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Subject: Economics

  • Disintermediation from E-commerce

     E-commerce was expected to provide the level playing field. However, Indian e-commerce has been experiencing the duopoly and new entrant faces several difficulties.

    What is disintermediation

    • The emergence of the internet was seen as a tool for marketers to reach consumers directly.
    • The term disintermediation meant taking intermediaries out of the loop.
    •  The aim was efficiency.
    • It was hoped that without local stockists and distributors in between, retail demand could be fulfilled at lower cost.
    • After all, anyone could put up a website and woo traffic.

    What is the issue?

    • Today, the gains of online market addressal have converged into the hands of a few big winners in a winner-takes-all scenario.
    • Getting an app onto handsets often involves a toll paid to e-gatekeepers.
    • These apps created an entry barrier for the new entrants.
    • So far, single-brand apps have mostly failed, regardless of price baits.
    • After all, it is hard to beat the convenience of a single-touch window that lets shoppers load e-carts with all their needs.

    Conclusion

    E-com was once about snipping out distribution networks. With market access cornered by pioneers, now others want to get past these intermediaries. Only blockbuster apps can do it.

  • Boosting demand with wage hike

    The article discusses the threat posed to the Indian economy by the subdued demand following the return of the labourers to their urban jobs.

    Rural employment issue

    • About 30 million migrant workers rushed home to their villages during the pandemic.
    • About 60 per cent of out-migration from rural India is aspiration-led.
    • Income earned in urban jobs is 2.5 higher than earned in rural area.
    • Though rural economy has been recovering faster than the urban economy, this optimism could prove short-lived, as eventually the more long-lasting determinants of rural wages could prevail.

    What are the determinants of rural wages

    1) NREGA wages

    • The government has raised the rural employment guarantee programme (NREGA) wages and outlays.
    • Demand for the scheme is outpacing supply.
    • This demand-supply mismatch means that it may not be an effective driver of higher rural wages.

    2) Low construction activities

    • Many rural Indians, especially those without land, have become building labourers.
    • 70 per cent of construction is related to real estate and property developers are dependent on funding from struggling non-banking financial companies.
    • Until this type of lending restarts, construction may not normalise.
    • And that means rural wages may not rise quickly either.

    3) Rising debt level

    • The increase in borrowing and fall in inflation over the last few years has increased the “real” indebtedness of rural Indians.
    • This affected particularly the landowners who pay villagers to farm their land.
    • This is likely to hurt their ability to pay high wages.

    3 Reasons why wage outlook could be dimmer

    • As migrant labours start to return to their urban jobs, their wage outlook appears to be bleak for 3 reasons.
    • 1) As during demonetisation, workers could find jobs again, but at lower wages.
    • 2) There could be a second-round of pandemic-led labour market weakness, driven by job losses and falling wages from the first round.
    •  3) We find that both rural and urban wages are driven by economic growth, India’s post-pandemic medium-term growth falling by one percentage point to 5 per cent does not bode well.

    Way forward

    • Weak wages could keep demand subdued. To offset this policymakers have an important role to play.
    • 1) In particular, policymakers may have to ensure that capital is allocated efficiently.
    • After all, investment is the only way to increase the economy’s capacity to create well-paying jobs.
    • 2) Bringing back investment growth would also involve capital re-allocation.
    • This means taking it away from sectors that are not working and redeploying it in sectors that are.
    • Improving the Insolvency and Bankruptcy Code procedure is a key step here.
    • 3) Another important step is to improve the health of banks as they are the ones allocating capital by giving loans.
    •  Implementation of the 5-Rs — recognition, restructuring, resolution, recapitalisation and reforms — for the banking sector may be particularly useful here.

    Consider the question “After supply-side disruption is over, India’s growth may suffer from the subdued wage growth. Suggest the steps to avoid this from happening.”

    Conclusion

    Supply disruption caused by reverse migration won’t last long, but led by lower wages, demand could remain weak, requiring policy intervention.

  • Atal Tunnel at Rohtang

    The Atal Tunnel at Rohtang, near Manali, is almost complete in all respects and will be inaugurated very soon in September.

    Tap to read more about Himalayas at:

    https://www.civilsdaily.com/the-northern-and-northeastern-mountains-part-1/

    Atal Tunnel

    • The 9-km-long tunnel is constructed under the Pir Panjal range.
    • It has been named after former PM Atal Bihari Vajpayee and will be the world’s longest highway tunnel above the altitude of 10,000 feet (3000 metres).
    • It was scheduled to be completed by May 2020, in a revised estimate, but the Covid-19 pandemic pushed back the completion by a few months due to lockdown conditions.
    • Vehicles can travel at a maximum speed of 80 km per hour. Up to 1,500 trucks and 3,000 cars are expected to use it per day when the situation gets to normal.

    What is its strategic advantage?

    • Cutting through the Pir Panjal range, the tunnel will reduce the distance between Manali and Leh by 46 km.
    • The tunnel will provide almost all-weather connectivity to the troops stationed in Ladakh.

  • Making agricultural reforms successful

    The article analyses the issues with the reforms in the agricultural marketing policies.

    Recent reforms in agricultural marketing

    • The 3 recent reforms in agricultural marketing bring major changes in policy.
    • The removal of restrictions under the Essential Commodities Act (ECA) should help attract private investment in agriculture.
    • The two new ordinances are expected to enable inter-State trade and promote contract farming, thereby providing a large number of options to farmers.

    Concerns that need to be addressed

    1) Policy credibility problem

    • The first problem is ‘time-inconsistency’ problem or the policy credibility problem.
    • This situation arises when a decision maker’s preferences change over time in such a way that the preferences are inconsistent at different points in time.
    • Because the policy signals are not very clear in the last few years as relates to agricultural marketing, as we will see below.
    • This clarity of clear signal is reflected in rollout of multiple schemes: e-NAM, PM-AASHA, PM-KISAN.
    • In 2016, the electronic national agricultural market (e-NAM) was launched with a lot of fanfare.
    • States needed to amend their respective Agricultural Produce Market Committee (APMC) Acts.
    • Several States could not or did not carry out these amendments and the e-NAM proved to be far less effective than desired.
    • As a result, the government reverted back to public price support by launching an ambitious programme, PM-AASHA, in September 2018.
    • The programme was confined to pulses and oilseeds to limit the fiscal costs.
    • However, the initial budgetary outlay did not match the level of ambition of the programme.
    • In addition to the PM-AASHA programme, two Model Acts were formulated by the Central government in 2017 and 2018 to promote agricultural marketing and contract farming in States.
    • States were required to legislate these Model Acts.
    • However, progress has been tardy and many States have not adopted the Model Acts.
    • This uninspiring performance of PM-AASHA necessitated a more radical and direct approach.
    • Thus evolved the PM-KISAN, a direct cash transfer programme, in the interim Budget of 2019-2020 (February 2019).
    • This programme involved a fixed payment of ₹6,000 per annum to each farm household with a budgetary outlay of ₹75,000 crore.
    • The frequent flip-flops in farm policy — from a market-based e-NAM to a public funded PM-AASHA and now back to market-based measures — may not inspire much confidence in the minds of private investors about the continuance of the present policies.

    2) Centre-State and State-State relations

    • Recent Ordinances were passed by the Central Government using the constitutional provisions but the implementation of the same vests with the States.
    • Also, inter-State trade involves movement of goods across the State boundaries.
    • Thus, coordination between the Central and the State governments, and also among various States becomes crucial.
    • Also, the States must have faced several problems in legislating and implementing the earlier Model Acts.
    • Thus, the Centre must engage with the States about these constraints in order to iron out the potential problems in the implementation of the ordinances.

    3) Multiple market failures and the resultant inter-linkage of rural markets

    • Absence or failure of credit and insurance markets may lead a farmer to depend upon the local input dealer.
    • This, in turn, may tie him to these intermediaries and constrain his choice of output markets.
    • Similarly, the widespread restrictions on land leasing in many States lead to an inefficient scale of production.
    • Thus, reforms in the output market alone are not sufficient.
    • Reforms in output must be supplemented and complemented with the liberalisation of the lease market and better access to credit and insurance markets.

    Consider the question “What are the reform measures taken by the government to deal with the issues in the agricultural marketing by farmers? What are the concerns with such measures?”

    Conclusion

    In conclusion, consistency in policy, collaborative approach and complementary reforms are necessary for the success of the recent agricultural market reforms.

    Back2Basics: Agricultural reform

    Read in detail about the 3 reforms form here-

    Agri reforms and way forward

  • [pib] Export Preparedness Index (EPI) 2020

    NITI Aayog in partnership with the Institute of Competitiveness has released the Export Preparedness Index (EPI) 2020.

    Try this PYQ:

    Q.Which one of the following is not a sub-index of the World Bank’s ‘Ease of Doing Business Index? (CSP 2019)

    (a) Maintenance of law and order

    (b) Paying taxes

    (c) Registering property

    (d) Dealing with construction permits

    EPI 2020

    • EPI intends to identify challenges and opportunities; enhance the effectiveness of government policies; and encourage a facilitative regulatory framework.
    • The structure of the EPI includes 4 pillars –Policy; Business Ecosystem; Export Ecosystem; Export Performance.
    • It has 11 sub-pillars –Export Promotion Policy; Institutional Framework; Business Environment; Infrastructure; Transport Connectivity; Access to Finance; Export Infrastructure; Trade Support; R&D Infrastructure; Export Diversification; and Growth Orientation.

    Highlights of the EPI

    • This edition of the EPI has shown that most Indian states performed well on average across the sub-pillars of Exports Diversification, Transport Connectivity, and Infrastructure.
    • Overall, most of the Coastal States are the best performers. Gujarat, Maharashtra and Tamil Nadu occupy the top three ranks.
    • Six of eight coastal states feature in the top ten rankings, indicating the presence of strong enabling and facilitating factors to promote exports.
    • In the landlocked states, Rajasthan has performed the best, followed by Telangana and Haryana.
    • Among the Himalayan states, Uttarakhand is the highest, followed by Tripura and Himachal Pradesh.
    • Across the UTs, Delhi has performed the best, followed by Goa and Chandigarh.

  • Eat Out to Help Out Scheme

    Since the lockdown began in India, different bodies representing the country’s hospitality sector have repeatedly asked the government for financial assistance to help tide over the crisis. UK’s popular Eat Out to Help Out (EOHO) Scheme can be an example of the kind of intervention in India.

    Note: The ‘Eat Out to Help Out’ Scheme recently seen in news is related to Hospitality. One may get confused over Poverty and Hunger.

    What is the EOHO Scheme?

    • The EOHO Scheme is an economic recovery measure by the UK government to support hospitality businesses as they reopen after the lockdown.
    • The scheme was announced as part of the Plans for Jobs summer economic update.
    • Under the EOHO Scheme, the government would subsidise meals (food and non-alcoholic drinks only) at restaurants by 50 per cent.
    • There is no minimum spending and no limit on the number of times customers can avail the offer, since the whole point of the scheme is to encourage a return to dining in restaurants.

    Why was this scheme deemed necessary?

    • All over the world, the food services sector is one of the worst affected by the pandemic.
    • The top two concerns were customers avoiding restaurants for fear of contracting the virus and customers having less disposable income for dining out.
    • Instead of delivering a financial package to operators, it makes eating out more affordable for consumers directly and helps restore demand.
    • Restoring consumer demand is being seen as crucial to the UK’s economic recovery.

    Can India benefit from such a scheme?

    • The main problem confronting the restaurant industry, following Unlock 1.0 in June, has been consumer fear, even as the government has remained silent about specific recovery packages aimed at the hospitality industry.
    • The government needs to work on the demand side.

  • New umbrella entities (NUEs) for retail payments.

    Context

    • Last week the Reserve Bank of India (RBI) released a document setting out the framework it plans to adopt to authorize the establishment of new umbrella entities (NUEs) for retail payments.

    What are NUEs

    • Once established, these newly authorized entities will be able to operate their own clearing and settlement systems.
    • establish new standards and technologies; and develop innovative new payment systems that enhance customer access, convenience and safety.
    • All NUEs will have to be interoperable with the National Payments Corporation of India (NPCI).
    • NPCI would also be allowed to set themselves up as for-profit entities, and they will themselves be able to participate in RBI’s payment and settlement systems.
    • The NPCI is at the epicentre of the digital payments in the country.

    If NPCI is doing its job well, then why NUE?

    • Between the UPI, IMPS, Aadhaar-enabled payments, Bharat BillPay, and all the other payment systems that it manages, 48% of all electronic retail payments in the country pass through the NPCI infrastructure.
    • NPCI is the fulcrum around which everything digital revolves.
    • Perhaps RBI’s concern stems from having the operations of so much of the country’s payment system concentrated in one entity.

    Are the concerns of RBI valid?

    • There is nothing wrong with having all digital transactions flow through a single entity—so long as that entity is neutral.
    • If RBI’s concern is technical, we could build sufficient redundancy into NPCI’s technical architecture to ensure that there is no single point of failure in the system.
    • Creating multiple umbrella entities is not the answer to this problem, as NUEs would be allowed to establish themselves as profit-oriented entities.
    • There is also the question of whether the trade-off is even worth it as replicating the NPCI infrastructure will require heavy investments to make participants in one NUE can seamlessly interact with those in every other.
    • Ensuring interoperability while still maintaining the security of the underlying infrastructure is going to be difficult and expensive.
    • There is the cost of the additional regulatory burden that RBI will have to shoulder, now that the banking-sector regulator will have to manage not just one but multiple umbrella entity.

    Issues with NPCI

    • There would be consequences to letting NPCI only entity in handling the payment system.
    • Any sort of monopoly results in market inefficiencies.
    • Of we have just one umbrella regulator, we will never be sure if transaction costs are as low as they could be, or if the variety of product offerings available to us could be better.
    • Problem is that the NPCI is expected to both manage the digital payments industry as well as come up with the frameworks necessary to foster innovation.
    • When NPCI had just small products in its portfolio it was able to perform both functions efficiently.
    • The effort of just keeping the system working seems to be taking a toll on NPCI’s ability to develop the protocols and standards that are needed to encourage innovation in this boom sector.

    What is the solution to issues faced by NPCI

    • One possible solution might be to create a separate and independent standards-setting body.
    • Such body would come up with the protocols and standards required to foster innovation in the digital payments space.
    • This is how most successful digital infrastructure systems work. Take the World Wide Web, for example.
    •  Any new standard that this body creates will have to first be approved by the NPCI, but then it can be rolled out throughout the digital payments ecosystem.

    Consider the question “Examine the role played by the NPCI in revolutionising the payment system in India.”

    Conclusion

    By establishing a neutral and independent standards-setting body, we can make sure that the system as a whole in our country evolves in the best traditions of digital infrastructure adopted anywhere in the world.

  • The idea of Central Bank Digital Currency in India

    The article discusses the idea of digital currency supported by the RBI and its advantages.

    Purpose of NUE

    • RBI recently released the framework for the establishment of a new umbrella entity (NUE) for retail payments.
    • NUE would help reduce payments concentration risk with Unified Payments Interface (UPI) facilitating over 1.5 bn transactions a month.
    • Given the sticky adoption and only a few payments apps dominating the UPI market, RBI intends to create a parallel retail system.

    5 requirements payment systems should fulfil

    • 1) The payments system should reduce the cost and time for government support to reach unbanked and underbanked people.
    • 2) It should ensure ease of access to credit for small and medium businesses.
    • 3) Improve the effectiveness of the implementation of monetary policy.
    • 4) The new payment system should effectively counter risk from unregulated new digital currencies like Bitcoin.
    • 5) It should discourage money laundering and tax evasion.

    CBDC: Solution to the above 5 requirements

    • CBDC is the digital form of fiat money, a digital equivalent of banknotes and coins.
    • A Central Bank Digital Currency (CBDC) could potentially solve the above problems.
    • Retail CBDCs can be issued directly by the central bank to people without going through traditional banks.
    • Individuals would have CBDC accounts directly on the central bank core ledger.
    • CBDC can reduce the cost and time for government support to reach people during desperate times (like pandemic).
    • CBDC can also enable many financial entities to settle directly with RBI.
    • In the current set up only a few large banks can settle directly with RBI.
    • With a digital currency, the settlement can be instantaneous and, as a result, more payments services providers like NBFCs could connect with RBI, thereby, reducing credit and liquidity risk.
    • CBDC lending would build MSMEs history and make further lending easier.
    • For India to be a $5 tn economy, businesses need credit, and that can happen when we have more banks.
    • India had 97 banks in 1947; today we are still at 95!
    • Interest bearing CBDCs can also improve monetary policy effectiveness by enabling real-time pass-through of the policy rate to the lending markets.
    • CBDCs can also allow for direct deposits into accounts of low-income households, senior citizens dependent on pensions and help cushion their purchasing power from the low-level interest rates during the times of economic downturn.
    • CBDC can thwart some competition against privately issued foreign currency-denominated digital currencies.

    Roles and responsibility of RBI with respect to CBDC

    • In terms of managing roles and responsibilities, RBI would only hold the accounts and implement monetary policies as it does now.
    • Fintech companies can become the channel for retail CBDC transmission and manage client relationships.
    • Fintechs can complement the commercial banks and can draw small businesses/poor households into the formal economy.
    • These companies could leverage their data to estimate customers’ creditworthiness and share their findings to banks for more efficient allocation of credit.

    Consider the question “A digital currency backed by the central bank could transform the retail payment landscape in India. Discuss.”

    Conclusion

    India has been at the forefront of the fintech revolution, and other developed countries have been following its path. While the world watches the melee between the Greenback and the Renminbi, it is time India also lays the foundation for a strong currency. CBDC may just be one of the ways to do it.

  • Boosting manufacturing

    The article analyses the issues of increasing manufacturing in India while dealing with the constraints faced by it. It also suggests the important role States can play.

    Why companies are expected to exit China

    • In the aftermath of the pandemic manufacturing companies are expected to exit China due to three primary reasons.
    • 1) Realisation that relying heavily on China for building capacities and sourcing manufacturing goods is not an ideal business strategy due to supply chain disruptions in the country caused by COVID-19.
    • 2) Fear of Chinese dominance over the supply of essential industrial goods.
    • 3) The growing risk and uncertainty involved in operating from or dealing with China in the light of geopolitical and trade conflicts between China and other countries, particularly the U.S.

    Where India stands in comparison with China

    • China ranks first in contribution to world manufacturing output, while India ranks sixth.
    • Against India’s target of share of manufacturing in Gross Domestic Product (GDP) to 25% by 2022, its share stood at 15% in 2018, only half of China’s figure.
    • Industry value added grew at an average annual rate of 10.68% since China opened up its economy in 1978, India’s grew at 7% after India opened up its economy.
    • Next to the European Union, China was the largest exporter of manufactured goods in 2018, with an 18% world share.
    • India is not part of the top 10 exporters who accounted for 83% of world manufacturing exports in 2018.

    Constraints faced by manufacturing sector in India

    India faces numerous constraints in promoting the manufacturing sector.

    • They chiefly include infrastructure constraints, a disadvantageous tax policy environment, restrictive trade policies, a non-conducive regulatory environment, rigid labour laws.
    • Constraints also include high cost of industrial credit, poor quality of the workforce, Low R&D expenditure, delays and constraints in land acquisition, and the inability to attract large-scale foreign direct investment into the manufacturing sector.

    What role States can play?

    • They  can  contribute land: Federal government system in India demands the participation of States for the lasting solution to the constraints on the sector.
    • An important requirement for the development of the manufacturing sector is the availability of land area.
    • This could be one of the reasons why manufacturing activity is mainly concentrated in Maharashtra, Gujarat, Tamil Nadu, Karnataka and Uttar Pradesh.
    • However, what is of concern is that some States that also have large land area contribute disproportionately little in manufacturing GSDP.
    • These states include Andhra Pradesh, Bihar, Chhattisgarh, Madhya Pradesh, Odisha, Rajasthan, Telangana, and West Bengal.

    Way forward

    • Identify reasons: The reasons for less manufacturing activity in these States have to be carefully examined.
    • State-specific industrialisation strategies: Based on such reasons, State-specific industrialisation strategies need to be devised and implemented in a mission mode with active hand-holding by the Central government.
    • State specific reforms: Policy actions on the part of individual States would improve India’s overall investment climate, thereby boosting investments, jobs, and economic growth.
    • Policy actions of the Centre and the States should  be well coordinated: Strategy Group consisting of representatives from the Central and State governments along with top industry executives to instil teamwork and leverage ideas through sharing the best practices of the Centre and States could be formed.

    Consider the question “What are the constraints faced by the manufacturing sector in India? Suggest the ways to deal with these constraints highlighting the important role States can play in boosting manufacturing.”

    Conclusion

    Both the States and the Central government needs to work in tandem to boost the manufacturing in India and transform the economic landscape of India.

  • Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme

    The outlay for the RoDTEP scheme is expected to be “much higher” than the NITI Aayog’s much-curtailed estimate of Rs 10,000 crore a year.

    Overt allocation

    • The central government had envisaged an annual allocation of about Rs 50,000 crore under the RoDTEP scheme to make exports zero-rated.

    Try this PYQ:

    Q. Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

    (a) China

    (b) India

    (c) Myanmar

    (d) Vietnam

    RoDTEP Scheme

    • RoDTEP is a scheme for the Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
    • It has replaced the current Merchandise Exports from India Scheme, which is not in compliance with WTO norms and rules.
    • The new RoDTEP Scheme is fully WTO compliant scheme.
    • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

    Back2Basics: Merchandise Exports from India Scheme (MEIS)

    • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
    • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and will be in existence till 2020.
    • MEIS intends to incentivise exports of goods manufactured in India or produced in India.
    • The incentives are for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
    • The MEIS covers almost 5000 goods notified for the purpose of the scheme.