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Subject: Economics

  • FCI to the rescue

    FCI, indeed, has remained a crucial topic from the examination viewpoint. Mostly it is highlighted for its issues, corruption and wastages in the godowns. Be it MS Swaminathan or the latest Shanta Kumar committee all focus on how to revamp this giant institution. This article, however, points to the relevance of the FCI in the times of pandemic and suggests areas where there is scope for improvement in fulfilling its role. Stay tuned to find out what are the major concerns with FCI which needs consideration by the government.

    A background check on FCI

    • The FCI was set up under the Food Corporations Act 1964.

    •  In its first decade, FCI was at the forefront of India’s quest of self-sufficiency in rice and wheat following the Green Revolution.

    • Its functions involved managing procurement and stocking grain that supported a vast Public Distribution System (PDS).

    • Over time it became a behemoth that had long outlived its purpose and Its operations were regarded as expensive and inefficient.

    • Even in the 1970s and 1980s, poor storage conditions meant a lot of grain was lost to pests, mainly rats; diversion of grain was widespread.

    What role can FCI play amid Covid-19?

    • The FCI has consistently maintained the PDS, a lifeline for vulnerable millions across the country.

    • In the middle of the COVID-19 pandemic, it can play a major role in avoiding hunger and starvation.

    • Before the lockdown, with 77 million tonnes of grains in its godowns, the FCI was facing a serious storage problem.

    • This was worrying not just because of a shortage of modern storage facilities but also because the FCI lacked a “pro-active liquidation policy” for excess stocks.

    • Post-COVID: FCI has opened up the godowns to release food stocks to those affected by the lockdown.

    • The FCI has also enabled purchases by States and non-governmental organisations directly from FCI depots, doing away with e-auctions typically conducted for the Open Market Sale Scheme (OMSS).

    • With rabi procurement underway in many States, it seems that the country will secure ample food supplies to cope with the current crisis.

    • Given the extended lockdown, the FCI is uniquely positioned to move grain across State borders where private sector players continue to face formidable challenges of transport.

    5 suggestions for the FCI to perform better

    1. Using roads along with rails:

    • The FCI is overwhelmingly reliant on rail, which has several advantages over road transport.

    • In 2019-2020 (until February) only 24% of the grain moved was by road.

    • The FCI has long recognised that road movement is often better suited for emergencies and for remote areas.

    • Containerised movement too, which is not the dominant way of transporting grain, is more cost-effective and efficient.

    • Now, more than ever, it is imperative to move grain quickly and with the least cost and effort, to areas where the need is greatest.

    2. Store grain near demand hotspot

    • The FCI already has a decentralised network of godowns.

    • In the current context, it would be useful for the State government and the FCI to maintain stocks at block headquarters or panchayats in food insecure or remote areas.

    • This would allow State governments to respond rapidly.

    •  It will also provide a sense of assurance and psychological comfort to vulnerable communities.

    • This is especially relevant for regions that are chronically underserved by markets or where markets have been severely disrupted.

    3. Release stocks over and above existing allocation

    • The central government need to look beyond the PDS and the Pradhan Mantri Garib Kalyan Yojana and release stocks over and above existing allocations.

    • This would provide flexibility to local governments to access grains for appropriate interventions at short notice and to sell grain locally at pre-specified prices until supply is restored.

    • This would allow the state government to engage in feeding programmes, free distribution to vulnerable and marginalised sections, those who are excluded from the PDS, etc.

    • In many States, there is a vibrant network of self-help groups formed under the National Rural Livelihoods Mission (NRLM) which can be tasked with last mile distribution of food aid other than the PDS.

    • Consultative committees presumably exist already in each State to coordinate with the FCI on such arrangements.

    4. Suspend FIFO principle

    • Typically, the FCI’s guidelines follow a first in, first out principle (FIFO).

    • FIFO mandates that grain that has been procured earlier needs to be distributed first to ensure that older stocks are liquidated, both across years and even within a particular year.

    • It is time for the FCI to suspend this strategy, that enables movement that costs least time, money and effort.

    5. Support the farmers trying to reach out to consumers directly

    • In many places, farmer producer organisations (FPOs) have been at the forefront of rebuilding these broken supply chains.

    • The FCI along with the National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED), is well placed to rope in expertise to manage the logistics to support these efforts.

    • NAFED has already taken the initiative to procure and transport horticultural crops.

    • The FCI should similarly consider expanding its role to support FPOs and farmer groups, to move a wider range of commodities including agricultural inputs such as seeds and fertilizers, packing materials and so on.

    Major concerns regarding FCI’s role

    • Cost of food subsidy: The first is a long-term concern regarding the costs of food subsidy.

    • An analysis of FCI costs spanning 2001-16 suggests that on average about 60% of the costs of acquisition, procurement, distribution and carrying stocks are in fact transfers to farmers.

    • Not all of what is counted as subsidy therefore represents a waste of resources.

    • The government needs to address the FCI’s mounting debts — an estimated ₹2.55 lakh crore in March 2020 in the form of National Small Saving Funds Loan alone.

    • Depressing food prices: A second concern is that extended food distribution of subsidised grain is akin to dumping and depresses food prices locally.

    • The depressed prices, in turn, affect farmers.

    The Covid-19 pandemic has brought into sharp focus the relevance of the FCI. This makes PDS and Food security in prelims as well as in mains examination focus area. So, questions based on the topic are likely to be asked by the UPSC, for ex- “The FCI’s role in providing succour has been proved many times in the past and it lived up to its reputation amid Covid-19 pandemic as well. In the light of the above statement, discuss the relevance of the FCI and suggest the ways to improve its performance in the times of disasters”

    Also consider a question asked by the UPSC in 2019, “What are the reformative steps taken by the Government to make the food grain distribution system more effective?”

    Conclusion

    In 2015, the Shanta Kumar report recommended repurposing the organisation as an “agency for innovations in Food Management System” and advocated shedding its dominant role in the procurement and distribution of grain. There is no doubt that the FCI needs to overhaul its operations and modernise its storage. At the same time, the relevance of an organisation such as the FCI or of public stockholding, common to most Asian countries, has never been more strongly established than now.

  • Why liquor sale matters to states?

    Following the ease of restrictions in the third phase of the nationwide lockdown, some of the most striking images showed long queues outside liquor stores around the country. The Delhi government announced a 70% hike in the price of liquor across categories in the capital.

    Aspirants must note:

    1. Purview of Excise duty (i.e. Petroleum and Liquor)

    2. Excise duty before and after GST regime

    3. Sources of state revenue etc.

    4. Argument relating to inclusion of Liquor in GST

    Why liquor matters?

    • Delhi’s “special corona fee” on alcohol underlines the importance of liquor to the economy of the states.
    • Manufacture and sale of liquor is one of the major sources of their revenue, and the reopening comes at a time when the states have been struggling to fill their coffers amid the disruption on account of the lockdown.

    How do states earn from liquor?

    • Liquor contributes a considerable amount to the exchequers of all states and UTs except Gujarat and Bihar, both of which have enforced prohibition.
    • Generally, states levy excise duty on manufacture and sale of liquor.
    • Some states, for example, Tamil Nadu, also impose VAT (value-added tax).
    • States also charge special fees on imported foreign liquor; transport fee; and label & brand registration charges.
    • A few states, such as UP, have imposed a “special duty on liquor” to collect funds for special purposes, such as maintenance of stray cattle.

    Share in revenue

    • A report published by the RBI last year shows that state excise duty on alcohol accounts for around 10-15 per cent of Own Tax Revenue of a majority of states.
    • In fact, the state excise duty on liquor is the second or third largest contributor to the category State’s Own Tax revenue; sales tax (now GST) is the largest.
    • This is the reason states have always wanted liquor kept out of the purview of GST.

    What exactly is State Excise?

    • Excise duty on alcohol, alcoholic preparations, and narcotic substances is collected by the State Government and is called “State Excise” duty.
    • For most of the states, excise duty is the second largest tax revenue after sales taxes (state VAT).
    • Besides, a substantial amount comes from licences, fines and confiscation of alcohol products.

    What has changed with the State Excise after the GST regime?

    • At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
    • However, the Goods and Services Tax (GST), introduction in July 2017, subsumed many types of excise duty. Today, excise duty applies only on petroleum and liquor.
    • Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.
    • Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
    • States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
    • After GST was introduced, central excise duty was replaced by Central GST because excise was levied by the central government. The revenue generated from CGST goes to the central government.

    What are the other sources of revenue for the states?

    • The states’ revenues comprise broadly two categories — Tax Revenue and Non-Tax Revenue.
    • Tax revenue is divided into two further categories: State’s Own Tax Revenue, and Share in Central Taxes.
    • Again, Own Tax Revenue comprises three principal sources:

    1) Taxes on Income (agricultural income tax and taxes on professions, trades, callings and employment);

    2) Taxes on Property and Capital Transactions (land revenue, stamps and registration fees, urban immovable property tax); and

    3) Taxes on Commodities and Services (sales tax, state sales tax/VAT, central sales tax, a surcharge on sales tax, receipts of turnover tax, other receipts, state excise, taxes on vehicles, taxes on goods and passengers, taxes and duties on electricity, entertainment tax, state GST, and “other taxes and duties”).

    Back2Basics: What is Excise Duty?

    • Excise duty is a form of tax imposed on goods for their production, licensing and sale.
    • It is the opposite of Customs duty in sense that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
    • At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
    • Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.

    Purview of excise duty

    • The GST introduction in July 2017 subsumed many types of excise duty.
    • Today, excise duty applies only on petroleum and liquor.
    • Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
    • States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
    • After GST was introduced, excise duty was replaced by central GST because excise was levied by the central government. The revenue generated from CGST goes to the central government.

    Types of excise duty in India

    Before GST kicked in, there were three kinds of excise duties in India.

    1) Basic Excise Duty

    • Basic excise duty is also known as the Central Value Added Tax (CENVAT). This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.
    • This duty was levied under Section 3 (1) (a) of the Central Excise Act, 1944. This duty applied on all goods except salt.

    2) Additional Excise Duty

    • Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
    • This duty was levied on some special category of goods.

    3) Special Excise Duty

    • This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
    • Presently the central excise duty comprises of a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.

  • ‘BharatMarket’: An e-commerce platform for retail traders

    Traders’ body Confederation of All India Traders (CAIT) said that it will soon launch a national e-commerce marketplace ‘BharatMarket’ for all retail traders in collaboration with several technology partners.

    A prelims question with tricky options to throw you off track-

    The BharatMarket initiative recently seen in news is-

    A. Trade of Bharat-22 Exchange Traded Fund (ETF)

    B. Platform for farmer to sell their produce

    C. Initiative in power sector

    D. e-commerce platform

    Here you have to play safe…..

    BharatMarket

    • The marketplace will integrate the capabilities of various technology companies to provide end-to-end services in the logistics and supply chains from manufacturers to end consumers, including deliveries at home.
    • It will include nationwide participation by retailers and aims to bring 95 per cent of retail traders onboard the platform, who would exclusively run the portal.
    • It has been already started as a pilot project, initially with a limited number of essential commodities, in six cities — Prayagraj, Gorakhpur, Varanasi, Lucknow, Kanpur and Bengaluru.
    • This will be an effective way to get essential commodities to consumers during the lockdown period and within containment zones.

  • From informal to the formal economy: The crooked road

    The article discusses the issues around the informal workforce in the economy. What are the factors responsible for the high informal sector in India? How is this sector responding in times of COVID? Are there some easy solutions to mainstream the informal sector into our formal economy? These are some of the points one should ponder upon while reading this article.

    The vulnerability of the informal workforce

    • Developing countries such as India are economically vulnerable to Covid-19 because of the presence of huge informal workforce.

    • Lack of protection: This vast informal workforce, which has no labour, social or health protection, is woefully ill-equipped to cope with the medical and economic shocks of the virus.

    The humongous size of the informal economy in India

    • Share of the informal sector: As per Periodic Labour Force Survey, 2017-18, 90.6 per cent of India’s workforce was informally employed.

    • This estimate includes those who are employed in informal enterprises (unincorporated small or unregistered enterprises).

    • It also includes informal workers in the formal sector (workers in the formal sector who are not provided any social security benefits by employers).

    • Take another example: Between 2004-05 and 2017-18, a period when India witnessed rapid economic growth, the share of the informal workforce witnessed only a marginal decline from 93.2 per cent to 90.6 per cent. 

    • Covid effect: Looking ahead, it is likely that informal employment will increase as workers who lose formal jobs during the COVID crisis try to find or create work (by resorting to self-employment) in the informal economy.

    • Also, formal enterprises are likely to continue hiring informal workers as they seek more flexibility and attempt to cut labour costs to cope with the COVID-19 induced economic uncertainty.

    Why is the informal more favourable over the formal?

    • The basic reason: necessity to eke out a subsistence living in the absence of alternative employment opportunities.

    • The ‘not so basic’ reasons: Some self-employed persons choose to be in the informal economy voluntarily to avoid registration or taxation.

    • Many are deterred by the costs of formalisation or don’t see much benefit from formalisation.

    • Finally, the phenomenon of informalisation of wage employment in the formal sector is a consequence of formal firms trying to avoid payroll taxes and employer’s contributions to social security or pensions to reduce labour costs.

    Some solution to smoothen the crooked road

    • A multi-pronged and comprehensive approach is needed to facilitate the transition.

    • Labour intensive growth: It requires creating more formal jobs through labour-intensive growth so that informal workers can move to these jobs.

    • Registering and taxing informal enterprises: The Indian experience of compelling informal firms to register and become tax compliant through demonetisation and introduction of GST formalised them only in a legal sense.

    • There is a need for increasing productivity of informal enterprises and incomes of the informal workforce by providing them with technical and business skills, infrastructure services, financial services, enterprise support and training to better compete in the markets.

    • Promoting the path to entrepreneurship in the informal economy.

    • Many informal enterprises would welcome efforts to reduce barriers to registration and related transaction costs as they expect to reap the benefits of formalising.

    • Reducing decent work deficit: This requires protecting informal workers by providing them a social protection floor, ensuring a set of basic working conditions (adequate living wages, limits on hours of work and safe and healthy workplaces).

    A direct question based on the issue of the informal sector can be asked by the UPSC, for ex- “There is a humongous presence of the informal sector in the Indian economy. What are the factors responsible for this? Suggest ways to transform the informal sector into the formal sector.”

    Conclusion

    Questions around the role of government and who bears the onus of protecting workers deserve careful consideration in the backdrop of the rising incidence of informal employment in the formal sector and the growth of the gig economy. It is apparent that in our relentless pursuit of economic growth, we have ignored the voices of India’s informal sector for too long.

    Back2Basics: What is the informal economy?

    • An informal economy (informal sector or grey economy) is the part of any economy that is neither taxed nor monitored by any form of government.
    • Although the informal sector makes up a significant portion of the economies in developing countries, it is sometimes stigmatized as troublesome and unmanageable.
    • However, the informal sector provides critical economic opportunities for the poor.

  • Globalisation 2.0 after Covid-19

    The article discusses the future of the Globalisation after Covid-19. Globalisation 2.0 which has been dominated by China will see several changes in the post-pandemic world. Investment decisions and Global Value Chains would undergo a paradigm shift. The article is concluded by expressing the hope that pandemic doesn’t end  Globalisation 2.0 but it will certainly usher in the new rules of capitalism.

    Globalisation 2.0 and issues with the flow of labour

    • What is Globalisation 2.0? In strictly economic terms, globalisation is about the free movement of capital, goods and labour across national borders.
    • Globalisation 2.0 began in the early 1980s and has lasted for four decades.
    • Under the 2.0 phenomenon, the labour flows were never as free as the movements of capital and goods.
    • This is because one does not necessarily see who produced the goods or capital coming into the borders.
    • But migrants are distinguishable, one can directly observe how ethnically, racially, religiously different they are from the mainstream.

    Rise of right-wing politics in the US and UK due to labour flows

    • Labour flows is a major reason for triggering right-wing politics of nativism in present times.
    • Donald Trump directed his political campaign against non-white immigrants, especially Hispanics and Muslims.
    • He criticised businessmen who, in search of lower costs, had made China the destination of their accumulated investments, transferring jobs away from America’s industrial heartland.
    • Thus, his policies to levy higher tariffs to curtail freer trade. These policies made sure that the American corporations bring capital back to the US.
    • In Europe, a similar politics has been led by the UK, though less vociferously.

    How China has benefited from Globalisation 2.0?

    • In 1980, China was the 48th largest economy in the world: with GDPs at roughly $200 billion, Indian and Chinese economies were similar in size.
    • In 2018, China, with a GDP of $13.6 trillion, was the second-largest economy in the world, behind the US ($20.5 trillion). But far ahead of Japan ($4.9 trillion), Germany ($4.0 trillion), Britain ($2.8 trillion), France ($2.8 trillion) and India ($2.7 trillion).
    • Not only in terms of GDP, but China had also become the largest trading nation in the world by 2018:
    • Exports: worth $2.5 trillion, substantially ahead of the US ($1.6 trillion).
    • FDI in China: In 2018, China attracted over $203 billion worth of net FDI, much more than India ($42 billion), and second only to the US ($258 billion).

    Is COVID-19 a sign of ending Globalisation 2.0?

    • Despite the pure economic logic of how easy it is to manufacture at scale in China, the global leader today are more concerned about the political overtones.
    • Given all the doubts about how China handled the information about the origins of the virus in Wuhan, anger against China in world capitals is evident.
    • Such anger can have impact on the rules of globalisation.
    • Strict regulation of labour laws: We can expect labour flows will now be more strictly regulated than before.
    • Political risks in investment decisions: Western investors will also have to factor in political risks in their investment decision-making.
    • National security concern: New concerns like what if China threatens supply disruptions for critical materials.
    • Instead of chasing lower labour costs, investors will either bring capital back to domestic shores or geographically restructure their supply chains.
    • To summarize it, Globalisation will not end, but it will be pushed into greater retreat. Thus, changing the rules of the BIG game of capitalism.

    A question based on the impact of the pandemic on the global trade, issues associated with and opportunities for India could be asked in the Mains Paper 3.

    Also the Idea of Globalisation is important from the aspect of paper 1 and Essay. “Globalisation’ vs ‘Nationalism’ was one of the topic in Essay paper in 2009.

    Conclusion

    For the foreseeable future, economic efficiency, the cornerstone of market-based systems, will not be high on priority. Politics will drive new economic policies, not market-based rationality.

  • Global Energy Review 2020, Report

    Covid-19 is having a ripple effect on the global energy space. Consistent lockdowns have reduced energy demand by almost 30 per cent in India.

    Covid-19 shock global energy demand

    • The IEA’s Global Energy Review studies the impacts of the Covid-19 crisis on global energy demand and CO emissions.
    • The projections of energy demand and energy-related emissions for 2020 are based on assumptions that the lockdowns implemented around the world.
    • It projects a 6 per cent fall in energy demand in 2020 — seven times the decline after the 2008 global financial crisis.
    • Electricity demand is set to decline by 5 per cent in 2020, the largest drop since the Great Depression in the 1930s.

    Global Energy Demands

    • The countries in full lockdown are experiencing an average decline of 25% in energy demand per week, while in those with a partial lockdown, the fall in energy demand is about 18% per week.
    • Global energy demand declined by 3.8% in the first quarter of 2020 compared to the first quarter of 2019.
    • Further, it is expected that the impact of Covid‑19 on energy demand in 2020 would be more than seven times larger than the impact of the 2008 financial crisis on global energy demand.

    Considering the above scenario the global demand of various energy sources can be analysed as given below

       Coal Demand:

    • It has been declined by 8% compared with the first quarter of 2019.
    • The reasons for such decline include, China – a coal-based economy – was the country hardest hit by Covid‑19 in the first quarter and cheap gas and continued growth in renewables elsewhere challenged coal.

    Oil Demand:

      • It has declined by 5% in the first quarter, majorly due to curtailment in mobility and aviation, which account for nearly 60% of global oil demand.
      • The report also estimates that the global demand for oil could further drop by 9% on average in 2020, which will return oil consumption to 2012 levels.
    •  Gas Demand:
      • The impact of the pandemic on gas demand has been moderate, at around 2%, as gas-based economies were not strongly affected in the first quarter of 2020.

    •  Renewables Energy Resources Demand:

      • It is the only source that has registered a growth in demand, driven by larger installed capacity.
      • Further, the demand for renewables is expected to rise by 1% by 2020 because of low operating costs and preferential access for many power systems.

    •  Electricity Demand:

      • It has been declined by 20% during periods of full lockdown in several countries.
      • However, the residential demand is outweighed by reductions in commercial and industrial operations.

    Indian scenario

    • The declines in electricity and transport demand in India have been among the deepest globally, but the contractions over the full year are likely to be smaller than the global average.
    • The impact of the crisis on energy demand is heavily dependent on the duration and stringency of measures to curb the spread of the virus.
    • At the same time, lockdown measures are driving a major shift towards low-carbon sources of electricity including nuclear, hydropower, wind and solar PV.

    Data on renewables

    • After overtaking for the first time ever in 2019, low-carbon sources are set to extend their lead this year to reach 40 per cent of global electricity generation — 6 percentage points ahead of coal.
    • Electricity generation from wind and solar PV continues to increase in 2020, lifted by new projects that were completed in 2019 and early 2020.

    Back2Basics: International Energy Agency (IEA)

    • The IEA is an autonomous organisation which works to ensure reliable, affordable and clean energy, headquartered in Paris, France.
    • It was established in the wake of 1973 (set up in 1974) oil crisis after the OPEC cartel had shocked the world with a steep increase in oil prices.
    • India became an associate member of the International Energy Agency in 2017.

  • E-Renminbi: China’s Official Digital Currency

    China in a significant move has launched a trial of digital yuan in four urban centres of the country for specific services even as the world grapples with the containment of Covid.

    What is a cryptocurrency? Discuss how a vibrant cryptocurrency segment could add value to India’s financial sector. (250 W)

    Prelims Perspective:-

    1. Subtle differences btn digital and virtual currency – e.g. Regulatory issues

    2. Which countries have official virtual currency – e.g. Petro of Venezuela

    e-RMB

    • It will be the electronic form of the renminbi, with a value equivalent to the paper notes and coins in circulation.
    • The People’s Bank of China, the country’s central bank, will be the sole issuer of the digital yuan, initially offering the digital money to commercial banks and other operators.
    • It will be launched in major cities of Shenzhen, Suzhou and Chengdu, as well as the Xiong’an New Area.
    • It aims to change the financial system in big ways — by cutting costs and making transactions easier, more convenient and more transparent.
    • The public would be able to convert money in their bank accounts to the digital version and make deposits via electronic wallets.

    Back2Basics: Cryptocurrency

    • A Cryptocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions.
    • It leverages blockchain technology to gain decentralization, transparency, and immutability.
    • The most important feature of a cryptocurrency is that it is not controlled by any central authority: the decentralized nature of the blockchain makes cryptocurrencies theoretically immune to the old ways of government control and interference.
    • It can be sent directly between two parties via the use of private and public keys.
    • Unlike decentralized cryptocurrencies, such as bitcoin, that allow users to transfer value with no central authority or third party involved, the government-backed digital currency is preferred.

    What are Blockchains?

    • Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.
    • Blockchain consists of three important concepts: blocks, nodes and miners.
    • Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
    • Miners create new blocks on the chain through a process called mining.

  • RBI’s job involves trade-offs, not conflicts

    The article discusses three things for the RBI to follow in fulfilling its role, these are- 1) Prudence 2) Flexibility 3) Acting within the mandate. Besides that, problems the RBI has been facing are also discussed. These things are discussed against the backdrop of Covid-19.

    Role of the RBI

    • A central bank like the RBI must replace intellectual certainty with the continuous debate over their actions.
    • RBI’s job involves complex trade-offs — next quarter vs quarter century, growth vs stability, and mandates vs expectations.
    • A global anthropological shock-like COVID makes these trade-offs — they are not conflicts — even harder.
    • The RBI must remember three things — acting prudently to balance the next quarter and quarter century, acting flexibly to blunt this economic cataclysm, and acting within their mandate to ensure institutional legitimacy and immunity.

    These three things are discussed below-

    1. Acting prudently

    • If everybody believed that in the long run we are all dead, we would never sit under trees planted by people who had no chance of sitting under them.
    • The coronavirus is a human tragedy but a central bank must not act like a commercial bank because that would compromise the balance between today and tomorrow.
    • A narcissism — bordering on solipsism — already reflects in global debt levels that steal from our grandchildren.
    • More importantly, India doesn’t have the economic strength to copy the US Federal Reserve’s $2.3 trillion offer to lend to businesses of all sizes and sorts.
    • And run anything close to this year’s expected US fiscal deficit of 15 per cent of GDP, or sustain Japan’s public debt levels at 240 per cent of GDP.
    • We are all in the same storm but we are all not in the same boat.

    2. Acting flexibly within the mandate

    • Renaissance physician Paracelsus had important advice for central banks; the dose makes the poison.
    • Anything powerful enough to help has the power to hurt; handling the inevitable tensions between the RBI’s dual mandate of growth and stability requires continuous work.
    • Our inflation targeting regime is a macroeconomic gift to India.
    • But recognising that is hardly inconsistent with acknowledging that inflation’s secular decline has many parents, some economic models are useful but all are incomplete, and the fog of war involves making second-best choices as long as they are reversible, proportional, and accountable.
    • Central banks often undertake liquidity management while leaving policy rates unchanged; current actions are not a conspiracy to undermine the MPC or its interest rate corridor (between reverse repo rate and MSF rate with repo rate midpoint targeting and call rate operating target).
    • They are a pragmatic encouragement for banks to lend to clients rather than lend Rs 7 lakh crore to the RBI.
    • Other virus flexibility includes repayment moratoriums (with 10 per cent provisions), bad loan accounting forbearance (despite past experience of breaking the thermometer doing little for the fever) and bank windows for NBFC/Mutual Fund liquidity.
    • Listening is hardly compromise.
    • Especially if accompanied by a will to unwind liquidity, asymmetry and forbearance when the planet’s gap year ends.

    3. Follow the mandate

    • Central bank governance is a fine balance; they function best when they don’t declare separation from the government and they aren’t considered a part of the finance ministry.
    • The difficulty of balance isn’t uniquely Indian.
    • The RBI must build on its track record of wisely balancing the trade-offs between depositors vs borrowers, companies vs banks, and stability vs growth.
    • And it must continue to stay out of the government’s domain.
    • The central bank crisis role debate is skewed by the great book, Lords of Finance, by Liaquat Ahamed that shows how central bankers of the 1920s failed to fight the Great Depression.
    • History matters but nobody knows if this is the beginning or ending of the virus.
    • Yet the global central bank COVID toolbox has been substantial; buying corporate bonds, making corporate loans, cutting interest rates, conducting open market operations, and reducing reserve ratios.
    • Additionally, banks have been permitted to grant loan moratoriums, hold less capital, restructure loans, pay lower deposit insurance premiums and delay bad loan recognition.
    • The emergency authority under Section 13 of the US Federal Reserve Act being used — prematurely — also exists in Section 18 of the RBI Act.
    • But emergency powers are the last resort. We are not there yet.
    • The recovery being V-shaped, U-shaped, or Bathtub-shaped is only modellable after the lockdown.

    Pre-existing problems facing the RBI

    • The RBI’s COVID balm is constrained by pre-existing conditions in Indian banking, which are given below-
    • Bad loans which peaked at Rs 14 lakh crore but still large.
    • Inadequate competition- scheduled commercial bank numbers have hovered between 90 and 100 since 1947.
    • Private bank governance- CEO so powerful that boards and shareholders are weak.
    • Public sector bank governance- shareholder so powerful that boards and CEOs are weak.
    • And the RBI’s own game (process, technology and human capital in regulation and supervision).
    • All these must be tackled with urgency when normalcy returns.

    A question based on the role of the central bank can be asked by the UPSC. Consider the following question “Crises have always tested the utility of central banks, be it the Great Depression, 2008 financial crisis or Covid-19. In light of this statement, explains the trade-offs involved in the RBI’s decisions and how shocks like Covid-19 makes these trade-offs even harder.”

    Way forward

    • Supplementing India’s fiscal and monetary policy interventions by announcing two bold reform plans — 90-day flick-of-pen and one-year structural — that tackle overdue reforms in labour, education, cities, finance, compliance, and civil services, will catalyse hope among employers, employees, banks, and overseas investors.

    Conclusion

    Creating a prosperous India needs many things. One of them is an independent, accountable, and boundaried central bank that listens.

     

  • Three dimensions of food security amid Covid-19

    The article discusses the three dimensions of food security-1)Availability 2)Acces 3) Absorption. The first two are also dependent on job security. All these are now being threatened by the pandemic. Ways to safeguard food security along with its 3 dimensions are suggested at the end of the article.

    1. Availability of food in the market

    • The first is the availability of food in the market, and this is seen as a function of production.
    • Fortunately, thanks to the Green Revolution, today we have enough food in the market and in government godowns.
    • This is a great accomplishment by Indian farmers who converted a “ship to mouth” situation to a “right to food” commitment.
    • Yet we cannot take farmers’ contributions in terms of sustaining production for granted.
    • Some special exemptions have been given to the agricultural sector, farmers are confronted at the moment with labour shortages.
    • But many of the inputs, including seeds, are expensive or unavailable, marketing arrangements including supply chains are not fully functional, pricing is not remunerative, and public procurement is also not adequate.
    • There is no room for complacency, as in the absence of demand, the lack of storage or value addition facilities, especially for perishable commodities, we do not yet know exactly what the impact of the current pandemic will be on the kharif sowing and food availability in the future.

    2. Access to food

    • The second dimension is the access to food, which is a function of purchasing power, as unless you are a farmer and grow your own food, others have to buy it.
    • Fortunately, the government, through the National Food Security Act (NFSA) and the PDS, has assured some additional food to every individual during this crisis.
    • Strengthening the food basket: This should be further strengthened and the food basket widened by including millets, pulses and oil.
    • Hidden hunger: Steps should also be taken to avoid hidden hunger caused by the deficiency of micronutrients in the diet.
    • In light of the closure of schools and anganwadi centres, and the consequent disruptions in the provision of midday meals or other nutritional inputs, it is important to pay attention to the life cycle approach advocated in the NFSA, particularly the first thousand days in a child’s life, when the cognitive abilities of the child are shaped.
    • We may otherwise see negative effects on nutritional security in the medium to longer term.

    After reading the article you’ll be able to answer the question such as this one- “In the ongoing crisis, maintaining the level of food security has become one of the most essential need. In light of the above statement, critically examine the priority areas for maintaining food security in the country. Suggest measures to make accessibility and availability of food easier for all.”

    Job security to ensure food security and access to food

    • Food security and access to nutritious, good quality food is also contingent on job security.
    • Today, a lot of people employed both on farms and in the non-farm sector are without jobs.
    • If job security is threatened, then so is food and nutrition security.
    • We have to ensure people do not lose their jobs, and one way of doing this will be to ensure value addition to primary products.
    • One example of such value addition is the Rice Biopark in Myanmar, wherein the straw, bran, and the entire biomass are utilised.
    • This would mean some attention to and investment in new technologies that can contribute to biomass utilisation.
    • The Amul model provides a good example from the dairy sector of improved incomes to milk producers through value addition.
    • Similar attention needs to be given to the horticulture sector on a priority basis.
    • Women farmers are at the forefront of horticulture and special attention needs to be given to both their technological and economic empowerment during this crisis.
    • A second pathway to livelihood security is strengthening the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).
    • Need to cover skilled work: Given the lack of jobs and incomes during the COVID-19 crisis, it is imperative to expand the definition of work in MGNREGA to cover skilled work related to farmers and their farming activities.
    • This is particularly important for women farmers and workers, who should not just be given tasks of carrying stones or digging mud.
    • Apart from farming, they engage in a range of essential care tasks, including caring for children, the elderly and sick people.
    • These tasks, often invisible, need to be recognised as work and supported with appropriate education, including on nutrition.

    3. Absorption of food in the body and its utilisation

    • The third dimension of food security is the absorption of food in the body or its utilisation.
    • Absorption and utilisation of food is dependent importantly on sanitation, drinking water and other non-food factors, including public health services.
    • Ensuring that these services are functional depends on the capacities of the local panchayats and their coordination with other local bodies.
    • The lack of adequate clean water, in particular, has come to the fore in both rural areas and urban slums in the context of COVID-19, where one of the key measures for stopping transmission relates to frequent hand-washing.

    Food security threatened by pandemic

    • If we can ensure food availability, food access and food absorption, then we have a fairly robust system of food and nutrition security.
    • All the above dimensions are, however, now threatened by the novel coronavirus, as discussed earlier.
    • It is very critical to highlight the linkages between agriculture, nutrition and health.
    • The inability to harvest, transport and market perishable fruits and vegetables at remunerative prices during the current crisis has deprived farmers of incomes and livelihoods.
    • It has also deprived consumers of micronutrients in their diets.
    • Farmers making losses, and agriculture moving from being job-led to jobless, raise questions about the sustainability of the production cycle.
    • At the same time, this can have long-term consequences on nutrition and health security.

    A question based on the dimension of the food security can be asked by the UPSC for ex- “Food security involved the security of food in all three dimensions, availability of food, access to food and absorption of food. How far the food security act is effective in ensuring security in all three dimensions?”

    Conclusion

    India avoided what could have been a big famine in the 1960s through the help of technology and public policy, which actively worked with and supported farmers to achieve significant increases in yield. Through a combination of farmers’ cooperation, technological upgrading and favourable public policies in procurement, pricing and distribution, we can deal with the fallouts of the pandemic.

  • National Infrastructure Pipeline (NIP)

    • To augment infrastructure and create jobs in the country, the government task force on National Infrastructure Pipeline (NIP), which in its report projected total investment of Rs 111 lakh crore in infra projects over five years.
    • It said that 18 per cent of the targeted investment is expected to be made in the road sector.

    It is estimated that India would need to spend $4.5 trillion on infrastructure by 2030 to sustain its growth rate. The endeavour of the National Infrastructure Pipeline (NIP), is to make this happen in an efficient manner.

    What is the National Infrastructure Pipeline (NIP)?

    • NIP includes economic and social infrastructure projects.
    • During the fiscals 2020 to 2025, sectors such as Energy (24%), Roads (19%), Urban (16%), and Railways (13%) amount to around 70% of the projected capital expenditure in infrastructure in India.
    • It has outlined plans to invest more than ₹102 lakh crore on infrastructure projects by 2024-25, with the Centre, States and the private sector to share the capital expenditure in a 39:39:22 formula.

    Key benefits of NIP

    • Economic: Well-planned NIP will enable more infra projects, grow businesses, create jobs, improve ease of living, and provide equitable access to infrastructure for all, making growth more inclusive.
    • Government: Well-developed infrastructure enhances the level of economic activity, creates additional fiscal space by improving the revenue base of the government, and ensures the quality of expenditure focused in productive areas.
    • Developers: Provides a better view of project supply, provides time to be better prepared for project bidding, reduces aggressive bids/ failure in project delivery, ensures enhanced access to sources of finance as a result of increased investor confidence.
    • Banks/financial institutions (F1s)/investors: Builds investor confidence as identified projects are likely to be better prepared, exposures less likely to suffer stress given active project monitoring, thereby less likelihood of NPAs.

    Projects include

    • The report contains recommendations on general and sector reforms relating to key infrastructure sectors for implementation by the Centre and states.
    • These projects will be implemented under the National Infrastructure Pipeline (NIP), a first of its kind exercise, by consulting states, relevant ministries and departments.
    • Three committees will be set up to monitor project progress, eliminate delays, and find ways to raise resources, along with a steering committee in each of the infrastructure ministries.
    • Sectors such as energy (24%), roads (18%), urban (17%) and railways (12%) amount to around 71% of the projected investments.
    • The projects will also be spread across sectors such as irrigation, mobility, education, health, water and the digital sector.