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Subject: Economics

  • India’s New Deal moment

    The article explains the opportunity presented by the budget to steer the economy out of the uncertain territory.

    3 characteristics of India’s economic recovery

    • First, India has broken the link between virus proliferation and mobility earlier and more successfully than many countries.
    • Second, the employment rate gradually improved till September but has weakened since then, even as the economy has progressively opened up.
    • CMIE’s labour market survey still reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.
    • A third phenomenon is large firms have endured the crisis better and are gaining market share at the expense of smaller firms.
    • To the extent there is a migration of activity from the informal/SME firms to larger firms, tax collections and Sensex/Nifty earnings should get a boost, even holding the economic pie constant.
    • Greater scale and formalisation undoubtedly augur well for medium-term productivity but could increase near-term labour market frictions and boost pricing power.

    Increased prospects of K-shaped recovery

    • Above 3 factors increases prospects of a K-shaped recovery from COVID, a phenomenon playing out globally.
    • Households at the top of the pyramid are likely to have seen their incomes largely protected, and savings rates increased.
    • Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.

    3 Implications of K-shaped recovery

    • 1) What we are currently witnessing is pent-up demand from the upper-income households.
    • However, households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts, this will be a recurring drag on demand, if the labour market does not heal faster.
    • 2) To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-impeding in the steady state.
    • This is explianed by the fact that marginal propensity to consume at the bottom is higher than that at the top, just as the marginal propensity to import at the top is higher than at the bottom.
    • 3) If COVID-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.

    Factors that need to be considered to decide the policy response

    • Policy need to look beyond the next few quarters and anticipate the state of the macro economy post this expression of pent-up demand.
    • The key factor is wheather private sector starts re-investing and re-hiring.
    • With manufacturing utilisation rates below 70 per cent pre-COVID, an investment revival, in turn, will depend crucially on the
    • Exports should benefit from strengthening global growth as the world gets progressively vaccinated and more US fiscal stimulus.

    Upcoming budget: India’s New Deal moment

    • It’s against this backdrop that the upcoming budget presents India with its New Deal moment.
    • Given the prevailing demand uncertainties, the budget represents an opportune moment for the Centre, in conjunction with the states, to embark on a large physical and social infrastructure push.
    • This will simultaneously boost near-term aggregate demand, crowd in private investment, create jobs to soak up the unemployed, and improve the economy’s external competitiveness.
    • Job creation, health and education, in turn, will be a start to help mitigate COVID-induced inequalities.

    How to finance the investment?

    • Gradual near-term consolidation coupled with a credible medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability.
    • How then can public investment increase meaningfully if the headline deficit (projected above 11 per cent of GDP) must come down?
    • Public investment could be increased only if the public investment push is financed by aggressive asset sales-strategic sales, disinvestment, land and infrastructure monetisation.
    • In this manner, expenditure to GDP can actually rise next year — generating an expansionary fiscal impulse to the economy — while automatic stabilisers are used to reduce the headline fiscal deficit.

    Conclusion

    India’s faster-than-expected rebound is very encouraging. But given labour market pressures and prospects of a K-shaped recovery around the world, the economy will need to be carefully nurtured and stoked. The budget presents a crucial opportunity to make a big down payment towards this end.

  • Challenges ahead for the RBI

    With the Indian economy showing green shoots, RBI has to face some fundamental challenges while withdrawing the expansionary measures. 

    Expansionary policy as a response to pandemic

    • To manage the financial pressures unleashed by COVID-19, the RBI unleashed several measures.
    • It reduced policy interest rates aggressively.
    • It released an unprecedented amount of liquidity in the market.
    • It instituted a slew of measures for targeted assistance to, especially distressed sectors.

    Time to roll back the expansionary monetary policy

    • As the Indian economy is showing the signs of recovery, the RBI must be planning for a non-disruptive exit out of the easy money regime.
    • Reversing a crisis-driven expansionary policy has to be a deliberative process, with the timing and sequencing carefully planned.
    • A big lesson of the global financial crisis is that any missteps on the exit path by way of commission, omission, or importantly communication, can be costly in macroeconomic terms.

    Challenges RBI will face on the way out of expansionary monetary policy

    1) Restraining inflation while supporting the recovery

    • Inflation remained above the RBI’s target band for the past several months.
    • According to the RBI’s own estimates, inflation is expected to remain above the band for the next several months.
    • Yet, the MPC, in its recent review, decided against any rate action out of concerns for growth and financial stability.
    • The MPC expects inflation to soften on its own in the weeks ahead.
    • That outcome is not inevitable.
    • Inflation could be pressured upwards by several factors even though there could be some apparent softening purely because of base effects.
    • There is the risk that persistent high inflation expectations would result in food inflation getting more generalised.
    • Core inflation could firm up because of rising input prices.
    • ‘Excessive margins’, among the factors cited by the MPC as one of the causes of high inflation, may not disappear.
    • Equally, there are concerns that the recovery, for all the positive signals, is still fragile. 
    • And there is heightened concern about an aggravated unemployment problem caused by big firms retrenching labour to cut costs.

    2) Impact on savings

    • RBI should also be concerned about the plight of savers who are being shortchanged by low-interest rates at a time of high inflation.
    • Low-interest rates, its impact on inflation and economic recovery taken together make a complex cocktail of dilemmas for the RBI as it seeks to normalise the policy rates.

    3) Withdraw excess liquidity at right time and to avoid ‘taper tantrum’

    • Another related challenge will be to withdraw the ‘excess’ liquidity in good time.
    • Banks are routinely depositing trillions of rupees with the RBI every day, evidencing that all the money that the central bank injected into the system is not doing much good anymore.
    • Every financial crisis can be traced back to mispricing of risk.
    • Mispricing of risk results when there is too much liquidity sloshing around the system for too long.
    • It will drive investors into dodgy ventures and threaten financial stability.
    • As the RBI seeks to guard financial stability by normalising liquidity, it will have to contend with possible market tantrums.
    • The lesson from the taper tantrums in the U.S. is that the RBI will have to manage its communication as carefully as it does the liquidity withdrawal.

    4) Stability of the rupee

    • Next challenge for the RBI will be to restrain the rupee from appreciating out of line with fundamentals.
    • Here, the RBI is confronted with a classic case of ‘the impossible trinity’.
    • The impossible trinity deals with allowing free capital flows while simultaneously maintaining a stable exchange rate and restraining inflation.
    • The current account surplus this year together with massive capital flows has meant an excess of dollars in the system putting upward pressure on already overvalued rupee.
    • The RBI has absorbed nearly $90 billion this fiscal year to prevent exchange rate appreciation and to maintain the competitiveness of the rupee.
    • The RBI’s ability to continue to intervene in the forex market will be constrained by its anxiety about how the resultant liquidity might aggravate inflation and the risk to financial stability.

    Consider the question “What are the challenges ahead for the RBI while winding down the expansionary monetary policy measures that were announced to deal with the economic disruption of caused due to pandemic and subsequent lockdown.

    Conclusion

    It is better to be rough right, as Keynes said, than be precisely wrong. That should be the guiding principle for RBI as it navigates its way out of the crisis driven easy money policy.

    Back2Basics: What is taper tantrum?

    • Taper tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) program.
    • The Fed announced that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it was feeding into the economy.
    • The ensuing rise in bond yields in reaction to the announcement was referred to as a taper tantrum in financial media.

  • Payments Infrastructure Development Fund (PIDF) Scheme

    The RBI has announced operational guidelines to create digital payments acceptance infrastructure across Tier III to Tier VI regions in India.

    Possible prelims question:

    Q. Which of the following is the major aim of Payments Infrastructure Development Fund (PIDF) recently created by the Reserve Bank of India (RBI)?

    a) Promotion of UPI payments

    b) Deploying Points of Sale (PoS) infrastructure

    c) Creation of digital wallets

    d) All of the above

    PIDF Scheme

    • The scheme was first announced in June last year to encourage fintech companies and banks to deploy point of sale (PoS) infrastructure across the country to improve the penetration of card-based and other digital payments.
    • The primary beneficiaries will be merchants providing essential services, such as transport and hospitality, government payments, fuel pumps, healthcare facilities, and groceries.
    • Amid the rapid rise in the volume of payments through the UPI network, the RBI is taking steps to further widen the use of digital payments in the country.
    • The fund will be operational for three years from January 1, 2021, and would help subsidise banks and non-banks for the deployment of payments, subject to them achieving specific targets.

    Why need PIDF?

    • Over the years, the payments ecosystem in the country has evolved with a wide range of options such as bank accounts, mobile phones, cards, etc.
    • To provide further fillip to the digitization of payment systems, it is necessary to give impetus to acceptance infrastructure across the country, more so in under-served areas.

  • What is a K-shaped Economic Recovery?

    The prospects of a K-shaped economic recovery from COVID are increasing both in India and across the world.

    What is K-Shaped Recovery?

    • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
    • This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
    • A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
    • This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

    Try these PYQs:

     

    Q.Economic growth in country X will necessarily have to occur if

    (a) There is technical progress in the world economy

    (b) There is population growth in X

    (c) There is capital formation in X

    (d) The volume of trade grows in the world economy

     

    Q. Economic growth is usually coupled with

    (a) Deflation

    (b) Inflation

    (c) Stagflation

    (d) Hyperinflation

    3 characteristics of India’s economic recovery

    • First, India has broken the link between virus proliferation and mobility earlier and more successfully than many countries.
    • Second, the employment rate gradually improved till September but has weakened since then, even as the economy has progressively opened up.
    • CMIE’s labour market survey still reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.
    • A third phenomenon is large firms have endured the crisis better and are gaining market share at the expense of smaller firms.
    • To the extent there is a migration of activity from the informal/SME firms to larger firms, tax collections and Sensex/Nifty earnings should get a boost, even holding the economic pie constant.
    • Greater scale and formalisation undoubtedly augur well for medium-term productivity but could increase near-term labour market frictions and boost pricing power.

    Increased prospects of K-shaped recovery

    • Above 3 factors increases prospects of a K-shaped recovery from COVID, a phenomenon playing out globally.
    • Households at the top of the pyramid are likely to have seen their incomes largely protected, and savings rates increased.
    • Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.

    3 Implications of K-shaped recovery

    • 1) What we are currently witnessing is pent-up demand from the upper-income households.
    • However, households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts, this will be a recurring drag on demand, if the labour market does not heal faster.
    • 2) To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-impeding in the steady state.
    • This is explained by the fact that marginal propensity to consume at the bottom is higher than that at the top, just as the marginal propensity to import at the top is higher than at the bottom.
    • 3) If COVID-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.

    Factors that need to be considered to decide the policy response

    • Policy need to look beyond the next few quarters and anticipate the state of the macro economy post this expression of pent-up demand.
    • The key factor is whether private sector starts re-investing and re-hiring.
    • With manufacturing utilisation rates below 70 per cent pre-COVID, an investment revival, in turn, will depend crucially on the demand dynamics
    • Exports should benefit from strengthening global growth as the world gets progressively vaccinated and more US fiscal stimulus.

    Upcoming budget: India’s New Deal moment

    • It’s against this backdrop that the upcoming budget presents India with its New Deal moment.
    • Given the prevailing demand uncertainties, the budget represents an opportune moment for the Centre, in conjunction with the states, to embark on a large physical and social infrastructure push.
    • This will simultaneously boost near-term aggregate demand, crowd in private investment, create jobs to soak up the unemployed, and improve the economy’s external competitiveness.
    • Job creation, health and education, in turn, will be a start to help mitigate COVID-induced inequalities.

    How to finance the investment?

    • Gradual near-term consolidation coupled with a credible medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability.
    • How then can public investment increase meaningfully if the headline deficit (projected above 11 per cent of GDP) must come down?
    • Public investment could be increased only if the public investment push is financed by aggressive asset sales-strategic sales, disinvestment, land and infrastructure monetisation.
    • In this manner, expenditure to GDP can actually rise next year — generating an expansionary fiscal impulse to the economy — while automatic stabilisers are used to reduce the headline fiscal deficit.

    Conclusion

    India’s faster-than-expected rebound is very encouraging. But given labour market pressures and prospects of a K-shaped recovery around the world, the economy will need to be carefully nurtured and stoked. The budget presents a crucial opportunity to make a big down payment towards this end.

     

  • What are Spectrum Auctions?

    In the spectrum auctions scheduled to begin on March 1this year, the government plans to sell spectrum for 4G in the 700, 800, 900, 1,800, 2,100, 2,300, and 2,500 MHz frequency bands.

    Q.What are the various challenges faced by India’s telecom before the upgradation to 5G technology?

    What is Spectrum?

    • Devices such as cellphones and wireline telephones require signals to connect from one end to another.
    • These signals are carried on airwaves, which must be sent at designated frequencies to avoid any kind of interference.
    • The Union government owns all the publicly available assets within the geographical boundaries of the country, which also include airwaves.
    • With the expansion in the number of cellphones, wireline telephone and internet users, the need to provide more space for the signals arise from time to time.

    Spectrum allocations

    • Spectrum refers to the invisible radio frequencies that wireless signals travel over. The frequencies we use for wireless are only a portion of what is called the electromagnetic spectrum.
    • To sell these assets to companies willing to set up the required infrastructure to transport these waves from one end to another, the central government through the DoT auctions these airwaves from time to time.
    • These airwaves called spectrum is subdivided into bands which have varying frequencies.
    • All these airwaves are sold for a certain period of time, after which their validity lapses, which is generally set at 20 years.

    Why is spectrum being auctioned now?

    • The last spectrum auctions were held in 2016 when the government offered 2,354.55 MHz at a reserve price of Rs 5.60 lakh crore.
    • Although the government managed to sell only 965 MHz – or about 40 per cent of the spectrum that was put up for sale.
    • The need for a new spectrum auction has arisen because the validity of the airwaves bought by companies is set to expire in 2021.

    How is the spectrum priced?

    • The reserve price of all these bands together has been fixed at Rs 3.92 lakh crore.
    • Depending on the demand from various companies, the price of the airwaves may go higher, but cannot go below the reserve price.

    How will the payment plan work?

    • As part of the deferred payment plan, bidders for the sub-1 GHz bands of 700, 800 and 900 MHz can opt to pay 25 per cent of the bid amount now, and the rest later.
    • In the above-1 GHz bands of 1,800, 2,100, 2,300, and 2,500 MHz frequency bands, bidders will have to pay 50 per cent upfront, and can then opt to pay the rest in equated annual instalments.
    • The successful bidders will, however, have to pay 3 per cent of Adjusted Gross Revenue (AGR) as spectrum usage charges, excluding wireline services.

    Who is likely to bid for the spectrum?

    • All major private telecom players in India are eligible contenders to buy additional spectrum to support the number of users on their network.
    • Apart from these three, new companies, including foreign companies, are also eligible to bid for the airwaves.
    • Foreign companies, however, will have to either set up a branch in India and register as an Indian company or tie-up with an Indian company to be able to retain the airwaves after winning them.

  • First Advance Estimates of GDP for 2021

    The Ministry of Statistics and Programme Implementation released the First Advance Estimates (FAE) for the current financial year.

    What do estimates show?

    • According to MoSPI, India’s gross domestic product (GDP) — the total value of all final goods and services produced within the country in one financial year — will contract by 7.7 per cent in 2020-21.
    • The first advance estimates of GDP, obtained by extrapolation of seven months’ data, are released early to help officers in the Finance Ministry and other departments in framing the broad contours of Union Budget 2021-22.

    What are the First Advance Estimates of GDP?

    • For any financial year, the MoSPI provides regular estimates of GDP. The first such instance is through the FAE.
    • The FAE for any particular financial year is typically presented on January 7th.
    • Their significance lies in the fact that they are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s budget allocations.
    • The FAE will be quickly updated as more information becomes available.
    • On February 26th, MoSPI will come out with the Second Advance Estimates of GDP for the current year.

    How is the FAE arrived at before the end of the concerned financial year?

    • The FAE are derived by extrapolating the available data. (Hope you remember Newtons’ interpolation and extrapolation from XII std.)
    • According to the MoSPI, the approach for compiling the Advance Estimates is based on Benchmark-Indicator method.
    • The sector-wise estimates are obtained by extrapolating indicators such as-
    1. Index of Industrial Production (IIP) of the first 7 months of the financial year
    2. Financial performance of listed companies in the private corporate sector available up to quarter ending September 2020
    3. The 1st Advance Estimates of crop production,
    4. The accounts of central & state governments,
    5. Information on indicators like deposits & credits, passenger and freight earnings of Railways, passengers and cargo handled by civil aviation, cargo handled at major seaports, sales of commercial vehicles, etc., available for first 8 months of the financial year.

    How is the data extrapolated?

    • In the past, extrapolation for indicators such as the IIP was done by dividing the cumulative value for the first 7 months of the current financial year by average of the ratio of the cumulative value of the first 7 months to the annual value of past years.
    • So if the annual value of a variable was twice that of the value in the first 7 months in the previous years then for the current year as well the annual value is assumed to be double that of the first 7 months.
    • However, this year, because of the pandemic there were wide fluctuations in the monthly data. Moreover, there was a significant drop, especially in the first quarter, on many counts.
    • That is why the usual projection techniques would not have yielded robust results.
    • As such, MoSPI has tweaked the ratios for most variables.

    What are the key takeaways from the First Advance Estimates for 2020-21?

    There are 7 key takeaways.

    #1 GDP Growth Rate:

    • In the context of recent history, the 7.7 per cent contraction in GDP is a sharp one considering that India has registered an average annual GDP growth rate of 6.8 per cent since the start of economic liberalisation in 1992-93.

    #2 Absolute level of real GDP:

    • At Rs 134.4 lakh crore, India’s real GDP — that is, GDP without the influence of inflation — in 2020-21 will be lower than the 2018-19 level.
    • In other words, from the start of the next financial year, India would first have to raise its GDP back to the level it was at in 2019-20 (Rs 143.7 lakh crore).

    #3 Per Capita GDP:

    • While the GDP provides an all-India aggregate, per capita GDP is a better variable if one wants to understand how an average India has been impacted.
    • India’s per capita GDP will fall to Rs 99, 155 in 2020-21.
    • In fact, while the overall real GDP will fall by 7.7 per cent, per capita real GDP will fall by 8.7 per cent.

    #4 Absolute level of real Gross Value Added (or GVA):

    • The GVA provides a picture of the economy from the supply side.
    • It maps the value-added by different sectors of the economy such as agriculture, industry and services. In other words, GVA provides a proxy for the income earned by people involved in the various sectors.
    • This fiscal, at Rs 123.4 lakh crore, India’s real GVA level, too, will fall below the 2018-19 level.

    #5 Absolute level of Private Final Consumption Expenditure (PFCE):

    • India’s overall GDP can be divided into four main sections. The biggest demand for goods and services comes from private individuals trying to satisfy their consumption needs.
    • Typically this would include all the things — be it toothpaste or a car — that you and your family members buy in their private individual capacity.
    • This demand is called PFCE and it constitutes over 56 per cent of the total GDP.

    #6 Per capita PFCE:

    • Just like per capita GDP, the per capita PFCE is also a relevant metric as it shows how much does an average Indian spend in his/her private capacity.
    • Typically, with rising incomes standards, such consumption levels also rise.
    • However, at Rs 55,609, per capita, PFCE will fall below the 2017-18 level.

    #7 Absolute level of Gross Fixed Capital Formation (GFCF):

    • The second biggest component of GDP is called GFCF and it measures all the expenditures on goods and services that businesses and firms make as they invest in their productive capacity.
    • So if a firm buys computers and software to increase the overall productivity then it will be counted under GFCF.
    • This type of demand accounts for close to 28 per cent of India’s GDP. Taken together, private demand and business demand account for almost 85 per cent of all GDP.

  • [pib] New Industrial Development Scheme for Jammu & Kashmir (J&K IDS, 2021)

    The Union Govt. has formulated the New Industrial Development Scheme for Jammu & Kashmir (J&K IDS, 2021).

    Tap to read more about: Reorganization of J&K

    J&K IDS, 2021

    • It is a new Central Sector Scheme for the development of Industries in the UT of Jammu & Kashmir.
    • The main purpose of the scheme is to generate employment which directly leads to the socio-economic development of the area.

    Incentives available

    • Capital Investment Incentive at the rate of 30% in Zone A and 50% in Zone B on the investment made in Plant & Machinery (in manufacturing) or construction of the building is available.
    • Capital Interest subvention: At the annual rate of 6% for a maximum of 7 years on loan amount up to Rs. 500 crore for investment in plant and machinery (in manufacturing) or construction of the building.
    • GST Linked Incentive: 300% of the eligible value of actual investment made in plant and machinery (in manufacturing) or construction in building for 10 years.
    • Working Capital Interest Incentive: All existing units at an annual rate of 5% for a maximum of 5 years. Maximum limit of incentive is Rs 1 crore.

    Key features:

    • The scheme is made attractive for both smaller and larger units.
    • Smaller units with an investment in plant & machinery upto Rs. 50 crore will get a capital incentive upto Rs. 7.5 crore and get capital interest subvention at the rate of  6% for a maximum of 7 years
    • The scheme aims to take industrial development to the block level in UT of J&K, which is the first time in any Industrial Incentive Scheme of the GoI.
    • The scheme has been simplified on the lines of ease of doing business by bringing one major incentive- GST Linked Incentive- that will ensure less compliance burden without compromising on transparency.
    • It is not a reimbursement or refund of GST but gross GST is used to measure eligibility for industrial incentive to offset the disadvantages that the UT of J&K face

    Major Impact and employment generation potential:

    • The scheme is to bring about a radical transformation in the existing industrial ecosystem of J&K with emphasis on job creation, skill development and sustainable development.
    • It is anticipated that the proposed scheme is likely to attract unprecedented investment and give direct and indirect employment to about 4.5 lakh persons.
    • Additionally, because of the working capital interest subvention, the scheme is likely to give indirect support to about 35,000 persons.

  • Payment banks

    The article highlights the important role Payment Banks could play in furthering the financial inclusion in India.

    Financial inclusion and challenges

    • Interventions, especially the JAM trinity—Jan Dhan accounts, Aadhaar and Mobile phones—have accelerated digital and financial inclusion in India.
    • Four of every five Indian adults have a registered bank account.
    • Financial inclusion is not only about opening accounts, it encompasses access to credit, insurance and micro-investment products in a simple and safe way.
    • This remains a challenge for ‘weaker sections and low-income groups’.
    • For instance, only 16% of micro, small and medium enterprises (MSMEs) have access to formal credit amid an estimated debt demand of â‚č69.3 trillion.

    High-technology, low-cost banking to accelerate financial inclusion

    • In 2014, Nachiket Mor committee recommended setting up “high technology—low cost” banking models to accelerate financial inclusion to the last mile.
    • Subsequently, the Reserve Bank of India licensed ‘vertically differentiated banking systems’, such as Payments Bank (PBs) and Small Finance Banks (SFBs).
    • SFBs have grown profitably thanks to the yield spread between deposits and lending.
    • Most of them started off as micro finance institutions with a ready asset base, and after converting into SFBs, they have got a better liability franchise but continue to operate in niche geographies.
    • On the other hand, PBs have shown strong growth in revenues, while operating at a larger scale than SFBs.
    • The high-tech PB model has shown more rigour than the cost-heavy branch-based SFB model in terms of its impact on inclusion.

    Need for structural intervention

    • If we intend to make a real move ahead on the inclusion front, PBs will have to play a larger role.
    • However, to realize their full potential, they need certain structural interventions:

    1) Liabilities

    • PBs can take deposits only up to â‚č1 lakh, which limits their ability to augment profit that can be further deployed to enhance efficiencies.
    • For a few segments, such as self-help groups and MSMEs, the savings account limit blocks the adoption of highly-accessible bank accounts.
    • Since the model has matured, it would be prudent to enhance the deposit limit to â‚č5 lakh and benchmark it to Deposit Insurance and Credit Guarantee Corporation limits.
    • Banking Correspondents (BCs) are a critical link in driving financial inclusion.
    • PBs could offer low-value and simple fixed or recurring deposit products and sell to consumers through their BC distribution network, thus improving their viability.

    2) Assets

    • Currently, there is no national-level lender with the risk appetite for thin-credit consumers.
    • PBs can evolve new micro-lending models through their BC networks and mobile apps and create an alternate credit score for these consumers.
    • Allowing micro-lending by PBs could be a starting point. Thereafter, regulators may consider a transition path for them to become SFBs, or even Universal Banks.

    3) Working together for collective impact

    • PBs have an edge in technology and reach, while traditional players have a trust legacy.
    • For collective impact on inclusion, two options can be evaluated with safeguards in place.
    • One, PBs could co-originate loans with traditional institutions so that capital requirements are shared.
    • Two, they can originate credit and allow it to mature, or securitize and turn it into a market-linked instrument.
    • This could accelerate credit formalization.

    Conclusion

    We must remind ourselves that there is no one-size-fits-all solution to achieve complete financial inclusion for the diversified needs of our people. An enabling framework needs to be in place. Payments Banks, in particular, have the potential to bridge India’s financial inclusion gaps.

  • Misunderstanding the MSP

    The article explains the purpose of Minimum Support Price (MSP) and reasons for insecurity in farmers regarding its continuance.

    Relation between MSP and time-bound procurement through PPS

    • MSP, public procurement system (PPS) and a strict time-bound purchase of output brought to the PPS(through APMCs) form a package deal.
    • Take out one aspect, the deal falls apart.
    • For example, if you have MSP but not compulsory PPS, the support price becomes redundant.
    • If you have MSP and PPS/APMC mandi but not strict time-bound purchase of the product brought to the PPS, the deal will fail.

    Purpose of MSP

    • At the launch of the Green Revolution, MSP and PPS were designed to assist the country in achieving its goal of food self-sufficiency, which was met by the early Seventies.
    • The purpose of MSP and PPS/APMC is now two-fold.
    • One, to maintain food self-sufficiency because crop diseases and weather conditions such as droughts.
    • The second purpose is to ensure a reasonable, assured income to the farmers.
    • The recommendation to dismantle FCI public procurement, made by the Shanta Kumar Committee in its 2015 report, displayed a lack of recognition of the importance of these two purposes.

    Issues with the Farm bills

    • The government’s assurance that MSP/APMC can co-exist with the big agro-business-controlled private markets is not tenable.
    • A farmer who has reached a contract will not be legally allowed to take the product to APMC if the APMC mandi offered him/her a better price.
    • The agro-business entity will take the non-compliant farmer to court, where the dispute resolution mechanism is stacked against the farmer due to the structural inequities of legal resources and social-cultural capital.
    • The proposed dispute resolution mechanism increases the choice of the trader to trade and not of the farmer to sell.
    • The central law will prevail in the private markets, while state laws will prevail in the APMC mandis.
    • Two markets with two regulatory frameworks will create conditions for perpetual Centre-state conflicts.
    • MSPs are announced for 23 crops but compulsory and timely public procurement, are provided mainly for two crops, wheat and rice, the support price does not work for the remaining 21 crops. 

    Challenge in defining MSP

    • Farmers’ organisations are insisting on the Swaminathan Committee formula of C2+50 per cent.
    • The MSP announced by the government is based on the A2+Fl+50 per cent formula.
    • Unlike the C2+50 per cent formula, A2+Fl+50  formula does not cover all the costs of farming.

    Conclusion

    Agrarian reforms that recognise the importance of ecologically and economically sustainable agriculture are an absolute necessity. Such reforms would require more than merely changing the trade emphasis of existing laws. They will involve the creation of inclusive, transparent and well-informed laws compatible with these reforms.

    Back2Basics: Understanding the cost formula

    • M S Swaminathan committee recommended minimum support prices (MSP) for crops at levels “at least 50 per cent more than the weighted average cost of production”.
    • The National Commission on Farmers did not elaborate on what really constituted “weighted average cost of production” in its report submitted in October 2006.
    • The Commission for Agricultural Costs and Prices (CACP), on the other hand, gives three definitions of production costs: A2, A2+FL and C2.
    • A2 costs basically cover all paid-out expenses, both in cash and in kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel, irrigation, etc.
    • A2+FL cover actual paid-out costs plus an imputed value of unpaid family labour.
    • C2 costs are more comprehensive, accounting for the rentals and interest forgone on owned land and fixed capital assets respectively, on top of A2+FL.

  • What are Digital Services Taxes?

    Digital services taxes adopted by India, Italy and Turkey discriminate against U.S. companies and are inconsistent with international tax principles, the U.S. Trade Representative’s office has said.

    Do you remember?

    GAFA tax—named after Google, Apple, Facebook, Amazon—is a proposed digital tax to be levied on large technology and internet companies.

    Fact of the matter: Equalization Levy

    • India has earlier expanded the scope of the Equalization Levy, or digital tax, to the sale of goods and services in the country by overseas e-commerce firms.
    • The Equalization Levy was introduced for the first time in 2016 as 6 per cent tax on revenues earned by non-residents from online advertising and related services.
    • The burden of this tax eventually fell on local firms advertising on these platforms.

    Contention for E-Commerce

    • In March 2020, the government expanded the scope of this levy to include the sale of goods and services in the country by overseas e-commerce operators.
    • The transactions were to be taxed at 2 per cent if businesses earned more than Rs 2 crore.
    • Globally, the rate of digital tax varies from 1.5 per cent (in Poland and Kenya) to 15 per cent (Paraguay). In Europe, the tax rate varies from 3 per cent (France, UK, Spain) to 7.5 per cent (Hungary).

    Digital Services Taxes

    • The “digital services tax” (DST) is a levy on the overall revenues earned by the supplier of specific digital services.
    • The DST should not be confused with the so-called “Netflix tax,” which one may find in some western countries.
    • The Netflix tax is essentially a “value-added tax” on digital services where the consumer bears the entire tax burden on the value of the final product.

    The US Question

    • The need to tax digital companies – the likes of Amazon, Google and Netflix – arises because these companies collect digital revenues from countries where they do not have a significant business presence.
    • These are new-age companies, which can use virtual infrastructure to operate in another country.
    • Countries across the globe have felt the need to tax revenues generated by such companies in a particular jurisdiction.
    • Talks began in 2018 under the aegis of the OECD to formalize a framework on what and how to tax revenues earned by such companies in a country in which they have no physical or significant presence.
    • But an abrupt US decision to pull out of the negotiations, involving 137 countries and threats of retaliatory action against those levying digital taxes have hit the 2020 deadline.

    India’s response

    • USTR has concluded the digital taxes imposed by France, India, Italy and Turkey discriminate against big U.S. tech firms, such as Google, Facebook, Apple and Amazon.com
    • For India, it created enormous uncertainty, since the country has always been at the forefront of adopting the concept of taxing foreign digital companies.
    • It is now subject to a probe initiated by the US called the ‘Section 301’ investigations into the digital taxes.

    A populist fuss by the US

    • The US is a bit confused and so is the exiting President. They are not able to decide what they want to do.
    • It is being argued that it could lead to tariffs before Donald leaves office or early in the administration of President-elect Biden.
    • This arguably another populist measure that Trump administration wants to leave behind.

    Conclusion

    • Given that a global consensus at the OECD or even the UN level may take several more months, countries including India are likely to continue with their unilateral DSTs.
    • At this juncture, when economies are reeling under the ill-effects of the pandemic, no country would want to give up its share of revenue and wait for a global consensus to emerge.