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Subject: Economics

  • National Monetization Pipeline

    The Union Finance Minister has launched the National Monetization Pipeline for the brownfield infrastructure assets.

    What is Asset Monetization?

    • Asset Monetization involves the creation of new sources of revenue by unlocking of the value of hitherto unutilized or underutilized public assets.
    • Internationally, it is recognized that public assets are a significant resource for all economies.
    • Many public sector assets are sub-optimally utilized and could be appropriately monetized to create greater financial leverage and value for the companies and of the equity that the government has invested in them.
    • This helps in the accurate estimation of public assets which would help in the better financial management of government/public resources over time.

    National Monetization Pipeline (NMP)

    • The NMP comprises a four-year pipeline of the Central Government’s brownfield infrastructure assets.
    • It will serve as a medium-term roadmap for the Asset Monetization initiative of the government, apart from providing visibility for the investors.
    • Incidentally, the 2021-22 Union Budget, laid a lot of emphasis on Asset Monetization as a means to raise innovative and alternative financing for infrastructure.
    • It has to be noted that the government views asset monetization as a strategy for the augmentation and maintenance of infrastructure, and not just a funding mechanism.

    What is the plan?

    • NMP is envisaged to serve as a medium-term roadmap for identifying potential monetization-ready projects, across various infrastructure sectors.
    • It estimates aggregate monetization potential of Rs 6.0 lakh crores through core assets of the Central Government, over a four-year period, from FY 2022 to FY 2025.

    Objectives of the program

    • NMP aims for universal access to high-quality and affordable infrastructure to the common citizen of India.
    • Asset monetization, based on the philosophy of Creation through Monetization, is aimed at tapping private sector investment for new infrastructure creation.
    • This is necessary for creating employment opportunities, thereby enabling high economic growth and seamlessly integrating the rural and semi-urban areas for overall public welfare.
    • The strategic objective of the programme is to unlock the value of investments in brownfield public sector assets by tapping institutional and long-term patient capital.

    Framework

    The framework for core asset monetization has three key imperatives:

    • The pipeline has been prepared based on inputs and consultations from respective line ministries and departments, along with the assessment of total asset base available therein.
    • Monetization through disinvestment and monetization of non-core assets have not been included in the NMP.
    • Further, currently, only assets of central government line ministries and CPSEs in infrastructure sectors have been included.
    • Process of coordination and collation of asset pipeline from states is currently ongoing and the same is envisaged to be included in due course.

    Estimated Potential

    • The aggregate asset pipeline under NMP over the four-year period, FY 2022-2025, is indicatively valued at Rs 6.0 lakh crore.
    • The estimated value corresponds to ~14% of the proposed outlay for Centre under NIP (Rs 43 lakh crore). This includes more than 12-line ministries and more than 20 asset classes.
    • The sectors included are roads, ports, airports, railways, warehousing, gas & product pipeline, power generation and transmission, mining, telecom, stadium, hospitality and housing.
    • The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include: Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and Telecom (6%).

    Implementation & Monitoring Mechanism

    • As an overall strategy, significant share of the asset base will remain with the government.
    • The programme is envisaged to be supported through necessary policy and regulatory interventions by the Government in order to ensure an efficient and effective process of asset monetisation.
    • These will include streamlining operational modalities, encouraging investor participation and facilitating commercial efficiency, among others.
    • Real time monitoring will be undertaken through the a separate dashboard.

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  • Account aggregators

    Context

    Account Aggregators will enable the use and enrich the quality of information needed for lenders to extend loans without collateral back-up.

    Issue of preference for a collateralised loan in India

    • Demand for credit in India far outstrips institutional supply.
    • Financial Service Providers (FSPs) are well aware of this demand.
    • And they have been looking for ways to provide credit without collateral back-up.
    • Historically, financial service providers (FSPs) like banks and non-bank finance companies (NBFCs) have relied on collateral while making lending decisions.
    • In the absence of collateral pledges, the only way to assess a consumer’s willingness and ability to repay is by examining the prospective borrower’s cash flows.
    • Your bank account statement is a digital representation of your financial life.
    • However, this bank account statement-driven process is highly manual, time-consuming, expensive and fraught with potential for abuse.
    • These shortcomings have held back cash-flow based lending for too long in India.
    •  Borrowers in the country have been underserved because of the preference for collateralized loans.
    • Both FSPs and consumers are in dire need of a seamless digital way of sharing account information.

    Account Aggregator (AA) framework

    • The account aggregator framework announced by the Reserve Bank of India (RBI) promises to solve these problems.
    • It aims to make financial data sharing as easy as making a Unified Payments Interface (UPI) transfer.
    • This is the promise of account aggregation, as envisaged by RBI.
    • Account aggregators (AAs), with their user interface, will play a pivotal role in closing the trust deficit between FSPs and consumers.

    Fenefits of Account Aggregator would work

    • User control over data: They permit users to control who gets access to their data, track and log its movement and reduce the potential risk of leakage in transit.
    • A single-window format allows user-friendly data movement and reduces the need for physical transfers and post-facto attestations.
    • Industry-standard for consent: AAs create a default industry standard for consent that cuts through the dense fine print buried in most privacy policies.
    • Wider data points to rely on: With the security of this data as a given, AAs allow lenders (or other FSPs for that matter) to rely on a wider selection of data points to determine the trustworthiness of a borrower.
    • Through AAs, FSPs have a chance to provide cash-flow based credit, personalized financial management tools, robo-advisory services and many more innovative financial products and services to a wider cross-section of people.

    Conclusion

    By incorporating security, transparency and agility into data sharing, AAs could usher in the most significant transformation of India’s fintech landscape yet.

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  • AERA Bill, 2021

    In the recent monsoon session, Parliament passed the Airports Economic Regulatory Authority of India (Amendment) Bill, 2021.

    Key features of the AERA Bill, 2021

    • It seeks to amend the Airports Economic Regulatory Authority of India Act, 2008.
    • The 2008 Act established the Airport Economic Regulatory Authority (AERA).
    • AERA regulates tariffs and other charges (such as airport development fees) for aeronautical services rendered at major airports in India.
    • The 2008 Act designates an airport as a major airport if it has an annual passenger traffic of at least 35 lakh.
    • The central government may also designate any airport as a major airport by a notification.
    • The Bill adds that the central government may group airports and notify the group as a major airport.

    Why has the definition of a major airport been amended?

    • The Amendment has changed the definition of a major airport to include “a group of airports” after the words “any other airport”.
    • The government hopes the move will encourage the development of smaller airports and make bidding for airports with less passenger traffic attractive.
    • It plans to club profitable airports with non-profitable ones and offer them as a package for development in public-private partnership mode to expand connectivity.

    Was there a need to amend the AERA Act?

    • The Airports Authority of India (AAI) awarded six airports — Lucknow, Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram and Guwahati — for operations, management and development in public-private partnership mode in February 2019.
    • In 2020 too, the AAI has approved leasing of another six airports — Bhubaneswar, Varanasi, Amritsar, Raipur, Indore and Tiruchi.
    • The Ministry of Civil Aviation plans to club each of these airports with nearby smaller airports for joint development.
    • The move follows FM’s Budget Speech this year, in which she said the government planned to monetize airports in tier-2 and tier-3 cities.

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  • [pib] Simhadri PV Project: Largest floating Solar Project in the country

    The National Thermal Power Corporation (NTPC) has commissioned the largest floating solar PV project of 25MW on the reservoir of its Simhadri thermal station in Visakhapatnam, Andhra Pradesh.

    Simhadri PV Project

    • The 2000MW coal-based Simhadri Station is the first power project to implement an open sea intake from the Bay of Bengal which has been functional for more than 20 years.
    • This is the first solar project to be set up under the flexibilization scheme of coal-powered plant, notified in 2018.
    • The floating solar installation which has a unique anchoring design is spread over 75 acres in an RW reservoir.
    • This floating solar project has the potential to generate electricity from more than 1 lakh solar PV modules.
    • This would not only help to light around 7,000 households but also ensure at least 46,000 tons of CO2e are kept at arm’s length every year during the lifespan of this project.
    • The project is also expected to save 1,364 million litres of water per annum. This would be adequate to meet the yearly water requirements of 6,700 households.

    Other important facts you must know

    • As of May 2021, India has 95.7 GW of renewable energy capacity, and represents ~ 25% of the overall installed power capacity.
    • The government plans to establish renewable energy capacity of 523 GW (including 73 GW from Hydro) by 2030.
    • India was the world’s 3rd largest renewable energy producer with 38% (136 GW out of 373 GW) of total installed energy capacity in 2020 from renewable sources.
    • Tamil Nadu has the highest installed solar power capacity in India. Kamuthi Solar Power Project near Madurai is the world’s second-largest solar park.

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    Back2Basics: NTPC

    • NTPC is an Indian statutory corporation engaged in the generation of electricity and allied activities.
    • It is incorporated under the Companies Act 1956 and is under the jurisdiction of the Ministry of Power.
    • NTPC’s core function is the generation and distribution of electricity to State Electricity Boards in India.
    • It is the largest power company in India with an electric power generating capacity of 62,086 MW.
    • It has also ventured into oil and gas exploration and coal mining activities.
    • In May 2010, NTPC was conferred Maharatna status by GoI, one of the only four companies to be awarded this status.

  • [pib] HUID System in Jewellery Industry

    Hallmarking scheme is turning out to be a grand success with more than 1 crore pieces of Jewellery hallmarked in a quick time” with more than 90000 Jewelers registered in a same time period.

    What is Hallmark Gold?

    1. The process of certifying the purity and fineness of gold is called hallmarking.
    2. Bureau of Indian Standards, the National Standards Body of India, is responsible for hallmarking gold as well as silver jewellery under the BIS Act.
    3. If you see the BIS hallmark on the gold jewellery/gold coin, it means it conforms to a set of standards laid by the BIS. Hallmarking gives consumers assurance regarding the purity of the gold they bought.
    4. That is, if you are buying hallmarked 18K gold jewellery, it will actually mean that 18/24 parts are gold and the rest is alloy.
    5. At present, only 30% of Indian Gold Jewellery is hallmarked.

    Here are the four components one must look at the time of buying gold (they are mentioned in the laser engraving of a hallmark seal):

    1. BIS Hallmark: Indicates that its purity is verified in one of its licensed laboratories
    2. Purity in carat and fineness (corresponding to given caratage KT)
    • 22K916 (91.6% Purity)
    • 18K750 (75% Purity)
    • 14K585 (58.5% Purity)

    What is HUID?

    • HUID is a unique code that will be given to every piece of jewellery at the time of hallmarking.
    • It will be helpful in identifying the jeweller or the Assaying and Hallmarking Centres (AHCs) which had hallmarked the jewellery.
    • It will be a six-digit alphanumeric code, with which every piece of jewellery will be tagged.
    • At the hallmarking centre, the jewellery is stamped with the unique number manually.

    What are the new hallmarking rules?

    • The government has made it mandatory for jewellers to hallmark gold jewellery, but with some relaxation.
    • Jewellers with an annual turnover of up to Rs 40 lakh will be exempted from mandatory hallmarking.
    • Similarly, jewellery for international exhibitions and government-approved business-to-business domestic exhibitions will also be exempted.
    • It will also allow hallmarking of additional carats — 20, 23, and 24.

    Issues with HUID

    • Jewellers say the HUID process has increased the time required to get the hallmarking on jewels and this has created huge backlogs at AHCs.
    • Since the process is being done manually, there are also chances of a mismatch of the code, he adds.
    • The inventory pile-up at the centres is also raising concerns about the security of the jewellery.
    • Several industry stakeholders point out the limited number of AHCs, which will not be enough to hallmark the large number of pieces that are sold in India every year.

    Answer this PYQ from CSP 2017

    Q.Consider the following statements:

    1. The Standard Mark of the Bureau of Indian Standards (BIS) is mandatory for automotive tyres and tubes.
    2. AGMARK is a quality Certification Mark issued by the Food and Agriculture Organisation (FAO).

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

     

    [wpdiscuz-feedback id=”3yrxgg00qw” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

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  • Indian bond trading is in need of better market making

    Context

    The Indian market for corporate debt needs buoyancy and this has been high on the agenda of our regulator

    Background

    • The Reserve Bank of India (RBI) stopped the automatic monetization of the fiscal deficit in 1997 and made the government borrow money from the market.
    • There are primary dealers or PDs, who pick up the Centre’s bond and provide buy and sell quotes in the secondary market for government bonds and thus help ensure sufficient liquidity.
    • The PDs came to be known as market makers and are paid a commission for playing that role.

    Liquidity challenge in the corporate bond market

    • Unlike the market for government bonds,  in the case of the country’s corporate bond market, the challenge is different.
    • It’s typically remunerative for a buyer to buy a security and hold on to it till its maturity.
    • Therefore, insurance companies, provident funds, and pension funds hold such long-term paper, as they can match the tenure of their assets with liabilities.
    • But this does not add liquidity to the market, and anyone buying a corporate bond today may not find someone to sell it to tomorrow as this market has little trading depth.
    •  Even in the G-Sec market, where we assume plenty of liquidity, it is a thinly-traded market, even though the perception is that it is very liquid.

    Why do we need market makers for the corporate bond market

    • To deal with the lack of depth and liquidity in the corporate debt market, the Securities and Exchange Board of India’s (Sebi) idea of creating market makers holds immense significance.
    • The fundamental problem here is that a bond is different from a share.
    • A company’s share can be exchanged seamlessly because every share in the market is the same slice of ownership.
    • Lack of quotes for different bonds of different tenure: In the case of bonds, however, there are several issuances of a company.
    • A single financial institution or non-bank financial company could have as many as 10 issuances a year of varying maturities and interest rates, making each of them a unique instrument.
    • Company XYZ may have issued in October 2015 a bond with a face value of ₹100 that pays 6% interest and is due for redemption in 2030, which will be quoted on exchanges for trading (if it’s being traded).
    • But, in 2021, it is no longer a 15-year bond, but a 9-year paper.
    • Therefore, the security loses importance, as the market normally uses benchmarks like 5 or 10 or 15 years; and every bond drops in the pecking order once it crosses these thresholds.
    • Therefore, we need to have market makers who will offer quotes for all major securities and thereby ensure that critical bonds are still available for trading.

    Suggestions

    • Provide waivers: Playing market maker will involve a cost and hence there should be certain waivers provided to them on trading fees.
    • Preferential access: They can be given preferential access to new issuances, so as to build up an inventory.
    • Waiver of mark-to-market: The mark-to-market (MTM) rules could be waived for a specified period, as valuation differences can affect their profit and loss accounts.
    • Capital at lower cost: Capital can be made available at a lower cost to market makers, as they require funding for the same.
    • Fifth, trade among market makers can be awarded benefits in terms of fees or easier taxes on gains made.
    • Create bond index: We need to have tradable-bond indices that reflect the price movements of a basket of bonds that they track.
    • Made public, such indices will provide appropriate arbitrage opportunities for investors to come in, and this should generate liquidity in the market for these bonds.

    Consider the question “Why bond market in India lacks the depth as compared to equity markets. What are the factors responsible for this? Suggest the way forward.”

    Conclusion

    Market makers are a way out. While success cannot be guaranteed, the idea should be adopted nonetheless, as with credit default swaps. It’s a work-in-progress. Let’s speed it up.

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    Back2Basics: Automatic monetization of deficit

    • The monetization of deficit was in practice in India till 1997, whereby the central bank automatically monetized government deficit through the issuance of ad-hoc treasury bills.
    • Two agreements were signed between the government and RBI in 1994 and 1997 to completely phase out funding through ad-hoc treasury bills.
    • And later on, with the enactment of the FRBM Act, 2003, RBI was completely barred from subscribing to the primary issuances of the government from April 1, 2006.

  • RBI, IRDAI nod must for FDI in bank-led insurance

    Applications for foreign direct investment in an insurance company promoted by a private bank would be cleared by the RBI and IRDAI to ensure that the 74% limit of overseas investment is not breached.

    What does one mean by Insurance?

    • Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.
    • The company pools clients’ risks to make payments more affordable for the insured.
    • Insurance is a capital-intensive business so has to maintain a solvency ratio. The solvency ratio is the excess of assets over liabilities.
    • Simply put, as an insurance company sells more policies and collects premiums from policyholders, it needs higher capital to ensure that it is able to meet future claims.
    • In addition, insurance is a long gestation business. It takes companies 7-10 years to break even and start becoming profitable.

    Types of Insurance

    Insurance sector of India

    • The insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), mandates that insurers should maintain a solvency ratio of at least 150 percent.
    • The insurance industry of India has 57 insurance companies 24 are in the life insurance business, while 34 are non-life insurers.
    • Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.
    • In addition to these, there is a sole national re-insurer, namely the General Insurance Corporation of India (GIC Re).
    • Other stakeholders in the Indian Insurance market include agents (individual and corporate), brokers, surveyors, and third-party administrators servicing health insurance claims.
    • In India, the overall market size of the insurance sector is expected to be $280 billion in 2020.

    Recent developments

    The chronological order of events:

    1. Nationalization of life (LIC Act 1956) and non-life sectors (GIC Act 1972)
    2. Constitution of the Insurance Regulatory and Development Authority of India (IRDAI) in 1999
    3. Opening up of the sector to both private and foreign players in 2000
    4. Increase in the foreign investment cap to 26% from 49% in 2015
    5. Increase in FDI limit from 49% to 74% in March 2020

    Issues with India’s insurance sector

    Insurance is considered a sensitive sector as it holds the long-term money of people. Various attempts were made in the past to open up the sector but without much success.

    • Lower insurance penetration due to various economic reasons such as poverty, etc.
    • Domination of the Public Sector ex. LIC
    • Trust issues in private insurances due to insolvency of private players
    • Saving habits of the public

    Significance of the recent amendment

    • The current amendment is an enabling amendment that gives companies access to foreign capital if they need it.
    • It is an important shift instance as the increase in the FDI cap means insurance companies can now be foreign-owned and -controlled as against the current situation wherein they are only Indian-owned and -controlled.
    • The move is expected to increase India’s insurance penetration or premiums as a percentage of GDP, which is currently only 3.76 percent, as against a global average of more than 7 percent.

    What does this mean for Indian insurance companies?

    • India has more than 60 insurance companies specializing in life insurance, non-life insurance, and health insurance.
    • The number of state-owned firms is only six and the remaining are in the private sector.
    • A higher FDI limit will help insurance companies access foreign capital to meet their growth requirements.

    How does this impact Indian promoters of insurance companies?

    • Most of the Indian promoters of insurance companies are either Indian business houses or financial institutions like banks.
    • Many entered into the insurance space when they were financially strong but are now struggling to cater to the constant need to infuse capital into their insurance joint ventures.
    • Over the years, the sector has seen large-scale consolidation and exits of many promoters.
    • A higher FDI cap will mean that more promoters could now completely exit or bring down their stakes in their insurance joint ventures.

    What higher does FDI mean for policyholders?

    • Higher FDI limits could see more global insurance firms and their best practices entering India.
    • This could mean higher competition and better pricing of insurance products.
    • Policyholders will get a wide choice, access to more innovative products, and a better customer service and claims settlement experience.

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    Back2Basics: Foreign Direct Investment

    • An FDI is an investment in the form of controlling ownership in a business in one country by an entity based in another country.
    • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
    • FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
    • Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
    • In a narrow sense, it refers just to building a new facility, and lasting management interest.

    FDI in India

    • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
    • There are two routes by which India gets FDI.

    1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

    2) Government route: Prior approval by the government is needed via this route. The application needs to be made through the Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of the FDI application under the Approval Route.

    • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
    • In 2015 India overtook China and the US as the top destination for Foreign Direct Investment.

  • Liberalizing Trade in Agriculture Machinery

    Context

    On July 15, the Centre issued a notification moving power tillers (PT) and their components from the “free” to “restricted” category indicating a clear intent to provide protection to the domestic industry.

    How heterodox opening policies affects farming

    Heterodox opening policies, being open on the export side while being closed on the import side, have long-term unintended consequences.

    • Productivity loss: One impact of heterodox policies is subpar mechanisation and productivity loss in agriculture.
    • India’s mechanisation coverage is around 40-45 per cent, compared to 90 per cent in developed countries.
    • At present, only Punjab, Haryana and western UP have mechanisation rates between 70 and 80 per cent whereas in eastern and southern states it is between 35 and 45 per cent, with even smaller coverage in North-Eastern states.
    • Comparatively high tariffs on agricultural machinery, placement under restricted trade hits the cog in the wheel of mechanisation.
    • Uncertainty and lower trade: A shift to restricted category and frequently changing tariffs engenders uncertainty and lowers trade.
    • Disincentivise innovation: Such policies also disincentivises domestic machine manufacturers to invest and innovate — the perils of protection.

    What India can learn from Bangladesh on farm mechanisation

    • Starting lower, Bangladesh overtook India in mechanisation by 2006.
    • A perfect example of orthodox opening in the late 1980s, Bangladesh removed import bans on Power Tiller and other machinery like diesel engines.
    • By 1995, PT were made duty free and credit support was provided for purchases.
    • Studies have credited PT in increasing the rice yield in Bangladeh, which grew 2.1 per cent annually from 1990, compared to 1.6 per cent between 1960 and 1989.

    Way forward

    If productivity in agriculture and incomes of farmers were to go up significantly, Indian agriculture must hit the mechanisation frontier.

    • Liberal and Stable trade policies: Liberal and stable trade policies will increase access, competition will expand varieties and bring down the prices.
    • New trade economics teaches us that farmers would be successful in trading or accessing markets only when highly productive, which beckons large scale and intensive mechanisation.
    • Credit support: Bangladesh also shows the role of complementary policies such as credit support.
    • Once the farmers achieve sufficiently high productivity, they can access markets and even integrate with global value chains (GVC) if allowed by policy as intended in the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020.

    Conclusion

    Liberal trade in machinery presents an opportunity to access distant and international markets. The key is to be both ways open.

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  • What India’s informal sector needs right now

    Context

    Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts.

    Significance of informal sector

    • India’s large informal sector, which employs around 80 per cent of the labour force and produces about 50 per cent of GDP.
    • Of the 384 million employed in the informal sector, half work in agriculture, living mostly in rural India, and the other half are in non-agricultural sectors.
    • Of those, about half live in rural India and the remaining in urban areas.
    • Ignoring problems in the informal sector can be costly as it can lead to job and wage losses, higher inflation and even risk the livelihood of migrant workers.

    Impact of pandemic on informal sector workers

    • Informal sector workers suffered far more from the national lockdown in 2020 than their formal sector counterparts.
    • Such disruptions can be inflationary too.
    • India was one of the few countries with high inflation throughout pandemic-stricken 2020.
    • The 40 per cent in the informal non-agricultural sector is the most affected by the pandemic.
    • These workers are most vulnerable as they have borne the brunt of the economic disruption that the pandemic has unleashed.

    Impact on the informal sector

    • Nominal GDP growth has been a good indicator of the formal sector corporate sales.
    • But during the pandemic and also during events like demonetisation, formal corporate sales have exceeded nominal GDP growth.
    • This means that some demand, which was previously supplied by the informal sector, began to be supplied by the formal sector.
    • Several surveys over this time also show a rise in urban unemployment and self-employment, with the latter category seeing the highest earnings loss.

    Way forward

    • Formalisation on the back of policy changes: While traditionally associated with efficiency gains, if it comes at the cost of putting small informal firms out of business.
    • Formalisation that comes only on the back of external pressure or leads to deep distress in the informal sector, may not be sustainable.
    • By contrast, formalisation that happens on the back of policy changes that help small and informal firms grow over time into medium or larger formal sector firms is more sustainable.
    • Social welfare scheme: We need protection for informal sector workers via social welfare schemes so that the disruption they are facing does not lead to a permanent fall in demand.
    • There is a case for remaining generous with programmes such as the rural MGNREGA scheme for longer.
    • India doesn’t have an MGNREGA equivalent urban social welfare scheme.
    • Reforms: Steps to promote reforms that are needed to help small businesses grow are critical.
    • For example, lowering the regulatory burden associated with growing firms.

    Conclusion

    Bringing the informal sector to the forefront of policy decisions can lead to a significant payoff for the entire economy for years to come.

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  • Sugarcane Pricing in India

    Earlier this month, the Supreme Court issued notices to States and major sugar producers to develop a mechanism to ensure that farmers are paid on time.

    Who determines Sugarcane prices?

    Sugarcane prices are determined by the Centre as well as States.

    1. The Centre announces Fair and Remunerative Prices which are determined on the recommendation of the Commission for Agricultural Costs and Prices (CACP) and are announced by the Cabinet Committee on Economic Affairs, which is chaired by Prime Minister.
    2. The State Advised Prices (SAP) are announced by key sugarcane producing states which are generally higher than FRP.

    Minimum Selling Price (MSP) for Sugar

    • The price of sugar is market-driven & depends on the demand & supply of sugar.
    • However, with a view to protecting the interests of farmers, the concept of MSP of sugar has been introduced since 2018.
    • MSP of sugar has been fixed taking into account the components of Fair & Remunerative Price (FRP) of sugarcane and minimum conversion cost of the most efficient mills.

    Basis of price determination

    • With the amendment of the Sugarcane (Control) Order, 1966, the concept of Statutory Minimum Price (SMP) of sugarcane was replaced with the Fair and Remunerative Price (FRP)’ of sugarcane in 2009-10.
    • The cane price announced by the Central Government is decided on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
    • This is done in consultation with the State Governments and after taking feedback from associations of the sugar industry.

    Try this PYQ:

    Q.The Fair and Remunerative Price (FRP) of sugarcane is approved by the:

    (a) Cabinet Committee on Economic Affairs

    (b) Commission for Agricultural Costs and Prices

    (c) Directorate of Marketing and Inspection, Ministry of Agriculture

    (d) Agricultural Produce Market Committee

     

    [wpdiscuz-feedback id=”vewzy6vmxu” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

    What is FRP?

    • FRP is fixed under a sugarcane control order, 1966.
    • It is the minimum price that sugar mills are supposed to pay to the farmers.
    • However, states determine their own State Agreed Price (SAP) which is generally higher than the FRP.

    Factors considered for FRP:

    • The amended provisions of the Sugarcane (Control) Order, 1966 provides for fixation of FRP of sugarcane having regard to the following factors:

    a) cost of production of sugarcane;

    b) return to the growers from alternative crops and the general trend of prices of agricultural commodities;

    c) availability of sugar to consumers at a fair price;

    d) price at which sugar produced from sugarcane is sold by sugar producers;

    e) recovery of sugar from sugarcane;

    f) the realization made from the sale of by-products viz. molasses, bagasse, and press mud or their imputed value;

    g) reasonable margins for the growers of sugarcane on account of risk and profits.

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