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Subject: Economics

  • What are Off-Budget Borrowings?

    Finance Minister is all set to present the Union Budget 2021 on February 1st with all eyeing on off-budget borrowings to reduce Fiscal Deficit.

    Try this PYQ:

    With reference to the Union Government, consider the following statements:

    1. The Department of Revenue is responsible for the preparation of Union Budget that is presented to the Parliament.
    2. No amount can be withdrawn from the Consolidated Fund of India without the authorization from the Parliament of India.
    3. All the disbursements made from Public Account also need authorization from the Parliament of India.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 2 and 3 only

    (c) 2 only

    (d) 1, 2 and 3

    What are off-budget borrowings?

    • Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution that borrows on the directions of the central government.
    • Such borrowings are used to fulfill the governmentā€™s expenditure needs.
    • Such borrowings are a way for the Centre to finance its expenditures while keeping the debt off the books ā€” so that it is not counted in the calculation of fiscal deficit.
    • But since the liability of the loan is not formally on the Centre, the loan is not included in the national fiscal deficit. This helps keep the countryā€™s fiscal deficit within acceptable limits.
    • As a result, a CAG report of 2019 pointed out that this route of financing puts major sources of funds outside the control of Parliament.

    Eyes on fiscal deficit

    • One of the most sought after details in any Union Budget is the level of fiscal deficit.
    • It is essentially the gap between what the central government spends and what it earns. In other words, it is the level of borrowings by the Union government.
    • This number is the most important metric to understand the financial health of any governmentā€™s finances.
    • As such, it is keenly watched by rating agencies ā€” both inside and outside the country. That is why most governments want to restrict their fiscal deficit to a respectable number.
    • One of the ways to do this is by resorting to ā€œoff-budget borrowingsā€.

    How much would the borrowings be?

    • According to the last Budget documents, in the current financial year, the Centre was set to borrow Rs 5.36 lakh crore.
    • However, this figure did not include the loans that public sector undertakings were supposed to take on their behalf or the deferred payments of bills and loans by the Centre.

    How are off-budget borrowings raised?

    • Issuance of Bonds: The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds.
    • Utilizing savings: For example, the food subsidy is one of the major expenditures of the Centre. In the Budget presentation for 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. The shortfall was met through a loan from the National Small Savings Fund.
    • Borrowing: Other PSUs have also borrowed for the government. For instance, public sector oil marketing companies were asked to pay for subsidized gas cylinders for PM Ujjwala Yojana beneficiaries in the past.
    • Bank sources: Public sector banks are also used to fund off-budget expenses. For example, loans from PSU banks were used to make up for the shortfall in the release of fertilizer subsidy.

    Its implications

    • Given the various sources of off-budget borrowing, the true debt is difficult to calculate.
    • For instance, it was widely reported that in July 2019, just three days after the presentation of the Budget, the CAG (cumulative aggregate growth) pegged the actual fiscal deficit for 2017-18 at 5.85% of GDP instead of the government version of 3.46%.

  • ‘The Inequality Virus’ Report

    The ā€˜Inequality Virus Reportā€™ was recently released on the opening day of the World Economic Forum in Davos.

    About the report

    • The Inequality Virus Report was released by Oxfam.
    • It inquired into different forms of inequities, including educational, gender and health during the pandemic.

    Highlights of the report

    ā€˜Riseā€™ in wealth

    • Indian billionaires increased their wealth by 35% during the lockdown to ā‚¹ 3 trillion, ranking India after the U.S., China, Germany, Russia and France.
    • The wealth of just the top 11 billionaires during the pandemic could easily sustain the MGNREGS or the Health Ministry for the next 10 years, stated the report.
    • A person (no citation needed!) who emerged as the richest man in India and Asia, earned ā‚¹90 crores an hour during the pandemic when around 24% of the people in the country were earning under ā‚¹ 3,000 a month during the lockdown.
    • The increase in his wealth alone could keep 40 crores, informal workers, out of poverty for at least five months, said the report.

    Observations made

    Health: Only 6% of the poorest 20% have access to non-shared sources of improved sanitation, compared to 93.4 % of the top 20 %.

    Education: Till October, 32 crores students were hit by the closure of schools, of whom 84 % resided in rural areas and 70 %attended government schools. Dalits, Adivasis and Muslims were likely to see a higher rate of dropout. Girls were also most vulnerable as they were at risk of early and forced marriage, violence and early pregnancies, it noted.

    Gender: Unemployment of women rose by 15% from a pre-lockdown level of 18 %, which could result in a loss of Indiaā€™s GDP of about 8 % or ā‚¹15 trillion. Women who were employed before the lockdown were also 23.5 percentage points less likely to be re-employed compared to men in the post lockdown phase.

    Recommendations

    • It recommended reintroducing the wealth tax and affecting a one-time COVID-19 cess of 4% on taxable income of over ā‚¹10 lakh to help the economy recover from the lockdown.
    • According to its estimate, a wealth tax on the nationā€™s 954 richest families could raise the equivalent of 1% of the GDP.

  • Shipping sector in india

    The article deals with the problems faced by India’s shipping sector and suggests the measures to improve the shipping sector.

    Importance of shipping for economic growth

    • The major economies of the world have always realized the potential of shipping as a contributor to economic growth.
    • For instance, control of the seas is a key component of Chinaā€™s Belt and Road Initiative (BRI).
    • However, geographically, China is not as blessed as India,Ā yet, seven of the top 10 container ports in the world are in China, according to the World Shipping Council.
    • What aided Chinaā€™s growth are strong merchant marine and infrastructure to carry and handle merchandise all over the world.

    Lack of carrying capacity

    • All the shipping infrastructure in peninsular India only helps foreign shipping liners.
    • India has concentrated only on short-term solutions.
    • Foreign ship owners carry our inbound and outbound cargo. This is the case in container shipping too.
    • As a country, we have still not optimized our carrying capacity.Ā 
    • Much of foreign currency is drained as transshipment and handling costs every day.
    • Due to this, members of our maritime business community have also preferred to be agents for foreign ship owners or container liners rather than becoming ship owners or container liners themselves.
    • As a result, there is a wide gap between carrying capacity and multi-folded cargo growth in the country.

    Way forward

    1) Regional cargo-specific ports

    • Instead of creating regional cargo-specific ports in peninsular India, we allowed similar infrastructural developments in multiple cargo-handling ports.
    • As a result, Indian ports compete for the same cargo.
    • We need to make our major ports cargo-specific, develop infrastructure on a par with global standards, and connect them with the hinterlands as well as international sea routes, they will automatically become transshipment hubs.
    • We need to only concentrate on developing the contributing ports to serve the regional transshipment hubs for which improving small-ship coastal operations is mandatory.

    2) Sagarmala

    • Sagarmala aims are port-led industrialization, development of world-class logistics institutions, and coastal community development.
    • Sagarmala will help in increasing domestic carrying capacity.
    • Shipbuilding, repair, and ownership are not preferred businesses in India and the small ship-owning community in India also prefer foreign registry instead of domestic registration.
    • If this has to change, there needs to be a change in the mindset of the authorities and the maritime business community.
    • ā€˜Make in Indiaā€™ will result in multi-folded cargo growth in the country, we need ships to cater to domestic and international trade.
    • Short sea and river voyages should be encouraged.
    • Shipbuilding and owning should be encouraged by the Ministry.
    • The National Shipping Board is an independent advisory body for the Ministry of Shipping, where the Directorate General of Shipping (DGS) is a member.
    • The NSB should be able to question the functioning of the DGS, which is responsible for promoting carrying capacity in the country.
    • Coastal communities should be made ship owners.
    • This will initiate the carriage of cargo by shallow drafted small ships through coast and inland waterways.
    • Sagarmala should concentrate on consolidating the strength of the coastal youth and make them contribute to the nationā€™s economy with pride.

    Consider the question “How shipping contributes to the economic prosperity of a country? Suggest the steps need to be taken to develop its shipping sector.”

    Conclusion

    Shipping plays an important role in the economic development of a country. India needs to focus on developing it to achieve the economic prosperity.

  • The formidable challenge of reversing a liquidity glut

    The article highlights the challenge in dealing with the excess liquidity in the economy after the central banks injected liquidity by persuing unorthodox policies.

    Overview of policies adopted during 2008 financial crisis

    • Days after the crash of Lehman Brothers, the United States Congress approved an emergency bailout package of $700 billion in September 2008.
    • The amount was used to buy off mortgage-backed securities from banks, hedge funds and pension funds to avert further Lehman-type bankruptcies.
    • As a result, fresh money was injected into the banking system for it to resume normal credit operations and clean up balance sheets.
    • Subsequent actions of the US government and Federal Reserve blurred the distinction between fiscal and monetary policy.
    • ā€˜Quantitative easingā€™ Ā was a term coined to describe unorthodox measures like a central bank buying off mortgages and loans, and thus taking credit risk onto its balance sheet.
    • So, quantitative easing was pursued by all the major central banks of the developed world.
    • Central banks embarked upon an aggressive money-printing spree. Assets on their books ballooned.

    Monetary response during pandemic subsequent liquidity glut

    • During the pandemic year more than a decade after the 2008 crisis, the Westā€™s monetary spigots have been opened even more.
    • A liquidity glut has ensued.
    • While the rate of monetary expansion over this period has been healthy, neither employment nor economic output grew by even a fraction of that rate.
    • Central bank finds itself in the maze.

    RBI in a similar situation

    • The Reserve Bank of India (RBI) too finds itself in a similar predicament, where the way out of its liquidity glut is hazy.
    • Due to purchases of foreign exchange externally and of government bonds domestically, RBI’s balance sheet has ballooned by more 30% by August last year.
    • RBI has injected liquidity through long-term repo operations, which essentially provide long-term money at low overnight rates.
    • The Indian central bank has also provided implicit liquidity support to mutual funds.
    • However, the RBI has not quite ventured into taking credit risk onto its books, nor has it signalled a readiness to buy toxic assets.

    Liquidity glut and challenges associated with it

    • As a result of Indiaā€™s liquidity glut, money is flowing in and out of the central bank to the tune ofĀ ā‚¹7 trillion on a daily basis.
    • This has resulted in an anomaly: market lending rates have gone below RBIā€™s reverse repo rate, which is supposed to be the de facto floor.
    • Cheap money encourages to do foolish and risky things, which, if done widely and voluminously enough, can spell disaster for financial stability.
    • But, any hint of reducing the rate of money expansion threatens to cause panic and burst the bubble it blew.
    • So, when RBI tentatively tried to move market rates higher by announcing a reverse repo auction,the market reaction was one of panic all the same, and there was a spike in interest rates.
    • This caused the central bank to rethink its strategy.
    • To calm nervous bond traders, the governor has categorically said that liquidity support will continue as long as necessary.

    Way forward

    • Ā We need to plan an exit from the current glut.
    • One way out could be loanĀ ā‚¹5 trillion to the central government against shares of public sector undertakings, at a low rate of 3% for a period of five years to fund its huge deficit.
    • That will bypass markets and not cause any disruption to interest rates.

    Consider the question “Why the challenges posed by liquidity glut caused by the unorthodox policies adopted by the central bank in the aftermath of the pandemic? What are the challenges in reducing the liquidity?”Ā 

    Conclusion

    Whatever the way out of this whirlpool of liquidity, itā€™s not going to be easy.

  • Agriculture credit

    India’s agriculture credit increased by 500% in the last decade, however, this increase in the credit has not been reflected in the condition of the farmers. The article deals with the issues with the agri-credit in India.

    Impact of credit on agriculture

    • Providing credit to small farmers at a reasonable rate has been the agenda of the Centre, the States, and the Reserve Bank of India (RBI) for decades.
    • However, the volume of credit has improved over the decades, its quality and impact on agriculture have only deteriorated.
    • In 2011-12, the target was ā‚¹4.75-lakh crore; now, agri-credit has reached the target of ā‚¹15-lakh crore in 2020-21 with an allocated subsidy of ā‚¹21,175 crores.
    • Agricultural credit has become less efficient in delivering agricultural growth.

    Issues with agri-credit: small farmers left-out

    • In the last 10 years, agriculture credit increased by 500% but has not reached even 20% of the 12.56 crore small and marginal farmers.
    • Ā 95% of tractors and other agri-implements sold in the country are being financed by non-banking financial companies, or NBFCs, at an 18% rate of interest.
    • The RBI has also questioned agricultural households with up to two hectares getting only about 15% of the subsidized outstanding loan from institutional sources (bank, co-operative society).
    • Ā As per the Agriculture Census, 2015-16, the total number of small and marginal farmersā€™ households in the country stood at 12.56 crore which makes up 86.1% of the total holdings.
    • As in the Situation Assessment Survey of Agricultural Households by the National Sample Survey Office (NSSO), the share of institutional loans rises with an increase in land possessed.
    • This shows that the bulk of subsidized agri-credit is grabbed by big farmers and agri-business companies.

    What are the reasons

    • A loose definition of agri-credit has led to the leakage of loans at subsidized rates to large companies in agri-business.
    • The RBI had set a cap that out of a bankā€™s overall adjusted net bank credit, 18% must go to the agriculture sector, and within this, 8% must go to small and marginal farmers and 4.5% for indirect loans, bank advances routinely breach the limit.
    • A review by the RBIā€™s internal working group in 2019 found that in some States, credit disbursal to the farm sector was higher than their agriculture gross domestic product (GDP) and the ratio of crop loans disbursed to input requirement was very unevenly distributed.
    • Ā This shows the diversion of credit for non-agriculture purposes.
    • One reason for this diversion is that subsidized credit disbursed at a 4%-7% rate of interest is being refinanced to small farmers, and in the open market at a rate of interest of up to 36%.

    Way forward

    • The way forward is to empower small and marginal farmers by ā€˜giving them direct income support on a per hectare basis rather than hugely subsidizing credit.
    • Streamlining the agri-credit system to facilitate higher crop loans to farmer producer organizations, or the FPOs of small farmers against commodity stocks can be a win-win model to spur agriculture growthā€™.
    • With mobile phone penetration among agricultural households in India being as high as 89.1%, efforts to improve institutional credit delivery through technology-driven solutions can reduce the extent of the financial exclusion of agricultural households
    • There is a need to reforming the land leasing framework and creating a national-level agency to build consensus among States and the Centre concerning agriculture credit reforms.

    Consider the question “Growth in the agriculture sector in India has not been commensurate with the growth in the agriculture credit. What are the reasons for this disparity? Suggest the measures to deal with the challenges in agri-credit delivery.”

    Conclusion

    Improving the access to credit at a reasonable rate will help in increasing their income but to do that reforms in credit delivery is the need of the hour.

  • What is The Great Reset?

    This news card is an excerpt from the original article published in The Indian Express and is articulated by C. Raja Mohan.

    The Great Reset

    • The Great Reset is a proposal by the World Economic Forum (WEF) to rebuild the economy sustainably following the COVID-19 pandemic.
    • It was unveiled in May 2020 by the United Kingdom’s Prince Charles and WEF director Klaus Schwab.

    The basis for the said reset

    • It is based on the assessment that the world economy is in deep trouble.
    • Schwab has argued that the situation has been made a lot worse by many factors, including the pandemicā€™s devastating effects on global society, the un- folding technological revolution, and the consequences of climate change.
    • He demands that the world must act jointly and swiftly to revamp all aspects of our societies and economies, from education to social contracts and working conditions.
    • Every country must participate, and every industry, from oil and gas to tech, must be transformed.

    Agenda behind

    The agenda of The Great Reset touches on many key issues facing the world a/c to C Raja Mohan. Three of them stand out as:

    First is the question of reforming capitalism

    • The WEF has been at the forefront of calling for ā€œstakeholder capitalismā€ that looks beyond the traditional corporate focus on maximizing profit for shareholders.

    Second, it is certainly right to focus on the deepening climate crisis

    • Climate skeptics have been ousted from Washington and President Biden has rejoined the 2015 Paris accord on mitigating climate change.

    The third is the growing difficulty of global cooperation

    • The era of great power harmony that accompanied the liberalization of the global economy at the turn of the 1990s has yielded place to intense contestation. The contestation is not just political but increasingly economic and technological.

  • The Cost of Guaranteed MSP

    The row over legally guaranteed MSP doesnā€™t seem to be settled down in near terms.

    Farmersā€™ demand

    • Farmer unions protesting are raising two fundamental demands.
    1. The first is for repealing the three agricultural reform laws enacted by the Centre.
    2. The second is to provide a legal guarantee for the minimum support prices (MSPs) that the Centre declares for various crops every year.
    • Currently, there is no statutory backing for these prices or any law mandating their implementation.

    Note: The MSP is now applicable on 23 farm commodities: 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley), 5 pulses (chana, arhar, moong, urad and masur), 7 oilseeds (groundnut, soyabean, rapeseed-mustard, sesamum, sunflower, nigerseed and safflower) and 4 commercial crops (sugarcane, cotton, copra and raw jute).

    Can MSP be made legally binding?

    Yes. There are two ways it can be done.

    (1) To force private buyers to pay it

    • In this case, no crop can be purchased below the MSP, which would also act as the floor price for bidding in mandi auctions.
    • Thereā€™s already a precedent: In sugarcane, mills are required by law to pay growers the Centreā€™s ā€œfair and remunerative priceā€ ā€“ UP and Haryana fix even higher ā€œstate advised pricesā€ ā€“ within 14 days of supply.
    • In no other crop is the compulsion to pay the government-announced MSP thrust on the private trade/industry.

    (2) The government itself buying the entire crop that farmers offer at the MSP

    Various govt agencies such as the Food Corporation of India, the National Agricultural Cooperative Marketing Federation of India, and the Cotton Corporation of India (CCI) do procure a large chunk of commodities on MSP.

    But how much produce can the government procure at MSP?

    • The MSP value of the total production of the 23 crops worked out to around Rs 10.78 lakh crore in 2019-20.
    • Not all this produce, however, is marketed. Farmers retain part of it for self-consumption, the seed for the next seasonā€™s sowing, and also for feeding their animals.
    • The marketed surplus ratio for different crops is estimated to range differently for various crops.
    • It ranges from below 50% for ragi and 65-70% for bajra (pearl millet) and jawar (sorghum) to 75% for wheat, 80% for paddy, 85% for sugarcane, 90% for most pulses, and 95%-plus for cotton, soyabean etc.
    • Taking an average of 75% would yield a number of just over Rs 8 lakh crore.
    • This is the MSP value of production that is the marketable surplus ā€” which farmers actually sell.

    So, is this MSP money paid out of the governmentā€™s pocket?

    Not really!

    • To start with, one must exclude sugarcane from the calculations. The onus for paying cane MSP, as earlier pointed out, lies on sugar mills and not the government.
    • Secondly, the government is already procuring many crops ā€“ especially paddy, wheat, cotton, and also pulses and oilseeds.
    • Thirdly, government agencies donā€™t have to buy every single grain that comes to the market. Mopping up even a quarter or third of the market arrivals is usually enough to lift prices.
    • Fourth, the crop bought on government account also gets sold. While such sales in wheat and paddy ā€“ which are distributed at super-subsidized rates under the National Food Security Act.
    • This entails heavy losses, but those are far less in the remaining MSP crops. The revenues realized from sales would partly offset the expenditures from MSP procurement.

    All in all, the additional fiscal outgo, from the government undertaking the maximum required procurement for guaranteeing MSP to farmers, may not be more than Rs 1-1.5 lakh crore per year.

    So, is the MSP system all okay?

    Nope!

    • The government undertaking to buy at MSP is definitely better than forcing private players. Their going out of business would ultimately hurt farmers most.
    • However, even assured government MSP-based procurement is fraught with problems.
    • The coverage of MSPs today does not extend to fruits, vegetables, and livestock products that together have a 45% share in the gross value of the output of Indiaā€™s agriculture, forestry, and fishing sector.
    • The value of milk and milk products alone is more than that of all cereals and pulses combined.

    Limitations for govt.

    • Extending MSP to all farm produce and guaranteeing it through law is hugely challenging, fiscally and otherwise.
    • It also explains why economists increasingly are in favor of guaranteeing minimum ā€œincomesā€ rather than ā€œpricesā€ to farmers.
    • One way to achieve that is via direct cash transfers either on a flat per-acre (as in the Telangana governmentā€™s Rythu Bandhu scheme) or per-farm household (the Centreā€™s PM Kisan Samman Nidhi) basis.

    Back2Basics:

    (1) Rythu Bandhu Scheme

    • Under Rythu Bandhu, the Telangana government gives every beneficiary farmer Rs 4,000 per acre as ā€œinvestment supportā€ before every crop season.
    • The objective is to help the farmer meet a major part of his expenses on seed, fertilizer, pesticide, and field preparation.
    • The scheme covers 1.42 crore acres in the 31 districts of the state, and every farmer owning land is eligible.

    (2) Pradhan Mantri Kisan Samman Nidhi

    • Under this program, vulnerable landholding farmer families, having cultivable land up to 2 hectares, will be provided direct income support at the rate of Rs. 6,000 per year.
    • This income support will be transferred directly into the bank accounts of beneficiary farmers, in three equal installments of Rs. 2,000 each.
    • Around 12 crore small and marginal farmer families are expected to benefit from this.

  • Tighter regulatory framework for NBFCs

    The Reserve Bank of India (RBI) has suggested a tougher regulatory framework for the non-banking finance companiesā€™ (NBFC) sector to prevent the recurrence of any systemic risk to the countryā€™s financial system.

    Try this PYQ:

    Which of the following can be said to be essentially the parts of Inclusive Governance?

    1. Permitting the Non-Banking Financial Companies to do banking
    2. Establishing effective District Planning Committees in all the districts
    3. Increasing government spending on public health
    4. Strengthening the Mid-day Meal Scheme

    Select the correct answer using the codes given below:

    (a) 1 and 2 only

    (b) 3 and 4 only

    (c) 2, 3 and 4 only

    (d) 1, 2, 3 and 4

    What are NBFCs?

    • Nonbank financial companies (NBFCs) are financial institutions that offer various banking services but do not have a banking license.
    • An NBFC in India is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by a government or local authority, or other marketable securities.
    • A non-banking institution that is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments is also an NBFC.

    What is the difference between banks & NBFCs?

    NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:

    • NBFC cannot accept demand deposits
    • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
    • The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks

    What are the new RBI regulations?

    • The regulatory and supervisory framework of NBFCs will be based on a four-layered structure ā€” the base layer (NBFC-BL), middle layer (NBFC-ML), the upper layer (NBFC-UL), and the top layer.
    • If the framework is visualized as a pyramid, at the bottom of the pyramid will be those where least regulatory intervention is warranted.
    • It can consist of NBFCs currently classified as non-systemically important NBFCs.
    • Moving up, the next layer may comprise NBFCs currently classified as systemically important NBFCs (NBFC-ND-SI), deposit-taking NBFCs (NBFC-D), HFCs, IFCs, IDFs, SPDs, and CICs.
    • The regulatory regime for this layer shall be stricter compared to the base layer.
    • The next layer may consist of NBFCs identified as ā€˜systemically significantā€™.
    • This layer will be populated by NBFCs having a large potential of systemic spill-over of risks and the ability to impact financial stability.

  • Getting it wrong on India’s level of agricultural support

    As per the OECD methodology, Indian farmers received negative support of Rs. 1.62-lakh crore in 2019, which implies that the government is taxing the farmers. But there are pitfalls in the methodology. The article explaines them.

    The issue of support given to the farmers

    • Many media reports, based on data by the Organisation for Economic Co-operation and Development (OECD), have stated that the support provided to Indian agriculture is extremely low or negative, and, therefore, net taxed.
    • The OECD has estimated that Indian farmers received negative support to the extent of minus ā‚¹2.36-lakh crore and minus ā‚¹1.62-lakh crore in 2010 and 2019, respectively.
    • Surprisingly, the negative support of minus ā‚¹1.62-lakh crore as estimated by the OECD was higher than the total budgetary allocation of the Ministry of Agriculture at ā‚¹1.09-lakh crore in 2019.

    Issues with the OECD estimates

    • Expenditure on the PM-KISAN, the National Food Security Mission, crop insurance, input subsidies such as fertilizer and electricity, are some of the measures covered under the 2019 OECD estimates.
    • However, the expenditure related to the operation of minimum support price and general services is not covered by it.
    • Despite the overall negative support, the expenditure of the Central and State governments on agriculture has increased substantially since 2000.
    • This support increased from ā‚¹1.61-lakh crore to ā‚¹3-lakh crore, between 2015 to 2019, registering 85% growth.
    • The massive negative market price support to the producers of different products has resulted in the total negative producer support, overshadowing the increase in the budgetary support over the years.

    Market Price Support as per OECD methodology

    • The market price support of a commodity is calculated by multiplying its total production with the gap between the domestic price and international prices in a relevant year.
    • This methodology assumes that in case there is no government intervention in the agriculture market, then the domestic and international price of a product will converge, resulting in no gap in prices.

    Why there is a focus on the price gap in OECD methodology

    • The OECD assumes government interventions lead to a gap between the international and domestic prices.
    • However, even if the government does not implement any program, the gap can still arise due to domestic and international factors.
    • Changes in supply and demand conditions in the domestic and international market due to shocks, depressed international prices due to subsidies given by other countries, among other factors, can generate a gap.

    3 Consequence of OECD’s Market Price Support methodology

    • 1) If the domestic price for a product is less than its international price, then support for that product would be negative.
    • 2) A negative market price support for a product in one year can turn into huge positive support in another year on account of the relative movement of domestic and international prices.
    • 3) Even if in a particular year, the government does not provide any additional support compared to a previous year, the level of support calculated by the OECD can change.
    • This will arise if there is a change in either the gap between the domestic price and international price for a commodity, or its production, in the two years.
    • Given the unpredictability in the inherent data, the total support can move from huge negative to huge positive.

    Concerns for India

    • For India, the negative support as a percentage of the total value of agriculture production has substantially reduced in recent years.
    • It is possible that support to Indian farmers in the near future becomes one of the highest in the world due to pitfalls in the OECD methodology.
    • This might set alarm bells ringing, particularly in the developed countries, which may aggressively question Indiaā€™s support measures.

    Consider the question “As per the OECD methodology, net support provided by Indian government to its farmers is negative for the year 2019. However, India’s expenditure on agriculture is consistently rising. What explains this conundrum? What are the concerns for India in the price support method of OECD?”

    Conclusion

    Rather than being swayed by the OECD numbers suggesting negative support, farmers, policymakers, and other stakeholders need to understand the pitfalls and limitations in the underlying methodology. This will help in providing a more correct perception of the level of support to agriculture in India.

  • Digital Service Tax could be an interim solution to cyber tax conundrum

    Business models of digital companies challenge the conventional basis of taxation in which the fixed place of business formed the basis. Digital Service Tax could provide a basis to deal with the challenge. The article deals with this issue.

    Equalisation levy and issues with it

    • Equalisation levy seeks to tax payments made for online advertising services to a non-resident business by residents in India.
    • India is amongst the first to have implemented such levy.
    • It is predominantly applicable to US companies since the market for digital services is dominated by US-based firms.
    • Any company that has a permanent residence in India is excluded since it is already subject to tax in India.
    • Ā In March 2020, India expanded the scope of the existing equalisation levy to a range of digital services that includes e-commerce platforms.
    • Such levy can result in over-taxation since the company will not be able to claim any credit for tax paid on Indian sales.
    • Such an approach is often viewed as contrary to the ethos of international agreements.

    Issue of taxation of digital companies

    • The agenda to reform international tax law so that digital companies are taxed where economic activities are carried out was formally framed within the OECDā€™s base erosion and profit shifting programme.
    • Worried they might cede their right to tax incomes, many countries have either proposed or implemented a digital services tax (DST).
    • However, the proliferation of digital service taxes (DSTs) is a symptom of the changing international economic order.
    • Countries such as India which provide large markets for digital corporations seek a greater right to tax incomes.
    • The core problem that the international tax reform seeks to address is that digital corporations, unlike their brick-and-mortar counterparts, can operate in a market without a physical presence.
    • The current basis for taxing in a particular jurisdiction is a notion of fixed place of business.

    Way forward

    • To overcome the challenge, countries suggested that a new basis to tax, say, the number of users in a country.
    • The EU and India were among the advocates of this approach.
    • In 2018, India introduced the test for significant economic presence in the Income Tax Act.
    • However, the proposal of a revised nexus was not supported widely.
    • Moreover, to give effect to a new system would require bilateral renegotiation of tax treaties that supersede domestic tax laws.
    • Meanwhile, the OECD continued to work to find commonalities among a range of solutions.
    • In its current form, the solution is too complex to administer and proposes to allocate residual profit ā€” a term that has no economic definition.
    • It would also require political consensus on multiple issues, including sensitive matters such as setting up of an alternative dispute resolution process comparable to arbitration.
    • This can increase the compliance burden.
    • The US has expressed its preference to apply this measure on a safe harbour basis, which can limit the companies to which it may be applicable.

    Consider the question “Digital corporations can operate in a market without a physical presence. The current basis for taxing in a particular jurisdiction is a notion of fixed place of business. In light of this, examine the challenges in taxing the digital companies and how India is dealing with such a challenge?”Ā 

    Conclusion

    As countries calibrate their response to competing demands for sovereignty to tax, DST is an interim alternative outside tax treaties. It possesses the advantage of taxing incomes that currently escape tax and creates space to negotiate a final, overarching solution to this conundrum.