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Subject: Economics

  • [pib] India’s Agriculture trade grows during 2020-21

    Consistent trade surplus in agricultural products

    • India has consistently maintained trade surplus in the agricultural products over the years.
    • The export of Agri and allied commodities during Apr, 2020 – Feb,2021 were Rs. 2.74 lakh Crore as compared to Rs. 2.31 Crore in the same period last year indicating an increase of 18.49%.
    • The imports of Agri and allied commodities during April, 2020 – Feb, 2021 were Rs. 1.41lakh Crore as compared to Rs. 1.37 lakh Crore in the same period last year witnessing a slight increase of 2.93%.

    Commodities that posted positive growth

    • India has witnessed tremendous growth of 727 % for Wheat export.
    • On specific demand from countries, NAFED has exported 50,000 MT wheat to Afghanistan and 40,000 MT wheat to Lebanon under G2G arrangement.
    • Country has witnessed significant growth of 132% in export of (Non-Basmati) Rice.
    • Export of Non-Basmati Rice has gone up from Rs 13,030 crores in 2019-20 to Rs 30,277 crores in 2020-21.
    • This increase in exports is on account of multiple factors, mainly being India capturing new markets namely, Timor-Leste, Papua New Guinea, Brazil, Chile, and Puerto Rico.
    • Exports were also made to Togo, Senegal, Malaysia, Madagascar, Iraq, Bangladesh, Mozambique, Vietnam, Tanzania Rep and Madagascar.
    • India also enhanced export of Soya meals by 132%. Soya meal has gone up from Rs 3087 crores in 2019-20 to Rs 7224 crores in 2020-21.

  • U.S. currency watchlist an intrusion into RBI’s policy space

    Why was India put on the currency watchlist by the US

    • The U.S. Treasury Department had recently retained India in a watchlist for currency manipulators submitted to the U.S. Congress.
    • It cited higher dollar purchases (close to 5% of the gross domestic product) by the Reserve Bank of India (RBI).
    • Another trigger for the inclusion in the currency watchlist is a trade surplus of $20 billion or more.

    What is India’s position

    • India had a steady holding pattern of forex reserves ‘with ups and downs’ based on market-based transactions that central banks may undertake.
    • The central bank’s activity in the foreign exchange market has been perfectly balanced and completely legitimate within the accepted monetary policy mandate of central banks across the world.
    • It is a mandate of the central bank to provide stability in the currency as a result of which central banks buy and sell foreign currency.
    • Our overall reserves have been fairly steady at $500 bn to $600 bn.
    • We are not accumulating reserves like China.

  • India invokes peace clause again as rice subsidies exceed 10% cap

    India has invoked the peace clause at the World Trade Organization (WTO), for the second time, for exceeding the 10 per cent ceiling on support it offered its rice farmers.

    • India had earlier invoked the clause for 2018-19, when it became the first country to do so.
    • India informed the WTO that the value of its rice production in 2019-20 was $46.07 billion while it gave subsidies worth $6.31 billion, or 13.7 per cent as against the permitted 10 per cent.

    What is Peace Clause?

    • The peace clause protects India’s food procurement programmes against action from WTO members in case the subsidy ceilings – 10 per cent of the value of food production in the case of India and other developing countries – are breached.

    What does India told to WTO?

    • India’s breach of commitment for rice arises from support provided in pursuance of public stockholding programmes for food security purposeswhich were in existence as on the date of the Bali Ministerial Decision on Public Stockholding for Food Security Purposes.
    • India said that under its public stockholding programmes for food security purposes, rice, wheat, coarse cereals and pulses, among others, are acquired and released in order to meet the domestic food security needs of the country’s poor and vulnerable population, and “not to impede commercial trade or food security of others. For these reasons only the breach of the de minimis limits for rice is covered by the peace clause.
      Government does not undertake exports on a commercial basis from public stockholdings. Additionally, open market sales of food grains from public stockholding are made provided the buyer gives an undertaking of not exporting from such purchase.
    • The peace clause can’t be challenged and because of this flexibility, distribution of food grains to the poor can be done for free which is crucial during the pandemic.
    • India ensures food security through the minimum support price (MSP) programme, and Public Distribution System and National Food Security Act, 2013.

    Subsidies of WTO:

    • In WTO terminology, subsidies in general are identified by “boxes” which are given the colours of traffic lights: green (permitted), amber (slow down — i.e. need to be reduced), red (forbidden).
    • In agriculture, things are, as usual, more complicated.
      • The Agriculture Agreement has no red box.
      • Domestic support exceeding the reduction commitment levels in the amber box is prohibited
      • There is a blue box for subsidies that are tied to programmes that limit production.
    • There are also exemptions for developing countries (sometimes called an “S&D box” or “development box”, including provisions in Article 6.2 of the Agreement).

    Amber Box:

    • Nearly all domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box, which is defined in Article 6 of the Agriculture Agreement as all domestic supports except those in the blue and green boxes.
    • These include measures to support prices, or subsidies directly related to production quantities.
    • These supports are subject to limits: “de minimis” minimal supports are allowed (generally 5% of agricultural production for developed countries, 10% for developing countries); 32 WTO members that had larger subsidies than the de minimis levels at the beginning of the post-Uruguay Round reform period are committed to reduce these subsidies.
    • The reduction commitments are expressed in terms of a “Total Aggregate Measurement of Support”.

    Blue Box:

    • This is the “amber box with conditions” — conditions designed to reduce distortion.
    • Any support that would normally be in the amber box, is placed in the blue box if the support also requires farmers to limit production (details set out in Paragraph 5 of Article 6 of the Agriculture Agreement).
    • At present there are no limits on spending on blue box subsidies.

    Green box:

    • The green box is defined in Annex 2 of the Agriculture Agreement.
    • In order to qualify, green box subsidies must not distort trade, or at most cause minimal distortion.
    • They have to be government-funded (not by charging consumers higher prices) and must not involve price support.
    • They tend to be programmes that are not targeted at particular products, and include direct income supports for farmers that are not related to current production levels or prices. They also include environmental protection and regional development programmes.
    • Green box” subsidies are therefore allowed without limits, provided they comply with the policy-specific criteria set out in Annex 2.

  • Agriculture policy should target India’s actual farming population

    The article highlights the ambiguity about the number of farmers in India and related issues.

    How many farmers does India really have

    • The Agriculture Ministry’s last Input Survey for 2016-17 pegged the total operational holdings at 146.19 million.
    • The NABARD All India Rural Financial Inclusion Survey of the same year estimated the country’s “agricultural households” at 100.7 million.
    • The Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) has around 111.5 million enrolled beneficiaries.
    • Agricultural households, as per NABARD’s definition, cover any household whose value of produce from farming activities is more than Rs 5,000 during a year.
    • That obviously is too little to qualify as living income.

    Who is real farmer

    • Agricultural households, as per NABARD’s definition, cover any household whose value of produce from farming activities is more than Rs 5,000 during a year.
    • That obviously is too little to qualify as living income.
    • A “real” farmer is someone who would derive a significant part of his/her income from agriculture.
    • This, one can reasonably assume, requires growing at least two crops in a year.
    • The 2016-17 Input Survey report shows that out of the total 157.21 million hectares (mh) of farmland with 146.19 million holdings, only 140 mh was cultivated.
    • And even out of this net sown area, a mere 50.48 mh was cropped two times or more, which includes 40.76 mh of irrigated and 9.72 mh of un-irrigated land.
    • Taking the average holding size of 1.08 hectares for 2016-17, the number of “serious full-time farmers” cultivating a minimum of two crops a year  would be hardly 47 million.
    • The above figure is also consistent with other data from the Input Survey.
    • These pertain to the number of cultivators planting certified/high yielding seeds (59.01 million), using own or hired tractors (72.29 million) and electric/diesel engine pumpsets (45.96 million), and availing institutional credit (57.08 million).
    • Whichever metric one considers, the farmer population significantly engaged and dependent on agriculture as a primary source of income is well within 50-75 million.
    • The current agriculture crisis is largely about these 50-75 million farm households.

    Lack of price parity

    • At the heart of farmers’ crisis is the absence of price parity.
    • In 1970-71, when the minimum support price (MSP) of wheat was Rs 76 per quintal, 10 grams of 24-carat gold cost about Rs 185.
    •  Today, the wheat MSP is at Rs 1,975/quintal, gold prices are Rs 45,000/10g.
    • The absence of farm price parity didn’t hurt much initially when crop productivity was rising.
    • Since the 1990s, yields have further gone up to 5.1-5.2 tonnes/hectare in wheat and 6.4-6.5 tonnes for paddy. But so have production costs. 
    • The demand for making MSP a legal right is basically a demand for price parity that gives agricultural commodities sufficient purchasing power with respect to things bought by farmers.

    Way forward

    • Most government welfare schemes are aimed at poverty alleviation and uplifting those at the bottom of the pyramid.
    • But there’s no policy for those in the “middle” and in danger of slipping to the bottom.
    •  When crop prices fail to keep pace with escalating costs — of not only inputs, but everything the farmer buys — the impact is on the 50-75 million surplus producers.
    • Any “agriculture policy” has to first and foremost address the problem of price parity.
    • Farmers’ interest be even better served by the government guaranteeing a minimum “income” rather than “price” support.
    • Subsistence or part-time agriculturalists, on the other hand, would benefit more from welfare schemes and other interventions to boost non-farm employment.

    Conclusion

    Whether it is crop, livestock or poultry, agriculture policy has to focus on “serious full-time farmers”, most of them neither rich nor poor. This rural middle class that was once very confident of its future in agriculture today risks going out of business. That shouldn’t be allowed to happen.

  • ECLGS ambit widened to cos with loan dues up to 60 days

    To provide relief to stressed companies, the Finance Ministry expanded the scope of a government-guaranteed credit facility to healthcare and stressed sector companies that have loan dues for up to 60 days (or SMA-1 accounts),as against 30 days earlier (SMA-0).

    Key highlights:

    • This has been expected to provide partial relief to stressed firms facing fresh uncertainty and business risks due to fresh lockdowns and restrictions being imposed by states.
    • SMA-1 borrowers in the healthcare sector and 26 other high stress sectorsare now eligible under ECLGS 2.0.
      • Companies from hospitality, travel & tourism, and leisure & sportingsectors are expected to benefit from the relaxation in the scheme.
    • Accounts that are classified as non-performing assets or where overdueshave crossed 60 days (SMA-II) are not eligible.
    • Companies that had loan dues up to 30 days (Special Mention Accounts or SMA-0) as on February 29, 2020, were being provided additional credit of 20 per cent outstanding under the scheme, which will now be given to SMA-1 accounts as well.
    • The government has recently extended the ECLGS till June 2021, as against March 31, 2021 earlier.

    About the ECLGS scheme:

    • The Finance Ministry unveiled a Rs. 20 Lakh Crore comprehensive package, known as the Emergency Credit Line Guarantee Scheme (ECLGS), in view of the economic distress caused by the COVID-19 pandemic.
    • This package is in aid of MSME sector, addressing working capital needs, operational liabilities and restart business impacted due the COVID-19 crisis.
    • Borrowers with up to Rs. 25 Crore outstanding as on Feb 29, 2020 and up to Rs. 100 Crore annual turnover for FY 2020 are eligible for this scheme.
    • Business Enterprises, MSMEs constituted as Proprietorship, Partnership, registered company, trusts and Limited Liability Partnerships (LLPs) shall also be eligible.
    • Borrower accounts which had NPA or SMA-2 status as on Feb 29, 2020 shall not be eligible under the scheme.
    • 20% of the total outstanding credit of borrowers can be sanctioned as a loan under the Guaranteed Emergency Credit Line (GECL), for those who having a loan as on Feb 29, 2020.

    Special Mention Accounts:

    • SMAs are those assets/accounts that shows symptoms of bad asset qualityin the first 90 days itself or before it being identified as NPA.
    • The classification of Special Mention Accounts (SMA) was introduced by the RBI in 2014, to identify those accounts that has the potential to become an NPA/Stressed Asset.
    • Logic of such a classification is because some accounts may turn NPA soon.
      • An early identification will help to tackle the problem better.
      • There are four types of Special Mention Accounts – SMA-NF, SMA 0, SMA1 and SMA 2.
    • The Special Mention Accounts are usually categorized in terms of duration.
    • For example, in the case of SMA -1, the overdue period is between 31 to 60 days.
      • On the other hand, an overdue between 61 to 90 days will make an asset SMA -2.
    • But some ‘Special Mention’ assets are identified on the basis of other factors that reflect sickness/irregularities in the account (SMA -NF).
    • In the case of SMA -NF, non-financial indications about stress of an asset is considered.

  • How IBC is moving away from promotor averse approach

    The Insolvency and Bankruptcy Code was amended recently taking into account its creditor centric approach.

    Introducing pre-packs for MSMEs

    • IBC was amended last week, through an ordinance.
    • The amendment sought to address a structural weakness in India’s resolution architecture by introducing the concept of pre-packs for micro, small and medium enterprises (MSMEs).
    • The pre-packaged framework involves a privately negotiated contract between the promoters of a financially distressed firm and its financial creditors to restructure the company’s obligations.
    •  This contract is negotiated within the IBC architecture but before the commencement of insolvency proceedings.
    • Once accepted by creditors, the plan must be presented to the National Company Law Tribunal (NCLT) for approval.

    How this framework is different from the existing framework

    • A firm’s promoters could have submitted a resolution plan even after it enters the insolvency proceedings, subject to restrictions imposed under Section 29A which clarifies all those who are ineligible for submitting the resolution plan.
    • So, the difference in the new framework essentially boils down to the following.

    1) Control of the firm

    • Under the IBC, upon the initiation of insolvency proceedings, control of a firm is taken away from promoters, and a resolution professional is appointed.
    • Now, during the restructuring, the promoter, through the pre-pack, retains control over the firm.
    • So effectively, we have transitioned from a “creditor-in-control” model of resolution to a “debtor-in-control” model of restructuring.
    • This amendment, which creates a framework for restructuring, without the promoter losing control over the firm, addresses a lacuna in the IBC.

    2) Issue of price discovery

    • In this arrangement, the is an absence of an open bidding process, such as during the resolution phase.
    • This might raise questions over price discovery, especially if value maximisation for creditors is the yardstick to measure the efficacy of IBC.
    • This marks a fundamental change in the IBC framework.

    Why the changes were needed

    • The IBC, while it has strengthened the position of the creditors, had swung to an extreme.
    • The resolution architecture as it stood prior to this amendment was perceived as being too creditor-centric.
    • Wresting control from the “errant” promoter, comes with its own set of consequences.
    • The notion that all business failure is due to the connivance of promoters needs to be reconsidered.
    • Firms may be unable to pay their obligations simply because the economic cycle has turned.
    • Or projects have not materialised as expected.
    • Of the 2,422 cases closed since IBC came into being, 46.5 per cent of the firms have gone into liquidation, while a resolution plan has been accepted in only 13.1 per cent of the cases.
    • This indicates liquidation bias.
    • At a time when there aren’t enough buyers in the economy, the IBC process would lead to significant value destruction.

    How it will benefit both creditor and promotors

    • Promoters get to hold on to their firms, and exit the process with more manageable obligations, making this an attractive proposition.
    • For creditors, considering the liquidation bias in IBC, as long as the value of the restructured obligation is greater than the liquidation value it makes sense to choose this option.
    • Moreover, this entire process remains outside the restructuring framework of the central bank.
    • And, considering that the pre-packs encompass all financial creditors, as opposed to RBI’s restructuring schemes which deal only with banks.
    • This takes into account the concerns of other financial creditors as well.

    Consider the question “How far IBC has succeeded in improving the insolvency regime in India? How the concepts of pre-packs is different from the previous system?

    Conclusion

    This approach will help clarify issues, bring about greater certainty to the process. And, once the creases are ironed out, it will create a permanent mechanism for restructuring debts.

  • [pib] E-SANTA: Electronic marketplace to connect Aqua farmers and buyers

    Union Commerce and Industry Ministry has inaugurated E-SANTA, an electronic marketplace providing a platform to connect aqua farmers and buyers.

    Note:

    Aquaculture also known as aquafarming is the farming of fish, crustaceans, mollusks, aquatic plants, algae, and other organisms. It involves cultivating freshwater and saltwater populations under controlled conditions, and can be contrasted with commercial fishing, which is the harvesting of wild fish.

    Mariculture commonly known as marine farming refers to aquaculture practiced in marine environments and in underwater habitats, opposed to in freshwater.

    E-SANTA

    • The term e-SANTA was coined for the web portal, meaning Electronic Solution for Augmenting NaCSA farmers’ Trade-in Aquaculture.
    • It will enable the farmers to get a better price and the exporters to directly purchase quality products from the farmers enhancing traceability, a key factor in international trade.
    • National Centre for Sustainable Aquaculture (NaCSA) is an extension arm of Marine Products Export Development Authority (MPEDA), Ministry of Commerce & Industry.
    • It will raise income, lifestyle, self-reliance, quality levels, traceability, and provide new options for our aqua farmers.
    • The platform will change the traditional way of carrying out business from a word of mouth basis to become more formalized & legally binding.

    E-SANTA will RAISE the lives & income of farmers by:

    1. Reducing Risk
    2. Awareness of Products & Markets
    3. Increase in Income
    4. Shielding Against Wrong Practice
    5. Ease of Processes

    Its’ utility

    • E-SANTA is a Digital Bridge to end the market divide and will act as an alternative marketing tool between farmers & buyers by eliminating middlemen.
    • It will revolutionize traditional aqua farming by providing cashless, contactless and paperless electronic trade platform between farmers and exporters.
    • It can become a tool to advertise collectively the kind of products the buyers, fishermen & fish producing organisations are harvesting.

    How does it work?

    • E-SANTA is a completely paperless and end-to-end electronic trade platform between Farmers and exporters.
    • The farmers have the freedom to list their products and quote their price while the exporters have the freedom to list their requirements and also to choose the products based on their requirements.
    • This enables the farmers and buyers to have greater control over the trade and enables them to make informed decisions.
    • The platform provides a detailed specification of each product listing and it is backed by an end to end electronic payment system with NaCSA as an Escrow agent.
    • After crop listing and online negotiation, a deal is struck, advance payment is made and an estimated invoice is generated.

  • An aggressive vaccination drive holds the key to economic revival

    The article highlights the challenges posed by the second wave of covid and how aggressive vaccination could help dealing with the issue.

    Severe second covid wave in India

    • India’s daily new cases have surged past 1,50,000, much above the first peak.
    • In India’s first wave, the increase from 50,000 to about 1,00,000 cases took about 50 days; in the second wave, it’s taken just 13.
    • To start with, the second wave was more concentrated, with Maharashtra accounting for 60 per cent of cases.
    • While the top five states still account for about 65 per cent of cases, the reproduction (R) factor in almost 10 states is estimated to be two or higher, creating risks for a wider and more rapid spread, if unaddressed.

    Lessons from the first wave

    • Policymakers, businesses and households have all learnt from the first wave and with the private sector better adapted to “live with the virus”.
    • Therefore, the economic costs should hopefully not be comparable to the first wave. Yet, they may not be trivial either.
    • The five states that account for 65 per cent of new cases also account for almost 36 per cent of GDP.
    • As virus cases have grown and restrictions have been imposed, retail and recreational mobility across these five states, is down 10 per cent since mid-March.
    • Labour market surveys have also begun to show discernable impacts on both participation and unemployment rates.

    Implications of unequal recovery for developing countries

    • The IMF projects India’s FY22 growth at 12.5 per cent, this would still leave India about 8-9 per cent below the level of output that was projected pre-pandemic for the end of 2021-22.
    • The challenge for emerging markets is that, given the quantum of fiscal and monetary space expended in combating the first wave, space to respond to subsequent waves will be constrained.
    •  Owing to the fiscal support and pace of vaccinations the US will be the only large economy, apart from China, to surpass its pre-pandemic path.
    • This, resulted in increased US yields, tightened global financial conditions, induced dollar strength and triggered
    • All this makes it harder for emerging economies to respond expansively to domestic shocks.
    • In effect, the heterogeneity of the recovery across developed and emerging markets is imposing policy constraints on the latter which, ironically, will simply compound the economic divergence.

    Challenges for India

    • India’s fiscal space to respond to a second wave appears constrained due to the following two factors:
    • 1) In India’s case, consolidated public debt will approach 90 per cent of GDP.
    • 2) The consolidated public sector borrowing requirements are budgeted above 11 per cent of GDP in FY22.
    • The dependence on budgeted asset sales has only increased, both as a hedge to tax revenues that could be impacted from a second wave, and as a means of protecting expenditures.
    • It will be equally crucial to leaving enough space for higher MGNREGA demand and other safety nets on account of a second wave, even while protecting capital expenditures — which generate large multiplier effects on the economy.
    • Similarly, monetary policy is already very accommodative, and with core inflation sticky and elevated, global deflationary pressures entrenched, there are natural limits to the degree of more monetary accommodation.

    Aggressive vaccination is the key

    • Israel, the UK and the US have all demonstrated how aggressive vaccinations can bend the COVID-curve.
    • Therefore, the Indian government’s decision to approve a third vaccine and fast-track emergency approval for foreign-produced vaccines is unambiguously positive.
    • On the demand side, of an estimated 100-110 million population of seniors (60-plus) in India, only about 40 million have taken the vaccine over the last six weeks, suggesting a reluctance to get vaccinated.
    • But, in fact, it’s crucial to ensure the vulnerable — those whose probability of hospitalisation is the highest — are fully vaccinated to reduce pressure on the health infrastructure.

    Consider the question “What are the challenges posed to the developing countries by heterogeneity of recovery across the developed and developing countries?

    Conclusion

    Vaccinations should be construed as simultaneously delivering both a positive demand and supply shock (for the economy), and a negative demand shock (for health infrastructure), thereby providing the best chance to decisively break the trade-offs between lives and livelihoods that bedevilled emerging markets all of last year.

  • Shaphari Scheme

    Commerce Ministry wants to build confidence in quality, antibiotic-free shrimp products from India for the global market.

    Shaphari Scheme

    • The Marine Products Exports Development Authority (MPEDA) has developed a certification scheme for aquaculture products called ‘Shaphari’, a Sanksrit word that means the superior quality of fishery products suitable for human consumption.
    • The Shaphari scheme is based on the United Nations’ Food and Agriculture Organization’s technical guidelines on aquaculture certification.
    • It will have two components — certifying hatcheries for the quality of their seeds and, separately, approving shrimp farms that adopt the requisite good practices.
    • The certification of hatcheries will help farmers easily identify good quality seed producers.
    • Those who successfully clear multiple audits of their operations shall be granted a certificate for a period of two years.
    • The entire certification process will be online to minimize human errors and ensure higher credibility and transparency.

    Bolstering confidence in India’s Shrimp production

    • To bolster confidence in India’s frozen shrimp produce, the country’s biggest seafood export item, the Centre has kicked off a new scheme called ‘Shaphari’ to certify hatcheries and farms that adopt good aquaculture practices.
    • Frozen shrimp is India’s largest exported seafood item.
    • But a combination of factors had hurt export volumes in recent months, including container shortages and incidents of seafood consignments being rejected because of food safety concerns.
    • Some recent consignments sourced from Indian shrimp farms being rejected due to the presence of antibiotic residue and this is a matter of concern for exporters.
    • The National Residue Control Programme for food safety issues in farm produce and pre-harvest testing system is already in place.
    • But this certification was proposed as a market-based tool for hatcheries to adopt good aquaculture practices and help produce quality antibiotic-free shrimp products to assure global consumers.

    Frozen shrimp export potential

    • Frozen shrimp is India’s largest exported seafood item. It constituted 50.58% in quantity and 73.2% in terms of total U.S. dollar earnings from the sector during 2019-20.
    • India exported frozen shrimp worth almost $5 billion in 2019-20, with the U.S. and China its the biggest buyers.
    • Andhra Pradesh, West Bengal, Odisha, Gujarat and Tamil Nadu are India’s major shrimp producing States, and around 95% of the cultured shrimp produce is exported.

  • Give small savers what is due to them

    The article highlights the issues with linking small savings interest rates with the yield on G-sec and its resetting on a quarterly basis.

    Issue of small savings interest rate

    • For decades, small savings have constituted an important source of household savings, funded development programmes of state governments and offered a safe and secure source of income to senior citizens.
    • Recently, a notification on reducing the interest rates on small savings schemes quickly made headlines and was rescinded after 12 hours.
    • For small savers, the pandemic turned into a triple whammy: Battling job losses, higher food prices and a sharp devaluation in the value of their savings and earnings thereof. 
    • Interest on the Senior Citizens’ Saving Scheme was cut to 7.4 per cent, effective from April 2020, from 8.7 per cent before,
    • This was done despite the Gopinath Committee had recommended the rates should never be revised more than 100 basis points in a single year.

    Linking small savings rate to G-sec yields

    • The suggestion to link small savings rates to G-Sec yields was first made in 2001 by Y V Reddy, then deputy governor of RBI.
    • Reddy committee suggested small savings rates should be reset once a year, allowing for a spread of up to 50 basis points.
    • Reddy’s recommendations were reiterated by his successor Rakesh Mohan.
    • The Gopinath Committee,  set up in 2009 gave its report in June 2011 and annual revisions in small savings rates linked to G-sec yields got underway effective April 2012.
    • In 2016, however, the government decided to reset them on a quarterly basis. 

    Why link small savings rate to G-sec yields

    • Such linking is premised on the argument that the money collected through these schemes is invested in central and state government securities. 
    • While the yield on the government securities progressively declined over time, small savings rates remained downwardly rigid.
    • This resulted in an asset-liability mismatch that threatened the viability of the NSSF.
    • It is also argued that people’s dependence on small savings schemes had significantly declined since formal banking had rapidly expanded.
    • Moreover, for those who used small savings as safety nets there were other alternatives such as old-age pension and other similar schemes.

    Issues with resetting rates on quarterly basis

    • All expert committees that examined the issue had strongly argued against resetting the rates on a quarterly basis.
    • The fear was it could result in unfair rewards for small savers in the event the G-sec yields remain artificially low for a certain period of time.
    • It did happen in the pandemic year when small savings rates faced the steepest cut in five years.
    • The changed policy on small savings is also premised on the belief that markets offer fair outcomes.
    • More often than not, that is not true.
    • The experience of the past year bears it out.
    • While retail inflation spiked, the RBI used every trick in its bag to hold G-sec yields down.

    Way forward

    • The government could go back to resetting the rates annually, keeping the revision under 100 basis points and allowing small savings rates a spread of at least 50 basis points, not up to 50 basis points, over and above the G-sec yields.
    • Also, it may revisit the suggestion made by the Rakesh Mohan Committee to use a weighted average of G-sec yields over preceding two years — two-thirds weight for the later year, one-third for the earlier year.

    Consider the question “What was the rationale for linking the interest rates on small savings to yield on G-sec? What are the issues with it?

    Conclusion

    Adopting the changes suggested here may require setting aside a few thousand crores to fill the resultant gap in the NSSF. But it is worth doing.