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Subject: Economics

  • SEBI suspends Futures Trading in key farm crops

    Market regulator Securities & Exchange Board of India (SEBI) has issued an order suspending futures trading in paddy (non-basmati), wheat, Bengal gram (chana dal), mustard seeds and its derivatives, soyabean and its derivatives, crude palm oil and green gram (moong dal) for a year.

    What are Derivatives?

    • A derivative is a contract between two parties which derives its value/price from an underlying asset.
    • The value of the underlying asset is bound to change as the value of the underlying assets keep changing continuously.
    • Generally, stocks, bonds, currency, commodities and interest rates form the underlying asset.

    Types of Derivatives

    The most common types of derivatives are futures, options, forwards and swaps:

    (1) Futures

    • Futures are standardized contracts that allow the holder to buy/sell the asset at an agreed price at the specified date.
    • The parties to the futures contract are under an obligation to perform the contract. These contracts are traded on the stock exchange.
    • The value of future contracts is marked to market every day.
    • It means that the contract value is adjusted according to market movements till the expiration date.

     (2) Options

    • Options are derivative contracts that give the buyer a right to buy/sell the underlying asset at the specified price during a certain period of time.
    • The buyer is not under any obligation to exercise the option.
    • The option seller is known as the option writer. The specified price is known as the strike price.

    (3) Forwards

    • Forwards are like futures contracts wherein the holder is under an obligation to perform the contract.
    • But forwards are unstandardized and not traded on stock exchanges.
    • These are available over-the-counter and are not marked-to-market.
    • These can be customized to suit the requirements of the parties to the contract.

    (4) Swaps

    • Swaps are derivative contracts wherein two parties exchange their financial obligations.
    • The cash flows are based on a notional principal amount agreed between both parties without the exchange of principal.
    • The amount of cash flows is based on a rate of interest.
    • One cash flow is generally fixed and the other changes on the basis of a benchmark interest rate.
    • Swaps are not traded on stock exchanges and are over-the-counter contracts between businesses or financial institutions.

    What are Agri-Futures?

    Like equity, currency or interest rate futures, they allows to buy or sell an underlier at a preset price on a future date. All agri contracts end in compulsory delivery.

    • Agri products available for trade include wheat, sugar, chana, soyabean, castor, chilli , jeera futures, etc. Edible oil seeds and oils, spices and items like guar are among the more liquid contracts.
    • An objective of futures trading is gains reaching farmers, by establishing an efficient price-discovery platform.
    • This has been achieved to a large extent on NCDEX, in products such as castor, chana, soy complex, mustard, guar, cumin, etc.

    National Commodity & Derivatives Exchange Limited (NCDEX) is an Indian online commodity and derivative exchange. It is under the ownership of Ministry of Finance.

    What are the reasons for this ban?

    (1) To cool off Food Inflation

    • India’s retail inflation rose to a three-month high of 4.91 % in November from 4.48 % in the previous month primarily because of a rise in food inflation to 1.87 % from 0.85 % over this period.

    (2) Double Digits WPI

    • Wholesale Price Index-based inflation has remained in double digits for eight consecutive months beginning in April, mainly because of the surging prices of food items.
    • In November, the wholesale price-based inflation surged to a record high of 14.23 % amid the hardening of prices of mineral oils, basic metals, crude petroleum, and natural gas.

    (3) To insulate future Price Shock

    • In view of Rabi Output that might be affected morbidly because of fertilizer shortage faced in many parts of the country.
    • By banning future’s trade, the government is trying to insulate any price shock the market might feel in the days to come in case the production is not up to par.

    What will be the impact?

    (1) The imports in such commodities, especially edible oils, would reduce in the short term as traders will not have a hedging platform.

    • Hedging, which is speculative in nature, has been made difficult.
    • This will lead to the release of blocked local produce supplies into the market, which should cool the prices.
    • Imports of commodities for speculative gains will be discouraged.

    (2) It is believed that speculators have a role in jacking up prices and this needed to be discouraged to curb inflation and support growth as the economy is recovering from the COVID-19 impact.

    (3) India is the world’s biggest importer of vegetable oil and this measure will make it difficult for edible oil importers and traders to transact business since they use Indian exchanges to hedge their risk.

    (4) Agri-futures, driven mainly by NCDEX, have a checkered history with bans often pushing NCDEX back.

    • Such frequent bans are not a good development for the market as it affects confidence levels.
    • Often, a contract that is banned may not return to the table, which were very effective in price-discovery.
    • Even when the contracts are restored, traders hesitate because of the fear of bans.
    • As it involves losses for market participants with open positions as they must square off contracts before maturity.

    What are the other steps taken?

    • Supply-side interventions by the Government had limited the fallout of continuing high international edible oil prices on domestic prices.
    • The Union Government substantially reduced taxes on imports of palm, soy and sunflower oil.
    • Union and State Governments had also recently reduced excise duty and VAT on petrol and diesel, aimed at bringing down inflation.
    • It has both direct effects as well as indirect effects operating through fuel and transportation costs.

    Way Forward

    • The ban is expected to be lifted by March when the next mustard crop starts hitting the market and prices cool down.
      • If the weather remains benign in the coming weeks, India is on course to harvest a bumper 11 million tonnes of mustard in 2021-22, up from 8.5 million tonnes in 2020-21.
    • The way out is not to ban any contract, but make sure to correct any serious aberration through a combination of higher margins so that if at all the price is getting distorted due to market manipulation, the correction takes place immediately.
    • Further, talking to potential wrongdoers is another way out, provided trading patterns noticed by the exchange reveal such tendencies.
      • Position limits can be changed to ensure undue influence is not exerted by any set of traders.

     

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  • Can India become a technology leader?

    Context

    Every time a technology giant chooses an India-born techie as its leader, there is a justifiable swelling of pride in the country, but also some disappointment.

    Why is India still not a major player in technology?

    • Inability to use opportunities: The popular narrative is that India’s failures are linked to its inability to make use of market-driven growth opportunities.
    • Brain drain: Indeed, as of 2019, there were 2.7 million Indian immigrants in the U.S.
    • They are among the most educated and professionally accomplished communities in that country.

    Role of the state

    • Example of the US: An invisible hand of the US government has been there to prop up each of the so-called triumphs of enterprise and the free market in the US.
    • Introduction of new generation technologies: Research by Mariana Mazzucato shows that the state has been crucial to the introduction of the new generation of technologies, including the computers, the Internet, and the nanotech industry.
    • Public funding: Public sector funding developed the algorithm that eventually led to Google’s success and helped discover the molecular antibodies that provided the foundation for biotechnology.
    • The role of the government has been even more prominent in shaping the economic growth of China, which is racing with the U.S. for supremacy in technology.
    • Even while being hailed as the ‘factory of the world’, China had been stuck at the low value-adding segments of the global production networks, earning only a fraction of the price of the goods it manufactured.
    • However, as part of a 2011 government plan, it has made successful forays into ‘new strategic industries’ such as alternative fuel cars and renewable energy.
    • China’s achievements came not because it turned ‘capitalist’, but instead by combining the strengths of the public sector, markets and globalisation.
    • China’s state-owned enterprises (SOEs) were seen as inefficient and bureaucratic.
    • However, rather than privatising them or letting them weaken with neglect, the Chinese state restructured the SOEs.
    • On the other, SOEs strengthened their presence in strategically important sectors such as petrochemicals and telecommunication as well as in technologically dynamic industries such as electronics and machinery.

    What went wrong in India’s case?

    • When India inaugurated planning and industrialisation in the early 1950s.
    • Public sector funding of the latest technologies of the time including space and atomic research and the establishment of institutions such as the Indian Institutes of Technology (IITs) were among the hallmarks of that effort.
    • Many of these institutions have over the years attained world-class standards.
    • The growth of information technology and pharmaceutical industries has been the fastest in Bengaluru and Hyderabad.
    • Poor education: However, the roadblocks to progress have been many, including India’s poor achievements in school education.
    • Missed opportunity to strengthen technological capabilities: In 1991, when India embraced markets and globalisation, it should have redoubled efforts to strengthen its technological capabilities.
    • Low spending on research and development: Instead, the spending on research and development as a proportion of GDP declined in India from 0.85% in 1990-91 to 0.65% in 2018.
    • In contrast, this proportion increased over the years in China and South Korea to reach 2.1% and 4.5%, respectively, by 2018.

    Positives for India

    • Higher enrollment for tertiary education: The number of persons enrolled for tertiary education in India (35.2 million in 2019) is way ahead of the corresponding numbers in all other countries except China.
    • More graduates from STEM: Further, graduates from STEM (Science, Technology, Engineering and Mathematics) programmes as a proportion of all graduates was 32.2% for India in 2019, one of the highest among all countries (UNESCO data).

    Way forward

    • Increase spending on education: India needs to sharply increase its public spending to improve the quality of and access to higher education.
    • An overwhelming proportion of tertiary students in India are enrolled in private institutions: it was 60% for those enrolled for a bachelor’s degree in 2017, while the average for G20 countries was 33%, according to OECD.
    • Improve technological capabilities: The ‘Make in India’ initiative will have to go beyond increasing the ‘ease of business’ for private industry.
    • Indian industry needs to deepen and broaden its technological capabilities.
    • India — which will soon have twice the number of Internet users as in the U.S. — is a large market for all kinds of new technologies.
    • While this presents a huge opportunity, the domestic industry has not yet managed to derive the benefits.
    • This will happen only if universities and public institutions in the country are strengthened and emboldened to enter areas of technology development for which the private sector may have neither the resources nor the patience.
    • Strengthen the public sector: PSUs should be valued for their potential long-term contributions to economic growth, the technologies they can create, and the strategic and knowledge assets they can build.
    • A strengthened public sector will create more opportunities for private businesses and widen the entrepreneurial base. Small and medium entrepreneurs will flourish when there are mechanisms for the diffusion of publicly created technologies, along with greater availability of bank credit and other forms of assistance.

    Conclusion

    The next big story about Indian prowess does not have to be from the U.S., but could come from thousands of such entrepreneurs in far-flung corners of the country.

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  • MSP for all crops is fiscally unfeasible

    Context

    Many political parties are demanding to make the minimum support prices (MSP) a legal instrument.

    Background of MSP

    • MSP regime had its genesis in 1965 when India was hugely short of basic staples and living in a “ship-to-mouth” situation.
    • Indicative price: It was an indicative price (not a legal price) and procurement of rice and wheat was done to support farmers when they were adopting new seeds (HYV technology) and domestic procurement was to feed the PDS.
    • The government declares MSP for 23 crops: Seven cereals (paddy, wheat, maize, bajra, sorghum, ragi and barley), five pulses (tur, moong, chana, urad and masur), seven oilseeds (soybean, groundnut, rapeseed-mustard, sesamum, safflower, sunflower and nigerseed) and four commercial crops (sugarcane, cotton, jute and copra).

    Need to rethink procurement policy

    • But now with granaries overflowing with rice and wheat, there is a need to rethink and redesign the procurement policy.
    • In the crop year 2020-21, about 60 million metric tonnes (MMTs) of rice and 43 MMTs of wheat were procured by the Food Corporation of India (FCI) and NAFED procured about 0.66 MMTs of pulses.

    The increasing cost of PDS

    • The main procurement by the government happens largely for rice and wheat to feed the public distribution system (PDS).
    • The PDS issue prices of rice and wheat are subsidised by more than 90 per cent of their economic cost to the government.
    • In 2020-21, the food subsidy bill was almost 30 per cent of the net tax revenue of the central government, reflecting clearly a huge consumer-bias in the system.
    • Way forward: Unless this PDS is reformed either by restricting this to say the bottom 30 per cent of the population, or raising the issue prices to say half the economic cost of rice and wheat, giving a better deal to farmers is likely to blow up the fiscal position of the central government.

    The cost of legal MSP

    • Assuming that only 10 per cent of the production of remaining crops (excluding sugarcane) is procured, it will cost the government about Rs 5.4 lakh crore annually to procure these other MSP crops.
    • This cost is estimated on the basis of economic costs of operation that are usually about 30 per cent higher than the MSP (in case of rice and wheat it is 40 per cent).
    • But it appears that despite this, market prices may stay below MSP, especially during the harvest time.
    • It also raises the question why only these MSP crops, why not other agri-produce, say milk, the value of which is more than the value of rice, wheat and sugarcane combined.

    Way forward

    • PDP: One may use price deficiency payments (PDP), implying that the government pays to farmers the gap between the market price and MSP, whenever market prices are below MSP.
    • Income support instead of price support: It may be better to use an income policy on a per hectare basis to directly transfer money into farmers’ accounts without distorting markets through higher MSPs or PDPs.

    Consider the question “What are the challenges in providing the legal backing to the Minimum Support Price to the agriculture produce? Suggest the way forward.”

    Conclusion

    There is no easy substitute to “getting the markets right”. Government need to apply an innovative approach to solve the conundrum of the MSP.

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  • Why policymakers prefer targeting of Retail Inflation over Wholesale Inflation?

    The wholesale inflation in India has grown by double digits. This is the highest year-on-year increase recorded in any month since the start of the 2011-12 data series.

    Context

    • It is surprising policymakers are not looking as concerned as the inflation figures show.
    • The Finance Ministry has largely focused on the trend in retail inflation — or the inflation rate at the level of retail consumers.
    • It is not just the policymakers within the government who prefer to focus on retail inflation but also the RBI.

    Wholesale and Retail (Consumer) Inflation

    • The wholesale and retail (consumer) inflation rates are based on the wholesale price index (WPI) and the consumer price index (CPI), respectively.
    • In other words, we make two separate indices — one each for wholesale prices and retail prices — and see how the index values have gone up in a particular month as against the same month last year.
    • The percentage change is the rate of inflation.
    • The CPI-based inflation data is compiled by the Ministry of Statistics and Programme Implementation (or MoSPI) and the WPI-based inflation data is put together by DPIIT.

    The tables alongside detail how the two indices — WPI and CPI — differ in their composition. There are two key differences.

    [A] Wholesale Price Index

    Component Weight (in %) Inflation rate (in %);

    Nov 2021
    All Commodities 100.00 14.23
    Primary Articles 22.62 10.34
    Fuel & Power 13.15 39.81
    Manufactured Products 64.23 11.92

    [B] Consumer Price Index

    Component Weight (in %) Inflation rate (in %); 

    Nov 2021
    General Index 100.00 4.91
    Food and beverages 45.86 2.60
    Pan, tobacco and intoxicants 2.38 4.05
    Clothing and footwear 6.53 7.94
    Housing 10.07 3.66
    Fuel and light 6.84 13.35
    Miscellaneous (services) 28.32 6.75

    A Comparison

    (1) Manufactured Goods Vs. Food Items

    • WPI is dominated by the prices of manufactured goods while CPI is dominated by the prices of food articles.
    • As such, if the year-on-year increase in the prices of food articles is subdued, as is the case at present, chances are that the overall (also called headline) retail inflation will be within reasonable bounds.
    • In WPI, if manufactured products are getting costlier at the wholesale level then that would likely spike wholesale inflation regardless of how food prices are doing at the wholesale level.

    (2) Accounting Service

    • Two, WPI does not take into account the change in prices of services. But CPI does.
    • If services such as transport, education, recreation and amusement, personal care etc. get significantly costlier, then retail inflation will rise but there will be no impact on wholesale price inflation.

    Why do policymakers prefer targeting retail inflation instead of wholesale inflation rate?

    • RBI’s limitations: RBI is the monetary authority that has little ability to control food and fuel prices. Ex: raising the repo rate (rate at which RBI lends money to banks) is unlikely to contain the price of vegetables if any disruptions have led to a sudden spike.
    • Non-commodity Inflation: Wholesale inflation does not capture price movements in non-commodity-producing sectors like services, which constitute close to two-thirds of economic activity in India.
    • Large revisions in WPI: Movements in WPI often reflect large external shocks and as such, the wholesale inflation rate is often subject to large revisions.

    Arguments in favour of CPI-based inflation targeting

    • Commodity basket: A crucial reason why CPI-based inflation could not be ignored is the fact that it has almost 57% dominance of food and fuel prices.
    • Affecting general public: Since most people use retail inflation as a way to arrive at their real earnings, and use it for wage negotiations etc., it makes more sense for policymakers,
    • Public faith: The choice of CPI establishes ‘trust’ viz., economic agents note that the monetary policy maker is targeting an index that is relevant for households and businesses.
    • Inflation affecting people: True inflation that consumers face is in the retail market. It is for this reason that almost all central banks in big economies use CPI as their primary price indicator.

    Impact of Wholesale inflation on Retail

    • The Urjit Patel committee analysed the relationship between WPI and CPI based on monthly data from January 2000 to December 2013 — a total of 14 years.
    • When they looked at the impact of an increase in WPI-food inflation on CPI food inflation, they found it to be “significant”.
    • It stated that higher food inflation in wholesale markets leads to an increase in retail food inflation “till two months”.
    • An increase in retail food inflation leads to a corresponding increase in WPI-food inflation.

     

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  • The challenge of achieving 9.5% growth rate

    Context

    The National Statistical Office (NSO) released the second quarter gross value added (GVA) and gross domestic product (GDP) numbers on November 30, 2021, indicating the pace of economic recovery in India after the two COVID-19 waves.

    Strong growth momentum required to exceed pre-COVID-19 levels

    • The real GVA for the first half of 2021-22 at ₹63.4 lakh crore has remained below the level in the first half of 2019-20 at ₹65.8 lakh crore by (-)3.7%.
    • This difference is even larger for GDP which at the end of first half of 2021-22 stood at ₹68.1 lakh crore, which is (-) 4.4% below the corresponding level of GDP at ₹71.3 lakh crore in 2019-20.
    • As the base effect weakens in the third and fourth quarters of 2021-22, a strong growth momentum would be needed to ensure that at the end of this fiscal year, in terms of magnitude, GVA and GDP in real terms exceed their corresponding pre-COVID-19 levels of 2019-20.
    • Domestic demand including private final consumption expenditure (PFCE) in the first half of 2021-22 remains below its corresponding level in 2019-20 by nearly ₹5.5 lakh crore.
    • This indicates that investment as well as consumption demand have to pick up strongly in the remaining two quarters to ensure that the economy emerges on the positive side at the end of 2021-22 as compared to its pre-COVID-19 level.

    Annual growth prospects

    • Required rate in second half of 2021-22: To realise the projected annual growth at 9.5% for 2021-22 given both by the Reserve Bank of India (RBI) and the International Monetary Fund (IMF), we require a growth of 6.2% in the second half of 2021-22.
    • This will have to be achieved even as the base effect weakens in the third and fourth quarters since GDP growth rate in these quarters of 2020-21 was at 0.5% and 1.6%, respectively.
    •  Thus, achieving the projected growth rate of 9.5% is going to be a big challenge.

    What should be the policy to achieve higher growth rate

    • Fiscal support: The policy instrument for achieving a higher growth may have to be a strong fiscal support in the form of government capital expenditure.
    • The Centre’s gross tax revenues have shown an unprecedented growth rate of 64.2% and a buoyancy of 2.7 in the first half of 2021-22.
    • The Centre’s incentivisation of state capital expenditure through additional borrowing limits would also help in this regard. According to available information, 11 States in the first quarter and seven States in the second quarter qualified for the release of the additional tranche under this window.
    • Even as Central and State capital expenditures gather momentum, high frequency indicators reflect an ongoing pick-up in private sector economic activities.

    Robust growth in Centre’s gross tax revenue

    • The growth in the Centre’s GTR in the first half of 2019-20 was at 1.5% and there was a contraction of (-)3.4% for the year as a whole.
    • In the face of such weak revenues, the Central government could not mount a meaningful fiscal stimulus in 2019-20 even as real GDP growth fell to 4.0%.
    • In contrast, the government is in a significantly stronger position in 2021-22 since the growth in GTR in the first half is 64.2% and the full-year growth is expected to be quite robust.

    Conclusion

    Thus, the key to attaining a 9.5% real GDP annual growth in 2021-22 lies in the government’s ongoing emphasis on infrastructure spending as reflected in the government’s capital expenditure.

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  • 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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