bargain. In light of this, examine the issues with the GST and suggest the way forward to deal with these issuef.”

    Conclusion

    Cooperative federalism is not a gesture or one-off outcome. It is, above all, a disposition, resulting from quotidian democratic practice. By rehabilitating cooperative federalism’s finest achievement — the GST — the Centre and states can help restore India’s broader economic prospects.

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  • Four-year moratorium for AGR dues

    In big bang reforms, the Union Cabinet approved a relief package for the telecom sector that includes a four-year moratorium on payment of statutory dues by telecom companies as well as allowing 100% foreign investment through the automatic route.

    What is AGR?

    • Adjusted Gross Revenue (AGR) is the usage and licensing fee that telecom operators are charged by the Department of Telecommunications (DoT).
    • It is divided into spectrum usage charges and licensing fees, pegged between 3-5 per cent and 8 per cent respectively.

    Why is AGR important?

    • The definition of AGR has been under litigation for 14 years.
    • While telecom companies argued that it should comprise revenue from telecom services, the DoT’s stand was that the AGR should include all revenue earned by an operator, including that from non-core telecom operations.
    • The AGR directly impacts the outgo from the pockets of telcos to the DoT as it is used to calculate the levies payable by operators.
    • Currently, telecom operators pay 8% of the AGR as licence fee, while spectrum usage charges (SUC) vary between 3-5% of AGR.

    Why do telcos need to pay out large amounts?

    • Telecom companies now owe the government not just the shortfall in AGR for the past 14 years but also an interest on that amount along with penalty and interest on the penalty.
    • While the exact amount telcos will need to shell out is not clear, as in a government affidavit filed in the top court, the DoT had calculated the outstanding licence fee to be over â‚č92,000 crore.
    • However, the actual payout can go up to â‚č1.4 lakh crore as the government is likely to also raise a demand for shortfall in SUC along with interest and penalty.
    • Of the total amount, it is estimated that the actual dues is about 25%, while the remaining amount is interest and penalties.

    Is there stress in the sector?

    • The telecom industry is reeling under a debt of over â‚č4 lakh crore and has been seeking a relief package from the government.
    • Even the government has on various occasions admitted that the sector is indeed undergoing stress and needs support.
    • Giving a ray of hope to the telecom companies, the government recently announced setting up of a Committee of Secretaries to examine the financial stress in the sector, and recommend measures to mitigate it.

    Issue of lower tariff

    • Currently, telecom tariffs are among the lowest globally, driven down due to intense competition following the entry of Reliance in the sector.
    • The TRAI examines the merits of a “minimum charge” that operators may charge for voice and data services.

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  • GST Council may consider bringing petrol, diesel under GST

    The GST Council might consider taxing petrol, diesel and other petroleum products under the single national GST regime.

    About GST Council

    • The GST Council is a constitutional body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
    • It is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
    • It dictates tax rate, tax exemption, the due date of forms, tax laws, and tax deadlines, keeping in mind special rates and provisions for some states.
    • The predominant responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services across the nation.

    How is the GST Council structured?

    • The GST is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A.
    • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
    1. The Union Finance Minister will be the Chairperson
    2. As a member, the Union Minister of State will be in charge of Revenue of Finance
    3. The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

    Terms of reference

    • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject to or exempted from the Goods and Services Tax.
    • They lay down GST laws, principles that govern the following:
    1. Place of Supply
    2. Threshold limits
    3. GST rates on goods and services
    4. Special rates for raising additional resources during a natural calamity or disaster
    5. Special GST rates for certain States

    Why bring Petro/Diesel under GST?

    • GST is being thought to be a solution for the problem of near-record high petrol and diesel rates in the country, as it would end the cascading effect of tax on tax.
    • The state VAT is being levied not just on the cost of production but also on the excise duty charged by the Centre on such output.

    Why were they left out of GST?

    • When a national GST subsumed central taxes such as excise duty and state levies like VAT on July 1, 2017, five petroleum goods – petrol, diesel, ATF, natural gas and crude oil – were kept out of its purview.
    • This is because both central and state government finances relied heavily on taxes on these products.
    • Since GST is a consumption-based tax, bringing petroleum under the regime would have mean states where these products are sold get the revenue and not the producer ones.
    • Simply put, Uttar Pradesh and Bihar with their huge population and a resultant high consumption would get more revenues at the cost of states like Gujarat.

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  • What is Input Tax Credit?

    The Supreme Court has confirmed a Madras High Court judgment which upheld a fiscal formula included in the Central Goods and Service Tax Rules to execute refund of unutilized Input Tax Credit (ITC) accumulated on account of input services.

    What is Input Tax Credit?

    • Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs.
    • Say, you are a manufacturer – tax payable on output (FINAL PRODUCT) is Rs 450 tax paid on input (PURCHASES) is Rs 300 You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs 150 in taxes. See here:

    Pc: Cleartax.in

    The case in discussion

    • The apex court Bench led, by Justice D.Y. Chandrachud, passed the judgment in the face of two contradicting judgments of Gujarat and Madras High Courts on the validity of Rule 89(5) of the Central GST Rules, 2017.
    • Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”.
    • The Gujarat High Court had held that by prescribing a formula in sub-Rule (5) of Rule 89 to execute refund of unutilized ITC accumulated on account of input services.
    • The Madras High Court, while delivering its judgment declined to follow the view of the Gujarat High Court.

    Answer this PYQ in the comment box:

    Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

     

    [wpdiscuz-feedback id=”555s0bzkxm” question=”Please leave a feedback on this” opened=”1″]Post your answers here[/wpdiscuz-feedback]

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  • Financial inclusion

    Context

    There are 63.4 million MSMEs in India and 99 per cent of which are micro-enterprises with less than Rs 10 lakh in investment. Financial inclusion and integration is key to bring these businesses into the formal economy.

    Financial integration

    • What is Financial inclusion? On the front of “financial inclusion”, which refers to the accessibility of banking and availability of credit, we have made significant progress.
    • Financial integration:  The journey from inclusion to integration is not only about making products available and accessible, but also about making them relevant, applicable, and acceptable.

    Demand size challenges

    1) Gap between demand and supply of capital

    • Due to a limited risk appetite, low or thin-file data on customers and challenging regulatory oversight, capital remains a constraint in designing bespoke products.
    • Way forward: For India to overcome these challenges, the existing infrastructure must be adapted to our new purpose, providing easy-to-use, customer-centric experiences.

    2) Accessibility

    •  Greater accessibility has major benefits for not only the customer but also the supplier.
    • For example, in rural India, people tend to save in the post office, because of village postal agents collect their savings from their doorstep.

    3) Intelligent product design and delivery

    • Products must be designed and delivered intelligently to meet the customer where they are, and by keeping in mind that they use products to reach their goals.
    • This involves tailoring the products to the needs and income profile of the customer, including being cognisant of their environment, geography, and demography.

    4) Lowering the operating costs

    • In the traditional financial system, the design and distribution cost on financial products at sachet size is high.
    • Financial service providers are consequently dissuaded from attempting to reach rural, financially excluded groups.
    • By using the power of machine learning and cloud infrastructure, we can significantly lower operating costs while offering customers affordable, bespoke financial products.

    5) Demand-side issues: Financial literacy and technology readiness

    • Financial literacy and technology readiness are two critical issues on the demand size.
    • Financial education assists people in making sound financial decisions.

    Consider the question “Benefits of the financial inclusion remain unrealised without financial integration. In light of this, examine the challenge in financial integration in India and suggest the way forward” 

    Conclusion

    It is our responsibility to create an ecosystem for them to deploy this capital of courage.

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  • National Financial Reporting Authority (NFRA)

    Audit regulator National Financial Reporting Authority (NFRA) wants to be positioned as a regulator for the entire gamut of financial reporting, covering all processes and participants in the financial reporting chain.

    What is NFRA?

    • NFRA is an independent regulator to oversee the auditing profession and accounting standards in India under Companies Act 2013.
    • It came into existence in October 2018.
    • After the Satyam scandal took place in 2009, the Standing Committee on Finance proposed the concept of the National Financial Reporting Authority (NFRA) for the first time in its 21st report.
    • Companies Act, 2013 then gave the regulatory framework for its composition and constitution.

    Functions

    • NFRA works to improve the transparency and reliability of financial statements and information presented by listed companies and large unlisted companies in India.

    Powers & duties

    • NFRA is responsible for recommending accounting and auditing policies and standards in the country.
    • It may undertake investigations, and impose sanctions against defaulting auditors and audit firms in the form of monetary penalties and debarment from practice for up to 10 years.
    • Since 2018, the powers of the NFRA were extended to include the governing of auditors of companies listed in any stock exchange, in India or outside of India, unlisted public companies above certain thresholds.

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  • Decoding asset monetisation

    Context

    The National Monetisation Pipeline (NMP), a bold initiative was recently announced by the Finance Minister.

     PPP model and issues with it

    • BOT: The PPP was about attracting private parties to build, operate and then transfer ‘greenfield’ or new infrastructure projects under build-operate-transfer (BOT) concession agreements.
    • More risks for the private sector: The winning private bidder had to take not only the operating risk, but also the development and construction risk of the project, such as a toll road, from scratch.
    • Why it was prone to delays?:  It involved the acquisition of land. This process became controversial and was subject to delay.
    • It involved securing environmental and other regulatory approvals. These proved challenging to obtain.
    • Undermining the trust: Compliance with these became a source of friction between the concessioning authority and the concessionaire.
    • All this undermined trust between the public and private parties and led to a huge volume of disputes for which there was no readily available resolution mechanism.

    How NMP is different from PPP?

    • Brownfield assets: The NMP is about leasing out ‘brownfield’ infrastructure assets such as an already operating inter-State toll highway under a toll-operate-transfer (TOT) concession agreement.
    • No land acquisition: In such an arrangement no acquisition of land is involved.
    • No construction risk: Nor does the concessionaire need to take any of the construction risk.
    • It is also certain to attract a different class of private capital.
    • To be successful in the BOT bids required a proven ability to navigate and manage the system.
    • Under the NMP, what will be required is operational experience in running a particular class of infrastructure assets and a strong understanding of the potential cash flows generated over the life of the concession.
    • This is certain to attract the largest global pension funds.

    Way forward

    • Allow flexibility: Given the long tenure of these concession agreements, they must be designed to allow for some flexibility so that each party has the opportunity to deal with unforeseen circumstances (such as climate-related disasters).
    • Performance standards: Contracts must also incorporate clear key performance indicators expected of the private party and clear benchmarks for assets as they are handed over by the government at the start of the concession.
    • Ensure effective implementation: No matter how well a contract is crafted, it still needs to be implemented effectively.
    • No opacity in concessional agreements: Experience shows that there is a tendency for government departments to inject opacity so that they have more power over the concessionaire.
    • To avoid this, it would be useful if the responsibility for administering the concession agreements did not lie directly with the line ministries and/or their agencies.
    • Dispute resolution mechanism: It is vital to put in place a robust dispute resolution mechanism.
    • Institute for contracts: There is a strong case to set up a centralised institution with the skills and responsibility to oversee contract design, bidding and implementation.
    • An institution such as ‘3 PPP India’, first mooted in the 2014 Budget, is needed.
    • Set up tribunal: It would also be advisable to set up an Infrastructure PPP Adjudication Tribunal along the lines of what was recommended by the Kelkar Committee (2015).
    • Start with predictable sectors: The government could start with sectors that offer the greatest cash flow predictability and the least regulatory uncertainty before expanding the experiment.

    Conclusion

    The NMP significantly differs from the PPP model and seeks to avoid its shortcomings through various changes.

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  • What the Q1 GDP numbers say

    Context

    India’s GDP data for Q1 of 2021-22 was released on August 31, 2021. The data revealed the real GDP growth at 20.1% in Q1.

    Making sense of the growth

    • Base effect: Real GDP growth at 20.1% in Q1 of 2021-22 is largely because of the contraction of 24.4% in the corresponding quarter of the first COVID-19 year, that is, 2020-21.
    • The Q1 2021-22 output and GDP growth data reflect a strong base effect since the corresponding levels of Q1 of 2020-21 were significantly adversely impacted by the first wave of COVID-19.
    • Fall in magnitude: The magnitude of real GDP fell short of the corresponding level in 2019-20 by a margin of â‚č3.3 lakh crore.
    • Required rate: A growth rate of 32.3% was required in Q1 of 2021-22 for achieving the same level of real GDP as in Q1 of 2019-20.
    • To achieve the annual growth of 9.5% as forecast by both the Reserve Bank of India and the International Monetary Fund for 2021-21, an average growth of 6.8% in the remaining part of the year would be required.
    •  The task would become relatively more demanding in Q3 and Q4 considering that the real GDP growth was positive at 0.5% and 1.6%, respectively, in the corresponding quarters of 2020-21.

    Analysing the demand side

    1) Private consumption growth lagging overall GDP growth

    • Largest segment: The largest segment of GDP viewed from the demand side is private final consumption expenditure (PFCE).
    • Its average share over the last three years (2018-19 to 2020-21) was 56.5%.
    • If PFCE were to reach back the 2019-20 level, it should have grown by 35.5% in this quarter.
    • The recovery in private consumption demand is lagging behind the overall GDP growth.
    • Way forward: Private consumption depends largely on income growth and its distribution.
    • Therefore, it would be useful to focus on further supporting income and employment levels for the MSMEs and informal sectors of the economy which have a higher propensity to consume.

    2) Export and investment: positive outcome in Q1

    • Noticeable positive outcomes in Q1 of 2021-22 came from exports and to some extent, from investment as reflected by gross fixed capital formation (GFCF).
    • Exports grew by 39.1% over a contraction of 21.8% in Q1 of 2020-21.
    • This differential is reflected in a positive growth of 8.7%.
    • Investment: In the case of GFCF, the base effect was quite large.
    • Despite a growth of 55.3% in Q1 of 2021-22, its magnitude was still 17.1% lower than the corresponding level in Q1 of 2019-20.

    3) Contraction in government final consumption

    • The only demand segment which contracted even with reference to Q1 of 2020-21 was government final consumption expenditure (GFCE).
    • This contraction was by a margin of (-) 4.8%.

    Analysing the output side

    1) Key service sectors

    • The key service sector — namely trade, transport, storage grew by 34.3% in Q1 of 2021-22 as compared to a contraction of 48.1% in Q1 of 2020-21.
    • However, relative to its level in Q1 of 2019-20, the output of this large service sector was significantly lower by 30.2% in Q1 of 2021-22.
    • Though public administration, defence and other services showed a growth of 5.8% in Q1 of 2021-22 over Q1 of 2020-21, they actually reflected a contraction of 5.0% as compared to Q1 of 2019-20.

    2) Agriculture

    • The key positive news came from the agricultural sector which showed a growth of 4.5% in Q1 of 2021-22, in continuation of annual growth of 3.6% in 2020-21.
    • Given agriculture’s positive growth in all the quarters of 2020-21, further contribution from this sector to the overall growth may not be expected.
    • Its average weight to the overall output is also low at about 15%.
    •  It is the high weight manufacturing sector and the two substantive service sectors — trade, transport et. al and financial, real estate et al. — which will have to support growth in the remaining part of the year.

    Way forward

    • Government should raise the demand: The Centre’s fiscal deficit in the first four months of 2021-22 amounted to only 21.3% of the budgeted target as compared to the corresponding average level of 90% over the last four years.
    • Clearly, significant policy space is opening up for the government to raise its demand and its contribution to output in the remaining part of the current fiscal year.
    • Dealing with likely third wave: Attempts should be made either to bypass or at least curb the adverse impact of COVID-19’s likely third wave.
    • Vaccination and investment in health infra:  Both the coverage of vaccination and the pace of investment in health infrastructure should be accelerated.
    • As revenues improve, expenditures can be increased.
    • There is no need to reduce the fiscal deficit below the budgeted level of 6.8% of GDP.

    Consider the question “To make up for the loss of output in the last two years India needs to embark on the path of high growth trajectory. Suggest the measure to achieve this objective.”

    Conclusion

    We need a faster rate of growth to make up for the loss of output in the previous two years from the trend rate. We must lay the foundation for faster growth in this year itself.

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  • National Edible Oil Mission (OP)

    Last week, the government announced the minimum support prices (MSP) of rabi crops for the marketing season 2022-23.

    Key Highlight: Hike for Oilseeds MSPs

    • The MSP for wheat is up by 2 per cent while that of rapeseed-mustard is up by 8.6 per cent.
    • This indicates that the government wants to focus more on edible oils/oilseeds than on wheat.
    • It is important to note that PM recently announced a Rs 11,000-crore National Edible Oil Mission-Oil Palm (NEOM-OP), as a part of the Aatmanirbhar Bharat Abhiyan.

    About NEOM-OP

    • This is a bold step to augment domestic edible oil supplies, given that 60 per cent of the edible oil consumed in the country is imported — more than half of this is palm oil followed by soybean and sunflower.
    • In FY 2020-21, edible oil imports touched $ 11 billion or about Rs 80,000 crore (for 13.5 million tonnes).
    • Despite these imports, edible oil inflation remains very high (July 2021 was 32.5 per cent).
    • Against this backdrop, the move to promote oil palm is a step in the right direction.

    Reasons for oil price hikes

    • Effective duty for rapeseed and cottonseed oils ranges from 38.5 per cent for crude and 49.5 per cent for refined oils.
    • It’s this high import duty, at a time when global edible oil prices have gone up by almost 70 per cent (y-o-y), that has caused high domestic inflation (32.5 per cent) in edible oils.

    Why Oil Palm?

    • It is the only crop that can give up to four tonnes of oil productivity per hectare under good farm practices.
    • But it is a water-guzzling crop, loves humidity (requires 150 mm rainfall every month) and thrives best in areas with temperatures between 20 and 33 degrees Celsius.
    • The National Re-assessment Committee (2020) has identified 28 lakh hectares suitable for oil palm cultivation in the country — the actual area under oil palm cultivation, as of 2020, is only 3.5 lakh hectares.
    • Much of this (34 per cent) is in the Northeastern states, including Assam, followed by Andhra Pradesh (19 per cent) and Telangana (16 per cent).
    • A large potential is thus waiting to be tapped.

    No reasons for farmers to switch

    • The government has a massive procurement programme for wheat, but a very meagre one for rapeseed-mustard even when the prices rule below MSP.
    • This relative incentive structure remains in favour of wheat.
    • So, we doubt if farmers will switch from wheat to mustard in any meaningful manner to bridge the edible oil deficit.

    What can be done to make NEOM-OP more effective?

    The NEOM-OP intends to focus on productivity and area expansion by supporting the farmers in the following ways:

    (A) Financial assistance

    • Input assistance for planting material, additional assistance to cover maintenance/opportunity costs of farmers, with no limits on acreage.
    • Big-budget assistance to industries that plan to set up a five tonnes/hour processing unit.
    • Such a comprehensive assistance package will attract farmers as well as incentivize the industry to work with agriculturists and augment domestic edible oil production.

    (B) Pricing mechanism for OP

    • There will be no MSP, but the FFB price for farmers would be fixed at 14.3 per cent of average landed crude palm oil price of the past five years, adjusted with the wholesale price index.
    • This is the most critical part of the pricing policy and the formula needs to be carefully calibrated.
    • However, the litmus test of pricing will be dovetailing it with the import tariff policy to protect the farmers in case landed prices fall below the cost of production.

    Way forward

    (1) Rationalizing import duties

    • The Commission for Agricultural Costs and Prices (CACP, which recommends MSP) recommended that India should keep an import duty trigger at $800/tonne (say).
    • If the import price falls below $800/tonne, the import tariff needs to go up in countercyclical manner.
    • Thus, import duty needs to be in sync with rational domestic price policy.
    • It is a necessary condition to give a fillip to aatmanirbharta in edible oils.

    (2) Neutral incentive structure

    • But the sufficient condition would be revisiting the existing incentive structure that unduly favours rice, wheat and sugarcane through heavy subsidisation of power, fertilisers and open-ended procurement.
    • The need is to devise a crop-neutral incentive structure where cropping patterns are aligned with demand patterns, and the crops are produced in a globally competitive manner.

    Conclusion

    • There is a huge deficit in edible oil production in the country.
    • Achieving self-sufficiency in edible oil production through the other oilseeds complex would require adding about 45 million hectares under oilseed cultivation.
    • This is not possible without drastically cutting down the area under cereal crops.
    • The best alternative is, therefore, to ensure proper care of palm oil crops, provide good planting material, better irrigation management, fertilizers and other inputs to raise productivity to four tonnes of oil/hectare.

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