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Subject: Economics

  • The new consumer

    The focus of this article is on the behavioural changes in the consumer post Covid. It also suggest the ways to deal with these changes.

    Context

    • The consumer during and post-COVID is showing remarkable flexibility, bringing about a paradigm shift in her consumption pattern.

    Issue of generating demand

    • Some state governments are busy demanding the opening up of the economy.
    • However, the issue is that the economy does not merely need opening up, but it requires urgent generation of basic demand.
    • That is why consumer behaviour needs to be closely watched.
    • Since the lockdown, the priorities of consumers have seen a drastic shift.

    Factors to consider to increase demand

    • 1) The decrease in the purchasing power to buy products needs to be addressed.
    • The government must look at ways like a reduction in taxes which will help the common man.
    • 2) The current scenario has also made all of us go back to the basic needs.
    • Luxury products hold little value. But renting will increase.
    • 3) The emphasis will be on saving for a rainy day, whether in the case of banks or households
    • 4) Aviation, tourism and hospitality sectors have been hit and continue to remain so even after the restrictions are lifted.
    • 5)  e-commerce has shown exponential growth and will continue to do so.
    • 6) With “Vocal for Local” gaining momentum, there’s a huge increase in local apps, local kirana stores, local artisans and brands.
    • 7) Schools and colleges have taken a hit as e-learning and online courses are being preferred.
    • 8) The entertainment industry has been drastically hit. The media and entertainment industry needs to pay heed to this and curate content accordingly.
    • 9) With a lot of people laying emphasis on their health and immunity, there’s been a substantial rise in the consumption of organic, ayurvedic, and immunity-boosting products.
    • Apart from the obvious products, financial and medical insurance will play an important role.
    • 10) Real estate will suffer as no long-term, high investment purchases will be favoured, but renting will increase.

    Role of the government

    • 1) People need to be provided with their daily needs — basic essentials such as food, water, housing, and electricity.
    • The government is already taking care of that, but money also needs to be given.
    • 2) Jobs need to be provided through development of infrastructure projects.
    • 3) Farmers need to have insurance for their crops and the infrastructure to sell at the right price.
    • 4) Migrant workers with their livelihoods being disrupted are looking for support,and many are focusing on agriculture as a means of income.

    Way forward

    • The government should focus on generating demand for products, and create jobs by improving infrastructure.
    • The government must incentivise spending by offering tax benefits on the amount spent.
    • Government must forget about fiscal prudence this year.
    • Consumers in rural areas are buying more than before.Companies should focus on tapping the rural demand

    Consider the question “Demand has been the driver of India’s growth. But the pandemic has dampened it with devastating effect. Agaist this backdrop suggest the measures to be taken by the government to revive the demand.”

    Conclusion

    With focus on these emerging trends and changing behaviour of the consumers, the government must take steps to bring the economy fast on the tracks.

  • Agriculture Infrastructure Fund (AIF) Scheme

    PM has launched a new financing scheme under the ₹1 lakh crore AIF.

    Note the following things about AIF:

    1) It is a Central Sector Scheme

    2) Duration of the scheme

    3)Target beneficiaries

    Agriculture Infrastructure Fund (AIF)

    • It is a Central Sector Scheme meant for setting up storage and processing facilities, which will help farmers, get higher prices for their crops.
    • It will support farmers, PACS, FPOs, Agri-entrepreneurs, etc. in building community farming assets and post-harvest agriculture infrastructure.
    • These assets will enable farmers to get greater value for their produce as they will be able to store and sell at higher prices, reduce wastage and increase processing and value addition.

    What exactly is the AIF?

    • The AIF is a medium – long term debt financing facility for investment in viable projects for post-harvest management infrastructure and community farming assets through interest subvention and credit guarantee.
    • The duration of the scheme shall be from FY2020 to FY2029 (10 years).
    • Under the scheme, Rs. 1 Lakh Crore will be provided by banks and financial institutions as loans with interest subvention of 3% per annum.
    • It will provide credit guarantee coverage under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for loans up to Rs. 2 Crore.

    Target beneficiaries

    The beneficiaries will include farmers:

    • PACS, Marketing Cooperative Societies, FPOs, SHGs, Joint Liability Groups (JLG), Multipurpose Cooperative Societies, Agri-entrepreneurs, Startups, and Central/State agency or Local Body sponsored Public-Private Partnership Projects

  • Restructuring to cushion impact on the economy

    “The article analyses the present scenario of the economy and impact of the steps taken by the central bank and the government.” 

    Context

    • Monetary policy committee (MPC) members, through a unanimous vote, decided to keep policy rates unchanged.
    • MPC also maintained an accommodative stance.
    • This was the result of inflation hovering around 6% i.e. above the MPCs target of 4%.

    Restructuring package after moratorium ends

    • Moratorium on loans ends 31 August, RBI said the way forward is a restructuring package for businesses and households.
    • Recent data released by large banks indicate that there has been a sizeable reduction in moratorium in June from 50% in April for all scheduled commercial banks (SCBs).
    • As economic activity normalizes further, the need for restructuring will be even lower.

    What do the trends indicate

    • Most indicators—manufacturing and services Purchasing Managers’ Index(PMI’s) electricity output, vehicle sales, exports, imports—point to economic momentum settling at 10-15% below covid levels in the near-term.
    • The RBI’s consumer confidence survey—gauge of consumer spending—was at its lowest in May, and the one-year outlook is not promising.
    • This implies that consumption demand, especially discretionary demand, will be far lower.
    • With muted consumption, capacity utilization, which had fallen to 68.2% last December, has fallen further in the last few months.
    • Thus, investment demand is not likely to see upward momentum in the near term, even with lower interest rates.

    How RBI’s intervention made the difference

    • An economic slowdown of such proportions leads to an increase in risk premium.
    • Rating upgrade to downgrade ratio of the corporate sector had fallen to 0.05 as in May from a high of 1.11 in December 2018.
    • Spread between 3-year AAA corporate bonds and sovereign bonds rose to 276 basis points on 26 March.
    • But the spread has since fallen to 50bps.
    • This was possible because of the abundant liquidity made available by RBI and credit enhancement provided by the government.

    Way forward

    • RBI and the government will have to work together to revive demand.
    • Centre has already expanded its gross borrowing to ₹12 trillion.
    • Even with net tax collections at 53% of last year’s levels, the Centre has increased its spending by 13% over 2019-20.
    • The government better understand that this is the time to apply Keynesian economics.
    • Global central banks have become large buyers of sovereign debt to support the larger roles being played the governments.
    • In India, too, the Centre and states will have to spend to crowd-in private sector spending.
    • RBI’s role will be important not only as the lender of last resort but also as a buyer of government securities.
    • It has carried out its function as a central bank well, and brought a semblance of stability to financial markets.
    • It will have to do the same in the sovereign bond market.
    • More importantly, it will have to remain vigilant of impending risks to growth and inflation, and be ready to act.

    Consider the question “To what extent the steps taken by the RBI and the government to stabilise the economy battered by the covid pandemic were helpful? 

     Conclusion

    As India’s central bank comes towards the end of its interest rate reduction cycle, it will have to navigate the economy through financial and macroeconomic stability. The government will also have to act in tandem with the central bank in steering the economy through this storm.

    Original

    articles:https://www.livemint.com/opinion/columns/opinion-restructuring-to-cushion-impact-on-the-economy-11596758908360.html

  • Importance of increasing the income of those at the bottom of income pyramid

    India’s growth has been fuelled by demand which has dampened owing to various factors. One untapped source of demand could be the group which lies at the bottom of income pyramid. This article suggests the ways to increase the income of this group.

    Structural demand problem

    • India’s structural demand problem predates the COVID-19 shock.
    • This problem has been compounded after lockdown as jobs have been lost and incomes have collapsed.
    • Boosting domestic demand is critical for an economic revival as external demand is likely to remain muted.
    • It is argued that India’s growth story has been driven by demand generated by those who are at the top of India’s socio-economic pyramid
    • But the demand from that section has now plateaued.

    So, where the demand is going to come from?

    •  Turn to those at the bottom of the pyramid.
    • Those at the bottom of pyramid have a high marginal propensity to consume.
    • But realising the untapped demand potential of this group requires enhancing their incomes and earnings.

    Division of India’s workforce

    • Periodic Labour Force Survey (2018-19) tells us that less than 10 per cent of the workforce is engaged in regular formal jobs.
    • Another 14 per cent are engaged in regular informal jobs with average monthly earnings (Rs 9,500), which is roughly equivalent to or slightly below a minimum wage.
    • The self-employed and casual workers account for 50 per cent and 24 per cent of the workforce respectively and report average earnings that are considerably below a decent minimum amount.
    • Casual workers, who are unlikely to receive work on every day of the month, are at the bottom of the employment structure.

    How to increase the earning of those at the bottom of employment structure

    • Devising strategies that enhance productivity growth in the informal economy could increase their income.
    • Raising the minimum wages of the worst-off workers.
    • At present, under the Minimum Wage Act,  India has a complex set of minimum wages which offer different wages by occupation type and skill levels.
    • The Code on Wages (2019) seeks to universalise minimum wages and extend them to the unorganised sector.

    Way forward

    • 1) Ensuring a decent minimum wage for those who are the bottom of the distribution — the casual labour, would be helpful in this context.
    • This will help set a higher wage floor for others engaged in low-paid work, including regular informal workers.
    • 2) It is also important that minimum wages are paid in public workfare programmes too, in particular MGNREGA works.
    • At present, MGNREGA wages are not covered under the Minimum Wages Act.
    • 3) The minimum wage can be linked to the consumption expenditure of the relatively better-off group of workers.

    Consider the question “India’s growth story is scripted by demand which has been tapering off. The new source of demand could be those at the bottom of income structure. Suggest the strategies to increase the income of this group which could then translate into demand.”

    Conclusion

    The Indian employment challenge today cannot be seen independently of the problem of inadequate income. The above intervention will not only enable income enhancement of those in low-paid work but also add fuel to demand and growth, this time from those at the bottom of the distribution.

  • Delhi government’s Electric Vehicle Policy

    Image source: TOI

    The Delhi government has notified the new Electric Vehicle Policy under which it aims to make a quarter of all new vehicle registrations battery-operated by 2024 and thereby help reducing air pollution.

    Try this PYQ:

    Q.In the context of proposals to the use of hydrogen-enriched CNG (H-CNG) as fuel for buses in public transport, consider the following statements:

    1. The main advantage of the use of H-CNG is the elimination of carbon monoxide emissions.
    2. H-CNG as fuel reduces carbon dioxide and hydrocarbon emissions.
    3. Hydrogen up to one-fifth by volume can be blended with CNG as fuel for buses.
    4. H-CNG makes the fuel less expensive than CNG.

    Which of the statements given above is/are correct? (CSP 2018)

    (a) 1 only

    (b) 2 and 3 only

    (c) 4 only

    (d) 1, 2, 3 and 4

    Some key highlights of the policy are:

    • A purchase incentive of Rs 5,000 per kilowatt/hour of battery capacity (advanced battery), a maximum incentive of Rs 30,000 per vehicle for two-wheelers.
    • A purchase incentive of Rs 30,000 per vehicle (advanced battery) for e-autos.
    • A purchase incentive of Rs 30,000 per vehicle for the purchase of one e-rickshaw and e-cart. Additionally, an interest subsidy of 5 per cent on loans on vehicles with advanced battery.
    • Conversion of 50 per cent of all new stage carriage buses (all public transport vehicles with 15 seats or more) by 2022.
    • A purchase incentive of Rs 10,000 per kilowatt/hour of battery capacity (advanced battery), and maximum incentive of Rs 150,000 per vehicle to the first 1,000 e-four wheelers.
    • Complete removal of road tax and registration fee for all battery electric vehicles.

    Significance of the policy

    • According to the VAHAN database of the Ministry of Road Transport and Highways, electric vehicles comprised only 3.2 per cent of the new vehicles registered in Delhi in 2019-20.
    • The proposed 25 per cent transformation of Delhi’s new-vehicle market could catalyse electric vehicle production and bring more product diversity.

  • [pib] First “Kisan Rail” flagged off

    Indian Railways introduced the first “Kisan Rail” from Devlali (Maharashtra) to Danapur (Bihar).

    Try this question for mains:

    Q.Discuss the role of agricultural marketing and logistics for doubling farmer’s income by 2022.

    Kisan Rail

    • From Maharashtra’s Devlali to Bihar’s Danapur, the train will cover the journey of 1,519 kilometres in over 31 hours.
    • It will take stops at Nasik Road, Manmad, Jalgaon, Bhusaval, Burhanpur, Khandwa, Itarsi, Jabalpur, Satna, Katni, Manikpur, Prayagraj Chheoki, Pt. Deendayal Upadhyay Nagar and Buxar.
    • This train will help in bringing perishable agricultural products like vegetables, fruits to the market in a short period of time.
    • The train with frozen containers is expected to build a seamless national cold supply chain for perishables, inclusive of fish, meat and milk.
    • It is a step towards realizing the goal of doubling farmers’ incomes by 2022.

    Other facts

    • Indian Railways have earlier run single commodity special trains like Banana Specials etc.
    • But this will be the first-ever multi-commodity trains and will carry fruits like Pomegranate, Banana, Grapes etc and vegetables like Capsicum, Cauliflower, Drumsticks, Cabbage, Onion, Chilies etc.

  • Balancing the interest of lenders and borrowers

    The article suggests the 5 point strategy to balance the interest of borrowers and lenders. Banks hold the special significance for the country and so require special and stricter regulation.

    Context

    •  COVID creates deep pain but we must resist consistently choosing borrowers over lenders.
    • We should persist with our multi-year five-pillar strategy to sustainably raise our Credit to GDP ratio from 50 per cent to 100 per cent.

    Issue of lending

    • A modern economy grows by lending.
    •  But fiscal constraints or natural disasters often create temptations to disguise spending as lending.
    • The last 20 years have given three lessons:
    • 1) Giving loans is easier than getting them back.
    • Corporate credit growing from Rs 18 lakh crore in 2008 to Rs 54 lakh crore in 2014 created a Rs 12 lakh crore bad loan problem.
    • 2) Accounting fudging and restructuring would not help.
    • 3) Government banks need more than capital.
    • Government banks’ risk-weighted assets are lower than two years ago despite a Rs 2 lakh crore capital infusion.

    History recommends patiently balancing financial inclusion and stability by persisting with our five-pillar strategy.

    1) Bank competition

    • Raising credit availability and lowering its price needs competition-driven innovation.
    • Capital should be chasing Indian banking given its high net interest margins, high market cap to book value ratios, and massive addressable market.
    • Yet, the RBI’s on-tap licencing has few applications pending.
    • We need many more banks.

    2) Private bank governance

    • Private banks are only 30 per cent of deposits but 80 per cent of bank market capitalisation.
    • Private banks are a special species with 20 times leverage, but this makes privatised gains and socialised losses possible.
    • Recent failures suggest problems with public shareholder collective action and the attention, skill, and courage of board directors.
    • Private bank governance must move from a perpetual private fiefdom to trustees that hand over in better condition to the next generation.

    3) Government bank governance

    • Over 10 years, government companies have sunk from 30 per cent of India’s market capitalisation to 6 per cent.
    • Government banks mirror this decline — their 70 per cent bank deposit share translates to only 20 per cent bank market capitalisation share.
    • Many have irrational employee costs to market capitalisation ratios ex- Bank of India with 58 per cent.
    • We need only four government banks with strong governance and no tax access for capital.

    4) RBI’s regulation and supervision

    • Recent failures in financial institutions reinforce the importance of statutory auditors, ethical conduct, shareholder self-interest, and risk management.
    • They also suggest a first-principles review that raises the RBI’s regulation and supervision.
    • Zero failure is impossible, but the RBI should boldly re-imagine its current mandate, structure and technology.

    5) Non-bank regulatory space

    • Regulatory differences traditionally existed between banks and non-banks.
    • But progress in payments, MSME lending, and consumer credit suggest that non-banks are as important for financial inclusion.
    • They need more regulatory space and supervision.

    Conclusion

    We won’t test the RBI’s COVID worst-case scenario of 14.7 per cent bad loans but handling the inevitable COVID bank pain needs resisting short-termism. In the long run, we are not all dead.

    Original article: https://indianexpress.com/article/opinion/columns/rbi-bank-and-the-covid-pain-india-gdp-6543101/

  • How are inflation rate and interest rate linked?

    The Monetary Policy Committee of the RBI has decided to keep the benchmark interest rates of the economy unchanged.

    Try this PYQ:

    Q.Which one of the following is not the most likely measures the Government/RBI takes to stop the slide of Indian rupee? (CSP 2019)

    (a) Curbing imports of non-essential goods and promoting exports

    (b) Encouraging Indian borrowers to issue rupee-denominated Masala Bonds

    (c) Easing conditions relating to external commercial borrowing

    (d) Following an expansionary monetary policy

    What is the link between growth, inflation and interest rates?

    • In a fast-growing economy, incomes go up quickly and more and more people have the money to buy the existing bunch of goods.
    • As more and more money chases the existing set of goods, prices of such goods rise.
    • In other words, inflation (which is nothing but the rate of increase in prices) spikes.

    How interest rates dominate?

    • To contain inflation, a country’s central bank typically increases the interest rates in the economy.
    • By doing so, it incentivizes people to spend less and save more because saving becomes more profitable as interest rates go up.
    • As more and more people choose to save, money is sucked out of the market and inflation rate moderates.

    What happens when growth rate decelerates or contracts?

    • When growth contracts or when its growth rate decelerates, people’s incomes also get hit.
    • As a result, less and less money is chasing the same quantity of goods.
    • These results in either the inflation rate decline.
    • In such situations, a central bank cuts down the interest rates so as to incentivise spending and by that route boost economic activity in the economy.
    • Lower interest rates imply that it is less profitable to keep one’s money in the bank or any similar saving instrument.
    • As a result, more and more money comes into the market, thus boosting growth and inflation.

    Why has RBI not raised interest rates this quarter?

    • RBI is facing an odd situation at present: GDP is contracting even as inflation is rising.
    • This is happening because the pandemic has reduced demand, on the one hand, and disrupted supply on the other.
    • As a result, both things are happening — falling growth and rising inflation.
    • It is true that for containing inflation, RBI should raise interest rates.
    • And under normal circumstances, it would have done just that. But raising interest rates at this stage would be catastrophic for India’s GDP growth.

    Risks of altering interest rates

    • If the RBI cuts the interest rate, it may be fuelling retail inflation further. It must be remembered that inflation hits the poor the hardest.
    • So, the RBI has chosen to do what many expected it to do: stay put and waits for another couple of months to figure out how growth and inflation are shaping up.

    Back2Basics: Monetary Policy Committee (MPC)

    • The RBI Act, 1934 (RBI Act) was amended by the Finance Act, 2016,  to provide for a statutory and institutionalized framework for an MPC, for maintaining price stability, while keeping in mind the objective of growth.
    • The MPC is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
    • The meetings of the MPC are held at least 4 times a year and it publishes its decisions after each such meeting.
    • As per the provisions of the RBI Act, out of the six members of the committee, three members are from the RBI and the other three Members of MPC are appointed by the Central Government.
    • Governor of the RBI is ex officio Chairman of the committee.

    Economics | Monetary Policy Explained with Examples

  • Drug pricing and dependence on China

    Whether or not the drug pricing system in India resulted in the growing dependence on China for APIs is analysed in this article. 

    Incentives for domestic production of APIs

    • The department of pharmaceuticals (DoP) has recently notified the Production-Linked Incentive (PLI) scheme.
    • The scheme aims to encourage domestic production of 41 active pharmaceutical ingredients (APIs), key starting materials (KSMs) and drug intermediaries (DIs).
    • A Drug Security Committee constituted by the DoP had identified 53 APIs with high dependence on China.

    Did drug price control policy increase dependence on China?

    • India was self-reliant on APIs until the mid-1990s.
    • Liberalisation in import restrictions led to a gradual influx of APIs from China.
    • India had a more stringent price control policy before the 1990s.
    • If price control system were the culprit, India would not have been self-sufficient in APIs until the mid-1990s.
    • A cost-based price control system that existed until 2013 regulated the prices of both APIs and formulations.
    • The approach to price control shifted from a cost-based to a market-based one since 2013.
    • The new price control policy does not regulate the price of APIs.
    • New price control policy regulates the prices of formulations of those APIs, which figure in the National List of Essential Medicines (NLEM).
    • There are many APIs which do not fall under DPCO but are still imported in a significant way from China.

    Understanding the growing dependence on China from the past perspective

    • Even though India now has a less stringent drug price control policy, the dependence on Chinese imports has been growing.
    • The share of China in India’s total import of APIs has increased from 61% in 2011 to 69% in 2019.
    • The experience in India was that firms would tend to rely on imported APIs if they have an option.
    • The Hathi Committee (1975), which had looked into why Indian firms were not engaging in the production of APIs, found that the capital invested to turnover ratio of APIs was much lower as compared to formulations.
    • This ratio was 1:1 for APIs at best and 1:2.6 for formulations on average, and in some cases, as high as 1:7.2.
    • Subsequently, various measures were adopted.
    • The ‘ratio parameter’ mandatorily required the producers of formulations to produce a certain quantity of APIs.
    • It was the government interventions to overcome the market failure that resulted in India attaining self-sufficiency in APIs.

    Consider the question “What are the APIs? Examine the implications of India’s dependence on imports for API and suggest the measures to reduce such dependence.”

    Conclusion

    An enquiry into the causes of dependence on China needs to go much beyond price control policy and look into whether the state continued to play a proactive role during the post-1991 period to maintain an ecosystem to enhance the competence of Indian API industry.

    Source-

    https://www.financialexpress.com/opinion/drug-pricing-is-certainly-not-the-issue-in-growing-dependence-on-china/2046086/

  • How to pay for the stimulus package

    The article addresses the issue of apprehensions over money financing. It also compares the option of borrowing from international institutions.

    Issues with public spending

    • Greater public spending will increase the fiscal deficit and this expansion has to be financed.
    • Theoretically, it can be financed by higher taxes.
    • But when the economy is in a recession, this option cannot be explored even though the balanced-budget multiplier is one.
    • When the multiplier is one, output expands by exactly the same amount as the increase in government spending.

    So, what are the options?

    There are two options

    1) Issuing debt to the public (Debt financing)

    2) Borrowing from the RBI (Money financing)

    Borrowing from World Bank and IMF?

    This borrowing has 4 issues with it-

    • 1) This borrowing will have to be paid back in hard currency.
    • This would involve India having to earn hard currency by stepping up exports.
    • If a stimulus of approximately 10% of the GDP is envisaged, with exports at 25% of the GDP, it would imply stepping up exports by close to 50%.
    • This would be a herculean task under present circumstances.
    • 2) There is the issue of conditionalities.
    •  It is not obvious what conditionalities will come along with the loan.
    • 3) The loan is bound to take some time to be negotiated, taxing the energies of a government that ought to be engaged in the day to day battle with COVID-19.
    • 4) The external debt is truly national which, arguably, government bonds held by the country’s private sector are not.

    Issues with money financing

    • The standard economic argument against money financing is that it is inflationary.
    • However, whether a fiscal expansion is inflationary or not is related more to the state of the economy than the medium of its financing.
    • When resources are unemployed, output may be expected to expand without inflation.

    Consider the question “Examine the issues with the money financing of the fiscal deficit.”

    Conclusion

    There is no reasoned case for denying ourselves the option of money financing to take us back to pre-COVID-19 levels of output and employment.