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Subject: Economics

  • Explained: Gross Value Added (GVA) Method

    The National Statistical Office (NSO) recently released its provisional estimates of national income for the financial year 2019-20. The release also detailed the estimates of the Gross Value Added (GVA).

    Try this question from CSP 2011:

    Q. In the context of Indian economy, consider the following statements

    1. The growth rate of GDP has steadily increased in the last five years.

    2. The growth rate in per capita income has steadily increased in the last five years.

    Which of the statements given above is/are correct?

    (a.) 1 only

    (b.) 2 only

    (c.) Both 1 and 2

    (d.) Neither 1 nor 2

    The GVA method

    • In 2015, in the wake of a comprehensive review of its approach to GDP measurement, India opted to make major changes to its compilation of national accounts.
    • It aims to bring the whole process into conformity with the UN System of National Accounts (SNA) of 2008.

    What is GVA?

    • As per the SNA, GVA is defined as the value of output minus the value of intermediate consumption.
    • GVA is a measure of the contribution to GDP made by an individual producer, industry or sector.
    • At its simplest, it gives the rupee value of goods and services produced in the economy after deducting the cost of inputs and raw materials used.
    • It can be described as the main entry on the income side of the nation’s accounting balance sheet, and from economics, perspective represents the supply side.

    How it has changed income calculation?

    • While India had been measuring GVA earlier, it had done so using ‘factor cost’.
    • GDP at ‘factor cost’ was the main parameter for measuring the country’s overall economic output until the new methodology was adopted.
    • GVA at basic prices became the primary measure of output across the economy’s various sectors and when added to net taxes on products amounts to the GDP.
    • In the new series, the base year was shifted to 2011-12 from the earlier 2004-05.

    GVA estimates by NSO

    • As part of the data on GVA, the NSO provides both quarterly and annual estimates of output — measured by the gross value added — by economic activity.
    • The sectoral classification provides data on eight broad categories that span the gamut of goods produced and services provided in the economy.
    • These are: 1) Agriculture, Forestry and Fishing; 2) Mining and Quarrying; 3) Manufacturing; 4) Electricity, Gas, Water Supply and other Utility Services; 5) Construction; 6) Trade, Hotels, Transport, Communication and Services related to Broadcasting; 7) Financial, Real Estate and Professional Services; 8) Public Administration, Defence and other Services.

    How relevant is the GVA data given that headline growth always refers to GDP?

    • The GVA data is crucial to understand how the various sectors of the real economy are performing.
    • The output or domestic product is essentially a measure of GVA combined with net taxes.
    • However, GDP can be and is also computed as the sum total of the various expenditures incurred in the economy.
    • It includes private consumption spending, government consumption spending and gross fixed capital formation or investment spending; these reflect essentially on the demand conditions in the economy.

    Significance of GVA

    • From a policymaker’s perspective, it is vital to have the GVA data to be able to make policy interventions, where needed.
    • Also, from global data standards and uniformity perspective, GVA is an integral and necessary parameter in measuring a nation’s economic performance.

    Issues with GVA

    • As with all economic statistics, the accuracy of GVA as a measure of overall national output is heavily dependent on the sourcing of data and the fidelity of the various data sources.
    • To that extent, GVA is as susceptible to vulnerabilities from the use of inappropriate or flawed methodologies as any other measure.
    • Economists argue that India’s switch of its base year to 2011-12 had led to a significant overestimation of growth.
    • They argued that the value-based approach instead of the earlier volume-based tack in GVA estimation had affected the measurement of the formal manufacturing sector and thus distorted the outcome.

  • Getting closer to doubling income of Farmers

    agriculture plays an important role in decreasing rural poverty in developing countries. Improved irrigation methods, seeds, and fertilizers have led to increased agricultural production in rural areas. The ECA is an act which was established to ensure the delivery of certain commodities or products, the supply of which if obstructed owing to hoarding or black-marketing would affect the normal life of the people. The ECA was enacted in 1955. This includes foodstuff, drugs, fuel (petroleum products) etc

  • [Burning Issue] COVID-19 and its Impact on Agriculture

    Farmers in India constantly battle against skewed monsoon and erratic rainfall, extreme natural events, interrupted supply chains and rising inflation. Like this was not enough. These troubles now are supplemented this year by the COVID induced lockdowns and the heralding Locusts Attack!

    God bless our Annadatas!

    Context

    The start of the coronavirus pandemic has coincided with the peak harvesting season. As the markets are locked down, there is a threat to the crop in over 100 lakh hectares in the country.

    Even among the different segments, the impact varies widely among different regions and among producers and agricultural wage labourers. This impact will reverberate across the larger economy and will linger longer than a few months.

    Issues surfaced after COVID pandemic

    In spite of all the measures and in view of continuing restrictions on movements of people and vehicular traffic, concerns have been raised regarding negative implications of COVID19 pandemic on the farm economy. The immediate problems in agriculture at the moment are primarily categorized under two heads:

    A. Impact on Global Agriculture

     

    1) Crop production and availability of seeds

    • For crop production, the largest part of the seeding process will be almost unaffected between now and the summer.
    • So there would be no impact as such on seeds availability for now.
    • But if the same scenario continues till year end, then surely seed availability can be an issue.

    2) Fertilizers shortage

    • Due to global trade disturbance, farmers are facing the shortage of agricultural inputs like fertilizer and pesticides.
    • In a shorter span, there is little shortage to be expected.
    • In the longer term, the delivery of fertilizer via international markets may become a problem since some of the production plants in China have been shut down.

    3) On food production and distribution

    • Most of the countries have taken measures such as home confinement, travel bans and business closure to control the rate of infection.
    • Agriculture produce is mostly perishable in nature, so farmers are compelled to hold their unsold produce for a longer period of time.
    • This has led to a reduction in food quality as well as an increase in the cost of production.

    4) On livestock

    • Different agricultural sector such as  livestock and fishery have been hit hard by the pandemic.
    • In India, COVID-19 has caused a higher impact on livestock farming due to limited access to animal feed and a shortage of labour.
    • For example, the travel ban has affected the delivery of breeding stock of poultry.

    5) On workers

    • Agricultural workers in low and middle-income countries lack proper health services and social protection and due to little saving or no saving.
    • Many informal workers in agriculture are obligate to work for their sustenance despite the self-isolation protocol during COVID-19 pandemic.

    6) Impact on food demand and food security

    • The demand for food has affected due to reduction in income and purchasing capacity.
    • Panicked Consumers are stock piling the foods which in turn has affected the food availability and price.
    • Due to the decline in international trade, disturbance in food supply chain and food production, food insecurity may arise.

    B. Impact on India

    Agriculture contributes about 17 per cent to Indian GDP. Agriculture, with its allied sectors, is the largest source of livelihoods in India. 70 percent of rural households still depend primarily on agriculture for their livelihood.

    1) Peak harvest with no procurement

    • This is the peak of Rabi season in India and crops like wheat, gram, lentil, mustard, etc. (including paddy in irrigated tracts) were at a harvestable stage or almost reaching maturity.
    • This is also the time when the farm harvests reach the mandis for assured procurement operations by designated government agencies.

    2) Labour unavailability due to reverse migration

    • The non-availability of labour has hurt operations in many parts.
    • Consequently, the shortage of migrant labour has resulted in a sharp increase in daily wages for harvesting crops.
    • Some parts of agriculture that have the luxury of deploying technology for harvestings, like Paddy and Wheat, are relatively more insulated since they often do not have to depend on large numbers of manual labour.

    3) Fall in prices

    • Agricultural prices have collapsed due to lack of market access including the stoppage of transportation and closure of borders.
    • The rise in labour costs and lack of access means that farmers are staring at huge losses and hence allowing crops to rot in the fields, a better ‘stop-loss’ mechanism.

    4) Scarcity of public goods

    • Making the food grains, fruits and vegetables and other essential items available to consumers, both in rural and urban areas, is the most critical challenge.
    • Transportation of public distribution system (PDS) items to last-mile delivery agents, by both rail and road, has been severely impacted in the beginning.

    5) Restrictions on Sale

    • There were self-imposed restrictions on the inter- and intra-State movements of farmers/labourers, as well as harvesting and related farm machines.

    6) Disruptions in supply-chain

    • The absence of transport facilities clubbed with vigilant blocking roads has a limiting effect on the movement of migratory harvest labour and agri-machinery.
    • Also, trucks and tractors are not inclusive of ‘farm machinery’ by definition..

    7) Lockdown induced debt and Cash Flow Constraints

    • The most important issue that farmers have to surmount is the problem of repaying their crop loans, gold loans and other informal debts.
    • Crop loans are repaid between April and May and a fresh loan is granted at the onset of a new season.
    • Any failure to do so will mean that they will be forced to borrow money from the informal sector at high rates of interest for the new season.

     

    Impact on Food Security

    • Border closures, quarantines, and market, supply chain and trade disruptions are restricting people’s access to sufficient/diverse and nutritious sources of food, especially in countries hit hard by the virus or already affected by high levels of food insecurity.
    • In slowdown times, as demand for food will decrease over the next months, prices should go down in 2020, and this will have a negative impact on farmers and the agricultural sector.
    • As of now, disruptions have been minimal as food supply has been adequate and markets have been stable so far to meet the ongoing demands (though skewed)..

    Indian response to Covid: Agriculture version

    The Center and State Governments have worked in harmony to redress the grievances of farmers. Both have introduced a series of measures every day such as subsidies, including crop insurance to farmers, free flow of agricultural credit, unemployment allowance to rural landless/migrant workers under MANREGA, etc.

    The govt. is using every arrow in its quiver to ensure the health of farmers by continuously sensitizing the farmers about working in fields with covered faces while maintaining social distancing.

    In order to reinforce a zero hurdle harvest season, the govt has exempted the movement of farm machinery from lockdown.

    1) Reforms in e-NAM

    • The new features of National Agriculture Market platform were introduced as a welcoming move to decongest mandis.
    • They aim to strengthen agriculture marketing by reducing the need for farmers to physically access the wholesale mandis for selling their harvested produce.

    2) Technological support

    • Kisan Sabha App developed by CSIR to connect farmers to supply chain and freight transportation management system was recently launched to support farmers during the lockdown.
    • The app aims to provide the most economical and timely logistics support to the farmers and increase their profit margins by minimizing the interference of middlemen and directly connecting with the institutional buyers.
    • Kisan Rath app was also launched to facilitate farmers & traders in searching for transport vehicles for movement of Agriculture & Horticulture produce.

    3) Boost to Contract farming

    • Various states have promoted innovative model allowing investors and farmers to enter into an agreement for contract farming in view of the continuing uncertainties due to the pandemic.
    • For example, the Consumer-Farmer Compact in Telangana has been ensuring food availability and access in COVID-19 times.
    • In this system, the consumers support farmers with their agricultural needs; in return, farmers ensure consumers are able to access food in a hassle-free manner.

    4) Allocations for direct transfers

    • Increasing the allocations for DBT to farmers through PM KISAN and including everyone who is actively undertaken during the lockdown.
    • This has helped most farming families to be partially compensated for the losses seen in months of March and April.
    • It has provided them with some cushion against the deflationary effect seen on farm-prices due to the prolonged lockdown.

    Future scope of reforms

    1) Focussing on Alternative Market Channels

    • The alternative market channel works on the principles of decentralisation and direct-to-home delivery.
    • The idea is to create smaller, less congested markets in urban areas with the participation of farmers’ groups and Farmer Producer Companies (FPCs) so that farmers have direct access to consumers.
    • It may provide a valuable option against the lockdown when efforts to avoid crowding in the wholesale markets are likely to continue.

    2) Reforming APMC

    • With these reforms, the government has also set in motion plans to dismantle the decades-old monopolies of state-run APMCs, that were often blamed for unfair trading, and had become a barrier for farmers to get a fair price on their produce.
    • There is an urgent need for abolishing or reframing the APMC Act and encourage direct buying of agri-produce from farmers/farmer producer organisations (FPOs).
    • The companies, processors, organised retailers, exporters, consumer groups, that buy directly from FPOs need not pay any market fee as they do not avail the facilities of APMC yards.

    3) Designating warehouses as markets

    • The warehouse receipt system can be scaled up.
    • The private sector should be encouraged to open mandis with modern infrastructure, capping commissions.

    4) Logistics transformation

    • To sustain the demand for agricultural commodities, investments in key logistics must be enhanced.
    • Moreover, e-commerce and delivery companies and start-ups need to be encouraged with suitable policies and incentives.
    • The small and medium enterprises, running with raw materials from the agriculture and allied sector or otherwise, also need special attention so that the rural economy doesn’t collapse.

    5) Institutionalizing farm labour

    • To obviate the immediate concerns of the scarcity of farm labour, policies must facilitate easy availability of machinery through state entities, Farmer Producer Organizations (FPOs) or custom hiring centres (CHCs) with suitable incentives.
    • It is also suggested to explore leveraging NREGS funds to pay part of the farm labour (with farmers paying the balance wage amount) to lessen the monetary burden on the farmer while ensuring wage employment to the landless labourers and workers.

    6) Expanding institutional lending

    • As the Kharif (rainy/wet) season is fast approaching, institutional lending of crop loans should be expanded and facilitated for smooth (and sufficient) flow of credit to borrowing farmers.
    • Agri-inputs – seeds, fertilizers, agro-chemicals, etc. – have to be pre-positioned for easy availability. The private sector must play a significant role in necessary policy support.

    Future of Agriculture in India

    Indian agriculture is in a way, a victim of its own past success – especially the green revolution…..

    1) Farming as a Viable Livelihood

    • Agriculture is dying, not as in the production of food but as a desirable profession.
    • One bad yield, whether due to errant rains, pests, etc., and most farmers have no buffer available.
    • The last point worth considering is that food and agriculture are not the same. Expenditures on food span the value-add, including processing, preparation, service in restaurants, etc.
    • Farmers in India merely get paid for their product and not for the food we eat.

    2) Rainbow revolution holds the key

    • The first major barrier to overcome is declining productivity.
    • Data reveals that India’s average yield of cereal per hectare is far less than that of many countries. Further, there is a huge inter-regional variation.
    • In order to cross the declining productivity barrier, there is a need to herald a rainbow revolution by making a shift from the wheat-rice cycle to other cereals and pulses.
    • However, this is not sufficient and has to be complemented with a huge investment in public infrastructure.

    3) Per drop more crop

    • The second major barrier is the scarcity of two major resources for agriculture – cultivable land and water.
    • While the cultivable land per person is declining because of the fragmentation of farms due to the rising population.
    • India also has much less per capita water available  as compared to other leading agrarian countries.
    • Given this scenario, it is time to make a shift to micro-irrigation so that the efficient and judicious use of scarce water resources can be made.

    4) R&D is the future

    • One of the major barriers to boosting farm productivity is the lack of new technologies and major breakthroughs post the green revolution.
    • While the National Agriculture Research System played a major role in the green revolution, in recent years there hasn’t been any major breakthrough in research.
    • One of the main reasons for this is the lack of financial resources.
    • There has also not been any major contribution from the private sector towards research and development.
    • The government should thus woo private players by giving them incentives to play a major role in agricultural research and development.

    Way Forward

    • With a burgeoning population, there is a corresponding rise in food demand in India.
    • A post-COVID situation offers that unique opportunity to repurpose the existing food and agriculture policies for a healthier population.
    • India, being trade-surplus on commodities like rice, meat, milk products, tea, honey, horticultural products, etc. may seize the opportunities by exporting such products with a stable agri-exports policy.
    • Development of export-supportive infrastructure and logistics would need investments and support of the private sector that will be in the long term interests of farmers in boosting their income.
    • This is indeed good news in the COVID scenario, assuming agriculture can practice largely unscathed.
    • Designing agricultural policies, post-COVID scenario, must include these imperatives for a food systems transformation in India.
    • Immediately, the govt. should focus on the coming Kharif cropping season, especially ensuring timely availability of seeds, fertilisers, pesticides, credit and other inputs.

    Conclusion

    Structural reforms such as land leasing, contract farming and private agricultural markets, etc. have long been advocated to bring enhanced investments into the agriculture sector and to push its growth. However, there has not been the uniform implementation of these legislations by State Governments and so the full potential of the sector is unrealized. These reforms need significant political will.

    The end of the lockdown will not end the problems. On the contrary, they are likely to be compounded at the onset of the new agricultural sowing season. There is a greater need for government support in the form of support for other agricultural inputs. Lack of any relief will only make the agricultural crisis worse. The need of the hour is to maximise possibilities of agriculture, which has demonstrated its utility and resilience in trying times.

     

     

     

    References

    https://www.civilsdaily.com/news/alleviating-the-farmers-pain/

    https://www.icrisat.org/containing-covid19-impacts-on-indian-agriculture/

    https://www.deccanherald.com/opinion/covid-19-impact-on-agriculture-varied-and-devastating-828390.html

    https://indianexpress.com/article/opinion/editorials/india-agriculture-sector-crisis-corona-impact-on-farmers-niti-aayog-6392233/

    https://www.civilsdaily.com/story/agricultural-marketing-reforms/

    https://thewire.in/agriculture/what-is-the-future-of-agriculture-in-india

    http://www.fao.org/2019-ncov/q-and-a/impact-on-food-and-agriculture/en/

  • Power Subsidies in Agriculture and Related issues

    tSometimes solutions that are meant to solve one problem results in the creation of another problem. Nowhere is this more evident than in the subsidies given on urea and electricity to the farmers. This article deals with the perils of the subsidy on electricity bills of farmers. However, there is an equally substantive argument in favour of the subsidies as well. So, what is the way out? Read to know…

    Replacing free power supply scheme with DBT

    • The Centre has prescribed that the free power supply scheme should be replaced with the direct benefits transfer (DBT) as a condition to allow States to increase their borrowing limit.
    • It is not the first time that the Union government has recommended DBT with regard to electricity.
    • But what is new is setting the time frame for implementing it.
    • By December this year, the DBT should be introduced at least in one district of a State and from the next financial year, a full roll-out should be made.

    Resistance from the states

    • Tamil Nadu, which was the first State to introduce free power in September 1984, is strongly resisting the Centre’s stipulation.
    • Tamil Nadu Chief Minister has taken a categorical stand against the proposal.
    • Though Chief Ministers of Andhra Pradesh, Telangana and Punjab, where free power scheme is in vogue, are yet to express their views.
    • But it is not difficult to predict their response.
    • After all, Punjab Chief Minister who had abolished the scheme during his first innings is now a strong votary of the scheme.

    Let’s get the overview of the power subsidy bill

    • In the last 15 years, Maharashtra has been the only State that scrapped the scheme within a year of introducing it.
    • Karnataka, which has been implementing it since 2008, may become the first southern State to have DBT in power supply if the hint dropped by Chief Minister in early March is any indication.
    • The power subsidy bills in the four southern States and Punjab are at least ₹33,000 crore, an amount the State governments will struggle to meet due to resource crunch in the light of the COVID-19 pandemic.

    But, why the Central government want to scrap the scheme?

    It is because of the following issues-

    1. Wastage of water and electricity

    • The financial stress apart, the universal application of the scheme has had deleterious consequences.
    • Primarily, the scheme has led to widespread wastage of water and electricity.
    • It is inherently against incentivising even a conscientious farmer to conserve the two precious resources.
    • It may be pertinent to point out that India is the largest user of groundwater at 251 billion cubic meters, exceeding the combined withdrawal by China and the U.S., as pointed out by Bharat Ramaswami of the Indian Statistical Institute last year.

    2. Worrying rate of the groundwater table depletion

    • Be it parts of the Cauvery delta in Tamil Nadu or Sangrur district of Punjab, the story about the groundwater table is the same — a worrying rate of depletion.
    • There is one more attendant problem.
    • To sustain their activity, farmers need to go for submersible or high-capacity pumpsets. [Consider the fact that to draw same quantity of water you have to use more power if your water table is low]

    3. It encourages the installation of more pump sets

    • Third, the extension of the scheme to different States over the years has only encouraged the installation of more pumpsets. Karnataka is a classic example, The number of irrigation pumpsets, which was around 17 lakh 12 years ago, is now around 30 lakh.

    4. Misuse of scheme

    • There is misuse of the scheme for which not just a section of farmers but also field officials have to be blamed.

    5. AT & C losses clubbed as consumption by farmers

    • In the absence of meters for these connections or segregation of feeders or metering of distribution transformers, accurate measurement of consumption becomes tricky.
    • Those in charge of power distribution companies find it convenient to reduce their aggregate technical and commercial (AT&C) losses by clubbing a portion of the losses with energy consumption by the farm sector.

    What is the argument of the supporter of the scheme?

    • Proponents of the free power scheme have a couple of valid points in their support.
    • Apart from ensuring food security, free power provides livelihood opportunities to landless workers.
    • When farmers dependent on supplies through canals get water almost free of cost, it is but fair that those not covered by canal irrigation should be given free electricity.
    • Though there is substance in the argument, it is not difficult to arrive at a fair pricing mechanism.
    • Small and marginal farmers and those who are outside the canal supply deserve free power, albeit with restrictions.
    • But there is no justification for continuing with the scheme perpetually to other farmers.
    • However, those enjoying free power need to be told about the need for judicious use of groundwater and how to conserve it.

    Consider the question-“Subsidies given to farmers on electricity has become an albatross around the States neck. However, such subsidies could also be termed as a necessary evil. Critically examine.”

    Conclusion

    Making use of the situation created by the COVID-19 pandemic, the Centre is trying to make lasting changes in areas where such measures are long overdue. At least in the area of power sector, its attempt can yield meaningful results only if there is a change in the mindset of agriculturists and political parties towards the concept of free power.

     

     

  • SWADES (Skilled Workers Arrival Database for Employment Support) Initiative

    The Union Govt. has launched a new initiative SWADES (Skilled Workers Arrival Database for Employment Support) to conduct a skill mapping exercise of the returning citizens under the Vande Bharat Mission.

    In the first go, one may get reminded of the SWADESH Darshan Scheme… Please beware! This SWADES initiative has nothing to do with the tourism sector!

    SWADES Initiative

    • SWADES is a joint initiative of the Ministry of Skill Development & Entrepreneurship (MSDE), the Ministry of Civil Aviation and the Ministry of External Affairs.
    • MSDE’s implementation arm National Skill Development Corporation (NSDC) is supporting the implementation of the project.
    • It aims to create a database of qualified citizens based on their skillsets and experience to tap into and fulfil the demand of Indian and foreign companies.
    • The collected information will be shared with the companies for suitable placement opportunities in the country.
    • The returning citizens are required to fill up an online SWADES Skills Card.
    • The card will facilitate a strategic framework to provide the returning citizens with suitable employment opportunities through discussions with key stakeholders including.

    Data on the returnees

    • Amongst the data gathered so far, the top countries from where the citizens are returning are UAE, Oman, Qatar, Kuwait and Saudi Arabia.
    • As per the skill mapping, these citizens had been primarily employed in sectors such as oil & gas, construction, tourism & hospitality, Automotive and Aviation.
    • The data also suggests that the States which have shown highest returning labour are Kerala, Tamil Nadu, Maharashtra, Karnataka and Telangana.

  • Global Economic Prospects (GEP) 2020 report by World Bank

    The World Bank has released its Global Economic Prospects (GEP) 2020 report.

    Try this PYQ from CSP 2019

    Q.) The Global Competitiveness Report is published by the-

    (a) International Monetary Fund

    (b) United Nations Conference on Trade and Development

    (c) World Economic Forum

    (d) World Bank

    Global Economic Prospects (GEP)

    • GEP is a World Bank Group flagship report that examines global economic developments and prospects, with a special focus on emerging market and developing economies.
    • It is issued twice a year, in January and June.
    • The January edition includes in-depth analyses of topical policy challenges while the June edition contains shorter analytical pieces.

    Summary of the report

    In a nutshell, the outlook for the global economy for 2020 has darkened, amid slowing activity and heightened downside risks.

    1) On poverty

    • The scope and speed with which the COVID-19 pandemic and economic shutdowns have devastated the poor around the world are unprecedented in modern times.
    • Current estimates show that 60 million people could be pushed into extreme poverty in 2020.

    2) Policy choices

    • Policy choices made today — include greater debt transparency to invite new investment, foster advances in digital connectivity, and a major expansion of cash safety nets for the poor.
    • The financing and building of productive infrastructure are among the hardest-to-solve development challenges in the post-pandemic recovery.

    3) Emerging Market and Developing Economies (EMDEs)

    • EMDEs face health crises, restrictions and external shocks like falling trade, tourism and commodity prices, as well as capital outflows.
    • These countries are expected to have a 3-8% output loss in the short term, based on studies of previous pandemics, as per the analysis.
    • Growth is likely to slow more in commodity-exporting EMDEs than in commodity-importing ones.

  • The contours of economic recovery

    This article analyses the various aspects of the stimulus package announced by the government. It gives a broad idea about the borrowing and fiscal deficit of the government. Where the fiscal deficit should be spent? Which area the announced reforms should focus on? You’ll be able to answer these questions after reading the article.

    Contraction of the Indian economy

    •  Many analysts have recently predicted a contraction for the Indian economy.
    • Goldman Sachs/ICRA and Nomura, in their recent assessments, have forecasted India’s growth to contract by (-)5.0 per cent and (-)5.2 per cent, respectively.
    • Even the RBI assesses that growth in the current year may be in the negative zone although it has not given a specific number.
    • The World Bank has predicted growth in the range of 1.5 to 2.8 per cent.
    • In order to relate budgetary magnitudes to GDP, we also need an idea of the magnitude of nominal GDP growth.
    • In the current year, this is expected to be at least 4 per cent points less than the rate of growth at 10 per cent as assumed in the 2020-21 budget.

    Let’s clear the misunderstanding about the stimulus

    • One misunderstanding about the “stimulus” must also be cleared.
    • Any increase in government expenditure over and above the base level acts as stimulus.
    • This is the traditional Keynesian approach.
    • It made no distinction between different types of expenditures.
    • It is only later studies that made a distinction based on the size of fiscal multipliers.

    How much will be the gross borrowing and fiscal deficit?

    • The Centre has already announced an increase in gross borrowing for 2020-21 from INR 7.8 lakh crore to Rs. 12 lakh crore.
    • This may lead to a fiscal deficit of about 5.7 to 5.8 per cent of GDP.
    • This may only be enough to provide for the considerable shortfall in the budgeted tax and non-tax revenues and non-debt capital receipts, which is also being estimated by a number of analysts to be in the range of Rs 18 lakh crore, implying a shortfall of Rs 4.45 lakh crore.
    • This shortfall is 2.08 per cent of GDP.
    • The Centre’s fiscal deficit will have to be further increased to accommodate the additional burden on the 2020-21 budget arising on account of the stimulus package.

    Let’s divide stimulus package into budgetary and non-budgetary part

    • The series of measures announced by the FM are a mix of i) already budgeted expenditure,ii) additional expenditure, iii) extension of credit facility with government guarantee for certain select sectors and a host of reform measures.
    • Analytically, the overall stimulus package of Rs 20.97 lakh crore can be divided into a budgetary and a non-budgetary part.

    1) Non-budgetary part

    • The non-budgetary part, accounting for nearly 85 per cent of the overall package.
    • Non-budgetary part consists mainly of liquidity enhancing measures for banks and NBFCs which may facilitate the financial sector in playing a key role to kickstart the economy.
    • The credit guarantee provided by the government under the various schemes announced recently is of central importance in this context.
    • In fact, for certain schemes, the government has come forward to provide 100 per cent guarantee, which should quicken the pace of credit sanction and delivery by banks.
    • Production of goods and services is inter-related in an economic system.
    • Once production starts, different sectors will be mutually supporting since different industries and service providers are locked in an input-output system.

    2) Budgetary part and fiscal deficits

    • The budgetary part amounts only to about 15 per cent of the overall package.
    • This can be further divided into government expenditure which was already budgeted in the 2020-21 budget and expenditures constituting genuine additionality.
    • The genuine additionality component is only 10 per cent of the package equivalent to 1 per cent of GDP.
    • Adding this to the enhanced level of 5.7 per cent of GDP, the Centre’s fiscal deficit may be close to 6.7-7 per cent of GDP.
    • This will maintain the level of budgeted expenditure while providing for the additional cost of the announced fiscal stimulus.
    • In fact, the fiscal deficit will be even higher if the current year’s GDP is lower than that of the previous year.

    Composition of government expenditure matters

    • With this high fiscal deficit, the composition of government expenditure becomes critical.
    • Some of the establishment expenditures and subsidies, especially those linked to petroleum prices like fertiliser and petroleum subsidies, may be reduced.
    • While expenditure on health-related items may be increased.
    • The central government has announced freezing of increments of DA and dearness relief components in the case of salaries and pensions respectively.
    • In fact, the government should be doing much more to relieve the plight of migrant workers.

    What is budgetary contribution for infrastructure?

    • According to the National Infrastructure Pipeline, the Centre’s budgetary contribution to infrastructure is estimated at 1.25 per cent of GDP on an annual basis.
    • This is less than 18 per cent of the estimated fiscal deficit of the Centre in 2020-21, indicating a very poor quality of fiscal deficit.
    • One dimension of expenditure restructuring should be to frontload infrastructure spending, including that on health infrastructure
    • Which will be helpful in taking advantage of the higher multiplier effects associated with capital expenditures.
    • Investment augmentation is also demand supporting and employment and income generating.

    Support to demand

    • Support to demand will come not only from the Centre but also from the states and the public sector undertakings.
    • States have been allowed to borrow an additional 2 per cent of their respective GSDPs subject to certain conditions.
    • In fact, at the present juncture, these conditions are not required since the enhancement of the borrowing limit is for one time while the reforms linked to conditions are permanent in nature.
    • In any case, states should be encouraged to support demand by going up to the full extent of the enhanced limit.

    Why the monetisation of debt is unavoidable?

    •  The combined fiscal deficit of the Centre and states alone may amount to close to 12 per cent of GDP in 2020-21.
    • Besides, the total public sector borrowing also includes the borrowing by central and state public sector undertakings.
    • Thus, the total Public Sector Borrowing Requirement may well exceed available sources of financing consisting of i) the financial savings of the household sector, ii) savings of the public sector iii) net capital inflows.
    • In this context, monetising debt has become unavoidable.
    • The Centre must be forthcoming on these issues while recognising that extraordinary situations call for extraordinary solutions.

    Reforms should be sector-specific

    • In the case of reforms, we have reached a new stage.
    • General reforms cutting across industries and sectors have been critical in the early stages.
    • The earlier regime of controls and permits had to be brought to a close.
    • But now reforms have to focus on specific sectors.
    • Applying the general principles of liberalisation to sectors such as agriculture and, more particularly, agricultural marketing, power sector, and telecom have assumed importance.
    • Labour market reforms are needed across all the states.
    • But labour reforms are introduced better when the economy is in the upswing.
    • Consensus building is critical before introducing labour reforms.
    • Land markets need to be freed up consistent with the concerns of small and marginal farmers.

    Consider the question “The fiscal stimulus and the promise of reforms announced by the government would be instrumental in bringing the Indian economy devastated by the Covid-19 pandemic back on track. Comment.”

    Conclusion

    Fiscal deficit should be used to create infrastructure ensuring that the quality of fiscal deficit is not poor. At the same time, reforms announced should be sector-specific and consensus-based in case of labour laws.

    Back2Basics: AT&C losses

    • Distribution loss consists of two parts: a. Technical loss and b. Commercial loss.
    • It is also called AT&C loss.
    • AT&C loss is nothing but the sum total of technical and commercial losses and shortage due to non-realization of billed amount.
    • AT&C Loss = (Energy input – Energy billed) * 100 / Energy input.

  • Moody’s downgrade India’s Ratings

    The Moody’s Investors Service downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2”. It stated that the outlook remained “negative”.

    Practice question for mains:

    Q. Why India’s GDP growth rate is being labelled an overestimate yet again by the global credit rating agencies? Discuss this in context to the latest downgrade of Indian Economy as highlighted by the Moody’s.

    Why this matters?

    • The Moody’s is historically the most optimistic rating agency about India.
    • This downgrade challenges India’s policymaking institutions.
    • They will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth.

    What is the reason for this downgrade?

    There are four main reasons why Moody’s has taken the decision:

    • Weak implementation of economic reforms since 2017
    • Relatively low economic growth over a sustained period
    • A significant deterioration in the fiscal position of governments (central and state)
    • And the rising stress in India’s financial sector

    What does “negative” outlook mean?

    • The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system.
    • These could lead to more severe and prolonged erosion in fiscal strength than Moody’s current projections.
    • The ratings have highlighted persistent structural challenges to fast economic growth such as “weak infrastructure, rigidities in labour, land and product markets, and rising financial sector risks”.
    • In other words, a “negative” implies India could be rated down further.

    Is the downgrade because of Covid-19 impact?

    No. The pandemic has amplified vulnerabilities in India’s credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year.

    Then why did the downgrade happen?

    • More than two years ago, in November 2017, Moody’s had upgraded India’s rating to “Baa2” with a “stable” outlook.
    • At that time, it expected that effective implementation of key reforms would strengthen the sovereign’s credit profile through gradual but persistent measures.
    • But those hopes were belied. Since that upgrade in 2017, implementation of reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness.
    • Each year, the central government has failed to meet its fiscal deficit (essentially the total borrowings from the market) target.
    • This has led to a steady accretion of total government debt.

    What will be the implications of this downgrade?

    • Ratings are based on the overall health of the economy and the state of government finances.
    • When India’s sovereign rating is downgraded, it becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world sees such debt as a riskier proposition.
    • A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before.
    • The weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.
    • Lower risk is better because it allows governments and companies of that country to raise debts at a lower rate of interest.

  • The Deccan Queen Express

    The historic Deccan Queen train between Mumbai and Pune completed 90 years on June 1.

    Take the opportunity to revise some of reformative measure in the Indian Railways taken through these years.  Click here to read more .

    The Deccan Queen

    • The Deccan Queen was introduced between Mumbai and Pune on June 1, 1930 by the Great Indian Peninsula Railway (GIPR), the forerunner of the Central Railway.
    • This was the first deluxe train introduced to serve the two important cities of the region, and was named after Pune – also known as the “Queen of Deccan”.
    • It is among the rare Indian trains that have never been hauled using steam traction and were always electric-powered; on rare instances running on diesel.
    • The GIPR in the 1940s would run Race Special trains for Mumbai’s horse racing enthusiasts who would come to Pune on weekends and race days.
    • This train holds many a record, including that of being India’s first superfast train, first long-distance electric-hauled train, first vestibuled train, the first train to have a ‘women-only’ car, and the first train to feature a dining car.

    Back2Basics: Railways in India

    • Indian Railways started its service 164 years ago on 16 April 1853.
    • The first railway proposals for India were made in Madras in 1832.
    • The first train was run over a stretch of 33 kilometres from Mumbai to Thane and was hauled by three steam locomotives named Sahib, Sindh and Sultan.
    • Indian Railway now has the 4th largest rail network in the world after the United States of America, China and Russia.

  • Problem of interest rate differential in India

    Do you remember Operation Twist by the RBI? what was being twisted there? It was the yield curve that was sought to be twisted. It had been aimed at reducing the gap between long term interest rates and short term policy rates. This article explains the impact such gap could have on the economy.

    Why long term loans come with a higher interest rate?

    • Long term loans equate to long repayment periods.
    • More uncertainty during these long periods can translate to higher risks.
    • And to compensate for the high risks involved, banks quote higher interest rates when corporates borrow from them to build and operate stuff.
    • However, when banks borrow from the RBI they are borrowing over short intervals.
    • And so they get charged lower interest rates.

    So, why banks are keeping interest rates high despite borrowing at low rates from the RBI?

    • Ever so often, the RBI cuts rates in the hopes of making loans more accessible to banks.
    • They are hoping banks will also extend this benevolence to their customers by cutting long term interest rates.
    • But right now, banks are scared.
    • They don’t think the corporates can pay back.
    • So they are keeping long term rates at elevated levels despite borrowing at consistently low rates from the RBI.

    What happens when gap between long-term and short term interest rates widen?

    •  Capital wasn’t cheap to begin with for corporate borrowers, and it’s getting more expensive.
    • This comes just as migrant rural workers have been driven out of urban production centers because of shuttered factories.
    • Even if this labor is safely put back on, say, road construction, concessionaires [think private road contractors] might still go bankrupt before completing any projects.
    • That’s because their annuity payments from the government are linked to falling short-term policy rates, whereas their long-term borrowing costs are both high and sticky

    To understand the issue of annuity payment and its relation with interest rates, let’s dig deeper into 3 types of models-

    1. Build-Operate-Transfer (BOT) Model

    • So, NHAI is the National Highways Authority of India and is largely responsible for building and maintaining roads.
    • Its preferred method to get the job done is to deploy what is called the BOT model.
    • The Build-Operate-Transfer (BOT) model, as the name suggests is a way for NHAI to offload its responsibilities of road building to private contractors.
    • Under BOT model, private contractors build the road, operate it, make money off of collecting toll, and after about 10–15 years, they hand over the road back to NHAI.
    • There aren’t enough private contractors willing to bid for such projects because — hey, maintaining and operating a road is a pain.
    • Why pain?  You have to wait 15 years to recoup all the money you had to pour in to build the damn thing. That’s the pain.

    2. Engineering, procurement and Construction (EPC) model

    • Under the EPC (Engineering, Procurement & Construction) model, NHAI pays private contractors first, so that they can help NHAI build the road.
    • The contractor does not operate or collect tolls here.
    • Instead, it can walk away scot-free with money in its coffers once it’s done building the road.
    • But it’s hard for the government to shore up all the resources required upfront.

    3. Hybrid Annuity Model (HAM)- The middle path

    •  It’s a nice little mix of both EPC and BOT.
    • Under it, NHAI pays some money upfront in fixed installments usually, 40% of the project cost.
    • And the private contractor does his bit by putting up the rest and finishing the project.
    • However, once the construction is complete, the contractor does not make money off of collecting toll.
    • Instead, he transfers the assets over to NHAI.
    • So its incumbent on the government to pay the rest of the money once the project takes off.
    • And the payments are dependent on the asset created, the performance of the developer, and a few other things.
    • However, since the payouts usually last 15–20 years we need to find a way to determine what kind of money the government pays the contractor every 6 months.
    • And here’s the best way to think about this — So when the government pays the 40% upfront, it’s promising to pay the 60% sometime in the future.
    • It’s money they owe the contractor.

    And, here is the crux of the matter

    • So when the repayments, are made, they’ll have to pay the principal and the interest.
    • The interest involves a fixed component (3%) and a variable component.
    • What is varible component? The variable component is effectively the short term policy rates.
    • So if the RBI keeps cutting these short term rates, private contractors get less money per instalment even if their roads are all nice and shiny.
    • And this can’t bode well for them because they probably put up the 60% back in the day by borrowing from another bank.
    • A bank that’s charging them long term interest rates that refuse to come down.

    Conclusion

    The widening gap between the short term policy rates and long term interest could easily spell the disaster for the entrepreneurs and in turn for the economy as a whole. The government should consider a special package for such entities given the unprecedented situations we found ourselves in.