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Subject: Economics

  • [pib] Fast Tracking Freight in India

    NITI Aayog, RMI and RMI India’s new report, Fast Tracking Freight in India: A Roadmap for Clean and Cost-Effective Goods Transport, presents key opportunities for India to reduce its logistics costs.

    Freight transport in India

    • Freight transportation is a critical backbone of India’s growing economy, and now more than ever, it’s important to make this transport system more cost-effective, efficient, and cleaner.
    • Due to the rising demand for goods and services, freight transport demand is expected to grow rapidly in the future.
    • While freight transport is essential to economic development, it is plagued by high logistics costs and contributes to rising CO2 emissions and air pollution in cities.

    Highlights of the Roadmap

    • According to the report, India has the potential to:
    1. Reduce its logistics cost by 4% of GDP
    2. Achieve 10 gigatonnes of cumulative CO2 emissions savings between 2020 and 2050
    3. Reduce nitrogen oxide (NOx) and particulate matter (PM) emissions by 35% and 28%, respectively, until 2050
    • The report outlines solutions for the freight sector related to policy, technology, market, business models, and infrastructure development.

    Various recommendations

    • The recommendations include increasing the rail network’s capacity, promoting intermodal transport, improving warehousing and trucking practices, policy measures and pilot projects for clean technology adoption, and stricter fuel economy standards.
    • When successfully deployed at scale, the proposed solutions can help India establish itself as a leader in logistics innovation and efficiency in the Asia–Pacific region and beyond.

    Transforming the system

    • As India’s freight activity grows five-fold by 2050 and about 400 million citizens move to cities, a whole system transformation can help uplift the freight sector.
    • This transformation will be defined by tapping into opportunities such as efficient rail-based transport, the optimization of logistics and supply chains, and a shift to electric and other clean-fuel vehicles.
    • These solutions can help India save â‚č311 lakh crore cumulatively over the next three decades.

  • Centre announces hike in MSP

    The Central government has hiked the minimum support price (MSP) for the coming Kharif season. The decision was taken by the Cabinet Committee on Economic Affairs.

    Answer this PYQ from CSP 2018 in the comment box:

    Q.Consider the following:

    1. Areca nut
    2. Barley
    3. Coffee
    4. Finger millet
    5. Groundnut
    6. Sesamum
    7. Turmeric

    The Cabinet Committee on Economic Affairs has announced the Minimum Support Price for which of the above?

    (a) 1, 2, 3 and 7 only

    (b) 2, 4, 5 and 6 only

    (c) 1, 3, 4, 5 and 6 only

    (d) 1, 2, 3, 4, 5 and 7

    What is the Minimum Support Price (MSP) system?

    • MSP is a form of market intervention by the Govt. of India to insure agricultural producers against any sharp fall in farm prices.
    • MSP is price fixed by GoI to protect the producer – farmers – against excessive fall in price during bumper production years.

    Who announces it?

    • MSP is announced at the beginning of the sowing season for certain crops on recommendations by Commission for Agricultural Costs and Prices(CACP) and announced by Cabinet Committee on Economic Affairs (CCEA) chaired by the PM of India.

    Why MSP?

    • The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
    • They are a guaranteed price for their produce from the Government.
    • In case the market price for the commodity falls below the announced MSP due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced MSP.

    Historical perspective

    • Till the mid-1970s, Government announced two types of administered prices:
    1. Minimum Support Prices (MSP)
    2. Procurement Prices
    • The MSPs served as the floor prices and were fixed by the Govt. in the nature of a long-term guarantee for investment decisions of producers, with the assurance that prices of their commodities would not be allowed to fall below the level fixed by the Government, even in the case of a bumper crop.
    • Procurement prices were the prices of Kharif and rabi cereals at which the grain was to be domestically procured by public agencies (like the FCI) for release through PDS.
    • It was announced soon after harvest began.
    • Normally procurement price was lower than the open market price and higher than the MSP.

    Crops Covered

    1. Government announces minimum support prices (MSPs) for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.
    2. The mandated crops are 14 crops of the kharif season, 6 rabi crops and two other commercial crops.
    3. The list of crops is as follows:
    • Cereals (7) – paddy, wheat, barley, jowar, bajra, maize and ragi
    • Pulses (5) – gram, arhar/tur, moong, urad and lentil
    • Oilseeds (8) – groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and nigerseed
    • Raw cotton
    • Raw jute
    • Copra
    • De-husked coconut
    • Sugarcane (Fair and remunerative price)
    • Virginia flu cured (VFC) tobacco

    Exception for Sugar

    • The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955.
    • Prior to 2009-10 sugar season, the Central Government was fixing the Statutory Minimum Price (SMP) of sugarcane and farmers were entitled to share profits of a sugar mill on 50:50 basis.
    • As this sharing of profits remained virtually unimplemented, the Sugarcane (Control) Order, 1966 was amended in October 2009 and the concept of SMP was replaced by the Fair and Remunerative Price (FRP) of sugarcane.

  • Legalizing Bitcoin in El Salvador and takeaways for India

    El Salvador, a small coastal country in Central America, on became the first in the world to make Bitcoin, a digital currency, legal.

    Lessons for India

    While there are many precedents El Salvador sets for a global debate on cryptocurrency, we explore what this means in the Indian context.

    (1) Not a precedent for monetary policy

    • The development in El Salvador changes little in terms of Indian monetary calculations around cryptocurrencies.
    • The dynamic underpinning the whole move is that El Salvador has no monetary policy of its own and hence, no local currency to protect.
    • The country was officially ‘dollarized’ in 2001 and runs on the monetary policy of the US Federal Reserve.
    • The move is in part motivated by loose and expansionary Federal Reserve policy.

    (2) Coexistence with USD

    • The dollar will continue to remain the dominant currency in the country and Bitcoin would exist side by side.
    • Indeed, some analysts have pointed out how bitcoinization might change nothing on the ground if “legal tender” is to be considered by its strict legal definition.
    • However, as a result of this development, El Salvador becomes a most interesting case study of how the dollar and bitcoin would coexist side by side, and how that would play out for Bitcoin adoption.

    (3) Not merely currency but technology

    • The overall use of Bitcoin appears less motivated by its use as a currency and much more by the image and investment boost this could give the country towards innovation.
    • El Salvador believes that this move will be good for luring “technology, talent, and new ideas” into the country.
    • The move into Bitcoin ties in with larger efforts to revive a stalling economy and bring back growth into the country post-Covid.

    (4) Potential shift in remittances

    • The impact Bitcoin has on these remittance inflows would be worth monitoring for India, which is home to the largest remittance market in the world.
    • Remittances make up close to 20% of El Salvador’s GDP with flows approximating $6 billion annually.
    • Many citizens lack a bank account and digital banking has low penetration.
    • In this scenario, there are multiple intermediaries in the remittance chain who take cuts of as high as 20%.

    (5) Impact on money laundering

    • The implication of this move for money laundering is unclear at the moment.
    • Currently, El Salvador is not considered deficient under the FATF money laundering requirements.
    • However, with large scale cryptocurrency inflows and outflows, it would be expected that El Salvador would comply with the 2019 FATF guidance on Virtual Currencies.

    Conclusion

    • The overall takeaway for India from the El Salvador case is not in the monetary sense at all.
    • This is the wealth that India has in spades and has barely protected with policy.
    • While deliberations continue in India on the monetary and financial regulations around cryptocurrency.
    • It is important that attention be paid to incentives for India’s developers working on key innovations in the space.

    Back2Basics: Bitcoin

    • Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
    • Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
    • The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.
    • The currency began to use in 2009 when its implementation was released as open-source software.

  • India’s ethanol roadmap: The targets and challenges

    The government of India has advanced the target for 20 per cent ethanol blending in petrol (also called E20) to 2025 from 2030. E20 will be rolled out from April 2023.

    What is the move?

    • A government-appointed panel has recommended to the Centre to keep the price of ethanol-blended petrol lower than normal petrol in view of lower calorific value as also to incentivize people to go for the clean fuel.
    • This measure is aimed at reducing the country’s oil import bill and carbon dioxide pollution. This new initiative is also part of measures to improve energy security and self-sufficiency measures.

    Roadmap for Ethanol Blending

    • The central government has released an expert committee report on the Roadmap for Ethanol Blending in India by 2025.
    • The roadmap proposes a gradual rollout of ethanol-blended fuel to achieve E10 fuel supply by April 2022 and phased rollout of E20 from April 2023 to April 2025.
    • Currently, 8.5 per cent of ethanol is blended with petrol in India.
    • In order to introduce vehicles that are compatible the committee recommends roll out of E20 material-compliant and E10 engine-tuned vehicles from April 2023 and production of E20-tuned engine vehicles from April 2025.

    What is included in the roadmap?

    (1) Energy security

    • The Union government has emphasized that increased use of ethanol can help reduce the oil import bill.
    • India’s net import cost stands at $551 billion in 2020-21. It is estimated that the E20 program can save the country $4 billion (Rs 30,000 crore) per annum.
    • Last year, oil companies procured ethanol worth about Rs 21,000 crore.
    • Hence it is benefitting the sugarcane farmers.
    • Further, the government plans to encourage the use of water-sparing crops, such as maize, to produce ethanol, and the production of ethanol from the non-food feedstock.

    (2) Fuel efficiency

    • There is an estimated loss of six-seven per cent fuel efficiency for four-wheelers and three-four per cent for two-wheelers when using E20, the committee report noted.
    • These vehicles are originally designed for E0 and calibrated for E10.
    • The Society of Indian Automobile Manufacturers informed the expert committee that with modifications in engines (hardware and tuning), the loss in efficiency due to blended fuel can be reduced.

    (3) Recalibrating engines

    • The use of E20 will require new engine specifications and changes to the fuel lines, as well as some plastic and rubber parts due to the fuel’s corrosive nature.
    • The engines, moreover, will need to be recalibrated to achieve the required power-, efficiency- and emission-level balance due to the lower energy density of the fuel.
    • This can be taken care of by producing compatible vehicles.

    (4) Vehicles rollout

    • E20 material compliant and E10 compliant vehicles may be rolled out across the country from April 2023, the committee noted.
    • These vehicles can tolerate 10 to 20 per cent of ethanol-blended petrol and also deliver optimal performance with E10 fuel.
    • Vehicles with E20-tuned engines can be rolled out all across the country from April 2025.
    • These vehicles would run on E20 only and will provide high performance.

    (5) Flex-fuel

    • A flexible-fuel vehicle (FFV) is an alternative fuel vehicle with an internal combustion engine designed to run on more than one fuel and both fuels are stored in the same common tank.
    • The Union ministry of road transport and highways issued a gazette notification March 2021 mandating stickers on vehicles mentioning their E20, E85 or E100 compatibility.
    • This will pave the way for flex fuel vehicles.

    Why such a move?

    (1) Fuel efficiency

    • Considering just the end use also indicates that CO2 emissions from blended fuel are lower than that for petrol since ethanol contains less carbon than petrol and produces less CO2.
    • The blended fuel burns more efficiently with a more homogenous mixture, which leads to a decrease in CO2 emissions compared with pure petrol.
    • The carbon dioxide released by a vehicle when ethanol is burned is offset by the carbon dioxide captured when the feedstock crops are grown to produce ethanol.
    • Comparatively, no emissions are offset when these petroleum products are burned.

    (2) Emission reduction

    • Use of ethanol-blended petrol decreases emissions such as carbon monoxide (CO), hydrocarbons (HC) and nitrogen oxides (NOx), the expert committee noted.
    • Higher reductions in CO emissions were observed with E20 fuel — 50 per cent lower in two-wheelers and 30 per cent lower in four-wheelers.
    • HC emissions reduced by 20 per cent with ethanol blends compared to normal petrol.
    • Nitrous oxide emissions, however, did not show a significant trend as it depended on the vehicle / engine type and engine operating conditions.
    • The unregulated carbonyl emissions, such as acetaldehyde emission were, however, higher with E10 and E20 compared to normal petrol.
    • However, these emissions were relatively lower. Evaporative emission test results with E20 fuel were similar to E0.

    Global shreds of evidence

    • An increase in the ethanol content in fuels reduced the emissions of some regulated pollutants such as CO, HC and CO2.
    • However, no such change in emissions was observed for nitrogen oxides emissions.
    • The addition of ethanol, with a high blending octane number, however, allowed a reduction in aromatics in petrol.
    • Such blends also burn cleaner as they have higher octane levels than pure petrol but have higher evaporative emissions from fuel tanks and dispensing equipment.

    Challenges ahead

    • Petrol requires extra processing to reduce evaporative emissions before blending with ethanol.
    • It is crucial to study the emissions from flexible fuel vehicles not only for the regulated gases but also the unregulated ones.
    • But producing and burning ethanol results in CO2 emissions.
    • Hence, net CO2 emission benefit depends on how ethanol is made and whether or not indirect impacts on land use are included in the calculations.
    • In summary, as we progress towards higher blending of ethanol, careful monitoring and assessment of emissions changes will be needed to make sure that emission reduction potential can be enhanced.

    Back2Basics: EBP Programme

    • Ethanol Blended Petrol (EBP) programme was launched in January, 2003 for supply of 5% ethanol blended petrol.
    • The programme sought to promote the use of alternative and environment-friendly fuels and to reduce import dependency for energy requirements.
    • OMCs are advised to continue according to priority of ethanol from 1) sugarcane juice/sugar/sugar syrup, 2) B-heavy molasses 3) C-heavy molasses and 4) damaged food grains/other sources.
    • At present, this programme has been extended to the whole of India except UTs of Andaman Nicobar and Lakshadweep islands with effect from 01st April 2019 wherein OMCs sell petrol blended with ethanol up to 10%.

  • Places in news: Sardar Sarovar Dam

    The Sardar Sarovar Dam is providing irrigation water in summer for the first time in history.

    Sardar Sarovar Dam

    • The Sardar Sarovar Narmada Dam is a terminal dam built on the Narmada river at Kevadia in Gujarat’s Narmada district.
    • Four Indian states, Gujarat, Madhya Pradesh, Maharashtra and Rajasthan, receive water and electricity supply from the dam.
    • The foundation stone of the project was laid out by Prime Minister Jawaharlal Nehru on 5 April 1961.
    • The project took form in 1979 as part of a development scheme funded by the World Bank through their International Bank for Reconstruction and Development, to increase irrigation and produce hydroelectricity
    • Called the ‘lifeline of Gujarat’, it usually has no water for irrigation during summers.

    Answer this PYQ in the comment box:

    Q.Which one of the following pairs is not correctly matched?

     

    Dam/Lake River

    (a) Govind Sagar: Satluj

    (b) Kolleru Lake: Krishna

    (c) Ukai Reservoir: Tapi

    (d) Wular Lake: Jhelum

    A successful model of river water sharing

    • River Narmada is a classic case of Integrated River Basin Planning, Development, and Management, with water storage available in all major, medium, and minor dams on the main river and its tributaries.
    • Its water is shared amongst four party states – Gujarat, Rajasthan, Madhya Pradesh and Maharashtra — in the ratio stipulated by the 1979 award of the Narmada Water Dispute Tribunal.

    How has it saved water for summers?

    • During the monsoon from July to October, the reservoir operation is well synchronized with the rain forecast in the catchment area.
    • The strategic operation of River Bed Power House (RPBH) ensures that minimum water flows downstream into the sea and maximum water is used during the dam overflow period, which is not calculated in the annual water share.
    • These measures help in maximizing the annual allocation of water share.
    • Similarly, in non-monsoon months, the measures for efficient use of the allocated share typically include minimizing the conventional and operational losses.
    • It includes: avoiding water wastage, restricting water-intensive perennial crops, adopting of Underground Pipelines (UGPL); proper maintenance and operation of canals on a rotational basis.

  • Consumer Confidence Survey (CCS) by the RBI

    The highlights of the Consumer Confidence Survey (CCS) were recently released by the RBI pointing to some all-time lows.

    Consumer Confidence Survey (CCS)

    • The RBI conducts this survey every couple of months by asking households in 13 major cities — such as Ahmedabad, Bhopal, Guwahati, Patna, Thiruvananthapuram — about their current perceptions and future expectations on a variety of economic variables.
    • These variables include the general economic situation, employment scenario, overall price situation, own income and spending levels.
    • Based on these specific responses, the RBI constructs two indices: the Current Situation Index (CSI) and the Future Expectations Index (FEI).
    • The main variables of the survey are- Economic situation, Employment, Price Level, Income and Spending.
    • The CSI maps how people view their current situation (on income, employment etc.) vis a vis a year ago. The FEI maps how people expect the situation to be (on the same variables) a year from now.
    • By looking at the two variables as well as their past performance, one can learn a lot about how Indians have seen themselves fairing over the years.

    Why does it matter?

    • The CCS is a survey that indicates how optimistic or pessimistic consumers are regarding their expected financial situation.
    • If the consumers are optimistic, spending will be more, whereas if they are not so confident, then their poor consumption pattern may lead to recession.

    What was the main finding?

    • As Chart 1 shows, the CSI has fallen to an all-time low of 48.5 in May.
    • An index value of 100 is crucial here, as it distinguishes between positive and negative sentiment.
    • At 48.5, the current consumer sentiment is more than 50 points adrift from being neutral — the farthest it has ever been. It is important to note that even a year ago, the CSI had hit an all-time low.
    • The FEI moved to the pessimistic territory for the second time since the onset of the pandemic.

    What are the factors responsible for pulling down the CSI and FEI respectively?

    • The RBI states that CSI is being pulled down because of falling consumer sentiments on the “general economic situation” and “employment” scenario.
    • So, on the “general economic situation”, RBI finds that there has been a largely secular decline in both current consumer sentiment and future expectations since PM Modi’s re-election in 2019.
    • What is equally worse is that more people expect the employment situation to worsen a year from now — that is why the one year ahead expectation line is below the zero marks.

    Big takeaways

    • These data layout the tricky challenge facing the Indian economy.
    • If the government’s strategy for fast economic growth — expecting the private sector to lead India out of this trough by investing in new capacities — is to succeed, then consumer spending (especially on non-essentials) has to go up sharply.
    • But for that to happen, household incomes have to go up; and for that to happen, the employment prospects have to brighten; and for that to happen, again, companies have to invest in new capacities.

  • Kinnaur Hydroelectric Project

    The people of Kinnaur, Himachal Pradesh have been protesting against the proposed 804-megawatt Jangi Thopan Powari hydroelectricity project (JTP HEP) over the Satluj since April 2021.

    Kinnaur Hydroelectric Project

    • The run-of-the-river (ROR) project envisages the construction of a concrete gravity dam of ±88 metres high above the deepest foundation level across river Satluj near Jangi village.
    • The diversion of water will involve the construction of a 12-km-long tunnel.
    • The tentative land requirement for the project is 295.93 hectares, out of which 270.43 ha is forest land and 25.5 ha is private.
    • Construction of the dam will result in the submergence of about 156.2917 ha of land, out of which 143.2093 ha is forest land and 13.0824 ha is private.

    Answer this PYQ in the comment box:

    Q.What is common to the places known as Aliyar, Isapur and Kangsabati? (CSP 2017)

    (a) Recently discovered uranium deposits

    (b) Tropical rain forests

    (c) Underground cave systems

    (d) Water reservoirs

    Why are people protesting?

    • Kinnaur district is mainly marked by its cold desert, tribal population, fragile topography, rich and diverse culture, apple orchards, off-season vegetables and the Satluj river.
    • The river has been dammed at multiple places along the valley to create an additional feature to Kinnaur’s identity as Himachal’s hydropower hub, which locals believe is a malediction.
    • An integral part of the old Hindustan-Tibetan Route, Jangram Valley, lies on the right bank of the Satluj river in the district.
    • This is not the first time that the cold desert has witnessed such a contestation.

    Sutlej is oveloaded

    • The Satluj has taken the biggest load of state hydropower ambition since the early 90s. Out of the total installed capacity, 56 per cent (5720MW) is done in the Satluj basin.
    • According to the State of the Rivers of Himachal Pradesh Report 2017:
    • In other words, 92 per cent of the river will either be flowing through tunnels or will be part of reservoirs.
    • Such a cumulative scale of disturbance with the river’s natural state drastically impacted the life, livelihood and ecology in the Satluj basin.

    Why need hydroelectric projects?

    • Hydropower is a necessary choice for the nation’s clean energy transition.
    • In purely technological terms, hydropower projects are an engineering marvel and generate clean, reliable electricity.
    • HEPs are not viable just from the local livelihood and environmental point of view but they have also failed on the financial viability side.

  • 7 Years of UPA Government vs 7 Years of NDA Government

    The article compares the performance of the present government under Prime Minister Modi with the first seven years of the Manmohan Singh government on various fronts.

    Context

    The current government completed seven years at the Centre recently. It is time to reflect and look back at its performance on basic economic parameters over the last seven years. It may also be interesting to compare and see how it fared vis-à-vis the first seven years of UPA government (2004-05 to 2010-11) under Manmohan Singh.

    Analysing the progress by studying key economic indicator

    1)  GDP growth

    • One of the key economic parameters is GDP growth.
    • It is not the most perfect one, as it does not capture specifically the impact on the poor, or on inequality.
    • But higher GDP growth is considered central to economic performance as it enlarges the size of the economic pie.
    • The average annual rate of growth of GDP under the Modi government so far has been just 4.8 per cent compared to 8.4 per cent during the first seven years of the Manmohan Singh government.
    • If this continues as business as usual, the dream of a $5 trillion economy by 2024-25 is not likely to be achieved.

    2) Inflation

    • The Modi government scores much better on the inflation front with CPI (rural and urban combined) rising at 4.8 per cent per annum.
    • It is well within the tolerance limits of RBI’s targeted inflation band and also much lower than 7.8 per cent during the first seven years of the Manmohan Singh government.

    3) Forex reserves

    • Also, at macro level, foreign exchange reserves provide resilience to the economy against any external shocks.
    • On this score too, the Modi government fares quite well with forex reserves rising from $313 billion on May 23, 2014 to $593 billion on May 21, 2021.

    4) Food and agriculture

    • It engages the largest share of the workforce in the economy and matters most to poorer segments.
    • On the agri-front, both governments recorded an annual average growth of 3.5 per cent during their respective first seven years.
    • However, on the food and fertiliser subsidy front, the Modi government broke all records in FY21, by spending Rs 6.52 lakh crore and accumulating grain stocks exceeding 100 million tonnes in May end, 2021.
    • One area in which the Modi government performed very poorly is agri-exports.
    • In 2013-14 agri-exports had crossed $43 billion while during all the seven years of the Modi government agri-exports remained below this mark of $43 billion.
    • Sluggish agri-exports with rising output put downward pressure on food prices.
    • It helped contain CPI inflation, but subdued farmers’ incomes.

    5) Infrastructure development

    • The Modi government has done better in power generation by increasing it from 720 billion units per annum to 1,280 billion units per annum.
    • Similarly, road construction too has been at least 30 per cent faster under the Modi government.

    6) Social sector

    • Based on an international definition of extreme poverty (2011 PPP of $ 1.9 per capita per day), the World Bank estimated India’s extreme poverty in 2015 to be about 13.4 per cent, down from 21.6 per cent in FY 2011-12.
    • Even the incidence of multidimensional poverty hovered around 28 per cent in 2015-16.
    • Three key indicators can be used to assess performance on this front:
    • One, average annual person days generated under MGNREGA in the first five years since this programme started under the UPA in 2006-07 to 2010-11, which was 200 crore, and under Modi government it improved to 230 crore.
    • Two, average annual number of houses completed under the Indira Awaas Yojana and PM Awaas Yojana-Gramin, which improved from 21 lakhs to 30 lakhs per annum.
    • Three, open defecation free (ODF) which was only 38.7 per cent on October 2, 2014 and shot up to 100 per cent by October 2, 2019, as per government records.

    Conclusion

    The current government has turned out to be more welfare-oriented than reformist in revving up GDP growth. How long this welfare approach is sustainable without enlarging the size of GDP pie is an open question.

  • Need to deal with distortions built into GST

    The article highlights the issues with the one state one vote system adopted in the GST Council decision making.

    Context

    The Goods and Services Tax (GST) Council in India is still engaged in a discussion on whether life-saving and hard-to-come-by products should be taxed. Such delay in decision-making can largely be explained by the distorted design and incentive structure of the GST itself.

    Imbalance in collection and distribution of taxes

    • The taxes collected under GST are accumulated by the Union government and a portion is transferred back to each state under a formula.
    • As is the case with most federal countries, there is a large imbalance in the collection and distribution of taxes between states.
    • this holds true also for income accrued to, and distributed, from the GST pool.
    • Four states — Maharashtra, Tamil Nadu, Karnataka, and Gujarat contribute nearly as much as the remaining 27 states combined.
    • Most federal countries exhibit this characteristic where a few large, rich, provinces or states contribute disproportionately.

    Variation in dependence of States on transfers from the Union government

    • Only about 30 per cent of the overall revenue of the states mentioned above — Maharashtra, Tamil Nadu, Gujarat, and Karnataka — comes from the Union government.
    • But for the remaining 27 states, roughly 60 per cent of their revenues are obtained through transfers from the Union government.
    • For the smaller Northeastern states, these transfers from the Union government constitute 80-90 per cent of their total revenues.
    •  In effect, the states that contribute the most to the GST pool are the least dependent on transfers from the Union government while the ones that contribute the least are the most dependent.

    Two problems in net-transfers in India

    1) One-sided transfers

    •  In almost every federal union, net-transfers work to reduce differences in development between states over time.
    • However, Over the last 25 years or so, net transfers have become increasingly one-sided in India.
    • That is, the quantum of net-transfers diminishes, as states become more equal through such transfers.
    • But in India, the opposite has occurred.

    2) Indirect taxes and cess

    • The Union government of the last seven years has greatly exacerbated this problem through two actions.
    • First, it has reconstructed the composition of taxation away from the fair and progressive channel of direct taxation towards the inherently regressive and unfair channel of indirect taxes.
    • Second, the Union has shifted a large proportion of taxation roughly 18 per cent of its overall revenues into cesses, a special form of taxes that remain outside the GST pool and hence do not have to be shared with the states.
    • Since 2014, cess revenues grew 21 per cent every year leading to a doubling in terms of its share of GDP.

    Implications of these two problems for fiscal federalism

    • The combined effect of these problems is that all states (collectively) get a lower share of overall revenues.
    • Individual states face an ever-increasing disparity in the ratio of funds received from the Union as a proportion of taxes collected by the Union from that state.
    • This is an affront to fiscal federalism and an assault on “cooperative federalism”.

    Issue of ‘one state one vote’ system

    • States that are more dependent on transfers from the Union want to maximise GST collections while states that are less dependent can afford to be more sensitive to citizens’ concerns.
    • The case of taxes on Covid products is perhaps the starkest instance of such differences.
    • Most large states are ready to forego this tax revenue for humanitarian considerations.
    • But 19 states representing the remaining 30 per cent of the population seem keen to continue to levy GST on Covid products.
    •  These are mostly smaller states.
    • Given the smaller population of such states, the adverse impact of Covid taxes will be minimal for them.
    • But they will reap the benefits of additional revenues from GST on Covid products levied on the much larger populations of the bigger states.

    Conclusion

    When direct tax policy decisions are legislated by Parliament, which has proportional representation from states according to their size of the population, indirect tax policy decisions should not be subject to one state one vote system.

  • Enabling financial inclusion

    The article takes an overview of the progress made by India in the financial inclusion and role played by JAM trinity in it.

    What is financial inclusion?

    Financial inclusion is defined as the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products.

    Growing adoption of digital payment in India

    • India overtook China to register the highest number of countrywide digital payments.
    • Real-time transactions crossed 25 billion, much higher than China’s 15 billion in 2020, as per the report of ACI Worldwide.
    • The report also stated that digital payments in India are set to account for 71.7 per cent of all payments by volume by the year 2025.
    • The digital payment boom is indicative of a larger paradigm shift in the ease of access to financial services.

    What are the contributing factors

    • More and more people, across all strata, are adopting digital payments as it is convenient, safe and limits exposure.
    • It is also a result of the nudges and diligent policy and technology frameworks created by the central government in the last few years.
    • By building the Jan-Dhan-Aadhar-Mobile (JAM) and Universal Payment Interface (UPI) platform, the government has been creating the ground for greater financial inclusion.

    Significance of JAM trinity

    • While Jan Dhan was the first pillar of the ambitious JAM trinity, Aadhaar card seeding and bank account linkages to mobile numbers have empowered people in hitherto unimagined ways.
    • The JAM trinity has helped people know their account status, receive scholarships and fellowships, get fertiliser and LPG subsidy, disability pensions and farm income support — directly into their accounts.
    • The trinity also helped eliminate middlemen, frauds, and leakages due to corruption.
    • In the past one year alone, Rs 4.3 lakh crore was transferred, in over 477 crore transactions under 319 schemes.
    • With an estimated saving of Rs 1.8 lakh crore, the success of DBT is a big thumbs up for the central government.
    • The aid that reached people during the pandemic under the PM Garib Kalyan package is indicative of the success of the government’s financial inclusion and digitisation efforts.

    Conclusion

    The unmissable digital and financial revolution that has been unleashed is hard to miss for anyone. The digital journey, however, is long and one hopes to see the positive trends sustaining given their transformative impact on the lives of Indians.