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Subject: Economics

  • [pib] SAKSHAM Portal

    The Technology Information, Forecasting and Assessment Council (TIFAC) has launched SAKSHAM, a dynamic job portal for mapping the skills of Shramiks.

    The name SAKSHAM closely leans towards HRD, Employment and Entrepreneurship developments.  Make a note of it. It can create confusion while revision.

    SAKSHAM

    • SAKSHAM is an acronym for Shramik Shakti Manch.
    • The portal with the demand and supply data uses an algorithm and AI tools, for geospatial information on demand and availability of Shramiks, and also provides analysis on skill training programmes of Shramiks.
    • It would directly connect Shramiks with MSMEs and facilitate placement of blue-collar jobs.
    • The pilot portal originally initiated with two districts is now being launched as an all India portal.

    Key features

    • A dynamic job portal – an opportunity for Shramiks and MSMEs
    • Facilitate the creation of 10 lakh blue-collar jobs
    • Direct connect between Shramiks and MSMEs, no middleman in between
    • Minimise migration of Shramiks – job opportunity in proximate MSMEs

  • National Rail Plan for 2030

    The Budget unveiled the National Rail Plan 2030. 

    Key provision in the Budget for railways

    • First, there is a National Rail Plan (NRP) for 2030.
    • Second, the Western dedicated freight corridor (DFC) and the Eastern DFC will be commissioned by June 2022.
    • Parts of DFC will be in public-private partnership (PPP) mode.
    • Third, there will be an East Coast corridor (Kharagpur to Vijaywada), an East-West corridor (Bhusaval to Kharagpur/Dankuni) and a North-South corridor (Itarsi to Vijayawada).
    • Fourth, all broad-gauge routes will be electrified by December 2023.
    • Fifth, there will be safety and passenger amenity measures.

    National Rail Plan provisions

    • The NRP is meant to increase the share of railways in freight, rectifying the pre-Independence and post-Independence bias
    • It also aims to develop capacity that will cater to demand in 2050.
    • It provides for mapping of the existing railway network on a GIS platform.
    • The primary value addition of the NRP is an analysis of the existing network, with expected additions (such as the National Infrastructure Pipeline) also built in.
    •  NRP bases decision making on objective criteria.

    Pricing and cross-subsidy issue

    • In 2018-19, as per the NRP, India’s operating ratio (OR) was 0.59 for freight and 1.92 for passenger traffic.
    • The problem is low passenger fares and artificially high freight rates required to cross-subsidise those.
    • This is not the complete picture since normally, freight and passenger trains share common sections of track and passenger trains are given preference over goods trains in getting a path (route from point A to point B).
    • Therefore, the average speed of a freight train is 24 km/hour — average speed is a surrogate indicator.
    • A superior indicator is transit time — the time taken for a consignment to reach from one point to another.

    Need for decreasing the cost and increasing the average speed

    • Indian Railways has a system of HDN and HUN identification for the present network.
    • HDNs are high-density routes.
    • HUNs are highly-used networks with multiple origins and destinations and no clear single haul corridor.
    • HUNs are primarily for passengers.
    • For freight, HDNs are important.
    • HDNs and HUNs carry 80 per cent of the traffic and there are sections where capacity utilisation is more than 100 per cent.
    • With traffic increasing, capacity utilisation will worsen.
    • If the intention is to increase rail share in the total freight carried to 44 per cent, the average speed must increase and costs must decline.
    • With the Western and Eastern DFCs, both should happen.

    Consider the question “What are the factors responsible for preventing the railways from realising its contribution in the development of the country. How far will the National Rail Plan help railways deal with these factors?” 

    Conclusion

    The implementation of the NRP will help railways deal with the issues faced by it.

    Back2Basics: Operating Ratio

    • The operating ratio shows the efficiency of a company’s management by comparing the total operating expense of a company to net sales.
    • An operating ratio that is decreasing is viewed as a positive sign, as it indicates that operating expenses are becoming an increasingly smaller percentage of net sales.

    OR = (Operating Expenses + Cost of Goods Sold)/ Net sales​ 

     

  • Significance of crude oil crossing $60 a barrel

    The price of Brent crude crossed the $60 per barrel mark after over a year on the back of oil-producing countries maintaining production cuts due to lockdowns.

    What is Crude Oil?

    • Petroleum also known as crude oil and oil is a naturally occurring, yellowish-black liquid found in geological formations beneath the Earth’s surface.
    • It is commonly refined into various types of fuels.
    • Components of petroleum are separated using a technique called fractional distillation, i.e. separation of a liquid mixture into fractions differing in boiling point by means of distillation, typically using a fractionating column.
    • It consists of naturally occurring hydrocarbons of various molecular weights and may contain miscellaneous organic compounds.
    • The name petroleum covers both naturally occurring unprocessed crude oil and petroleum products that are made up of refined crude oil.

    Why has the price of crude oil risen sharply?

    • Major oil-producing countries had cut oil production last year amid a sharp fall in demand due to the Covid-19 pandemic.
    • However oil-producing countries have continued to limit production despite an increase in prices with Saud Arabia cutting its own oil production by 1 million barrels per day to strengthen crude oil prices.
    • Expectations of strong improvements in demand with the global rollout of the Covid-19 vaccine have also put upward pressure on crude oil prices according to experts.

    How will this impact India?

    • The rise in the price of Brent crude will lead to an increase in India’s import bill.
    • India imports of 80 per cent of its crude oil requirements and the average price of Indian basket of crude oil has already risen to $54.8 barrel for January.
    • The upward move in crude prices will also put upward pressure on petrol and diesel prices across the country which is already at all-time highs.

    Signs of no remedy

    • The government had hiked central taxes on petrol and diesel by Rs 13 per litre and Rs 11 per litre in 2020 to boost revenues amid lower economic activity.
    • The increase in taxes had prevented consumers from getting the benefit of low fuel prices as international prices crashed during the first quarter of last fiscal.

  • Infrastructure push now, fiscal consolidation later

    The Budget will aid the growth in the aftermath of the pandemic, however, concerns remain over the fiscal deficit.

    Concerns about fiscal deficit

    • The Budget, taken as a whole, has provided reasonable stimulus to growth through a change in the composition of expenditure and other measures to improve the climate for investment.
    • But concerns remain about fiscal deficit.

    High expenditure growth

    • Proposed growth in central expenditure, both in 2020-21 Revised Estimates (RE) and in 2021-22 Budget Estimates (BE), indicates the extent of contemplated fiscal stimulus.
    • For reaching the projected 2020-21 RE levels, the growth required in the last quarter of the current fiscal year over the corresponding period of the previous year appear extraordinary.
    • This involves transferring on to the Budget, the accumulated food subsidies amounting to â‚č2,54,600 crore given to the Food Corporation of India through National Small Savings Fund (NSSF) loans.
    • The balance of subsidies amounting to â‚č1,68,018 crore would be the food subsidy pertaining to 2020-21 (RE).
    • This is a desirable change towards transparency.
    • Taking revenue expenditure figures as budgeted and adjusting for the NSSF-accumulated food subsidy amount, the growth is 6.7% in revenue expenditure in 2021-22 (BE) over 2020-21(RE).
    • A good part of expenditure for the last quarter of 2020-21 may also pertain to clearing unpaid dues of various stakeholders including the private sector, autonomous bodies and government-aided institutions.
    • Clearing these payments is desirable and would add to demand.
    • The main expenditure push comes through a budgeted growth of 26.2% in capital expenditure in 2021-22.
    •  Relative to GDP, capital expenditure is expected to increase from 1.6% in 2019-20 to 2.3% in 2020-21 RE and 2.5% in 2021-22 BE, signalling a significant change in priority.

    Increase in receipts

    • Significant increases are planned in non-tax revenues and non-debt capital receipts.
    • This increase is mainly predicated on higher dividends from non-departmental undertakings and spectrum sales.
    • From a contraction of 35.6% in 2020-21 (RE), non-tax revenues are budgeted to grow by 15.4% in 2021-22.
    • In the case of non-debt capital receipts, mainly covering disinvestment, a budgeted growth of 304.3% in 2021-22 stands in contrast with the contraction of 32.2% in 2020-21 (RE).
    • Disinvestment initiatives have so far yielded minimal results.
    • Budgeted increase in the Centre’s gross tax revenues is dependent on nominal GDP growth of 14.4%, with a buoyancy of 1.6 for direct taxes and 0.8 for indirect taxes. 

    Steps towards asset monetisation

    • An important initiative pertains to the launching of a National Monetisation Pipeline.
    • The time lags involved in starting yielding revenue remain unpredictable because of various potential disputes and claims involving government-owned land.
    • A transparent auction process needs to be set up to facilitate suitable price discovery.

    Other institutional initiatives

    • The Budget includes central government’s share to the National Infrastructure Pipeline.
    • However, success of the infrastructure expansion plan would depend on other stakeholders of the pipeline playing their due role.
    • The Budget also proposes setting up of a Development Finance Institution (DFI), to serve as a catalyst for facilitating infrastructure investment.
    • The DFI would have an initial capital of â‚č20,000 crore.
    • In order to manage non-performing assets of public sector banks, there is a proposal to set up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
    • Much depends upon the fine-tuning the operations of these institutions.

    Finance Commission’s recommendations

    • In the action taken report, the Union government has accepted the recommended vertical share of 41% for the States in the shareable pool of central taxes.
    • The government has accepted the Fifteenth Finance Commission’s recommendation for revenue deficit grants, local body grants and disaster-related grants.
    • The scope of revenue deficit grants has been extended to cover 17 States in the initial years.
    • The determination of these grants is not based on equalisation principle although some norms have been used in the assessment exercise.
    • However, the government has put on hold the consideration of State-specific and sector-specific grants including performance-based incentives.
    • The substantive issue pertains to the mode of transfers in terms of general-purpose unconditional transfers against specific purpose and conditional transfers.
    • States had shown a preference for the former mode and it is for this reason that the 14th Finance Commission had raised the States’ share from 32% to 42%.
    • The reduction from 42% to 41% is only on account of the consideration of 28 States excluding Jammu and Kashmir because of its new status.
    • The imposition of cesses which are almost permanent has reduced the shareable pool.
    • In fact, the States’ share in the Centre’s gross tax revenues is only 30% in 2021-22 (BE).

    Way forward

    • The Fifteenth Finance Commission has also proposed a revised fiscal consolidation road map for the Centre and States.
    • The Fifteenth Finance Commission has recommended the setting up of a High-Powered Intergovernmental Group to re-examine the fiscal responsibility legislations of the Centre and States.
    • Giving up the prudential norms will be a wrong lesson to learn from the crisis.
    • The issue of debt sustainability can be certainly re-examined by taking into account the evolving profiles of debt, interest payments, and primary deficits relative to GDP.

    Conclusion

    Fiscal deficit must be related to household savings in financial assets and the interest payments to revenue receipts. It should not be forgotten that in fiscal 2021-22, interest payments to total revenue receipts will be 45.3%, pre-empting a significant proportion of revenue receipts. We must be conscious of the burden of the rising stock of debt.

  • Making Budget work

    The article deals with the marked departures in this year’s Budget and the challenges in realising the changes.

    Three paradigm shifts from past in this the Budget

    1)Increased infrastructure spending

    • The main theme of the budget is a big thrust on infrastructure spending and public investment.
    • If the budgeted numbers are realised, capex would have grown from 1.6 per cent of GDP pre-COVID to 2.5 per cent in two years.
    • With India’s investment/GDP ratio falling by 5 percentage points over the last decade, a sustained public investment push — with its large multiplicative effects — is a much-needed impetus to reinvigorate growth and create jobs.

    Implications of increased spending

    • The certainty sustained public investment is likely to crowdin private investment.
    • The certainty of investment-led employment that is likely to reduce household precautionary savings.
    • However, higher capex spend is being paid for by disinvestment and privatisation.
    • Effectively, non-core public-sector assets that don’t generate positive externalities — and, in fact, potentially distort the sectors they compete in — are expected to be replaced with much-needed physical and social infrastructure.
    • This newly created physical and social infrastructure emanate positive externalities and necessarily suffer from under-provisioning by the private sector.
    • If successfully executed — this will not be a case of selling the family silver to pay a credit card bill.
    • Instead, it will be akin to a productivity-enhancing asset swap on the public sector’s balance sheet.

    2) Shift in the way for financing infrastructure

    • In stark contrast to the PPP model, infrastructure will now be financed off public sector balance sheets and, once operational and viable, will be monetised so as to recycle proceeds into the next project.
    • In theory, this is the appropriate division of public-private risk sharing.
    • It combines the public sector’s ability to better mitigate upstream risk while taking advantage of the glut of global liquidity potentially attracted to downstream projects.

    3) Shift is towards more conservative and transparent fiscal accounting

    • There has been much focus on bringing the Food Corporation of India (FCI) liabilities back on the budget.
    • Less appreciated is the conservatism with which tax revenues have been budgeted for.
    • Revised estimates peg this year’s gross taxes at 9.9 per cent of GDP.
    • But for that to happen, taxes, net of excise, will need to contract by 20 per cent in the last quarter.
    • So it’s very likely gross taxes will end up 0.5 per cent of GDP higher this year.
    • Not only is this a welcome departure from the past when revenues were consistently over-budgeted, but it sets the base for next year.
    • With nominal GDP expected to grow in double digits, it’s likely taxes, net of excise, will experience a higher-than-unitary-elasticity to growth, especially given the increased formalisation that COVID has spawned.
    • Tax collections are, therefore, likely to exceed budgeted levels in 2021-22.
    • It behooves a very uncertain macroeconomic environment and creates some buffer if crude prices keep rising or other revenues don’t materialise.
    • Credible accounting over time will bring down risk premia in bond yields, and paradoxically generate a stimulative impulse.

    Three challenges in realising these changes

    1) Execution challenge

    • The budget’s impact on shaping the macroeconomic narrative will depend on the speed and efficacy of simultaneously building and selling public assets.
    • It will be important, for instance, to front-load disinvestment and strategic sales to take advantage of buoyant equity markets before global central banks become more cautious.
    • With debt likely to rise to almost 90 per cent of GDP this year, it’s now incumbent on all stakeholders to consistently deliver the 10 per cent nominal GDP growth that’s needed to first stabilise debt at these levels and then bring it down.
    • Viewed from this lens, it is a budget where execution is vital.

    2) Withdrawal of the policy support at appropriate time

    • While fiscal policy is being appropriately counter-cyclical at the moment, it must be equally nimble in the other direction.
    • When the recovery gets more entrenched, policy support should be withdrawn with equal speed and alacrity.

    3) Role of monetary policy

    • With fiscal policy playing a primary role, monetary policy must slowly take a back seat.
    • The combination of a more relaxed fiscal path and domestic private sector savings normalising after the COVID surge could result in equilibrium bond market yields rising [fall in the price of bond] — but that is a cost worth incurring for a meaningful public investment push.
    • In the near term, the RBI may focus on ensuring this new equilibrium is reached in a non-disruptive manner.
    • Given the current slack in the economy, it’s understandable if fiscal and monetary are temporarily complementary.
    • But as confidence in the recovery grows, fiscal and monetary must quickly become substitutes — with the RBI progressively normalising liquidity to wardoff financial stability and fiscal dominance concerns — so as to safeguard macroeconomic stability.

    Consider the question “This year’s Budget marked many departures from the past Budgets. However, there are several challenges in realising these departures. What are such departures and identify the challenges in realising them?”

    Conclusion

    The budget must be commended for embarking on important paradigm shifts. But its success, and in turn the sustainability of India’s recovery, will now come down squarely to policy execution and coordination.

     

  • IBC as an enabler

    The article analyses whether or not the Insolvency and Bankruptcy Code is delivering on its objectives.

    Criticism of IBC

    • The Insolvency and Bankruptcy Code (IBC), 2016 was enacted to resolve the stress of companies.
    • However, the corporate insolvency resolution process (CIRP)  has been criticised as it rescues only about 25 per cent of companies and leads to liquidation for the rest.

    Is IBC delivering on its mandate

    Let’s analyse how Insolvency and Bankruptcy Code (IBC) 2016 is working towards value maximising outcomes.

    1) It enables the market to attempt to resolve

    • The CIRP enables the market to attempt to resolve stress through a resolution plan whereby the company survives.
    • When it concludes that there is no feasible resolution plan to rescue the company, the company proceeds for liquidation.
    • The market usually rescues a viable company and liquidates an unviable one.
    • There are quite a few companies which have negligible assets and/or are defunct when they enter CIRP.
    • Many of these are beyond rescue for a variety of reasons, including creative destruction, and their continuation is a cost to the economy.
    • In such cases, the code enables liquidation to release available resources to alternate uses.
    • It is welcome, as it releases the assets as well as the entrepreneur stuck up in an unviable company, which is a key objective of the code.

    2) Look at the total asset value not the number of companies

    • In terms of absolute numbers, 25 per cent of companies were rescued and 75 per cent proceeded for liquidation.
    • In value terms, however, 75 per cent of the assets were rescued and 25 per cent of assets proceeded for liquidation.
    • Of the companies sent for liquidation, 75 per cent were either sick or defunct, and of the companies rescued, 25 per cent were either sick or defunct.

    3) Look at the overall impact, not just final numbers

    • Third, the stress that a company suffers is like an illness which can be treated by a variety of options.
    • Normally, recovery is better if diagnosis and treatment start early.
    • Likewise, the health of the company deteriorates if the resolution process is delayed.
    • The percentage of rescue at this later stage may not be significant.
    • The credible threat of CIRP that a company may change hands has redefined the debtor-creditor relationship.
    • Faced with the possibility of the CIRP, a debtor makes all-out efforts to prevent the stress, or resolve it much before it translates into a default, or settles the default.
    • Even after an application is filed, a debtor continues efforts to resolve the financial stress midway through settlement, review, mediation, or withdrawal to avoid the consequences of CIRP.
    • The number of companies that recover before filing the application as a percentage of those that get starts the insolvency process would give the fair idea about the efficacy of the IBC.

    Consider the question “The IBC has often been criticised for liquidating the companies rather than rescuing them. Do you agree with this criticism? Give reasons in support of your argument.”

    Conclusion

    Liquidation or rescue is an outcome of the market forces; the law is only an enabler giving choices and nudging a company towards value maximising outcomes. The “invisible hands” of the market works towards the best outcome, which we should respect and accept.

  • What are the One-Person Companies (OPCs)?

    In her Budget speech, the Union Finance Minister had announced measures to ease norms on setting up one-person companies (OPCs).

    Q.What are One-Person Companies (OPCs)?  Discuss how they will help startups and non-resident Indians?

    What is an OPC?

    • As the name suggests, a one-person company is a company that can be formed by just one person as a shareholder.
    • These companies can be contrasted with private companies, which require a minimum of two members to get going.
    • However, for all practical purposes, these are like private companies.
    • It is not as if there was no scope for an individual with aspirations in business prior to the introduction of OPC as a concept.
    • As an individual, a person could get into the business through a sole proprietorship mode, and this is a path that is still available.

    Why do we need such companies?

    • A single-person company and sole proprietorship differ significantly in how they are perceived in the eyes of law.
    • For the former, the person and the company are considered separate legal entities. In a sole proprietorship, the owner and the business are considered the same.
    • This has an important implication when it comes to the liability of the individual member or owner. In a one-person company, the sole owner’s liability is limited to that person’s investment.
    • In a sole proprietorship set-up, however, the owner has unlimited liability as they are not considered different legal entities.
    • Some see the proposal as a move to encourage corporatization of small businesses. It is useful for entrepreneurs to have this option while deciding to start a business.

    Is this a new idea?

    • Such a concept already exists in many countries. In India, the concept was introduced in the Companies Act of 2013.
    • Its introduction was based on the suggestions of the J. Irani Committee Report on Company Law, which submitted its recommendations in 2005.
    • Pointing out that there was a need for a framework for small enterprises, it said small companies would contribute significantly to the Indian economy.
    • But because of their size, they could not be burdened with the same level of compliance requirements as large public-listed companies.

    Features of OPCs

    • The law on one-person companies that took shape, as a result, exempted such companies from many procedural requirements, and, in some cases, provided relaxations.
    • For instance, such a company does not need to conduct an annual general meeting, which is a requirement for other companies.
    • A one-person company also does not require signatures of both its company secretary and director on its annual returns. One is enough.
    • There was, however, criticism that some rules governing a one-person company were restrictive in nature. This year’s Budget has dealt with some of these concerns.

    How many OPCs does India have?

    • According to data compiled by the Monthly Information Bulletin on Corporate Sector, there were 34,235 OPCs out of a total number of about 1.3 million active companies in India (Dec 2020).
    • Data also show that more than half of the OPCs are in business services.

  • The Budget unshackles India’s economic growth story

    The article highlights the three key feature of the Budget which makes it historic.

    1) Disinvestment

    • Budget 2021-22 will begin the process of the withdrawal of the state from business.
    • Bank nationalisation in 1969 signalled a new era — just more than 50 years later, India has changed course for the better.
    • The budget signals that the process towards the goal of greater economic freedom, and faster and more equitable economic development, and maturity, has well and truly begun.

    2) Changed role of fiscal deficit in economic policy

    • Many of us forgot the original meaning of fiscal deficits and their importance.
    • When there is an unemployment, a considerable portion of deficit financing can go towards growth, rather than inflation.
    • The relegation of the fiscal deficit to a secondary role in economic policy was the second big departure from a conventional budget.
    • The conventional argument was that fiscal deficit was something to really worry about, hence taxes must be raised to keep the deficit within limits.
    • There was serious talk of a COVID cess, a wealth tax, and increase in the tax rate for the rich.
    • There is no increase in tax rates to increases tax revenue.
    • Rather, the finance minister took the extra-bold step of reducing corporate taxes in September 2019.
    • India awaits a comprehensive reform of the Direct Tax Code. It did not happen. But the stage is set for such a reform.

    3) Transparency in fiscal math

    • If the government borrows from the Food Corporation of India (to finance MSP purchases, what else), it will now appear as part of expenditures and as part of the deficit.
    • Also, the GDP growth estimates for 2021-22, forecasted at 14.5 per cent (nominal).
    • Normally, finance ministers in India tend to over-estimate, and most often, fall short.
    • Budget 2021-22 might be the first to significantly exceed the forecasts.

    Criticism of the budget

    • One of the issues with the budget cited by the critics is that its forecasts would be in error because of problems of “execution and implementation”.

    Conclusion

    With many firsts, it is a budget that lays the foundation for sustainable recovery in GDP growth and welfare improvement.

  • Dairy Industry in India : An analysis

    The article highlights the issues facing the dairy sector and explains the utility of IVF technology for crossbreeding.

    Importance of dairy sector

    • The dairy sector assumes significance on account two reasons:
    • 1) It has to do with the socio-cultural affinity towards cows and dairy products in large parts of the country.
    • 2) As an industry, it employs more than 70 million farmers.
    • Need of the hour is for us to identify ways in which we can enhance the return on investment for our farmers.

    India’s journey from milk deficit country to one of surplus

    • Initiated in 1970, Operation Flood transformed India into one of the largest milk producers.
    • The per capita availability of milk in 2018-19 was 394 grams per day as against the world average of 302 grams.
    • Today with an annual production of 187.75 million tonnes India accounts for about 22% of the world’s milk production.
    • However, India is yet to join the ranks of major milk exporting nations, as much of what we produce is directed towards meeting domestic demands.

    Making India milk exporting nation

    • Indigenous cows produce 3.01kgs of milk per cow per day, while the yield of exotic crossbred cows is 7.95kgs.
    • Crossbreeding has taken off in a big way because of the advancements in reproductive technologies like In vitro fertilization (IVF), embryo transfer process, and artificial insemination.
    • Out of these processes, IVF and artificial insemination have proven to be the most popular and effective methods.
    • The NAIP (Nationwide Artificial Insemination Programme) Phase-I was launched in September 2019.
    • Every animal in the programme was assigned a 12-digit unique identification number under the Pashu Aadhar scheme.
    • NAIP Phase-II was initiated on 1 August 2020 with an allocation of â‚č1,090 crore in 604 districts covering 50,000 animals per district and is on track to be completed by the 31 May 2021.
    • Under the programme, 9.06 crore artificial inseminations will be performed and is expected to lead to the birth of 1.5 crore high yielding female calves.
    • Consequently, 18 million tonnes of additional milk will be produced as average productivity will be enhanced from 1,861kg per animal per year to 3,000kg per animal per year.
    • Artificial insemination (AI) technology has been the most used method in India, but its success hinges upon accuracy in heat detection and timely insemination.
    • And this is where In Vitro Fertilization (IVF) technology will prove to be more effective.

    Conclusion

    In keeping with our ethos of ‘Jai Kisan, Jai Vigyan’ the marriage of rural farming with the latest innovations in technology will usher in unprecedented transformation in our dairy industry.

  • Laws that have distorted agriculture and labour markets need to go

    The article suggests the two steps to ensure growth while protecting the poor. The first is the creation of social safety net and next is factor market reforms.

    Issue of farmers’ income

    • An Indian engaged in industry or any aspect of the services sector (this includes a waiter in a restaurant) earns more than an average farmer.
    • This is an anomaly.
    • So, despite all the pro-farmer laws and protection, why do farmers in India earn less?
    • A recent study by RBI showed that across all crops, the farmgate price is 40-60 per cent less than the consumer price.
    • The real challenge is how to encourage growth while protecting the poor.

    Encouraging growth while protecting the poor: 2 steps

    • 1) A social safety net needs to be created to provide direct income transfers to the vulnerable.
    • 2) Factor markets involving labour and agricultural land need to be reformed to ensure productivity-enhancing growth.
    • Only way to ensure growth which benefits the poor is through employment creating in the manufacturing and services sector.

    1) Social safety nets in India

    • Despite a narrow tax base, India has created a comprehensive social safety net, which can cushion growth-enabling market reforms.
    • Accurate targeting under India’s Food Security Act to the bottom 67 per cent through Aadhaar identification and digital ration cards paired with E-POS machines has considerably reduced the leakage of subsidised grains.
    • The National Social Assistance programme intends to provide direct income support to over 40 million elderly landless agricultural workers, poor women-headed households and families with physically-challenged children.
    • India also provides income support annually to 145 million farmers, paying out Rs 75,000 crore.
    • This benefits all farmers while MSP benefits only 6 per cent of farm produce.

    2) Factor market reforms

    • If state support for social safety net has to become sustainable, wide-ranging growth, which will broaden the tax base, is essential.
    • India’s growth itself can be designed to reduce the number of people who need state support.
    • The agriculture and labour reforms recently passed create the conditions for productivity-enhancing growth, benefiting millions of small farmers and unorganised workers.

    Let us take a look at what the farm laws achieve and how they will change the status quo

    1) Amendment to Essential Commodities Act

    • The stock limits under the Essential Commodities Act do not enable large tur or moong and rice processors to procure in bulk for their entire season’s processing requirements.
    • This restricts large-scale processing units which can run throughout the non-harvest season.
    • This draconian anti-farmer rule has now been done away with.
    • This will enable the expansion of agro-processing and supply chains.
    • A larger share of the produce procured for agro-processing increases its shelf life, enabling the farmer to retain a greater value.
    •  30-40 per cent of the post-harvest value, particularly in vegetables and fruits, is lost due to inadequate storage, processing and transportation facilities.
    • Removal of stock limits and the accompanying contract farming act will bring in investments to tap the wasted resource.

    2) APMC regulation

    • The second law, removes another distortion: Only traders registered in APMCs can buy farmers produce.
    • Even though conditions for perfect markets exist, the APMC regulation creates this bottleneck.
    • Intermediaries extract a greater share of value as they are price makers while farmers are price takers.
    • This situation is further aggravated as farmers are restricted to selling within the taluka boundaries or limits of the APMC, and if they have to sell in other APMC, they have to pay the APMC tax.
    • The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill 2020 confines the authority of the APMC to levy fees and give trader licences within the boundary of the market yard.
    • Farmers will continue to have the option to sell in APMCs but any private market/non-APMCs registered trader can also set up an agricultural market and compete with APMCs to buy the same produce.
    • Karnataka implemented the Uniform Market portal in 2014, enabling trade across taluka APMC limits without APMC fees.
    • An analysis by researchers at the MIT Sloan School of Management has shown that prices of many agricultural goods increased by 3.5 to 5.1 per cent.
    • Significantly, profit margins of small farmers increased by more than 36 per cent.

    Labour reforms

    • Apart from agriculture, the abundance of labour is the second greatest comparative advantage of India.
    • However, multiple labour laws instead of encouraging employment, have created disincentives for job creation due to high costs of compliance.
    • While India’s employment elasticity with respect to GDP growth is only 0.2, China’s is at 0.44. Even for Bangladesh, the elasticity is 0.38.
    • India’s path-breaking labour reforms leverage the true comparative advantage of the country’s factor endowments to promote growth with higher employment elasticity.
    • The old labour laws protected existing jobs at the cost of preventing new job creation through creative destruction.
    • Bangladesh has shown the way to increase formal jobs by legalising fixed-term employment and banning union activity in FDI industries.
    • Raising the threshold for seeking prior permission for laying off workers will enable capital and land locked in sunset industries to move freely to new sunrise industries.

    Consider the question “An Indian engaged in industry or any aspect of the services sector earns more than an average farmer. What are the factors responsible for this anomaly? Suggest ways to achieve growth that could ensure sustainable safety net?”

    Conclusion

    The need of the hour is to continuously communicate with those unhappy with the reforms to explain how the current status quo is hurting farmers and informal workers.