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Subject: Economics

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

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

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

    MITRA Scheme

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

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

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

    Which are the 14 new MFP?

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

    Now try this PYQ from CSP 2018:

    Q. Consider the following:

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

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

    (a) 1, 2, 3 and 7 only

    (b) 2, 4, 5 and 6 only

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

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

    About MSP for MFP Scheme

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

    Back2Basics: Forest Produce in India

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

  • Credit rating

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

    Prejudice against emerging economies

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

    Issues with Credit Rating

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

    What should be the basis of India’s argument

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

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

    Conclusion

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

  • An overview of Economic Survey 2020-21

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

    Focus on a recovery path

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

    Comparison with past Economic Surveys

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

    What the Survey misses

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

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

    Conclusion

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

  • Need for expansionary fiscal stance in the Budget

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

    Issues with expenditure and revenue estimates

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

    What CGA data reveals

    • The data from the Controller General of Accounts show that between April and November 2020, revenues of the central government predictably collapsed, by around 18%, or ₹181,372 crores, compared to the same period of the previous year.
    • But despite that, expenditures should have gone up, because the lockdown-induced collapse in an economic activity meant that public spending would be the only thing keeping the economy afloat.
    • In three rounds of stimulus packages government claimed to inject amounts of ₹1.7-lakh crore in March, ₹20-lakh crore in May, and then ₹2.65-lakh crore in November
    •  However, the public accounts show that the total spending of the central government increased by only ₹86,301 crores.
    • That was only a 4.6% increase — not even enough to keep pace with inflation.
    • In other words, the central government reduced its real spending over the period of the pandemic and economic crisis.
    • This fiscal stance obviously affects people and also adds to contractionary tendencies in the economy, and prolongs the severe demand recession.
    • Policies that destroy informal economic activities eventually come to harm the formal enterprises as well.

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

    Conclusion

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

  • Keep the wheels of economic recovery turning

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

    Estimates of damages and signs of economic recovery

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

    State of the economy before pandemic

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

    Crucial role played by the RBI

    • While being cautious of inflation, the RBI has decided to continue the accommodative stance in its latest monetary policy to support growth.
    • The CPI inflation after crossing 7% has cooled off to 4.6% in December.
    • Still, the real interest rates remain very low.
    • The efficacy of the new monetary framework (NMF) — the agreement between the RBI and Government of India in February 2016 to adopt inflation targeting in India — will be reviewed in March 2021, and we flag the need for revising the framework.
    • The RBI is continuing its liquidity infusion programmes including the on-tap Targeted Long Term Repo Operations (TLTRO).
    • This programme announced on October 9, 2020 for five stressed sectors has been extended to 26 stressed sectors notified under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0).
    • The RBI is also continuing its ‘operation twist’  with Open Market Operations (OMO) of ₹10,000 crore scheduled for December 17, 2020.
    • Nevertheless, the RBI Governor has rightly pointed out that the signs of recovery are far from being broad-based.

    Stimulus for targeted state intervention

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

    Way forward

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

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

    Conclusion

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

  • [pib] International Energy Agency (IEA)

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

    Try this MCQ:

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

    a) International Energy Agency (IEA)

    b) World Economic Forum (WEF)

    c) International Renewable Energy Agency (IRENA)

    d) International Solar Alliance

    International Energy Agency

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

    Greater role play

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

    Why need a partnership with IEA?

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

  • 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 government’s expenditure needs.
    • Such borrowings are a way for the Centre to finance its expenditures while keeping the debt off the books — 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 country’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 government’s finances.
    • As such, it is keenly watched by rating agencies — 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 “off-budget borrowings”.

    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 ‘Inequality Virus Report’ 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

    ‘Rise’ in wealth

    • Indian billionaires increased their wealth by 35% during the lockdown to ₹ 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 ₹90 crores an hour during the pandemic when around 24% of the people in the country were earning under ₹ 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 India’s GDP of about 8 % or ₹15 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 ₹10 lakh to help the economy recover from the lockdown.
    • According to its estimate, a wealth tax on the nation’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 China’s Belt and Road Initiative (BRI).
    • However, geographically, China is not as blessed as India, yet, seven of the top 10 container ports in the world are in China, according to the World Shipping Council.
    • What aided China’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. 
    • 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.
    • ‘Make in India’ 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 nation’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.