💥Mains Ready By December. Smash Mains & Smash PYQ Admissions Open
Talk to Mentor

Civilsdaily

Login

Subject: Economics

  • 1.5x Formula for crops MSP calculation

    Talks between farmer unions and the government failed to reach a resolution. The main bone of contention in these talks is the Minimum Support Price (MSP) for crops, which farmers fear the new laws will do away.

    Try this:

    Q.There is also a point of view that agriculture produce market committees (APMCs) set up under the state acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine. (CSM 2014)

    What is MSP?

    • The MSP assures the farmers of a fixed price for their crops, well above their production costs.
    • MSP, by contrast, is devoid of any legal backing. Access to it, unlike subsidised grains through the PDS, isn’t an entitlement for farmers.
    • They cannot demand it as a matter of right. It is only a government policy that is part of administrative decision-making.
    • The Centre currently fixes MSPs for 23 farm commodities based on the Commission for Agricultural Costs and Prices (CACP) recommendations.

    Why in news yet again?

    • The Union Budget for 2018-19 had announced that MSP would be kept at levels of one and half times of the cost of production.
    • This year the govt. has increased the MSP for all mandated Kharif, Rabi and other commercial crops with a return of at least 50 per cent of the cost of production for the agricultural year 2018-19 and 2019-20.
    • This is the ambiguity from where this 1.5 times formula arrived at.

    How did the government fix the MSPs of crops before every planting season?

    • The CACP considered various factors while recommending the MSP for a commodity, including the cost of cultivation.
    • It also takes into account the supply and demand situation for the commodity; market price trends (domestic and global) and parity vis-à-vis other crops; and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors.

    What changed with the 2018 budget?

    • The Budget for 2018-19 announced that MSPs would henceforth be fixed at 1.5 times of the production costs for crops as a “pre-determined principle”.
    • Simply put, the CACP’s job now was only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula.

    How was this production cost arrived at?

    • The CACP projects three kinds of production cost for every crop, both at the state and all-India average levels.
    • ‘A2’ covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
    • ‘A2+FL’ includes A2 plus an imputed value of unpaid family labour.
    • ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.

    Now try this PYQ:

    Q.The economic cost of food grains to the Food Corporation of India is Minimum Support Price and bonus (if any) paid to the farmers plus:

    (a) Transportation cost only

    (b) Interest cost only

    (c) Procurement incidentals and distribution cost

    (d) Procurement incidentals and charges for godowns

    Which production costs were taken in fixing the MSPs?

    • In 2018, then FM Arun Jaitley’s did not specify the cost on which the 1.5-times formula was to be computed.
    • But the CACP’s ‘Price Policy for Kharif Crops: The Marketing Season 2018-19’ report stated that its MSP recommendation was based on 1.5 times the A2+FL costs.

    What are the farmer’s demands?

    • Farm activists, however, had said that the 1.5-times MSP formula should have been applied on the C2 costs.
    • CACP considers A2+FL and C2 costs, both while recommending MSP. It reckons only A2+FL cost for return.
    • However, C2 costs are used by CACP primarily as benchmark reference costs (opportunity costs) to see if the MSPs recommended by them at least cover these costs in some of the major producing States.

  • The perils of deregulated imperfect agrimarkets

    The article examine issue of agriculture produce marketing. The passage of FPTC Act 2020 sought to address the challenges faced by the farmers. However, these are several issues the Act fails to resolve. These issues are discussed here.

    Why do farmers sell outside mandis?

    • Official data show that even for paddy and wheat, respectively, only 29% and 44% of the harvest is sold in a mandi.
    • In other words a large proportion of Indian harvest is not directly sold in a mandi.
    • Farmers are forced to sell outside the mandis for two reasons.

    1) There are not enough mandis

    • The National Commission on Agriculture (NCA) had recommended that every Indian farmer should be able to reach a mandi in one hour by a cart.
    • Thus, the average area served by a mandi was to be reduced to 80 km2.
    • For this, the number of mandis was to increase to at least 41,000.
    • But there were only 6,630 mandis in 2019 with an average area served of 463 km2.
    • Using another set of criteria, a government committee in 2017 had recommended that India should have at least 10,130 mandis.
    • So, by all counts, India needs not less but more mandis.

    2) Transport cost

    • Most small and marginal farmers, do not find it economical to bear the transport costs to take their harvests to mandis.
    • Thus, they end up selling their harvest to a village trader even if at a lower price.
    • Even if private markets replace mandis, small and marginal farmers will continue to sell to traders in the village itself.
    • The situation will change only if economies of scale rise substantially at the farm-level.

    Why there is poor private investment in markets?

    • Already, 18 States have allowed the establishment of private markets outside the APMC; 19 States have allowed the direct purchase of agricultural produce from farmers; and 13 States have allowed the establishment of farmer’s markets outside the APMC.
    • Despite such legislative changes, no significant private investment has flowed in to establish private markets in these States.
    • The reason for poor private investment in markets is the presence of high transaction costs in produce collection and aggregation.
    • When private players try to take over the role of mandis and the village trader, they incur considerable costs in opening collection centres and for salaries, grading, storage and transport.
    • Corporate retail chains face additional costs in urban sales and storage, as well as the risk of perishability.
    • This is why many retail chains prefer purchasing from mandis rather than directly from farmers.

    Issue of mandi tax

    • Many commentaries treat taxes in mandis as wasteful. This assertion is not fully true for two reasons:
    • 1) Much of the mandi taxes are reinvested by APMCs to improve market infrastructure.
    • A fall in mandi taxes would reduce the surplus available with APMCs for such investment.
    • 2) In States such as Punjab, the government charges a market committee fee and a rural development fee.
    • The Punjab Mandi Board uses these revenues to construct rural roads, run medical and veterinary dispensaries, supply drinking wate etc.
    • Such rural investments will also be adversely affected if mandis are weakened.

    Weakening of MSP regime

    • Many policy signals point to a strategic design to weaken the MSPs.
    • 1) Rising input and labour costs necessitates a regular upward revision of MSPs to keep pace with costs of living.
    • However, MSPs are rising at a far slower rate over the past five to six years than in the past.
    • 2) The government has not yet agreed to fix MSPs at 50% above the C2 cost of production.
    • As a result, farmers continue to suffer a price loss of ₹200 to ₹500 per quintal in many crops.
    • 3) The Commission for Agricultural Costs and Prices (CACP) has been recommending to the government that open-ended procurement of food grains should end.
    • These policy stances have set alarm bells ringing among farmers.
    • The farmers Punjab, Haryana and western Uttar Pradesh feel that if mandis weaken and private markets with no commitment to MSPs expand, they fear a gradual erosion of their entitlement to a remunerative price.

    Steps to be taken

    • 1) India needs an increase in the density of mandis, expansion of investment in mandi infrastructure and a spread of the MSP system to more regions and crops.
    • 2) This increase in density should happen hand-in-hand with a universalisation of the Public Distribution System.
    • 3) APMCs need internal reform to ease the entry of new players, reduce trader collusion and link them up with national e-trading platforms.
    • The introduction of unified national licences for traders and a single point levy of market fees are also steps in the right direction.

    Consider the question “The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 was passed with a view to address the challenges faced by the farmers in selling their produce. However, there are concerns with the provision of the Act and its efficacy to addresss these challenges. What are the issues with the Act? Suggest the measures to address these issues.” 

    Conclusion

    The government’s must try to allay the fears of farmers over the Farm Bills and it is never too late to rethink. Unconditional talks with farmers would be an appropriate starting point.

  • Future of 5G in India

    India, which has the highest average monthly mobile data traffic per smartphone, is expected to surpass 350 million 5G subscriptions by 2026, according to a report by Swedish telecom equipment maker Ericsson.

    Also read:

    [Burning Issue] 5G Technology

    Ericsson Mobility Report, 2020

    • As per the report, four out of every ten mobile subscriptions in 2026 will be 5G globally with 5G subscriptions forecast to reach 3.5 billion.
    • In the India region, LTE (long-term evolution technology) subscriptions are forecast to increase from 710 million in 2020 to 820 million in 2026” by which time 3G will be phased out.
    • LTE remains the dominant technology in 2020, accounting for 63%.
    • Based on the reported timeline for spectrum auction for 5G services, India could have its first 5G connection in 2021.

    Internet usage in India

    • In India, the reliance of people on mobile networks to stay connected as well as work from home during the pandemic has resulted in average traffic per smartphone is the global highest.
    • Low prices for mobile broadband services, affordable smartphones and increased time spent by people online all contribute to monthly usage growth in India.

    Back2Basics: 5G Technology

    • It is the next-generation cellular technology that will provide faster and more reliable communication with ultra-low latency.
    • A government panel report points out that with 5G, the peak network data speeds are expected to be in the range of 2-20 Gigabits per second (Gbps).
    • This is in contrast to 4G link speeds in averaging 6-7 Megabits per second (Mbps) in India as compared to 25 Mbps in advanced countries.
    • Once 5G becomes commercial, users will be required to change their current devices in favour of 5G-enabled ones.
    • However, it is likely that the primary use of the technology will go beyond the delivery of services on personal mobiles devices.

  • Cultivation of ‘Wild’ Arunachal Kiwi

    Recently, the ‘Wild’ Arunachal Kiwi has received organic certification by the Mission Organic Value Chain Development for the North East Region.

    Try this PYQ:

    Q.Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?

    (a) Spices

    (b) Fresh fruits

    (c) Pulses

    (d) Vegetable oils

    Arunachal Kiwi

    • The kiwifruit (Actinidia deliciosa Chev.) is a deciduous fruiting vine native to Yangtze River valley of south and central China.
    • In Arunachal Pradesh, a domesticated variety of kiwi was introduced as a commercial fruit only in 2000.
    • The Ziro Valley specifically located at 1,500-2,000 metres above sea level is the most ideal for kiwi.
    • It is also called “China’s miracle fruit” and “Horticulture wonder of New Zealand”.

    Benefits of certification

    • Certification helps producers and handlers; they receive premium prices for the products and have access to fast-growing, local, regional and international markets.

    Organic certification in India

    • An agricultural practise/product is considered organic when there are no chemical fertilizers or pesticides involved in its cultivation process.
    • Such certifications in India can be obtained after a strict scientific assessment done by the regulatory body, Agricultural and Processed Food Products Export Development Authority (APEDA).

  • Farmers’ protest

    Farmers all across the Punjab and Haryana have marched to New Delhi over the new legislations.

     Major cause of Farmers’ protest

    • Much of the opposition really is just to one of the three laws. It is the Farmers’ Produce Trade and Commerce (Promotion and Facilitation)  Act and its provisions that are seen as weakening the APMC mandis.
    • Even in that one — the act — there are only some contentious provisions, which, although key, can still leave doors open for negotiation.

    A fight for privilege

    • Farmers, if anything, would gain from removal of stocking restrictions on the trade, as it potentially translates into unlimited buying and demand for their produce.

    The contentious one: FPTC Act

    • The FPTC Act is a bone of contention. It permits sale and purchase of farm produce outside the premises of APMC mandis.
    • Such trades (including on electronic platforms) shall attract no market fee, cess or levy “under any State APMC Act or any other State law”.
    • An issue here is the very right of the Centre to enact legislation on agricultural marketing.
    • Article 246 of the Constitution places “agriculture” and “markets and fairs” in the State List.
    • But entry 42 of the Union List empowers the Centre to regulate “inter-State trade and commerce”.

    An example of Central hegemony

    • While trade and commerce “within the State” is under entry 26 of the State List, it is subject to the provisions of entry 33 of the Concurrent List.
    • Under this, the Centre can make laws that would prevail over those enacted by the states.
    • Entry 33 of the Concurrent List covers trade and commerce in “foodstuffs, including edible oilseeds and oils”, fodder, cotton and jute.
    • The Centre, in other words, can very pass any law that removes all impediments to both inter- and intra-state trade in farm produce, while also overriding the existing state APMC Acts. The FPTC Act does precisely that.

    Farmers question

    • Some experts make a distinction between agricultural “marketing” and “trade”.
    • Agriculture per se would deal with everything that a farmer does — right from field preparation and cultivation to also sale of his/her own produce.
    • The act of primary sale at a mandi by the farmer is as much “agriculture” as production in the field.
    • “Trade” begins only after the produce has been “marketed” by the farmer.

    The centre’s overriding logic behind

    • Going by this interpretation, the Centre is within its rights to frame laws that promote barrier-free trade of farm produce (inter- as well as intra-state) and do not allow stockholding or export restrictions.
    • But these can be only after the farmer has sold.
    • Regulation of first sale of agricultural produce is a “marketing” responsibility of the states, not the Centre.

    What do farmers’ want?

    • Farmers would want no restrictions on the movement, stocking and export of their produce.
    • For example, Maharashtra’s onion growers have vehemently opposed the Centre’s resort to ban on exports and imposition of stock limits whenever retail prices have tended to go up.
    • But these restrictions relate to “trade”.
    • When it comes to “marketing” — especially dismantling of the monopoly of APMCs — farmers, especially in Punjab and Haryana, aren’t very convinced about the “freedom of choice to sell to anyone and anywhere” argument.

    Where lies the major issue?

    • Much of government procurement at minimum support prices (MSP) — of paddy, wheat and increasingly pulses, cotton, groundnut and mustard — happens in APMC mandis. 
    •  In a scenario where more and more trading moves out of the APMCs, these regulated market yards will lose revenues.
    • They may not formally shut, but it would become like BSNL versus Jio.
    • And if the government stops buying, farmers will be left with only the big corporates to sell to.

    What could be negotiated?

    • If the protesting farmer union leaders were to sit down at the negotiating table, the government can possibly get them to agree to drop the demand on repealing all the three laws.
    • Their problem is essentially about the FPTC Act and its provisions that they see as weakening the APMC mandis.
    • These may be just fears, but they aren’t small.
    • From the government’s standpoint, the elephant in the room would be if the farmers insist on an additional demand: Making MSP a legal right.
    • This  would be still impossible to meet, even if the three farm laws were to be put on hold.

     

  • Stepping out of the shadow of India’s malnutrition

    The article takes stock of the food insecurity and malnutrition in India with the aid of two recently published reports.

    Reports about food security in India

    • Two recent reports — “The State of Food Security and Nutrition in the World 2020” by the Food and Agricultural Organization of the United Nations and the 2020 Hunger report, “Better Nutrition, Better Tomorrow” by the Bread for the World Institute  – document staggering facts about Indian food insecurity and malnutrition.
    • The reports use two globally recognised indicators, Prevalence of Undernourishment (PoU) and the Prevalence of Moderate or Severe Food Insecurity (PMSFI).
    • Using these indicators, the reports indicate India to be one of the most food-insecure countries, with the highest rates of stunting and wasting among other South Asian countries.

    Comparing rate of reduction in malnutrition with neighbouring countries

    • Malnutrition in India has not declined as much as the decline has occurred in terms of poverty.
    • On the contrary, the reduction is found to be much lower than in neighbouring China, Pakistan, Nepal and Bangladesh.
    • The decline in China is way higher than that of India, even though it had started with lower levels of PoU in 2000.

    Food security during pandemic and National Food Security Act 2013

    • Two crucial elements still got left out in the National Food Security Act – 2013.
    • These two elements are the non-inclusion of nutritious food items such as pulses and exclusion of potential beneficiaries.
    • Because of this, the current COVID-19 pandemic would make the situation worse in general, more so for vulnerable groups.
    • Though States have temporarily expanded their coverage in the wake of the crisis, the problem of malnutrition is likely to deepen in the coming years.
    • Hence, a major shift in policy has to encompass the immediate universalisation of the Public Distribution System which should definitely not be temporary in nature.

    Conclusion

    The need of the hour remains the right utilisation and expansion of existing programmes to ensure that we arrest at least some part of this burgeoning malnutrition in the country.

  • Putting India-U.S. trade ties on new footing

    After tumultuous years of Trump administration in trade policies, the article examines the new possibilities under the next U.S. President in trade ties with India.

    Approach towards WTO and India

    • The new U.S. administration will have more constructive stance on multilateral issues in the World Trade Organization (WTO).
    • The Trump administration went out of its way in seriously undermining WTO institutions when the organisation was already in need of reform and new direction.
    • The Biden administration is less likely to engage in unilateral tariff increases and more likely to pursue remedies in the WTO.
    • In case of India, the Trump administration it pursued an aggressive approach to resolve market access concerns through threats to eliminate India’s benefits under the Generalized System of Preferences programme.
    • However, the follow-through was weak.
    • The administration was on the brink of concluding a historic bilateral trade deal, yet it lost focus.

    5 likely developements

    • 1) It is clear that Mr. Biden plans to focus on domestic concerns first.
    • There may be trade aspects to some of these efforts, but they may have limited early relevance for a future U.S.-India trade policy.
    • 2) Two, as it turns to trade policy, the Biden administration is not likely to place India among its top few priorities.
    • Among top priorities will include formulating its approach with China, such as finding alternatives to the Regional Comprehensive Economic Partnership to set new global standards that address China’s practices.
    • That said, India should be among the priorities at the next level down.
    • 3) The trade deal still pending with the Trump administration remains compelling.
    • There could be an early opportunity to conclude these negotiations and for the Biden administration to get credit.
    • A bilateral deal will not lead to serious consideration of FTA negotiations any time soon.
    • But this first trade agreement could pave the way for later additional small agreements.
    • 4) The existing Trade Policy Forum (TPF) met only once over the last four years.
    • It seems likely that the Biden administration will see the TPF’s value as a venue for more regular discussions on a range of trade issues.
    • 5) A reinvigorated TPF will present new opportunities for the two countries to take up a range of cutting-edge trade issues that will be critical in determining whether the U.S. and India can converge more over time or will drift further apart.
    • These include digital trade issues, intellectual property rights and approaches to nurturing innovation, better health sector alignment, and more regular regulatory work on science-based agricultural policies.

    Conclusion

    The future looks bright for U.S.-India trade under a Biden administration, but that does not mean it will be any easier. It will be critical for leadership on both sides to commit to strong efforts to put the trade relationship on a new footing, which will have to involve a ‘can-do’ attitude to solving problems.

    Back2Basics: Trade Policy Forum

    • It was established in 2005.
    • The Forum is part of the overall United States-India Economic Dialogue, replacing the Trade Policy Working Group pillar.
    • It  convenes on a regular basis.
    • The Forum provides an opportunity to work together to expand trade between the two countries.
    • The agenda could cover the following subjects: tariff and non-tariff trade barriers; foreign direct investment; subsidies; customs procedures; standards, testing, labeling and certification intellectual property rights protection; sanitary and phytosanitary measures; government procurement; and services.

  • Mistake in allowing industrial houses to own banks

    The article analyses the risks involved in allowing the corporate houses to own and operate the banks.

    Context

    • An internal working group of the RBI has recently made a recommendation to permit industrial houses to own and control banks.

    Encourage bank but not owned by banks

    • According to the report, the main benefit is that industry-owned banks would increase the supply of credit, which is low and growing slowly.
    • Credit constraints are indeed a real problem, and creating more banks is certainly one way of addressing the issue.
    • But this is an argument for encouraging more banks but it is not an argument for creating banks specifically owned by industry.
    • The other powerful way to promote more good quality credit is to undertake serious reforms of the public sector banks.

    Problems in allowing industrial houses in banking

    • The problem with banks owned by corporate houses is that they tend to engage in connected lending.
    • This can lead to three main adverse outcomes:

    1) Over-financing of risky activities

    • Lending to firms that are part of the corporate group allows them to undertake risky activities that are not easily financeable through regular channels.
    • Precisely because these activities are risky, they often do not work out.
    • And when that happens, it is typically taxpayers who end up footing the bill.
    • In principle, connected lending can be contained by the regulatory authority.
    • However, experiences in other nations show that regulating connected lending is impossible convincing most advanced countries that regulating connected lending is impossible.
    • Indonesia tried to regulate the practice: It banned the practice.
    • The only solution is to ban corporate-owned banks.
    • Regulation and supervision need to be strengthened considerably to deal with the current problems in the banking system before they are burdened with new regulatory tasks.

    2) Lack of exit

    • The economic landscape is littered with failed firms, kept alive on life support, making it impossible for more efficient firms to grow and replace them.
    • While some progress was initially made under the Insolvency and Bankruptcy Code (IBC), this had stalled even before the pandemic, largely because existing promoters and owners mounted a stiff resistance.
    • If industrial houses get direct access to financial resources, their capacity to delay or prevent exit altogether will only increase.

    3) Increasing dominance

    • The Indian economy already suffers from over-concentration.
    • We not only have concentration within industries, but in some cases the dominance of a few industrial houses spans multiple sectors.
    • If large industrial houses get banking licences, they will become even more powerful, not just relative to other firms in one industry, but firms in another industry.

    Impact on regulator and government

    • The power acquired by getting banking licences will not just make them stronger than commercial rivals, but even relative to the regulators and government itself.
    • This will aggravate imbalances, leading to a vicious cycle of dominance breeding more dominance.

    Impact on quality of credit

    • Indian financial sector reforms have aimed at improving not just the quantity, but also the quality of credit.
    • The goal has been to ensure that credit flows to the most economically efficient users, since this is the key to securing rapid growth.
    • If India now starts granting banking licences to powerful, politically connected industrial houses we will effectively be abandoning that long-held objective.

    Impact on economy and democracy

    • Indian capitalism has suffered because of the murky two-way relationship between the state and industrial capital.
    • If the line between industrial and financial capital is erased, this stigma will only become worse.
    • Corporate houses that are already big will be enabled to become even bigger allowing them to dominate the economic and political landscape.
    • A rules-based, well-regulated market economy, as well as democracy itself — will be undermined, perhaps critically.

    Consider the question “What are the challenges and opportunities in allowing the industrial houses to own and operate the banks.”

    Conclusion

    The conclusion is clear. Mixing industry and finance will set us on a road full of dangers — for growth, public finances, and the future of the country itself.

  • [pib] SDG Investor Map for India

    Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

    UNDP and Invest India have launched the SDG Investor Map for India, laying out 18 Investment Opportunities Areas (IOAs) in six critical SDG (Sustainable Development Goals) enabling sectors.

    Try this PYQ:

    Q.The Partnership for Action on Green Economy (PAGE), a UN mechanism to assist countries transition towards greener and more inclusive economies, emerged at:

    (a) The Earth Summit on Sustainable Development 2002, Johannesburg

    (b) The United Nations Conference on Sustainable Development 2012, Rio de Janeiro

    (c) The United Nations Framework Convention on Climate Change 2015, Paris

    (d) The World Sustainable Development Summit 2016, New Delhi

    SDG Investor Map for India

    • SDG Finance Facility platform at UNDP in partnership with Invest India, the investment promotion arm of the Government of India has developed this Map.
    • The map will help public and private sector stake-holders direct capital towards IOAs, and White Spaces (Areas of Potential) that can contribute to the sustainable development needs of the country.
    • The map has identified 18 IOAs and 8 White Spaces across 6 Priority Sectors including Education, Healthcare, Agriculture and Allied Services, Financial Services, Renewable Energy and Alternatives, and Sustainable Environment.

    Utility of this map

    • Investing in the SDGs at this point is crucial to ‘Building Back Better’ and making the economy and our societies more resilient and sustainable.
    • With the COVID-19 pandemic, the financing gap for the SDGs in India has only widened further and decades of development progress is nearly on the verge of reversal.
    • Enhanced productivity, technology adoption and increased inclusion are all critical factors that this map uses to identify the most attractive sectors for investors.

    Back2Basics: What are SDGs?

    • The SDGs or Global Goals are a collection of 17 interlinked goals designed to be a “blueprint to achieve a better and more sustainable future for all”.
    • They were set in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030.
    • They are included in a UN Resolution called the 2030 Agenda or what is known as Agenda 2030.
    • Countries are expected to take ownership and establish a national framework for achieving these Goals.
    • Implementation and success will rely on countries’ own sustainable development policies, plans and programmes.

  • Steps needed to achieve Comparative advantage in Manufacturing

    The article suggests the policy approach to achieve industrial growth while avoiding the isolationist approach in pursuit of AtmaNirbharBharat.

    Issue of policy binary

    • The goals of the Make in India initiative and now the AatmaNirbharBharat Abhiyan are driving a major shift in policy.
    • Import duties are being raised.
    • Production-linked incentives are being offered to firms across a wide canvas of 10 priority sectors.
    • At the same time, there is considerable unease at the rolling back of trade liberalisation.
    • This binary is not very useful.

    Steps needed to gain competitive advantage

    1) Infrastructure

    • It would still take India many years to develop its physical infrastructure to the levels required for international competitiveness.
    • Until then, large industrial parks for textiles, electronics, toys or shipbuilding need to be developed by state agencies with soft financing.
    • Competitive logistics are essential.
    • This was critical for the success of the information technology (IT) industry where world-class infrastructure was created within the software parks.
    • High-speed broadband real-time connectivity to the US market was provided through public investment.
    • This was done well before general telecom modernisation began.

    2) Closing the financing gap

    • Long-term financing for world-class infrastructure is still a gap.
    • The central government can either use one of its existing financial institutions or create a new development financial institution to provide long-term low-interest rate debt.
    • The sovereign needs to provide risk-mitigation through an implicit guarantee. It can afford to do so.

    3)  Prevent real exchange rate appreciation

    • Before considering specific increases in import duties, real exchange appreciation should be undone.
    • This would have the effect of raising tariffs across the board.
    • It is high time the government and the Reserve Bank of India (RBI) agreed on this objective.

    4) Change the regime for SEZ

    • Allow SEZ to sell into the domestic area with import duties at the lowest applicable rate with any trading partner and the same value-addition norms.
    • Tax exemption on profits could be dispensed with while continuing to provide a duty-free import regime.
    • This would create a level-playing field for production vis-à-vis competitive locations overseas.
    • Large zones would have to be developed by the state.
    • The private sector can be partners in the process, but achievement of scale is only possible by the state.
    • Production for the domestic as well as the global market would become easier.

    5) Encourage domestic value addition

    • Domestic value-addition can be incentivised by-
    • 1) Reducing duties to zero for all primary raw materials and inputs.
    • 2) then progressively higher rates for intermediates with the highest rate for the finished product.
    • In short, have just the opposite of the inverted duty structure we have had for computers.
    • This would change investment and production decisions if other costs of production in India have been made competitive.

    6) Commitment of procurement of full production

    • In some industries, commitment of procurement of full production for a few years would suffice to get investment.
    • Bids could be invited for solar panels, or for battery storage for the grid, for annual supply for, say, five years with the condition that full value-addition has to be done in India.
    • Such commitment would provide for amortisation of the capital investment and make it a risk-free investment.
    • If the bid size is large enough, the best global firms would come and invest.
    • If the bids are repeated, prices would come down and a competitive industry structure would be created.

    7) Encourage public investment

    • Public investment in firms should not be ruled out altogether.
    • In some cases, it may be the best way to create competitive capacity.
    • Maruti Suzuki is a good example in India.
    • Volkswagen was set up by a state government in Germany, which is still a substantial shareholder.
    • This is a policy instrument that can be used to create competitive advantage.

    8) Creation of fund

    • There should also be willingness to create a fund that looks at modest returns, but aims at creating national and global champions through start-ups.

    Conclusion

    The foundation of China’s incredible success was laid by Deng Xiaoping with the maxim on economic policy that one should not bother about the colour of the cat as long as it caught mice. India’s policies have tended to be doctrinaire. We need a heavy dose of pragmatism to achieve our full potential.

    Source:-

    https://www.financialexpress.com/opinion/industrial-growth-the-right-policy-mix-for-success/2136735/