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Subject: Economics

  • Harmonized System of Nomenclature Code

    It has been made mandatory for a GST taxpayer having a turnover of more than Rs 5 crore in the preceding financial year, to furnish 6 digits HSN Code (Harmonized System of Nomenclature Code). This comes into effect from April 1.

    HSN code

    • The Harmonized System, or simply ‘HS’, is a six-digit identification code developed by the World Customs Organization (WCO).
    • Called the “universal economic language” for goods, it is a multipurpose international product nomenclature.
    • Over 200 countries use the system as a basis for their customs tariffs, gathering international trade statistics, making trade policies, and monitoring goods.
    • The system helps in harmonizing customs and trade procedures, thus reducing costs in international trade.

    What makes the 6 digit code?

    • A unique six-digit code has numbers arranged in a legal and logical structure, with well-defined rules to achieve uniform classification.
    • Of the six digits, the first two denote the HS Chapter, the next two give the HS heading, and the last two give the HS subheading.
    • The HS Code for pineapple, for example, is 0804.30, which means it belongs to Chapter 08 (Edible fruit & nuts, peel of citrus/melons), Heading 04 (Dates, figs, pineapples, avocados, etc. fresh or dried), and Subheading 30 (Pineapples).

  • Land record Modernisation in India

    Updated land record system could help the landowner in many ways. However, there is a lack of an updated land record system in India. There are several factors responsible for it. The article highlights these factors.

    Need for updated land record

    • For a significant section of the rural poor, land is both an asset and a source of livelihood.
    • With livelihoods affected, the importance of land ownership for access to formal loans as well as government relief programmes became even more evident.
    • But the relatively poor availability of clear and updated land titles remains a hurdle.
    • The government of India’s Digital India Land Records Modernisation Programme (DI-LRMP) scheme is the most recent effort in encouraging updating of land record.

    Reasons for lack of updated land record data

    The National Council of Applied Economic Research made a pioneering effort in this direction by launching NCAER Land Records and Services Index (N-LRSI) in 2020.

    Following are the finding of NCAER about the poor state of land records.

    • The dismal state of land records is due to the failure of the Indian administration to evolve from British-era land policies.
    • In addition, land record regulations and policies vary widely across Indian states/union territories.
    • Though DI-LRMP provides a common framework for reporting the progress of land record management by states/UTs, the heterogeneous nature of regulations/guidelines for land record management in India makes the progress non-uniform.
    • One of the major roadblocks in ensuring continuous updation of land records is the lack of skilled manpower in land record departments in states.
    • Another dimension relates to the poor synergy across land record departments.
    • There is a lack of synergy between the revenue department as the custodian of textual records, the survey and settlement department managing the spatial records and the registration department, which is responsible for registering land transactions.
    • The swiftness of the process of updating ownership as the result of the registration of a transaction is commonly known as mutation.
    • The information obtained from all the state/UT sources in this regard revealed that no state/UT has the provision for online mutation on the same day as the registration.

    Way forward

    • With poor inter-departmental synergy, aspiring for updated and accurate records will always be a distant goal and states/UTs should take necessary actions to have the appropriate systems in place.
    • The improved system of land records is likely to facilitate the efforts that some states/UTs are making to ease land transactions — like lowering stamp duties by the Maharashtra government.
    • Finally, these efforts are going to be instrumental for the health of India’s rural economy.

    Consider the question “How an updated and functional land record system could help transform the rural economy? What are the hurdles in creating the updated land record system?”

    Conclusion

    The governments need to take measures to remove the hurdles in the creation of a robust land record system so as to help the landowners access institutional channels of credit.

  • What are Small Savings Instruments?

    The government has sharply slashed the rates on all small savings instruments for the first quarter of 2021-22 (Update: The order has been slashed now)

    What is the news?

    • The government has sharply slashed the rates of return on the Public Provident Fund down from 7.1% to 6.4% and effecting cuts ranging from 40 basis points (0.4%) to 110 basis points (1.1%).

    What are Small Savings Instruments?

    • Saving schemes are instruments that help individuals achieve their financial goals over a particular period.
    • These schemes are launched by the Government of India, public/private sector banks, and financial institutions.
    • The government or banks decide the interest rate for these schemes and are periodically updated.
    • You can use the savings you make through these schemes for emergencies, retirement, higher education, children’s education, marriage, at the time of job loss, to reduce debts and more.

    Why are they significant?

    Saving schemes are important for individuals of a country and, in turn, for an economy because of the following reasons:

    • Safety: Depositing your hard-earned excess money in saving schemes will help secure it for your future needs. Holding on to liquid money may not be safe.
    • Retirement Funds: Periodically, depositing money in long-term saving schemes can help you build a retirement corpus..
    • Tax Savings: Many saving schemes offer one or the other kind of tax benefits—may it be tax deductions, exemption, or both.
    • Avoid Unwanted Expenses: When you have all the money at hand, you may end up spending it on unwanted items.

  • [pib] Emergency Credit Line Guarantee Scheme (ECLGS) 3.0

    The Government has extended the scope of Emergency Credit Line Guarantee Scheme (ECLGS) through introduction of ECLGS 3.0 to cover business enterprises in Hospitality, Travel & Tourism, Leisure & Sporting sectors.

    ECGL Scheme

    • Under the Scheme, 100% guarantee coverage to be provided by National Credit Guarantee Trustee Company Limited (NCGTC) for additional funding of up to Rs. 3 lakh crore to eligible MSMEs and interested MUDRA borrowers.
    • The credit will be provided in the form of a Guaranteed Emergency Credit Line (GECL) facility.
    • The Scheme would be applicable to all loans sanctioned under GECL Facility during the period from the date of announcement of the Scheme to 31.10.2020.

    Aims and objectives

    • The Scheme aims at mitigating the economic distress faced by MSMEs by providing them additional funding in the form of a fully guaranteed emergency credit line.
    • The main objective is to provide an incentive to Member Lending Institutions (MLIs), i.e., Banks, Financial Institutions (FIs) and NBFCs to increase access to, and enable the availability of additional funding facility to MSME borrowers.
    • It aims to provide a 100 per cent guarantee for any losses suffered by them due to non-repayment of the GECL funding by borrowers.

    Salient features

    • The entire funding provided under GECL shall be provided with a 100% credit guarantee by NCGTC to MLIs under ECLGS.
    • Tenor of the loan under Scheme shall be four years with a moratorium period of one year on the principal amount.
    • No Guarantee Fee shall be charged by NCGTC from the Member Lending Institutions (MLIs) under the Scheme.
    • Interest rates under the Scheme shall be capped at 9.25% for banks and FIs, and at 14% for NBFCs.

    ECLGS 3.0

    • It would involve extension of credit of upto 40% of total credit outstanding across all lending institutions.
    • The tenor of loans granted under ECLGS 3.0 shall be 6 years including moratorium period of 2 years.
    • Further, the validity of ECLGS i.e. ECLGS 1.0, ECLGS 2.0 & ECLGS 3.0 have been extended upto 30.06.2021 or till guarantees for an amount of Rs. 3 lakh crore are issued.
    • The revised operational guidelines in this regard shall be issued by National Credit Guarantee Trustee Company Ltd (NCGTC).

     

  • What are Military Farms?

    Military farms have been closed after 132 years of service.

    Read till the end to know what Project Freiswal is.

    What are Military Farms?

    • The farms were set up with the sole requirement of supplying hygienic cow milk to troops in garrisons across British India.
    • The first military farm was raised on February 1, 1889, at Allahabad.
    • Post-independence, the farms flourished with 30,000 heads of cattle in 130 farms all over India.
    • They were even established in Leh and Kargil in the late 1990s.

    Why are they shutdown?

    • The major task was the management of large tracts of defence land, production and supply of baled hay to animal holding units.
    • There have been several recommendations in the past to shut down the farms.
    • In 2012, the Quarter Master General branch had recommended their closure.
    • Again in December 2016 by Lt. Gen. DB Shekatkar (retd) committee was appointed to recommend measures to enhance combat capability and rebalance defence expenditure of the armed forces.

    Their significance

    • For more than a century, the farms with dedication and commitment supplied 3.5 crore litres of milk and 25,000 MT of hay yearly.
    • It is credited with pioneering the technique of artificial insemination of cattle and the introduction of organised dairying in India, providing yeoman service during the 1971 war.
    • It also supplied milk at the Western and Eastern war fronts as well as during the Kargil operations to the Northern Command.

    Another initiative: Project Freiswal

    • It utilizes Friesian-Sahiwal cross-breeds as a base for the evolution of a new milch strain – “Frieswal” – through interbreeding, selection and progeny testing of bulls.
    • It was introduced on 3 November 1987 at the Military Farm School and Research Centre in Meerut.
    • It had the objective of studying the genetic aspects of Holstein x Sahiwal crossbreeds and those of important indigenous cattle breeds for their improvement through selection.

  • Lessons from past for the new financial institutions

    The article explains the factors that resulted in the failure of several financial institutions created by the government.

    Establishment of Development Finance Institution

    • As promised in the Budget, the Lok Sabha recently passed The National Bank for Financing Infrastructure and Development (NBFID) Bill, 2021.
    • The Bill seeks to establish a development finance institution (DFI) to fund infrastructure.

    Providing finance to NBFID

    • The government will initially own 100% of the proposed NBFID’s â‚č20,000-crore share capital.
    • The government’s stake will be reduced later to 26%.
    • The government will also support NBFID in raising cheap, long-term finance.
    • Apart from the initial share capital, the government will also provide a â‚č5,000-crore grant at the end of its first financial year, presumably to defray initial costs.
    • The government has also committed to guarantee NBFID’s borrowings and bond issuances in the domestic and overseas markets.
    • In addition, the government will underwrite NBFID’s foreign exchange hedging costs.

    Concerns and lessons from the past

    • Studying the performance of IL&FS Ltd and IDFC Ltd, two infrastructure financing institutions, set up in the public sector, will be instructive.
    • IL&FS had borrowed short-term loans to finance long-term infrastructure assets.
    • Sustaining this became difficult when a slowing economy and political interference forced infrastructure borrowers to stop repaying loans.
    • Also, it had grown unwieldy, was mismanaged, and escaped scrutiny for too long by handing out plum postings to select bureaucrats.
    • Similarly, 1996 budget speech announced the setting up of IDFC to address the lack of long-term infrastructure financing.
    • In 2004, interference by the bureaucrats to tackle slow growth of loan led to the resignation of several senior executives in IDFC.
    • IDFC, created originally to finance infrastructure projects, has since then wound down its project finance book.
    • 2021-22 Budget speech also mentioned the creation of another institution that will acquire the banking sector’s stressed assets.
    • On the similar lines, Industrial Reconstruction Corporation of India was create in 1971.
    • Mandated with nursing sick and weak companies, it collapsed under this onerous burden.
    • The institution was eventually shut down in 2012.

    Consider the question “Examine the role the National Bank for Financing Infrastructure and Development will play in the infrastructure development in the country. Also, examine the factors that led to the failure of development finance institutions in the past.”

    Conclusion

    The short lesson is this: Fix the distorted demand side before increasing supply. Any number of institutions can be launched, but cannot be expected to work miracles in a corroded system.

  • Suez Shows Civilization Is More Vulnerable Than We Think

    The recent closure of the Suez Canal highlights the inherent flaw in the global supply chains. Choking of one of the many such points leads to disruption in the global trade.

    Points of vulnerability

    • Suez Canal was blocked this week by a container ship named Ever Given when a gust of wind moved the ship out of the course and grounded it.
    • Egypt has expanded parts of the canal to enable two-way traffic and accommodate larger carriers.
    • The Ever Given ship went off course and got stuck in a part of the waterway that’s still narrow.
    • But it’s also a reminder that even an advanced civilization like ours has points of acute vulnerability. 

    Avoiding single points of failures

    • Systems designers strive to avoid these single points of failure, so that transport, energy and communication networks are able to withstand attacks or unexpected calamities.
    • Technological advances and globalization were also supposed to make us less susceptible to this type of problem.
    • The internet, for example, was conceived as a decentralized system that’s pretty difficult to break, as was Bitcoin.
    • But global infrastructure, defined broadly, still has a surprising number of pinch points.
    • These can be difficult to remedy, as creating back-up options is expensive and counteracts economies of scale.
    • In some cases, the problem is even getting worse:
    • Industries are becoming more concentrated due to corporate takeovers.
    • Big chunks of our lives are now mediated by a just handful of technology companies.
    • The governments are now more cognizant of the political and economic power held by those who control choke points.

    How canal can disrupt the global trade

    • The Panama Canal, the Suez Canal and the Strait of Hormuz are places where container ships and oil tankers are forced to navigate narrow passages.
    • The alternative is a long detour or more expensive air freight.
    • For decades these waterways have been recognized as areas of huge strategic importance and as being susceptible to military or terror attacks.
    • Various back-up routes have been mooted but most haven’t materialized.

    Vulnerabilities in economic sphere

    • In seeking to rid itself of one pinch point — pipelines that traverse Ukraine provides gas to Europ — Germany has created another: the twin Nord Stream gas pipelines that connect Russia and Germany under the Baltic Sea.
    • The U.S. worries these will weaken eastern Europe and increase Germany’s dependence on Russia.
    • In the realm of finance, trillions of dollars of financial instruments are tied to the London interbank offered rate.
    • This rate was easy to manipulate until they were exposed in the years following the 2008 financial crisis.
    • Libor is now being replaced.
    • Similarly, Europe has long relied on the Swift payments system and the U.S. dollar, but that dependence came into question in 2018 as it disagreed with the U.S. over Iran sanctions.
    • In technology, people have warned for years that the U.S. needs a back-up for the Global Positioning System.
    • The system can be spoofed or otherwise disrupted.
    • Semiconductors are where the clearest pinch points are emerging.
    • A global computer chip shortage during Covid has forced auto manufacturers to tear up production plans.
    • Very few companies are able to produce the most advanced chips, due to the technical challenges and vast cost of constructing foundries.
    • The most important of these, Taiwan Semiconductor Manufacturing Co., is based on an island that’s under constant threat of invasion by Beijing.
    • ASML Holding NV of the Netherlands has a monopoly on the machines needed to fabricate the best chips.
    • Now China’s inability to buy the most cutting edge gear from ASML is holding back its own semiconductor ambitions.

    Way forward

    • None of these choke-point problems are easy to resolve.
    • Not only are there geopolitical ambitions at work here but there are also usually trade-offs between building greater resilience and efficiency.
    • But because redundancy offers protection and is therefore a public good, there’s an argument that governments should play a role in providing it.
    • Antitrust polies can be used to challenge monopolies and foster more competition.

    Consider the question “What are the threat emanating from the various forms of choke points to the global trade? Suggest the ways to deal with it.”

    Conclusion

    Having a back-up is a good idea. We learn that when the roof falls in, or when a ship called the Ever Given snarls up the Suez Canal.

  • Need for technological solutions to use water for agriculture more sustainably

    The article examine the use of water for sugarcane and rice cultivation in India and its impact. 

    Water availability and usage in India

    • As per the Central Water Commission’s reassessment of water availability, India receives a mean annual precipitation of about 3,880 billion cubic meters (BCM) but utilises only 699 BCM (18 percent) of this; the rest is lost to evaporation and other factors.
    • The demand for water is likely to be 843 BCM in 2025 and 1,180 BCM by 2050.
    • As per the UN’s report on Sustainable Development Goal-6 (SDG-6) on “Clean water and sanitation for all by 2030”, India achieved only 56.6 per cent of the target by 2019.
    • Further, as per the Niti Aayog’s Composite Water Management Index (2019), 75 per cent households in India do not have access to drinking water on their premises.
    • India ranks 120th amongst 122 countries in the water quality index.
    • India is identified as a water-stressed country with its per capita water availability declining from 5,178 cubic metre (m3)/year in 1951 to 1,544 m3 in 2011 — this is likely to go down further to 1,140 cubic metre by 2050.

    How free or highly subsidised electricity skews water use pattern

    • Despite decades of large public and private investments in irrigation, only about half of India’s gross cropped area:198 million hectares is irrigated.
    • Groundwater contributes about 64 per cent, canals 23 per cent, tanks 2 per cent and other sources 11 per cent to irrigation.
    • This results primarily from incentive policy of free or highly subsidised power, particularly in the country’s north-west, the site of the erstwhile Green Revolution.
    • Overexploitation of groundwater has made this region amongst the three highest water risk hotspots.
    • Overall, about 1,592 blocks in 256 districts in India are either critical or overexploited.

    Need to focus on rice and sugarcane

    • Agriculture uses about 78 per cent of fresh water resources.
    • As per a NABARD-ICRIER study on Water Productivity Mapping, these crops alone consume almost 60 per cent of India’s irrigation water.
    • We need a paradigm shift to increase land productivity measured as tonnes per hectare (t/ha), and to maximise applied irrigation productivity measured as kilogrammes, or Rs, per cubic metre of water (kg/m3).
    • Figure 1 shows applied irrigation water productivity against land productivity for rice and sugarcane in important growing states.
    • Note that while Punjab scores high on land productivity of rice, it is at the bottom with respect to applied irrigation water productivity.
    • In the case of sugarcane, irrigation water productivity in Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu is only 1/3rd of that in Bihar and UP (Figure 2).
    • There is, thus, a need to realign cropping patterns based on per unit of applied irrigation water productivity.

    Use of technology

    • There are technologies to produce the same output of rice and sugarcane with almost half the irrigation water.
    • Jain Irrigation, for instance, has set up drip irrigation pilots for paddy and sugarcane.
    • The results of these pilots indicate while it takes 3,065 litres of water to produce 1 kg of paddy grain (yield level 7.75 t/ha) under traditional flood irrigation, under drip, it can be reduced to just 842 litres.
    • The benefit cost ratio of drip with fertigation in case of sugarcane in Karnataka is observed to be 2.64.
    • An extension to this is the “Family Drip System” innovated by Israel-based — Netafim.
    • The company has also launched its largest demonstration project in Asia at Ramthal, Karnataka.
    • Technologies like Direct Seeded Rice (DSR) and System of Rice Intensification (SRI) can also save 25-30 per cent of water compared to traditional flood irrigation.

    Need for right pricing policies

    • Technological solutions cannot make much headway unless pricing policies of agri-inputs are put on the right track and farmers are incentivised for saving water.
    • The Punjab government, along with the World Bank and J-PAL, has started some pilots with an innovative policy of “Paani Bachao Paise Kamao” to encourage rational use of water among farmers.

    Consider the question “Examine the impact of rice and sugarcane cultivation on the groundwater table in India. How technological solutions can help use water more sustainably for agriculture?”

    Conclusion

    Overall, it seems it is time to switch from the highly subsidised price policy of water/power (and even fertilisers) to direct income support on a per hectare basis, and investment policies that help with newer technologies and innovations.

  • What is the 2008 Lehman Crisis?

    The fire sale of about $20 billion of Archegos assets, comprising Chinese and US stocks, has sent jitters in the global financial markets, raising worries that the event could be a possible “Lehman moment”.

    What is the Lehman Crisis?

    • The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis.
    • After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal Reserve summoned several banks to negotiate to finance for its reorganization.
    • These discussions failed, and Lehman filed a petition that remains the largest bankruptcy filing in US history, involving more than US$600 billion in assets.

    Note: The subprime mortgage crisis occurred when the real estate market collapsed and homeowners defaulted on their loans.

    What defines the moment?

    • It signalled a limit to the government’s ability to manage the crisis and prompted a general financial panic.
    • Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the interbank lending market tightened, threatening banks with imminent failure.
    • The government and the Federal Reserve system responded with several emergency measures to contain the panic.

    Other terminologies:

    Margin Call

    • Typically, a margin call occurs when the value of an investor’s margin account falls below the broker’s required amount during a market correction or sell-off.
    • As the margin account contains securities bought with borrowed money, a margin call occurs when lenders demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value.
    • A margin call is usually an indicator that the securities held in the margin account have decreased in value.
    • When a margin call occurs, the investor must choose to either deposit more money in the account or sell some of the assets held in their account.
    • If the investor fails to pay up the margin amount, the lender will resort to the sale of assets lying in the investor’s account.

  • Learning economic lessons from Bangladesh

    The article examines the key driving factors of Bangladesh’s stellar economic progress and draws lessons for India.

    Overview of Bangladesh’s economic achievements

    • Bangladesh’s GDP growth in 2019 was an enviable 8.4 per cent — twice that of India’s during that year.
    • It is one of the few countries to have maintained a positive growth rate during the COVID-19 pandemic.
    • Its GDP per capita is just under $2,000 — almost the same as India’s.
    • In five years, by 2026, Bangladesh will drop its least developed country tag, and move into the league of developing countries — on a par with India.

    Parallels between Vietnam and Bangladesh’s progress

    • Vietnam instituted market and economic reforms in 1986, which enabled it to achieve rapid economic growth and industrialisation.
    • It began with the manufacturing of textiles and garments and moved into making mobiles and electronics.
    • As supply chains diversify from China, Vietnam is a beneficiary.
    • It is now the “+1” in the “China +1” strategy of multinationals.
    • Vietnam has signed trade agreements and inserting itself into global supply chains.
    • Bangladesh has followed a similar strategy.
    • Its rise is directly connected with the textiles and garments industry, which accounts for 80 per cent of the country’s exports.
    • Bangladesh also enjoys preferential trade treatments with the European Union, Canada, Australia, and Japan with negligible or zero tax.
    • With India too, Dhaka has a zero-export duty on key products like readymade garments.
    • Like Vietnam, its foreign investment regime is investor-friendly.
    • For instance, Bangladesh’s liberal FDI policy allows 100 per cent equity in local companies and no limits on repatriation of profits in most sectors. 
    • Indian companies are increasingly present in Bangladesh, and Indian products are popular — an outcome of a strong cultural affinity.

    Women in workforce and microfinance

    • The world’s most successful and pioneering microfinance organisations like Grameen and BRAC have aided small businesses in the country, and regionally.
    • Many of these schemes, over the years, were directed at women.
    • This has paid dividends not just in financial independence, but also in encouraging them to work outside the home.
    • Consequently, Bangladesh’s workforce in its textiles sector is almost all women — 95 per cent women in an industry which is 80 per cent of Bangladesh’s exports.

    Role of government schemes

    • This, along with government schemes like Pushti Apas (Nutrition Sisters) and community health clinics has helped Bangladesh in the development indices.
    • Bangladesh fares better on infant mortality, sanitation, hunger and gender equality than many countries including India.

    Key lessons for India

    • Increasing women in the workforce, liberalising internal and external trade, and making micro lending accessible, are some of the lessons.
    • But so is the goal of being a global hub for the sub region, building special economic zones which requires infrastructure, connectivity and a welcoming environment for investors both domestic and foreign.
    • both countries have suffered since 1947, without connectivity, at huge cost.
    • It is time to integrate our power systems, think about free trade, liberalise the visa regime.

    Conclusion

    India need not always carry the burden of South Asia’s development alone. It now has a partner with whom to collaborate effectively towards achieving that goal.