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Subject: Economics

  • Strategic Petroleum Reserves

    Under Phase II of the petroleum reserve program, the Government has approved two additional commercial-cum-strategic facilities at Chandikhol (Odisha) and Padur (TN) on Public-Private Partnership (PPP) model.

    Strategic Petroleum Reserves Programme

    • To ensure energy security, the govt had decided to set up 5 million metric tons (MMT) of strategic crude oil storage at three locations namely, Visakhapatnam, Mangalore, and Padur (near Udupi).
    • These strategic storages would be in addition to the existing storage of crude oil and petroleum products with the oil companies and would serve as a cushion during any supply disruptions.
    • The petroleum reserves established are strategic, and the crude oil stored in these reserves will be used during an oil shortage event, as and when declared so by the Government of India.
    • The construction of the Strategic Crude Oil Storage facilities is being managed by Indian Strategic Petroleum Reserves Limited (ISPRL), a Special Purpose Vehicle.

    Why need SPR?

    • The Gulf War in 1990 caused a sharp rise in oil prices and a massive increase to India’s imports.
    • During the subsequent 1991 Indian economic crisis, foreign exchange reserves could barely finance three weeks’ worth of imports while the government came close to defaulting on its financial obligations.
    • India was able to resolve the crisis through policies that liberalized the economy. However, India continued to be impacted by the volatility of oil prices.
    • In 1998, the AB Vajpayee administration proposed building petroleum reserves as a long-term solution to managing the oil market.
    • Three storage facilities were built in underground locations in Mangalore, Visakhapatnam and Padur.

    Construction of ISPR

    • The crude oil storages are constructed in underground rock caverns and are located on the East and West coasts of India.
    • Crude oil from these caverns can be supplied to the Indian Refineries either through pipelines or through a combination of pipelines and coastal movement.
    • Underground rock caverns are considered the safest means of storing hydrocarbons.

  • [pib] Digital Payment Solution: e-RUPI

    The Prime Minister has launched e-RUPI, a person and purpose-specific digital payment solution.

    What is e-RUPI?

    • e-RUPI is a cashless and contactless instrument for digital payment.
    • It is a QR code or SMS string-based e-Voucher, which is delivered to the mobile of the beneficiaries.
    • The users of this seamless one-time payment mechanism will be able to redeem the voucher without a card, digital payments app, or internet banking access, at the service provider.
    • It has been developed by the National Payments Corporation of India on its UPI platform, in collaboration with the Department of Financial Services, Ministry of Health & Family Welfare, and National Health Authority.

    How does it work?

    • e-RUPI connects the sponsors of the services with the beneficiaries and service providers in a digital manner without any physical interface.
    • It also ensures that the payment to the service provider is made only after the transaction is completed.
    • Being pre-paid in nature, it assures timely payment to the service provider without the involvement of any intermediary.

    Benefits offered

    • It is expected to be a revolutionary initiative in the direction of ensuring a leak-proof delivery of welfare services.
    • Even the private sector can leverage these digital vouchers as part of their employee welfare and corporate social responsibility programs.

    Answer this PYQ in the comment box:

    Q.Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?

    (a) Mobile wallets will not be necessary for online payments.

    (b) Digital currency will totally replace physical currency in about two decades.

    (c) FDI inflows will drastically increase.

    (d) Direct transfer of subsidies to poor people will become very effective

  • First group insolvency proceeding points to larger weakness in IBC

    Context

    National Company Law Appellate Tribunal (NCLAT) stayed the approval granted by the Mumbai bench of the National Company Law Tribunal (NCLT) to the resolution plan for the Videocon Group.

    Concerns with resolution plan

    • Resolution plan submitted by Twinstar Technologies, provided for payment of Rs 2,962 crore — a mere 4.15 per cent of Videocon’s total admitted debt of Rs 64,838 crore.
    • Payment of debt not in fair and equitable manner:  Under the IBC (Section 30(2)(b)), the resolution plan must provide for payment of debts amongst creditors in a “fair and equitable” manner.
    • However, in the plan submitted by Twinstar, unsecured assenting financial creditors and operational creditors are getting a paltry 0.62 per cent and 0.72 per cent of their admitted dues.
    • Even the secured assenting and dissenting financial creditors had to settle for only 4.9 per cent and 4.56 per cent of their respective dues.
    • Confidentiality obligation concerns: Twinstar’s bid of Rs 2,962 crore is close to the liquidation value of the Videocon Group estimated at Rs 2,568 crore, thereby raising legitimate suspicion and concern over the confidentiality of the resolution process.
    • The I&B Regulations, 2016 state that the resolution professional must maintain the confidentiality of the fair market value and liquidation value of the corporate debtor and can only disclose the same to the CoC members after the resolutions plan have been submitted.
    • Time delay: Status-quo ante has been restored until the next date of hearing by which time more than three years would have passed since the Videocon group was admitted into insolvency proceedings.
    • This is way beyond the statutory timeline of 330 days.

    Confidentiality rules need to be revised

    • The CoC members must, on receipt of the information, issue an undertaking of confidentiality.
    • But no such obligation falls on the resolution professional.
    • Further, Section 29(2) of the code provides that the resolution professional must disclose all “relevant information” to the resolution applicant and it is for the resolution applicant to ensure compliance with confidentiality obligations.
    • Again, there is no such duty imposed on the resolution professional.
    • Even under Section 25 of the code, titled “Duties of resolution professional”, the specific duty to maintain confidentiality of sensitive information is absent.
    • Clearly, the current regime does not have much deterrence value so as to ensure solemn adherence to confidentiality.

    Conclusion

    Videocon was one of the first test cases to examine the prospects of insolvency jurisprudence in India and the first one, for group insolvency proceedings.  However, almost four years and a 95 per cent haircut later, the call for an immediate course correction couldn’t be louder.

    Back2Basics: Operational creditor and financial creditors

    • When a corporate defaulter is brought under the resolution process (Corporate Insolvency Resolution Process or CIRP), there can be two types of creditors to whom the corporate should give back money –
    • (1) the entities who gave loans or funds to the corporate.
    • (2) the entities from whom the corporate bought inputs and other services.
    • The financial creditors are basically entities (lenders like banks) that have provided funds to the corporate.
    • Their relationship with the entity is a pure financial contract, such as a loan or debt security.
    • On the other hand, business and other entities that have provided inputs and other materials and services and to whom the defaulted corporate owes a debt are called as operational creditors.
    • Both have claims on the defaulted corporate or the defaulted corporate owe payments to both these categories.
    • Rights for these categories under the resolution process are also different.
    • The IBC gives a clear preference to the claims of the financial creditors over the operational creditors through several procedures.

    Haircut

    • A haircut is the difference between the loan amount and the actual value of the asset used as collateral.
    • It reflects the lender’s perception of the risk of fall in the value of assets.
    • But in the context of loan recoveries, it is the difference between the actual dues from a borrower and the amount he settles with the bank.

  • How to exit farming risk trap

    Context

    The farmers’ protest against farm laws brings into focus the factors afflicting agriculture in India.

    Issues of Indian agriculture

    • Some 50 years after the Green Revolution, an all-India agricultural landscape is characterized by relatively low productivity levels that co-exist with high levels of variation in crop yields across our farming districts.
    • Excessive control: Various government agencies have a say on all aspects of the farmer’s livelihood — the latest count includes 13 central and countless state ministries and agencies.
    • These agencies oversee rural property rights, land use, and land ceilings; commodity prices, input subsidies, and taxes, infrastructure, production, credit, marketing and procurement, public distribution, research, education, trade policy, etc.
    • Poor policies: The result has been a mix of arbitrary and conflicting policy interventions by both the central and state government agencies.
    • Poor provision of basic public goods: This, combined with poor and varying levels of provision of basic public goods, including irrigation explains the poor state of Indian agriculture.

    Risk-to-return in agriculture

    • The following figures indicate the median (typical) district-level yield (in tonnes-per-hectare) for four major crops — rice, wheat, maize, and cotton — along with the geographic variability of this yield (risk) across all reporting districts for each year from 1966 to 2018.
    • Combining these two values — median district yield and its geographic variability across all farming districts — provides us a measure of the all-India level of risk-to-return, in percentage terms.

    Lessons from risk-to-return profile

    • One, the large gap in rice and wheat yields that opened up between Punjab and Haryana and the farm districts in the rest of the country remains far from being closed.
    • Limited mobility of ideas: There is severe unevenness in the provision of common goods across districts — irrigation, roads, power, etc.
    • There is also the absence of well-functioning markets for agricultural land, crops, and inputs, the slow labour reform, and the poor quality of education.
    • These two factors have worked to reduce overall resource mobility within and across our farming districts.
    • Most importantly, they have limited the mobility of ideas and technology needed to increase productivity and reduce the variation of yield across districts.
    • Decentralization failed: As a result of lack of mobility, the real promise of a decentralized system — of experimentation, of learning from each other, and the adoption of best practices and policies — has failed to materialize.
    • Distortion due to subsidies: Various input subsidies and minimum price guarantee procurement schemes provided by the state have worked to worsen the overall levels of productivity and the risk in agriculture, generating adverse effects for all of us, through the degradation of our water resources, soil, health, and climate.
    • At the same time, these policies have tightened the trap our farm households find themselves in.
    • Thus, as is evident in the next chart, outside of rice and wheat, the risk-to-return levels are even higher in the case of maize and cotton, including for Punjab.
    • As a result, the farm households of Punjab and Haryana fear both, the loss of state support for rice and wheat and the higher risks implied by a switch to other crops.

    Way forward

    • Minimize risk: The guiding principle for three farm laws must be to create conditions that allow farm households to maximize their income while minimizing the overall level of risk in Indian agriculture.
    • Freedom of choice: Farmers must be made free to determine the best mix of resources, land, inputs, technology, and organizational forms for their farms.
    • More freedom: Farmers, just as entrepreneurs in the non-farm sector, must be allowed to enter and exit agriculture, on their own terms and contract with whomever they wish.
    • Allow entry of corporates: Entry of the large or small private corporates in the Indian agricultural stream will help the Indian farmer, along with the rest of us, move to a low-risk, high-return path of progress.

    Conclusion

    The more we delay the needed reforms, the more difficult it will prove to be for all of us to extract ourselves out of these risk-laden currents of agriculture.

  • What is National Farmers Database?

    The Centre’s new National Farmers Database will only include land-owning farmers for now as it will be linked to digitized land records.

    National Farmers Database

    • The Central government had proposed an Agristack initiative to create a digital database that focuses on farmers and the agricultural sector.
    • As part of the first step of this initiative, the government has initiated a farmers database that would serve as the core of the Agristack.
    • The database would be linked to the digital land record management system and would thus only include farmers who were legal owners of agricultural land.
    • The database would facilitate online single sign-on facilities for universal access and usher in proactive and personalized services to farmers such as DBT, soil and plant health advisories, weather advisories
    • It would also facilitate seamless credit & insurance, seeds, fertilizers, and pesticide-related information.

    Need for such database

    • India has 140 million operational farmland holdings.
    • The availability of a database would serve an important role in the formulation of evidence-based policies for the agricultural sector.
    • Also, the government can make use of the database for targeted service delivery with higher efficiency and in a focused and time-bound manner.
    • The database could be used to select beneficiaries of government schemes.
    • The availability of data will make it possible to implement digital technologies like AI/Machine Learning, IoT in the agricultural domain, thus opening up the sector to immense opportunities for improvement in productivity.

    Back2Basics: AgriStack Initiative

    • The AgriStack is a collection of technologies and digital databases proposed by the Central Government focusing on India’s farmers and the agricultural sector.
    • The central government has claimed that these new databases are being built to primarily tackle issues such as poor access to credit and wastage in the agricultural supply chain.
    • Under AgriStack’, the government aims to provide ‘required data sets’ of farmers’ personal information to Microsoft to develop a farmer interface for ‘smart and well-organized agriculture’.
    • The digital repository will aid the precise targeting of subsidies, services, and policies.
    • Under the program, each farmer of the country will get what is being called an FID, or a farmers’ ID, linked to land records to uniquely identify them.

  • Telangana’s Dalit Bandhu Scheme

    Telangana CM has recently been informed to spend Rs 80,000 crore to Rs 1 lakh crore for Dalit Bandhu Scheme, touted as the country’s biggest direct benefit transfer scheme, to empower Dalits across the state.

    Dalit Bandhu Scheme

    • Dalit Bandhu is the latest flagship program of the Telangana government.
    • It is envisioned as a welfare scheme for empowering Dalit families and enable entrepreneurship among them through a direct benefit transfer of Rs 10 lakh per family.
    • This is, once implemented on the ground, going to be the biggest cash transfer scheme in the country.
    • Apart from monetary assistance, the government plans to create a corpus called the Dalit Security Fund permanently to support the beneficiary in the event of any adversities.
    • This fund will be managed by the district collector concerned, along with a committee of beneficiaries.
    • The beneficiary would be issued an identity card with an electronic chip, which will help the government monitor the progress of the scheme.

    Where is the scheme being implemented?

    • The CM decided to implement it on a pilot basis in the Huzurabad Assembly constituency.
    • Based on the experiences of implementation in Huzurabad, the scheme will be rolled out across the state in a phased manner.
    • Officials were asked to visit Dalit colonies and interact with Dalit families to find out their views and opinions before preparing guidelines for the scheme.
    • The pilot project will focus on monitoring the implementation of the scheme, evaluating the results, and also creating a safety fund for the beneficiaries with the government’s participation.

    How is Dalitha Bandhu being implemented?

    • The CM has ensured that the Dalit Bandhu is free.
    • The governments in the past came out with some schemes and asked for bank guarantees.
    • This is not a loan. There is no need to repay it. There is no chance of any involvement of middlemen.
    • To promote Dalit entrepreneurship, the government has decided to start a system of reservations for Dalits in sectors where the government issues licenses.
    • The government will provide reservations for Dalits in issuing licenses for wine shops, medical shops, fertilizer shops, rice mills, etc.

  • [pib] King Chilli ‘Raja Mircha’ from Nagaland exported to London

    In a major boost to exports of Geographical Indications (GI) products from the north-eastern region, a consignment of ‘Raja Mircha’ also referred to as king chili from Nagaland was exported to London via Guwahati by air for the first time.

    Raja Mircha

    • The King chili from Nagaland is also referred to as Bhoot Jolokia and Ghost pepper.
    • It got GI certification in 2008.
    • Raja Mircha contains Scoville Heat Units (SHUs) which makes it the world’s hottest chili.
    • It belongs to the genus Capsicum of the family Solanaceae.
    • It has been considered as the world’s hottest chili and is constantly on the top five in the list of the world’s hottest chilies based on the SHUs.

    Answer this PYQ in the comment box:

    Q.Which of the following has/have been accorded ‘Geographical Indication’ status?

    1. Banaras Brocades and Sarees
    2. Rajasthani Daal-Bati-Churma
    3. Tirupathi Laddu

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

    Back2Basics: Geographical Indication (GI)

    • The World Intellectual Property Organization defines a GI as “a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin”.
    • GIs are typically used for agricultural products, foodstuffs, handicrafts, industrial products, wines, and spirit drinks.
    • Internationally, GIs are covered as an element of intellectual property rights under the Paris Convention for the Protection of Industrial Property.
    • They have also covered under the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.

  • Unlocking recovery

    Context

    Many developed countries are poised for strong growth. This will compel their respective central banks to begin normalizing the extremely loose monetary policies. This will require a reorientation of India’s stimulus strategy.

    Global growth momentum

    • On the global front, the growth momentum has been strong, particularly in the US and China, although recent data suggest this has peaked or is even stalling.
    • Post the perceived hawkishness of the last US Federal Reserve policy meeting, the traded interest rate of the benchmark US 10-year treasury bond fell to below 1.3 percent.
    • The falling rate reflects disquiet about the durability of the recovery once the fiscal stimulus starts waning.
    • China recently announced a 0.5 percent cut in the required reserves ratio for banks.
    • Europe’s recovery had begun to inch up, but members of the European Central Bank have begun to push back on market expectations of early tapering.
    • However, some smaller global central banks have started normalizing their respective Quantitative Easing programs.

    Growth momentum in India

    • The encouraging aspect of the recovery is the resilience of many mid-and large-turnover companies in the face of the debilitating public health crisis
    • In India, there are signs that the recovery momentum began to strengthen from mid-June, and of demand accelerating, despite capacity utilization in many industries below thresholds needed for the next round of private investments.
    • In line with the market consensus, we think that 2021-22 growth is likely to be in the 9-10 percent range.
    • Tax collections, another indicator of activity, even if a bit skewed, support this view.
    • A revival of retail consumer demand is critical for sustaining the recovery. Reports from industry associations suggest a somewhat mixed picture.
    • Demand emanating from rural geographies is important for sustaining recovery.
    • Demand for work under MGNREGA suggests continuing stress.
    • Monsoons will be a big contributor.
    • The sowing of Kharif crops stalled in late June but is predicted to pick up again in mid-July.
    • Renewed government intervention is required.

    Factors deciding the trajectory of recovery

    • Inflation: Rising inflation could force a monetary policy normalization faster than presently anticipated.
    • Global recovery: Effects global central banks’ policy tightening will only add to the difficulty of balancing a policy-induced increase in interest rates, moderating financial markets volatility, and maintaining growth incentives.
    • Access to credit: Access to credit remains a crucial input in the recovery matrix, particularly for small and micro-enterprises.
    • The Union government’s Emergency Credit Line Guarantee Scheme (ECLGS) has reportedly been very effective in stabilizing the solvency (and cash flows) of micro and small businesses.

    Way forward

    • Expansion of subvention scheme: The expansion of subvention (ECLGS) is probably the most effective template to incentivize credit flows, leveraging on the government’s balance sheet to take on the first loss risks.
    • At the same time, capex proposals of the Centre and states should gradually draw in private sector capex.
    • Policy intervention to create a level field: Corporate health has improved, with lower debt on balance sheets.
    • Adoption of technology is widespread; this will boost productivity and competitiveness.
    • But these factors reinforce trends in consolidation and market power.
    • It will require policy interventions to create a more level playing field for smaller companies, which is crucial for job creation.

    Conclusion

    Policy support will thus need to adapt from the “revive” to the “thrive” phase, to place India on a sustained 7 percent-plus growth path.

  • Electricity (Amendment) Bill, 2021

    The Electricity (Amendment) Bill, 2021 will be introduced and is likely to be pushed for passage in the ongoing monsoon session of Parliament.

    Need for this bill

    • Electricity distribution is at the cutting edge of the power sector.
    • Despite the last 25 years of power sector reforms, the electricity distribution companies are unable to pay the generation and transmission companies as well as banks / financial institutions due to poor financial health.
    • In this situation, patchwork may not turn around the power sector and a holistic approach is the need of the hour.
    • The provisions of the proposed amendment bill have to be seen in this context.

    Key features of Electricity (Amendment) Bill, 2021

    De-licensing: Electricity distribution is delicensed, at least in the letter, giving consumers a choice to choose a distribution company in their area.

    Universal service obligation: There is the provision of a universal service obligation fund, which shall be managed by a government company.  This fund shall be utilized to meet any deficits in cross-subsidy. In case of supply through pre-paid meters, security deposit will not be required.

    Appellate Tribunal for Electricity (APTEL): It is being strengthened by an increasing number of members. The domains from where the chairperson and members of Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERC) will come have been described.

    Renewable Power Obligation: Keeping in view the national climate change goals, the responsibility of fixing renewable power obligations (RPO) is shifted from state commissions to the central government.

    Penalty: Penalty for contravention of the provisions of the Act has been increased up to Rs 1 crore. Non-fulfillment of RPO will attract stringent penalties as per the proposed amendments.

    Important issues not addressed

    • Recovery of dues: Discoms collect revenue from the consumers and feed the supply chain upstream. They are, however, unable to recover their costs, out of which nearly 75-80 percent are power purchase costs.
    • Tariff: A broad guideline to reduce tariffs could have been part of the proposed amendment bill. Recently, the Forum of Regulators came out with a report on cost elements of tariff and suggested measures to reduce the same.
    • AT&C losses: The Aggregate Technical & Commercial (AT&C) losses of 12 states were more than 25 percent and of six states between 15 and 25 percent, according to a report released by the distribution utility forum based on Uday dashboard in 2020.

    Some provisions may backfire

    • Power distribution is proposed to be delicensed. However, the eligibility criteria shall be prescribed by the central government and the conditions for registration by the SERC.
    • There is a provision for amendment and cancellation of registration as well. In case these provisions are implemented similar to a license, the purpose shall be defeated.
    • The newly registered companies are given the facility to use the power allocation as well as the network of existing discom, which may be dilapidated in many cases due to paucity of funds.
    • With such a network, the quality of supply to the electricity consumers will be seriously affected.
    • Financial penalty on discom may not fully compensate and satisfy the consumers in such cased.

    Some of the issues that may be considered for holistic power sector reforms:

    • The provision of coal and railway freight regulators
    • Linkage of AT&C losses as key performance indicator for release of central funds to states by any ministry
    • Provision of a risk management committee and corporate governance within discoms, irrespective of being listed company

    Way forward

    • Fourteen years after the last amendment to the Electricity Act, currently, the focus of the amendment is on competition and compliance.
    • Electricity regulatory commissions hold the key to take this forward.
    • The commissions should be built as strong institutions and their autonomy should be respected and maintained.
    • After providing a robust framework for fair competition, the government should minimize its frequent interventions in the sector.
    • The government interventions often distort the market and maybe resorted to only in case of market failure.

  • Revival of Construction sector

    Context

    The latest estimates of the fourth quarter of financial year 2020-21 (January-March) brought some relief, for policymakers.

    Interpreting the construction sector GVA increase

    • The construction sector showed a 15 per cent increase in gross value added (GVA) in the last quarter, which is nearly double the growth experienced by the sector in the previous year (7.7 per cent).
    • Sign of better times: The buoyant growth of this sector has been hailed by policymakers not just as a sign of better times to come,
    • Addressing distress: Growth in the construction sector is also considered as the capacity of the economy to address the distress that households have faced in the past year.
    • Addressing needs of workforce: The Chief Economic Advisor pointed to the high growth rates in construction possibly to indicate that growth would address the needs of the beleaguered workforce.
    • The Union budget 2021 has also allocated a considerable sum towards infrastructure and construction in the hopes of the sector playing a catalysing role.

    Issues with relying on the growth of high-employment sector

    • No strong correlation: While GVA and/or GDP are considered as indicators of economic health, it has been argued in detail how it may not be prudent to rely on these alone as measures of economic welfare.
    • In particular, mere growth in a sector may not necessarily translate into benefits for its workers.
    • In the last quarter of 2019-2020, when construction GVA grew at nearly 8 per cent, employment in the same sector grew by 3 per cent based on our estimates from CMIE-CPHS.
    • Fallback employment option: The fact that employment grew in this sector even during a crisis year is largely because of the fact that the construction sector emerged as a fallback employment option for many displaced workers.
    • During “normal” times, the sector typically employs only about 10-15 per cent of India’s total workforce.
    • Even if this sector were to expand in line with its GVA growth, it will not be able to provide employment beyond a certain level.
    • Employment alone is not enough: Moreover, employment alone is not enough.
    • Earnings for an average daily wage worker in the sector have actually declined this year.
    • Again, the overall economic growth in GVA in the sector has not been passed on to the workers.

    Way forward

    • Any relief effort that relies solely on economic growth as a means to uplift workers will be sorely inadequate as we see from the experience of workers in construction.
    • The need of the hour is to go beyond relying on sectoral growth as a means of delivering relief to workers.
    • Direct transfers of cash and food are also needed, as is livelihood support through employment guarantee programmes.

    Conclusion

    While boosting growth of high-employment sectors is one strategy to adopt, this has its limitations. The capacity of a sector is limited in terms of the number of workers that it can absorb, and the extent to which growth can benefit workers.

    Back2Basics: What is GVA?

    • Gross value added (GVA) is an economic productivity metric that measures the contribution of a corporate subsidiary, company, or municipality to an economy, producer, sector, or region.
    • GVA is essentially a measure of the “net” value of output — deducting the cost of any input that went into its production from its total value.
    • GVA thus adjusts gross domestic product (GDP) by the impact of subsidies and taxes (tariffs) on products.