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Subject: Economics

  • Urban, multi-State cooperative banks to come under RBI supervision

    To ensure that depositors are protected, the Centre has decided to bring all urban and multi-State cooperative banks under the direct supervision of the Reserve Bank of India (RBI).

    Practice question for mains:

    Q. What are Cooperative Banks? How are they regulated? Discuss their role in extending credit facilities in rural India.

    What are Cooperative Banks?

    • A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
    • They are registered under the States Cooperative Societies Act.
    • They are also regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1955.

    What is the present decision?

    • The urban cooperatives and multi-State cooperative banks have been brought under RBI supervision process, which is applicable to scheduled banks.
    • Currently, these banks come under dual regulation of the RBI and the Registrar of Co-operative Societies.

    Why such a move?

    • The move to bring these urban and multi-State coop banks under the supervision of the RBI comes after several instances of fraud and serious financial irregularities.
    • The most recent was the major scam at the Punjab and Maharashtra Co-operative (PMC) Bank last year.
    • The RBI was forced to supersede the PMC Bank’s board and impose strict restrictions.

  • Universalising the PDS

    • The Public distribution system (PDS) is an Indian food Security Systemestablished under the Ministry of Consumer Affairs, Food, and Public Distribution.
    • PDS evolved as a system of management of scarcity through distribution of food grains at affordable prices.
    • PDS is operated under the joint responsibility of the Central and the State Governments.
      • The Central Government, through Food Corporation of India (FCI), has assumed the responsibility for procurement, storage, transportation and bulk allocation of food grains to the State Governments.
      • The operational responsibilities including allocation within the State, identification of eligible families, issue of Ration Cards and supervision of the functioning of Fair Price Shops (FPSs) etc., rest with the State Governments.
    • Under the PDS, presently the commodities namely wheat, rice, sugar and keroseneare being allocated to the States/UTs for distribution. Some States/UTs also distribute additional items of mass consumption through the PDS outlets such as pulses, edible oils, iodized salt, spices, etc.

  • Tale of two economies

    China began heavy investment in infrastructure. This was a key policy decision as it provided employment to millions of people improving their economic status and purchasing power, which was the essential ingredient for industrial progress.ajya Sabha TV programs like ‘The Big Picture’, ‘In Depth’ and ‘India’s World’ are informative programs that are important for UPSC preparation. In this article, you can read about the discussions held in

  • ‘Country of Origin’ on GeM Portal

    The government has made it mandatory for sellers on the Government e-Marketplace (GeM) portal to clarify the country of origin of their goods when registering new products.

    Practice question for mains:

    Q. India’s quest for self-reliance is still a distant dream. Critically comment in light of the popular sentiment against the Chinese imports in India.

    What is Government e-Marketplace?

    • The GeM is a one-stop National Public Procurement Portal to facilitate online procurement of common use Goods & Services required by various Government Departments / Organizations / PSUs.
    • It was launched in 2016 to bring transparency and efficiency in the government buying process.
    • GEM aims to enhance transparency, efficiency and speed in public procurement.
    • It is a completely paperless, cashless and system driven e-marketplace that enables procurement of common use goods and services with minimal human interface.
    • It provides the tools of e-bidding, reverses e-auction and demand aggregation to facilitate the government users to achieve the best value for their money.
    • The purchases through GeM by Government users have been authorized and made mandatory by the Ministry of Finance by adding a new Rule No. 149 in the General Financial Rules, 2017.
    • It has been developed by Directorate General of Supplies and Disposals (Ministry of Commerce and Industry) with technical support of National e-governance Division (MEITy).

    What is the new move?

    • Sellers on the GeM portal will now have to disclose the origins of their products.
    • The portal also has a ‘Make in India’ filter, and government offices will be able to ascertain which products have a higher content of indigenously produced raw materials.

    Why need ‘Country of Origin’ tag?

    • The tag would help bidders choose products that meet the ‘minimum 50 per cent local content’.
    • This is the new procurement norm amended by the government earlier this month categorise suppliers based on the level of local content in their goods.
    • The GeM portal now allows buyers to reserve a bid for Class I local suppliers, or suppliers of those goods with more than 50 per cent local content.
    • For bids below Rs 200 crore, only Class I and Class II (those with more than 20 per cent local content) are eligible.

    Why is all of this happening?

    • The decision comes in the backdrop of the government’s push for self-sufficiency which intends to promote self-reliance by boosting the use of locally produced goods.
    • At $ 70.32 billion in 2018-19 and $ 62.38 billion between April 2019 and February 2020, China accounts for the highest proportion of goods imported into India (around 14 per cent in 2019-2020 so far).
    • It also follows the deadly clashes between Indian and Chinese troops in Galwan Valley which have prompted several government departments to launch an offensive against imports from China.

    How will ordinary consumers in India be impacted?

    • The announcement may over time filter out imported goods from use in government offices and facilities.
    • This might provide an opportunity to Indian manufacturers across industries to push their products in government facilities.
    • A more direct impact may be seen if the proposal to mandate the country of origin for products on private platforms is implemented.

  • Animal Husbandry Infrastructure Development Fund (AHIDF)

    The Cabinet Committee on Economic Affairs has approved setting up of Animal Husbandry Infrastructure Development Fund (AHIDF) worth Rs. 15000 crore.

    Practice question for mains:

    Q. In pursuit of doubling farmer’s income, development of animal husbandry has to play a crucial role. Discuss.

    About AHIDF

    • The fund is part of the Rs 20 lakh crore stimulus packages to help people affected by the lockdown to prevent the spread of COVID-19.
    • The AHIDF would promote infrastructure investments in dairy, meat processing and animal feed plants.
    • Farmer producer organizations (FPOs), MSMEs, Section 8 companies, private companies and individual entrepreneurs would be eligible to benefit from the fund.
    • It will ensure the availability of capital to meet upfront investment required for these projects and also help enhance overall returns/ payback for investors.

    Provisions of the AHIDF

    • The beneficiaries will have to contribute 10 per cent margin towards the proposed infra project and the rest 90 per cent would be a loan component to be made available to them by scheduled banks.
    • The balance 90% would be the loan component to be made available by scheduled banks.
    • Government of India will provide 3% interest subvention to eligible beneficiaries.
    • There will be 2 years moratorium period for the principal loan amount and 6 years repayment period thereafter.

  • Different response to a different economic crisis

    The economic crisis in the wake of the pandemic is different from past crises. In the past, the financial crisis led to economic shock. This time its economic shock that that is causing the financial crisis. This also means that our response to this crisis should also be different. This article elaborates on the fiscal and monetary policy response to the crisis.

    Pattern followed by economic crises

    • There is a well-established pattern to economic crises in emerging markets (EMs).
    • First, because of loose fiscal and monetary policies, the economy goes into a demand overdrive.
    • Demand overdrive spikes inflation and widens the current account deficit (CAD).
    • Then, CAD is financed by foreign capital chasing the promise of even higher growth and asset prices.
    • At some point, the overdrive is perceived as unsustainable, which triggers a reassessment of growth, inflation, and financial stability.
    • Domestic and foreign investors stop new investments, large capital outflows ensue.
    • Banks stop giving new loans and rolling over old ones on fears of worsening credit quality.
    • Growth collapses and a full-blown economic crisis follows.
    • The 1995 Mexican, the 1997 Asian, the 1999 Russian, the 2008 sub-prime, and the 2013 Taper Tantrum are all examples of such crises.
    • In the case of India, the 1981-82, the 1991-92, and the 2013 crises all had the same characteristics.

    Pattern in response to such crises

    • The first response is to restore confidence in policymaking.
    • It means large increases in interest rates, massive withdrawal of liquidity, and deep cuts in fiscal deficit.
    • Just before the crisis assets [which reflects in bank’s balance sheets] are severely overvalued on inflated views of growth, profits, and income prior to the crisis.
    • So, the second step is to restart the economy by restructuring the tattered balance sheets of banks, firms, and households.
    • This means debt restructuring and bank recapitalisation aided by privatisation, closures, and mergers.
    • These measures often need to be bolstered by structural reforms.
    • The economic crisis makes it easier to forge the political consensus for the reforms.

    But the economic crisis caused by pandemic is different

    • Why is it different?
    • Because, before the COVID-19 outbreak far from overheating, Indian economy was slowing down.
    • The financial system had virtually shut off the flow of credit as it wrestled with its bad debt burden.
    • This is not an instance of a financial crisis turning into an economic shock weighed down by damaged balance sheets.
    • Instead, this is an instance of an economic shock that could turn into a financial crisis if the damaged balance sheets are not repaired.

    So, should the response also be different?

    • Yes.
    • Do the opposite of what is done in a typical EM crisis: Cut interest rates, increase liquidity support, and allow the fiscal deficit to widen.
    • The RBI has done the first two generously, although with the coming disinflation, it needs to cut interest rates much more.
    • But, what about the fiscal policy of the government?

    Fiscal policy of the government: Doing not enough

    • The government’s approach to fiscal policy, however, seems ambivalent.
    • The overall fiscal support from the government will be limited to 2 per cent of the GDP.
    • So all the revenue shortfall and the pandemic-related budgetary support must add up to 2 per cent of the GDP.
    • If the revenue shortfall is more than 2 per cent of GDP, then total spending will need to be cut.

    Why fiscal policy matters for balance sheets

    • In this crisis, the causality of damage to balance sheets runs opposite.
    • Balance sheets will be damaged not because of prior excesses but because of the collapse in incomes during the lockdown.
    • Consequently, debt doesn’t need to be restructured to resume the flow of credit and get the recovery going.
    • Instead, what is needed is adequate income support to households and firms.
    • Such support will provide the needed time and space for the recovery to take hold.
    • Which, in turn, would repair much of the damage to the balance sheets.
    • But the fiscal response so far has been inexplicably restrained.

    What should the government focus on

    •  What matters today is the assurance of medium-term growth and not a few higher or lower points in this year’s fiscal deficit.
    • To do that, the government needs to allow the deficit to rise.
    • This extra deficit should help accommodate the decline in revenue and also provide adequate income support.
    • Some have argued that the government, instead, needs to offset the decline on private demand by increasing public spending.
    • This is an odd argument.
    • It would mean letting demand collapse and then compensating it with higher government spending.
    • Instead, using the same resources to ensure that private demand did not decline was the more natural and efficient response.

    What should be the RBI’s response

    • The RBI, too, has a very large role to play.
    • As elsewhere, it is now the only entity that has a strong enough balance sheet to provide any meaningful support.
    • The RBI is keeping markets flush with liquidity and low interest rates.
    • However, the RBI also needs to undertake extensive quantitative easing to keep bond yields from spiking given the likely large increase in deficit.
    • Because of the depth of the growth shock, bad debt will rise.
    • The natural instinct of banks is to cut back credit because of worsening credit quality.
    • To prevent this from happening, the RBI will need to extend substantial regulatory forbearance on accounting norms, provisioning rules, and, if needed, even capital requirements.
    • In addition, like the US Fed and the ECB, the RBI might also need to provide liquidity directly to corporates.
    • As of now, banks are providing liquidity to corporates supported by government guarantees as proposed now.

    Consider the question “The economic crisis brought by the corona crisis is not like the ones we faced before. This crisis is about an economic shock turning into the financial crisis. So, what should be fiscal and monetary policy interventions to tackle the crisis?”

    Conclusion

    This is not a crisis like the ones before. This time around, we need to weigh not the cost of taking these measures but the cost of not taking them.

  • Why trade openness and national security go together

    Protectionism involves the use of one or more restrictions on free trade between countries. What are the main reasons why this should be avoided?

    The main arguments against protectionism are outlined below:

    Market Distortion and loss of Economic Efficiency

    Protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth:

    Higher Prices for Consumers

    Import tariffs in particular push up prices for consumers and insulate inefficient domestic sectors from genuine competition. They penalise foreign producers and encourage an inefficient allocation of resources both domestically and globally.

    Reduction in Market Access for Producers

    Export subsidies depress world prices and damage output, profits, investment and jobs in many lower and middle-income developing countries that rely heavily on exporting primary and manufactured goods for their growth.

    Extra Costs for Exporters

    For goods that are produced globally, high tariffs and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather than protecting them. For example, a tariff on imported steel can lead to higher costs and lower profits for car manufacturers and the construction industry.

    Adverse Effects on Poverty

    Higher prices from tariffs tend to hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that lower income families spend a higher share of their income. Tariffs can therefore lead to a rise in relative poverty.

    Retaliation & Trade Wars

    There is the danger that one country imposing import controls will lead to retaliatory action by another.

  • Initial Public Offer (IPO) of LIC

    The government has started the process to launch the initial public offer (IPO) of Life Insurance Corporation (LIC) within this year.

    Read the complete thread here at:

    [Burning Issue] Divestment of LIC

    Try this question from CSP 2019:

    Q.In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?

    1. Ad Hoc Committees set up by the Parliament
    2. Parliamentary Department Related Standing Committees
    3. Finance Commission
    4. Financial Sector Legislative Reforms Commission
    5. NITI Aayog

    Select the correct answer using the code given below:

    (a) 1 and 2

    (b) 1, 3 and 4

    (c) 3, 4 and 5

    (d) 2 and 5

    About LIC

    • LIC is an state-owned insurance group and investment corporation owned by the Government of India.
    • It was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India.
    • Over 245 insurance companies and provident societies were merged to create the state-owned LIC.

    Why LIC IPO?

    • LIC is the largest investor in government securities and stock markets every year.
    • On an average, LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
    • LIC also has huge investments in debentures and bonds besides providing funding for many infrastructure projects according to its Annual Report for 2017-18.

    Biggest IPO in Indian markets

    • The finance ministry has invited bids from transaction advisors, including consulting firms, investment bankers, and financial institutions, for assisting the government in the preparatory processes leading to the IPO.
    • The IPO is expected to be the biggest in the Indian capital markets given the size and scale of LIC, the country’s oldest and largest life insurer.

    What is the size and position of LIC in the insurance market?

    • Even if the government decides to sell 5-10 per cent of its equity in LIC through an IPO, the share sale of LIC, which was set up in 1956, is expected to be the largest.
    • The insurer’s total assets had touched an all-time high of Rs 31.11 lakh crore in 2018-19, an increase of 9.4 per cent.
    • The Corporation realized a profit of Rs 23,621 crore from its equity investment during 2018-19, down 7.89 per cent from Rs 25,646 crore in the previous year.
    • LIC would have at least one transaction of IPO of a size of at least Rs 5,000 crore, or a capital market transaction of at least Rs 15,000 crore.

    How does LIC fit into the overall disinvestment roadmap?

    • In the Budget 2020-21, the finance ministry had announced plans for IPO of LIC and a proposal to sell the government’s equity in the stressed IDBI Bank.
    • The government expects to raise Rs 90,000 crore through stake sale in LIC and IDBI Bank, and another Rs 1.2 lakh crore through other disinvestments.
    • LIC is also a majority shareholder in IDBI Bank.
    • The government had earlier listed the shares of General Insurance Corporation and New India Assurance through IPOs three years ago.

    What benefits can be expected through the IPO?

    • An IPO will certainly bring in transparency into affairs of LIC since it will be required to inform financial numbers and other market-related developments on time to the stock exchanges.
    • Investors can benefit from picking up equity in the insurer, which has been making underwriting profit as well as profits on its investments.
    • LIC’s investment in various equity and bond instruments will come under greater scrutiny after its lists on the exchanges.

    Back2Basics: IPO

    • IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
    • Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc.
    • A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares.
    • Through the IPO, the company gets its name listed on the stock exchange.

    Also read:

    Disinvestment Policy in India.

  • Agri reforms and way forward

    At a time when the economy is going through the crisis, anything that could provide revenue to the government will be a real godsend. This article suggests two such areas to tap into. It also examines the effects of recently issued 3 ordinances related to agriculture.

    Rs. 1,50,000 crore: Value of excessive grain stock

    • There is one area which the government can tap to raise more than Rs 1,00,000 crore.
    • As on June 1, FCI had unprecedented grain stocks of 97 million metric tonnes (MMT) in the Central Pool (see Figure).
    • Even on July 1, when the procurement of rabi ends, FCI is likely to have grain stocks of about 91-92 MMT.
    • This will be against a buffer stock norm of 41.12 MMT that are required for the Public Distribution system (PDS), and some strategic reserves.
    • So, compared to this norm, on July 1, FCI will have “excess stocks” of at least 50 MMT.
    • Even if one takes a conservative and lower ballpark figure of Rs 30,000/tonne  as the combined economic cost of rice and wheat, the value of this “excessive stock”, beyond the buffer norm, is Rs 1,50,000 crore.
    • This is unproductive capital locked-up in the Central pool of FCI.
    • Unlock this by liquidating “excess stocks” through open market operations.
    • It will not recover its full economic cost, as they are much higher than the prevailing market prices, but by not liquidating it.
    • But FCI will keep incurring unnecessary interest costs of about Rs 8,000-10,000 crore per annum.
    • This is simply not a good food policy.

    How will amendment to ECA 1955 will help

    •  Amendment of the Essential Commodities Act, via the ordinance route, can instil confidence in the private sector for building large scale storage.
    • Now, stocking limits will not be imposed on the private sector, except under exceptional circumstances.
    • The government, however, delete the clause of “extraordinary price rise”.
    • Removing it will lead to private sector building large and modern storage facilities (silos).
    • It will propel investments in building more efficient food supply lines.
    • The only condition could be to register large storage facilities under the Warehousing Development and Regulatory Authority (WDRA) to know how much stock is there with the private sector, and where.

    How will amendment to APMC Act will help

    • The ordinance on APMC creates multiple channels for farmers to sell their produce outside the APMC mandi system.
    • It also helps towards an unrestricted all India market for agri-produce.
    • Of course, it will be resisted by many states that are taking undue advantage of the APMC mandis’ virtual monopoly power.
    • But if the central ordinance is implemented in its true spirit, it will be a game-changer.

    How will the ordinance on contract farming will help

    • It aims to encourage contract farming.
    • The basic idea behind this is that farmers’ sowing decisions should be made in view of the expected prices of those crops at the time of harvest.
    • It is forward looking and more aligned to the likely demand and supply situation.
    • The current practice, where farmers’ sowing decisions are more influenced by last year’s price, often leads to the problem of boom and bust.
    • Although honouring an assured price remains a challenge when actual market conditions differ widely at the time of the harvest.

    Relook at food subsidy is needed

    •  In the Union budget of 2020-21, a sum of Rs 1,15,570 crore has been provisioned for food subsidy.
    • This number is highly misleading as FCI has been asked to borrow from the National Small Savings Fund (NSSF).
    • As on March 31, 2020, borrowings from the NSSF were Rs 2,54,600 crore, on which FCI pays an interest rate of 8.4 to 8.8 per cent per annum.
    • So, the real food subsidy bill for 2020-21 amounts to Rs 3,70,170 crore.
    • The Economic Survey has suggested- 1) reducing the coverage under PDS; 2) linking issue price to at least half of the procurement price; 3) move gradually towards cash transfers.
    • These steps will save a minimum of Rs 50,000 crore annually.

    Consider the question “There was a mention of reforms related to agri-sector in the recently announced stimulus package. Examine the issues with segments of agri-sector which necessitated these reforms.”

    Conclusion

    Liquidating the excess grain stock and rationalising the PDS could provide the government with much needed resources at a time when it needs it the most. Also, reforms in the related to agriculture could remove the stumbling blocks in the way towards the prosperity of farmers.

  • Why bad loans won’t start piling right away

    Steps taken by the government have averted the piling up of the bad loans, though for the time being only. When the moratorium period ends, we will see the spike in the bad loans. This article explains the same.

    Why bad loans are expected to increase

    •  Consumer spending has collapsed over the last few months due to the pandemic.
    • Though lately there have been some signs of revival, it will take a while before spending comes anywhere near the pre-covid level.
    • This will mean that many businesses will start running out of cash pretty soon if they have not already.
    • A company that starts running out of cash will not be in a position to repay its loans and, thus, will ultimately default.

    How individuals will be affected

    • A recent estimate by rating agency Crisil suggests that about 70% of 40,000 companies have cash to cover employee costs for only two quarters.
    • This tells us that companies will fire employees, before, during, or even after defaulting on a loan.
    • If companies do not resort to employee retrenchment, they will cut salaries and many already have.
    • Past payments and future business with vendors and suppliers will be negatively impacted.
    • In this situation, the problem at the company level will impact individuals too.
    • When individuals start having a cash flow problem, it will lead to defaults on retail loans

    But why we are not seeing the defaults happening already?

    • A moratorium is a deferment of repayment to provide temporary relief to borrowers. The loan ultimately needs to be repaid.
    • The Reserve Bank of India has let banks and non-banking financial companies (NBFCs) offer a moratorium on loans.
    • Hence, until the end of August, borrowers have an option to not repay the loans, without it being considered as a default.
    • Hence, any loan defaults will start only after August but they won’t be immediately categorized as a non-performing asset or a bad loan.
    • Bad loans are largely those loans that have not been repaid for 90 days or more.
    •  Hence, defaulted loans will be categorized as bad loans only post-November.
    • This will be revealed when banks publish their results for October to December 2020, in January-February 2021.

    Conclusion

    Even if 20% of loans that end up under a moratorium are defaulted on, the quantum of bad loans, especially those of public sector banks, will go up big time.