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Subject: Economics

  • Despite some hits, the Budget has crucial misses

    The article highlights the key aspects of the budget and also mention the failure to address the challenge of employment and rising inequality.

    Significance of the Budget

    • At its simplest, is the government’s tentative income and expenditure statement.
    • At its broadest, the Budget is a pious statement of the government’s policy and ideological intentions.
    • It is also the government’s statement of how it seeks to tackle the immediate political (electoral) and economic challenges.

    Stepping up public investment and challenge of financing

    • The present Budget’s focus on stepping up public investment by 34.5% in the coming fiscal year (compared to the current year) is a welcome sign.
    • The government will borrow an additional â‚č80,000 crore for the purpose in the next two months.
    • Realisation of these investments would crucially depend on tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the government’s ability to raise resources from the market, without raising interest rates for the private sector.
    • There is no mention of the government’s recourse to debt monetisation.
    • While the investment intentions are evident, its financing efforts seem to have too many loose ends.

    Development Finance Institution

    • To deal with the poor industrial and infrastructure investment during the last decade the Budget proposed setting up of Development Finance Institution.
    • One of the reason for poor investment was a lack of long-term credit for infrastructure,which yields low rates of return spread over a long period of time.
    • Commercial banks, whose deposits are for short to medium term, find it difficult to lend for long term (more than five years) for the fear of maturity mismatch.
    • Moreover, as banks were laden with rising non-performing assets on account of poor corporate sector performance during the last decade.
    • Also,  most successful industrialising economies have relied on DFIs for providing long-term credit.

    Financing challenge DFI could face

    • Weakness of DFI lies in securing stable long-term, low cost sources of finance.
    • The proposed DFI will be financed by foreign portfolio investments (FPI), which is a cause for concern.
    • By definition, FPI represents short term inflows with exchange rate risks, while infrastructure investment is for long term whose revenues will be mostly in rupees.
    • Such an investment will inevitably lead to currency and maturity miss-match, raising cost of capital.
    • Hence, there is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies.

    Health infrastructure

    • A substantial annual fixed investment in improving urban sanitation, drinking water and sewage facilities, it is indeed a welcome step.
    • A lessons from rural Swachh Bharat Abhiyan is that  complementary facilities need to be constructed in a coordinated manner to maximise the effectiveness of such investments.

    No effort to address rising inequality

    • There is no targeted employment programme to alleviate the immediate crisis is a matter of concern.
    • There is no mention of the stupendous rise in economic inequality during just the last year.
    • While the poor lost their jobs and livelihoods in 2020, corporate India’s profits increased.
    • The Budget could have consider a special tax on the super-rich — as many countries are now mooting.

    Consider the question “What necessited the Development Finance Institution? Examine the challenge it would face in its functionig?”

    Conclusion

    In summary, if the capital expenditure plan outlined in the Budget speech is credible, and implemented with assured financial backing, it could revive the investment cycle. The proposed development bank for term lending for infrastructure is welcome, provided its sources of finance are cheap, long term and mostly domestic. Investments in urban public health infrastructure — sanitation, water supply and sewage — are in the right direction if implemented in a coordinated manner.

     

  • Bringing transparency in Budget in agri-food sector

    The article analyses the Union Budget and highlights the emphasis on transparency by showing the borrowing of the FCI and arrears of the fertiliser companies in the Budget.

    Transparency in food subsidy and arrears of fertiliser industry

    • Year after year, a substantial part of the food subsidy was being put under the carpet by increasing the Food Corporation of India’s (FCI) borrowings.
    • The amount had crossed Rs 3 lakh crore.
    • The revised estimate (RE) for FY 2020-21 is 3.66 times the budgeted figure, indicating that almost all borrowings of FCI have been cleared.
    • This is indeed a historic step towards introducing transparency in the Union Budget.
    • The Budget also cleared off the fertiliser industry’s arrears.
    • Against the budgeted figure of Rs 71,309 crore for FY 2020-21, the revised estimate is Rs 1,33,947 crore, an increase of Rs 62,638 crore.

    Neglect of R&D

    • From a policy perspective one must point to the huge bias towards subsidies as compared to investments, especially research and development.
    • The allocation for agri-R&D is a meagre Rs 8,514 crore in FY 2021-22 against a RE of Rs 7,762 crore in FY 2020-21.
    • The marginal returns in terms of agri-growth from expenditures on agri-R&D are almost five to 10 times higher than through subsidies.
    • India spends not even half of what a private global company like Bayer spends on agri-R&D — almost Rs 20,000 crore every year.
    • This is why growth momentum in agriculture remains subdued and India keeps spending on freebies with sub-optimal results.

    Subsidies needs a rethink

    1) Food subsidy

    • The FCI’s economic cost of rice is Rs 37/kg and of wheat about Rs 27/kg.
    • This economic cost is roughly 40 per cent higher than the procurement price.
    • This calls for giving the public distribution system’s beneficiaries the choice of direct cash transfers.
    • This could create a more diversified demand which, in turn, will support diversification in agriculture.
    • Further, in food subsidy, it is time to revise the issue prices for beneficiaries except for the antyodaya (most marginal) category.
    • Percentage of population covered by the food subsidy should be brought down to 40 per cent.

    2) Fertiliser subsidy

    • Massive subsidisation of urea, to the tune of almost 70 per cent of its cost, is leading to its sub-optimal usage.
    • It is time to move towards direct cash transfers to farmers based on a per hectare basis and free up prices of fertilisers.
    • This will help reduce leakages and imbalance in NPK (nitrogen, phosphorus, potassium) usage and lead to efficiency, equity and environmental sustainability.

    Consider the question “If one looks at India’s Union Budget, it is easy to notice huge bias towards subsidies and neglect of the research and development in agriculure in the allocation for agriculture sector. What are the implications of such bias?” 

    Conclusion

    Overall, the expenditure on agri-R&D needs to be doubled or even tripled in next three years, if growth in agriculture has to provide food security at a national level and subsidies on food and fertilisers need to be contained. At the same time, food subsidy and fertiliser subsidy needs rationalisation.

  • Budget is constructive, but lack of income support continues

    The article takes broad overview of the Budget and highlight the recovery led by the goverment spending.

    Faster and sharper recovery

    • The economy has been recovering sharply and faster in the last two quarters than suggested by official growth numbers.
    • Official growth number remain based on antiquated year-on-year comparisons.
    • Comparisons from a year ago have a serious problem in that they depend on what happened four quarters earlier and tell us very little about growth momentum.
    • J.P. Morgan estimates suggest that, on a quarterly basis, India’s GDP plunged 25 per cent in the second quarter of 2020 and grew 21.5 per cent in the third quarter of the same fiscal year.
    •  This is a narrative markedly different from that portrayed by the official numbers.

    What is the basis of optimis

    • The economy is likely to have grown another 10.5 per cent in the fourth and is expected to deliver a growth rate of negative 6.5 per cent for the full fiscal year and then rise by 13.5 per cent in FY 2022.
    • The basis of this optimism is two-fold.
    • First, by accident or design, India has managed to break the link between infection and mobility.
    • The second is the recent shift in the government’s fiscal stance.
    • After delaying for nearly six months, the government began to speed up spending in September.

    Government spending to boost economy

    • With the economy recovering and the equity market surging, taxes and privatisation would reasonably be expected to rise.
    • The revenue increase could be used to reduce the deficit while keeping spending broadly at its current share of the Gross Domestic Product (GDP).
    • This would allow spending to grow 17-18 per cent, in line with the nominal GDP.
    • The choice really boiled down to where to spend.

    Higher fiscal deficit

    • For this year, the Budget pegged the deficit at 9.5 per cent of GDP, much higher than market estimates of around 7 per cent and a 5 per cent-point rise over the previous year.
    • Instead of funding food procurement through off-balance-sheet borrowing by the Food Corporation of India (FCI), as has been the case in the last few years, this year’s Budget has rightly brought some of that spending back on its accounts.
    • Excluding subsidies and interest payments, the increase in the deficit is just 2 percentage points of GDP.

    Continues lack of income support

    • In the details, while there is a welcome emphasis on public health, infrastructure projects, and on privatisation, the glaring omission is the continued lack of income support.
    • This lack of income support is important.
    • Underlying the strong headline recovery in growth, imbalances in the economy have widened significantly.
    • The scarring in the labour market is extensive and the likely damage to household and SME balance sheets substantial.
    • While a debt moratorium and other regulatory forbearance have concealed the extent of the damage, these measures simply postpone the eventual reckoning.
    • A key risk is that not only is medium-term growth impaired because of the scarring, but also that banks turn risk-averse and do not extend credit exactly when the recovery is expected to gather strength once mobility fully normalises.

    Consider the question “While the Budget for 2021-21 rightly health, infrastructure and privatisation, the lack of income support could threaten the prospects of recovery. Comment.”

    Conclusion

    While the Budget is constructive and has helped to allay fears of excessive fiscal tightening, it did not go far enough to mitigate the tail risk that the current economic recovery does not turn into a “dead cat bounce”.

  • [pib] Mega Investment Textiles Parks (MITRA) Scheme

    The Finance Minister has proposed setting up of a scheme of Mega Investment Textiles Parks (MITRA) Scheme in her budget speech.

    Do not get confused over Sahakar Mitra Scheme and this one.

    MITRA Scheme

    • MITRA aims to enable the textile industry to become globally competitive, attract large investments, and boost employment generation and exports.
    • It will create world-class infrastructure with plug and play facilities to enable create global champions in exports.
    • It will be launched in addition to the Production Linked Incentive Scheme (PLI).
    • It will give our domestic manufacturers a level-playing field in the international textiles market & pave the way for India to become a global champion of textiles exports across all segments”.

  • [pib] 14 new Minor Forest Produce (MFP) included Minimum Support Price (MSP) scheme

    14 new Minor Forest produce items have been included under the Mechanism for Marketing of Minor Forest Produce through Minimum Support Price scheme.

    Which are the 14 new MFP?

    Tasar Cocoon, Cashew Kernel (Anacardiumoccidentale), Elephant Apple Dry, Bamboo Shoot (Phyllostachys edulis), Malkangani Seed, Mahul Leaves, Nagod (Vitex negundo), Gokhru (Tribulus terrestris), Pipla/ Uchithi, Gamhar/ Gamari (dry bark), Oroxylumindicum, Wild Mushroom dry, Shringraj (Eclipta Alba), Tree Moss (Bryophytes).

    Now try this PYQ from CSP 2018:

    Q. Consider the following:

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

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

    (a) 1, 2, 3 and 7 only

    (b) 2, 4, 5 and 6 only

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

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

    About MSP for MFP Scheme

    • Under the scheme, Minimum Support Price for Minor Forest Produce (MFP) has been fixed for select MFP.
    • The scheme is designed as a social safety net for improvement of livelihood of MFP gatherers by providing them fair price for the MFPs they collect.
    • The Scheme has been implemented in eight States having Schedule areas as listed in the Fifth Schedule of the Constitution of India.
    • From November 2016, the scheme is applicable in all States.

    Back2Basics: Forest Produce in India

    • Forest produce is defined under section 2(4) of the Indian Forest Act, 1927.
    • Its legal definition includes timber, charcoal, catechu, wood-oil, resin, natural varnish, bark, lac, mahua flowers, trees and leaves, flowers and fruit, plants (including grass, creepers, reeds and moss), wild animals, skins, tusks, horns, bones, cocoons, silk, honey, wax, etc.
    • Forest produce can be divided into several categories.
    • From the point of view of usage, forest produce can be categorized into three types: Timber, Non-Timber and Minor Minerals.
    • Non-timber forest products [NTFPs] are known also as minor forest produce (MFP) or non-wood forest produces (NWFP).
    • The NTFP can be further categorized into medicinal and aromatic plants (MAP), oilseeds, fibre & floss, resins, edible plants, bamboo, reeds and grasses.

  • Credit rating

    The Economic Survey-2020-21 highlights the issue of the adverse rating given to emerging economies by global credit rating agencies. This article suggests using our flawless repayment record as the basis of argument.

    Prejudice against emerging economies

    • The Economic Survey for 2020-21, charged international credit rating agencies with prejudice against emerging economies such as India and China.
    • The Survey has used economic size as an argument.
    • The economy that is the world’s fifth-largest has predominantly been rated AAA, S&P’s top rating.
    • By contrast, India, which displaced the UK in 2019 as the world’s fifth-largest, has been rated BBB-, the lowest investment grade.
    • The Survey points out that since 1994, only twice has the credit rating (as assigned by S&P and Moody’s) of the fifth-largest economy in US dollar terms been poor.
    • This was when China and India rose to that rank, in 2005 and 2019 respectively.

    Issues with Credit Rating

    •  Rating agencies rarely get credit quality right and they have been found to be well behind the curve in almost every default crisis.
    • The behavior of these agencies has been pro-cyclical, which is often seen to aggravate crises and fuel bubbles.
    • They are too lenient when the times are good, and too harsh when economic conditions worsen, making booms and busts that much more dramatic.

    What should be the basis of India’s argument

    • Unless the country has the privilege of printing the world’s reserve currency, as the US has, there is nothing special that ensures a large economy will always repay what it owes.
    • India’s argument should revolve around the country’s flawless repayment record.
    • The last time we were on the verge of a sovereign default, in 1991, we reformed our economy.
    • Today, the country has foreign exchange reserves in excess of $584 billion, while its total external debt, including that of the private sector, is a shade over $556 billion.

    Consider the question “The Economic Survey of 2020-21 point to the adverse rating of India economy by the global rating agencies. What is the significance of such ratings for the economy. What should be the basis of the argument against India’s adverse rating by the agencies?”

    Conclusion

    Despite the above-mentioned factors, we still find that Indian borrowers must pay higher rates of interest overseas than they would have to with a better rating. Global rating agencies need to overhaul their methodology to better reflect reality.

  • An overview of Economic Survey 2020-21

    The pandemic has been leaving its imprint various aspects of our lives and Economic Survey is no different. This year’s Economic Survey focuses on the recovery path of the economy disrupted by the pandemic. The article takes an overview of the survey and also mentions the missing areas.

    Focus on a recovery path

    • The Economic Survey analyses the broad trends at the macro level and the profiling of the initiatives across various economic activities.
    • This year, the Economic Survey focuses on the recovery path after initial derailment and the losses suffered by the Indian economy due to the pandemic.
    • The recovery is expected to follow a V-shaped path.
    • The Survey advocates countercyclical fiscal policies based on the premise that growth leads to debt sustainability.
    • The Survey brings together various relevant factors that have both a short and long-term impact on the economy and the budget.
    • This year’s Survey focuses on enhanced public healthcare spending and demonstrates how effective it has been in slashing out-of-pocket expenditures in the recent past.
    • It also shows the brilliant performance under the Pradhan Mantri Jan Arogya Yojana (PM-JAY) and the improved outcomes in states that have implemented the programme.
    • With focus on basic needs, the Survey has brought back national attention on the fundamental developmental paradigm.
    • The idea of analysing inequalities in times of recovery is a reassuring premise to move on with.

    Comparison with past Economic Surveys

    • If we consider the last two Economic Surveys, the introduction of new concepts and approaches has been quite evident.
    •  In the Survey for 2018-19, the idea of “nudge” helped provide recognition of the importance of social behaviour change for any policy to succeed.
    • This led to the adoption of transformative approach in the Swachh Bharat Mission and Beti Bachao Beti Padhao initiative that integrated behavioural insights.
    • Another powerful idea has been using technology to run and monitor welfare schemes.
    • The Economic Survey 2019-20 talked overwhelmingly about the importance of wealth creation, entrepreneurship, and financial markets in the economic development.

    What the Survey misses

    • The Survey should have focussed on a new narrative for trade.
    • Apart from explaining the missing value chains and integration with South and Southeast Asia, the survey should have analysed the high cost of tariffs when 38 per cent of our exports are import-dependent.

    Consider the question “In the wake of economic disruption caused by the pandemic, India needs a new narrative for trade. However, India faces the challenge of missing value chains and lack of integration with South and Southeast Asia. In light of this, suggest the policies India should adopt as new narrative for trade.“

    Conclusion

    Besides trade, FDI inflows and the accumulation of foreign exchange reserves has been remarkable this year. It is expected that India will emerge as an important link in the global value chain sector which has been visibly disrupted by the pandemic

  • Need for expansionary fiscal stance in the Budget

    The article highlights the issues with the system of Budget presentation and suggest the areas to focus on.

    Issues with expenditure and revenue estimates

    • Experience shows revenues being much less than the Budget projections: each year, this mistake is repeated and even amplified.
    • The expenditure estimates are even more disingenuous because they understate the actual expenditures that should be counted.
    • This concern has been repeatedly brought up by the Comptroller and Auditor General of India (CAG).
    • A CAG report in 2018 identified at least three methods of reducing the stated expenditure:
    • 1) Not paying for the full fertilizer subsidy.
    • 2) Not paying the central government’s dues to the Food Corporation of India (FCI) for the food subsidy, and forcing the FCI to borrow from the market.
    • 3) Using other special purpose vehicles to pay for infrastructure investment, like the Long Term Irrigation Fund.
    • In 2017-18, just those three items amounted to â‚č1,29,446 crore or 1.8% of GDP.
    • These strategies are problematic because they are non-transparent and they also force other agencies (like State governments and public sector enterprises) to go in for expensive commercial borrowing.

    What CGA data reveals

    • The data from the Controller General of Accounts show that between April and November 2020, revenues of the central government predictably collapsed, by around 18%, or â‚č181,372 crores, compared to the same period of the previous year.
    • But despite that, expenditures should have gone up, because the lockdown-induced collapse in an economic activity meant that public spending would be the only thing keeping the economy afloat.
    • In three rounds of stimulus packages government claimed to inject amounts of â‚č1.7-lakh crore in March, â‚č20-lakh crore in May, and then â‚č2.65-lakh crore in November
    •  However, the public accounts show that the total spending of the central government increased by only â‚č86,301 crores.
    • That was only a 4.6% increase — not even enough to keep pace with inflation.
    • In other words, the central government reduced its real spending over the period of the pandemic and economic crisis.
    • This fiscal stance obviously affects people and also adds to contractionary tendencies in the economy, and prolongs the severe demand recession.
    • Policies that destroy informal economic activities eventually come to harm the formal enterprises as well.

    Consider the question “There has been growing concerns that expenditure estimates presented in our Budget fail to represent the actual expenditure of the government. What are the reasons for that and how it could affect the reliability of government finances?”

    Conclusion

    The Budget this year needs to focus on moving to a more expansionary fiscal stance that prioritizes employment generation and public service provision.

  • Keep the wheels of economic recovery turning

    Ahead of the Budget, the article discusses the status of Indian economy and suggests the measures to be adopted in the budget to speed up the recovery.

    Estimates of damages and signs of economic recovery

    • The first advance estimates of national income published on January 7 project a contraction of 7.7% for real GDP.
    • The Q2 GDP estimates published by the National Statistical Office had suggested an economic recovery in India.
    • An improvement in the rate of contraction from 23.9% in Q1 to 7.5% in Q2 was seen as the beginning of a sustained recovery.
    • The Ministry of Finance, in its Monthly Economic Review highlighted it as signifying a ‘V’ shaped recovery and as a reflection of the resilience and robustness of the Indian economy.
    • The Monetary Policy Statement of the Reserve Bank of India (RBI) released on December 4, 2020 also projects positive growth in the remaining quarters of the financial year.

    State of the economy before pandemic

    • Growth rate of the economy had collapsed from 8.2% in Q4 of 2017-18 to a mere 3.1% in Q4 of 2019-20, sliding continuously for eight quarters.
    • The policy stance against this backdrop was premised on the hope that private corporate investment will pick up momentum sooner than later.
    • The RBI did the heavy lifting through five consecutive lowering of repo rate along with liquidity infusion programmes.
    • However, monetary-fiscal linkages are crucial to catalyse the demand.

    Crucial role played by the RBI

    • While being cautious of inflation, the RBI has decided to continue the accommodative stance in its latest monetary policy to support growth.
    • The CPI inflation after crossing 7% has cooled off to 4.6% in December.
    • Still, the real interest rates remain very low.
    • The efficacy of the new monetary framework (NMF) — the agreement between the RBI and Government of India in February 2016 to adopt inflation targeting in India — will be reviewed in March 2021, and we flag the need for revising the framework.
    • The RBI is continuing its liquidity infusion programmes including the on-tap Targeted Long Term Repo Operations (TLTRO).
    • This programme announced on October 9, 2020 for five stressed sectors has been extended to 26 stressed sectors notified under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0).
    • The RBI is also continuing its ‘operation twist’  with Open Market Operations (OMO) of â‚č10,000 crore scheduled for December 17, 2020.
    • Nevertheless, the RBI Governor has rightly pointed out that the signs of recovery are far from being broad-based.

    Stimulus for targeted state intervention

    • According to the International Monetary Fund’s Fiscal Monitor Database of Country Fiscal Measures, the fiscal stimulus for India is 1.8% of GDP.
    • The IMF, in its Fiscal Monitor, highlights the need to scale up public investment to ensure successful reopening, boost growth and prepare economies for the future.
    • What we need is stimulus not based on “business cycle” but from the perspective of much needed targeted state interventions in public health, education, agriculture and physical infrastructure, and to redress widening inequalities.
    • As private final consumption expenditure is sluggish, contracting 26.7% and 11% in Q1 and Q2, respectively, a “fiscal dominance” is expected in India for sustained economic recovery.
    • However, India cannot afford fiscal stimulus at the rates of advanced economies, due to a lack of fiscal space.

    Way forward

    • Plummeting private corporate investment in India is a matter of concern.
    • The fear of financial crowding out emanating from high fiscal deficit is misplaced in the context of India.
    • Economic recovery will be determined by the degree of containment of the pandemic and the sustained macroeconomic policies.
    •  Any abrupt withdrawal of ongoing economic policy support, both by the monetary and fiscal authorities, will be detrimental to growth in times of the pandemic.
    • The fiscal rules at the national and subnational government levels need to be made flexible.

    Consider the question “Recovery of Indian economy battered by the pandemic has not been complete. Suggest the fiscal measure to be adopted by the government to speed up the recovery.”

    Conclusion

    The fiscal stimulus needs to continue in FY 2021-22 to speed up India’s recovery along with the measures suggested above.

  • [pib] International Energy Agency (IEA)

    The Framework for Strategic Partnership between the International Energy Agency (IEA) members and India was signed yesterday to strengthen mutual trust and cooperation & enhance global energy security, stability and sustainability.

    Try this MCQ:

    Q.The Global Energy Transition Index recently seen in news is released by:

    a) International Energy Agency (IEA)

    b) World Economic Forum (WEF)

    c) International Renewable Energy Agency (IRENA)

    d) International Solar Alliance

    International Energy Agency

    • The IEA is a Paris-based autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development (OECD) in 1974 in the wake of the 1973 oil crisis.
    • It was initially dedicated to responding to physical disruptions in the supply of oil, as well as serving as an information source on statistics about the international oil market and other energy sectors.
    • At the end of July 2009, IEA member countries held a combined stockpile of almost 4.3 billion barrels of oil.
    • They are required to maintain total oil stock levels equivalent to at least 90 days of the previous year’s net imports.
    • The IEA acts as a policy adviser to its member states but also works with non-member countries, especially China, India, and Russia.
    • The Agency’s mandate has broadened to focus on the “3Es” of effectual energy policy: energy security, economic development, and environmental protection.

    Greater role play

    • The latter has focused on mitigating climate change.
    • The IEA has a broad role in promoting alternate energy sources (including renewable energy), rational energy policies, and multinational energy technology co-operation.

    Why need a partnership with IEA?

    • This partnership will lead to an extensive exchange of knowledge and would be a stepping stone towards India becoming a full member of the IEA.
    • India and the IEA members will work as Energy Security, Clean & Sustainable Energy, Energy Efficiency, Enhancing petroleum storage capacity in India, Expansion of gas-based economy in India, etc.