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Subject: Economics

  • [pib] Rashtriya Kamdhenu Aayog

    Rashtriya Kamdhenu Aayog (RKA) has started a nationwide campaign to celebrate “Kamdhenu Deepawali Abhiyan” this year on the occasion of Deepawali festival.

    Try this PYQ:

    Q.Consider the following statements:

    1. Agricultural soils release nitrogen oxides into the environment.
    2. Cattle release ammonia into the environment.
    3. Poultry industry releases reactive nitrogen compounds into the environment.

    Which of the statements given above is/are correct?

    (a) 1 and 3 only

    (b) 2 and 3 only

    (c) 2 only

    (d) 1, 2 and 3

    Rashtriya Kamdhenu Aayog (RKA)

    • RKA has been constituted by PM for the conservation, protection and development of cows and their progeny and for giving direction to the cattle development programmes.
    • It is a high powered permanent body to formulate policy and to provide direction to the implementation of schemes related to cattle so as to give more emphasis on livelihood generation.

    Why need RKA?

    • Livestock economy sustains nearly 73 million households in rural areas.
    • Even though, the country is the largest producer of milk, the average milk yield in India is only 50% of the world average.
    • The low productivity is largely due to deterioration in genetic stock, poor nutrition and unscientific management.

  • Economic recovery and its discontents

    The article highlights the measures taken by the RBI in the recent MPC meeting to assure the buyers of the Government bonds and ensuring the policy rate transmission.

    Dealing with the rate transmission issue and why it matters

    • The gap between the repo rate and the average lending rate of banks is at a record high.
    • So, the RBI and the MPC focused on improving rate transmission.
    • This gap can be broken up into two parts:
    • The first is the gap between the RBI-set repo rate and the rate at which the government of India borrows (the GSec yield).
    • It is also called the “term premium” can be influenced by the RBI’s actions.
    • The second is the gap between the GSec yield and the rate at which individuals or private firms borrow.
    • This gap reflects risk aversion in the financial system and a lack of capacity.
    • The RBI has avoided directly influencing the term premium, perhaps to maintain its credibility and independence, staying clear of accusations that it is financing the government’s fiscal deficit.
    • However, unless the rate at which the government borrows comes down borrowing costs for the whole economy will stay elevated.

    Challenge of Balance-of-Payment surplus (i.e. excess dollars)

    • Over the past few months, the country’s foreign currency reserves have been growing at an unprecedented rapid pace.
    • This means that India is getting far more dollars than it needs. Three factors are responsible for this.
    • 1) Some short-term factors responsible are weak imports and a faster normalisation of exports.
    • 2) There have also been structural shifts in India’s economic policy which point to a persistent BoP surplus.
    • In addition to low energy prices, policies supporting Atmanirbhar Bharat mean lower imports and the push towards making India a participant in global value chains mean higher exports.
    • 3) At the same time, India’s capital account is being opened up: The special-category government of India bonds, for example.

    Why BoP surplus is opportunity

    • When the excess dollar inflows turn into a deluge, as they have over the past six months, the supply of rupees in the domestic economy also becomes excessive.
    • If the RBI can direct this surplus into government bonds, it can maintain its independence and credibility, and at the same time achieve its target of rate transmission.

    Measures by the RBI to assure the bond market

    • The buyers of government bonds need to feel reassured of not getting hurt by the volatility in bond prices.
    • When bond prices rise, the yields fall, and vice versa.
    • Banks parking trillions of rupees with the RBI at 3.35 per cent overnight would earn nearly 6 per cent if they bought government bonds.
    • That they did not was because they were afraid of the bond prices falling, which would offset the gains from higher rates.
    • The increase in the Hold-To-Maturity limits by the RBI  by one year to March 2022, has assured the banks that they need not fear booking interim losses if bond prices are volatile.
    • The announcement that the RBI would purchase state and central government bonds on the market (even if in small sizes) would provide further comfort.
    • The change in assessment of inflation should help buyers of government bonds take the risk.
    • Banks or other bond investors that refrained from purchasing government bonds because they felt the RBI would increase interest rates at some point to comply with its legal mandate, would be reassured by this clear communication.
    • The targeted refinancing operations (TLTRO) should help bring down borrowing rates in the targeted industries.

    Conclusion

    Economic challenges may persist for the foreseeable future. The economic scars of the last six months are likely to take time to heal. The RBI and the MPC, which have been proactive, creative and accommodative so far, may have to stay so for a while longer.

  • Issues with the MSP in the age of surplus production

    The author analyses the inefficiencies in the MSP regime while comparing it with the sugar sector and the milk sector. The recent agri-reform in the opinion of the author could help to make the Indian agriculture more efficient.

    MSP system Vs. Market-driven system

    • MSP regime was the creation of the era of scarcity in the mid-1960s.
    • Indian agriculture has, since then, turned the corner from scarcity to surplus.
    • In a surplus economy, unless we make agriculture demand-driven, the MSP route can spell financial disaster.
    • This transition is about changing the pricing mix — how much of it should be state-supported and how much market-driven.
    • The new laws are trying to increase the relative role of markets without dismantling the MSP system.
    • Currently, no system is perfect, be it the one based on MSP or that led by the markets, but the MSP system is much more costly and inefficient.
    • The market-led system will be more sustainable provided we can “get the markets right”.

    Issues with the MSP

    • A perusal of the MSP dominated system of rice and wheat shows that the stocks with the government are way above the buffer stock norms.
    • The economic cost (to FCI) of procured rice comes to about Rs 37/kg and that of wheat is around Rs 27/kg.
    • No wonder, market prices of rice and wheat are much lower than the economic cost incurred by the FCI.
    • So, grain stocks with the FCI cannot be exported without a subsidy[i.e. export below the cost], which invites WTO’s objections.
    • The FCI’s burden is touching Rs 3 lakh crore which is not reflected in the Central budget as the FCI is asked to borrow more and more.
    • The FCI can reduce costs if it uses policy instruments like “put options”.

    2 Lessons: from sugarcane and milk pricing

    1) Populism resulted in making sugar industry globally non-competitive

    • In the case of sugarcane, the government announces a “fair and remunerative price” (FRP) [not MSP]to be paid by sugar factories [not paid by the Government].
    • While some states like Uttar Pradesh announces its own “state advised price” (SAP).
    • The sheer populism of SAP has resulted in cane arrears amounting to more than Rs 8,000 crore, with large surpluses of sugar that can’t be exported.
    • This sector has, consequently, become globally non-competitive.
    • Unless sugarcane pricing follows the C Rangarajan Committee’s recommendations the problems of the sugar sector will not go away.

    2) Success story of milk sector

    • In the case of milk co-operatives, pricing is done by the company in consultation with milk federations.
    • It is more in the nature of a contract price.
    • It competes with private companies, be it Nestle, Hatsun or Schreiber Dynamix dairies.
    • The milk sector has been growing at a rate two to three times higher than rice, wheat and sugarcane.
    • Today, India is the largest producer of milk — 187 million tonnes annually.

    So, how the recent reforms will help the farmers

    •  As a result of changes in farm laws in the next three to five years companies will be encouraged to build efficient supply lines somewhat on the lines of milk.
    • These supply lines — be it with farmers producer organisations (FPOs) or through aggregators — will, of course, be created in states where these companies find the right investment climate.
    • These companies will help raise productivity, similar to what has happened in the poultry sector.
    • Milk and poultry don’t have MSP and farmers do not have to go through the mandi system paying high commissions, market fees and cess.

    Conclusion

    The pricing system has its limits in raising farmers’ incomes. More sustainable solutions lie in augmenting productivity, diversifying to high-value crops, and shifting people out of agriculture to high productivity jobs elsewhere, the recent reforms are the steps in this direction.

    Back2Basic: What is MSP

    • Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
    • The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
    • The minimum support prices are a guarantee price for their produce from the Government.
    • The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.
    • In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

    What are ‘put options’

    • Put options give holders of the option the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame.
    • Put options are available on a wide range of assets, including stocks, indexes, commodities, and currencies.
    • Put option prices are impacted by changes in the price of the underlying asset, the option strike price, time decay, interest rates, and volatility.
    • Put options increase in value as the underlying asset falls in price, as volatility of the underlying asset price increases, and as interest rates decline.
    • They lose value as the underlying asset increases in price, as volatility of the underlying asset price decreases, as interest rates rise, and as the time to expiration nears.

     

  • Skal International Asia Area (SIAA)

    The UT of Jammu and Kashmir has won the bid to host the 50th annual Skal International Asia Area (SIAA) Congress in 2021 during the annual general meeting recently against four other cities.

    Note: Skal International is not an affiliate of the United Nations. This is where a prelims  question can pull a nerve.

    Skal International

    • Skal International is a professional organization of tourism leaders around the world, promoting global tourism and friendship.
    • It is a Spain-based tourism body with 15,000 members and 150 chapters across the world.
    • The word Skal comes from Scandinavia and has a long tradition. The “Skal” is a bowl containing a welcome drink that is offered to visitors when entering a home.
    • Its members, the industry’s managers and executives meet at local, national, regional and international levels to discuss and pursue topics of common interest.
    • It is the only international group uniting all branches of the travel and tourism industry.

  • [pib] Bharatmala Pariyojana

    A total of 322 projects in a length of 12,413 km have been awarded under Bharatmala Pariyojana. Further, 2921 Km has been constructed under the Project till the date.

    Try this PYQ:

    Q.Consider the following pairs:

    National Highway: Cities connected

    1. NH 4: Chennai and Hyderabad
    2. NH 6: Mumbai and Kolkata
    3. NH 15: Ahmedabad and Jodhpur

    Which of the above pairs is/are correctly matched?

    (a) 1 and 2 only

    (b) 3 only

    (c) 1, 2 and 3

    (d) None

    Bharatmala Pariyojana

    • It is a centrally-sponsored and funded the Road and Highways project.
    • It is an umbrella program for the highways sector that focuses on optimizing the efficiency of freight and passenger movement across the country by bridging critical infrastructure.
    • The total investment for 83,677 km committed new highways is estimated at ₹5.35 lakh crore making it the single largest outlay for a government road construction scheme.
    • It works for the development of Economic Corridors, Inter Corridors and Feeder Routes, National Corridor Efficiency Improvement, Border and International connectivity roads, Coastal and Port connectivity roads and Green-field expressways.
    • The ambitious umbrella programme has subsumed all existing Highway Projects including the flagship National Highways Development Project (NHDP), launched in 1998.

  • RBI shifts focus on bond market to transmit policy signals

    The article analyses the implications of the recently concluded MPC meeting and predicts the trends for the future.

    Highlights of the MPC meeting

    • In the October meeting of the monetary policy committee (MPC), repo rate were kept unchanged at 4%, with a continuation of an accommodative stance.
    • It chose to ignore elevated levels of CPI inflation as transitory and maintaining focus on supporting growth.
    • It appears that the MPC would maintain a status quo on rates through this fiscal year.
    • The scope for further easing is anyways limited to 0.50%, as any more easing may affect household financial savings and endanger financial stability.

    Ensuring the rate transmission

    • With unchanged repo rates, the focus of the liquidity measures announced by the RBI is to further improve transmission of previous rate cuts across a spectrum of market rates and other instruments.
    • The RBI Governor assured market participants that the large supply of government bonds in the second half along with a likely pick-up in credit demand, would be accommodated through open market purchases of government bonds.

    Reducing the cost of borrowing

    • The RBI may have to buy bonds worth ₹1,000 to 1,500 billion in these operations over 2HFY21 keeping pressure on yields [which affects interest rates].
    • In a related move, to reduce the cost of borrowings for state governments, the RBI for the first time will buy state government bonds, as a special case for this year.

    Other measures

    • The extension of enhanced Held to Maturity (HTM) limit of banks on their government bonds portfolio to March 2022.
    • A new on-tap targeted LTRO window was announced, for banks to borrow up to ₹1,000 billion from the RBI at a floating rate linked to the repo rate, and invest in corporate paper issued by specific sectors and to provide loans to them.
    • In effect, the aim of the central bank is to ensure that lower policy rates determined by the macro-economic fundamentals, are reflected in lower cost of borrowings for the Centre, states and corporates.

    Containing inflation

    • Inflation outlook for this fiscal and projections for next year indicate that CPI inflation would ease, from an average of 6.8% in Q2 to 4.5% in Q4 and 4.1% by Q4FY22.
    • Headline inflation is expected to fall, as supply conditions normalize with progressive unlocking and another year of bumper farm output helps pull down food inflation.
    • Higher fuel taxes and import duties are expected to provide an upward push though.
    • Effective supply management will therefore be crucial in controlling food inflation and ensuring that it does not turn persistent and feeds into non-food inflation.

    Conclusion

    • The role of monetary policy in the is limited and the RBI focus will remain on improving transmission of policy signals through banking, bond and credit market channels.

    Back2Basics: LTRO

    • Long-Term Repo Operation (LTRO) was introduced by the Reserve Bank in February, 2020.
    • Through this policy, the central bank would provide liquidity support to commercial banks for a period of 1 to 3 years at the current repo rate, and would accept government securities as collateral in return.
    • This is in contrast to the other measures it was providing such as Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) which provide cash to banks for a period of 1 to 28 days only.

  • Reviving the private investment in infrastructure

    Declining private investment in the infrastructure needs policy overhaul. The article suggests the changes in the policy and approach on the part of the government to achieve the sustainable 40 per cent private investment in the infrastructure. 

    Declining private investment in infrastructure

    Currently, private financing into the infrastructure sector has declined to around 20 per cent of the total funding.

    Reasons for the decline are-

    • 1) the crisis in the non-banking finance sector.
    • 2) the financial challenges faced by infrastructure companies.
    • 3) the inadequately developed Indian market for infrastructure financing.
    • The Economic Survey 2017-18 has assessed India’s infrastructure financing needs at $4.5 trillion by 2040.
    • Reviving private investment flows into infrastructure to around 40 per cent will be key to attaining this threshold.

    Actions need to be taken to revive the private investment in infrastructure

    • The Vijay Kelkar committee had put out a balanced report in 2015 on overhauling the PPP ecosystem, including governance reform, institutional redesign, and capacity-building.

    Ramping up private investments in infrastructure will need action on two fronts:

    • 1) Refreshing institutions and policies for channelling financing.
    • 2) Providing a stable, durable, and empowering ecosystem for private players to partner with government entities.

    1) Institutions and policies for channelling financing

    • Due to long-duration profitability cycles of infrastructure projects, successful PPP  requires stable revenue flow assurances and a settled ecosystem to investors over long periods.
    • This could be achieved means of policy stability, assurances possibly secured by law.
    • PPP contracts also need to provide for mid-course corrections to factor in uncertainties including utilisation patterns, as well as the creation of competing infra assets.
    • Government partners in PPP arrangements need to ensure that open-ended arrangement that might entail unforeseeable risk are minimised for the private investor, including aspects such as land availability and community acceptance.

    2) Institution and policies for financing

    • There is a need to change the culture and attitude towards the conjoining of government entities and private partners.
    • Kelkar committee has stated that there needs to be an approach of “give and take” and the Government should avoid a purely transactional approach.
    • Government should avoid trying to minimise risk to themselves by passing on uncertain elements in a project — like the land acquisition risk — to the private partner.
    • This attitudinal change can be achieved by amending the Prevention of Corruption Act to encompass modern-day requirements, including factoring in the need for government agents to take calibrated risks while engaging with the private sector.
    • The private partners also need to be incentivised to focus on project outcomes, with guard-rails in place to discourage rent-seeking behaviour.
    • In sum, risk avoidance by the public entity and rent-seeking by the private partner are the twin challenges that need to be carefully addressed.
    • On the regulatory front, a compelling need would be to promulgate a PPP legislation which can provide a robust legal ecosystem and procedural comfort.

    Consider the question “Declining private investment in the infrastructure has several implications for the economy. In ligh of this, examine the factor for such decline and suggest the measures to boost the private investment in the infrastructure.” 

    Conclusion

    After we emerge out of this pandemic, a focus area for public policy has to be the creation of a modern-day, sustainable and resilient infrastructure. . Designing a fresh approach and creating a stable policy environment that provides comfort and incentives to private investors will be key to attaining this goal.

  • Is Indian economy going through stagflation

    The article analyses the challenge faced by the Monetary Policy Committee in wake of a pandemic where falling growth is accompanied by the rising inflation.

    Dilemma with inflation targetting in pandemic

    • After the RBI’s adoption of a flexible inflation targeting framework from August 2020, it became even more focused on anchoring inflation and inflation expectations than ever before.
    • But the COVID pandemic has created a dilemma for the RBI.
    • Higher-than-anticipated inflation compelled the monetary policy committee (MPC) to hold policy rates despite the contraction in April-June GDP by 23.9 per cent.

     CPI vs. WPI: Which should be focused for inflation targeting?

    • Inflation-targeting framework based on one narrow nominal consumer price index (CPI)  has highlighted the challenges of conducting monetary policy in a severe growth shock scenario.
    • Inflation targeting is particularly challenging if it coincides with a sharp increase in headline CPI inflation as in the current period.
    • The current framework has led to an excessive and obsessive emphasis on point CPI estimates, at the cost of ignoring other indicators.
    • WPI core inflation, which essentially represents the manufacturing sector, is below 1 per cent but this does not find much mention.
    • This is strange because ultimately, the GDP deflator is calculated using both CPI and WPI inflation, with the latter having a greater weight.
    • This should be taken into consideration, while reviewing the existing monetary policy framework.
    • Given the composition of the current CPI basket, RBI’s monetary policy actions can at best impact only 41.35 per cent of the overall items.
    • Food and beverages, fuel items, gold and silver tobacco/intoxicants are items over which the RBI does not have any control.[58.65 per cent of the overall items]

    This is a different time

    • In normal times, a sustained increase in food and fuel prices can lead to a generalised increase in prices.
    • But this argument is not valid in the current context where a large number of people have lost their jobs or have seen fall in incomes.
    • In the current context, higher food and fuel prices would lead to reduction in expenditure on discretionary items.
    • So there will be only a relative shift in prices, without any fear of a generalised spiral, as households will not be in any position to demand higher wages to compensate for the increase in prices of food and fuel items.
    • Given the amount of slack in the economy, a scenario of sustained generalised increase in prices seems unlikely over the next 6-9 months.

    How to measure the success of inflation targeting

    • The CPI inflation targeting framework has helped to reduce inflation expectations during FY17-FY21 on average (9.3 per cent) compared to the previous period of FY12- FY16 (12.8 per cent).
    • However, the gap between inflation expectations and actual CPI inflation has remained unchanged at 5.1 per cent during these two periods.
    • The success of the inflation-targeting framework should not only be judged by the actual CPI inflation trend, but also in terms of gap between the two.

    How RBI performed without inflation targeting framework in the past

    • Even without any formal inflation-targeting framework, India had successfully managed to keep inflation low during FY02-FY06.
    • The RBI’s stance then was based on a multiple-indicator approach to conduct monetary policy.
    • First factor that made it possible was the increase in minimum support prices of food-grains was kept below 3 per cent on average.
    • Second factor was the composition of growth which was better during this period with investment growth surpassing consumption growth by several percentage points.
    • It is for this reason that CPI inflation remained contained at 4 per cent on average during this period even with 7 per cent real GDP growth.

    Risk of structural increase in inflation

    • In the current cycle, investment growth is likely to be impacted more severely than consumption growth.
    • Given the acute weakness in the demand side of the economy, persistent problems in the real estate sector, continued deleveraging of the NBFC sector and significant job losses structural increase in inflation is limited.

    What should be the policy response

    • The scope for rate cuts remains dim in the near-term.
    • But the RBI to remain active with a host of unconventional measures, which will likely include more proactive bond purchases to ensure that market interest rates do not rise significantly due to fiscal and market borrowing-related concerns.

    Conclusion

    Given the prevailing unholy mix of growth and inflation, it is tempting to categorise India’s economic situation as one of “stagflation”. But, in our view, it is too early to conclude decisively on this matter, given the fluid nature of things.

    Back2Basics: Inflation expectations

    • Inflation expectations are what people expect future inflation to be, and they matter because these expectations actually affect people’s behavior.
    • If people expect inflation to be lower and they act on those beliefs, they could, in fact, cause inflation to be lower.
    • If businesses expect lower inflation, they may raise prices at a slower rate; they don’t want the prices of their items to look too out of line with those of their competitors.
    • If workers expect lower inflation, they may ask for smaller wage increases.
    • The combination of businesses and workers acting in this manner will result in the economy experiencing lower inflation.

     

     

     

  • [pib] Kasturi Cotton

    Now India’s premium Cotton would be known as ‘Kasturi Cotton’ in the world cotton trade.

    Kasturi Cotton

    • It is the first-ever Brand and Logo for Indian Cotton on Second World Cotton Day.
    • The Kasturi Cotton brand will represent Whiteness, Brightness, Softness, Purity, Luster, Uniqueness and Indianness.

    Do you know?

    1. Cotton is one of the principal commercial crops of India and it provides livelihood to about 6.00 million cotton farmers.
    2. India is the 2nd largest cotton producer and the largest consumer of cotton in the world.
    3. India produces about 6.00 Million tons of cotton every year which is about 23% of the world cotton.
    4. India produces about 51% of the total organic cotton production of the world, which demonstrates India’s effort towards sustainability.

  • Production Linked Incentive (PLI) Scheme

    The Ministry of Electronics and IT had approved some proposals by electronics manufacturers under its Production Linked Incentive (PLI) Scheme.

    Try this MCQ:

    Q.The Production Linked Incentive (PLI) Scheme often seen in news is related to-

    a) Electronics manufacture

    b) Khadi and Village Industries

    c) MSMEs

    d) None of these

    What is the PLI scheme?

    • As a part of the National Policy on Electronics, the IT ministry had notified the PLI scheme on April 1 this year.
    • The scheme will, on one hand, attract big foreign investment in the sector, while also encouraging domestic mobile phone makers to expand their units and presence in India.
    • It would give incentives of 4-6 per cent to electronics companies which manufacture mobile phones and other electronic components.
    • A/c to the scheme, companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 per cent on incremental sales of all such mobile phones made in India.
    • In the same category, companies which are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.

    Tenure of the scheme

    • The PLI scheme will be active for five years with financial year (FY) 2019-20 considered as the base year for calculation of incentives.
    • This means that all investments and incremental sales registered after FY20 shall be taken into account while computing the incentive to be given to each company.

    Which companies and what kind of investments are considered?

    • All electronic manufacturing companies which are either Indian or have a registered unit in India will be eligible to apply for the scheme.
    • These companies can either create a new unit or seek incentives for their existing units from one or more locations in India.
    • Any additional expenditure incurred on the plant, machinery, equipment, research and development and transfer of technology for the manufacture of mobile phones and related electronic items will be eligible for the incentive.
    • However, all investment done by companies on land and buildings for the project will not be considered for any incentives or determine the eligibility of the scheme.