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Subject: Economics

  • Char Dham Project

    The Chamba Tunnel constructed by the Border Roads Organisation (BRO) under Chardham Project was recently inaugurated.

    Make a note of all projects and circuits under Swadesh Darshan and PRASHAD Scheme.

    What is the Char Dham Project?

    • The Char Dham project consists of widening and repairing 889-kilometres of national highways leading to revered shrines of Kedarnath, Badrinath, Gangotri and Yamunotri.
    • It is a proposed two-lane expresses National Highway with a minimum width of 10 metres in the state of Uttarakhand.
    • The project includes 900 km national highways will connect whole of Uttarakhand state.

    Chamba Tunnel

    • The Chamba tunnel is 440 m long and is a Horseshoe type tunnel with 10-metre carriageway width and 5.5m vertical clearance.
    • The BRO achieved this major milestone by digging up a 440 m long Tunnel below the busy Chamba town on Rishikesh-Dharasu road Highway (NH 94).

    Back2Basics: Border Roads Organisation (BRO)

    • The BRO develops and maintains road networks in India’s border areas and friendly neighbouring countries and functions under the Ministry of Defence.
    • It is entrusted for construction of Roads, Bridges, Tunnels, Causeways, Helipads and Airfields along the borders.
    • Officers from the Border Roads Engineering Service (BRES) and personnel from the General Reserve Engineer Force (GREF) form the parent cadre of the Border Roads Organisation.
    • It is also staffed by officers and troops drawn from the Indian Army’s Corps of Engineers on extra regimental employment.
    • The BRO operates and maintains over 32,885 kilometres of roads and about 12,200 meters of permanent bridges in the country.

  • The perils of the liquidity push

    Whether to focus on demand side or supply side is the dilemma policymakers dealing with the financial crises have always faced. If we look closely, the focus of the package announced by the government is on the supply side and pushing liquidity in the economy. This article examines the various measure announced in the package and elaborated why such measures are likely to fail.

    Focus on credit and liquidity in the package

    • The government has relied heavily on measures aimed at pushing credit to banks, non-banking financial companies (NBFCs) and businesses big and small.
    • These are expected to use borrowed funds to lend to others, make payments falling due, compensate employees even while under lockdown, and otherwise spend even while not earning.
    • The thrust is to get the Reserve Bank of India (RBI) and other public financial institutions to infuse liquidity and increase lending by the financial system.
    • RBI offered the financial institution capital for longer periods at a repo or policy interest rate that has been cut by more than a percentage point to 4%.

    Let’s understand liquidity and its role in crisis

    • The Prime Minister in his speech calling for a “self-reliant India” identified, besides land, labour and laws, “liquidity” as among the areas of focus of the package.
    • What is liquidity: In economic and business parlance, liquidity refers to ease of access to cash.
    • A liquid asset is one that can be easily sold for or replaced with cash.
    • And a liquid firm or agent is a holder of cash, a line providing access to cash, or assets that can be easily and quickly converted to cash without significant loss of value.
    • In periods of crisis, individuals, small businesses, firms, financial institutions and even governments tend to experience a liquidity crunch.
    • Relaxing that crunch is a focus of the government’s crisis-response package.
    • So, the government has given a much larger role to enhancing liquidity than it does either to direct transfers.

    So, let’s look at steps taken by the government to ensure liquidity

    1. LTRO and issues with it

    • Among the first steps taken by the RBI was the launch of special and ‘targeted’ long term repo operations (TLTROs).
    • LTROs allowed banks to access liquidity at the repo rate to lend to specified clients.
    • One round of such operations, which was relatively more successful, called for investment of the cheaper capital in higher quality investment grade corporate bonds, commercial paper, and non-convertible debentures.
    • What went wrong? That funding allowed big business, varying from Reliance and L&T to financial major HDFC, to access cheap capital to substitute for past high-cost debt or finance ongoing projects.
    • There is little evidence that this is triggering new investment decisions.

    2. Focus on saving NBFCs and why it failed to give the desired result?

    • The second round was geared to saving NBFCs, whose balance sheets were under severe stress even before the COVID-19 strike.
    • NBFCs were finding it difficult to roll over the short-term debt they had incurred to finance longer-term projects.
    • Banks were wary about lending to these NBFCs.
    • Banks feared that their clients could default in amounts that would bring the viability of these institutions into question.
    • Those fears were confirmed when Franklin Templeton announced that it was shutting down six of its funds.
    • Franklin Templeton set off redemption requests across the NBFC sector, as investors rushed to take back their money.
    • This happened at a  time when the ability of these institutions to mobilise funds to meet these demands had been impaired.
    • Not surprisingly, banks were unwilling to respond when liquidity was infused to target lending to the NBFCs.

    3. More intermediaries and credit guarantee by the government

    • Building on these initial liquidity infusion efforts, the COVID-19 package identified more intermediaries.
    • These intermediaries include the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, and the National Housing Bank.
    • The intermediaries were expected to refinance lending by the banks to different sections.
    • To persuade the banks and other intermediaries to take up these offers when the clients they must lend to MSME, street vendors, marginal farmers, etc. are themselves stressed, in some instances the government offered them partial or full credit guarantees in case their clients defaulted.
    • The government also sought to persuade the RBI to lend directly to NBFCs against their paper.

    Why the above 3 measure won’t succeed?

    • These measures, which are only marginally effective even in the best of times, will not work during this crisis.
    • Consider a bank or NBFC lending to small business.
    • With economic activity either at a complete stop or at a fraction of the normal, those who can access credit would either not borrow or only do so to protect themselves and not use the funds either to pay their workers or buy and stock inputs.
    • Even after the lockdown is lifted, the compression of demand resulting from the loss of employment and incomes would be considerable.
    • It would be aggravated by the fact that spending by a fiscally conservative government would fall sharply because of a collapse in revenue collections.
    • Faced with sluggish demand, firms are unlikely to meet past and current payments commitments and help the revival effort, just because they have access to credit.
    • This would mean that credit flow would actually not revive.
    • This danger is even greater because the government has been measly with its guarantees.
    • The government doesn’t want to accumulate even contingent liabilities that do not immediately affect the fiscal deficit.

    Increasing the disposable income

    • Another component of the “liquidity” push is the measures that temporarily increase the disposable income of different sections.
    • Such measures include advance access to savings like provident fund contributions, lower tax deduction at source, reduced provident fund contributions and moratoriums on debt service payments for a few months.
    • These measures are expected to provide access to cash inflows and reduce cash outflows, to induce agents to meet overdue payments or just spend to enhance the incomes of others.
    • These are marginal in scope, if relevant at all.
    • They have been combined with non-measures like adding on pending payments such as income tax refunds to spike “liquidity provision”.

    Way forward

    • What is needed now is government support in the form of new and additional transfers to people in cash and kind, and measures such as wage subsidies, equity support and spending on employment programmes.
    • That, as many have acknowledged, would require debt financed spending by the government, with borrowing at low-interest rates from the central bank or a “monetisation” of the deficit.
    • Unfortunately, obsessed as it is with fiscal conservatism and tax forbearance, the government is unwilling to take that route.

    Consider the question “Every stimulus package provokes a debate for its emphasis on either supply-side or the demand side. Examine the provision in the stimulus package announced by the government which focuses on the supply side. What are the issues with supply-side focus in the package?”

    Conclusion

    Overall, the “transmission” of the supply side push from these monetary policy initiatives for relief and revival is bound to be weak. Given the circumstances, the liquidity push, even if partially successful, would only culminate in eventual default, as borrowers use the debt to just stay afloat in the absence of new revenues.

  • Time to evaluate and merge income support schemes

    Both States and Center have income support schemes for the farmers. Coincidentally, they both suffer from common problems such as the exclusion of tiller from the benefit and identifying the landless labourers. This article floats the idea of merging all the support schemes in favour of an umbrella scheme. So, what are the solutions and how will an umbrella scheme be more beneficial? Read to know…

    Not much ‘new cash’ in the relief package

    • On May 12, the PM announced that his government’s relief-cum-stimulus package would be Rs 20 lakh crore, almost 10 per cent of India’s GDP.
    • But when Finance Minister unveiled the package, sector by sector, many wondered where the “new cash” was?
    • So, it became clear that additional relief and stimulus in the system is just about 1 per cent of the GDP — not 10 per cent.
    • Much of the rest is directed towards increasing liquidity and deferring some loan payments, but not much additional cash.

    Cash-transfer schemes by the state governments: Chhatisgarh and other states

    • In this context, the Chhattisgarh government deserves compliments for launching the Rajiv Gandhi Kisan Nyay Yojana (RGKNY).
    • RGKNY is an income transfer scheme at Rs 10,000/acre for paddy farmers and Rs 13,000/acre for sugarcane farmers.
    • The state’s chief minister has said that the scheme will be extended to farmers of other crops — in fact, to landless labourers as well.
    • On the face of it, RGKNY will help put money directly into the hands of farmers and poor agricultural labourers.
    • In kharif 2018-19, Telangana announced a cash transfer scheme of Rs 4,000/acre, per season — this was raised to Rs 5,000/acre per season in kharif 2019-20.
    • There is a live portal that gives the details of the scheme and its progress.
    • In the rabi season of 2018-19, the Odisha government launched the KALIA scheme-Krushak Assistance for Livelihood and Income Augmentation- on a somewhat similar pattern.
    • West Bengal’s Krishak Bandhu and Jharkhand’s Mukhya Mantri Krishi Aashirwad Yojana are the other income support schemes worth mentioning.

    2 Issues with income support policies and solutions

    1. The beneficiary is not always tiller of the land

    • Ideally, the money of the policies should go to the real tiller.
    • But in large parts of the country, there is no record of tenancy.
    • The government data shows only 10 per cent tenancy in the country.
    • While several micro-level studies indicate that it could be anywhere between 25-30 per cent.
    • In fact, in many regions like the Godavari belt, it could be even more than 50 per cent.
    • It does not make much sense to put money into the accounts of absentee landlords.

    So, what is the solution to this problem?

    • 1) The best way would be to change the tenancy laws.
    • Open up land lease markets, ensuring that the owner of the land has full rights to take his land back after the expiry of the lease period.
    • The current law, favouring “land to the tiller”, is loaded against the owner.
    • As a result, much of tenancy in the country remains oral.
    • 2) In the absence of such legal changes in land lease laws, the only way forward is to fully inform the tiller that the owner has got income support.
    • And then appeal to the owner to pass on this benefit to the tiller — or adjust the land rent accordingly.
    • Information and persuasion campaigns in radio and newspapers would increase the chances of the benefits being passed on to the real tillers.

    2. Identifying the landless labourers working on the farms

    • The other issue is identifying the landless labourers working on farms.
    • Majority of them are temporary and seasonal workers.
    • And leaving the task of identification to panchayats and patwaris can open doors for large leakages and corruption.

    What is the solution to this problem?

    • There have been talks in the past for synchronising MGNREGA with farm operations.
    • The synchronising will have two benefits-
    • 1)It will contain the cost of farming.
    • 2) It will ensure that those engaged in this employment guarantee scheme do useful and productive work.
    • The legal framework of the MGNREGA scheme does allow this on farms owned by people of SC/ST communities, and on the lands of marginal farmers.

     Merging Income Support Schemes: The way forward

    • The time has come to think seriously about merging income support schemes.
    • The merger will include the PM KISAN and state-level schemes, with the MGNREGA and price-subsidy schemes — food and fertiliser subsidies given by Centre and power subsidies given by state government.
    • These schemes amount to Rs 5 lakh crore — that’s a good sum of money to start a basic income cover for poor households.
    • Markets could then be left to operate freely.
    • This approach can cover landless labourers, farmers, and poor consumers — these categories overlap.
    • Let there be an expert group to look closely into the functioning of each one of these schemes and create an umbrella scheme to take care of the poor and the needy.

    Consider the question-“Examine the issues with the income support schemes for farmers by the States as well as the Central government. Do you think that an umbrella scheme after merging all the support schemes will be helpful in overcoming such issues?”

    Conclusion

    Though income support schemes by the state government and the Centre are a welcome move, however, when one looks at the issues with these schemes an umbrella scheme after merging all the present schemes will go a long way in solving the problems which almost all these schemes face today.

    Back2Basics: PM- KISAN

    • Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)is a Central Sector Scheme with 100% funding from the Government of India.
    • It is being implemented by the Ministry of Agriculture and Farmer’s Welfare.
    • Under the scheme, the Centre transfers an amount of Rs 6,000 per year, in three equal instalments, directly into the bank accounts of the all landholding farmers irrespective of the size of their land holdings.
    • It intends to supplement the financial needs of the Small and Marginal Farmers (SMFs) in procuring various inputs to ensure proper crop health and appropriate yields, commensurate with the anticipated farm income at the end of each crop cycle.
    • The entire responsibility of identification of beneficiary farmer families rests with the State / UT Governments.

  • Hardly the 1991 moment for agriculture

    Reforms in agri-marketing has been long overdue. So, the government recently announced three reforms in this regard. This article examines the problems of agri-marketing. And it concludes that the said reforms are far from being the silver bullet for these problems. So, why these reforms are not going to be effective? Does demand play any role in the problems agriculture is facing currently? Read to know about these issues.

    Announcement of reforms regarding agricultural marketing

    • The announcement of reforms in agricultural marketing by Finance Minister in May, has been hailed by some as the “1991” moment for agriculture.
    • The three reforms regarding agricultural marketing were the reforms in the 1) Agricultural Produce Marketing Committee (APMC) Act, 2) the Essential Commodities Act, 3) Contract farming.
    • All of these have been in discussion for almost two decades, with the APMC Act having already seen substantial reforms in many States.
    • The first comprehensive model act on APMC was proposed during 2003, and since then, similar efforts to push for more reforms have been proposed in 2007, 2013, and as late as 2017 by the present government.

    So, let’s a look at provisions of APMC Act and issues with it

    What is the main argument against APMC Act?

    • Two main arguments against the APMC Act are-
    • 1) It creates barriers to the entry and exit of traders.
    • 2) Makes the sale and purchase of agricultural produce compulsory for farmers as well as traders.

    Different steps taken by the state governments to address the issues

    • So, as many as 17 State governments have amended the APMC Act to make it more liberal.
    • In fact, the regulations and the functioning of mandis vary a great deal across States.
    • Kerala does not have an APMC Act.
    • Bihar repealed it in 2006.
    • But several others such as Maharashtra, West Bengal, Odisha, Gujarat, and Andhra Pradesh deregulated fruits and vegetables trade, allowed private markets, introduced a unified trading licence and have introduced a single-point levy of market fee.
    • Tamil Nadu has already reformed its APMC with no market fee.
    • Several others such as Jharkhand, Himachal Pradesh, Uttarakhand, Haryana and Rajasthan have undertaken one or more of these reforms.
    • Many States have introduced direct marketing of farm produce, examples being the Uzhavar Sandhai (Tamil Nadu), the Rythu Bazaar (Andhra Pradesh and Telangana), the Raitha Santhe (Karnataka), the Apni Mandi (Punjab) and the Krushak Bazaar – (Odisha).

    So, why the mandis are still blamed for farmers’ problems?

    • Despite the above-stated reforms, APMC mandis continue to be vilified for-1)  all the ills plaguing marketing infrastructure 2) the low prices received by the farmers for their produce.
    • What is the problem? The problem with mandis is not the regulation per se and the structure of mandis but the political interference in the functioning of the markets.
    • These are more obvious in case of large mandis specialising in commercial crops and fruits and vegetables, where production is regionally concentrated.
    • But even with these deficiencies, APMC mandis continue to play an important role in providing access to the market for farmers.

    What the Bihar example teaches us?

    • Bihar repealed the APMC Act in 2006.
    • The general argument in favour of reforms is that 1) it will allow private investment in marketing infrastructure and 2) provide more choices to farmers, leading to better prices received by farmers.
    • But in the case of Bihar,  no investment came in building market infrastructure.
    • The loss of revenue due to the repeal of the APMC also led to deterioration of existing infrastructure in the State.
    • The revenue collected from the APMC earlier was used not only for the modernisation of these market yards but also for the laying of roads and construction of other infrastructure to provide farmers better access to markets.
    • But after the repeal, there have been no takers for these market yards, with no investment in creating private mandis.
    • On the other hand, it has led to proliferation of private unregulated markets which charge a market fee from traders as well as farmers, and without any infrastructure for weighing, sorting, grading and storage.
    • Even in other States where there is deregulation to allow private traders, there is hardly any investment to create market spaces let alone provide other facilities.
    • There is also no evidence that farmers have received better prices in private mandis outside the APMC.
    • While there have been instances of collusion and corruption in the running of the APMC, they continue to provide essential services to farmers.

    Inadequacies of the regulated market

    • As against the recommendation that a regulated market should be available to farmers within a radius of 5 km currently regulated markets is in the radius of 12 km.
    • There are more than 7,000 regulated markets and 20,000 rural markets when the need is at least twice these figures.
    • Most of the existing ones require investment in upgradation of infrastructure.

    Price received is more a function of demand than access to market

    • The argument that the only bottleneck for farmers not receiving remunerative prices is due to the APMC Act is flawed.
    • More than 80% of farmers, most of whom are small and marginal farmers, do not sell their produce in the APMC mandis.
    • For a majority of farmers, prices received are more a function of the demand for agricultural commodities than access to markets.

    So, let’s come to decline in demand for agriculture produce

    • For much of the period during the last two years, terms of trade have moved against agriculture.
    • Agricultural commodity price inflation had been negative for a large part of the last two years.
    • With underlying weakness in demand and obsession with inflation targeting through fiscal and monetary policies, most agricultural commodities have seen a sharp decline in demand and, consequently, prices received by farmers.
    • The argument for choice of markets is only valid as long as there are buyers with purchasing power in the market.
    • No amount of marketing reforms will lead to higher price realisation for farmers if the underlying macroeconomic conditions are unfavourable to agriculture and farmers.

    What is solution to decline in demand?

    • The primary task of the government should have been to increase fiscal spending to revive demand in the economy.
    • This has become even more necessary after the sharp decline in incomes, job losses and decline in demand following the lockdown and expected contraction in economic activity for the year ahead.
    • With international prices also showing declining trend, the urgency is to protect the farmers from the decline in commodity prices.

    Consider the question “Though the APMC Act has often been blamed for the woes of the farmers in price realisation, the act is not the sole reason for price realisation problems faced by the farmers. Critically examine.

    Conclusion

    The announced reforms are less likely to be effective if carried out without consulting the states. And on the demand side, government needs to increase fiscal spending to create demand in the economy. These two steps will go a long way in ensuring higher incomes to farmers.

    Back2Basics: Agriculture Produce Marketing Committee Regulation (APMC) Act.

    • All wholesale markets for agricultural produce in states that have adopted the Agricultural Produce Market Regulation Act (APMRA) are termed as “regulated markets”.
    • With the exception of Kerala, J & K, and Manipur, all other states have enacted the APMC Act.
    • It mandates that the sale/purchase of agricultural commodities notified under it are to be carried out in specified market areas, yards or sub-yards. These markets are required to have the proper infrastructure for the sale of farmers’ produce.
    • Prices in them are to be determined by open auction, conducted in a transparent manner in the presence of an official of the market committee.
    • Market charges for various agencies, such as commissions for commission agents (arhtiyas); statutory charges, such as market fees and taxes; and produce-handling charges, such as for cleaning of produce, and loading and unloading, are clearly defined, and no other deduction can be made from the sale proceeds of farmers.
    • Market charges, costs, and taxes vary across states and commodities.

    Essential Commodities Act 1955

    • 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.
    • It has since been used by the Government to regulate the production, supply and distribution of a whole host of commodities it declares ‘essential’ in order to make them available to consumers at fair prices.
    • Additionally, the government can also fix the maximum retail price (MRP) of any packaged product that it declares an “essential commodity”.
    • The list of items under the Act includes drugs, fertilizers, pulses and edible oils, and petroleum and petroleum products.
    • The Centre can include new commodities as and when the need arises, and takes them off the list once the situation improves.

    How ECA works?

    • If the Centre finds that a certain commodity is in short supply and its price is spiking, it can notify stock-holding limits on it for a specified period.
    • The States act on this notification to specify limits and take steps to ensure that these are adhered to.
    • Anybody trading or dealing in the commodity, be it wholesalers, retailers or even importers are prevented from stockpiling it beyond a certain quantity.
    • A State can, however, choose not to impose any restrictions. But once it does, traders have to immediately sell into the market any stocks held beyond the mandated quantity.
    • This improves supplies and brings down prices. As not all shopkeepers and traders comply, State agencies conduct raids to get everyone to toe the line and the errant are punished.
    • The excess stocks are auctioned or sold through fair price shops.

  • Digital currency plan made in China

    Central banks all over the world have had mixed feelings towards cryptocurrencies. Some of them have resorted to banning them altogether. And yet, cryptocurrencies exist and have been flourishing. But China seems to be bent on taking the “road less travelled”. This article explains the various aspects underlying the China’s move. These somehow apply to all the central banks, including the RBI. Read more to know more about such aspects.

    Digital currency by China’s central bank

    • In December 2019, a pilot programme was launched in Beijing to intensively advance the trial work of fintech innovation regulation.
    • This pilot has now been expanded to include several other cities.
    • This expansion of the pilot marks the initiation of China’s central bank digital currency (CBDC).
    • Christened Digital Currency Electronic Payment (DCEP), available via a mobile wallet app.
    • It is pegged 1:1 with fiat currency, and designed to replace M0 which comprises currency issued by the PBoC less the amount held by banking institutions.
    • This is the first such serious initiative in the whole world.

    Why central banks are sceptical of cryptocurrencies?

    • Historically, monetary authorities everywhere have been sceptical of cryptocurrencies.
    • The reasons for scepticism includes following problems-
    • 1) Wild fluctuations in the value of cryptocurrencies.
    • 2) The implied challenge to the monopoly of central banks in issuing fiat currencies.
    • 3) The looming possibility of software bugs.
    • 4) The tainted shadow of the dark web.

    But some central banks have been planning to issue fiat digital currency

    • Authorities were far more intrigued by CBDCs.
    • In fact, the Basel-based Bank for International Settlement (BIS) has been conducting surveys on this issue for some time.
    • The recent survey of 2019 “Proceeding with Caution – a Survey on Central Bank Digital Currency” revealed that while in general, central banks have been proceeding cautiously towards introducing central banks digital currencies.
    • Some have been planning to issue a fiat digital currency in the short to medium term.
    • In particular, the survey revealed that nearly 25% of central banks have the required authority to issue a CBDC, while a third do not, and 40% remain unsure.

    If you cannot beat them, join them

    • So, what factors led China to release the cryptocurrency?
    • Chinese investors were always attracted to cryptocurrencies.
    • With the bearish turn in the Chinese stock market in 2015-16, bitcoins became increasingly popular as an alternative asset class in China.
    • As in media reports, in the recent past, China has emerged as the capital of the crypto ecosystem, accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin mining operations.
    • The PBoC tried hard to curtail this exuberance but achieved limited success.
    • The recent move to introduce the CBDC in China is a logical outcome of the efforts to curb and tackle its runaway cryptomarket practices.
    • Or, the philosophy of the PBoC could simply have been, if you cannot beat them, join them.

    Advantages and concerns

    • At a practical level, the benefits of CBDC are manifold.
    • First, paper money comes with high handling charges and eats up 1% to 2% of GDP.
    • Second, by acting as a powerful antidote for tax evasion, money laundering and terror financing, CBDCs can materially boost tax revenues while also improving financial compliance and national security.
    • Third, as a tool of financial inclusion, particularly in emergencies, direct benefit transfers can be instantly delivered by state authorities deep into rural areas, directly into the mobile wallets of citizens who need them.
    •  Fourth, CBDCs can provide central banks with an uncluttered view and powerful insights into purchasing patterns at the citizen scale.
    • In the long run, it is believed that CBDCs will make cross-border payments fast and frictionless.

    Concerns

    • All these salutary benefits come packaged with a deep and abiding concern about the relentless rise of a surveillance state and the concomitant erosion in citizen privacy and anonymity.
    • If face-recognition technology enables states to spy on the physical movement of citizens, will CBDCs be used to spy on every movement of their money?

    But how Central bank’s digital currency is different from private cryptocurrencies such as Bitcoin?

    • An earlier research paper by PBoC Deputy Governor favoured a two-tier CBDC model.
    • In this model instead of directly interacting with the public, the central bank would involve financial intermediaries such as commercial banks.
    • In tier 1, the central bank would interface with financial intermediaries.
    • In tier 2, the financial intermediaries would interface with the general public.
    • Advantage? Such a model is accretive in that it preserves the power of existing financial systems and extends their influence further.
    • It is believed that the DCEP uses a DLT architecture (with central controls) which preserves the primacy of the monetary authority, unlike private cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) that are truly decentralised.

    Silver bullet to slay three dragons

    • What may China be signalling with the launch of DCEP?
    • First, on the world economic stage, it may want DCEP to challenge the hegemony of the U.S. dollar as the default global reserve currency.
    • Second, in its war with American BigTech, it may want to showcase DCEP as its weapon of choice to counter FB or Facebook’s Libra, which is planning to offer a common cryptocurrency to 2 billion-plus FB users across the world.
    • Third, and still in the realm of speculation, it may wish to use the DCEP to clip the wings of AliPay and WeChatPay, gigantic fintech duopolies that control 90% of the China’s domestic digital payments, and whose ambitions may one day pose a threat to the aura and authority of the central bank.

    Consider the question “Most of the central banks have been sceptical in their attitude toward the cryptocurrencies. Yet, they persisted. Next came the Supreme Court decision lifting ban on them. In light of this, examine the advantages and concerns that come with the cryptocurrencies.”

    Conclusion

    From gold to silver to paper to digital, the march of currencies goes on. China has rolled the dice on central bank digital currencies, challenging other nations to follow. Welcome to the future of money.

  • Neglect of demand side

    What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.

    Why stakeholders are not happy with the package?

    • Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
    •  Marketing reforms and infrastructure creation are distant promises.
    • MSME sector:  The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
    • In their experience, lenders are not always supportive in extending loans.
    • While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
    • What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
    • Corporate sector: There is nothing for the corporate sector in manufacturing or services.
    • The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
    • Ironically, there is little for public health, already in a dilapidated state.
    • Even stock markets, characterised by irrational exuberance in the past month, have dropped.

    Government expenditure in the fiscal stimulus

    • The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
    • This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
    • Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
    • The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
    • Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

    Focus of the package: supply side

    • It is clear that the design of this relief package seeks to focus on the supply side.
    • Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
    • Focus is not on the demand side by stepping up government expenditure.
    • This is done with the aim of minimising the cost to the government.
    • The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.

    So, let’s understand why focus on supply side is flawed strategy

    • This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
    • Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
    • Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
    • At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
    • In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
    • For this reason, the fiscal stimulus should have been much larger.

    Excessive concerns over fiscal deficit

    • The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
    • Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
    • The conclusion drawn, wrongly, is that there is no fiscal space.
    • The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
    • In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.

    Monetising the deficit  and issues involved in doing so

    • This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
    • Such market borrowing would simply drive up interest rates and nip recovery in the bud.
    • It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
    • Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
    • In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
    • Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
    • For one, their ethics and integrity have seen steady erosion.
    • Moreover, how many sovereign governments will they downgrade?
    • In fact, we might be better off without the footloose and volatile portfolio investment inflows.

    Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”

    Conclusion

    If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.

  • Focus on supply side

    Whether to focus on supply side or demand side is the dilemma governments often face while deciding the measures to cure the ailing economy. This article explains using basic economics and evidence from across the world to make the case for a focus on the supply side. In doing so, it explains the problems with demand side measures such as cash transfers and tax rebets.

    Issue of neglect of demand side

    • The Union government is often criticised for its apparent neglect of the demand side and its excessive focus on the supply side.
    • Structural reforms — the COVID-19 package was no exception.
    • Low credit growth, weak inflation, and flat wage growth are the factors focused by demand-side proponents.
    • The deand side proponents suggest measures such as cash transfers, income tax cuts, and cheap credit to consumers.

    So, let’s focus on Demand vs. Supply side debate

    Low growth in credit to MSME

    • A demand shock typically leads to a rise in both volume and the price.
    • A supply shock not only hurts the volume but also leads to price rise.
    • In banking, a good proxy for the price of credit is the spread.
    • Spread is difference between lending rate and the funding rate  repo rate or deposit rates for the banks.
    • The spread reflects the risk premium banks charge to their customers.
    • The spread has consistently risen from just below 4 per cent at the start of 2018 to around 6 per cent in January 2020.
    • That means, the banks charged 4-6 per cent more on loan than it paid to its depositor or to RBI on the funds it got from them.
    • The fact that spreads are rising was highlighted by the 2019 Economic Survey as well.
    • At the same time, the credit growth — especially for public banks and to the MSME sector — has been sluggish for the previous two to three years.
    • The MSME sector witnessed sub-zero credit growth for the whole of 2017 and even now, the credit growth is very tepid at around 2 per cent Y-o-Y.
    • Rising spreads with lower credit volume provide a clear sign that credit supply is broken.

    What a paper by Nobel laureates on MSME says?

    • Paper by Nobel laureates Abhijit Banerjee and Esther Duflo examines the reasons for MSME problems.
    • The paper amply highlights the fact that the MSME sector suffers from lack of credit availability to finance investments rather than the lack of demand for credit.
    • They showed that when the government changed the definition of small firms, the firms newly covered by the priority sector lending programme used the extra credit to increase production and investment.
    • If there was no demand for credit, cheaper credit under the priority sector programme should have been used to repay the older expensive sources of borrowings.

    So, how will the recently announced package help MSEs?

    • Consistent with this view, we think that the government’s approach of guaranteeing SME credit by resolving the risk-sharing problem for banks will expand credit to credit-starved SMEs at lower credit spreads.
    • Similarly, expansion of the universe of small/medium firms will bring fresh investments from the firms, which are newly covered under priority sector programme as they will be able to get cheaper credit.

    2 Measures to increase consumer demand and issues involved

    1. Direct transfers schemes

    • No doubt that cash-transfers are superior to distortive subsidies and the “Garib Kalyan” package was a step in this direction.
    • In fact, the government has already transferred close to Rs 40,000 crore to bank accounts including Rs 10,000 crore to women under PMJDY.

    But is cash-transfers the ultimate solution to recovery?

    • In fact, the PMJDY account balance has increased.
    • The increase is from close to Rs 1,17,000 crore before the advent of COVID-19 to Rs 1,35,911 crore as of May 13 .
    • This is a massive jump of close to Rs 18,000 crore.
    • Recent research by Prasanna Tantri and co-authors shows that PMJDY account holders actively use the accounts — 1.12 transactions per quarter compared to the World Bank standard of one transaction.
    • In fact, PMJDY accounts see withdrawals when account holders are in distress, according to the study.
    • So the rise in balances is not mechanical.

    So, why are they not spending?

    • It’s not that people covered under PMJDY are comfortable financially.
    • A number of papers show that tax rebates boost demand in the short-run, but the quantum is limited.
    • For example, Sumit Agarwal and his co-authors show that the 2001 tax rebate programme in the US led to an average spending of only $60 on $500 rebate over nine months.
    • A recent study at the Kellogg Business School by Christian Borda and co-authors shows that tax rebates after the 2008 crisis in the US led to rise in spending, but by only 3.5 per cent in the first month of the rebates.
    • The crux is that no rational consumer goes on a consumption spree when he is facing job uncertainty!

    2. What about providing cheap credit to customers?

    • Trying to boost demand by providing cheap credit to consumers is not a good idea either as evidenced by the debt-financed housing boom in the US, which led to the 2008 crisis.
    • In fact, Atif Mian and Amir Sufi, using a large panel of 30 countries, uncover a more general pattern — an increase in household debt to GDP ratio leads to a sustained drop in future GDP, investments, and unemployment.
    • On the other hand, the economic cycles are much more muted when the initial growth is caused by structural reforms as pointed in a recent IMF study covering over 80 countries.

    Consider the question “Whenever governments decide on the stimulus package amid financial crises, supply side vs. demand side debate flares up. This has also been the case in India as the government announced the stimulus package recently. In light of this, examine the issues involved in demand side measures.”

    Conclusion

    To put the burden of recovery on risk-averse consumers, incentivising them to spend rather than save when there is employment uncertainty, is against any reasonable risk-sharing principle. Risk should be borne by those who have the appetite — the firms and government.

  • In news: International Tea Day

    The ‘International Tea Day’ gets thumbs up from the UN. Tea is the most consumed drink in the world, second only to water.

    It would be no surprise to expect a question based on worldwide tea production:

    Q. Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

    (a) China

    (b) India

    (c) Myanmar

    (d) Vietnam

    International Tea Day

    • While the UN has been aware of the popularity of the drink, May 21, 2020, became the first time when it recognized and gave an official nod to International Tea Day.
    • The UN General Assembly proclaimed May 21 as International Tea Day.
    • The day is aimed at promoting sustainable production, consumption and trade of tea.
    • As part of the celebrations, key players in tea production come together and make systematic plans for expansion of demand for tea, particularly in tea producing countries where per capita consumption is relatively low.
    • This day also reminds all actors at global, regional and national levels to ensure that the tea sector continues to play a role in reducing extreme poverty, fighting hunger and safeguarding natural resources.

    Tea

    • Tea is an aromatic beverage commonly prepared by pouring hot or boiling water over cured leaves of the Camellia sinensis, an evergreen shrub native to East Asia.
    • After water, it is the most widely consumed drink in the world.
    • There are many different types of tea; some, like Darjeeling and Chinese greens, have a cooling, slightly bitter, and astringent flavour.
    • Tea has a stimulating effect in humans primarily due to its caffeine content.
    • China is the leading producer of tea in the world. (Ref.)

    Its significance

    • In 2018, over 50 lakh tonnes of tea was consumed globally, according to Food and Agriculture Organization (FAO) of the UN.
    • The origin of tea plantations dates back to 5,000 years. Like many cultures, tea enjoys a special space in Indian culture.
    • With more than 100 varieties being consumed in the country, India is among the top four producers of tea.
    • Currently, tea is grown in more than 35 countries and supports 1.3 crore people including smallholder farmers around the globe.

    Back2Basics: Tea cultivation in India

    • India is the second producer of tea in the world and second in terms of land devoted to tea growing as well.
    • Much of India’s tea production is concentrated in the areas of Darjeeling, Nilgiri, Dooars, and Assam, which is the single largest tea growing region in the world. The top 5 growing states in India, ranked by production, are:

    1) Assam

    2) West Bengal

    3) Tamil Nadu

    4) Kerala

    5) Karnataka

  • Structural issues in agri-marketing

    The article discusses the structural issues that may not go away with the reforms announced by the government recently. Issues like inadequacies in APMC infrastructure, regulation of APMCs need are discussed in detail.

    What is the issue?

    • The Union government signalled the intention to enact a new central law.
    • The new law would override existing state regulations that restrict the farmer from legally selling to anyone other than a buyer licensed by the local Agricultural Produce Marketing Committee (APMC).
    • The decision to push for a central law comes after dissatisfaction with two decades of partial and uneven reforms by different states.

    So, will the change in the law solve the marketing problem?

    •  This will be overstating the power of legal reform in guaranteeing economic freedom and outcomes.
    • The problems farmers face are of two type-
    • 1) Problems that are a result of vested, monopolistic interests.
    • 2) Problems that are rooted in larger structural conditions that significantly weaken their terms of engagement in agricultural markets.
    • Type 1 may be addressed by regulatory intervention.
    • But type 2 will need location-specific policies, well-directed investment, and well-functioning agricultural institutions.
    • So, solving either of these problems require consensus, coordination and capacity in which the states will need to play a major role.

    Why do farmers sell their produce outside APMC mandis?

    • The dominant narrative is that farmers are forced to sell their produce only to licensed APMC traders.
    • But the reality is that even today the majority of Indian farmers sell their produce to small-scale and largely unlicensed traders and intermediaries.
    • This is true, especially of small and marginal cultivators.
    • But, if farmers are bound by law to sell in APMC mandis, why are so many of them selling outside?

    But, do we have enough mandis?

    • At least part of the answer to the question of why farmers sell outside mandis is that India still doesn’t have enough mandis.
    • Over the decades, most states in general, and specific regions in particular, have hugely under-invested in the basic infrastructure required to create viable, primary wholesale markets within easy physical reach of farmers.
    • The 2017 Doubling Farmers Income Report estimates that in addition to the current 6,676 principal and sub-market yards under APMCs India needs over 3,500 additional wholesale markets.
    • Approximately 23,000 rural periodic markets (or haats) have also suffered long-standing neglect.
    • So, the new allocation towards market infrastructure must be fully utilised to build up an appropriately designed physical marketing ecosystem, especially in remote regions.
    • Most importantly, unlike in the past, this process should engage deeply with farmers and traders in each location to avoid misdirected and misplaced infrastructure and assets.

    Regulatory reforms in mandis needed

    • Where APMC mandis do exist and have established themselves as dominant market sites, mandi committees have typically done everything in their power to restrict competition.
    • Obtaining a licence for a new entrant — has most often proved to be a bureaucratic nightmare and a costly affair.
    • This is where regulatory reform to remove conflicts of interests, enable the entry of new buyers, and facilitate the flow of trade both within and outside the mandi system is absolutely crucial.
    • No state has done enough in this direction, but here too there are cautionary lessons.

    Perils of complete deregulation: Example of Bihar

    • Complete deregulation, as we have seen in the decade following Bihar’s repeal of its APMC Act in 2006, does not necessarily transform agricultural markets and spur competition.
    • Even after all restrictions were lifted, there was little uptake in direct procurement by formal players in the state.
    • When corporations entered the maize market in a big way, they chose to buy from larger traders and aggregators and not from farmers.
    • Most farmers have seen little change in marketing practice and continue to sell to village traders as they had done before the repeal.
    • Where private markets have emerged — mainly for horticultural produce — they are constituted and run by local traders and commission agents.
    • But across the system, traders complain about deteriorating infrastructure.
    • And the regulatory vacuum has led to the proliferation of brokers to deal with counter-party risk in growing and dynamic commodity markets such as maize.

    Benefits of limited degree of regulation: MP and Karnataka example

    • Madhya Pradesh and Karnataka have undertaken some degree of regulatory reform instead of repeal.
    • In these states, we do observe, at least to some extent, the fruits of competition.
    • In the early 2000s, MP granted ITC a licence to set up procurement hubs outside mandi yards.
    • Establishment of ITC procurement hubs not only resulted in price competition, but also from electronic weighing and quick payments, as mandis upgraded in response.
    • But ITC’s procurement channel was understandably restricted to select commodities (and qualities), seasons and farms within its own commercial strategy.
    • These limitations revealed the mandi’s comparative advantage as a permanent multi-buyer, multi-commodity market for all local producers.
    • The key lesson to draw from studies of direct procurement and contracting is the need for a regulatory architecture that enables both new and existing systems to respond, adapt, and compete.

    Issue of intermediation

    •  Small traders and intermediaries exist — and persist — because they are able to respond — in cash, credit, time and place — to the multiple needs of farmers and firms across the interconnected domains of production, marketing, processing and consumption.
    • This is not to say that they do not exploit farmers when the opportunity arises.
    • So, the organised and technologically driven procurement and marketing systems will only work if they manage to address the real constraints that farmers face on the ground, especially access to credit, inputs, storage, transport, and timely payments.
    • Most of these constraints originate in the relations of land ownership and access and the limits and exclusions they impose on smallholding farmers and landless cultivators.
    • Simply put, farmers will not be in a position to exercise any newly granted regulatory freedom in the market if they cannot overcome these constraints.
    • Equally, while increasing competition for intermediaries is desirable, their elimination is a misguided — and indeed dangerous — objective if one does not respect or replace the roles and risks that they cover.

    Issue of re-regulation and new barriers to entry

    • Agriculture is at the very heart of the essential economy and our food system runs on the backs of small-scale producers, traders, commission agents, processors, wholesalers, retailers, and labourers.
    • Regulatory reform to increase competition must not degenerate into re-regulation that unduly favours large-scale consolidation and channel control by erecting new barriers to entry and operation for agro-commercial MSMEs.

    The UPSC asked a direct question about the APMC Act in 2014- ” There is also a point of view that Agriculture Produce Market Committees (APMCs) set up under the State Acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine.”

    Conclusion

    While going for the reforms government must consider the issues underlying the problems and try to address them. We must recognise and strengthen the diversity, dynamism, enterprise, and resilience of India’s agricultural markets.

     

     

  • Explained: Contract Farming and its benefits

    The Odisha government has promulgated an ordinance allowing investors and farmers to enter into an agreement for contract farming in view of the continuing uncertainties due to the pandemic.

    Practice question for mains:

    Q. What is Contract Farming? Examine its potentials and feasibility from the perspective of farmers’ interests.

    Moving on with Odisha’s law

    • The Odisha ordinance is aimed at facilitating both farmers and sponsors to develop mutually beneficial and efficient contract farming system.
    • It is argued that the new system will lead to improved production and marketing of agricultural produce and livestock while promoting farmers’ interest.
    • The agreement will be entered into between the contract farming sponsor, who offers to participate in any component or entire value chain including preproduction, and the contract farming producer (farmers), who agree to produce the crop or rear the livestock.
    • Both the loans and advances given by the sponsor to the producer can be recovered from the sale proceeds of the produce.
    • And in no case realized, recovery can be through the sale or mortgage or lease of the land in respect of which the agreement has been entered into.

    What is Contract Farming?

    • Contract farming (CF) can be defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products.
    • Typically, the farmer agrees to provide agreed quantities of a specific agricultural product.
    • These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser.
    • In turn, the buyer commits to purchase the product and, in some cases, to support production through, for example, the supply of farm inputs, land preparation and the provision of technical advice.

    Some business models in CF

    1) Informal model – This model is the most transient and speculative of all contract farming models, with a risk of default by both the promoter and the farmer. However, this depends on the situation: interdependence of contract parties or long-term trustful relationships may reduce the risk of opportunistic behaviour.

    2) Intermediary model – In this model, the buyer subcontracts an intermediary (collector, aggregator or farmer organisation) who formally or informally contracts farmers (a combination of the centralised/ informal models).

    3) Multipartite model – This model can develop from the centralised or nucleus estate models. It involves various organisations such as governmental statutory bodies alongside private companies and sometimes financial institutions.

    4) Centralized model – In this model, the buyers’ involvement may vary from minimal input provision (e.g. specific varieties) to control of most production aspects (e.g. from land preparation to harvesting). This is the most common CF model.

    Advantages of Contract Farming:

    To the farmers:

    • It helps in skilling of farmers as they learn to use various resources efficiently like fertilizer, pesticides and get in touch with new technology in some cases.
    • Farmers get the opportunity for diversification of crops.
    • Price risk is drastically reduced as many contracts specify prices in advance.
    • Contract farming can open up new markets which would otherwise have been unavailable to small farmers. The farmers can also get easy credit from the Bank under contractual agreements.
    • In the case of agri-processing level, it ensures a consistent supply of agricultural produce with quality, at the right time and lesser cost.

    To the Client:

    • They get uninterrupted & regular flow of raw material of high quality which helps in protection from fluctuation in market pricing.
    • Long term planning of business is possible as they have a dedicated supplier base of raw material.
    • Concept of contract farming can be extended to other crops also which helps to generate goodwill for the organisation.

    Limitations

    • Contract farming arrangements are often criticized for being biased in favour of firms or large farmers while exploiting the poor bargaining power of small farmers.
    • Problems faced by growers like an undue quality cut on produce by firms delayed deliveries at the factory, delayed payments, low price and pest attack on the contract crop which raised the cost of production.
    • Contracting agreements are often verbal or informal in nature, and even written contracts often do not provide legal protection in India that may be observed in other countries. Lack of enforceability of contractual provisions can result in a breach of contracts by either party.
    • Single Buyer – Multiple Sellers (Monopsony).
    • Adverse gender effects – Women have less access to contract farming than men.

    Also read

    What is contract farming? Critically analyze the features of the draft “Model Contract Farming Act – 2018”. (150 W)

    With inputs from Vikaspedia