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Subject: Economics

  • The MSME sector holds the key to an Indian economic recovery

    The article highlights the importance of MSMEs for the economy and issues faced by the sector.

    Context

    • The economy may have recovered from the trough of April but is yet to show signs of a sustained recovery on an annual basis.
    • The number of establishments registered with the Employees’ Provident Fund Organisation declined by more than 30,800 in October, compared to September.

    Incentives for MSMEs

    • The above-cited numbers are indicator of the vulnerability of the employment situation, but also as a performance indicator of micro, small and medium enterprises (MSMEs).
    • The MSME sector is vital for employment generation, as also for an economic recovery to sustain.
    • Under Atmanirbhar Rozgar Yojana the government will bear the entire provident fund contributions for two years of all new employees hired.
    • However, similar announcements earlier failed to enthuse the MSME sector.
    • Along with the employment incentive, the MSME sector has also been provided collateral free credit.
    • But the offtake from the scheme has not been impressive, pointing to deeper issues.

    Why the incentives failed

    • Part of the reason these incentives failed lies in the very nature of the MSME sector and its heterogeneity, which is inherent in its definition as a residual sector once large enterprises are excluded.
    • A 2015-16 survey of the National Statistical Office shows that almost 94% of these enterprises are tiny, with less than four workers.
    • Only 31% are registered under various acts, but these face regulatory hurdles, some of them related to compliance with the goods and service tax (GST).

    Problems faced by MSMEs

    • In 2015-16 survey of the National Statistical Office two most important problems mentioned were a lack of demand and unpaid dues.
    • On both, the situation after 2015-16 has worsened, with the economy slowing down and the government responsible for the largest unpaid dues.
    • With the finances of state governments also strained due to pandemic, the fiscal situation has added to the problem of unpaid dues.
    • The sector is also affected by the political economy of state intervention, which seems biased in favour of large corporations.
    • Unlike the â‚č1.5 trillion tax bonanza that large companies received as part of a pre-pandemic stimulus, there was no such bounty for the MSME sector.
    • With most state governments relaxing labour regulations for large companies, even the low-wage advantage that this sector enjoyed has got diminished.
    • Policy changes have not only reduced the compliance burden of labour laws, but have also helped large enterprises reduce wage costs.
    • Consequently, the MSME sector has to now compete with a corporate sector that has easy access to capital, cheap and unregulated labour and a lower tax burden than before.

    Way forward

    • Apart from the fiscal stimulus, the sector requires a political-economy approach that prioritizes MSME interests.
    • India needs to ease the regulatory burden of small units and aid their survival through fiscal support.
    • Above all, they need a level-playing field vis-Ă -vis big businesses.

    Consider the question “Despite several incentives by the government MSME sector fails to play the role expected of it. What are the issues faced by the sector and suggest the measure to deal with the issues.” 

    Conclusion

    Given the important role played by the sector in the economy, issues faced by it must be addressed on ani urgent basis to revive the economy battered by the pandemic.

  • Faultlines in India’s economic liberalism

    The article counters the argument made by External Affairs Minister S. Jaishankar about the impact of economic liberalisation on India’s economy.

    Impact of liberalism on India

    • India’s External Affairs Minister S. Jaishankar recently disapproved of free trade and globalisation.
    • About FTA’s he said that “the effect of past trade agreements has been to de-industrialise some sectors.”
    • These observations were made days after countries of the Asia-Pacific region signed the Regional Comprehensive Economic Partnership (RCEP) agreement.
    • He said that , “in the name of openness, we have allowed subsidi[s]ed products and unfair production advantages from abroad to prevail”

    Flaws in the argument

    •  There are several flaws in Mr. Jaishankar’s arguments.

    1) India cannot be the part of global value chain

    • India is now truly at the margins of the regional and global economy.
    • With trade multilateralism at the World Trade Organisation (WTO) remaining sluggish, FTAs are the gateways for international trade.
    • By not being part of any major FTA, India cannot be part of the global value chains.
    • India’s competitors such as the East Asian nations, by virtue of they being part of mega-FTAs, are in an advantageous position to be part of global value chains and attract foreign investment.

    2) Indian economy has bee relatively closed economy

    • India is surely a much more open economy than it was three decades ago, globally, India continues to remain relatively closed when compared to other major economies.
    • According to the WTO, India’s applied most favoured nation import tariffs are 13.8%, which is the highest for any major economy.
    • Likewise, according to the United Nations Conference on Trade and Development, on the import restrictiveness index, India figures in the ‘very restrictive’ category.
    • From 1995-2019, India has initiated anti-dumping measures 972 times (the highest in the world) trying to protect domestic industry.

    3) Economic survey accepts the benefits of FTAs

    • The External Affairs Minister is contradicting government’s economic survey presented earlier this year.
    • The survey concluded that India has benefitted overall from FTAs signed so far.
    • Blaming FTAs for deindustrialisation means ignoring real problem of the Indian industry — which is the lack of competitiveness and absence of structural reforms.

    4) India has been a major beneficiary of economic globalisation

    • It cannot be ignored that India has been one of the major beneficiaries of economic globalisation — a fact attested by the International Monetary Fund (IMF).
    • Post-1991, the Indian economy grew at a faster pace, ushering in an era of economic prosperity.
    • According to the economist Arvind Panagariya, poverty in rural and urban India, which stood at close to 40% in 2004-05, almost halved to about 20% by 2011-12.
    • This was due to India clocking an average economic growth rate of almost 8%.

    Conclusion

    Desire to make India a global destination for foreign investment is a pipe dream because it is naive to expect foreign investors to be gung-ho about investing in India if trade protectionism is the government’s official policy.

  • [pib] PM Formalization of Micro Food Processing Enterprises Scheme

    Union Minister for Food Processing Industries has inaugurated the capacity building component of the Pradhan Mantri Formalization of Micro food processing Enterprises scheme (PM-FME Scheme).

    The event also sought the launch of the GIS One District One Product (ODOP) Digital Map of India.

    Practice question for mains:

    Q.What is the PM FME Scheme? Discuss its potential to neutralize various challenges faced by India’s unorganized food industries

    PM-FME Scheme

    • Launched under the Aatmanirbhar Bharat Abhiyan, the PM-FME Scheme is a centrally sponsored scheme.
    • It aims to enhance the competitiveness of existing individual micro-enterprises in the unorganized segment of the food processing industry and promote formalization of the sector.
    • It seeks to provide support to Farmer Producer Organizations, Self Help Groups, and Producers Cooperatives along their entire value chain.
    • Under the PM-FME scheme, capacity building is an important component.
    • The scheme envisages imparting training to food processing entrepreneurs, various groups, viz., SHGs / FPOs / Co-operatives, workers, and other stakeholders associated with the implementation of the scheme.

    Features of the scheme

    • The Scheme adopts One District One Product (ODODP) approach to reap the benefit of scale in terms of procurement of inputs, availing common services and marketing of products.
    • The States would identify food product for a district keeping in view the existing clusters and availability of raw material.
    • The ODOP product could be a perishable produce based product or cereal-based products or a food product widely produced in a district and their allied sectors.
    • An illustrative list of such products includes mango, potato, litchi, tomato, tapioca, kinnu, bhujia, petha, papad, pickle, millet-based products, fisheries, poultry, meat as well as animal feed among others.
    • The Scheme also place focus on waste to wealth products, minor forest products and Aspirational Districts.

     About ODOP Digital Map

    • The GIS ODOP digital map of India provides details of ODOP products of all the states to facilitate the stakeholders.
    • The digital map also has indicators for tribal, SC, ST, and aspirational districts.
    • It will enable stakeholders to make concerted efforts for its value chain development.

  • Export remain key to economic growth

    The article highlights the argument made by Arvind Panagaria about the primacy of export for the progress of the country in his new book India Unlimited: Reclaiming the Lost Glory.

    (more…)

  • India’s challenges in maintaining its viability against competitive economies

    The article deals with the challenges India faces in attracting the relocating supply chains in the wake of the pandemic.

    Is China losing its appeal

    • Some labour-intensive industries, such as textiles and apparels, have been moving to Bangladesh and Sri Lanka as labour costs in China are increasing.
    • But trends in other industries show that businesses have mostly remained in China.
    • COVID-19 crisis has resulted in firms establishing relatively small-scale operations elsewhere.
    • This is perceived as a buffer against being completely dependent on China, referred to as the ‘China +1’ strategy.

    3 Reason for firms to remain in China

    •  1) Starting an enterprise and maintaining operations in China are much easier than elsewhere.
    • 2) Chinese firms are nimble and fast, which is evident from the quick recovery of Chinese manufacturing after the lockdown.
    • 3) Many global companies have spent decades building supply chains in China, getting out would mean moving the entire ecosystem.

    3 Challenges facing India

    • This has led to intensification of competition among Asian countries to be ‘plus one’  in the emerging manufacturing landscape.
    • India faces three challenges in this race.

    1) Increasing domestic public investment

    • First is the task of increasing domestic public investments, which have implications for both demand and supply sides.
    • In India, even before the pandemic, the growth in domestic investments had been weak,
    • This seems to be the opportune time to bolster public investments as interest rates are low globally and savings are available.
    • Private investments would continue to be depressed, due to the uncertainty on the future economic outlook.

    2) Reforms in trade policy

    • India needs a major overhaul in her trade policy world trade had been rattled by tendencies of rising economic nationalism and unilateralism leading to the return of protectionist policies.
    • A revamped trade policy needs to take into account the possibility of two effects of the RCEP:
    • 1) Walmart effect: It would sustain demand for basic products and help in keeping employee productivity at an optimum level, but may also reduce wages and competition due to sourcing from multiple vendors at competitive rates.
    • 2) Switching effects: It would be an outcome of developed economies scouting for new sources to fulfil import demands, which requires firms to be nimble and competitive.
    • Trade policy has to recognise the pitfalls of the present two-track mode, one for firms operating in the ‘free trade enclaves’ and another for the rest.
    • A major fallout of this ‘policy dualism’ is the dampening of export diversification.
    • The challenge is to make exporting activity more attractive for all firms in the economy.

    3) Increasing women’s participation in labour force

    • While India’s GDP has grown by around 6% to 7% per year women’s labour force participation rate has fallen from 42.7% in 2004–05 to 23.3% in 2017–18.
    • This means that three out of four Indian women are neither working nor seeking paid work.
    • Globally, India ranks among the bottom ten countries in terms of women’s workforce participation.
    • When Bangladesh’s GDP grew at an average rate of 5.5% during 1991 and 2017, women’s participation in the labour force increased from 24% to 36%.
    • India could gain hugely if barriers to women’s participation in the workforce are removed.
    • The manufacturing sector should create labour-intensive jobs that rural and semi-urban women are qualified for.

    Consider the question “Relocation of supply chains offers an opportunity for India. However, it faces several challenges in attracting these relocating supply chains. What are these challenges? Suggest measures to deal with these challenges.”

    Conclusion

    India’s approach to the changed scenario needs to be well-calibrated. The stage is set for a new ‘Asian Drama’. What will be India’s role in it? Well, it will not be on the basis of past accolades, for sure.

  • Economic implications of India opting out of RCEP

    Even as India opted to stay out after walking out of discussions last year, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.

    Must read:

    China-led RCEP takes off without India

    Try answering this also:

    Q.Signing the Regional Comprehensive Economic Partnership (RCEP) agreement would have given more substance to India’s Act East policy. Analyse.

    Why did India walk out?

    • India decided to exit RCEP negotiations over “significant outstanding issues”.
    • Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector.
    • The current structure of RCEP still does not address these issues and concerns.

    How far is China’s presence a factor?

    (1) Escalated tensions

    • Escalated tension with China is considered to be a major reason for India’s decision.
    • Major issues that were unresolved during RCEP negotiations were related to the exposure that India would have to China.

    (2) Surge in imports

    • This included India’s fears that there was “inadequate” protection against surges in imports.
    • It felt there could also be a possible circumvention of rules of origin— the criteria used to determine the national source of a product.
    • In the absence of this, other partner countries could dump their products by routing them through other countries that enjoyed lower tariffs.

    (3) Inability for countermeasures

    • India was unable to ensure countermeasures like an auto-trigger mechanism to raise tariffs on products when their imports crossed a certain threshold.
    • It also wanted RCEP to exclude most-favoured-nation (MFN) obligations from the investment, especially to countries with which it has border disputes.

    (4) No assurance of market access to India

    • RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
    • The agreement would have forced India to extend benefits given to other countries for sensitive sectors like defence to all RCEP members.

    (5) Trade balances paradox

    • India’s stance on the deal also comes as a result of learnings from unfavourable trade balances that it has with several RCEP members, with some of which it even has Free Trade Agreements.
    • India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing FTAs with several RCEP members to increase exports.

    What can the decision cost India?

    • There are concerns that India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc.
    • The move could potentially leave India with less scope to tap the large market that RCEP presents —the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.
    • Given attempts by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific.

    What are India’s options now?

    • India, as an original negotiating participant of RCEP, has the option of joining the agreement without having to wait 18 months as stipulated for new members in the terms of the pact.
    • RCEP signatory states said they plan to commence negotiations with India once it submits a request of its intention to join and it may participate in meetings as an observer prior to its accession.
    • A possible alternative for India is to review its existing bilateral FTAs with some of these RCEP members as well as newer agreements with potential for Indian exports.
    • There is also a growing view that it would serve India’s interest to invest strongly in negotiating bilateral agreements with the US and the EU, both currently a work in progress.

    Conclusion

    • A country can never get into FTAs merely to provide its market to the partner countries.
    • When we accommodate our partner countries, our objective is also to increase the presence of our products in the markets of partners, and India hasn’t been able to achieve the latter objective.

  • PLI Scheme extended to 10 key Sectors

    Manufacturing holds key to the economic prosperity of the country. The article examines the significance of Production Linked Incentive Scheme to boost manufacturing in India.

    Need for increasing manufacturing capabilities

    • The world of manufacturing is now more interconnected than ever before with all major industries—automobile, electronics, pharmaceuticals, textiles, etc—operating as a global value-chain.
    • In order to integrate India as a pivotal part of this modern economy, there is a strong need to step up our manufacturing capabilities in sectors of high growth, including the cutting edge technology sectors.
    • A strong and dynamic manufacturing sector will fuel India’s economic growth by allowing companies producing in India to penetrate effectively into the global supply chains across various sectors.
    • Apart from enhancing exports, it will also reduce our import dependencies and spur domestic consumption.
    • ‘Atmanirbhar Bharat’ has brought manufacturing to the centre stage and emphasised its significance in driving India’s growth.

    Factors favouring India

    • India offers an attractive domestic market, with a large population in the educated and earning segment.
    • It also has a strong institutional framework which allows for a smooth functioning of the industry.
    • A concerted effort towards attracting substantial investments for the creation of large manufacturing facilities, combined efficiency and economies of scale, can help Indian companies globally competitive and integrate with the global markets.

    How Production Linked Scheme (PLI) will help achieve these objectives

    • The Production Linked Incentive (PLI) Scheme is designed to incentivise incremental production for a limited number of eligible anchor entities in each of the selected sectors.
    • These selected entities will invest in technology, plant & machinery, as well as in R&D.
    • The scheme will also have beneficial spillover effects by the creation of a widespread supplier base for the anchor units established under the scheme.
    • Along with the anchor unit, these supplier units will also help to generate massive primary and secondary employment opportunities.
    • The sectors for PLI have been shortlisted on the basis of their potential for economic growth, extent of benefit to the rural economy, revenue and employment generation.
    • A key benefit of the PLI Scheme is that it can be implemented in a very targeted manner to attract investments in areas of strength and to strategically enter certain segments of global value chains (GVCs).
    • This will help bring scale and size in key sectors and create and nurture global champions.
    • The scheme incentivises upcoming technologies that represent the biggest economic opportunities of the 21st century.
    • The scheme intends to generate large-scale employment by incentivising the development of traditional, labour intensive sectors like Food Processing and Textiles.
    • The current basket of Indian manufacturing constitutes of large volume of low-value products.
    • The scheme aims to correct this by encouraging large manufacturers to bring technology and to build capabilities for high-value output thereby providing higher returns to the upstream producers.
    • It will also enable an increase in exports.
    • The scheme envisages globally-integrated manufacturing in sectors such as automobile and auto components, pharmaceuticals, telecommunications, white goods and steel.
    • These are crucial sectors in terms of their strategic importance, contribution to the GDP and employment-generation potential.

    Conclusion

    Given the scale of incentives, which is around Rs 1,96,000 crore, the manufacturing sector of the country is set to transform in the next few years. Its contribution to the GDP will significantly improve, leading to unprecedented investment and job creation.

    Source:-

    https://www.financialexpress.com/opinion/pli-scheme-will-help-india-nurture-manufacturing-giants/2128992/

  • Power sector reforms: UK lessons for India

    Reforms in power sector in the UK were extensive and offers some important lessons for India. This article elaborates on the issue of reforms the challenges in introducing such reforms in India.

    Background of the power sector reforms in UK

    • After living with vertically integrated utilities till 1989, they unbundled.
    • Unbundling created markets both at generation and retail end.
    • Today, they are back to a situation where 70% of the power generated is sold outside the wholesale market.
    • The Electricity Act, 1989, which paved the way for the appointment of a regulator and thereafter, leading to unbundling, both vertical and horizontal.
    • Twelve distribution utilities were set up (called RECs) along with three-generation companies and also a national wires company (called NGC).
    • All of them were privatised barring Nuclear Electricity.
    • Retail competition was introduced in 1990 and was extended to all consumers in 1998.
    • A wholesale market was set up for generators.
    • The next major step was to fragment the generators because the regulator felt that they were colluding.
    • NETA in 2001 was primarily a tie-up between gencos and their consumers with long-term power purchase agreements.
    • The Energy Act, 2012, was enacted, which envisaged further changes.

    Issues with Power sector reform in India

    • The Electricity Act, 2003 is a very cautious and timid exercise compared to what has been done in the UK.
    • Through the Act, we have merely unbundled and ring-fenced our utilities so that there is transparency in the accounts; this itself took us several years.
    • There has been no attempt to create a wholesale market or a full-fledged retail market where the consumer chooses the supplier.
    • Large consumers, having loads in excess of 1 MW, however, have the option of open-access where they can opt to receive supply from some other entity, instead of his incumbent utility.
    • The road to open access though has been bumpy, and discoms have opposed it tooth and nail.
    • Besides what was possible in the UK may not be possible in India.
    • The UK did not have a regime of cross-subsidies where the commercial and industrial sectors subsidise agriculture and low-end domestic consumers and also did not have high commercial loss levels.
    • Moreover, in the UK, all consumers were metered, unlike India.
    • There is yet another factor: ‘Power’ falls in the Concurrent List.
    • The Centre and states rarely see eye-to-eye on several issues concerning the sector, especially on matters relating to distribution.
    • Consequently, any major change does not get accepted.

    Issues in introducing reform in India

    • The CERC floated a discussion paper in December 2018 about the creation of a wholesale market in India.
    • This amounts to retrofitting, and retrofitting in an existing architecture has its limitations.
    • But the issue is whether India should attempt creating a wholesale market or for that matter a full-fledged retail market in India, especially after the experience of the UK.
    • The UK is almost back to the era of vertically integrated utilities, and consumers barely switch their retailer.

    Way forward

    • We need to privatise our distribution sector by creating joint ventures with the government.
    • the government will have to undertake initial hand-holding till such time commercial losses are wiped out.
    • This is the model which was followed in the case of Delhi and has proven successful.
    • Commercial losses have come down from 50% to single-digit figures within a span of 10 to 12 years.
    • Once we reach that stage, we can think of creating a full-fledged retail market where a consumer can choose her supplier.

    Consider the question “Despite several reforms in the power sector, India still lacks full-fledged retail. What are the challenges in the creation of such a market. Suggest the ways to deal with the challenges.”

    Conclusion

    The Indian consumer is only interested in good quality power supply at a reasonable price. We only need to take policy measures so that the incumbent utilities can provide this, since, this will be the least costly path.

    Source:-

    https://www.financialexpress.com/opinion/power-reforms-uk-lessons-for-india/2127560/

  • How to improve the income and Productivity of Indian labour?

     

    Slowdown in demand

    • The bigger medium-term problem facing Indian economy is the slowdown of aggregate demand — private final consumption expenditure (PFCE), investment and exports.
    • The largest component of GDP, PFCE, has declined as a share of GDP 68 per cent in 1990 to 56 per cent of GDP in 2019 .
    • The consumption of the top socio-economic deciles (top 10%) has stagnated.
    • Also the consumption demand of the rest of the demography ( 90%) — mostly in agriculture, small-scale manufacturing and self-employed — is not increasing due to low income growth.

    How to increase income and productivity

    • Atmanirbhar Bharat depends on improving the income and productivity of a majority of the labour force.
    • First, incentivise the farming community to shift from grain-based farming to cash crops, horticulture and livestock products.
    • Second, shift the labour force from agriculture to manufacturing.
    • India can only become self-reliant if it uses its 900 million people in the working-age population with an average age of 27 and appropriates its demographic dividend as China did.
    • That is possible if labour-intensive manufacturing takes place in a big way, creating employment opportunities for labour force with low or little skills, generating income and demand.
    • India is in a unique position at a time when all other manufacturing giants are ageing sequentially — Japan, EU, the US, and even South Korea and China.
    • Most of these countries have moved out of low-end labour-intensive manufacturing, and that space is being taken by countries like Bangladesh, Vietnam, Mexico, etc.
    • India offers the best opportunity in terms of a huge domestic market and factor endowments.

    Way forward

    • We need Indian firms to be part of the global value chain by attracting multinational enterprises and foreign investors in labour-intensive manufacturing, which will facilitate R&D, branding, exports, etc.
    • There is a need to aggressively reduce both tariffs and non-tariff barriers on imports of inputs and intermediate products.
    • Removing these barriers create a competitive manufacturing sector for Make in India, and “Assembly in India”.
    • Apart from trade reforms, further factor market reforms are required, such as rationalising punitive land acquisition clauses and rationalising labour laws, both at the Centre and state level.
    • We also have to go for large-scale vocational training from the secondary-school level, like China and other east and south-east Asian countries.

    Consider the question “Key to faster economic progress of India lies in income growth and productivity of its labour force. Suggest the ways to achieve these.”

    Conclusion

    The COVID-triggered economic crisis should lead us to create a development model that leads to opportunities for the people at the bottom of the pyramid. A competitive and open economy can ensure Atmanirbhar Bharat.

  • Atmanirbhar Bharat Abhiyan 3.0 Package

    Finance Minister has announced a fresh set of relief and stimulus measures for the economy worth â‚č1.19 lakh crore, including a scheme to boost re-employment chances of formal sector employees who lost their jobs amidst the COVID-19 pandemic.

    Assist this newscard with:

    [Burning Issues] Atmanirbhar Abhiyan Package

    Atmanirbhar Bharat

    • Atmanirbhar Bharat, which translates to ‘self-reliant India’ or ‘self-sufficient India’, is the vision of our PM of making India a bigger and more important part of the global economy.
    • It doesn’t mean “self-containment”, “isolating away from the world” or being “protectionist”.
    • It calls for pursuing policies that are efficient, competitive and resilient, and being self-sustaining and self-generating.
    • The five pillars of ‘Atmanirbhar Bharat’ are stated as economy, infrastructure, technology-driven systems, vibrant demography and demand.

    Highlights of the Package 3.0