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Subject: Economics

  • Export remain key to economic growth

    The article highlights the argument made by Arvind Panagaria about the primacy of export for the progress of the country in his new book India Unlimited: Reclaiming the Lost Glory.

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  • India’s challenges in maintaining its viability against competitive economies

    The article deals with the challenges India faces in attracting the relocating supply chains in the wake of the pandemic.

    Is China losing its appeal

    • Some labour-intensive industries, such as textiles and apparels, have been moving to Bangladesh and Sri Lanka as labour costs in China are increasing.
    • But trends in other industries show that businesses have mostly remained in China.
    • COVID-19 crisis has resulted in firms establishing relatively small-scale operations elsewhere.
    • This is perceived as a buffer against being completely dependent on China, referred to as the ‘China +1’ strategy.

    3 Reason for firms to remain in China

    •  1) Starting an enterprise and maintaining operations in China are much easier than elsewhere.
    • 2) Chinese firms are nimble and fast, which is evident from the quick recovery of Chinese manufacturing after the lockdown.
    • 3) Many global companies have spent decades building supply chains in China, getting out would mean moving the entire ecosystem.

    3 Challenges facing India

    • This has led to intensification of competition among Asian countries to be ‘plus one’  in the emerging manufacturing landscape.
    • India faces three challenges in this race.

    1) Increasing domestic public investment

    • First is the task of increasing domestic public investments, which have implications for both demand and supply sides.
    • In India, even before the pandemic, the growth in domestic investments had been weak,
    • This seems to be the opportune time to bolster public investments as interest rates are low globally and savings are available.
    • Private investments would continue to be depressed, due to the uncertainty on the future economic outlook.

    2) Reforms in trade policy

    • India needs a major overhaul in her trade policy world trade had been rattled by tendencies of rising economic nationalism and unilateralism leading to the return of protectionist policies.
    • A revamped trade policy needs to take into account the possibility of two effects of the RCEP:
    • 1) Walmart effect: It would sustain demand for basic products and help in keeping employee productivity at an optimum level, but may also reduce wages and competition due to sourcing from multiple vendors at competitive rates.
    • 2) Switching effects: It would be an outcome of developed economies scouting for new sources to fulfil import demands, which requires firms to be nimble and competitive.
    • Trade policy has to recognise the pitfalls of the present two-track mode, one for firms operating in the ‘free trade enclaves’ and another for the rest.
    • A major fallout of this ‘policy dualism’ is the dampening of export diversification.
    • The challenge is to make exporting activity more attractive for all firms in the economy.

    3) Increasing women’s participation in labour force

    • While India’s GDP has grown by around 6% to 7% per year women’s labour force participation rate has fallen from 42.7% in 2004–05 to 23.3% in 2017–18.
    • This means that three out of four Indian women are neither working nor seeking paid work.
    • Globally, India ranks among the bottom ten countries in terms of women’s workforce participation.
    • When Bangladesh’s GDP grew at an average rate of 5.5% during 1991 and 2017, women’s participation in the labour force increased from 24% to 36%.
    • India could gain hugely if barriers to women’s participation in the workforce are removed.
    • The manufacturing sector should create labour-intensive jobs that rural and semi-urban women are qualified for.

    Consider the question “Relocation of supply chains offers an opportunity for India. However, it faces several challenges in attracting these relocating supply chains. What are these challenges? Suggest measures to deal with these challenges.”

    Conclusion

    India’s approach to the changed scenario needs to be well-calibrated. The stage is set for a new ‘Asian Drama’. What will be India’s role in it? Well, it will not be on the basis of past accolades, for sure.

  • Economic implications of India opting out of RCEP

    Even as India opted to stay out after walking out of discussions last year, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.

    Must read:

    China-led RCEP takes off without India

    Try answering this also:

    Q.Signing the Regional Comprehensive Economic Partnership (RCEP) agreement would have given more substance to India’s Act East policy. Analyse.

    Why did India walk out?

    • India decided to exit RCEP negotiations over “significant outstanding issues”.
    • Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector.
    • The current structure of RCEP still does not address these issues and concerns.

    How far is China’s presence a factor?

    (1) Escalated tensions

    • Escalated tension with China is considered to be a major reason for India’s decision.
    • Major issues that were unresolved during RCEP negotiations were related to the exposure that India would have to China.

    (2) Surge in imports

    • This included India’s fears that there was “inadequate” protection against surges in imports.
    • It felt there could also be a possible circumvention of rules of origin— the criteria used to determine the national source of a product.
    • In the absence of this, other partner countries could dump their products by routing them through other countries that enjoyed lower tariffs.

    (3) Inability for countermeasures

    • India was unable to ensure countermeasures like an auto-trigger mechanism to raise tariffs on products when their imports crossed a certain threshold.
    • It also wanted RCEP to exclude most-favoured-nation (MFN) obligations from the investment, especially to countries with which it has border disputes.

    (4) No assurance of market access to India

    • RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
    • The agreement would have forced India to extend benefits given to other countries for sensitive sectors like defence to all RCEP members.

    (5) Trade balances paradox

    • India’s stance on the deal also comes as a result of learnings from unfavourable trade balances that it has with several RCEP members, with some of which it even has Free Trade Agreements.
    • India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing FTAs with several RCEP members to increase exports.

    What can the decision cost India?

    • There are concerns that India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc.
    • The move could potentially leave India with less scope to tap the large market that RCEP presents —the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.
    • Given attempts by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific.

    What are India’s options now?

    • India, as an original negotiating participant of RCEP, has the option of joining the agreement without having to wait 18 months as stipulated for new members in the terms of the pact.
    • RCEP signatory states said they plan to commence negotiations with India once it submits a request of its intention to join and it may participate in meetings as an observer prior to its accession.
    • A possible alternative for India is to review its existing bilateral FTAs with some of these RCEP members as well as newer agreements with potential for Indian exports.
    • There is also a growing view that it would serve India’s interest to invest strongly in negotiating bilateral agreements with the US and the EU, both currently a work in progress.

    Conclusion

    • A country can never get into FTAs merely to provide its market to the partner countries.
    • When we accommodate our partner countries, our objective is also to increase the presence of our products in the markets of partners, and India hasn’t been able to achieve the latter objective.

  • PLI Scheme extended to 10 key Sectors

    Manufacturing holds key to the economic prosperity of the country. The article examines the significance of Production Linked Incentive Scheme to boost manufacturing in India.

    Need for increasing manufacturing capabilities

    • The world of manufacturing is now more interconnected than ever before with all major industries—automobile, electronics, pharmaceuticals, textiles, etc—operating as a global value-chain.
    • In order to integrate India as a pivotal part of this modern economy, there is a strong need to step up our manufacturing capabilities in sectors of high growth, including the cutting edge technology sectors.
    • A strong and dynamic manufacturing sector will fuel India’s economic growth by allowing companies producing in India to penetrate effectively into the global supply chains across various sectors.
    • Apart from enhancing exports, it will also reduce our import dependencies and spur domestic consumption.
    • ‘Atmanirbhar Bharat’ has brought manufacturing to the centre stage and emphasised its significance in driving India’s growth.

    Factors favouring India

    • India offers an attractive domestic market, with a large population in the educated and earning segment.
    • It also has a strong institutional framework which allows for a smooth functioning of the industry.
    • A concerted effort towards attracting substantial investments for the creation of large manufacturing facilities, combined efficiency and economies of scale, can help Indian companies globally competitive and integrate with the global markets.

    How Production Linked Scheme (PLI) will help achieve these objectives

    • The Production Linked Incentive (PLI) Scheme is designed to incentivise incremental production for a limited number of eligible anchor entities in each of the selected sectors.
    • These selected entities will invest in technology, plant & machinery, as well as in R&D.
    • The scheme will also have beneficial spillover effects by the creation of a widespread supplier base for the anchor units established under the scheme.
    • Along with the anchor unit, these supplier units will also help to generate massive primary and secondary employment opportunities.
    • The sectors for PLI have been shortlisted on the basis of their potential for economic growth, extent of benefit to the rural economy, revenue and employment generation.
    • A key benefit of the PLI Scheme is that it can be implemented in a very targeted manner to attract investments in areas of strength and to strategically enter certain segments of global value chains (GVCs).
    • This will help bring scale and size in key sectors and create and nurture global champions.
    • The scheme incentivises upcoming technologies that represent the biggest economic opportunities of the 21st century.
    • The scheme intends to generate large-scale employment by incentivising the development of traditional, labour intensive sectors like Food Processing and Textiles.
    • The current basket of Indian manufacturing constitutes of large volume of low-value products.
    • The scheme aims to correct this by encouraging large manufacturers to bring technology and to build capabilities for high-value output thereby providing higher returns to the upstream producers.
    • It will also enable an increase in exports.
    • The scheme envisages globally-integrated manufacturing in sectors such as automobile and auto components, pharmaceuticals, telecommunications, white goods and steel.
    • These are crucial sectors in terms of their strategic importance, contribution to the GDP and employment-generation potential.

    Conclusion

    Given the scale of incentives, which is around Rs 1,96,000 crore, the manufacturing sector of the country is set to transform in the next few years. Its contribution to the GDP will significantly improve, leading to unprecedented investment and job creation.

    Source:-

    https://www.financialexpress.com/opinion/pli-scheme-will-help-india-nurture-manufacturing-giants/2128992/

  • Power sector reforms: UK lessons for India

    Reforms in power sector in the UK were extensive and offers some important lessons for India. This article elaborates on the issue of reforms the challenges in introducing such reforms in India.

    Background of the power sector reforms in UK

    • After living with vertically integrated utilities till 1989, they unbundled.
    • Unbundling created markets both at generation and retail end.
    • Today, they are back to a situation where 70% of the power generated is sold outside the wholesale market.
    • The Electricity Act, 1989, which paved the way for the appointment of a regulator and thereafter, leading to unbundling, both vertical and horizontal.
    • Twelve distribution utilities were set up (called RECs) along with three-generation companies and also a national wires company (called NGC).
    • All of them were privatised barring Nuclear Electricity.
    • Retail competition was introduced in 1990 and was extended to all consumers in 1998.
    • A wholesale market was set up for generators.
    • The next major step was to fragment the generators because the regulator felt that they were colluding.
    • NETA in 2001 was primarily a tie-up between gencos and their consumers with long-term power purchase agreements.
    • The Energy Act, 2012, was enacted, which envisaged further changes.

    Issues with Power sector reform in India

    • The Electricity Act, 2003 is a very cautious and timid exercise compared to what has been done in the UK.
    • Through the Act, we have merely unbundled and ring-fenced our utilities so that there is transparency in the accounts; this itself took us several years.
    • There has been no attempt to create a wholesale market or a full-fledged retail market where the consumer chooses the supplier.
    • Large consumers, having loads in excess of 1 MW, however, have the option of open-access where they can opt to receive supply from some other entity, instead of his incumbent utility.
    • The road to open access though has been bumpy, and discoms have opposed it tooth and nail.
    • Besides what was possible in the UK may not be possible in India.
    • The UK did not have a regime of cross-subsidies where the commercial and industrial sectors subsidise agriculture and low-end domestic consumers and also did not have high commercial loss levels.
    • Moreover, in the UK, all consumers were metered, unlike India.
    • There is yet another factor: ‘Power’ falls in the Concurrent List.
    • The Centre and states rarely see eye-to-eye on several issues concerning the sector, especially on matters relating to distribution.
    • Consequently, any major change does not get accepted.

    Issues in introducing reform in India

    • The CERC floated a discussion paper in December 2018 about the creation of a wholesale market in India.
    • This amounts to retrofitting, and retrofitting in an existing architecture has its limitations.
    • But the issue is whether India should attempt creating a wholesale market or for that matter a full-fledged retail market in India, especially after the experience of the UK.
    • The UK is almost back to the era of vertically integrated utilities, and consumers barely switch their retailer.

    Way forward

    • We need to privatise our distribution sector by creating joint ventures with the government.
    • the government will have to undertake initial hand-holding till such time commercial losses are wiped out.
    • This is the model which was followed in the case of Delhi and has proven successful.
    • Commercial losses have come down from 50% to single-digit figures within a span of 10 to 12 years.
    • Once we reach that stage, we can think of creating a full-fledged retail market where a consumer can choose her supplier.

    Consider the question “Despite several reforms in the power sector, India still lacks full-fledged retail. What are the challenges in the creation of such a market. Suggest the ways to deal with the challenges.”

    Conclusion

    The Indian consumer is only interested in good quality power supply at a reasonable price. We only need to take policy measures so that the incumbent utilities can provide this, since, this will be the least costly path.

    Source:-

    https://www.financialexpress.com/opinion/power-reforms-uk-lessons-for-india/2127560/

  • How to improve the income and Productivity of Indian labour?

     

    Slowdown in demand

    • The bigger medium-term problem facing Indian economy is the slowdown of aggregate demand — private final consumption expenditure (PFCE), investment and exports.
    • The largest component of GDP, PFCE, has declined as a share of GDP 68 per cent in 1990 to 56 per cent of GDP in 2019 .
    • The consumption of the top socio-economic deciles (top 10%) has stagnated.
    • Also the consumption demand of the rest of the demography ( 90%) — mostly in agriculture, small-scale manufacturing and self-employed — is not increasing due to low income growth.

    How to increase income and productivity

    • Atmanirbhar Bharat depends on improving the income and productivity of a majority of the labour force.
    • First, incentivise the farming community to shift from grain-based farming to cash crops, horticulture and livestock products.
    • Second, shift the labour force from agriculture to manufacturing.
    • India can only become self-reliant if it uses its 900 million people in the working-age population with an average age of 27 and appropriates its demographic dividend as China did.
    • That is possible if labour-intensive manufacturing takes place in a big way, creating employment opportunities for labour force with low or little skills, generating income and demand.
    • India is in a unique position at a time when all other manufacturing giants are ageing sequentially — Japan, EU, the US, and even South Korea and China.
    • Most of these countries have moved out of low-end labour-intensive manufacturing, and that space is being taken by countries like Bangladesh, Vietnam, Mexico, etc.
    • India offers the best opportunity in terms of a huge domestic market and factor endowments.

    Way forward

    • We need Indian firms to be part of the global value chain by attracting multinational enterprises and foreign investors in labour-intensive manufacturing, which will facilitate R&D, branding, exports, etc.
    • There is a need to aggressively reduce both tariffs and non-tariff barriers on imports of inputs and intermediate products.
    • Removing these barriers create a competitive manufacturing sector for Make in India, and “Assembly in India”.
    • Apart from trade reforms, further factor market reforms are required, such as rationalising punitive land acquisition clauses and rationalising labour laws, both at the Centre and state level.
    • We also have to go for large-scale vocational training from the secondary-school level, like China and other east and south-east Asian countries.

    Consider the question “Key to faster economic progress of India lies in income growth and productivity of its labour force. Suggest the ways to achieve these.”

    Conclusion

    The COVID-triggered economic crisis should lead us to create a development model that leads to opportunities for the people at the bottom of the pyramid. A competitive and open economy can ensure Atmanirbhar Bharat.

  • Atmanirbhar Bharat Abhiyan 3.0 Package

    Finance Minister has announced a fresh set of relief and stimulus measures for the economy worth ₹1.19 lakh crore, including a scheme to boost re-employment chances of formal sector employees who lost their jobs amidst the COVID-19 pandemic.

    Assist this newscard with:

    [Burning Issues] Atmanirbhar Abhiyan Package

    Atmanirbhar Bharat

    • Atmanirbhar Bharat, which translates to ‘self-reliant India’ or ‘self-sufficient India’, is the vision of our PM of making India a bigger and more important part of the global economy.
    • It doesn’t mean “self-containment”, “isolating away from the world” or being “protectionist”.
    • It calls for pursuing policies that are efficient, competitive and resilient, and being self-sustaining and self-generating.
    • The five pillars of ‘Atmanirbhar Bharat’ are stated as economy, infrastructure, technology-driven systems, vibrant demography and demand.

    Highlights of the Package 3.0

  • What is a Technical Recession?

    Latest RBI bulletin projects contraction for a second consecutive quarter, which means the economy, is in a ‘technical recession’.

    Nowcasts by RBI

    • In its latest monthly bulletin, the Reserve Bank of India has dedicated a chapter on the “State of the economy”.
    • The idea is to provide a monthly snapshot of some of the key indicators of India’s economic health.
    • As part of the exercise, the RBI has started “nowcasting” or “the prediction of the present or the very near future of the state of the economy”.
    • And the very first “nowcast” predicts that India’s economy will contract by 8.6% in the second quarter (July, August, September) of the current financial year.
    • It implies India that has entered a “technical recession” in the first half of 2020-21— for the first time in its history.

    What is a Recessionary Phase?

    • At its simplest, in any economy, a recessionary phase is the counterpart of an expansionary phase.
    • In simpler terms, when the overall output of goods and services — typically measured by the GDP — increases from one quarter (or month) to another, the economy is said to be in an expansionary phase.
    • And when the GDP contracts from one quarter to another, the economy is said to be in a recessionary phase.
    • Together, these two phases create what is called a “business cycle” in any economy. A full business cycle could last anywhere between one year and a decade.

    Now try this PYQ:

    Q.Consider the following actions by the Government:

    1. Cutting the tax rates
    2. Increasing government spending
    3. Abolishing the subsidies

    In the context of economic recession, which of the above actions can be considered a part of the “Fiscal stimulus” package?

    (a) 1 and 2 only

    (b) 2 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

    How is the Recession different?

    • When a recessionary phase sustains for long enough, it is called a recession. That is, when the GDP contracts for a long enough period, the economy is said to be in a recession.
    • There is, however, no universally accepted definition of a recession — as in, for how long should the GDP contract before an economy is said to be in a recession.
    • But most economists agree with the US definition that during a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.

    Then, what is a Technical Recession?

    • While the basic idea behind the term “recession” — significant contraction in economic activity — is clear, from the perspective of empirical data analysis, there are too many unanswered queries.
    • For instance, would quarterly GDP be enough to determine economic activity? Or should one look at unemployment or personal consumption as well?
    • It is entirely possible that GDP starts growing after a while but unemployment levels do not fall adequately.
    • To get around these empirical technicalities, commentators often consider a recession to be in progress when real GDP has declined for at least two consecutive quarters.
    • That is how real quarterly GDP has come to be accepted as a measure of economic activity and a “benchmark” for ascertaining a “technical recession”.

    How long do recessions last?

    • Typically, recessions last for a few quarters. If they continue for years, they are referred to as “depressions”.
    • But depression is quite rare; the last one was during the 1930s in the US.
    • In the current scenario, the key determinant for any economy to come out of recession is to control the spread of Covid-19.

  • `Financial institutions in India need more freedom

    The article deals with the issue of credit and financial institutions in India. It also suggests the five changes needed in the lending financial institutions in India.

    Financial institutions and credit in India

    •  India has labour and land but not enough capital.
    • The case for foreign financial institutions is also simple — their technology, processes, and experience raise everybody’s game.
    • India is open — foreigners own 25 per cent of public equity, 90 per cent of private equity, and Google and Walmart are UPI’s biggest volume contributors.
    • India’s challenge over the last 10 years has been bank credit.
    • Credit-to-GDP ratio is stuck at 50 per cent, banking concentration measured by flow has increased by 70 per cent, and bad loans exceed Rs 10 lakh crore.

    Significance of  lending financial institutions

    • Foreign institutions are unlikely to lend when needed most and lend to small enterprise borrowers.
    • Bank numbers have practically remained unchanged since 1947 despite world-leading net interest margins.
    • Nationalised banks that have an eight-times higher chance of bad loan, would save Rs 35,000 crore annually with industry benchmarked productivity.
    • regulators prioritise domestic stakeholders.
    • The home bias for global bank lending is accelerating.
    • UPI crossing 2 billion monthly transactions demonstrates how mandated interoperability, local innovation, and enlightened regulation help insurgents take on incumbents.

    5 Changes required in lending financial institutions

    • 1) The biggest impact lies in creating a nationalised bank holding company that replaces the Finance Ministry’s Department of Financial Services, has no access to government finances, and is governed by an independent board.
    • 2) We must licence 25 new full banks over 10 years.
    • 3) We must expect and empower the RBI to deal with bank challenges earlier, faster, and invasively, by reimagining post-mortems, granting listed bank capital induction flexibility and making regulation ownership agnostic.
    • 4) We must explore new eyes for banking supervision that include differential deposit insurance pricing.
    • 5) Finally, financial stability and innovation are not contradictory; let’s blunt regulatory barriers between banks, non-banks, and fintech.

    Conclusion

    The opportunities for India arising from the coming Asian century, China’s contradictions and China’s new inward focus strategy come not once in a decade but once in a generation. Let’s empower our financial services entrepreneurs to exploit this opportunity.

  • What is the Viability Gap Funding (VGF) Scheme?

    The government has expanded the provision of financial support by means of viability gap funding for public-private partnerships (PPPs) in infrastructure projects to include critical social sector investments in sectors such as health, education, water and waste treatment.

    Note the minutes of VGF, its meaning, funding mechanism, various sectors included and its nodal ministry etc. UPSC can ask static statements based question.

    What is the move?

    • Now, under this scheme, private sector projects in areas like wastewater treatment, solid waste management, health, water supply and education, could get 30% of the total project cost from the Centre.
    • Separately, pilot projects in health and education, with at least 50% operational cost recovery, can get as much as 40% of the total project cost from the central government.
    • The Centre and States would together bear 80% of the capital cost of the project and 50% of operation and maintenance costs of such projects for the first five years.

    Viability Gap Funding (VGF) Scheme

    • Viability Gap Finance means a grant to support projects that are economically justified but not financially viable.
    • The scheme is designed as a Plan Scheme to be administered by the Ministry of Finance and amount in the budget are made on a year-to-year basis.
    • Such a grant under VGF is provided as a capital subsidy to attract the private sector players to participate in PPP projects that are otherwise financially unviable.
    • Projects may not be commercially viable because of the long gestation period and small revenue flows in future.
    • The VGF scheme was launched in 2004 to support projects that come under Public-Private Partnerships.

    Its’ funding

    • Funds for VGF will be provided from the government’s budgetary allocation. Sometimes it is also provided by the statutory authority who owns the project asset.
    • If the sponsoring Ministry/State Government/ statutory entity aims to provide assistance over and above the stipulated amount under VGF, it will be restricted to a further 20% of the total project cost.

    VGF grants

    • VGF grants will be available only for infrastructure projects where private sector sponsors are selected through a process of competitive bidding.
    • The VGF grant will be disbursed at the construction stage itself but only after the private sector developer makes the equity contribution required for the project.