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Subject: Economics

  • EASE Banking Reforms Index

    Union Minister of Finance & Corporate Affairs has felicitated best performing banks on EASE Banking Reforms Index.

    Note the various themes under which the index works.

    EASE Banking Reforms Index

    • EASE stands for ‘Enhanced Access and Service Excellence’. The index is prepared by the Indian Banking Association (IBA) and Boston Consulting Group.
    • It is commissioned by the Finance Ministry.
    • It is a framework that was adopted last year to strengthen public sector banks and rank them on metrics such as responsible banking, financial inclusion, credit offtake and digitization.

    Various themes and performance by the states

     

  • Pradhan Mantri Matsya Sampada Yojana

    PM will digitally launch the PM Matsya Sampada Yojana (PMMSY) today.

    PM Matsya Sampada Yojana

    • The PMMSY aims to bring about the Blue Revolution through sustainable and responsible development of the fisheries sector in India.
    • It has an estimated investment of Rs. 20,050 crores for its implementation during a period of 5 years from FY 2020-21 to FY 2024-25 in all States/UTs, as a part of AatmaNirbhar Bharat Package.
    • PMMSY aims at enhancing fish production by an additional 70 lakh tonne by 2024-25, increasing fisheries export earnings to Rs.1,00,000 crore by 2024-25.
    • Thus it aims doubling of incomes of fishers and fish farmers, reducing post-harvest losses from 20-25% to about 10% and generation of gainful employment opportunities in the sector.

    Aims and objectives of PMMSY

    • Harnessing of fisheries potential in a sustainable, responsible, inclusive and equitable manner
    • Enhancing of fish production and productivity through expansion, intensification, diversification and productive utilization of land and water
    • Modernizing and strengthening of the value chain – post-harvest management and quality improvement
    • Doubling fishers and fish farmers incomes and generation of employment
    • Enhancing contribution to Agriculture GVA and exports
    • Social, physical and economic security for fishers and fish farmers
    • Robust fisheries management and regulatory framework

    Implementation strategy

    The PMMSY will be implemented as an umbrella scheme with two separate components namely:

    (a) Central Sector Scheme and

    (b) Centrally Sponsored Scheme

    • Majority of the activities under the Scheme would be implemented with the active participation of States/UTs.
    • A well-structured implementation framework would be established for the effective planning and implementation of PMMSY.
    • For optimal outcomes, ‘Cluster or area-based approach’ would be followed with requisite forward and backward linkages and end to end solutions.

    Other inaugurations: e-Gopala App

    • e-Gopala App is a comprehensive breed improvement marketplace and information portal for direct use of farmers.
    • At present no digital platform is available in the country for farmers managing livestock including buying and selling of disease-free germplasm in all forms (semen, embryos, etc); availability of quality breeding services and guiding farmers for animal nutrition etc.
    • There is no mechanism to send alerts (on the due date for vaccination, pregnancy diagnosis, calving etc) and inform farmers about various government schemes and campaigns in the area.
    • The e-Gopala App will provide solutions to farmers on all these aspects.

  • Coordinated strategy between government and RBI

    The article analyses the relation between the response of fiscal authority and monetary authority to get the maximum payoff in the normal circumstance. But the pandemic would require different approach.

    Coordination between monetary and fiscal authority in India

    • Coordination between monetary and fiscal authorities has been a thorny issue globally in recent years.
    • If there is perfect coordination between the monetary and fiscal policy then there should be statistically significant negative correlation between the two. 
    • In the Indian context, for the 30-year period till FY2020, relation between the change in the consolidated fiscal deficit and the change in the growth rate of broad money reveals no coordination, substantiating the dominance of fiscal over monetary policy.
    •  Non-coordination between the two in India is also constrained by several policy targets and fewer instruments.

    Optimal combination of monetary and fiscal strategy

    • Both the government and the RBI have two options between them — either a contraction or an expansion.
    • Thus, we effectively have four policy options, and each of the options will have a particular benefit.
    • Our endeavour is to find out which policy option can result in a Nash Equilibrium.
    • A Nash equilibrium occurs when neither the government nor the RBI can increase its benefit by unilaterally changing its action.
    • The payoff scenarios are hypothesised as benefits accruing to the government and the RBI separately when they are deciding on either of the policy options: Contraction or expansion.
    •  The government favour an expansionary policy and gets maximum payoffs from a fiscal expansion, either with monetary expansion or contraction.
    • The monetary authority ideally wants to contract the economy to fight inflation and gets maximum payoffs from a monetary contraction.

    So, what is optimal combination of fiscal and monetary strategy

    •  If the RBI opts for monetary expansion, the government also opts for expansion as the payoff is higher.
    • But this will compel the RBI to then opt for contraction, since that gives it a higher payoff.
    • Knowing this, the government’s best strategy will be then an expansion — so the outcome will always be a fiscal expansion with a simultaneous monetary contraction.
    •  This is the only Nash equilibrium for this game.

    Responding to the pandemic

    • The current pandemic is resulting in behavioural changes of individuals in terms of risk-taking.
    • In the Indian context too, there are behavioural changes in terms of risk-taking.
    • Many of the current companies were also born during the financial crisis, like Uber (2009), Microsoft (1975), Disney (1923), General Motors (1908) and General Electric (1890).
    • Echoing such “procedural rationality” in the current unprecedented circumstances, we thus believe fiscal expansion and monetary expansion is the desirable outcome.

    Conclusion

    The RBI has been largely successful in communicating to the market about its intentions and we now expect the government to manage expectations with coordinated communication and leave matters of financing the fiscal deficit, through measures like monetisation, to the RBI.

    B2BASICS

    NASH EQUILBRIUM

    Simply put, it is a situation where no player can increase his payoff by deviating alone (from the situation). That is,it is a situation where both players are involved in mutual best replies.

  • Green-Blue Infrastructure Policy

    The Delhi Development Authority (DDA) is holding public consultations for the preparation of the Master Plan for Delhi 2041 with special focus on water bodies and the land.

    Try this question:      

    Q.Urban water resources management is an uphill task for Indian cities. Discuss.

    What is Green-Blue infrastructure?

    • ‘Blue’ infrastructure refers to water bodies like rivers, canals, ponds, wetlands, floodplains, and water treatment facilities; while ‘Green’ stands for trees, lawns, hedgerows, parks, fields, and forests.
    • The concept refers to urban planning where water bodies and land are interdependent, and grow with the help of each other while offering environmental and social benefits.

    How does DDA plan to go ahead with it?

    • In the first stage, the DDA plans to deal with the multiplicity of agencies, which because of the special nature of the state, has plagued it for several years.
    • DDA wants the first map out the issues of jurisdiction, work being done by different agencies on drains and the areas around them.
    • Thereafter, a comprehensive policy will be drawn up, which would then act as the common direction for all agencies.

    Why such a policy?

    • Delhi has around 50 big drains (blue areas) managed by different agencies, and due to their poor condition and encroachment, the land around (green areas) has also been affected.
    • DDA, along with other agencies, will integrate them and remove all sources of pollution by checking the outfall of untreated wastewater as well as the removal of existing pollutants.
    • A mix of mechanized and natural systems may be adopted, and dumping of solid wastes in any of these sites will be strictly prohibited by local bodies, through the imposition of penalties.

    Major features

    • The land around these drains, carrying stormwater, will be declared as special buffer projects.
    • The network of connected green spaces would be developed in the form of green mobility circuits of pedestrian and cycling paths.
    • It will be developed along the drains to serve functional as well as leisure trips.

    Challenges ahead

    • The biggest challenge is the multiplicity of agencies.
    • Secondly, cleaning of water bodies and drains has been a challenge for agencies in Delhi for years now.

  • State Reforms Action Plan Rankings 2019

    Andhra Pradesh has bagged the first rank among all the states in the country in the state business reforms action plan-2019 (BRAP-2019), representing ease of doing business for Atmanirbhar Bharat.

    About the Ranking

    • It is the annual ease of doing business index of states and UTs of India based on the completion percentage scores of action items points of annual Business Reforms Action Plan (BRAP) under the Make in India initiative.
    • This ranking is based on the implementation of the business reform action plan.
    • Some of the key focus areas are access to information and technology, the setting up of a single-window system, construction permit enablers and land administration, according to DPIIT.
    • It based on the progress of states in completing annual reform action plan covering 8 key areas.

    The top ten states under the State Reform Action Plan 2019 are:

    1. Andhra Pradesh
    2. Uttar Pradesh
    3. Telangana
    4. Madhya Pradesh
    5. Jharkhand
    6. Chhattisgarh
    7. Himachal Pradesh
    8. Rajasthan
    9. West Bengal
    10. Gujarat

  • Reforming tax system

    The article discusses two recent measures announced by the government to bring in the transparency in the tax system.

    Issue of lower tax collection and way out

    • An economic contraction this year will severely impact tax collections.
    • Changing tax rates or the tax base in response is difficult and a hurried approach can have wider consequences.
    • So, the only tool available is to urge voluntary compliance.
    • Compliance is achieved through a fine balance between enforcement and encouragement.
    • Despite enforcement-driven measures in the past the taxpaying population has remained at only 6 per cent.
    • Thus, the only way to boost collections is to build trust between the administration and the taxpayer.

    Relation between complexity of system and compliance

    • A taxpayer has to interact with the tax system at numerous instances.
    • While interacting, if the taxpayer perceives the system to be complex, such perception affects compliance.
    • Perceived complexity can discourage individuals from filing returns.
    • This could reflect simply in the difference between the number of taxpayers and the returns filed: which is around 20 million.
    • Such behaviour is bound to impact tax collection.

    Recent government measures to bring transparency

    1) New taxpayer’s charter with some new features

    • The charter is a document that lists a taxpayer’s rights and obligations.
    • A taxpayer’s charter is often perceived as a means to build taxpayer’s trust.
    • The rights and obligations mentioned in India’s new charter are in line with global practices.
    • There are 3 interesting additions in the new charter: 1) commitment to reducing compliance costs 2) holding its authorities accountable 3) publishing a periodic report of service standards.
    • A tax ombudsman can ensure that some of these standards are met, however, in 2019, the cabinet approved the abolition of the quasi-judicial post.

    2) Faceless assessment

    • This relates to the frequent complaint of taxpayers about corruption and delay.
    • To end personal interface, e-assessment was introduced in 2019.
    • Developing this idea further, faceless assessment now seeks to further automate the case selection and the distribution function of the assessing officer.
    • The intent is to divest and distribute the functions of a single assessing officer so that assessment is carried out in a fair manner.

    Consider the question “What are the factors responsible for low tax compliance in India? What are the steps taken by the government to increase compliance?

    Conclusion

    If the commitment to a fair and impartial system and a time-bound resolution of matters is to be met, the new processes, with reviews and anonymity, must ensure efficiency in case selection and consistency in assessment.

  • Priority Sector Lending (PSL)

    The RBI has released a revised priority sector lending guidelines to augment funding to segments including start-ups and agriculture.

    New Priority Sector Lending (PSL) guidelines

    • Bank finance of up to â‚č50 crores to start-ups, loans to farmers both for installation of solar power plants for Solarization of grid-connected agriculture pumps and for setting up compressed biogas (CBG) plants have been included as fresh categories eligible for finance under the priority sector.
    • This has come to align it with emerging national priorities and bring a sharper focus on inclusive development, after having wide-ranging discussions with all stakeholders.
    • It will enable better credit penetration to credit deficient areas, increase the lending to small and marginal farmers and weaker sections, boost credit to renewable energy, and health infrastructure
    • The targets prescribed for ‘small and marginal farmers’ and ‘weaker sections’ are being increased in a phased manner.
    • Higher credit limit has been specified for farmer producer organisations (FPOs)/farmers producers companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price.

    Back2Basics: Priority Sector Lending

    • PSL is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low-income groups and weaker sections.
    • This is essentially meant for an all-round development of the economy as opposed to focusing only on the financial sector.
    • The broad categories of priority sector for all scheduled commercial banks are as under:
    1. Agriculture and Allied Activities (Direct and Indirect finance)
    2. Small Scale Industries (Direct and Indirect Finance)
    3. Small Business / Service Enterprises
    4. Micro Credit
    5. Education loans
    6. Housing loans

  • What counts as ‘Act of God’?

    Amid disruptions caused by Covid-19, the Finance Minister has referred to an Act of God while businesses are looking at a legal provision, force majeure, to cut losses.

    Note the key differences between the Act of God and Force Majeure.

    Evoking “Act of God”

    • The force majeure or “Act of God” clause has its origins in the Napoleonic Code.
    • The finance ministry had issued an office memorandum inviting attention to the force majeure clause (FMC) in the 2017 Manual for Procurement of Goods issued by the Department of Expenditure.
    • It clarified that the pandemic should be considered a case of natural calamity and FMC may be invoked, wherever considered appropriate.

    What is a force majeure clause?

    • The law of contracts is built around a fundamental norm that the parties must perform the contract.
    • When a party fails to perform its part of the contract, the loss to the other party is made good.
    • However, the law carves out exceptions when the performance of the contract becomes impossible for the parties.
    • A force majeure clause is one such exception that releases the party of its obligations to an extent when events beyond their control take place and leave them unable to perform their part of the contract.
    • FMC is a clause that is present in most commercial contracts and is a carefully drafted legal arrangement in the event of a crisis.
    • When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.
    • Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.

    Difference between the two

    • Both concepts elicit the same consequences in law.
    • Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention.

    What situations legally qualify for use of force majeure?

    • While some contracts have clauses with standard circumstances, some contracts would have specific circumstances that are more focused.
    • For example, a shipping contract would have a force majeure clause that could cover a natural disaster like a tsunami.
    • If an event is not described, then it is interpreted in a way that it falls in the same category of events that are described.
    • An FMC is negotiated by parties, and events that could potentially hamper the performance of the contract are catalogued.
    • It is not invoked just by expressing that an unforeseen event has occurred.
    • In case a contract does not have a force majeure clause, there are some protections in common law that can be invoked by parties.
    • For example, the Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.

    Global precedents dealing with COVID-19 pandemic

    • In China, where the Covid-19 outbreak originated, the Council for Promotion of International Trade is issuing force majeure certificates to businesses.
    • China’s Supreme People’s Court had recognised the 2002 SARS outbreak as a force majeure event.
    • Singapore enacted the Covid-19 (Temporary Measures) Act in April to provide relief to businesses that could not perform their contractual obligations due to the pandemic.
    • The Paris Commercial Court in July ruled that the pandemic could be equated to a force majeure event.
    • In the UK, the Financial Conduct Authority has brought in a test case before the High Court to look into business insurance contracts and interpret the standard wordings in such contracts.
    • The International Chamber of Commerce has developed a Model Code on the force majeure clause reflecting current international practice.

  • [pib] NIDHI-EIR Programme

    A brochure featuring Entrepreneurs in Residence (EIR) under the National Initiative for Developing and Harnessing Innovations (NIDHI) programme was launched by Dept. of Science and Technology (DST).

    Try this MCQ:

    Q.The NIDHI-EIR Programme sometimes seen in news functions under the:

    a)Ministry of Science & Technology

    b)Ministry of Commerce and Industry

    c)Ministry of Finance

    d)Ministry of Micro, Small and Medium Enterprises

    About NIDHI-EIR

    • DST has announced a National Initiative for Developing and Harnessing Innovations (NIDHI) is an umbrella programme for nurturing ideas and innovations into successful startups.
    • EIR programme is one of the programs introduced under NIDHI to inspire the best talents to be entrepreneurs, to minimise the risk involved in pursuing start-ups, and to partially set off their opportunity costs of high paying jobs.
    • It provides tremendous opportunities for innovative entrepreneurs to expand their networks and get critical feedback on their ventures in order to promote their entrepreneurial career goals and aspirations.

    The opportunities under NIDHI-EIR program include:

    • Guidance from experienced, innovative and highly successful entrepreneurs on the business concept, strategy or venture and insight into specific industries or markets.
    • Best practices for starting a business and broaden the professional network.
    • Co-working spaces for developing the idea into a marketable product.

  • Reforms that will lead to economic Poorna Swaraj

    The article discusses the long term and short term strategy to deal with the disruption caused by the pandemic and using it to bring about the reform in various sectors.

    Context

    • The pain of COVID is real, GST shortfall of Rs 3 lakh crore, expected new bad loans of Rs 3 lakh crore, and a 25 per cent first quarter contraction of GDP.
    • COVID will end, the last quarter was unique, and COVID has created a policy window for overdue reform.

    3 Questions to be answered to determine short term measures

    • 1) Are we at the start, middle, or end of the virus?
    • This matters because life will be tentative until companies and individuals know where we are.
    • 2)Will companies will they save for a rainy day or live for today?
    • This matters because lower demand is fantastic for the environment but fatal for the economy (the paradox of thrift).
    • 3) Do we have an effective solution for professions that can’t be done without social distancing until the vaccine arrives?
    • All policy can do in the short run is ensure that disease doesn’t lead to death, unemployment doesn’t lead to hunger, and working capital problems don’t lead to bankruptcy.

    Factors in favour of India in the long run

    • Our post-COVID, post-Trump, post-China, post-GST, and post US Federal Reserve economic strategy must recognise factors in our favour.
    • China’s territorial arrogance may be premature.
    • China’s credit to GDP is an unsustainable 300 per cent, many of its big companies will not survive when faced with open market, and its domestic consumption is not sufficient to substitute for global trade.
    • China’s military overreach is unifying the region and creating coalitions and alliances that they will regret but India will enjoy.
    • Muted global growth means oil prices will remain low; this is a huge macroeconomic gift for a country like India.
    • The global digitisation supercycle creates insatiable demand for software talent which would be big advantage for India.
    • Over the next few decades, most rich countries will struggle to grow.
    • This forces investors to overprice growth. And because of our past sins, India is the only big country with decades of growth left.

    Reforms India need

    • Our problem is not jobs but productivity.
    • This needs compliance reform-taking an axe through our 67,000 compliances and 6,700 filings.
    • Labour law reform.
    • Banking reform: raising our credit to GDP ratio from 50 per cent to 100 per cent by licensing more banks and fixing existing ones.
    • Education reform.
    • Ease-of-doing-business reforms: reduce the number of ministries from 52 to 15.
    • Civil service reform:cut the number of people in Delhi with the rank of Secretary from 250+ to 50, a risk-averse bureaucracy must be sidestepped or overruled.

    Consider the question “The disruption caused by the pandemic offers a window for India to create enduring change through economic reforms to take advantage of the opportunity provided by the pandemic. Discuss.”

    Conclusion

    We should focus on creating climate change for our entrepreneurs, firms, and citizens with reforms that will give them economic Poorna Swaraj. And take our per capita income of $2,500 to $10,000 in five years. If not now, then when?