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Subject: Economics

  • Where the “fiscal space” debate should focus?

    The article focuses on the “fiscal space” debate in India. So, what is this debate? This debate is focuses upon the size of the fiscal deficit this year in India, ways that could be used to finance it and upper limit of this deficit etc. But the author argues that we should focus on debt/GDP trajectory in the subsequent years. Besides this, he suggests what our policy intervention comprise.

    Monetary policy and fiscal policy: Efficacy Vs. Space debate

    • In response to the economic disruption caused by Covid-19, monetary policy has moved swiftly and aggressively in many economies.
    • But questions remain on its incremental efficacy.
    • With a high level of uncertainty around, risk-averseness is evident in the financial systems.
    • This risk-averse tendency reduces the efficacy of lower rates and higher liquidity.
    • So, while monetary policy may have space, how much efficacy will it have?
    • Fiscal policy i.e. spending by the governments can have much efficacy.
    • But how much space does it have? Therein lies the debate.

    Focus on Debt/GDP trajectory, not on level

    • The “fiscal space” debate in India has centred exclusively on this year’s deficit and how it will be financed.
    •  But a more holistic assessment of fiscal space should focus on two factors 1) the government’s inter-temporal budget constraint 2)  how India’s debt/GDP evolves in the coming years.
    • These two are the factors that rating agencies and foreign investors will eventually focus on.
    • Following are the question that debate should focus on.
    • How much will India’s debt/GDP jump up this year?
    • More importantly, what happens thereafter?
    • Will debt/GDP keep rising year after year? Or will it start declining?
    • As research has found, it’s typically the trajectory of debt/GDP — more than the level — that impacts future growth.

    Evolution of debt

    • The evolution of debt is essentially a function of three variables:
    • 1) The primary deficit.
    • 2) Nominal GDP growth
    • 3) The government’s cost of borrowing.
    • The higher is the difference between growth and cost of borrowing, the greater is the depreciation of the existing debt stock.
    • High growth allows countries to “grow out” of their debts.
    • In contrast, high primary deficits worsen the debt burden.

    Where does India stand?

    • India comes into COVID-19 with a debt/GDP of about 70 per cent.
    • A primary deficit across the Centre and states of about 2.5 per cent of GDP including the Centre’s extra-budgetary resources. — based on the Revised Estimates for 2019-20.
    • A weighted average sovereign borrowing cost of about 7.5 per cent (on the stock of debt) and an estimated pre-COVID nominal GDP growth of 7.5 per cent in 2019-20.
    • In other words, the favourable gap between growth and borrowing costs had closed.
    • With this backdrop, one can simulate what happens to debt/GDP in the coming years under different growth, fiscal and interest-rate scenarios.
    • What do we find?
    • Even under relatively benign scenarios –nominal GDP growth of 4 per cent and a fiscal expansion of 3 per cent of GDP this year- India’s debt/GDP will balloon towards 80 per cent by the end of the year.
    • But India will not be alone. Public debt is expected to balloon all over the world.
    • Instead, what will matter for sustainability is the trajectory of debt thereafter.
    • Does debt/GDP come down or keep going up in subsequent years?

     Fiscal space depends on potential growth in coming years

    • The subsequent trajectory of Debt/GDP depends overwhelmingly on medium-term growth.
    • Consider the following two scenarios and refer to the figure given below-
    • 1. Fiscal Deficit 6%
    • Consider that this year’s combined fiscal deficit widens by 6 per cent of GDP.
    • But the primary deficit is then consolidated back to 2 per cent of GDP in the next 3 years.
    • And as long as nominal GDP is 10 per cent in the medium term which corresponds to real GDP growth of 7 per cent.
    • Debt/GDP gets on to a constantly declining path after the third year.
    • This suggests a bigger fiscal intervention is sustainable but only if medium-term growth prospects are lifted in tandem.
    • 2. Fiscal Deficit 3%
    • Consider that this year’s deficit widens by “just” 3 per cent of GDP.
    •  But medium-term nominal GDP growth settles at 8 per cent that is, real GDP growth of 5 per cent.
    • Debt/GDP rises relentlessly for the next decade towards 90 per cent of GDP.

    Key takeaway: focus on medium-term growth

    • This suggests even a relatively-conservative fiscal response this year becomes unsustainable if medium-term growth prospects are diminished.
    • Small changes in medium-term growth have large implications for fiscal sustainability.
    •  How much fiscal space India has to respond in the crisis year will depend crucially on what potential growth is likely to be in the coming years.
    • The more that India’s policy response can preserve, protect and boost medium-term growth — both through the nature of the policy intervention this year and the accompanying reforms — the larger the fiscal response India can mount.
    • Put more starkly, the fiscal debate between “need” and “affordability” is endogenous.
    • The medium-term sustainability of any fiscal package this year will depend on the nature of growth-enhancing interventions and reforms that accompany it.

    So, what could the interventions comprise?

    1. Keep small business afloat

    • Policy must ensure that all viable enterprises can survive the pandemic.
    • If economically-viable but illiquid small and medium enterprises go under, the implications both for unemployment and India’s underlying production capacity could be severe.
    • The government’s credit-guarantee scheme is, therefore, very important and should hopefully induce banks to provide much-need working capital to keep small businesses afloat.

    2. Reforms in the finance sector

    • It is important to jump-start a risk-averse financial sector into funding an economic recovery, more broadly.
    • Last week’s bond market interventions which involved special liquidity and partial guarantee funds are important to ease conditions at the financial periphery.
    • Over time, however, liquidity must give way to capital and reform.
    • Following steps will be crucial to strengthening the financial sector-
    • 1)Pre-emptively recapitalising public sector banks for growth and resolution capital.
    • 2) Conducting an AQR for the NBFC sector after pandemic.
    • 3) Then converting well-run NBFCs into banks to avail of a stable deposit franchise.
    • 4) Modifying the incentives under which public sector banks operate.
    • Higher potential growth is only feasible if the financial sector is able to fund it.

    3. Reforms in the other sectors

    • Real reforms must accompany those in the financial sector.
    • The government’s announcement on unshackling agriculture — if carried through to its logical conclusion — is potentially game-changing for farmers and will be a landmark reform for the sector.
    • As COVID-19 hastens the reorganisation of supply-chains within Asia, India must seize the moment to integrate into the Asian supply chain.
    • Revisit a Special Export Zone (SEZ) model with the appropriate regulatory environment to avoid the pitfalls of the past.
    • Path dependence will be key. If the first one or two SEZs succeed, it would create a powerful demonstration effect both externally to help attract more firms into India.
    • And internally inducing different states to compete to create their own SEZs to drive jobs and investment.

    4. Social infrastructure and ways to pay for it

    • If the virus has taught the world anything, it’s the criticality of social infrastructure.
    • India will not be able to fundamentally alter its growth potential without crucial investments in health and education.
    • The government’s announcement to boost health spending is, therefore, very welcome.
    • But how will this be paid for? This is where policy must get creative.
    • Existing assets on the public sector balance sheet must be aggressively monetised to fund growth-enhancing investments in physical and social infrastructure.
    • This will simultaneously take the pressure off the fiscal and financial sectors, and deliver a productivity-enhancing swap on the public sector balance sheet.

    The article is helpful to consolidate the basic understanding of the macroeconomic parameters of economy. Consider the question asked by UPSC last year “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments”

    Conclusion

    Higher potential growth is the antidote to many pressures, from incomes to jobs to debt sustainability. To the extent this unprecedented crisis creates political space and capital to reform, the opportunity must be seized.

    Back2Basics: Nominal GDP

    • Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. 
    • GDP is the monetary value of all the goods and services produced in a country.
    • Nominal differs from real GDP in that it includes changes in prices due to inflation, which reflects the rate of price increases in an economy.

    Primary Deficit

    • Primary deficit refers to the difference between the current year’s fiscal deficit and interest payment on previous borrowings.
    • It indicates the borrowing requirements of the government, excluding interest.
    • It also shows how much of the government’s expenses, other than interest payment, can be met through borrowings.

    Debt/GDP ratio

    • The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP).
    • By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.
    • Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

    AQR- Asset Quality Rating

    • An asset quality rating refers to the assessment of credit risk associated with a particular asset, such as a bond or stock portfolio.
    • The level of efficiency in which an investment manager controls and monitors credit risk heavily influences the rating bestowed.
    • And because asset quality is an important determinant of risk that profoundly impacts liquidity and costs, analysts go to great lengths to make sure they issue the most accurate evaluations possible.
    • After all, their pronouncements can greatly affect the overall condition of a business, bank, or portfolio for years to come.

  • Proposed amendments could harm DISCOMs

    Despite several policy measures, DISCOMs continue to suffer from various issues. This article focuses on the comprehensive proposal to amend the Electricity Act 2003. But here’s a catch, we will be discussing some issues with proposed amendment. Let’s dive into our DISCOMs analysis.

    Two-part tariff policy

    • At the core of DISCOM woes is the two-part tariff policy.
    • Two-part tariff policy was mandated by the Ministry of Power in the 1990s at the behest of the World Bank.
    • As more private developers came forward to invest in generation, DISCOMs were required to sign long-term power purchase agreements (PPA).
    • Under PPA, DISCOMs were committed to pay-  1) a fixed cost to the power generator, irrespective of whether the State draws the power or not, 2) a variable charge for fuel when it does.

    How Over-optimistic projection led to losses?

    • The PPAs signed by DISCOMs were based on over-optimistic projection of power demand estimated by the Central Electricity Authority (CEA).
    •  The 18th Electric Power Survey (EPS) overestimated peak electricity demand for 2019-2020 by 70 GW.
    • The 19th EPS published in 2017, by 25 GW, both pre-Covid 19.
    • Thus, DISCOMs were locked into long-term contracts, ended up servicing perpetual fixed costs for power not drawn.
    • Due to the CEA’s overestimates, the all-India plant load factor of coal power plants is at an abysmal 56% even before COVID-19.
    • This means that coal power plants are generating electricity only 56% of what maximum these power plants are able to generate.

    Renewable energy factor

    • Renewable impacted the power sector in the following 3 ways-
    • 1) From 2010, solar and wind power plants were declared as “must-run”.
    • This required DISCOMs to absorb all renewable power as long as there was sun or wind, in excess of mandatory renewable purchase obligations.
    • This means backing down thermal generation to accommodate all available green power.
    • This resulted in further idle fixed costs payable on account of two-part tariff PPAs.
    • 2)  Power demand peaks after sunset.
    • In the absence of viable storage, every megawatt of renewable power requires twice as much spinning reserves to keep lights on after sunset.
    • DISCOMs, especially in the southern region, have had to integrate large volumes of infirm power, mostly from solar and wind energy plants.
    • These renewable energy plants enjoy must-run status irrespective of their high tariffs.
    • The tariff is  ₹5/kwh in Karnataka and ₹6/kwh in Tamil Nadu for solar power.
    • All this even as the demand growth envisaged in the 18th EPS failed to materialise.
    • 3) In 2015 the Centre announced an ambitious target of 175 gigawatts of renewable power by 2022.
    • This followed with a slew of concessions to renewable energy developers, and aggravating the burden of DISCOMs.
    • Incidentally, China benefited by as much as $13 billion in the last five years from India’s solar panel imports.

    So, what are the proposals in the Electricity Act-2020?

    1. Sub-franchisees and  issues with it

    • The amendment proposes sub-franchisees, presumably private, in an attempt to usher in markets through the back door.
    • Issue:  Private sub-franchisees are likely to cherry-pick the more profitable segments of the DISCOM’s jurisdiction.
    • The Electricity Bill 2020 containing the proposed amendments is silent on whether a private sub-franchisee would be required to buy the expensive power from the DISCOM or procure cheaper power directly from power exchanges.
    • If it is the first, the gains from the move are doubtful since the room for efficiency improvements is rather restricted in the already profitable regions attractive to sub-franchisees.
    • If it is the second, DISCOMs will then be saddled with costly power purchase from locked-in PPAs and fewer profitable areas from which to recover it.

    2. Concession to renewable

    • The amendment proposes even greater concessions to renewable power developers.
    • This would have a cascading impact on idling fixed charges, impacting the viability of DISCOMs even more.

    3. Elimination of cross-subsidies

    • The most controversial amendment proposed, seeks to eliminate in one stroke, the cross-subsidies in retail power tariff.
    • This means each consumer category would be charged what it costs to service that category.
    • Rural consumers requiring long lines and numerous step-down transformers and the attendant higher line losses will pay the steepest tariffs.
    • The proposed amendments envisage that State governments will directly subsidise whichever category they want to, through direct benefit transfers.
    • Cross-subsidy is a fact of life in even private industries, soap, newspapers, or even utilities such as telecom.
    • But eliminating them in one stroke is bound to be ruinous to State finances.
    • There are also myriad problems with Direct Benefit Transfer.
    • This proposal is practically infeasible; if forcibly implemented, it will lead to chaos.

    4. Selection of the State regulator

    • State regulators will henceforth be appointed by a central selection committee.
    • The composition of which inspires little confidence in its objectivity.
    • This could result in jeopardising not only regulatory autonomy and independence but also the concurrent status of the electricity sector.

    5. Electricity Contract Enforcement Authority

    • Its members and chairman will also be selected by the same selection committee referred to above.
    • The power to adjudicate upon disputes relating to contracts will be taken away from State Electricity Regulatory Commissions and vested in this new authority.
    • This is being done ostensibly to protect and foster the sanctity of contracts.
    • This is also to ensure that States saddled with high-priced PPAs and idling fixed costs, yet forced to keep increasing the share of renewables in their basket, have no room for manoeuvre.

    Consider the question “Despite various policy interventions, DISCOMs continue to suffer from financial woes. Analyse the reasons for their woes. Examine the proposals in the Electricity Act (Amendment) Bill 2020.”

    Conclusion

    Beyond a doubt, the Electricity sector requires change but we must try to bring holistic and participatory approach to find solutions.

    Back2Basics: Electricity Act 2003

    • The act covers major issues involving generation, distribution, transmission and trading in power.
    • Before Electricity Act, 2003, the Indian Electricity sector was guided by The Indian Electricity Act, 1910 and The Electricity (Supply) Act, 1948 and the Electricity Regulatory Commission Act, 1998.
    • The Electricity Act 2003 consolidates the position for existing laws and aims to provide for measures conducive to the development of electricity industry in the country.
    • The act attempted to address certain issues that have slowed down the reform process in the country and consequently had generated new hopes for the electricity industry.

     

  • Minimum Public Shareholding (MPS) Requirement

    The Securities and Exchange Board of India (SEBI) has relaxed the 25 per cent minimum public shareholding norm and advised exchanges not to take penal action till August 2020 in case of non-compliance.

    A statement based question can be asked about the SEBI in the prelim asking-

    If it is a statutory or quasi-judicial body ; Scope of its regulation; Appointment of its chairman etc..

    What is a Public Shareholding Company?

    • A Public Shareholding Company is a company whose capital is divided into shares of equal value, which are transferable.
    • Shareholders of a Public Shareholding Company are not liable for the company’s obligations except for the amount of the nominal value of the shares for which they subscribe.

    What is MPS requirement?

    • The 25 per cent MPS norms were introduced in 2013, whereby no listed company was permitted to have more than 75 per cent promoter stake.
    • The rules were aimed at improving liquidity and better stock price discovery by making higher float available with public.
    • The average promoter holding in India is among the highest globally.
    • Last year, the government had proposed to increase the minimum public float from the current 25 per cent to 35 per cent. It had met with opposition, forcing the government to drop the plan.

    Why ease MPS norms?

    • The Sebi move is aimed at easing such compliance rules amid the disruptions caused by the coronavirus pandemic.
    • The decision has been taken after receiving requests from listed entities and industry bodies as well as considering the prevailing business and market conditions.
    • As per the norms, exchanges can impose a fine of up to Rs 10,000 on companies for each day of non-compliance with MPS requirements.
    • Besides, exchanges can intimate depositories to freeze the entire shareholding of the promoter and promoter group. This circular will come into force with immediate effect.

    Back2Basics: Securities and Exchange Board of India (SEBI)

    • The SEBI is the regulator of the securities and commodity market in India.
    • It was first established in 1988 as a non-statutory body for regulating the securities market.
    • It became an autonomous body on 12 April 1992 and was accorded statutory powers with the passing of the SEBI Act 1992.
    • SEBI has to be responsive to the needs of three groups, which constitute the market:

    1) issuers of securities

    2) investors

    3) market intermediaries

  • Atmanirbhar Abhiyan Package

    The article examines the various aspects of the recently announced Atmanirbhar Bharat Abhiyaan (ANBA). But before digging deeper into the ANBA the author ruminates over India’s growth (GDP) story. Reasons for India’s failure to deliver on the economic empowerment are also examined. In the end, the relation between the free economies and the welfare states is examined.

    The good and the bad of India’s GDP story

    • India crossed the UK two years ago, France last year, and will cross Germany and Japan in the next five years. (In terms of nominal GDP)
    • That will leave only America and China ahead of us.
    • But India’s per capita GDP story is on a different track.
    • We once equalled Korea (1960) and China (1997) but today there are 138 countries ahead of us.
    • The COVID-19 lockdown and the stories of pain inflicted on migrant workers exposes how per capita GDP is more important for our citizens than total GDP.

    A take on Economic empowerment

    • Ramchandra Guha, in his book- Gandhi: The Years that Changed India, suggests that while other patriots had used Swaraj to signify national independence, Gandhiji made India aware of its true or original meaning, Swa-Raj, or self rule- both political and economic.
    • Our collective political Swaraj hasn’t always translated into individual economic Swa-Raj because of inadequate formalisation, industrialisation, urbanisation, financialisation, and skilling.

    Atmanirbhar Bharat Abhiyaan(ANBA) – A step towards Swaraj

    • The Atmanirbhar Bharat Abhiyaan (ANBA) policy announcements are important moves in meeting Gandhiji’s vision of individual self-reliance and recognising poverty as the worst form of violence.
    • ANBA targets avoiding unemployment becoming hunger and illiquidity becoming insolvency.
    • The agriculture package of Rs 1.63 lakh crore included farm-gate and aggregation point infrastructure, fisheries, animal husbandries, and others like animal vaccination, micro food enterprises.
    • The non-bank liquidity package of Rs 5.94 lakh crore included MSMEs, NBFCs, MFIs, housing finance companies, power discoms, and others (PF, tax relief).
    • The migrant and farmer package of Rs 3.16 lakh crore included concessional credit via kisan credit card, farmer working capital, affordable housing, and others (food, street vendors, microloans).
    • The welfare and health package of Rs 1.85 lakh crore included women and pensioner benefits, MNREGA, emergency health response, and others like food, financial security.
    • RBI’s liquidity measures of Rs 5.24 lakh crore included two phases of targeted long-term repo operations, CRR cut, marginal standing facility limit increase, refinancing facilities, and mutual fund special liquidity facility.
    • The reform to the Essential Commodities Act, APMCs and contract farming directly impact prosperity as 45 per cent of our agricultural labour force generates only 14 per cent of GDP.

    How ANBA maintained fiscal health?

    • ANBA is also important for what it is not. It’s not fiscal profligacy-i.e. the government is spending with due care for fiscal deficit figures.
    • Total spending may be higher if the loans for which government has stated to stand as a guarantor turns NPAs (for ex. MSMEs loans).
    • But for now, it marginally raises our already difficult fiscal deficit.
    • It’s not an institutional assault — RBI’s role in ANBA keeps it away from the political minefield that the US Federal Reserve has entered.
    • The US Fed is buying the bonds sold by corporations (i.e. Fed is spending itself) while the RBI has only lent the money to banks.
    • There is a recognition that RBI has lending powers, not spending powers.
    • It’s not a mindless public sector expansion: The end of monopolies (public sector monopoly) and new public-private partnership opportunities signal pragmatism and efficiency targeting.
    • It’s not waiting for potential COVID upsides: it makes us worthy if risky global just-in-time supply chains get replaced by resilient just-in-case diversification.
    • It’s not shutting off India from the world i.e. Atmanirbhar is not isolationist policy.
    • It creates new openness to ideas, investment, and trade.

    What is on agenda for ANBA 2.0?

    • The unfinished agenda for ANBA 2.0 includes following-
    • Civil service reform-the steel frame has become a steel cage.
    • Government reform-Delhi doesn’t need 57 ministries and 250 people with Secretary rank.
    • Financial reform-sustainably raising credit to GDP ratio from 50 per cent to 100 per cent.
    • Urban reform-having 100 cities with more than a million people rather than 52.
    • Education reform-our current regulator confuses university buildings with building universities.
    • Skill reform-our apprentice regulations are holding back employers and universities.
    • Labour reform-our capital is handicapped without labour and labour is handicapped without capital.

    Welfare state and free economies

    • A modern state is a welfare state with formal private jobs.
    • The idealisation of Scandinavian social democracies forgets that their dense social security nets are underwritten by remarkably free economies.
    • The World Bank Ease of Doing Business scale ranks Denmark third, Norway seventh, and Sweden 12th of 190 countries.
    • Despite — or thanks to — America’s capitalism, its central government spends 37 per cent of GDP while India’s spends 14 per cent.
    • And its ferocious fiscal pandemic response involves $3 trillion government borrowing in the next three months.
    • People suggest the US can sustain its welfare state because it has the world’s reserve currency.
    • But America can afford its welfare state because of the productivity of its cities, companies and citizens. Consider the following-
    • New York’s GDP equals Russia with 6 per cent of the people and 0.00005 per cent of the land.
    • The $4.5 trillion revenue of its 25 largest companies is more than Germany’s GDP.
    • Its per capita income is $55,000.
    • India’s welfare state does not lack intentions but lacks resources.
    • No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.
    • This is what ANBA hopes to achieve.

    Consider the question “Far from being an isolationist, Atmanirbhar Bharat Abhiyan seeks to make India a welfare state with more productive cities, firms and citizens. Comment.”

    Conclusion

    India missed the manufacturing export train that China boarded but another may be coming.  Policy reform is not the solving of a sum but the painting of a picture — 90 days after the lockdown ends, we need ANBA 2.0 to finish the job.

    Back2Basics: Just in time inventory

    • The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.
    • Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.
    • This method requires producers to forecast demand accurately.

    Just in case inventory

    • Just in case (JIC) is an inventory strategy in which companies keep large inventories on hand.
    • This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.
    • The company that utilizes this strategy likely has a hard time predicting consumer demand or experiences large surges in demand at unpredictable times.
    • A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold-out inventory.

  • New Possibilities for Agriculture Sector

    The finance minister proposed package for the farmers. The package has 11 points. But this article discusses only 3 points which the author hopes would be the game-changer for agri-marketing. The three points pertain to the ECA, APMC Acts and contract farming. So, how can these three proposed laws transform agri-marketing and be a boon to farmers and consumers at the same time? Read the article.

    1. Amending the Essential Commodities Act 1955

    • Background of the ECA: The ECA of 1955 has its roots in the Defence of India Rules of 1943.
    • At that time, India was ravaged by famine and was facing the effects of World War II.
    • It was a scarcity-era legislation.
    • By the mid-1960s, hit by back-to-back droughts, India had to fall back on PL480 imports of wheat from the US and the country was labelled as a “ship to mouth” economy.
    • Importer to exporter:  Today, India is the largest exporter of rice in the world and the second-largest producer of both wheat and rice, after China.
    • Our granaries are overflowing.

    So, how ECA hurts farmers as well as consumers?

    • Our legal framework is of the 1950s, which discourages private sector investment in storage.
    • How ECA discourage investment?  The ECA can put stock limits on any trader, processor or exporter at the drop of a hat.
    • Such limits discourage investments in storage facilities. As a result, the country lacks storage facilities.
    • When farmers bring their produce to the market after the harvest, there is often a glut, and prices plummet. All this hurts the farmer.
    • In the lean season, prices start flaring up for the consumers.
    • So, both lose out because of the lack of storage facilities.

    How the amendment will help?

    • The amendment announced last week, if implemented in the right spirit, will remove roadblocks in investment and help both farmers and consumers.
    • It will bring relative price stability.
    • It will also prevent the wastage of agri-produce that happens due to lack of storage facilities.

    2. Central law to allow farmers to sell outside APMC

    • Issues with APMC Acts: Our farmers suffer more in marketing their produce than during the production process.
    • APMC markets have become monopsonistic with high intermediation costs.

    How the proposed Central law to allow farmers to sell to anyone outside the APMC yard will help?

    • 1. It will bring greater competition amongst buyers.
    • 2. It will lower the mandi fee and the commission for arhatiyas (commission agents).
    • 3. It will reduce other cesses that many state governments have been imposing on APMC markets.
    • 4. The proposed law will open more choices for the farmers and help them in getting better prices. So their incomes should improve.
    • 5. By removing barriers in inter-state trade and facilitating the movement of agri-goods, the law could lead to better spatial integration of prices.
    • 6. This will help farmers of regions with surplus produce to get better prices and consumers of regions with shortages, lower prices.
    • 7. India will have one common market for agri-produce, finally.

    3. Legal framework for contract farming

    • The legal environment for contract farming, with the assurance of a price to the farmers at the time of sowing, is a step in the right direction.
    • It will help them take cropping decisions based on forward prices.
    • Normally, our farmers look back at last year’s prices and take sowing decisions accordingly.
    • The new system will minimise their market risks.

    2 Supplementary notes for success of above 3 measures

    •  Big buyers like processors, exporters, and organised retailers going to individual farmers is not a very efficient proposition.
    • They need to create a scale.
    • 1. And for that, building farmer producer organisations (FPOs), based on local commodity interests, is a must.
    • How FPOs will help? This will help ensure uniform quality, lower transaction costs, and also improve the bargaining power of farmers vis-à-vis large buyers.
    • NABARD has to ensure that all FPOs get their working capital at 7 per cent interest rate — a rate that the farmers pay on their crop loans.
    • Currently most of them depend on microfinance institutions and get loans at 18-22 per cent interest rates.
    • This makes the entire business high-cost.
    • 2. Another thing to watch out for is the fine print of the legislation.
    • Certain conditions to reimpose the ECA restrictions if the prices of commodity go up in the proposed legislation could be counterproductive.
    • That would be unreasonable and all the reforms would be undone.
    • One needs to understand how much is the “extra burden” inflicted by the price increase on the food budget of a household.

    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

    The reforms, announced last week could be a harbinger of major change in agri-marketing, a 1991 moment of economic reforms for agriculture. But before one celebrates it, let us wait for the fine print to come.

    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.

    PL-480

    • The US President Dwight D. Eisenhower signed into law the Agricultural Trade Development and Assistance Act of 1954, commonly known as PL–480 or Food for Peace.
    • Prior to that, the United States had extended food aid to countries experiencing natural disasters and provided aid in times of war, but no permanent program existed within the United States Government for the coordination and distribution of commodities.
    • Public Law 480, administered at that time by the Departments of State and Agriculture and the International Cooperation Administration, permitted the president to authorize the shipment of surplus commodities to “friendly” nations, either on concessional or grant terms.
    • It also allowed the federal government to donate stocks to religious and voluntary organizations for use in their overseas humanitarian programs.
    • Public Law 480 established a broad basis for U.S. distribution of foreign food aid, although reduction of agricultural surpluses remained the key objective for the duration of the Eisenhower administration.

  • Fiscal support to the power sector

    Part of the package announced by Finance Minister was a Rs 90,000-crore liquidity injection into power distribution companies (or discoms).

    Practice question:

    Ujwal DISCOM Assurance Yojana (UDAY) has failed to turn around the precarious financial position of state power DISCOMs in India. Discuss.

    Fiscal push for DISCOMs

    • The move is aimed at helping the discoms clear their dues with gencos (or electricity generation companies), who in turn can clear their outstanding dues with suppliers, such as coal miners, easing some of the working capital woes of Coal India Ltd and contract miners.
    • This is subject to the condition that the Centre will act as guarantor for loans given by the state-owned power finance companies such as PFC and REC Ltd to the discoms.

    Why was this needed?

    • The primary trigger is the poor financial condition and revenue collection abilities of most state discoms.
    • This is despite several interventions, including a scheme called UDAY that was launched in 2015 to fix the problems of a sector where the upstream side (electricity generation) was drawing investments even as the downstream (distribution) side was leaking.

    How do the DISCOMs work?

    To understand how the sector works, we have to imagine a three-stage process.

    • First stage: Electricity is generated at thermal, hydro or renewable energy power plants, which are operated by either state-owned companies or private companies.
    • Second stage: The generated electricity then moves through a complex transmission grid system comprising electricity substations, transformers, and power lines that connect electricity producers and the end-consumers.
    • The entire electricity grid consists of hundreds of thousands of miles of high-voltage power lines and millions of miles of low-voltage power lines with distribution transformers that connect thousands of power plants to millions of electricity customers all across the country.
    • Third stage: This last-mile link is where discoms come in, operated largely by state governments. However, in cities such as Delhi, Mumbai, Ahmedabad, and Kolkata, private entities own the entire distribution business or parts of it.

    Why there is a problem?

    • Discoms essentially purchase power from generation companies through power purchase agreements (PPAs), and then supply it to their consumers (in their area of distribution).
    • The key issue with the power sector currently is the continuing problem of the poor financial situation of state discoms.
    • This has been affecting their ability to buy power for supply, and the ability to invest in improving the distribution infrastructure. Consequently, this impacts the quality of electricity that consumers receive.

    There are two fundamental problems here:

    1) Lack of competitiveness

    • One, in India, electricity price for certain segments such as agriculture and the domestic category (what we use in our homes) is cross-subsidised by the industries (factories) and the commercial sector (shops, malls).
    • This affects the competitiveness of the industry.

    2) Transmission and distribution losses

    • There is the problem of AT&C (aggregate transmission and distribution losses), which is a technical term that stands for the gap in the bills that it raises and the final collection process from end-consumers.
    • As a result, the discoms are perennially short of funds, even to pay those supplying power to them, resulting in a cascading impact up the value chain.

    Back2Basics: UDAY Scheme

    https://www.civilsdaily.com/news/uday-scheme-for-financial-turnaround-of-power-distribution-companies/

  • Sovereign Gold Bonds: A substitute for physical gold

    Gold bond prices rise to near record highs after the second tranche of subscription were closed.

    Questions based on capital markets are quite frequent these years.  Consider this-

    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? (CSP 2019)

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

    What is a Sovereign Gold Bond (SGB)?

    • SGB is a substitute for holding physical gold.
    • The bonds are issued by the RBI on behalf of the government and are a bond denominated in gold.
    • The government issues such bonds in tranches at a fixed price that investors can buy through banks, post offices and also in the secondary markets through the stock exchange platform.

    What are the benefits of buying SGB?

    • These bonds are backed by a sovereign guarantee and can also be held in Demat form.
    • Further, they are priced as per the underlying spot gold prices.
    • Hence, investors who want to invest in gold can buy the bonds without worrying about the safekeeping of physical gold along with locker charges, making charges or purity issues.
    • Plus, these bonds offer interest at the rate of 2.5% per annum on the principal investment amount.
    • While the interests on the bonds are taxable, the capital gains at the time of redemption are exempt from tax.
    • These bonds can also be used as collateral for availing loans from banks and NBFCs.

    How are the bonds structured?

    • SGB has a fixed tenure of eight years, though early redemption is allowed after the fifth year from issuance.
    • Since the bonds are listed on the exchange, these can be transferred to other investors as well.
    • The bonds are priced in rupees based on the simple average of the closing price of gold of 999 purity which published by the India Bullion and Jewellers Association.
    • At the time of redemption, cash equivalent to the number of units multiplied by the then prevailing price would be credited to the bank account of the investor.

    Are there any risks in investing in SGB?

    • A capital loss is a risk since the bond prices would reflect any change in gold prices.
    • If gold prices fall, the principal investment would fall proportionately.

    Why need such bonds?

    • The gold demand rises in times of uncertainty or high inflation.
    • Gold demand is mostly met through imports
    • Years of high imports are ones of high current account deficits which, in turn, have weakened the rupee.
    • It is to reduce this huge import bill that, in November 2015, the government tried to introduce gold bonds.

  • Tale of two crises: Global Financial Crisis (GFC) and Corona Financial Crisis (CFC)

    Not all financial crises are the same. And this is more so about the two crises that we have been witness to – the 2008 Global Financial Crisis (GFC) and the current Corona Financial Crisis (CFC). The author points out the four key difference in the two crises. These four difference also mean that the solution for 2008 GFC may not be the solution for the present CFC. But why is it so? Read to know more…

    1. Origin of the two crises

    • The GFC originated in the financial sector.
    • In GFC, banks and financial intermediaries got carried away by irrational exuberance and recklessly piled on risk.
    •  CDS, CDO, MBS, ABS and various other became the villains in the GFC drama as it unfolded in the rich countries.
    • As people lost their wealth and savings in the financial meltdown, demand collapsed and growth slumped.
    • The contagion, which originated in the financial sector, spread to the real economy.
    • In contrast, the CFC came from outside the economic system.
    • The first impact came by way of a supply shock as China-centred supply chains broke down.
    • And then as countries ordered lockdowns and economies shut down, demand slumped.
    • The ensuing distress in the real economy led to distress in the financial system.

    So, how origin of the crisis matter for its resolution?

    • Restoring the faith in the financial system was key to the resolution of GFC.
    • Which meant rescue and rehabilitation of banks and other financial institutions.
    • Once that task in the financial sector was accomplished, repair of the real economy fell in place.
    • The demand came back, supply resumed and growth picked up.
    • In contrast, the central challenge in the resolution of the CFC is to beat the pandemic, and that solution has to come from science.
    • Only when there is public confidence that the incidence of the pandemic has been brought down to a low-level equilibrium, will there be a resolution in both the real and financial economies.
    • We are seeing that even during this crisis, just like in 2008, governments are coming out with fiscal stimulus packages and central banks with monetary stimulus packages.
    • But these are not solutions to the pandemic; they are just holding operations till the central problem is resolved.

    2. No one country hold key to solution

    • The second difference between the two crises arises from the asymmetry of the solutions.
    • The GFC originated in the subprime mortgage sector of the US and then, rapidly engulfed the world.
    • The CFC originated in the Hubei province of China and rapidly engulfed the world.
    • But the similarity ends there.
    • For the resolution of the GFC, restoring financial stability in the US was necessary, and a sufficient condition for restoration of financial stability everywhere.
    • But the situation with the CFC is different.
    • Every country needs to control the pandemic within its borders.
    • But that is not sufficient because the virus can hit back from across the border.
    • No country is safe until every country is safe.

    3. Policy interventions involve a dilemma

    • How the policy interventions interact with one another makes for the third difference between the two crises.
    • During the resolution of the GFC, solutions in the financial sector and in the real economy reinforced each other.
    • For example, to mitigate the crisis, the RBI cut rates and intervened in the forex market, the government extended special concessions for housing and real estate sectors to provide stimulus in the real economy.
    • There was synergy in these actions.
    • In contrast, in managing the challenge of the CFC, what we are seeing is tension between the various sets of policy actions.
    • The effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector.
    • The more stringent the lockdown to save lives, the more extensive the loss of livelihoods.
    • Managing this tension is by far the biggest dilemma for governments battling the crisis.

    4. No single large economy to keep the world afloat

    • The global financial crisis, although it was called “global” did not affect all countries equally.
    • China was less affected even as all rich countries were in a financial meltdown.
    • In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat.
    • In contrast, now all rich and big economies are weighed down by the virus, and there is not a single large economy to keep the rest of the world afloat.

    Consider the question “Analyse the key differences in the Global Financial Crisis of 2008 and the financial crisis caused by the Covid-19.”

    Conclusion

    If pandemics are going to be more frequent, as is now suspected, it is all the more important that there is a more enforceable global protocol on early warning and information sharing. For all their differences, the GFC and CFC are similar in one respect — they both teach us life-enhancing lessons. The GFC forcefully reminded us that greed and avarice will only bring tears in the end. The CFC is teaching us that the force of nature is bigger than the combined force of our science and technology.

    Back2Basics: Credit Default Swap (CDS)

    • A credit default swap (CDS) is a type of credit derivative that provides the buyer with protection against default and other risks.
    • The buyer of a CDS makes periodic payments to the seller until the credit maturity date.
    • In the agreement, the seller commits that, if the debt issuer defaults, the seller will pay the buyer all premiums and interest that would’ve been paid up to the date of maturity.

    Collateralised Debt Obligations (CDO), MBS and ABS

    • To create a CDO, investment banks gather cash flow-generating assets—such as mortgages, bonds, and other types of debt.
    • These assets are then repackaged into discrete classes or tranches based on the level of credit risk assumed by the investor.
    • These tranches of securities become the final investment products: bonds, whose names can reflect their specific underlying assets.
    • For example, mortgage-backed securities (MBS) are comprised of mortgage loans.
    • And asset-backed securities (ABS) contain corporate debt, auto loans, or credit card debt.
    • CDOs are called “collateralized” because the promised repayments of the underlying assets are the collateral that gives the CDOs their value.
    • Mortgage-backed securities played a central role in the financial crisis that began in 2007 and went on to wipe out trillions of dollars in wealth, bring down Lehman Brothers, and roil the world financial markets.
    • In retrospect, it seems inevitable that the rapid increase in home prices and the growing demand for MBS would encourage banks to lower their lending standards and drive consumers to jump into the market at any cost.

  • Ensuring the take off of aviation industry

    Primarily the major driver of connectivity, the aviation industry is one of the worst affected industries in the corona crisis. It is in the need of relief package from the government. The article discusses the contribution of the industry in the economy. Finer details of the operation of the industry are also explained. In the end, details of the measures expected from the government relief package are discussed.

    Significance of aviation industry in Indian economy

    • The air transport industry, including airlines and its supply chain, is estimated to contribute directly or indirectly $72 billion of GDP to India.
    • India being the fastest-growing domestic market in the world at 18.6 per cent per annum, followed by China at 11.6 per cent. (IATA report)

    Impact of Covid-19 crisis

    • The same IATA report says that in India, 29.32 lakh jobs in the aviation sector are at risk.
    • Airlines in the Asia Pacific region may see the largest revenue drop.
    • The air transport business along with its supply chain may see a near wipeout of approximately 40 per cent of business volume in the current financial year.
    •  The two-month-long shutdown has eroded the capital of most airlines.
    • The cost of maintaining Aircraft on Ground (AoG) is extremely high, and with nil revenues, this is a sure-shot recipe for disaster.

    Economics of running airlines profitably

    • You should be flying your entire fleet, with no Aircraft on Ground. (Airbus A-320 or similar)
    • Every plane must fly for 11 hours a day.
    • Which will be possible only if you have a turnaround time of 30-45 minutes.
    • And you have an average Passenger Load Factor (PLF) of around 65 to 67 per cent.

    Now, consider this:

    • Forty per cent of your fleet is grounded.
    • Due to social distancing and other hygiene protocols, an aircraft can fly only eight hours because of the elongated turnaround time.
    • One-third seats are to be kept vacant.
    • And finally, you are flying with a reduced 50 per cent PLF.
    • The break-even ticket price in such a scenario would be astronomical.

    Demand for  financial relief package

    • The Asia Pacific division of the IATA has corresponded with the Indian government, citing the case of some of the other nations which have announced financial relief packages for the sector.
    • As per reports, countries like Australia, New Zealand and Singapore, have announced relief packages for airlines.
    • FICCI has urged the government to immediately provide direct cash support to Indian carriers whereby the airlines can meet their fixed costs.

    What relief measures could be provided?

    • First, a moratorium for the next 12 months on all interest on the principal amount of loans without limitations of size or turnover through a direction to all financial institutions.
    • Second, VAT on ATF by state governments, which ranges from 0-30 per cent, should be rationalised with immediate effect to a maximum of 4 per cent across all states for the next six months.
    • Third, aviation turbine fuel needs to be brought under the ambit of 12 per cent GST, with full input tax credit on all goods and services.
    • Fourth, a waiver for private airport operators space rentals and AAI, royalty, landing, parking, route navigation and route terminal changes for the next one year.
    • This should be done not only for the airlines but all aviation-related businesses.
    • Fifth, all airlines and aviation-related business must be treated as priority sector lending.
    • Sixth, no loans to airlines and other aviation-related business should be classified as NPAs and no collateral enforced or enhanced during this moratorium.
    • Finally, support the airlines and other-aviation related companies by paying or taking care of salaries of the employees for a period of six months.
    • This will allow employee retention and is being done in a lot of countries.

    A question was asked by the UPSC in 2017 related to the development of Airports in India under PPP model. This shows the importance of the aviation sector from UPSC point of view. Consider the question asked by the UPSC “Examine the development of Airports in India through joint ventures under PPP model. What are the challenges faced by the authorities in this regard?”

    Conclusion

    Recovery from this crisis is going to be a long and uphill task. It will take effort, planning and, most importantly, coordination between the aviation industry and the government.

    Back2Basic: IATA-International Air Transport Association

    • IATA was founded in Havana, Cuba, on 19 April 1945.
    • It is the prime vehicle for inter-airline cooperation in promoting safe, reliable, secure and economical air services – for the benefit of the world’s consumers.
    • The international scheduled air transport industry is more than 100 times larger than it was in 1945.
    • Few industries can match the dynamism of that growth, which would have been much less spectacular without the standards, practices and procedures developed within IATA.

     

     

     

  • Economic stimulus package for Agriculture

    FM has announced plans to enact a central law to permit barrier-free inter-State trade of farm commodities and ensure a legal framework to facilitate contract farming under the third tranche of the Atmanirbhar Bharat Abhiyan economic stimulus package.

    Try this question:

    ‘Doubling Farmer’s Income’ and ‘USD 5 trillion economy’  seems more like slogans today in wake of COVID pandemic. Comment on the statement with keeping in view the Atmanirbhar Bharat Abhiyan of the government.

    Details of the package

    • The third tranche included plans to invest ₹1.5 lakh crore to build farm-gate infrastructure and support logistics needs for fishworkers, livestock farmers, vegetable growers, beekeepers and related activities.
    • The Centre will deregulate the sale of six types of agricultural produce, including cereals, edible oils, oilseeds, pulses, onions and potatoes, by amending the Essential Commodities Act, 1955.
    • Stock limits will not be imposed on these commodities except in case of national calamity or famine or an extraordinary surge in prices.
    • The Centre is considering introducing a law on contract farming under the Contract Act of 1872 to enable farmers to directly engage with processors, aggregators, large retailers and exporters in a fair and transparent manner.
    • It would allow private players to invest in inputs and technology in the agricultural sector.

    Must read:

    [pib] Atmanirbhar Bharat Abhiyan (Self-reliant India Mission)