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Subject: Economics

  • Need for national security shield in FDI

     

    Relaxation on Chinese FDI

    • Last April, India had subjected all Chinese FDI to mandatory government screening.
    • The aim was to curb opportunistic takeovers of Indian companies, a concern fuelled by sharp corrections in equity markets in March 2020.
    • Several economies including the US, Australia, Canada and Germany faced similar concerns.
    • They blocked specific takeover attempts, using special laws for national security screening of inward FDI.
    •  In the absence of similar legislation, India did not differentiate between investments which raised genuine national security concerns and those that did not.
    • This is a crucial shortcoming.
    • With market indices now hovering at their peaks, reportedly India may allow Chinese FDI up to 25 per cent in equity under the automatic route.

    Regulation of FDI and issues with it

    • India regulates foreign investments primarily through FEMA.
    • FEMA clearly provides two specific macro-prudential objectives — facilitating external trade and payments; and promoting orderly development and maintenance of foreign exchange markets in India.
    • Accordingly, it empowers the central government and the RBI, acting in consultation with each other, to regulate capital account transactions.
    • These regulations determine who can invest through the FDI route, in which sector and how much.
    • In practice, however, FEMA regulations have often responded to concerns not strictly related to macro-prudential objectives.
    • One such concern has been national security.

    Need for the law to scrutinise FDI from national security angle

    • Shortcoming of FEMA underscores the need for India to emulates its western peers and enact a statute specifically designed for national security screening of strategic FDI.
    • Unlike FEMA, this new statute must explicitly lay down legal principles for determining when a foreign acquisition of an Indian company poses genuine national security threats.
    • In this regard, a policy paper published by the Peterson Institute for International Economics three types of legitimate threats from foreign acquisitions.

    3 Types of threat from foreign acquisitions

    1) Dependency on foreign supplier

    • The first threat arises if a foreign acquisition renders India dependent on a foreign-controlled supplier of goods or services crucial to the functioning of the Indian economy.
    • For this threat to be credible, it needs to be further established that the industry in which the acquisition is supposed to take place is tightly concentrated, the number of close substitutes limited, and the switching costs are high.

    2) Technology transfer

    • The second threat emanates from a proposed acquisition transferring a technology or an expertise to a foreign-controlled entity that might be deployed by that entity or a foreign government in a manner harmful to India’s national interests.
    • The credibility of this threat again depends on whether the market for such technology or expertise is tightly concentrated or if they are readily available elsewhere.

    3) Threat of infiltration, surveillance or sabotage

    • The third threat arises if a proposed acquisition allows insertion of some potential capability for infiltration, surveillance or sabotage via human or non-human agents into the provision of goods or services crucial to the functioning of Indian economy.
    • This threat is particularly credible when the target company supplies crucial goods or services to the Indian government, its military or even critical infrastructure units and the switching costs are high.

    Way forward

    • The above stated 3 types of threats could provide conceptual clarity in the new statute could make national security assessments objective, transparent and amenable to the rule of law.
    • On procedure, the statute must empower only the finance minister to reject certain strategic foreign acquisitions on national security grounds.
    • Both the power and accountability mechanisms should be hardcoded into the statute itself, as is the case in some mature parliamentary democracies.
    • For instance, the Australian Foreign Acquisitions and Takeovers Act, 1975 empowers the treasurer to block certain foreign acquisitions on national security grounds.
    • Similarly, the Investment Canada Act, 1985 empowers a minister to reject certain foreign acquisitions.

    Consider the question “India needs to recognise the national security threat emanating from strategic FDI. This requires identifying threats. In lights of this, examine the types of threats and suggest the ways to deal with it.” 

    Conclusion

    Overall, India’s tryst with Chinese FDI underscores the importance of identifying specific national security threats emanating from strategic FDI and addressing them objectively. This is too sensitive a matter to be left to capital controls under FEMA. A dedicated statute for national security screening of inward FDI would be best suited for handling such issues.

  • India as a factory for the Quad

    The article highlights how India could offer the solution to the tactical issue faced by the Quad: matching China’s manufacturing capacity.

    Strategic case for the Quad

    • The strategic case for the Quadrilateral Security Dialogue, better known as the Quad, has always been sound.
    • A rising China, with its authoritarian one-party system, is a challenge to the democratic order.
    • The strategic case for the Quad has, however, always faced a tactical hurdle.
    • China was the factory of the world.
    • It had become an almost indispensable cog in the global supply chain owing to its low-cost manufacturing prowess at a mass scale.
    • How could any grouping hope to challenge China’s power-play dynamics while at the same time being dependent on its factories to sustain its economies?

    Two recent development that changed the dynamic

    • Two recent developments have completely changed the dynamic.
    • First, Australia returned to the Malabar Naval exercises in 2020, after 13 years.
    • Second, on March 12, the first summit-level meet of the Quad — comprising the US, India, Japan and Australia — is scheduled to take place.

    Rise in India’s manufacturing ability

    • What has changed between 2007 and 2020 that Quad 2.0 has become viable is the globally visible rise in India’s manufacturing ability.
    • Consider the following examples.

    1) PPE Kit manufacturing

    • First, the success in PPE kits.
    • At the beginning of the COVID-19 pandemic, India was manufacturing zero PPE kits.
    • India not just created an overnight world-class manufacturing capacity to meet its own needs but also started exporting PPE kits.

    2) Vaccine Maitri

    • Second, the soft power of Vaccine Maitri.
    • The developed countries are scrambling to secure vaccines for their domestic population.
    • India is not only vaccinating its own people faster than any other country but is also exporting millions of vaccines to countries in need.
    • From Canada to Pakistan and from the Caribbean Islands to Brazil — Made in India vaccines have been a life vest across the globe.

    3) India’s private industry

    • Third, the enterprise of India’s private industry — a hallmark of the deepening manufacturing base.
    • As a recent New York Times report noted, when it came to syringes — without which the vaccines were useless — the global scramble again led to Indian manufactures.
    • Hindustan Syringes alone has ramped up its manufacturing capacity to almost 6,000 syringes a minute.

    4) Precision high-end manufacturing

    • The PLI scheme launched for electronics’ manufacturing evinced unprecedented global interest with 22 top companies, including the top manufactures for Apple and Samsung mobile phones.
    • Over the next five years, a manufacturing capacity of over $150 billion and exports of $100 billion have been tied up through this scheme.

    5) Figher plane manufacturing

    • Fifth, the success of India’s fourth-generation fighter jet programme and the orders placed by the Indian Air Force for 83 Tejas jets.
    • India’s success is one more milestone in its journey towards emerging as a global manufacturing destination.

    Policy changes to make India manufacturing destination

    • Concurrently, India has been reforming its economic policies to make it even more attractive as a manufacturing destination.
    • India has the lowest tax rate anywhere in the world — 15 per cent for new manufacturing units.
    • FDI norms have been relaxed across the board and automatic approval processes instituted for FDI even up to 100 per cent.
    • Privatisation of PSUs is now an established process.
    • Labour laws have been finally reformed and compliance burdens significantly eased.
    • Taxation is now faceless, thus ending the spectre of rent-seeking.
    • A well-functioning, world-class bankruptcy law is in place. Interest rates are low.
    • And India’s digital infrastructure rivals the best in the world and in many cases beats it.

    Consider the question “India’s growing prowess as the manufacturing hub could provide the Quad tactical basis by replacing China. Comment.“

    Conclusion

    The only arrow that was missing in the quiver of the Quad has now been attained. The strategic case for the Quad was never in doubt. The dependence on China’s factories is what kept the grouping of democracies from emerging. India has raised its hand to solve that problem.

  • A case for a revamped, need-based PDS

    The article highlights the factors governing the food subsidy bill and suggests ways to reduce it.

    Growing food subsidy bill

    • The Economic Survey, tabled in Parliament in January, rightly flagged the issue of a growing food subsidy bill.
    • During 2016-17 to 2019-20, the subsidy amount, clubbed with loans taken by the Food Corporation of India (FCI) under the National Small Savings Fund (NSSF) towards food subsidy, was in the range of ₹1.65-lakh crore to ₹2.2-lakh crore.
    • In future, the annual subsidy bill of the Centre is expected to be about ₹2.5-lakh crore.
    • During the three years, the quantity of food grains drawn by States (annually) hovered around 60 million tonnes to 66 million tonnes.
    • The National Food Security Act (NFSA) 2013, covered two-thirds of the country’s population, this naturally pushed up the States’ drawal.
    • Based on an improved version of the targeted Public Distribution System (PDS), the law requires the authorities to provide to each beneficiary 5 kg of rice or wheat per month.

    How politics influenced the issue price

    • Economic Survey has hinted at an increase in the Central Issue Price (CIP).
    • Central Issue Price has remained at ₹2 per kg for wheat and ₹3 per kg for rice for years, though the NFSA, even in 2013, envisaged a price revision after three years.
    • What makes the subject more complex is the variation in the retail issue prices of rice and wheat, from nil in States such as Karnataka and West Bengal for Priority Households (PHH) and Antyodaya Anna Yojana (AAY) ration card holders.
    • In Tamil Nadu, rice is given free of cost for all categories; this includes non-PHH.
    • A mere increase in the CIPs of rice and wheat without a corresponding rise in the issue prices by the State governments would only increase the burden of States.
    • Political compulsions are perceived to be coming in the way of the Centre and the States increasing the prices.

    Relook at food subsidy system

    • An official committee in January 2015 called for decreasing the quantum of coverage under the law, from the present 67% to around 40%.
    • For all ration cardholders drawing food grains, a “give-up” option, as done in the case of cooking gas cylinders, can be made available.
    •  Even though States have been allowed to frame criteria for the identification of PHH cardholders, the Centre can nudge states into pruning the number of such beneficiaries.
    • As for the prices, the existing arrangement of flat rates should be replaced with a slab system.
    • Barring the needy, other beneficiaries can be made to pay a little more for a higher quantum of food grains.

    Consider the question “There is a pressing need for revamping the food subsidy system. In light of this, suggest the measures to improve the system.”

    Conclusion

    These measures, if properly implemented, can have a salutary effect on retail prices in the open market. A revamped, need-based PDS is required not just for cutting down the subsidy bill but also for reducing the scope for leakages. Political will should not be found wanting.

  • Farmers produce organisations (FPOs)

    The article analyses the role farmers produce organisations (FPOs) can play in improving the bargaining power of the small farmers and also suggest ways to improve FPOs.

    Declining size of farm holdings

    • The average farm size in India declined from 2.3 hectares (ha) in 1970-71 to 1.08 ha in 2015-16.
    • The share of small and marginal farmers increased from 70 per cent in 1980-81 to 86 per cent in 2015-16.
    • At the state level, the average size of farm holdings in 2015-16 ranged from 3.62 ha in Punjab, 2.73 in Rajasthan and 2.22 in Haryana to 0.75 in Tamil Nadu, 0.73 in Uttar Pradesh, 0.39 in Bihar and 0.18 in Kerala.

    Encouraging FPOs to help small farmers

    • Small farmers face several challenges in getting access to inputs and marketing facilities.
    • In the last decade, the Centre has encouraged farmer producer organisations (FPOs) to help farmers.
    • Since 2011, it has intensively promoted FPOs under the Small Farmers’ Agri-Business Consortium (SFAC), NABARD, state governments and NGOs.
    • The membership of an FPO ranges from 100 to over 1,000 farmers.
    • The ongoing support for FPOs is mainly in the following two forms:
    • 1) A grant of matching equity (cash infusion of up to Rs 10 lakh) to registered FPOs.
    • 2) A credit guarantee cover to lending institutions (maximum guarantee cover 85 per cent of loans not exceeding Rs 100 lakh).
    • The budget for 2018-19 announced supporting measures for FPOs including a five-year tax exemption.
    • The budget for 2019-20 talked of setting up 10,000 more FPOs in the next five years.
    • Some studies show that we need more than one lakh FPOs for a large country like India while we currently have less than 10,000.

    Looking at the performance of FPOs in last decade

    • Experience shows a mixed performance of FPOs in the last decade.
    • Some estimates show that 30 per cent of these are operating viably while 20 per cent are struggling to survive.
    • The remaining 50 per cent are still in the initial phase of mobilisation and business planning.
    • NABARD has undertaken a field study on the benefits of FPOs in Punjab and Madhya Pradesh.
    • The study shows that in nascent FPOs, the proportion of farmer members contributing to FPOs activities is 20-30 per cent while for the emerging and mature FPOs it is higher at about 40-50 per cent.
    • A study by International Food Policy Research Institute (IFPRI) has undertaken a comparative study of FPOs in Maharashtra and Bihar.
    • In Maharashtra, some of the FPOs have organically evolved (OFPOs) when farmers have taken the lead to adopt market-oriented practices, develop cost-effective solutions in production and marketing.
    • In the case of Bihar, almost all FPOs have been promoted (PFPOs).

    Challenges

    • Studies of NABARD show that there are some important challenges for building sustainable FPOs.
    • Some of these are lack of technical skills, inadequate professional management, weak financials, inadequate access to credit, lack of risk mitigation mechanism and inadequate access to market and infrastructure.

    Focusing on 3 issues for the improvement of FPOs

    1) Getting credit

    • Issues such as working capital, marketing, infrastructure have to be addressed while scaling up FPOs.
    • Banks must have structured products for lending to FPOs.
    • These organisations lack professional management and, therefore, need capacity building.

    2) Linking with input companies

    • FPOs have to be linked with input companies, technical service providers, marketing/processing companies, retailers etc.
    • They need a lot of data on markets and prices and other information and competency in information technology.

    3) Augmenting the size of land

    • The FPOs can be used to augment the size of the land by focusing on grouping contiguous tracts of land as far as possible — they should not be a mere grouping of individuals.
    • Women farmers also can be encouraged to group cultivate for getting better returns.
    • FPOs can also encourage consolidation of holdings.

    Consider the question “How FPOs can play an important part in helping the small farmers by improving their bargaining power? What are the challenges faced by the FPOs?”

    Conclusion

    The FPOs have to be encouraged by policy makers and other stakeholders apart from scaling up throughout the country to benefit particularly the small holders.

  • Ramagundam Floating Solar Power Plant

    The country’s biggest floating solar power plant, by generation capacity at Ramagundam in Peddapalli district of Telangana is set to be commissioned by May-June.

    Try this PYQ:

    With reference to technologies for solar power production, consider the following statements :

    1. ‘Photovoltaics’ is a technology that generates electricity by direct conversion of light into electricity, while ‘Solar Thermal’ is a technology that utilizes the Sun’s rays to generate heat which is further used in electricity generation process.
    2. Photovoltaics generate Alternating Current (AC), while Solar Thermal generates Direct Current (DC).
    3. India has manufacturing base for Solar Thermal technology, but not for Photovoltaics.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 3

    (d) None

    Ramagundam Solar Plant

    • It would be one of the renewable (solar) energy plants being developed by NTPC with an installed capacity of 447MW in the Southern Region and the entire capacity would be commissioned by March 2023.
    • It will be spread over 450 acres of water surface area in the reservoir.
    • It will be the single location largest floating solar plant in the country as of now; 92 MW floating unit at Kayamkulam gas plant in Kerala and a 25 MW unit at Simhadri power plant.
    • In addition, we are setting up a 230 MW ground-mounted solar power plant in Ettayapuram near Tuticorin in Tamil Nadu

    Why floating solar?

    • One of the biggest advantages of floating solar panels is that the installations do not require valuable land space.
    • Many of these installations can take up unused space on bodies of water, such as hydroelectric dam reservoirs, wastewater treatment ponds, or drinking water reservoirs.
    • Additionally, installing solar panels out on open water reduces the need for tree removal and forest clearing, a practice used in the case of some larger solar panel installations.
    • The bodies of water that host floating solar arrays help cool down the solar equipment, which means the panels produce electricity at higher efficiencies in hot climates than they might otherwise.
    • The floating solar panel structure shades the body of water and reduces evaporation from these ponds, reservoirs, and lakes.
    • This is a particularly useful benefit in areas susceptible to drought, as water loss to evaporation can add up over time and contribute to a shortage.

  • Enabling the Business of Agriculture (EBA) 2019,

    Enabling the Business of Agriculture (EBA) 2019, published by the World Bank highlights the constraints faced by farmers. The article highlights the key findings of the publication.

    Constraints in carrying out farming activity

    • Debates around the farm laws have brought to light the issue of developing a sound regulatory framework to promote India’s agricultural growth.
    • The fact remains that farmers, mainly smallholders, across India continue to face various constraints.
    • They include constraints in accessing agricultural inputs, markets, finance, human resources, and information, which are critical for increasing farmers’ competitiveness.
    • A recent publication by the World Bank titled Enabling the Business of Agriculture (EBA) 2019 measures the extent to which government regulatory systems in 101 countries worldwide make it easier for their farmers to operate agricultural activities.
    • These indicators measure the strength of a country’s agricultural regulatory environment pertaining to market integration and entrepreneurship in agriculture.
    • Among 101 countries covered, India ranked 49 on the EBA aggregate score.

    Key takeaways from EBA for India

    • India lags behind its close competitors in world agriculture, namely China, Brazil, and Russia.
    • Compared to these three countries, India has the weakest performance on five out of eight indicators.
    • They are registering fertilizer and machinery, securing water, sustaining livestock, and protecting plant health indicators.
    • Registering fertilizer and machinery indicators measure domestic laws and regulations that provide farmers access to fertilizer and agricultural machinery.
    • The regulatory processes that help farmers make appropriate decisions regarding the level of investment in irrigation are measured by securing water indicator.
    • Sustaining livestock indicator captures the quality of regulations affecting farmers’ access to livestock farming inputs.
    • The quality of legislation on phytosanitary standards (SPS) is captured through the protecting plant health indicator.

    Need to develop a suitable regulatory system

    • Governments can play a critical role in this regard by enacting laws and regulations.
    • Such laws and regulations can influence farmers’ access to agricultural inputs, cost of production, agricultural markets and value chains, the competitiveness of farmers, and private investment in the farming sector.
    • The regulatory system that governs irrigation management is essential for reducing the variability of farm output, prices, and incomes, minimising vulnerability to natural shocks, and incentivising the production of riskier and high returns crops.
    • Gaining access to the global agricultural value chain requires a sound regulatory framework on SPS.

    India’s strong areas

    • The comparative score of India on supplying seed, trading food, and accessing finance indicators is high.
    • Supplying seed indicator evaluates laws and regulations that ensure timely release of seed to farmers.
    • The trading food indicator assesses laws and regulations that facilitate exporting of farm products by farmers.
    • The regulatory framework on the use of warehouse receipts is assessed using accessing finance indicator.
    • A robust warehouse receipts system enables the farmers to obtain the credit needed to invest in agriculture.

    Opportunity for India

    • The future of world agriculture and food production is expected to increasingly depend on middle-income countries such as China, India, Brazil, and Indonesia.
    • To make the best use of this great opportunity, India needs to put in place an agricultural regulatory system that would make it easier for its farmers to conduct agricultural activities.

    Consider the question “Farmers, mainly smallholders, across India continue to face various constraints in carrying out farming activities. What are the implications of such constraints? What role government can play in removing these constraints?”

    Conclusion

    The EBA project results reveal that, compared to its close competitors, the strength of India’s agricultural regulatory environment is weak on the whole and with respect to key performance indicators.

  • [pib] Glycemic Index in Rice

    The Union Minister of Agriculture and Farmers Welfare has provided some useful information about some indigenous varieties of rice.

    Try this PYQ from CSP 2018:

    Q.With reference to the Genetically Modified mustard (GM mustard) developed in India, consider the following statements:

    1. GM mustard has the genes of a soil bacterium that give the plant the property of pest-resistance to a wide variety of pests.
    2. GM mustard has the genes that allow the plant cross-pollination and hybridization.
    3. GM mustard has been developed jointly by the IARI and Punjab Agricultural University.

    Which of the statements given above is/are correct?

    (a) 1 and 3 only

    (b) 2 only

    (c) 2 and 3 only

    (d) 1, 2 and 3

    Indigenous varieties of rice

    • Indigenous varieties of rice are being promoted through varieties of programmes.
    • 574 indigenous varieties of rice have been propagated and tested at more than 10,000 farmers’ fields.
    • Nutritional profiling of 300 selected rice varieties has been done for market linkage and better price to the farmers.
    • Farmers are also being trained on conservation, improvement and use of traditional/ indigenous varieties through participatory variety selection.
    • Further, for access to seeds of these indigenous varieties, community seed banks have been established.

    Key varieties

    • Lalat and Improved Lalat (GI value: 54) as Low GI
    • Swarna, Sambha Mahsuri and Shaktiman (GI value <60) as intermediate GI have been identified

    There is no certification for GI (Glycemic Index) in rice in India.

    What is Glycemic Index (GI)?

    • GI is a number from 0 to 100 assigned to food, with pure glucose arbitrarily given the value of 100, which represents the relative rise in the blood glucose level two hours after consuming that food.
    • The GI of a specific food depends primarily on the quantity and type of carbohydrate it contains.
    • But it is also affected by the amount of entrapment of the carbohydrate molecules within the food, the fat and protein content of the food, the number of organic acids (or their salts) in the food, and whether it is cooked and, if so, how it is cooked.
    • A food is considered to have a low GI if it is 55 or less; high GI if 70 or more, and mid-range GI if 56 to 69.

  • Privatisation of Banks

    The article highlights the different aspects that need to be considered while contemplating the idea of privatisation of public banks.

    Opposite trends in India and the US

    • While the United States epitomises the private banking model, a nationwide public banking movement is coming into vogue.
    • In contrast, India seems to be quickly warming to the idea of bank privatisation.

    Public or the private?

    • The development view sees government presence in the banking sector as a means to overcome market failures in the early stages of economic development.
    • The government-owned banks can improve welfare by allocating scarce capital to socially productive uses.
    • The stellar success of Indian PSBs in implementing the PMJDY while missing the mark on creating high-quality credit highlights a critical divide between the asset and the liability side of a bank.
    • Banks provide two functions at a fundamental level: Payments and deposit-taking on the liability side and credit creation on the asset side.
    • The payment services function, a hallmark of financial inclusion, is similar to a utility business — banks can provide this service, a public good, at a low cost universally.
    • The lending side, in contrast, is all about the optimal allocation of resources through better credit evaluation and monitoring of borrowers.
    • Private banks are more likely to have the right set of incentives and expertise in doing so.
    • It comes as no surprise that the PSBs in India are better at providing the public good functions, whereas private banks seem better suited for credit allocation.
    • However, the political view argues that vested interests can influence the lending apparatus to achieve political goals.
    • This results in distortion of credit allocation and reduce allocative efficiency in government-owned banking systems.

    Reasons for privatisation of banks

    • Evidences shows that government ownership in the banking sector leads to lower levels of financial development and growth
    • This led to waves of banking sector privatisations that swept emerging markets in the 1990s.
    • Cross-country evidence suggests that bank privatisations improved both bank efficiency and profitability.

    How public banks performed in India

    • Public sector Banks (PSBs) dominate Indian banking, controlling over 60 per cent of banking assets.
    • The private-credit to GDP ratio, a key measure of credit flow, stands at 50 per cent, much lower than international benchmarks — in China it is150 and in South Korea it is 150 per cent.
    • India’s Gross NPA ratio was 8.2 per cent in March 2020, with striking differences across PSBs (10.3 per cent) and private banks (5.5 per cent).
    • The end result is much lower PSB profitability compared to private banks.
    • The rationale for privatisation stems from these considerations.

    Way forward

    • The optimal mix of the banking system across public and private boils down to what you need out of your banking system.
    • When the wedge between social and private benefits is large, as with financial inclusion, there is a strong case for public banks.
    •  At this stage, inefficiency in capital allocation seems to be a bigger issue for the Indian banking sector, whereas, in the US, the debate is centred around the public goods aspects of banking.

    Consider the question “What are the factors India needs to consider as it reverses the course of history by privatising the public banks?”

    Conclusion

    At this stage, inefficiency in capital allocation seems to be a bigger issue for the Indian banking sector, whereas, in the US, the debate is centred around the public goods aspects of banking.

  • [pib] SATAT Scheme

    Oil and Gas Marketing Companies (OGMCs) are inviting potential entrepreneur to procure Compressed Bio Gas (CBG) under the SATAT scheme.

    Try this MCQ:

    Q.SATAT is an initiative of the Government of India, aims at:

    (a) Promoting Self Help Groups in rural areas

    (b) Providing financial and technical assistance to young start-up entrepreneurs

    (c) Promoting affordable transportation

    (d) Providing affordable and quality education to the citizens for free

    SATAT Scheme

    • SATAT stands for Sustainable Alternative Towards Affordable Transportation.
    • It is an initiative aimed at setting up Compressed Bio-Gas production plants and makes them available in the market for use in automotive fuels by inviting Expression of Interest from potential entrepreneurs.
    • The initiative was launched in October 2018 by the Ministry of Petroleum & Natural Gas in association with the PSUs- Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd.

    Its implementation

    • CBG plants are proposed to be set up mainly through independent entrepreneurs.
    • CBG produced at these plants will be transported through cascades of cylinders to the fuel station networks of OMCs for marketing as a green transport fuel alternative.
    • The 1,500-strong CNG stations network in the country currently serves about 32 lakh gas-based vehicles.
    • The entrepreneurs would be able to separately market the other by-products from these plants, including bio-manure, carbon-dioxide, etc., to enhance returns on investment.
    • So far 9 CBG plants have been commissioned and started supply of CBG under the scheme.
    • These plants are located in Andhra Pradesh (1No.), Gujarat (3 No.), Haryana (1 No.), Maharashtra (3 No.) and Tamil Nadu (1No.).

    Benefits of the programme

    There are multiple benefits from converting agricultural residue, cattle dung and municipal solid waste into CBG on a commercial scale:

    • Responsible waste management, reduction in carbon emissions and pollution
    • Additional revenue source for farmers
    • Boost to entrepreneurship, rural economy and employment
    • Support to national commitments in achieving climate change goals
    • Reduction in import of natural gas and crude oil
    • Buffer against crude oil/gas price fluctuations

    Back2Basics: Compressed Bio Gas (CBG)

    • Biogas is produced naturally through a process of anaerobic decomposition from waste / bio-mass sources like agriculture residue, cattle dung, sugarcane press mud, municipal solid waste, sewage treatment plant waste, etc.
    • After purification, it is compressed and called CBG, which has a pure methane content of over 95%.
    • CBG is exactly similar to the commercially available natural gas in its composition and energy potential.
    • With calorific value (~52,000 KJ/kg) and other properties similar to CNG, CBG can be used as an alternative, renewable automotive fuel.
    • Given the abundance of biomass in the country, CBG has the potential to replace CNG in automotive, industrial and commercial uses in the coming years.

  • Recovery? Different numbers tell different stories

    India’s growth numbers reveal a different story when seen through the quarter-on-quarter growth lense. The article deals with this issue.

    Weakness of India’s GDP statistics

    • The CSO press release for 4Q20 stated that India grew 0.4 per cent on a year-ago basis.
    • That is, relative to the level of GDP four quarters before.
    • Many heaved a sigh of relief at growth turning positive after two-quarters of negative year-ago: -24.4 per cent in 2Q20 and -7.3 per cent in 3Q20 and declared that growth would accelerate from hereon.
    • Nothing could be further from the truth.
    • To know whether the economy will accelerate or decelerate, one needs to know its current speed.
    • To do that, one needs to compute the quarter-on-quarter growth as almost all large economies do.
    • This is a central weakness of India’s GDP statistics, exemplified by last week’s 4Q20 print.

    Challenges in measuring quarter-on-quarter growth

    • These computations are not easy, because each quarter has its own characteristics or, as economists call it, “seasonality”
    • Seasonality naturally increases or decreases activity in that period.
    • Think of quarters with festivals or with harvests versus those without them.
    • The modern economy is more complicated as its seasonal patterns change when its structure does.
    • To compare two quarters, these changes to seasonality need to be excluded from the data.
    • Statisticians have been working on this issue for more than a century and, over the last two decades.
    • As a result, many official statistical bodies (such as the US Census Bureau) have made deseasonalising methods freely available.

    Understanding the issue through example

    • If the level of 1Q20 GDP is set at 100, then the quarterly growth rates imply that it fell to 75, rising to 91.1 in the following quarter and then to 96.3 last quarter.
    • Now assume that the level of GDP remains constant for the next five quarters, that is, there is no growth in the economy until the end of fiscal year 2021-22.
    • This would mechanically put the full-year growth in 2021-22 at 7.2 per cent simply because of the low average level of GDP in the previous year.
    • If the speed of the economy were to remain at its current pace of 5.7 per cent, then the annual growth in 2021-22 would be an astonishing 28.7 per cent.
    • Any annual growth projection for next year that is less than this necessarily implies a slowdown from the current pace.

    So, what is Indian economy’s current growth rate

    • J.P. Morgan uses one of the above mentioned deseasonalising technique.
    • The derived quarterly path is the following: In 1Q20, India’s economy grew 3.7 per cent over the previous quarter, in 2Q20 the economy contracted 25 per cent and then recovered 21.5 per cent in 3Q20 and ended the last quarter at 5.7 per cent.
    • Put differently, growth slowed to 5.7 per cent last quarter — the latest reading of the economy’s “current” speed.

    Putting in context the projected nominal growth

    • The budget documents suggest that the government’s projected nominal growth for 2021-22 is 14.5 per cent.
    • This implies a real growth rate of around 11 per cent assuming inflation averages 3.5 per cent.
    • The implied average quarterly pace, consistent with an 11 per cent annual growth, is just 1 per cent.
    • The year-on-year quarterly numbers will keep rising giving the false assurance of a strengthening recovery when in reality the level of income would rise only at a grinding pace.

    Reasons behind the deceleration

    • India’s growth drivers had already slowed dramatically prior to the pandemic, the pandemic likely exacerbated them.
    • With listed companies posting strong profit growth in 3Q and 4Q, much of the decline in overall income has fallen on households and MSMEs.
    • This is likely to have not only worsened income inequality, but also severely impaired their balance sheets, making it that much more difficult to access credit in the coming quarters.
    • While industry has recovered to 98 per cent of its pre-pandemic level, the service sector remains substantially below.
    • Thus, much of the continued high unemployment (as reported by private surveys) is in services.
    • This is likely to have disproportionately increased women’s unemployment, thereby widening the gender gap.
    • Last quarter, central government spending rose 12 per cent, but overall public expenditure contracted 1 per cent, implying a sharp contraction at the state level.

    Consider the question “Why quarter-on-quarter growth rates reveal a true picture of India’s growth rate as compared to year-on-year rates? What are the challenges in dealing with the quarter-on-quarter data?”

    Conclusion

    Neither fiscal policy nor monetary policy are designed to reverse these widening economic imbalances. This makes it hard to see India’s growth engines firing on all cylinders, despite the rollout of vaccines and the anticipated surge in US growth.