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Subject: Economics

  • Case for principles of sound public policy

    Context

    • Due to extreme uncertainty, several adventurous prescriptions have been put forth.

    Following are 4 unconventional measures and issues with them are discussed here.

    1) Shoud we change the Inflation targeting regime?

    • Monetary policy committee (MPC) concluding that elevated inflation has constrained it from easing policy rates further.
    • One way out of this is for the government to relax the inflation-targeting framework.
    • This would involve greater tolerance for higher levels of inflation or by extending the period over which the MPC has to meet its inflation target.
    • Others have suggested shifting from headline to core-inflation as the nominal anchor of monetary policy or incorporating other indicators such as nominal GDP explicitly into the framework.
    • The more extreme ones talk about doing away with the inflation targeting framework altogether.

    Why changing the inflation targeting regime will not be helpful

    • There is a strong argument for the MPC to look beyond the current spike in inflation and ease rates further.
    • But disagreements with either the rationale or the stance of the committee members must not be construed as disagreements with the framework.
    • Raising the tolerance threshold may sound appealing now, but it will inject a degree of uncertainty and unpredictability in monetary policy.
    • Considering that anchoring expectations around the inflation target takes time, frequent revisions are unlikely to help stabilise household expectations.
    • While explicitly signalling  will be one of deviating from a rule-based framework.

    2) What we shift to Multiple Indicator Structure?

    • Such a move would bring back the situation of the pre-MPC days.
    • In pre-MPC days there was far greater uncertainty over monetary policy.
    • In pre-MPC days there was no clarity over the indicator that was dictating the stance of the RBI governor or which indicator would be given preference, and when.
    • Such proposals go against the rationale for shifting to such a framework in the first place — an inflation targeting regime.
    • Inflationg targeting regime is a well-defined anchor, is meant to facilitate greater transparency and accountability from the central bank.

    Way forward

    • There must be a concerted attempt to push for more external voices in the MPC.
    • In the UK, a non-voting treasury representative sits with the MPC to discuss policy issues.

    3) Should central bank effectively financing the Centre’s capital expenditure on a regular basis?

    •  This is problematic at many levels.
    • First, notwithstanding problems in estimating potential output, monetisation, even in the rarest of rare cases, should be the last resort.
    • Such an arrangement, risks tilting the balance of power in favour of the government.
    • Any government, owing to its short-term political imperatives, is likely to be seduced by the apparent simplicity of this idea.
    • Second, giving a central bank a degree of control over the government’s expenditure priorities is not a prudent approach.
    • Whatever be their policy inclinations and expenditure priorities, elected representatives have to face voters.
    • Why should unelected technocrats be in charge of determining the expenditure priorities of the government?
    • Such proposals blur the lines between fiscal and monetary policy and may lead to what some call the fiscalisation of monetary policy.

    4) Should government pledge its shares in companies?

    • This raises questions. Should a sovereign pledge assets to borrow in the local currency?
    • In 1991, India had pledged gold for a foreign currency-denominated loan not a local currency loan.
    • So why the collateral? And what happens if the value of the shares pledged falls below that of the loan?

    Conclusion

    Some unconventional measures may well be needed at the current juncture. But discarding the principles of sound public policy, though it sounds appealing, could end up doing more harm than good.

  • [pib] Delhi–Meerut Regional Rapid Transit System (RRTS)

    The first look of India’s first RRTS train on Delhi-Ghaziabad-Meerut corridor has been unveiled.

    Try this PYQ:

    Q.Consider the following pairs:

    National Highway: Cities connected

    1. NH 4: Chennai and Hyderabad
    2. NH 6: Mumbai and Kolkata
    3. NH 15: Ahmedabad and Jodhpur

    Which of the above pairs is/are correctly matched?

    (a) 1 and 2 only

    (b) 3 only

    (c) 1, 2 and 3

    (d) None

    About the RRTS train

    • The Delhi–Meerut RRTS is an 82.15 km long, under-construction, semi-high speed rail corridor connecting Delhi-Ghaziabad-Meerut.
    • It is one of the three rapid-rail corridors planned under Phase-I of Regional Rapid Transport System (RRTS) project of National Capital Region Transport Corporation (NCRTC).
    • With a maximum speed of 160 km/h (99.42 mph), the distance between Delhi and Meerut will be covered in around 62 min (1.03 h).
    • With radiating stainless steel outer body, these aerodynamic RRTS trains will be lightweight and fully air-conditioned.
    • Each car will have six automatic plug-in type wide doors, three on each side for ease of access and exit.

  • Lessons from Bihar’s abolition of its APMC system for farmers

    The article analyses the results of complete abolition of APMC in Bihar in the context of current protest against the agri bills.

    Context

    • Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 has been a source of anger among farmers.
    • By allowing unregulated trading areas beyond APMC mandis, the law seeks to remove intermediaries from agricultural trade and raise price realization for farmers.

    Excessive politicization of APMCs

    • APMC’s excessive politicization has resulted in cartelization and price-fixing.
    • For this reason, there have been several attempts at reforming their functioning.
    • Easier licensing norms, the removal of entry and exit barriers and computerization and transparency have been introduced in most APMC markets.
    • However, the Bihar government decided to abolish the APMC system altogether in 2006.

    Analysing the impact of abolition of APMC in Bihar

    • It was hoped that abolition would ensure better prices for farmers of the state and attract large sums of private investment.
    • Before their abolition, Bihar had 95 market yards, of which 54 had infrastructure such as covered yards, godowns and administrative buildings, weighbridges, and processing as well as grading units.
    •  With no revenue to maintain it, that infrastructure is now in a dilapidated condition.
    •  A study by the National Council for Applied Economic Research reported increased volatility in grain prices after 2006.
    • Most of the farmers surveyed reported high storage costs at private warehouses.
    • Farmers this year in Bihar received lower price for maize compared to the farmers in states with APMC.

    Lessons from Bihar

    • The Bihar experiment has important lessons for future marketing reforms in agriculture.
    • The benefits of these reforms will only accrue to farmers if they are accompanied by private investment in creating the physical infrastructure and institutional mechanisms needed to allow for greater participation of farmers.
    • The record of states on attracting private investment isn’t much better.

    Conclusion

    By only attempting to shift trade away from APMC to non-APMC areas, without a regulatory framework, the new law is unlikely to ensure better price realization for farmers.

  • Explained: How is MSP fixed?

    The recently enacted Farmers bill seeks to dismantle the monopoly of APMC mandis, thereby allowing sale and purchase of crops outside these state government-regulated market yards. This has prompted many fears regarding the continuance of the existing minimum support price (MSP)-based procurement regime.

    Try this PYQ:

    Q.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. (UPSC 2014)

    What does the law say about MSP?

    • The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill does not give any statutory backing to MSP.
    • There is not even a single mention of either “MSP” or “procurement” in the Bill passed by both Houses of Parliament last week.

    Is there any legal backing for MSP?

    • MSP, by contrast, is devoid of any legal backing. Access to it, unlike subsidised grains through the PDS, isn’t an entitlement for farmers.
    • They cannot demand it as a matter of right.

    What is the basis of MSP then?

    • It is only a government policy that is part of administrative decision-making.
    • The government declares MSPs for crops, but there’s no law mandating their implementation.
    • The Centre currently fixes MSPs for 23 farm commodities based on the Commission for Agricultural Costs and Prices (CACP) recommendations:
    1. 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley)
    2. 5 pulses (chana, arhar/tur, urad, moong and masur)
    3. 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower and nigerseed) and
    4. 4 commercial crops (cotton, sugarcane, copra and raw jute) —

    What about CACP?

    • The CACP come to existence in 1965 and MSPs are being announced since the time of the Green Revolution, starting with wheat in 1966-67.
    • The CACP is simply an attached office of the Ministry of Agriculture and Farmers Welfare.
    • It can recommend MSPs, but the decision on fixing (or even not fixing) and enforcement rest finally with the government.
    • The government can procure at the MSPs if it wants to. There is no legal compulsion. Nor can it force others (private traders, organised retailers, processors or exporters) to pay.

    Exceptions to MSP: Fair and remunerative price (FRP)

    • The only crop where MSP payment has some statutory element is sugarcane.
    • This is due to its pricing being governed by the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act.
    • That order, in turn, provides for the fixation of an FRP for cane during every sugar year (October-September).
    • But even the FRP — which, incidentally, was until 2008-09 called the ‘statutory minimum price’ or SMP — is payable not by the government.
    • The responsibility to make FRP payment to farmers within 14 days of cane purchase lies solely with the sugar mills.

    Has there been any move to give MSP legislative backing?

    • The CACP, in its price policy report for the 2018-19 Kharif marketing season, had suggested enactment of legislation conferring on farmers ‘The Right to Sell at MSP’.
    • This, it felt, was necessary “to instil confidence among farmers for procurement of their produce”. That advice, predictably, wasn’t accepted.

    A cause for farmers fury

    • The ongoing farmer protests essentially reflect a loss of that very confidence.
    • Is the dismantling of the monopoly of APMC mandis in wholesale trading of farm produce the first step at ending even the present MSP-based procurement programme, largely limited to wheat and paddy?
    • If APMCs were to turn unviable due to the trades moving outside, how will government agencies undertake procurement that now takes place in mandis?
    • These questions are playing in the minds of farmers, particularly in states such as Punjab, Haryana and MP that have well-established systems of governmental MSP purchases.
    • For them, freedom to sell to anyone, anywhere and anytime has little value compared to the comfort of assured procurement at MSP.

    Govt’s response

    • PM has tweeted that the “system of MSP will remain” and “government procurement will continue”.
    • The Agriculture Minister, too, has pointed out that past governments never thought it necessary to introduce a law for MSP.

  • Explained: How remunerative is farming in India?

    The government’s push to reform India’s agriculture sector has divided opinions and triggered a debate about the state of Indian agriculture.

    Try this PYQ:

    Q.In view of the declining average size of land holdings in India which has made agriculture nonviable for a majority of farmers, should contract farming and land leasing be promoted in agriculture? Critically evaluate the pros and cons. (UPSC 2015)

    Features of Indian Agriculture

    In the context of this debate, two long-standing characteristics of Indian agriculture are noteworthy:

    1. Indian agriculture is highly unremunerative
    2. It has been heavily regulated by the government and protected from the free play of market forces

    Why are the new legislation introduced?

    • According to the government, the new Bills passed by Parliament attempt to make it easier for farmers to sell to and produce for the private sector.
    • The hope is that liberalizing the sector and allowing greater play for market forces will make Indian agriculture more efficient and more remunerative for the farmers.
    • In this context, it is important to understand some of the basics of Indian agriculture.

    Basics of Indian agriculture

    (1) Workforce engaged

    • At the time of Independence, about 70% of India’s workforce (a little less than 100 million) was employed in the agriculture sector.
    • Even at that time, agriculture and allied activities accounted for around 54% of India’s national income.
    • Over the years, agriculture’s contribution to national output declined sharply. As of 2019-20, it was less than 17% (in gross value added terms).
    • And yet, the proportion of Indians engaged in agriculture has fallen from 70% to just 55% (Chart 1).
    • As the Committee on Doubling Farmers’ Income (2017) observes, “the dependence of the rural workforce on agriculture for employment has not declined in proportion to the falling contribution of agriculture to GDP”.

    (2) Land holdings

    • While the number of people dependent on agriculture has been burgeoning over the years, the average size of landholdings has become reduced sharply — even to the extent of being unviable for efficient production.
    • Data shows that 86% of all landholdings in India are small (between 1 and 2 hectares) and marginal (less than 1 hectare — roughly half a football field).
    • The average size among marginal holdings is just 0.37 ha which hardly provides enough income to stay above the poverty line.

    (3) Debts

    • The combined result of several such inefficiencies is that most Indian farmers are heavily indebted (Chart 2).
    • The data shows that 40% of the 24 lakh households that operate on landholdings smaller than 0.01 ha are indebted. The average amount is Rs 31,000.
    • A good reason why such a high proportion of farmers is so indebted is that Indian agriculture — for the most part — is unremunerative.
    • Chart 3 provides the monthly income estimates for an agriculture household in four very different states as well as the all-India number.
    • Some of the most populous states like Bihar, West Bengal and Uttar Pradesh have very low levels of income and very high proportions of indebtedness.

    (4) Buying & selling

    • Another way of understanding the plight of the farmers relative to the rest of the economy is to look at the Terms of Trade between farmers and non-farmers.
    • Terms of Trade is the ratio between the prices paid by the farmers for their inputs and the prices received by the farmers for their output.
    • As such, 100 is the benchmark. If the ToT is less than 100, it means farmers are worse off.
    • As Chart 4 shows, ToT rapidly improved between 2004-05 and 2010-11 to breach the 100-mark but since then it has worsened for farmers.

    (5) MSP

    • A key variable in the debate is the role of minimum support prices. Many protesters fear governments will roll back the system of MSPs.
    • MSPs provide “guaranteed prices” and an “assured market” to farmers, and save them from price fluctuations. This is crucial because most farmers are not adequately informed.
    • But although MSPs are announced for around 23 crops, actual procurement happens for very few crops such as wheat and rice.
    • Moreover, the percentage of procurement varies sharply across states (Chart 5). As a result, actual market prices — what the farmers get — are often below MSPs.

  • Redefining essential items: why it was needed, and who it will impact

    Recently, the Rajya Sabha passed the Essential Commodities (Amendment) Bill, 2020 which is aimed at deregulating commodities such as cereals, pulses, oilseeds, edible oils, onion and potatoes.

    Try this question:

    What are the salient features of Essential Commodities (Amendment) Bill, 2020?

    Essential Commodities (Amendment) Bill, 2020

    • It amends the Essential Commodities Act, 1955, by introducing a new Subsection 1(A) in Section 3.
    • After the amendment, the supply of certain foodstuffs — including cereals, pulses, oilseeds, edible oils, potato — can be regulated only under extraordinary circumstances, which include an extraordinary price rise, war, famine, and natural calamity of a severe nature.
    • In effect, the amendment takes these items out from the purview of Section 3(1), which gives powers to the central government to “control production, supply, distribution, etc, of essential commodities”.
    • Earlier, these commodities were not mentioned under Section 3(1) and reasons for invoking the section were not specified.

    How is an ‘essential commodity’ defined?

    • There is no specific definition of essential commodities in the Essential Commodities Act, 1955. Section 2(A) states that an “essential commodity” means a commodity specified in the Schedule of the Act.
    • The Act gives powers to the central government to add or remove a commodity in the Schedule.
    • The Centre, if it is satisfied that it is necessary to do so in the public interest, can notify an item as essential, in consultation with state governments.

    Which are those commodities?

    • According to the Ministry of Consumer Affairs, Food and Public Distribution, which implements the Act, the Schedule at present contain seven commodities.
    • They are drugs; fertilizers, whether inorganic, organic or mixed; foodstuffs including edible oils; hank yarn made wholly from cotton; petroleum and petroleum products; raw jute and jute textiles; seeds of food-crops and seeds of fruits and vegetables, seeds of cattle fodder, jute seed, cottonseed.
    • By declaring a commodity as essential, the government can control the production, supply, and distribution of that commodity, and impose a stock limit.

    Under what circumstances can the government impose stock limits?

    • While the 1955 Act did not provide a clear framework to impose stock limits, the amended Act provides for a price trigger.
    • It says that agricultural foodstuffs can only be regulated under extraordinary circumstances such as war, famine, extraordinary price rise, and natural calamity.
    • However, any action on imposing stock limits will be based on the price trigger.
    • Thus, in case of horticultural produce, a 100% increase in the retail price of a commodity over the immediately preceding 12 months or over the average retail price of the last five years, whichever is lower, will be the trigger for invoking the stock limit.
    • For non-perishable agricultural foodstuffs, the price trigger will be a 50% increase in the retail price of the commodity over the immediately preceding 12 months or over the average retail price of the last five years, whichever is lower.

    Why was the need for this felt?

    • The 1955 Act was legislated at a time when the country was facing a scarcity of foodstuffs due to persistently low levels of foodgrains production.
    • The country was dependent on imports and assistance (such as wheat import from the US under PL-480) to feed the population.
    • To prevent hoarding and black marketing of foodstuffs, the Essential Commodities Act was enacted in 1955. But now the situation has changed.
    • The production of wheat has increased 10 times while the production of rice has increased more than four times since five decades.
    • The production of pulses has increased 2.5 times, from 10 million tonnes to 25 million tonnes. In fact, India has now become an exporter of several agricultural products.

    What will be the impact of the amendments?

    • The key changes seek to free agricultural markets from the limitations imposed by permits and mandis that were originally designed for an era of scarcity.
    • The move is expected to attract private investment in the value chain of commodities removed from the list of essentials, such as cereals, pulses, oilseeds, edible oils, onions and potatoes.
    • While the purpose of the Act was originally to check illegal trade practices such as hoarding, it has now become a hurdle for investment in the agriculture sector in general, and in post-harvesting activities in particular.
    • The private sector had so far hesitated about investing in cold chains and storage facilities for perishable items as most of these commodities were under the ambit of the EC Act.
    • The amendment seeks to address such concerns.

    Why is it being opposed?

    • This was one of the three ordinances/Bills that have seen protests from farmers in parts of the country.
    • The Opposition says the amendment will hurt farmers and consumers, and will only benefit hoarders.
    • They say the price triggers envisioned in the Bill are unrealistic — so high that they will hardly ever be invoked.

  • Putting farmers first

    The faremers have been protesting against the agri bill. This article explains the rationale behind the bill and how it could help the farmers.

    Challenges Indian agriculture face

    • Indian agriculture has been characterised by fragmentation due to small holding sizes, weather dependence, production uncertainties, huge wastage and market unpredictability.
    • This makes agriculture risky and inefficient with respect to both input and output management.

    Recent steps to help farmers

    • The  government has taken various steps in this direction, for example-
    • The implementation of the Swaminathan committee’s recommendation regarding fixing MSP at least 50 per cent profits on the cost of production.
    • Increasing the agri budget by more than 11 times in the past 10 years.
    • Establishing e-NAM mandis.
    • An Agriculture Infrastructure Fund of Rs 1 lakh crore under the Atmanirbhar Bharat Package, the scheme for the formation of 10,000 FPOs, etc.

    What the agri bills seek to achieve

    • The bills will create an ecosystem where farmers and traders enjoy the freedom of choice of sale and purchase of farming produce.
    • This freedom of choice will help to facilitate remunerative prices to farmers through competitive alternative trading channels.
    • This will promote barrier-free inter-state and intra-state trade and commerce of farming produce outside the physical premises of markets notified under state agricultural produce marketing legislation.
    • The farm bills also lay the ground of a legal framework for fair and transparent farming agreements between farmers and sponsors.
    • This framework will facilitate greater certainty in quality and price, adoption of quality and grading standards, linkage of farming agreements with insurance and credit instruments and also enable the farmer to access modern technology and better inputs.
    • These recommendations have been made by the Swaminathan Committee, which suggested the removal of the mandi tax, creation of a single market and facilitating contract farming.

    Safeguard in the bill

    • The bill have several safeguards such as the prohibition of sale, lease or mortgage of farmers’ land and farmers’ land is also protected against any recovery.
    • Farming agreements cannot be entered into, if they are in derogation of the rights of a sharecropper.
    • Farmers will have access to flexible prices subject to a guaranteed price in agreements.
    • The sponsor has to ensure the timely acceptance of delivery and payment of produce to farmers and farmers’ liability is limited to only the advance received and cost of inputs provided by the sponsor.
    • Disputes will be resolved through a Conciliation Board, to be constituted by the sub-divisional magistrate (SDM), failing which an aggrieved party may approach the concerned SDM for the settlement of the dispute.

    Consider the question “What are the changes introduced by the two recent bills passed by the government related to agri markets and contract farming how will these changes be helpful to the farmers?”

    Conclusion

    These farm bills will bring transformative changes in our agricultural sector and reduce wastage, increase efficiency, unlock value for our farmers and increase farmers’ incomes.

  • What is Infrastructure Investment Trusts (InvITs)?

    The National Highways Authority of India (NHAI) has come up with its Infrastructure Investment Trust (InvIT) issue.

    Try this PYQ:

    Q.Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

    Significance of the issue

    • The issue will enable NHAI to monetize its completed National Highways that have a toll collection track record of at least one year.
    • The NHAI reserves the right to levy a toll on identified highways and it will help the company raise funds for more road development across the country.

    What are InvITs?

    • Infrastructure investment trusts are institutions similar to mutual funds, which pool investment from various categories of investors and invest them into completed and revenue-generating infrastructure projects, thereby creating returns for the investor.
    • Structured like mutual funds, they have a trustee, sponsor(s), investment manager and project manager.
    • While the trustee (certified by Sebi) has the responsibility of inspecting the performance of an InvIT, sponsor(s) are promoters of the company that set up the InvIT.
    • In the case of Public-private partnership (PPP) projects, it refers to the infrastructure developer or a special purpose vehicle holding the concession.
    • While the investment manager is entrusted with the task of supervising the assets and investments of the InvIT, the project manager is responsible for the execution of the project.

    How will it work for NHAI?

    • NHAI’s InvIT will be a Trust established by NHAI under the Indian Trust Act, 1882 and SEBI regulations.
    • The InvIT Trust will be formed the objective of investing primarily in infrastructure projects.
    • The fund raised can be invested in the project SPVs by way of an issue of debt.
    • The trust can utilise it to repay their loans or even for prepayment of certain unsecured loans and advances.

    Why does NHAI need fund?

    • At a time when private sector investment in the economy has declined, fund-raising by NHAI and spending on infrastructure will not only provide a fillip to the economy but will also crowd-in private sector investment.
    • So NHAI’s InvIT offer is a way for the government to tap alternative sources of financing to boost public spending in the roads and infrastructure sector.
    • It is important to note that in October 2017, the Centre had launched Bharatmala Pariyojana, its flagship highway development programme, for development of 24,800 km of roads.
    • In order to complete the projects, NHAI needs adequate funds and one of the options is to monetize the completed and operational NH assets.

    How does it benefit the investor?

    • Retail or even large financial investors may not be typically able to invest in infrastructure projects such as roads, power, energy etc.
    • InvITs enable these investors to buy a small portion of the units being sold by the fund depending upon their risk appetite.
    • Given that such trusts comprise largely of completed and operational projects with positive cash flow, the risks are somewhat contained.
    • The investors can benefit from the cash flow that gets distributed as well as in capital appreciation of the units.
    • Unitholders also benefit from favourable tax norms, including exemption on dividend income and no capital gains tax if units are held for more than three years.

  • What are Basel III compliant Bonds?

    The country’s largest lender State Bank of India has raised Rs 7,000 crore by issuing Basel III compliant bonds.

    Try this PYQ:

    Q.‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to:

    (a) Develop national strategies for the conservation and sustainable use of biological diversity

    (b) Improve the banking sector’s ability to deal with financial and economic stress and improve risk management

    (c) Reduce greenhouse gas emissions but places a heavier burden on developed countries

    (d) Transfer technology from developed countries to poor countries to enable them to replace the use of chlorofluorocarbons in refrigeration with harmless chemicals

    What are Basel III compliant Bonds?

    • The bonds qualify as tier II capital of the bank, and has a face value of Rs 10 lakh each, bearing a coupon rate of 6.24 per cent per annum payable annually for a tenor of 10 years.
    • There is a call option after 5 years and on anniversary thereafter.
    • Call option means the issuer of the bonds can call back the bonds before the maturity date by paying back the principal amount to investors.

    Back2Basics: What are Basel Norms?

    • Basel is a city in Switzerland. It is the headquarters of the Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
    • Basel guidelines refer to broad supervisory standards formulated by this group of central banks – called the Basel Committee on Banking Supervision (BCBS).
    • The set of the agreement by the BCBS, which mainly focuses on risks to banks and the financial system is called Basel accord.
    • The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
    • India has accepted Basel accords for the banking system.

    Basel I

    • In 1988, BCBS introduced a capital measurement system called Basel capital accord, also called as Basel 1.
    • It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks.
    • The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).
    • RWA means assets with different risk profiles.
    • For example, an asset-backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1999.

    Basel II

    • In June ’04, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.
    • The guidelines were based on three parameters, which the committee calls it as pillars:
    • Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
    • Supervisory Review: According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks.
    • Market Discipline: This needs increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.

    Basel III

    • In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.
    • A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding.
    • Also, the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk.
    • Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
    • The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

  • Action plan for the success of Atmanirbhar Bharat project

    Atmanirbhar Bharat Abhiyan, well considered plan by the Central government seeks to transform the Indian economy. The article analyses its potential and suggests the ways to achieve the aims.

    Vocal for local

    • Prime Minister Narendra Modi gave a call to fellow Indians to be “Vocal for Local” in May.
    • This includes not only to buy and use local products but to also take pride in promoting them.

    Challenges

    1) Imports from China

    • Serious challenge to Atmanirbhar mission is country’s $65 billion worth of imports from China alone.
    • Most of these imports are of essential items — raw materials, components and intermediates required in producing finished goods.
    • For example, the pharmaceuticals sector imports nearly 70 per cent of its raw material and drug intermediates.
    • It may not be feasible to replace all Chinese imports in the near future.
    • It may also be debatable if the end goal is to replace the entire chain of imports from a country.
    • Nevertheless, experts and industrialists do assert that the ANBA is an excellent initiative and gives India the opportunity to embark on the self-reliance drive.

    2) Struggling MSMEs

    • A major part of the Vocal for Local mission rests on the MSMEs, which has been seen as struggling for survival.
    • But the reforms announced as part of the ANBA should put them on a stronger footing.
    • One immediate fallout of these measures will be creation of large scale employment opportunities for both the skilled and unskilled workforce.
    • A stronger manufacturing base will also lead to positive spinoffs related to the supply-purchase of local raw material and capacity building of allied manufacturing units.

    Way forward

    • First, an umbrella action plan should be drawn by the Niti Aayog listing all targets under the ANBA and the Vocal for Local Mission.
    • A monitoring agency will review and suggest course correction to ensure that no delay is allowed to build.
    • Second, each state/UT will develop an action plan in consonance with the umbrella plan.
    • A separate organisation created by each state will be responsible for the implementation of the action plan
    • Such organisation should also conduct regular studies to identify local and global market trends and invite competitive solutions to meet market demands.
    • Third, each district (or a group of districts) will work out a more detailed action plan, and charter of responsibilities for ground level officers and departments.

    Conclusion

    The ANBA is a mission to empower the people of India. It will in all likelihood become a benchmark of how governments and their various organisations can work in a mission mode.