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Subject: Economics

  • Importance of Resilient supply chains

    What does supply chain resilience mean? 

    • When assembly lines are heavily dependent on supplies from one country, the impact on importing nations could be crippling if that source stops production intentionally (economic sanction) or unintentionally (natural disaster)
    • Example: Japan imported $169 billion worth from China, accounting for 24% of its total imports. Japan’s imports from China fell by half in February 2020 that impacted Japan’s economic activity.
    • In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few

    Recent incidents that led to supply chain disruption

    • Disruptions in supply chains can be natural or man-made.
    • When the novel coronavirus pandemic broke out, it had an immediate and telling effect on supply chains emanating from China.
    • In Japan’s case, a nuclear disaster (Fukushima Daiichi) caused a sharp drop in Japanese automobile exports to the United States.
    • Terrorist drone attacks on oil refineries in Saudi Arabia in September 2019 resulted in a drop of 5.7 million barrels of oil per day.
    • That attack triggered a steep plunge in Saudi Arabia’s stock market and a sharp spike in global oil prices.
    • Tensions with China led the United States government to impose restrictions on the export of microchips to China’s biggest semiconductor manufacturer SMIC.

    Supply Chain Resilience Initiative (SCRI)

    • Geo-politics and geo-economics can never be truly separated.
    • Also, there is a growing trend of weaponization of trade and technology.
    • China had imposed sanctions on its key exports of grain, beef, wine, coal, etc to Australia for demanding an inquiry into the origins of the coronavirus and advocating a robust Indo-Pacific vision.
    • It is against this backdrop that India, Japan, and Australia initiated the Supply Chain Resilience Initiative (SCRI).
    • It focuses on automobiles and parts, petroleum, steel, textiles, financial services, and IT sectors.
    • The SCRI may be strengthened by the future involvement of France.
    • Kingdom has also shown interest in the SCRI.

    “China plus one” strategy

    • For many Japanese companies, global performance and profits are linked to manufacturing facilities and supply chains in China.
    • Yet, they have shown an early capacity for risk mitigation through the “China Plus One” business strategy.
    • The “China plus one” strategy aims at diversification of investments to the Association of Southeast Asian Nations (ASEAN), India, and Bangladesh.
    • Japan announced a 2.2 billion Relocation Package.
    • Of the companies that availed this package, 57 relocated to Japan, 30 to Southeast Asia, and two to India.

    India’s vulnerability to supply chain disruptions

    • India can ill-afford the shocks of disruption in supply chains.
    • For instance, the pandemic caused a breakdown in global supply chains in the automotive sector.
    • For India, which imports 27% of its requirement of automotive parts from China, this quandary was a wake-up call.
    • It is t is noteworthy is that despite being the fourth largest market in Asia for medical devices, India has an import dependency of 80%. 
    • Given the renewed thrust in the health-care sector, this is the right time to fill gaps through local manufacturing.

    India increasing its presence in global supply chains

    1) Electronic industry

    • India’s electronics industry was worth $120 billion in 2018-2019 and is forecast to grow to $400 billion by 2025.
    • India is enhancing its presence in the global supply chains by attracting investments in the semiconductor components and packaging industry.
    • The Indian electronics sector is gradually shifting away from completely knocked down (CKD) assembly to high-value addition.

    2) Defence sector

    • Defence is among the key pillars of the ‘Atmanirbhar Bharat’ policy.
    • The government is providing a big boost to defence manufacturing under the ‘Make in India’ program.
    • It has identified a negative import list of 101 items.
    • There is a tremendous opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.

    Consider the question “Pandemic has demonstrated the damage vulnerable supply chains can cause. It also underscored the importance of resilient supply chains. In light of this, examine the importance of diversification of supply chains.”

    Conclusion

    India has the capacity and the potential to become one of the world’s largest destinations for investments, and one of the world’s largest manufacturing hubs, in the aftermath of the pandemic.

  • What are Dedicated Freight Corridors (DFCs)?

    Prime Minister has inaugurated a 351-km section between Khurja and Bhaupur in Uttar Pradesh for commercial operations of the Dedicated Freight Corridor (DFC).

    There is another concept named Dedicated Passenger Corridors (DPCs). Can you guess the idea behind?

    Background of DFCs

    • The concept of Dedicated Freight Corridor (DFC) was mooted in 2006 to generate substantial capacity for freight traffic by developing separate tracks on identified routes.
    • The Dedicated Freight Corridor Corporation of India Ltd (DFCCIL) was incorporated as a separate company under the Ministry of Railways.

    What is the DFC?

    • Under the Eleventh Five Year Plan (2007–12), Railways started constructing a new DFC in two long routes, namely the Eastern and Western freight corridors.
    • The section recently launched is part of the 1,839-km Eastern DFC that starts at Sohnewal (Ludhiana) in Punjab and ends at Dankuni in West Bengal.
    • The other arm is the around 1,500-km Western DFC from Dadri in Uttar Pradesh to JNPT in Mumbai, touching all major ports along the way.
    • There is also a section under construction between Dadri and Khurja to connect the Eastern and Western arms.

    Why is it important?

    • Around 70% of the freight trains currently running on the Indian Railway network are slated to shift to the freight corridors, leaving the paths open for more passenger trains.
    • Tracks on DFC are designed to carry heavier loads than most of the Indian Railways.
    • DFC will get track access charge from the parent Indian Railways, and also generate its own freight business.

    What trains will use the new section?

    • Freight trains plying on this section from now on will help decongest the existing Kanpur-Delhi main line of Indian Railways, which currently handles trains at 150% of its line capacity.
    • The new section means on the Indian Railway mainline, more passenger trains can be pumped in and those trains can, in turn, achieve better punctuality.
    • Foodgrain and fertilizers from the northern region are transported to the eastern and Northeast regions.
    • From East and Northeast, coal, iron ore, jute, and petroleum products are transported North and West.

  • Reforms with the future and farming needs in mind

    Some provisions of the new farm laws are opposed by the farmers. The article explains the utility of these provisions.

    Major objections to farm laws

    • The first objection is that the Agricultural Produce Market Committees (APMC) will be eventually closed,
    • The second objection is that Minimum Support Prices (MSP) will be stopped,
    • The third fear is that corporates will take over the agriculture trade, and farmers’ land will be taken over by powerful corporates.

    Why reforms were needed

    • The gap between the agri-income of a farmer and that of a non-agriculture worker increased from ₹25,398 in 1993–94 to ₹1.42 lakh in 2011-12.
    • Aggregate food demand has fallen short of domestic production necessitating the export of a large quantity to prevent domestic prices from falling very low.
    • India is sitting on an excess stock of 60 lakh tons of sugar and nearly 72 million tons of extra buffer stock of wheat and rice which is causing a huge drain on fiscal resources.
    • India’s agri-exports are facing difficulty, imports are turning attractive as domestic prices are turning much higher.
    • Rural youth are looking for jobs outside agriculture and there is a serious problem of unemployment in the countryside.
    • There are numerous instances of market failure to the detriment of producers and consumers.
    • This is turning farmers to look at the government for remunerative prices through MSP for most agricultural products.
    • The growth rate in agriculture is driven by heavy support through various kinds of subsidies and output price support.
    • These costs and losses and subsidies will take away most of the tax revenue of the central government.

    3 Provisions and their utility

    1) Relation between MSP and APMC

    • APMC has nothing to do with the payment of the MSP.
    • The necessary and sufficient conditions for the MSP are procurement by the government, with or without the APMC.
    • Experience shows that even after fruits and vegetables were de-notified from the APMC, they continued to arrive at APMC mandis in large quantities while farmers got additional options.
    • The protesting farmers have raised concerns to keep the level-playing field for the APMC and private players, and the government has shown agreement to address this fully.

    2) Criteria for traders

    • Protesting farmers are also opposing the provision of the simple requirement of a PAN card for a trader.
    • After having a PAN card, even a farmer can go for trading, his son can do agri-business and other rural youth can undertake purchases of farm commodities for direct sale to a consumer or other agribusiness firms.
    • If stringent criteria such as bank guarantee, etc. are included in the registration, then the spirit of the new law to facilitate farmers and rural youth to become agribusiness entrepreneurs will be lost.

    3) Mistaking contract farming with corporate farming

    • Critics and protesting farmers are mixing contract farming with corporate farming.
    • The new Act intends to insulate interested farmers (especially small farmers), against market and price risks.
    • The Act is voluntary and either party is free to leave it after the expiry of the agreement.
    • It prohibits the transfer, sale, lease, mortgage of the land or premises of the farmer.
    • The Act will promote diversification, quality production for a premium price, export, and direct sale of produce, with desired attributes to interested consumers.
    • It will also bring new capital and knowledge into agriculture and pave the way for farmers’ participation in the value chain.

    Conclusion

    The policy reforms undertaken by the central government through these Acts are in keeping with the changing times and requirements of farmers and farming. If they are implemented in the right spirit, they will take Indian agriculture to new heights and usher in the transformation of the rural economy.

  • National Common Mobility Card (NCMC)

    Prime Minister has launched the ambitious National Common Mobility Card (NCMC) service for the Delhi Metro’s Airport Express Line.

    Q.What is the National Common Mobility Card (NCMC)? How it a step moving towards a one nation one card system? (150W)

    National Common Mobility Card

    • The idea of NCMC was floated by the Nandan Nilekani committee set up by the Reserve Bank of India (RBI).
    • The committee had suggested that NCMC should contain two instruments – a regular debit card which can be used at an ATM and a local wallet.
    • Banks mandated by the department of financial services have been asked to make their debit cards NCMC compliant, to ensure availability of service.
    • The committee has also proposed a host of measures, including all payments by the government to citizens through the digital mode, to reduce the number of cash transactions in the country.

    Features of the NCMC

    • NCMC will allow passengers with RuPay debit cards, issued in the last 18 months by 23 banks, including SBI, UCO Bank, Canara Bank, Punjab National Bank, etc, to be swiped for Metro travel.
    • It can be used at all transit locations making all new metro and transit payments interoperable via one card.
    • NCMC is an automatic fare collection system. It will turn smartphones into an inter-operable transport card that commuters can use eventually to pay for Metro, bus, and suburban railways services.
    • NCMC service is slated to cover the entire 400km stretch of Delhi Metro.
    • It will allow entry and exit from Metro stations with the help of a smartphone, known as the automatic fare collection (AFC) system.
    • To make AFC compliant indigenous gates for metro stations, the government has engaged Bharat Electronics Limited. Eventually, all Metro stations will be fitted with AFC gates.

  • What are Zero Coupon Bonds?

    The government has used financial innovation to recapitalize a bank by issuing the lender Rs 5,500-crore worth of non-interest bearing bonds called Zero-Coupon Bonds.

    Try this PYQ:

    Q.Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

    Zero-Coupon Bonds

    • These are non-interest bearing, non-transferable special GOI securities that have a maturity of 10-15 years and are issued specifically to Punjab & Sind Bank.
    • These bonds are not tradable; the lender has kept them in the held-to-maturity (HTM) investments bucket, not requiring it to book any mark-to-market gains or losses from these bonds.
    • This will earn no interest for the subscriber; market participants term it both a ‘financial illusion’ and ‘great innovation’ by the government.

    How do they differ from bonds issued by private firms?

    • There is a difference between zero-coupon bonds issued by other corporates and these.
    • Zero-coupon bonds by private companies are normally issued at discount, but since these special bonds are not tradable these can be issued at par.

  • Dangers lurking beneath economic recovery

    As Indian economy recovers from the economic disruption caused by the pandemic, there are dangers of rising inequality and cosequently the rising inflation. The article deals with these issues.

    3 features of Indian recovery

    • 1) The number of new cases has fallen while the fatality rate continues to drop.
    • 2) India has rolled out one of the smallest fiscal support packages globally, with central government spending flat so far this year.
    • 3) Inflation is now a big problem, with consumer prices above the 6 per cent tolerance level for the past eight months.

    Consequences of low fiscal spending

    • It may seem that India is back on the path to recovery.
    • But  the low level of fiscal spending could leave behind other problems, such as rising inequality.
    • Although, in India there was a focus on vulnerable section, there were some misses, such as the urban poor being left out, and the overall outlay was small.
    • For instance, demand for the rural employment guarantee programme continues to outstrip supply.
    • There is the rise in inequality between large and small firms, which is likely to be felt by individual employees.
    • Large firms were helped by cost-cutting, low interest rates, access to buoyant capital markets and increased spending in the formal economy probably helped.
    • The smaller listed firms did not do as well.
    • Small firms are more labour intensive than large firms.
    • If small firms do poorly, it impacts a large number of people.
    • All this could impact demand over time.
    • Rising inequality could stoke inflation (in services particular).
    • Consumption patterns show that the rich in India tend to consume more services than the poor.
    • And rising inequality could, therefore, stoke inflation.

    Possibility of services inflation

    • 1) As a vaccine comes into play, there could be a release of pent-up demand for high-touch services.
    • 2) As large firms and their employees do relatively well, they are likely to demand more services, stoking prices.
    • 3) Many service providers did not do a regular annual price reset in 2020, so they may raise prices to cover the two years once demand picks up.
    • If inflation does become persistent and leads to tighter monetary policy, that could weigh on growth over time.

    Way forward

    • To control inflation in 2021, the RBI may have to take steps such as:-
    • 1) Gradually drain the excess liquidity in the banking sector,
    • 2) Provide a floor for short-term rates, which have fallen below the reverse repo rate.
    • 3) Narrow the policy rate corridor by raising the reverse repo rate.
    • A quicker exit from loose monetary policy could become another area where India differs from the world.

    Consider the question “What are the consequences of economic recovery in the wake of pandemic? Suggest the ways to deal with these consquences.”

    Conclusion

    Putting all of this together, it seems India will come full circle in 2021. For a while it was worried more about weak growth than high inflation. But as growth recovers, inflationary concerns could reappear.

  • What is Positive Pay System?

    With the New Year, a new concept of Positive Pay System for Cheque Truncation System (CTS) will be introduced by the Banking regulator Reserve Bank of India (RBI) seeking to further augment customer safety in cheque payments.

    Try this PYQ:

    Q.Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?

    (a) Mobile wallets will not be necessary for online payments.

    (b) Digital currency will totally replace the physical currency in about two decades.

    (c) FDI inflows will drastically increase.

    (d) Direct transfer of subsidies to poor people will become very effective.

    Positive Pay System

    • The concept of Positive Pay involves a process of reconfirming key details of large-value cheques.
    • Put simply, cheques will be processed for payment by the drawee bank based on information passed on by its customer at the time of issuance of the cheque.
    • When the beneficiary submits the cheque for encashment, the cheque details are compared with the details provided to the drawee bank through Positive Pay.
    • If the details match, the cheque is honoured. In case of mismatch in cheque details, the discrepancy is flagged by CTS to the drawee bank and the presenting bank, which would take redress measures.

    For cheques above 50k

    • The banks are advised to enable it for all account-holders issuing cheques for amounts of ₹50,000 and above.
    • While availing of this facility is at the discretion of the account-holder, banks may consider making it mandatory in case of cheques for amounts of ₹5 lakh and above, the RBI had said.

    Benefits of the system

    • Under the Positive Pay system, the drawee bank is already aware of the issuer the details of the high-value cheque (above ₹50,000) he has issued.
    • Without this intimation, if a cheque gets presented, then the drawee bank can reject payment and examine the case. Positive Pay is going to benefit both the issuer and the beneficiary.
    • For the issuer, the benefit from this concept is that there cannot be fraudulent cheques encashed out of issuer’s account.
    • For the beneficiary, the benefit is that the cheques handed out to him will mostly get honoured.

    Is Positive Pay the same as ‘certified cheque’?

    • The concept of ‘certified cheque’ was there long back — about 30 years back, long before technology swept across the Indian banking landscape.
    • Whenever anybody issued a cheque, banks used to certify that money is there in their customer’s bank account and, therefore, the cheque will get honoured.
    • This provided comfort to a beneficiary that cheque payment will get honoured and therefore did not insist on a pay order or demand draft.
    • Drawee banks used to earmark the amount in the account of the issuer and then certify the cheque.
    • This was adopted in an era when the cheque instrument used to travel physically for clearing.

    Why need such a system?

    • The RBI says the Positive Pay system is to augment customer safety in cheque payments and reduce instances of fraud occurring on account of tampering of cheque leaves.
    • Banks had recently witnessed a rise in frauds involving high-value cheques.

  • Fixed-term employees

    The recent incident of violence at the iPhone manufacturing factory brought into focus the issue of contract labour. The article explains the reasons for its persistence despite the provision of fixed-term employment.

    Difference between a contract worker and fixed-term worker

    • Contract workers, who are hired via an intermediary (contractor) and are not on the payrolls of the company on whose shop floors they work.
    • Fixed-term employees can be directly hired by employers without mediation by a middleman.
    • They are ensured of the same work hours, wages, allowances, and statutory benefits that permanent workers in the establishment are entitled to.
    • Employers are not required to provide retrenchment benefits to fixed-term employees.
    • With an aim to discourage the use of contract workers the government introduced the option of fixed-term employment in the Code on Industrial Relations (2020).

    Issues with the provision of fixed-term employment

    • Fixed-term employment in India is indeed quite open-ended.
    • The Code does not specify a minimum or maximum tenure for hiring fixed-term employees.
    • Nor does it specify the number of times the contract can be renewed.
    • The absence of such safeguards can lead to an erosion of permanent jobs.
    • Workers may find themselves moving from one fixed-term contract to another, without any assurance of being absorbed as permanent workers by their employer.

    So, why firms still hire contract workers?

    • The cost of hiring contract workers continues to remain lower than the cost of hiring fixed-term employees. who are required to be paid pro-rata wages and social security including gratuity.
    • In addition, the monitoring, legal compliance, and litigation costs are shifted onto the contractor in case of contract workers, thereby reducing the transaction costs of recruitment to firms.
    • To encourage a shift away from contract workers to fixed-term employees, the government should have completely prohibited the use of contract labor in core activities
    • Instead of completely prohibiting contract workers in core activities the Labour Code on Occupational Safety and Health has allowed it under certain conditions.
    • Such a provision encourages the use of contract workers, undermining the initiative of introducing fixed-term employment.

    Using PLI and Atmanirbhar Bharat to boost formal job creation

    • The production linked incentive scheme (PLI) offers government subsidies for a limited period which is five years for mobile handsets.
    • The objective of the PLI scheme is to create “good jobs”.
    • It may have been more useful to link these incentives for which a financial outlay of Rs 1.45 lakh crore has been approved over five years for 10 sectors explicitly to job creation.
    • Significantly, under the Atmanirbhar Bharat Rozgar Yojana, the government is offering provident fund subsidies to employers for hiring new formal workers.
    • Both these programs could jointly be leveraged to give a big boost to formal job creation in the manufacturing sector.

    Consider the question “Examine the reasons for the persistence of contractual labour despite the option of fixed-term employment. Also suggest the ways to increase the employment opportunities that are secure.” 

    Conclusion

    The government should focus on the creation of employment opportunities that are secure through policies and laws.

  • Significance and History of National Farmers’ Day

    National Farmers’ Day, or Kisan Diwas, is celebrated across the country on December 23 to honour India’s farmers.

    Do you think that the extraordinary haste with which the farm bills were pushed through both the Houses has created the present crisis?

    National Farmers’ Day

    • It marks the birth anniversary of the nation’s fifth PM Choudhary Charan Singh.
    • In 2001, the government decided to recognise Choudhary Charan Singh’s contribution to the agriculture sector and welfare of farmers by celebrating his birth anniversary as Kisan Diwas.
    • Since then, December 23 has been observed as National Farmers’ Day.
    • Generally, awareness campaigns and drives are organised across the country to educate people on the role of farmers and their contribution to the economy.

    Who was CCS and what was his connection with farmers?

    • Chaudhary Charan Singh, who briefly served as PM between 1979 and 1980, is widely regarded as one of the country’s most famous peasant leaders.
    • He was known for his pioneering work to promote the welfare of farmers and the agricultural sector.
    • Charan Singh was no stranger to the struggles faced by the Indian farmer. He was born into a middle-class peasant family in Uttar Pradesh on December 23, 1902.
    • Greatly influenced by the teachings of Mahatma Gandhi, he took an active part in the fight for independence.
    • After that, his political career largely focused on socialism in rural India.

    Major legislations

    • He was behind several major farmer-forward Bills, including the Land Utilization Bill of 1939 and the Debt Redemption Bill in 1939.
    • While serving as agriculture minister in 1952, he led UP in its efforts to abolish the Zamindari system.
    • In fact, he went on to draft the UP Zamindari and Land Reforms Bill himself.
    • On 23 December 1978, he founded the Kisan Trust — a non-political, non-profit making body — with the aim of educating India’s rural masses against injustice, and fostering solidarity among them.

  • Budget’s big worry: the food subsidy

    The article highlights the challenge of managing the procurement of wheat and rice at MSP by the FCI and maintaining its financial health.

    The problem of surplus in wheat and rice procurement

    • While MSP is declared for 23 crops, the biggest financial burden comes from wheat and rice.
    • Procurement has increased significantly with states like MP, Chhattisgarh, Telangana and Odisha stepping up their efforts.
    • Overall procurement of rice and wheat has gone up to 52 million tonnes and 39 million tonnes, respectively.
    • The requirement of PDS and welfare schemes is about 60 million tonnes.
    • This leaves a surplus of about 30 million tonnes, in addition to the carry-over stock of about 42 million tonnes (current)—far above the buffer and strategic reserve norms.

    Cost of the surplus and its significance

    • The subsidy burden for rice and wheat (2020-21) is estimated to be Rs 1.8 lakh crore.
    • FCI procures wheat and rice at MSP (some states do so under the decentralised procurement & distribution scheme).
    • They incur costs like market fees, labour charges, packing costs, transport, storage charges, etc.
    • These are of the order of 9% for procurement, 9-11% for labour and transport, and 15-17% for distribution.
    • The sale price is fixed at Rs 2 and Rs 3 per kg for wheat and rice, respectively, under the National Food Security Act.
    • In addition, there are releases under LEAN (lower entitlements and higher costs compared to NFSA cards, but subsidised nonetheless) and Open Market Sales (OMSS).
    • Cost of holding the buffer for a year is about Rs 5,500 per tonne.
    • FCI is holding 39 million tonnes of rice and 55 million tonnes of wheat (July 2020) against the buffer/strategic reserve norm of 13.5 million tonnes of rice and 27.6 million tonnes of wheat, i.e., a surplus of 52 million tonnes.
    • The cost of holding this stock works out to Rs 29,000 crore per year.

    Financial burden on FCI

    • The finance ministry has not been able to allocate adequate funds to meet the full requirement of food subsidy.
    • Under-provisioning on this account has been going on, and FCI was being given loans at 8% interest from the National Savings Scheme Fund (NSSF) since 2016-17.
    • The outstanding loan on this account (October 31, 2020) is Rs 2,93,000 crore.
    • This has meant FCI getting zero budgetary support against current subsidy claims since 2017, thereby, postponing the problem year after year.
    • The subsidy burden is rising (with MSP increasing every year, quantities going up and prices under PDS fixed), and is likely to cross Rs 2 lakh crore.

    Conclusion

    Government need to bring in the reforms in the PDS and MSP regime to stop both the systems from collapsing under their own weights.

    Source:-

    https://www.financialexpress.com/opinion/union-budget-2021-22-the-burgeoning-food-subsidy-bill-will-be-a-key-budget-worry/2155584/