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Subject: Economics

  • Give reforms a chance

    Agri-bill passed by the Parliament resulted in the protest from farmers from several states. The bills have also been challenged on the legal footing as well. This article explains how the bills will benefit the farmers and also examines the legal basis used for their passage.

    States trying to nullify the agri bills passed by Parliament

    • Parliament has passed three bills on agriculture reform. This has evoked protests, largely in Punjab and Haryana.
    • Taking recourse to Article 254 of the Constitution, the Punjab government has passed its own bills to nullify some provisions of the central acts.
    • Similar action by the Chhattisgarh and Rajasthan governments seems to be on the anvil.

    Legal justification for Parliament passing the laws related to agriculture

    • The Constitution has placed agriculture on the state list.
    • Various petitions have also been filed in the Supreme Court claiming that the central laws infringe upon the jurisdiction of state governments.
    • However, it is the Centre which decides and announces support prices for major crops for the entire country.
    • It also decides issues such as bank loan waivers.
    • International agreements and multilateral trade in agricultural products also fall in the Union government’s domain.
    • Agricultural and dairy products, in fact, had a prominent role in India not joining the Regional Comprehensive Economic Partnership (RCEP).
    • Entry 33 in the concurrent list limits the power of states in agriculture, by empowering both governments to legislate on production, trade and supply of a range of agricultural foodstuffs and raw material.

    Use of Article 254 to bypass Central law

    • The Punjab bill has set in motion the process of states taking refuge under Article 254 to pass their own pieces of legislation.
    • All state bills that seek to nullify central acts have to be approved by the President after they have received the consent of the governor of the state.

    Way forward

    • Reformist chief ministers and astute policy planners should grab this opportunity and encourage investment in private infrastructure to create supply chains and give the farmer the benefit of demand-led prices.
    • They should also take appropriate action to create institutional mechanisms, such as farmer producer organisations or aggregators, to ensure greater farmer participation.

    Conclusion

    It would be in the interests of the farming community and state governments to give the much-delayed reform measures a fair chance by giving them access to competitive purchases, affording better prices.

  • How to improve the financial picture of the DisComs

    The article analyses the factors responsible for financial difficulties faced by the DisComs and suggests the ways to deal with the issues.

    Important role of the DisComs

    • Distribution Companies (DisComs) are the utilities that typically buy power from generators and retail these to consumers.
    • For all of India’s global leadership for growth of renewable energy, or ambitions of smart energy, the buck stops with the DisComs.
    • The days of scarcity of power are over.
    • The physical supply situation has mostly improved.
    • But the financial picture has not brightened much.

    Analysing the data on liabilities of the DisComs

    •  ₹90,000 crore (later upgraded to  ₹1,25,000 crore) was earmarked for DisComs in ₹20-lakh crore package announced in the wake of Covid-19’s economic shock.
    • The Power Finance Corporation (PFC)’s Report on Utility Workings for 2018-19 showed dues to generators were ₹2,27,000 crore, and this is well before COVID-19.
    • It also showed similar Other Current Liabilities.
    • DisComs have delayed their payments upstream (not just to generators but others as well) — in essence, treating payables like an informal loan.

    But why do DisComs not pay on time?

    • Ideally, DisComs should not incur losses as they enjoy a regulated rate of return.
    • While AT&C losses can explain part of any gap. Major reasons are as discussed below:

    1) Regulatory issue and cash-flow gap due to it

    • The first problem starts at the regulatory level where even if DisComs performed as targeted, across India, they would face a considerable cash flow gap.
    • This cash flow gap was ₹60,000-plus crore in FY18-19 compared to their then annual cost structure of ₹7.23-lakh crore.

    2) Payabeles issue: Due from consumers, state and regulatory gap

    •  These dues are of three types.
    • First, regulators themselves have failed to fix cost-reflective tariffs thus creating Regulatory Assets,which are to be recovered through future tariff hikes.
    • Second, about a seventh of DisCom cost structures is meant to be covered through explicit subsidies by State governments.
    • Third, consumers owed DisComs over ₹1.8 lakh crore in FY 2018-19, booked as trade receivables.
    • State governments are the biggest defaulters, responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time.

    3) Challenge of renewable energy

    • The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage.
    • And as battery technologies mature, their dependence on DisComs may wane entirely.
    • Even without batteries, regulations permitting, they may want to find third party suppliers under competitive models.

    Impact of Covid pandemic

    • COVID-19 has completely shattered incoming cash flows to utilities.
    •  The revenue implications were far worse since the lockdown disproportionately impacted revenues from so-termed paying customers, commercial and industrial segments.
    • Reduced demand for electricity did not save as much because a large fraction of DisCom cost structures are locked in through Power Purchase Agreements (PPAs) that obligate capital cost payments, leaving only fuel savings with lower offtake.

    Way forward

    • We will probably need a much larger liquidity infusion than has been announced thus far, but it also must go hand-in-hand with credible plans to pay down growing debt.
    • We need a complete overhaul of the regulation of electricity companies and their deliverables.
    • We need to apply common sense metrics of lifeline electricity supply instead of the political doleout of free electricity even for those who may not deserve such support.
    • For the rest, regulators must allow cost-covering tariffs.

    Consider the question “Examine the factor responsible for making the DisComs financial unviable? Sugget the pathways to deal with the issues faced by the DisComs”

    Conclusion

    The financial problems of DisComs have been brewing for many yearsHowever, if business as usual was not even good enough before COVID-19, it will not be workable for the current national needs of quality, affordable, and sustainable power.

  • Natural gas to come under GST

    Officials have indicated that the government is considering bringing natural gas under the ambit of the GST regime.

    Try this question from CSP 2018:

    Q.Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

    Why such demands?

    • Global energy MNCs have called on the government to bring natural gas under the GST regime.
    • Currently petrol, diesel, aviation turbine fuel, natural gas and crude oil fall outside India’s Goods and Services Tax (GST) regime.

    Why is it important to bring natural gas under the GST regime?

    • Bringing natural gas under the GST would lead to a reduction in the cascading impact of taxes on industries such as power and steel, which used natural gas as an input.
    • This would do away with the central excise duty and different value-added taxes imposed by states.
    • This would lead to an increase in the adoption of natural gas in line with the government’s stated goal to increase the share of natural gas in the country’s energy basket from 6.3% to 15%.

    Back2Basics: GST

    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

    Must read:

    Goods and Services Tax

  • Reform land ceiling laws

    Land ceiling laws, enacted to deal with the problems of a bygone era, remains unchanged even in most of the States. This has given rise to different problems. The article suggests the relaxation of the ceiling acts to deal with the problem of land degradation and water depletion.

    Background of the ceiling laws

    •  India implemented land ceiling laws to deal with the ‘zamindars’ and impose landowning limits based on total production value of land—irrigated, grove, orchard, dry, etc.
    • Landholdings were scrutinised at individual and family level, and large farms were discouraged.
    • For most states, the ceiling ratio of dry-to-irrigated land is 3:1.

    Issues with the ceiling laws

    • In 2020, State land laws remain unchanged, trapping farm families in a negative ownership trap.
    • As with each generation, the average landholding of individuals reduces.
    • Dropping farm incomes, higher inputs costs, low sale price, soil degradation and water depletion erode production and farm value.
    • A progressive farmer hits production saturation due to limited land.
    • Contract farming has been no consolation either.
    • The result is that the Indian farm size is very small, 86% under two hectares, and is decreasing as the average size of operational holding has declined to 1.08 hectares in 2015-16 versus 1.15 in 2010-11 (Agricultural Census 2015-16).
    • The government is reticent on the Economic Survey’s recommendations to increase land ceiling limits.
    • Recently, Karnataka rescinded land limit reforms.

    How to deal with soil degradation and water depletion

    • 30% of India’s land is degraded, bad agri-practices threaten soil health, and water-guzzling crops like paddy, sugarcane, etc, have resulted in a water crisis in many places.
    • States must study soil conservation program of the US, which paid farmers subsidies for soil conservation or allowing land to be fallow.
    • States should incentivise farmers for agro-ecological plantations and agro-forestry by relaxing land ceiling limits for them.
    • State Acts may include organic plantations under exempt categories similar to tea/rubber plantations.
    • Native biodiversity based mixed orchards, from mahua to moringa, can be encouraged and exempted by state governments.
    • Policy change will have benefits—soil and water rejuvenation, increase in farmers’ incomes and new products for the free market.
    • The return of organic matter and biodiversity will sustain farmland productivity.
    • Plus APEDA predicts a $50 billion organic export 2030, but the cherry would be additional carbon credits.
    • If 10% of arable land converts to organic grove land, India will mitigate climate change and pollution.
    • Each hectare with 0.01% humus can store 80,000 litres of water. We need a central policy to bolster this drive.
    • Farmers may take over waste or degraded land, beyond land ceiling limits, and restore land as a carbon sink and produce more nutrition per acre.
    • As farmers will care for these lands, the government’s financial burden to restore wastelands will lessen.

    Consider the question “Land degradation threatens India’s future if not dealt with in time. In light of this, examine the reasons for soil degradation and suggest the ways to deal with it” 

    Conclusion

    As a nation, we have a choice to steer the bigger farms towards agro-ecology or allow industrial farms to take over rural India. The government needs to bring out a fourth Ordinance to free the land for healing the Earth.

    Source:-

    https://www.financialexpress.com/opinion/reform-land-ceiling-laws-incentivise-farmers-for-agro-ecological-plantations-and-agro-forestry/2113635/

     

     

  • Politics and economics of farm bills

    Reforms in agriculture have been overdue. But the passage of farm bills by the Parliament has evoked opposition from several stakeholders. However, the passage of bills by the Punjab Assembly is the first from any State Assembly. The article explains how politics dominates agriculture reforms and its implications for economic growth.

    States trying the negate the farm bill passed by Parliament

    • By passing its farm bills, Punjab has become the first state to legislate to negate impact of legislation enacted by Parliament last month.
    • Other states like Rajasthan and Chhattisgarh, could follow suit soon.
    • Notwithstanding whether President Ram Nath Kovind gives his assent to the state bills that undermine the central ones, the important issue is to determine how much of this conflict is about economics aimed at helping farmers and how much sheer politics.

    Issues with Punjab’s farm bills

    • Punjab’s farm bills prohibit private players from buying wheat and paddy below the MSP even outside the APMC markets.
    • It doesn’t apply to other crops, say maize, cotton, pulses and oilseeds that are under the ambit of the central MSP system.
    • The point is that this pertains only to wheat and paddy.
    • The bill could even have been extended to milk and vegetables by declaring local MSPs for them, but it didn’t do that.
    • Because the state government knows full well that it will create a fiasco in agri-markets, which might boomerang on it politically.
    • Law for wheat and paddy will not help farmers as the Centre already buys more than 95 per cent of Punjab’s wheat and paddy at MSP through the Food Corporation of India (FCI) and state procurement agencies.

    Economic roots of politics over MSP: Lessons from the past

    • Demand that MSP be made a legal instrument (rather than indicative) actually exhibit deep distrust of the private sector and markets.
    • In1972 government announced that the wholesale trade in wheat and rice (paddy) will be taken over by the government as traders were being unscrupulous in not giving farmers their due MSP and manipulating prices.
    • The first marketing season of the government takeover of wholesale wheat trade, in 1973-74, saw a major fiasco.
    • Market arrivals dropped, and wheat prices shot up by more than 50 per cent. It was a bitter lesson.

    Long overdue reforms in agriculture

    • Economic reforms in 1991 took some time to yield results, but, by the 2000s, India was taking 7 per cent.
    • But even the 1991 economic reforms bypassed agriculture marketing reforms.
    • It was only in 2003, a model act on agri-marketing was circulated to the states.
    • But that model act did not go far enough.
    • From 2004 to 2014 government did not pursue any major agri-marketing reforms.
    • In food government enacted the National Food Security Act in 2013, giving 5 kg wheat or rice to 67 per cent of the population at Rs 2/kg and Rs 3/kg.
    • A high-level committee (HLC) under Shanta Kumar was formed in 2014 to restructure the grain management system.
    • The committee suggested major changes, including cash transfers in the public distribution system, and overhauling the FCI’s operations and free markets to make the system more efficient.
    • But the government could not undertake bold reforms, except some marginal tinkering of labour rules in the FCI.

    Conclusion

    The COVID-19 crisis opened a window of opportunity to reform the agri-marketing system. The government grabbed it — this is somewhat akin to the crisis of 1991 leading to de-licensing of industry. Patience and professionalism will bring rich rewards in due course, not noisy politics.

  • Kisan Suryodaya Yojana

    PM has launched the ‘Kisan Suryodaya Yojana’ aimed at providing day-time electricity to farmers in the State of Gujarat for irrigation and farming purposes.

    Try this question from CSP 2017:

    Q. The term ‘Domestic Content Requirement’ is sometimes seen in the news with reference to-

    (a) Developing solar power production in our country

    (b) Granting licences to foreign T.V. channels in our country

    (c) Exporting our food products to other countries

    (d) Permitting foreign educational institutions to set up their campuses in our country

    Kisan Suryodaya Yojana

    • Under the scheme, farmers will be able to avail power supply from 5am to 9pm for irrigation purposes.
    • Around 234 transmission lines are to be installed under the scheme. Each line is to carry the power of 66 KW. They are to be erected to a total length of 3,490 km.
    • Dahod, Patan, Mahisagar, Panchmahal, Chhota Udepur, Kheda, Tapi, Valsad, Anand and Gir-Somnath have been included under the Scheme for 2020-21.
    • The remaining districts will be covered in a phase-wise manner by 2022-23.

  • Base Year of CPI- Industrial Workers revised to 2016

    The Labour and Employment Ministry has revised the base year of the Consumer Price Index (CPI) for Industrial Workers (CPI-IW) from 2001 to 2016.

    Why such a move?

    • This revision reflects the changing consumption pattern, giving more weightage to spending on health, education, recreation and other miscellaneous expenses while reducing the weight of food and beverages.

    What is the Consumer Price Index (CPI)?

    • The CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
    • It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.
    • The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
    • Essentially it attempts to quantify the aggregate price level in an economy and thus measure the purchasing power of a country’s unit of currency.

    Types of CPI in India

    • CPI in India comprises multiple series classified based on different economic groups.
    • There are four series, viz the CPI UNME (Urban Non-Manual Employee), CPI AL (Agricultural Labourer), CPI RL (Rural Labourer) and CPI IW (Industrial Worker).
    • While the CPI UNME series is published by the Central Statistical Organisation, the others are published by the Department of Labour.
    • From February 2011 the CPI (UNME) released by CSO is replaced as CPI (urban), CPI (rural) and CPI (combined).

    How it is different from WPI?

    • CPI is different from WPI, or Wholesale Price Index, which measures inflation at the wholesale level.
    • While WPI keeps track of the wholesale price of goods, the CPI measures the average price that households pay for a basket of different goods and services.
    • WPI measures and tracks the changes in the price of goods before they reach consumers; goods that are sold in bulk and traded between entities or businesses (rather than consumers).
    • Even as the WPI is used as a key measure of inflation in some economies, the RBI no longer uses it for policy purposes, including setting repo rates.
    • The central bank currently uses CPI or retail inflation as a key measure of inflation to set the monetary and credit policy.

    Major components of WPI

    • Primary articles are a major component of WPI, further subdivided into Food Articles and Non-Food Articles.
    • Food Articles include items such as Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish, etc.
    • Non-Food Articles include Oil Seeds, Minerals and Crude Petroleum
    • The next major basket in WPI is Fuel & Power, which tracks price movements in Petrol, Diesel and LPG
    • The biggest basket is Manufactured Goods. It spans across a variety of manufactured products such as Textiles, Apparels, Paper, Chemicals, Plastic, Cement, Metals, and more.
    • Manufactured Goods basket also includes manufactured food products such as Sugar, Tobacco Products, Vegetable and Animal Oils, and Fats.

    Note: WPI has a sub-index called WPI Food Index, which is a combination of the Food Articles from the Primary Articles basket, and the food products from the Manufactured Products basket.

    Now try this PYQ from 2014 CSP:

    Q.With reference to India, consider the following statements:

    1. The Wholesale Price Index (WPI) in India is available on a monthly basis only
    2. As compared to the Consumer Price Index for Industrial Workers (CPI (IW)), the WPI gives less weight to food articles.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

    Back2Basics: Base Year

    • A base year is the first of a series of years in an economic or financial index. It is typically set to an arbitrary level of 100.
    • Any year can serve as a base year, but analysts typically choose recent years. They are periodically revised to keep data current in a particular index.
    • A base year is used for comparison in the measure of business activity or economic index.
    • For example, to find the rate of inflation between 2013 and 2018, 2013 is the base year or the first year in the time set.

  • Forex Reserves hit a record high

    India’s foreign exchange reserves touched a lifetime high of $555.12 billion, according to RBI data.

    Aspirants must make a note here:

    1. Authority managing FOREX in India
    2. Components of FOREX
    3. IMF’s SDRs
    4. Emergency use of FOREX

    What are Forex Reserves?

    • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
    • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
    • The Forex reserves of India consist of below four categories:
    1. Foreign Currency Assets
    2. Gold
    3. Special Drawing Rights (SDRs)
    4. Reserve Tranche Position
    • The IMF says official Forex reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
    • It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

    Where are India’s forex reserves kept?

    • The RBI Act, 1934 provides the overarching legal framework for the deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counterparties.
    • As much as 64 per cent of the foreign currency reserves is held in the securities like Treasury bills of foreign countries, mainly the US.
    • 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad.
    • In value terms, the share of gold in the total foreign exchange reserves increased from about 6.14 per cent as at end-September 2019 to about 6.40 per cent as at end-March 2020.

    Try this PYQ:

    Q. Gold tranche(Reserve tranche) refers to (CSP 2020)-

    (a) A loan system of World bank

    (b) One of the operations of a central bank

    (c) A credit system of WTO granted to its members

    (d) A credit system granted by IMF to its members

    Rising above the 1991 crisis

    • Unlike in 1991, when India had to pledge its gold reserves to stave off a major financial crisis, the country can now depend on its soaring Forex reserves to tackle any crisis on the economic front.
    • The level of Forex reserves has steadily increased by 8,400 per cent from $5.8 billion as of March 1991 to the current level.

  • Promotion of nutri-cereals(Millet crop) in India

    Promotion of millet crops serves the dual purpose of securing health and supporting farmers. This article explains the strategy adopted by the government to achieve the same.

    Millet crops in India

    • The three major millet crops currently growing in India are jowar (sorghum), bajra (pearl millet) and ragi (finger millet).
    • India also grows a rich array of bio-genetically diverse and indigenous varieties of “small millets” like kodo, kutki, chenna and sanwa.
    • Major producers include Rajasthan, Andhra Pradesh, Telangana, Karnataka, Tamil Nadu, Maharashtra, Gujarat and Haryana.

    Advantages of millet cultivation

    • Millets are good for the soil, have shorter cultivation cycles and require less cost-intensive cultivation.
    • These unique features make millets suited for and resilient to India’s varied agro-climatic conditions.
    • Millets are not water or input-intensive, making them a sustainable strategy for addressing climate change and building resilient agri-food systems.

    Reasons for decline in millet production in India

    • In the 1960s before the Green Revolution, millets were extensively grown and consumed in India.
    • With the Green Revolution, the focus, rightly so, shifted to food security and high-yielding varieties of wheat and rice.
    • An unintended consequence of this policy was the gradual decline in the production of millets.
    • Millets were increasingly seen as “poor person’s food”.
    • The cost incentives provided via MSPs also favoured a handful of staple grains.

    Health issues related to refined food

    • Along with declining millet production, India saw a jump in consumer demand for ultra-processed and ready-to-eat products, which are high in sodium, sugar, trans-fats and even some carcinogens.
    • This demand was again met by highly-refined grains.
    • With the intense marketing of processed foods, even the rural population started perceiving mill-processed rice and wheat as more aspirational.
    • This has lead us to the double burden of mothers and children suffering from micronutrient deficiencies and the astounding prevalence of diabetes and obesity.

    Strategy for promotion of nutri-cereals

    1) Rebranding the cereals as nutri-cereals

    • The first strategy from a consumption and trade point of view was to re-brand coarse cereals/millets as nutri-cereals.
    • As of 2018-19, millet production had been extended to over 112 districts across 14 states.

    2) Incentive through hiking MSP

    • Second, the government hiked the MSP of nutri-cereals, which came as a big price incentive for farmers.
    • From 2014-15 to 2020 MSPs for ragi has jumped by 113 per cent, by 72 per cent for bajra and by 71 per cent for jowar.
    • MSPs have been calculated so that the farmer is ensured at least a 50 per cent return on their cost of production.

    3) Providing steady markets through inclusion in PDS

    • To provide a steady market for the produce, the Modi government included millets in the public distribution system.

    4) Increasing area, production and yield

    • The Ministry of Agriculture & Farmers’ Welfare is running a Rs 600-crore scheme to increase the area, production and yield of nutri-cereals.
    • With a goal to match the cultivation of nutri-cereals with local topography and natural resources, the government is encouraging farmers to align their local cropping patterns to India’s diverse 127 agro-climatic zones.
    • Provision of seed kits and inputs to farmers, building value chains through Farmer Producer Organisations and supporting the marketability of nutri-cereals are some of the key interventions that have been put in place.

    5) Intersection of agriculture and nutrition

    • The Ministry of Women and Child Development has been working at the intersection of agriculture and nutrition by -1) setting up nutri-gardens, 2) promoting research on the interlinkages between crop diversity and dietary diversity 3) running a behaviour change campaign to generate consumer demand for nutri-cereals.

    Consider the question “What are the reasons for decline in the millet production in India? What are the steps taken by the government to encourage its production?”

    Conclusion

    As the government sets to achieve its agenda of a malnutrition-free India and doubling of farmers’ incomes, the promotion of the production and consumption of nutri-cereals seems to be a policy shift in the right direction.

  • Analysing the success of NPCI

    The article tracks the evolution of digital payments system in India and the transformational role played by the NPCI in it.

    Adoption of digital payments in India

    • Digital payments have found strong ground in India reducing all other modes of payments to the background.
    • Through a faster system of simultaneous debits and credits, the money value is transferred from one account to the other across banks.
    • With such versatility and ease of settling financial transactions, the growth of digital payments is going to be phenomenal, supported by banks and Fin-Tech companies.

    Evolution of digital payments in India

    • A major thrust toward large value payments was effected through the Real Time Gross Settlement System, or RTGS, launched by the RBI in March 2004.
    • The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS.
    • It substantially reduced the time taken for settlements.
    • Around the same time, the RBI introduced National Electronic Funds Transfer, or NEFT to support retail payments.
    • Now, NEFT is available round the clock and RTGS will follow from December 2020 — only a few countries have achieved this.
    • These systems were seeded and reinforced with the setting up of the umbrella retail payments institution: National Payments Corporation of India (NPCI).
    • NPCI was set up by 10 lead banks at the instance of the RBI in 2009.
    •  The NPCI as a not-for-profit company

    How NPCI transformed retail payment systems in India

    • The NPCI’s success against deeply entranced formidable international players, supported by innovative technology, viz. Unified Payments Interface (UPI) and Immediate Payment Service (IMPS), is well recognised by central banks in many other countries.
    • The Bank for International Settlements’s endorsement of the NPCI model in 2019 is a major accolade.
    • With digital payment being a public good like currency notes, it was necessary that the corporation was fully supported by the RBI and the government as an extended arm of the sovereign.
    • It was also necessary to contain expectations on profits, avoiding direct or indirect control by powerful private interests could dilute the public good character of the outfit.

    Issue of converting NPCI into for-profit

    • Converting NPCI intro for-profit company will be a retrograde step with huge potential for loss of consumer surplus along with other strategic implications.
    • Instead the strategy should be to assist the NPCI financially, either by the RBI or the government, to provide retail payment services at reduced price (in certain priority areas).
    • This may also help support expansion of the payment system network and infrastructure in rural and semi-urban areas in partnership with Fin-Tech companies and banks.

    Issue fo MDR

    • In Budget 2020-21, the government prescribed zero Merchant Discount Rate (MDR) for RuPay and UPI, both NPCI products.
    • Zero MDR on UPI and RuPay will help to popularise digital payments benefiting both customers and merchants.
    • There is justification in this zero MDR prescription by the government.
    • It is justified because depositors implicitly pay around 3% to banks as net interest margin, being the difference between saving and risk free bond rate, for enjoying certain payments services traditionally.
    • When banks enjoy such a huge amount of current account savings account (CASA) deposits, in return, is it not incumbent on them to provide such payment services?
    • The government left out other providers of digital payment products from this MDR prescription.
    • Taking advantage of this dichotomy, many issuing banks switched to mainly Visa and Master cards for monetary gains.
    • As customers were induced by such supplier banks, it created a kind of indirect market segmentation and cartel formation, though there is hardly any quality difference in payment products.
    • It may be noted that even the European Central Bank imposed a ceiling on MDR for all, protecting consumer interest.
    • It is hoped that the government will take corrective action in the next Budget to ensure a level playing field and to relieve the NPCI from such policy-induced market imperfection.

    Pricing for digital payments

    • The ideal pricing for digital payments products should be based on an analysis of-(i) producer surplus (ii) consumer surplus (i.e. gain or loss of utility due to pricing) (iii) social welfare for which we need cost-volume-price data.
    • A factor which needs to be reckoned is the float funds digital payments allow (cash withdrawal is a drain on the banking system), which is a source of sizeable income for banks.
    • The RBI will do well to study and arrive at a rational structure of pricing including MDR (possibly also penalty on default by customer).

    Consider the question “Elaborate on how the NPCI has been successful in transforming the digital payment landscape in the country through innovations? What are the challenges facing retail payments infrastructures?”

    Conclusion

    Given that the digital payment system is like a national superhighway, for which the government has a crucial role to play in protecting consumers against exploitation.

    Back2Basics: RTGS and NEFT

    • With NEFT (National Electronic Funds Transfer)
      you can transfer any amount to the recipient’s account in a one-on-one transfer basis.
    • NEFT transactions don’t have a maximum limit for funds that can be transferred in a single day.
    • The NEFT system is available round the clock throughout the year on all days (24x7x365).
    • Funds are transferred in batches that are settled in 48 half-hourly time slots throughout the day.
    • There is no maximum or minimum limit on the amount of funds that could be transferred through NEFT.

    RTGS (Real Time Gross Settlement)

    • Business owners can use RTGS when they need to transfer large amounts instantly.
    • One advantage that RTGS has over the other methods is the transaction speed, since the entire amount is transferred in real time.
    • The available hours for RTGS transactions vary based on the individual banks and their branches.
    • There’s a minimum limit of Rs. 2 lakhs for RTGS transactions, and there’s no maximum limit as such.

    What is MDR?

    • The merchant discount rate (MDR) is charged to merchants for processing debit and credit card transactions.
    • To accept debit and credit cards, merchants must set up this service and agree to the rate.
    • The merchant discount rate is a fee, typically between 1%-3%, that merchants must consider when managing business costs