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Subject: Economics

  • Farm laws must reflect regional and crop diversities

    The article argues for consideration of the regional variation in the conditions of farmers and their concerns in the context of recently introduced farm laws.

    Argument against diversification

    • In Punjab, Haryana and western UP, minimum support price (MSP)-based agriculture has a logic.
    • Not all regions must diversify.
    • The region has great alluvial soil, good irrigation and almost a century-long tradition of the application of science to agriculture.
    • In south Punjab, with less irrigation, and parts of Haryana not covered by the Indira Gandhi Canal, some diversification to pulses, cotton etc. could work but the solid specialisation in this region remains.

    Issue of middlemen

    • Arhtiyas (middlemen) are important in Indian agricultural markets.
    • They are a part of the supply chain in north-west India.
    • Here they are not like the middlemen elsewhere.
    • They function simply as agents of the procurement agencies.
    • This was done by the past government to reduce overhead costs of procurement.

    Steps need to be taken

    • The e-markets, forwards and farmer-managed companies are not the dominant mode of rural organisations.
    • Agriculture is the one good sector in otherwise dismal year.
    • So, we need to strengthen it, not feed off on its glory, even outside north-west India.
    • We have the largest spread of agricultural markets in the world according to spatial maps.
    • But they are not APMCs.
    • With weak markets (outside of grains) and without first-stage processing and other infrastructure, the farmer knows he is at the mercy of the trader and comes out on the streets when that is not understood.

    Evolution of MSP

    • The MSP played a crucial role in the days of compulsory procurement and zonal restrictions.
    • Each crop had its own report then.
    • Later separate reports were replaced by two reports, one for kharif and another one for rabi, apart from one for sugarcane (an annual crop).
    • The 1982 rabi report stated that relative prices and, in that context, MSP had the role of an intervention mechanism when markets failed, outside the compulsory procurement area.
    • Later, the concept of transport costs and managerial costs became important.

    Way forward

    • The Essential Commodities Act should be ditched.
    • Good laws are good because progress starts with them, but not all laws are good everywhere.
    • A modified version of the laws with a roadmap can be on the agenda — not everywhere, but most places outside the lands of the five rivers.

    Conclusion

    The amended laws should be considered in the context of regional variation in the country and necessary changes should be made to address the concerns of the farmers.

  • [pib] Mahabahu-Brahmaputra

    PM will launch the ‘Mahabahu-Brahmaputra’, lay the foundation stone of Dhubri Phulbari Bridge and perform Bhumi Pujan for construction of Majuli Bridge Assam.

    Click here to read all North-East related news.

    Mahabahu-Brahmaputra

    • The program is aimed at providing seamless connectivity to the Eastern parts of India and includes various development activities for the people living around River Brahmaputra and River Barak.
    • It will consist of the Ro-Pax vessel operations between Neamati-Majuli Island, North Guwahati-South Guwahati and Dhubri-Hatsingimari.
    • The Ro-Pax services will help in reducing the travel time by providing connectivity between banks and thus reducing the distance to be travelled by road.
    • PANI (Portal for Asset and Navigation Information) will act as a one-stop solution for providing information about river navigation and infrastructure.

    Dhubri Phulbari Bridge

    • PMwill lay the foundation stone for the four-lane bridge over the Brahmaputra between Dhubri (on North Bank) and Phulbari (on South Bank).
    • The proposed Bridge will be located on NH-127B, originating from Srirampur on NH-27 (East-West Corridor), and terminating at Nongstoin on NH-106 in the State of Meghalaya.
    • It will connect Dhubri in Assam to Phulbari, Tura, Rongram and Rongjeng in Meghalaya.
    • It will reduce the distance of 205 Km to be travelled by Road to 19 Km, which is the total length of the bridge.

    Majuli Bridge

    • PM will perform Bhumi Pujan for the two-lane Bridge on the Brahmaputra between Majuli (North Bank) and Jorhat (South Bank).
    • The bridge will be located on NH-715K and will connect Neematighat (on Jorhat side) and Kamalabari (on Majuli side).
    • The Construction of the bridge has been a long demand of the people of Majuli who for generations have been dependent on the ferry services to connect with the mainland of Assam.

  • Indian investments and BITs

    The article examine the termination of agreement for the development of East Container Terminal by Sri Lanka in the context of unilateral termination of bilateral investment treaties by India.

    Context

    • Recently, Sri Lanka terminated 2019 agreement with India and Japan that aimed to jointly develop the strategic East Container Terminal (ECT) at the Colombo port.
    • Apart from analysing the diplomatic fallout of this problematic decision for India-Sri Lanka ties, the issue also needs to be looked at through the prism of the India-Sri Lanka bilateral investment treaty (BIT).

    India-Sri Lanka  BIT and its termination

    • In 1997, India and Sri Lanka signed a BIT to promote and protect foreign investment in each other’s territories.
    • It empowers individual foreign investors to directly sue the host state before an international tribunal if the investor believes that the host state has breached its treaty obligations.
    • This is known as investor-state dispute settlement (ISDS).
    • Article 3(2) of this treaty provides that investments and returns of investors of each country shall, at all times, be accorded fair and equitable treatment (FET) in the other country’s territory.
    • The normative content of the FET provision has been fleshed out by scores of ISDS tribunals in the last two decades.
    • The tribunals have persistently held that an important component of the FET provision is that the host state should protect the legitimate expectations of foreign investors. 
    •  In a case known as International Thunderbird Gaming Corporation v Mexico, it was held that the concept of legitimate expectations relates to a situation where the host state’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure to honour those expectations could cause the investor (or investment) to suffer damages.
    • Sri Lanka, by signing the agreement to jointly develop the ECT at the Colombo port, created such expectations on the part of Indian investors.
    • However, the twist in the tale is that India unilaterally terminated the India-Sri Lanka BIT on March 22, 2017.
    • This termination was part of the mass repudiation of BITs that India undertook in 2017 as a result of several ISDS claims being brought against it.
    •  In cases of such unilateral termination, survival clauses in BITs assume significance because they ensure that foreign investment continues to receive protection during the survival period.
    • But, in the case of the investment in developing the ECT at the Colombo port, this survival clause will be inconsequential, since the agreement was signed in 2019, i.e., after India unilaterally terminated the BIT.

    Important lessons

    • As a consequence of the onslaught of ISDS claims in the last few years, India has developed a protectionist approach towards BITs.
    • However, an important attribute that perhaps has not received much attention is that BITs are reciprocal.
    •  BITs do not empower merely foreign investors to sue India, but also authorise Indian investors to make use of BITs to safeguard their investment in turbulent foreign markets.
    • Accordingly, given India’s emergence as an exporter, and not just an importer of capital, the government should revisit its stand on BITs.

    Consider the question “Examine the implications of unilateral termination of bilateral investment treaties(BITs) by India.”

    Conlcusion

    India needs to adopt a balanced approach towards BITs with an effective ISDS provision. This will facilitate Indian investors in defending their investment under international law should a country, like Sri Lanka, renege on an agreement.

  • Tax regime change

    Article explains the measures adopted in the Budget 2021-22 for increasing compliance and transparency.

    Maintaining the status quo

    • COVID-19 has upset fiscal maths around the world.
    • It is in this context that the Union budget assumed significance this year.
    • The expectations of tax breaks were rife on the presumption that this could boost economic activity.
    • Whereas others called for a tax on stock market gains.
    • Unyielding to such requests, the budget was based on a pragmatic approach to maintain the status quo.

    Why higher tax rates would not help much

    • Nearly 60 per cent of corporate taxes are paid by the 0.06 per cent of the companies belonging to the top income bracket.
    • On the other hand, among individual taxpayers, only 0.17 per cent report taxable incomes above Rs 25 lakh.
    • Therefore, higher taxes would either yield little revenue or adversely affect economic activity.

    Need to shift focus to compliance and greater transparency

    •  For increasing compliance and transparency, significant proposals have been made:
    • 1) Limited the window for reopening the case to 3 years.
    • 2) The introduction of the requirement for an assessment officer to provide facts on the basis of which he/she re-assesses.
    •  3) The faceless Income Tax Appellate Tribunal (ITAT).
    • By making the process of assessment faceless the major causes for litigation are addressed.
    • The limited window of re-opening cases for small taxpayers and due consideration of risk management strategy and the CAG’s observations in carrying out such assessments marks an improvement in the process.

    Dispute resolution mechanism with better interface

    • The Vivad se Vishwas scheme was launched in 2020 to address piling litigation and it is reported that collections under this scheme have been Rs 85,000 crore for 1,10,000 taxpayers.
    • This is a small fraction as compared to the Rs 4.34 lakh crore in corporate taxes and Rs 4.49 lakh crore in income taxes that are locked in dispute.
    • Therefore, a dispute resolution mechanism that allows for better interface between the taxpayer and the department may, in fact, be relatively beneficial.

    Consider the question “Examine the reasons for small tax base in India. Examine the measures adopted in the Budget 2021-22 for increasing compliance and transparency.”

    Conclusion

    The budget estimates suggest that corporate tax and income tax collections are expected to increase by 22 per cent. With an expected growth rate of 14 per cent in nominal GDP, the remaining gains in taxes are presumably expected from higher compliance or realisation of taxes due. Whether this will pan out remains to be seen.

     

  • Why are Petrol, Diesel prices rising?

    Diesel and petrol prices have hit record highs across the country.

    Govt explanation

    • The government reasons that global crude oil prices have risen by more than 50 per cent to over $63.3 per barrel since October, forcing oil retailers to increase pump prices.
    • That, however, is only partly true.
    • Indian consumers are already paying much higher than what they were paying last January, even though crude prices are yet to reach levels of early last year.

    Note: Petrol and diesel do not come under the purview of goods and services tax (GST).

    Fuel price dynamics in India

    • Retail petrol and diesel prices are in theory decontrolled — or linked to global crude oil prices.
    • It means that if crude prices fall retails prices should come down too, and vice versa.
    • But this does not happen in practice, largely because oil price decontrol is a one-way street in India.
    • When global crude oil prices fall and prices slide, the government slaps fresh taxes and levies to ensure that it rakes in extra revenues.
    • The consumer should have ideally benefited by way of lower pump prices, is forced to either shell out what she’s already paying or spend even more for every litre of fuel.
    • The main beneficiary in this subversion of price decontrol is the government.

    Why crude oil prices are rising now?

    • Prices collapsed in April 2020 after the pandemic spread around the world, and demand fell away.
    • But as economies have reduced travel restrictions and factory output has picked up, global demand has improved, and prices have been recovering.
    • The controlled production of crude amid rising demand has been another key factor in boosting oil prices, with Saudi Arabia voluntarily cutting its daily output.

    What is the impact of taxes on retail prices of auto fuels?

    • The central government hiked the central excise duty on petrol to Rs 32.98 per litre during the course of last year from Rs 19.98 per litre at the beginning of 2020.
    • It increased the excise duty on diesel to Rs 31.83 per litre from Rs 15.83 over the same period to boost revenues as economic activity fell due to the pandemic.
    • A number of states have also hiked sales tax on petrol and diesel to shore up their revenues.

    How much tax do we pay now?

    Currently, state and central taxes amount to around 180 per cent of the base price of petrol and 141 per cent of the base price of diesel in Delhi.

    How will these hikes impact inflation?

    • Experts note that the impact of rising fuel inflation has been counterbalanced by declining food inflation, but that consumers with greater expenditure on travel are feeling the pinch of higher prices.
    • Rising fuel inflation may pinch consumers who have to travel further for work and have access to affordable cereals etc.
    • The urban population would be more impacted by rising fuel prices than the rural population — however, a weak monsoon may lead to rural India being hit as farmers are forced to rely more on diesel-powered irrigation.

  • Farm lessons from China, Israel

    China and Israel offer two important lessons for India to transform its agriculture: agri-market reforms and water accounting.

    Lessons from Israel and China

    • India, China and Israel — started off their new political journey in late 1940s, but today China’s per capita income in dollar terms is almost five times that of India, and Israel’s almost 20 times higher than India.
    • China produces three times more agri-output than India from a smaller arable area.
    • China started off its economic reforms in 1978 by taking up agriculture first.
    • It dismantled its commune system of land holdings and liberated agri-markets that allowed farmers to get much higher prices.
    • As a result, in 1978-84, farmers’ incomes in China increased by almost 14 per cent per annum, more than doubling in six years.
    • Israel cultivates high-value crops for exports (citrus fruits, dates, olives) by using every drop of water and recycling urban waste water for agriculture, by de-salinisation of sea waters.
    • Water accounting in Israel is something exemplary.

    Need for agri-reform in India

    • The average holding size in China was just 0.9 ha in 2016-18, smaller than India’s 1.08 ha in 2015-16.
    • So there is no doubt that small holders can do wonders, if they are given the right incentives, good infrastructure and research support, and the right institutional framework to operate.
    • In India, the 1991 reforms did not include agriculture.
    • Indian agri-food policies remained more consumer-oriented with a view to protect the poor.
    • Export controls, stocking limits on traders, movement restrictions, etc all continued at the hint of any price rise.
    • The net result of all this was farmers’ incomes remained low and so did those of landless agri-labourers.

    Way forward

    • India needs to change its policy framework from being subsidy-led to investment-driven, from being consumer-oriented to producer-oriented, and from being supply-oriented to demand-driven by linking farms with factories and foreign markets, and, finally, from being business as usual to an innovations-centred system.
    • Until India breaks away from the policy of free power for agriculture, there would be no incentive for farmers to save water.
    • In a state like Punjab where almost 80 per cent of blocks are over-exploited or critical, meaning the withdrawal of water is much more than the recharge.
    • Highly subsidised urea and open-ended procurement have become a deadly cocktail that are eating away the natural wealth of Punjab.
    • Out-of-box thinking is needed to break this regressive cycle for a brighter future for Punjab, for our own children.

    Consider the question “What are the implications of subsidy oriented policies for Indian agriculture.”

    Conclusion

    Lessons from China and Israel suggest that India need reform in agri-food policies and water accounting to address several issues plaguing agriculture.

  • Major Port Authorities Bill, 2020

    Rajya Sabha has passed the Major Ports Authorities Bill 2020 with 88 votes for and 44 against it. The Bill was passed in Lok Sabha in September last year.

    Major Ports Authorities Bill 2020: Major: Highlights

    • The Bill provides for the regulation of major ports and will replace the Major Port Trusts Act of 1963, and a board of Major Port Authority for each major port will replace the current port trusts.
    • The Bill will apply to the major ports of Chennai, Cochin, Jawaharlal Nehru Port, Kandla, Kolkata, Mumbai, New Mangalore, Mormugao, Paradip, VO Chidambaranar and Vishakhapatnam.

    Boards to replace trusts

    • Under the 1963 Act, all major ports are managed by the respective Board of Port Trusts that have members appointed by the central government.
    • The Bill provides for the creation of a Board of Major Port Authority for each major port.
    • These Boards will replace the existing Port Trusts.
    • It will have a member each from the state governments, the Railways Ministry, the defence ministry, and the customs department.
    • The Bill allows the Board to use its property, assets and funds as deemed fit for the development of the major port.

    Board has financial powers

    • Under the 1963 Act, the Board had to seek the prior sanction of the Centre to raise any loan.
    • Under the new Bill, to meet its capital and working expenditure requirements, the Board may raise loans from any scheduled bank or financial institution within India, or any financial institution outside India.
    • However, for loans above 50% of its capital reserves, the Board will require prior sanction of the central government.

    The board will fix rates

    • At present, the Tariff Authority for Major Ports fixes the scale of rates for assets and services available at ports.
    • Under the bill, which now awaits President’s accent to become a law, the Board or committees appointed by the Board will determine these rates for services that will be performed at ports.
    • The services would include the access to and usage of the port assets, and different classes of goods and vessels, among others.

    Punishments

    • Under the 1963 Act, there are various penalties for contravening provisions of the Act.
    • The penalty for setting up any structures on the harbours without permission, for example, may extend up to Rs 10,000, and the penalty for evading rates may extend up to 10 times the rates.
    • Under the new Bill, any person contravening any provision of the Bill or any rules or regulations will be punished with a fine of up to Rs one lakh.

    Opposition criticism

    • Opposition parties had opposed the legislation terming it the move to privatize ports.
    • They said that this Bill is nothing but a retraction of the Singapore model.
    • When there were hue and cry that there cannot be the privatization of ports, it adopted a policy of so-called corporatization. Thereafter, it ultimately privatized its ports.
    • So, corporatization is the first step. The next in the offing is privatization said the opposition.

    What did the govt. say?

    • The government has brought in a provision that will allow ports to take their own decisions. To change tariffs, the ports have to now approach the ministry.
    • The port sector in the last six years has doubled the profit. Profit has increased, liabilities have come down. For modernization, 300 projects are ongoing.
    • This Bill is not to privatize any port, but it is to ensure that our ports can properly compete with private ports.

  • [pib] SAKSHAM Portal

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

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

    SAKSHAM

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

    Key features

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

  • National Rail Plan for 2030

    The Budget unveiled the National Rail Plan 2030. 

    Key provision in the Budget for railways

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

    National Rail Plan provisions

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

    Pricing and cross-subsidy issue

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

    Need for decreasing the cost and increasing the average speed

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

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

    Conclusion

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

    Back2Basics: Operating Ratio

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

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

     

  • Significance of crude oil crossing $60 a barrel

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

    What is Crude Oil?

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

    Why has the price of crude oil risen sharply?

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

    How will this impact India?

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

    Signs of no remedy

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