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Subject: Economics

  • What are Social Stock Exchanges?

    A working group constituted by the Securities and Exchange Board of India (SEBI) on Social Stock Exchanges (SSEs) has recommended allowing non-profit organisations to directly list on such platforms.

    Practice questions for mains:

    Q. What are Social Stock Exchanges? Discuss how it will help finance social enterprises in India.

    What are Social Stock Exchanges (SSEs)?

    • An SSE is a platform which allows investors to buy shares in social enterprises vetted by an official exchange.
    • The Union Budget 2019 proposed setting up of first of its kind SSE in India.
    • The SSE will function as a common platform where social enterprises can raise funds from the public.
    • It will function on the lines of major stock exchanges like BSE and NSE. However, the purpose of the Social Stock Exchange will be different – not profit, but social welfare.
    • Under the regulatory ambit of SEBI, a listing of social enterprises and voluntary organizations will be undertaken so that they can raise capital as equity, debt or as units like a mutual fund.

    Why SSEs?

    • India needs massive investments in the coming years to be able to meet the human development goals identified by global bodies like the UN.
    • This can’t be done through government expenditure alone. Private enterprises working in the social sector also need to step up their activities.
    • Currently, social enterprises are very active in India. However, they face challenges in raising funds.
    • One of the biggest hurdles they face is, apparently, the lack of trust from common investors.

    Benefits

    • There is a great opportunity to unlock funds from donors, philanthropic foundations and CSR spenders, in the form of zero-coupon zero principal bonds. These bonds will be listed on the SSE.
    • At first, the SSE could become a repository of social enterprises and impact investors.
    • The registration could be done through a standard process.
    • The SEs could be categorized into different stages such as- Idea, growth stage and likewise, investors can also be grouped based on the type of investment.

  • Kisan Credit Cards (KCC) for 1.5 crore dairy farmers

    The Union Govt. is set to provide Kisan Credit Card (KCC) to 1.5 crore dairy farmers belonging to Milk Unions and Milk producing Companies within the next two months under a special drive.

    We can expect multiple statements based prelim question here. Note the following features of the KCC from the newscard:

    1. Year of its introduction (in rarest case)

    2. Types of banks issuing KCC

    3. Credit types extended under KCC

    4. Sectors covered under KCC

    What is Kisan Credit Card (KCC)?

    • KCC is a credit scheme introduced in August 1998 by banks to extend credit facilities to farmers.
    • This model scheme was prepared by the NABARD on the recommendations of R.V. GUPTA committee to provide term loans for agricultural needs
    • Participating institutions include all commercial banks, Regional Rural Banks, and state co-operative banks. The scheme has short term credit limits for crops and term loans.
    • KCC offering credit to the farmers is of two types: 1. Cash Credit 2. Term Credit (for allied activities such as pump sets, land development, plantation, drip irrigations).

    Facilities under KCC

    • Credit card and passbook or credit card cum passbook provided to eligible farmers facilitate revolving cash credit facility.
    • Any number of withdrawals and repayments within a limit, which is fixed on the basis of operational land holding, cropping pattern and scale of finance can be made.
    • Each withdrawal has to be repaid within a maximum period of 12 months and the Card is valid for 3 to 5 years subject to annual review.
    • Conversion/reschedulement of loans is permissible in case of damage to crops due to natural calamities.
    • Crop loans disbursed under KCC Scheme for notified crops are covered under Rashtriya Krishi Bima Yojana, to protect farmers against loss of crop yield caused by natural calamities, pest attacks etc.

    What’s’ in the bucket for Dairy Farmers?

    • Under the dairy cooperative movement, approximately 1.7 crore farmers are associated with 230 Milk Unions in the country.
    • In the first phase of this campaign, the target is to cover all farmers who are members of dairy cooperative societies and associated with different Milk Unions and who do not have KCC.
    • Although the general limit for KCC credit without collateral is Rs. 1.6 lakh, but for dairy farmers, it can be upto Rs.3 lakh.
    • This will ensure more credit availability for dairy farmers associated with Milk Unions as well as assuring repayment of loans to banks.

  • CHAMPIONS Platform to empower MSMEs

    Recently PM has launched the technology platform CHAMPIONS as a one-stop-shop solution of MSME Ministry.

    At the very first sight, the name CHAMPIONS creates a delusion. It looks more of an HRD initiative. Here lies the risk! Please cautiously make a personal note here. Demarcate all such initiatives on an A4 page.

    CHAMPIONS Platform

    • CHAMPIONS stand for Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength.
    • The portal is basically for making the smaller units big by solving their grievances, encouraging, supporting, helping and handholding.
    • It is a technology-packed control room-cum-management information system.
    • It is also fully integrated on a real-time basis with GOI’s main grievances portal CPGRAMS and MSME Ministry’s own other web-based mechanisms.
    • This ICT based system is set up to help the MSMEs in a present difficult situation and also to handhold them to become national and international champions.

    Detailed objectives

    • Grievance Redressal: To resolve the problems of MSMEs including those of finance, raw materials, labour, regulatory permissions etc particularly in the COVID created a difficult situation;
    • To help them capture new opportunities: including manufacturing of medical equipment and accessories like PPEs, masks, etc and supply them in National and International markets;
    • To identify and encourage the sparks:e. the potential MSMEs who are able to withstand the current situation and can become national and international champions.

  • Is India prepared for crude oil eventualities?

    The era we are living in is reigned by the uncertainties. And the oil market is not immune to these uncertainties. Against this background, India’s energy security is discussed in this article. Switching to the “just in case” needs with respect to crude oil is suggested by the author. But, that would require capital. So, how could the problem of capital be solved? Read the article to know…

    Switching from just in time to just in case

    • The post-COVID “world (will be) switching from just in time to just in case”  said economist Alan Kirman.
    • This is more so for the Indian petroleum sector.
    • The decision-makers of this sector should switch to a “just in case” policy mode.

    Oil market: Land full of uncertainties

    • The oil market is in no man’s land. Few speak with conviction about its future trajectory.
    • Last month, it dropped into negative territory for a day in the USA.
    • But today the price of the same crude quality is above $30/barrel.
    • If one reads the commentary of experts, some predict that prices will soon cross $50/barrel while some predict price-crash to below $20/barrel.
    • The fine print of these reports is always caveated with the disclaimer, “it all depends” on one or more of the comparably uncertain variables.
    • These variables include economic growth, geopolitics — US-China relations, the timing of the development of an anti-COVID vaccine or a combination of all these variables.
    • The fact is no one really knows how the petroleum sector will fare in the “new normal” of the post-COVID world.

    The problems policy-makers face: some known, some unknown

    • Policy-makers know that irrespective of the twists and turns in the petroleum market, India will need fossil fuels (coal, oil and gas) to drive its economic growth for at least the next decade, if not longer.
    • And that a sizeable percentage of these requirements will have to be imported.
    • The country does not have the geology to expect gushers especially in an environment of volatile (and relatively low) oil prices.
    • What must also be discomforting is the “known unknown” of the post-COVID stress.
    • They know that COVID has knocked the props from under the Indian economy.
    • They also know that every petroleum company, irrespective of whether it is in the private or public sector, will face an increasingly uncertain and challenging future business environment.
    • What they do not know is the nature of these challenges, and therefore, the conditions, sine qua non, for managing them.

    Let’s look at some facts and figures of India’s crude oil requirements

    • India consumes around 50,00,000 barrels of crude oil every day.
    • Of that, it imports approximately 45,00,000 barrels/day making the country the third-largest crude market in the world.
    • Every month, on average, 70 loaded VLCC (very large crude carriers ) — accounting for 10 per cent of the global tanker market — bring crude oil to India.
    • Approximately 60 per cent of this oil is discharged in and around the Jamnagar area and then carried by pipelines to refineries in Jamnagar, Mathura, Panipat, Bina and Bhatinda.
    • And 50 per cent or so is sourced from Saudi Arabia, Kuwait, Abu Dhabi, Iran and Iraq.
    • It is against this background of post-COVID uncertainties and above facts India should consider switching to “just in case” policy mode.

    Why should India consider switching to “just in case” policy mode?

    We should analyse this by considering two scenarios

    • ONGC/OIL are strategically important PSUs.
    • Few have questioned the support to these two companies and the importance of harnessing our indigenous oil and gas reserves.
    • Until now, this support has been premised on the view that oil supplies are relatively scarce and that prices will trend upwards.

    1) Low oil prices scenario

    • 1) We now need to ask: What if, “just in case” the oil market is structurally oversupplied and prices fall to such low levels that it makes no commercial sense for ONGC/OIL to expend public resources on “ high risk, high cost” exploration?
    • Oil and gas are, after all, tradables and can be purchased on the high seas.
    • Should they not, given this possibility, contemplate redefining their core purpose and perhaps pivot away from oil and gas towards clean energy?

    2) Choking of supply lines scenario

    • Looked at through a different lens but with a “just in case” mindset, the preponderance of crude supplies sourced from countries facing deep political, economic and social tensions raises the question:
    • What if these domestic problems choked our access?
    • How would we manage the disruption?
    • Our decision-makers have worried about supply security for decades.
    • But the circumstances created by COVID are new.
    • The issue of strategic reserves could, for instance, acquire a different hue.
    • We have currently 11 days of reserve cover (5.33 million tonnes) with plans to increase it to 24 days (11.83 million tonnes).
    • Were we to decide to build up these reserves to levels comparable to other countries of between 70 to 100 days of import cover, the issue would be capital.
    • Given the slowdown of the economy and the pressures on the exchequer, the government would not have the financial resources to invest in the creation of additional facilities.
    • The only way this financial hurdle could be overcome is if the government and the private sector invest jointly.
    • This collaborative option would have to be considered to counter the “just in case” contingency of prolonged and major disruption.
    • And if indeed such an option were acceptable, it could be extended to cover trading, crude purchases, co-freighting, subject of course to anti-trust and competition rules.

    Consider the example to understand the importance of “just in case” thinking

    • An example to embed the importance of “just in case” thinking can be drawn from the geopolitics of our neighbourhood.
    • What if the relations between India/Pakistan/China took an ugly turn?
    • What security measures should we contemplate to protect the petroleum assets located in Mumbai and Jamnagar?

    Consider the question “Over the decades, India has been grappling with the issue of energy security. With the rising uncertainties around the world, the issue has gained more prominence. In light of this, suggest the ways to tide over the disruption in oil supplies.”

    Conclusion

    In the backdrop of COVID, when all hands on decks are needed to tackle the “urgent” task of reviving the economy, the government must not, in the process, lose sight of the “importance” of creating, if nothing else, the mindset of preparedness to respond to “just in case outcomes”.

  • Using COVID crisis to reorient India towards reforms

    Following the announcement of relief and stimulus package, the debate began over its various aspects. This article assesses the various aspects of the package and draws comparison with the package announced by the other countries. So, how does India fare compared with other countries?

    Fiscal component of  stimulus package

    • According to the IMF-PT (policy tracker), the fiscal component of the Indian package is estimated to be at least 3.5 per cent of GDP as expenditure for poor households, migrant workers and agriculture.
    • There is an additional 0.5 per cent of GDP for states to spend unconditionally, bringing the fiscal package excluding loans to businesses to at least 4 per cent of GDP.
    • The support for businesses (MSMEs) is estimated to be 2.7 per cent of GDP.
    • Of this, at least 2 per cent of GDP is in the form of 100 per cent credit guarantees and equity infusion.

    Comparison with major emerging economies

    • Among major developing economies, only Brazil -8 per cent of GDP– and Peru -7 per cent of GDP– have a fiscal stimulus higher than the 5 per cent level for India.
    • The Brazil estimate includes about 3 per cent of GDP as working capital loans to businesses and households.
    • The fiscal support level for some important emerging economies is — China 2.5 per cent of GDP and Indonesia 3.5 per cent.

    Why it is difficult to segregate the stimulus package?

    • While comparing the fiscal stimulus packages across countries, it is important to understand that such packages are in the nature of additional spending and tax reliefs.
    • Which can work directly through aggregate demand or indirectly by mitigating risk and enhancing access to fund.
    • Access to fund is ensured in the nature of credit guarantees to financial institutions and non-financial enterprises
    • A large number of fiscal stimulus packages announced by different countries contain credit guarantees to financial institutions, SMEs, and agriculture.
    • Hence, it is difficult to segregate fiscal stimulus into its pure and impure components.
    • Most economists, and international organisations, recognise that fiscal stimulus consists of both the pure and impure.
    • And includes three broad items — a direct “above-the-line” component, a “below-the-line” component and guarantees of various forms primarily credit.
    • The choice of using only one component of the fiscal stimulus is selective and highly inappropriate.

    India as a positive fiscal stimulus outlier

    • To put the packages into perspective, the average of all fiscal measures in the G24 developing economies is equal to 3.6 per cent.
    • No matter how the calculation is done, India is a positive fiscal stimulus outlier; by IMF-PT calculations.
    • The stimulus is close to the largest among major emerging market economies.

    So, how much rich countries are spending?

    • The rich nations are spending more — they can afford to. Japan announced what may be the upper limit to the expansion — 21.1 per cent of GDP.
    • However, this does include large elements of loans and credit guarantees.
    • Through a combination of several fiscal measures (tax deferrals, credit guarantees, etc.) the US has pledged close to 13 per cent of GDP.
    • The European Union, on average, has pledged 4 per cent of GDP.
    • The average for advanced countries is around 6 per cent of GDP.

    Significance of monetary policy change made by RBI

    • The monetary policy change in India is quite significant.
    • The change paves the way for internationally competitive monetary policy.
    •  That is, real interest rates comparable to those prevalent in competitor economies.
    • The repo rate now stands at 4 per cent, with inflation well contained.
    • This is substantially a much different, and much-improved RBI response than that what occurred in 2008-09.
    • At that time, as a monetary counter to the financial crisis, the RBI reduced the repo rate by 425 basis points to 4.75 per cent.
    • This was done over seven months and the prevailing CPI inflation rate was 10 per cent.

    Economic reforms as a part of stimulus package

    • India has announced several economic reforms as a part of the stimulus package.
    • These are long-awaited — freeing up of the labour market, allowing farmers to sell their produce and land to who they choose, removal of archaic laws like the Essential Commodities Act, with the promise of more to come.
    • This is not an empty promise — the Centre will advance another 1.5 per cent of GDP to states to expand spending.
    • This advance will be conditional on them for undertaking long-pending reforms.
    • The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures.

    Conclusion

    The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures. We should use the crisis to re-orient India towards its long-awaited destiny.

  • Foreign direct investment (FDI) in India

    The FDI in India grew by 13% to a record of $49.97 billion in the 2019-20 financial years, according to official data.

    Get aware with the recently updated FDI norms. Key facts mentioned in this newscard can make a direct statement based MCQ in the prelims.

    Ex. FDI source in decreasing order: Singapore – Mauritius – Netherland – Ceyman Islands – Japan – France

    Data on FDI

    • The country had received an FDI of $44.36 billion during April-March 2018-19.
    • The sectors which attracted maximum foreign inflows during 2019-20 include services ($7.85 billion), computer software and hardware ($7.67 billion), telecommunications ($4.44 billion), trading ($4.57 billion), automobile ($2.82 billion), construction ($2 billion), and chemicals ($1 billion).
    • Singapore emerged as the largest source of FDI in India during the last fiscal with $14.67 billion investments.
    • It was followed by Mauritius ($8.24 billion), the Netherlands ($6.5 billion), the U.S. ($4.22 billion), Caymen Islands ($3.7 billion), Japan ($3.22 billion), and France ($1.89 billion).

    What is FDI?

    • An FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
    • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
    • FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
    • Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
    • In a narrow sense, it refers just to building a new facility, and lasting management interest.

    FDI in India

    • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
    • There are two routes by which India gets FDI.

    1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

    2) Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of FDI application under Approval Route.

    • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
    • In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.

    Back2Basics

    Amendment in the FDI Policy for curbing opportunistic takeovers/acquisitions of Indian companies

  • Understanding the monetisation of deficit

    The RBI could finance the government debt by buying bonds from the secondary market. Or it could directly finance the debt. And both could stoke inflation. But, do they carry the same inflation risk. The answer is an unambiguous ‘No’. So, how monetisation of debt is different from Open Market Operation by the RBI? Read the article to know…

    What is Monetised deficit?

    • The Monetised Deficit is the extent to which the RBI helps the central government in its borrowing programme.
    • In other words, monetised deficit means the increase in the net RBI credit to the central government, such that the monetary needs of the government could be met easily.

    What monetisation of deficit mean (and doesn’t mean)

    • Monetisation of the deficit does not mean the government is getting free money from the RBI.
    • If one works through the combined balance sheet of the government and the RBI, it will turn out that the government does not get a free lunch.
    • But it does get a heavily subsidised lunch.
    • That subsidy is forced out of the banks.
    • And, as in the case of all invisible subsidies, they don’t even know.

    So, is the RBI monetising the debt?

    • It is not as if the RBI is not monetising the deficit now; it is doing so.
    • It is doing so indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
    • Note that both monetisation and OMOs involve printing of money by the RBI.
    • But there are important differences between the two options that make shifting over to monetisation a non-trivial decision.

    Historical context of the monetisation of debt: An agreement

    • In the pre-reform era, the RBI used to directly monetise the government’s deficit almost automatically.
    • That practice ended in 1997 with a landmark agreement between the government and the RBI.
    • It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO route.
    • The implied understanding also was that the RBI would use the OMO route not so much to support government borrowing.
    • So, the RBI uses OMO as liquidity instrument to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

    So, what were the outcomes of the agreement?

    • The outcomes of that agreement were historic.
    • Since the government started borrowing in the open market, interest rates went up.
    • HIgh interest rates incentivised saving and thereby spurred investment and growth.
    • Also, the interest rate that the government commanded in the open market acted as a critical market signal of fiscal sustainability.
    • Importantly, the agreement shifted control over money supply, and hence over inflation, from the government’s fiscal policy to the RBI’s monetary policy.
    • The India growth story that unfolded in the years before the global financial crisis in 2008 when the economy clocked growth rates in the range of 9 per cent was at least in part a consequence of the high savings rate and low inflation which in turn were a consequence of this agreement.

    What is the reasoning for jeopardising the hard-won gains of agreement?

    • The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause.
    • Escape clause permits monetisation of the deficit under special circumstances.
    • What is the case for invoking this escape clause?
    • The case is made on the grounds that there just aren’t enough savings in the economy to finance government borrowing of such a large size.
    • Bond yields would spike so high that financial stability will be threatened.
    • The RBI must therefore step in and finance the government directly to prevent this from happening.

    No, the situation is not so grim-Look at the bond yields

    • There is no reason to believe that we are anywhere close to the above-mentioned situation.
    • Through its OMOs, the RBI has injected such an extraordinary amount of systemic liquidity that bond yields are still relatively soft.
    • In fact the yield on the benchmark 10 year bond which was ruling at 8 per cent in September last year has since dropped to just around 6 per cent.
    • Even on the day the government announced its additional borrowing to the extent of 2.1 per cent of GDP, the yield settled at 6.17 per cent.
    • That should, if anything, be evidence that the market feels quite comfortable about financing the enhanced government borrowing.

    Why worry about monetisation if OMO also leads to inflation?

    The following four issues make clear the difference in OMO and monetisation

    1. Issue of RBI’s control over monetary policy

    • Both monetisation and OMOs involve expansion of money supply which can potentially stoke inflation.
    • If so, why should we be so wary of monetisation?
    • Because although they are both potentially inflationary, the inflation risk they carry is different.
    • OMOs are a monetary policy tool with the RBI in the driver’s seat, deciding on how much liquidity to inject and when.
    • In contrast, monetisation is, and is seen, as a way of financing the fiscal deficit with the quantum and timing of money supply determined by the government’s borrowing rather than the RBI’s monetary policy.
    • If RBI is seen as losing control over monetary policy, it will raise concerns about inflation.
    • That can be a more serious problem than it seems.

    2. Credibility of RBI on curbing inflation

    • India is inflation prone.
    • Note that after the global financial crisis when inflation “died” everywhere, we were hit with a high and stubborn bout of inflation.
    • In hindsight, it is clear that the RBI failed to tighten policy in good time.
    • Since then we have embraced a monetary policy framework and the RBI has earned credibility for delivering on inflation within the target.
    • Forsaking that credibility can be costly.

    3. Yield on bond could shoot up anyway

    • If, in spite of above problems, the government decides to cross the line, markets will fear that the constraints on fiscal policy are being abandoned.
    • Perception in the market will be that the government is planning to solve its fiscal problems by inflating away its debt.
    • If that occurs, yields on government bonds will shoot up, the opposite of what is sought to be achieved.

    4. Monetisation is not inevitable yet

    • What is the problem that monetisation is trying to solve?
    • There are cases when monetisation — despite its costs — is inevitable.
    • If the government cannot finance its deficit at reasonable rates, then it really doesn’t have much choice.
    • But right now, it is able to borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.
    • If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure.
    • We are not there yet.

    Consider the question asked in 2019, “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your argument.”

    Conclusion

    Though OMO and monetisation both leads to inflation, the issues with monetisation have far-reaching consequences. Also, the situation we are in doesn’t yet warrant monetisation which should be seen as a last resort.

    Back2Basics:  Open Market operation

    • OMOs are conducted by the RBI by way of sale and purchase of G-Secs to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
    • When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
    • Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

     

     

  • Alleviating the farmers’ pain

    The article discusses the recently announced reforms in the agri-marketing. The legal changes promised are expected to deal with problems farmer face in selling their products and a law dealing with contract farming. These legal reforms are expected to increase farmers’ income.

    Some of the issues faced by the farmers

    • If any class of economic agents of our country has been denied the constitutional right of freedom of trade, it is farmers.
    • They don’t have the freedom of selling their produce even in their neighbourhood.
    • Remunerative price is still a mirage for them.
    • Their farm incomes are at the mercy of markets, middlemen and money lenders.
    • For every rupee that a farmer makes, others in the supply chain get much more.
    • Both farmers and consumers are the sufferers of the exploitative procurement and marketing of farm produce.
    • The public investments in irrigation and other infrastructure has increased.
    • The institutional credit and minimum support price given over the years has been increasing.
    • Yet, farmers are shackled when it comes to selling their produce.

    Restriction on the farmers: Echoes from the past

    • This exploitation of farmers has its roots in the Bengal famine of 1943, World War II, and the droughts and food shortages of the 1960s.
    • The Essential Commodities Act, 1955, and the Agricultural Produce Market Committee (APMC) Acts of the States are the principle sources of violation of the rights of farmers to sell their produce at a price of their choice.
    • These two laws severely restrict the options of farmers to sell their produce.
    • Farmers continue to be the victims of a buyers’ market.
    • This is the principal cause of their exploitation.
    • Renowned farm scientist M.S. Swaminathan has for long argued for the right of farmers to sell their produce as they deem fit.

    Balancing the interest of consumers and the farmers

    • Given the economic disparities in the country, the interests of consumers need to be protected.
    • But that should not happen at the cost of the producers of the very commodities that the consumers need.
    • For various reasons, a balance in this regard could not be struck.
    • The restrictive trade and marketing policies being practised with respect to agricultural prices have substantially eroded the incomes of farmers.

    Let’s have a look at a study on agricultural policies in India

    • A study on agricultural policies in India by the Indian Council for Research on International Economic Relations-Organisation for Economic Co-operation and Development (2018), co-authored by the renowned farm economist Ashok Gulati, was published with startling revelations.
    • It concluded that the restrictions on agricultural marketing amounted to ‘implicit taxation’ on farmers to the tune of â‚č45 lakh crore from 2000-01 to 2016-17.
    • This comes to â‚č2.56 lakh crore per year.
    • No other country does this.

    Reforms to remove the hurdles in farmer getting remunerative price

    • Recently announced package has approximately â‚č4 lakh crore support for farming and allied sectors, aimed at improving infrastructure and enhancing credit support.
    • But the most welcome feature of this package is the firm commitment to rewriting the Essential Commodities Act and the APMC laws.
    • The revision of these restrictive laws is long overdue and will remove the hurdles that farmers face in getting a remunerative price for their produce by giving them more options to sell.
    • This long-awaited revision needs to be undertaken with care and responsibility so that no space or scope is left for farmers to be exploited yet again.
    • While allowing several buyers to directly access the produce from the farmers, a strong and effective network of Farm Producers’ Organisations should be created to enhance the bargaining power of farmers.
    • This will ensure that individual farmers are not exploited.
    • An effective law on contract farming is also the need of the hour.
    • Law on contract farming will secure incomes of farmers besides enabling private investments.
    • Yet another unique feature of this package has been its comprehensiveness towards improving the incomes of farmers through a range of activities.
    • A study by the National Institute of Agricultural Extension Management has revealed that of the 3,500 farmers’ suicides examined, there was no farmer who had supplementary incomes from dairy or poultry.
    • The huge support to animal husbandry and fisheries in the stimulus package underlines the need for diversifying the income sources of farmers.

    Consider the question “The APMC Acts of the has been blamed for poor price realisation by the farmers. Recently announced reforms promise to do away with such issues in the APMC Act. In light of this, examine the issues with APMC Acts and how the promised reforms are expected to resolve such issues.”

    Conclusion

    It is time to allow our farmers to sell their produce anywhere for their benefit. All stakeholders should be taken on board while revising restrictive agri-marketing laws.

  • How effective is the stimulus package to revive the supply chains?

    Disruption of the supply chains lies at the heart of the decline in the output amid lockdown. And the government has announced the fiscal stimulus to revive the economy. How effective will be the fiscal stimulus to streamline the supply chains? The focus of this article is on tackling this question.

    Disruption in supply chains and decline in output

    • Much of the decline in output is due to supply chain disruptions generated by the lockdown.
    • Government spending can do little to alleviate this.
    • Putting money in the hands of people can increase the demand for goods but cannot increase the supply of goods and services.
    • In modern economies, the production of goods happens through complex supply chains that traverse geographical boundaries.

    Let’s understand how supply chains work

    •  Upstream sectors like ‘mining’ produce metals that are in turn used to produce machines.
    • These machines are used to sow seeds, harvest crops, and transport fuel.
    • Finally, the harvested crops are used by downstream sectors to produce flour and bread.
    • At each step, machines and labour combine to produce goods which are the inputs for sectors further downstream.

    So, how lockdown affected the supply chains?

    • Under the lockdown, numerous inputs have not moved from their producers to their users.
    • These disruptions may not at first generate a reduction in consumer goods like bread.
    • However, the availability of consumer goods will begin to decline as bakers run out of flour, and mills exhaust their stocks of wheat.
    • And there is no way to guarantee the flow of essential goods while suspending the production of non-essential goods.
    • Automotive spare parts may be non-essential in the short run, but become essential as food-carrying trucks begin to break down.(i.e. in the long run)
    • How far is the long run? This is difficult to say; there may be some variation across goods.

    Impact of labour shortage on supply chains

    • The supply chain disruptions are going to be amplified by labour shortage as workers remain at home.
    • Countries like India are likely to experience a greater reduction in output on this count than, say, Europe or the U.S.
    • This is because of the higher labour intensity of production in India.
    • To understand this, think of the difference in unloading of goods in the port at Rotterdam and the port at Kochi.
    • Is it viable to substitute labour with capital? Poorer countries are less likely to be able to substitute locked down labour with capital because of the dearth of capital in these nations.

    Adapting and Adjusting to the new reality

    • As economies emerge out of the lockdown, entrepreneurs, workers, and consumers must adjust to the new reality.
    • The world supply chain must adapt.
    • Firms may choose to source inputs from suppliers in their geographical proximity to minimise the risk of future disruptions.
    • But this involves building productive capacity at new locations, all of which requires investments fuelled by savings.
    • Furthermore, the investments must be guided by price signals.
    • Within a market economy, the movement of prices provides the incentive and information needed to adapt and grow.
    • As economist Ronald Coase put it, prices are bundles of information wrapped in an incentive.
    • As the prices of some inputs rise, the buyers of these inputs look for alternate suppliers, and firms which did not hitherto produce the good have an incentive to do so.
    • The key to economic recovery lies in millions of such adjustments.
    • Through such adjustments, firms locate new providers of inputs, new buyers of their output, and build factories at new locations.

    How fiscal stimulus would disrupt the recovery of supply chains?

    • Market adjustment processes are likely to be disrupted by government stimulus packages.
    • Governments spend by printing money, raising debt, or increasing taxes.
    • Irrespective of the way in which the expenditure in funded, resources are transferred from private entrepreneurs to government bureaucrats.
    • When governments print money, they draw resources through inflation.
    • Bureaucrats tend to be less efficient than profit-motivated firms in allocating scarce resources.
    • Bureaucrats have little incentive or information to bring about the granular supply chain adjustments necessary to revive growth.
    • As the stimulus package kicks in, economic efficiency is likely to decline and so are the chances of a timely recovery of output.

    A lesson from West Germany after WW II

    • The experience of West Germany after World War II has a useful lesson for India.
    • Beginning mid-1944, Allied bombing disrupted the German supply chain by targeting bottleneck sectors like electric power generation.
    • This destruction of the supply chain devastated the German economy.
    • Per person food production fell to about half of its pre-war level.
    • Two years later, this changed after Chancellor Ludwig Erhard lifted price controls and cut taxes.
    • West German entrepreneurs re-established a thriving supply chain through which goods went from upstream sectors to final consumers.
    • By 1950, per capita income in West Germany had reached its pre-war level.

    Consider the question “Supply chain disruption has been at the core of economic consequences of the corona pandemic. New adjustment in the supply chains would be the norm in the aftermath of the pandemic. What these readjustments would entail? Suggest the measures to help the supply chains recover.”

    Conclusion

    The recent supply chain disruptions are likely to last long. The path to recovery lies in cutting government expenditure, removing price controls, and opening up trade.

  • Applying the lessons learned from GST to One Nation One Ration Card (ON-ORC)

    Never before we felt the necessity of portable benefit schemes as we did in the wake of the pandemic. Portable ration card could have mitigated the suffering of migrant workers to some extent. But it was not to be. This article examines the challenges in implementing the idea of ON-ORC and offers the solution to these challenges by drawing on the lessons learned from GST. At the same time, the shortcoming of GST can also be avoided in the ON-ORC.

    What is One Ration Card (ON-ORC)?

    • In the present system, a ration cardholder can buy foodgrains only from an Fair   Price Shop that has been assigned to her in the locality in which she lives.
    • However, this will change once the ONORC system becomes operational nationally.
    • Under the ONORC system, the beneficiary will be able to buy subsidised foodgrains from any FPS across the country.
    • The new system, based on a technological solution, will identify a beneficiary through biometric authentication on electronic Point of Sale (ePoS) devices installed at the FPSs.
    • This would enable that person to purchase the number of foodgrains to which she is entitled under the NFSA.

    Portable welfare benefit and attempts so far to achieve it

    •  The idea of portable welfare benefits means a citizen should be able to access welfare benefits irrespective of where she is in the country.
    • In the case of food rations, the idea was first mooted under the UPA government by a Nandan Nilekani-led task force in 2011.
    • The current government had committed to a national rollout of One Nation, One Ration Card (ON-ORC) by June 2020, and had initiated pilots in 12 states.

    Progress on intra-state and inter-state portability

    • While intra-state portability of benefits has seen good initial uptake, inter-state portability has lagged.
    • The finance minister has now announced the deadline of March 2021 to roll out ON-ORC.

    So, to ensure a smooth rollout, let’s review the challenges thus far

    1) The fiscal implications:

    • ON-ORC will affect how the financial burden is shared between states.

    2) The larger issues of federalism and inter-state coordination:

    • Many states are not convinced about a “one size fits all” regime because i) they have customised the PDS through higher subsidies, ii) higher entitlement limits, and iii) supply of additional items.

    3) The technology aspect:

    • ON-ORC requires a complex technology backbone that brings over 750 million beneficiaries, 5,33,000 ration shops and 54 million tonnes of food-grain annually on a single platform.

    How the lessons learned from GST can be applied to deal with the above 3 challenges?

    1. Fiscal challenge

    • Just like with ON-ORC, fiscal concerns had troubled GST from the start.
    • States like Tamil Nadu and Gujarat that are “net exporters” were concerned they would lose out on tax revenues to “net consumer” states like UP and Bihar.
    • Finally, the Centre had to step in and provide guaranteed compensation for lost tax revenues for the first five years.
    • The Centre could provide a similar assurance to “net inbound migration” states such as Maharashtra and Kerala that any additional costs on account of migrants will be covered by it for the five years.

    2. We could have a National council for ON-ORC

    • GST also saw similar challenges with broader issues of inter-state coordination.
    • In a noteworthy example of cooperative federalism, the central government created a GST council consisting of the finance ministers of the central and state governments to address these issues.
    • The government could consider a similar national council for ON-ORC.
    • To be effective, this council should meet regularly, have specific decision-making authority, and should operate in a problem-solving mode based on consensus building.

    3. Technological aspect: PDS Network

    • GST is supported by a sophisticated tech backbone, housed by the GST Network (GSTN), an entity jointly owned by the Centre and states.
    • A similar system would be needed for ON-ORC.
    • The Nilekani-led task force recommended setting up of a PDS network (PDSN).
    • PDSN would track the movement of rations, register beneficiaries, issue ration cards, handle grievances and generate analytics.
    • Since food rations are a crucial lifeline for millions, such a platform should incorporate principles such as inclusion, privacy, security, transparency, and accountability.
    • The IM-PDS portal provides a good starting point.

    Also, there are certain shortcomings in GST which we could avoid in ON-ORC

    We should learn from the shortcomings and challenges of the GST rollout. For example:

    1) Delay in GST refunds led to cash-flow issues.

    • Similar delays in receiving food rations could be catastrophic.
    • Therefore, ON-ORC should create, publish and adhere to time-bound processes.
    • The time-bound processes could be in the form of right to public services legislation that have been adopted by 15 states, and rapid grievance redress mechanisms.

    2)  Increase in compliance burden for MSMEs, especially for those who had to digitise overnight.

    • Similar challenges could arise in ON-ORC.
    • PDS dealers will need to be brought on board, and not assumed to be compliant.
    • Citizens will need to be shielded from the inevitable teething issues by keeping the system lenient at first.
    • This can be done by providing different ways of authenticating oneself and publicising a helpline widely.

    Consider the question “One Nation-One Ration Card(ON-ORC) could solve many problems faced by the beneficiaries when they move across the country. Examine the challenges the ON-ORC could face. Suggest ways to deal with these challenges.”

    Conclusion

    If done well, ON-ORC could lay the foundation of a truly national and portable benefits system that includes other welfare programmes like LPG subsidy and social pensions. It is an opportunity to provide a reliable social protection backbone to migrants, who are the backbone of our economy.