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Subject: Economics

  • Is e-NAM portal capable of supporting farmers?

    Context

    • The union government has launched new features in electronic agriculture market platform (e-NAM), to decongest wholesale markets amid coronavirus threat.
    • Whether these features would solve the problems of farmers is a matter of question.

    What is e-NAM?

    • eNAM platform is an online trading platform for agricultural commodities in India.
    • It was launched on April 14, 2016 as a pan-India electronic trade portal linking agricultural produce market committees (APMCs) across all states.
    • It facilitates farmers, traders and buyers with online trading in commodities.
    • It helps in better price discovery and provides facilities for smooth marketing of their produce.

    Trading on e-NAM

    • Over 90 commodities including staple food grains, vegetables and fruits are currently listed in its list of commodities available for trade.
    • The farmer needs to upload details of his produce and a photo of the harvest on the platform.
    • It actually provided for evaluation and grading of produce.

    Why farmers don’t prefer e-NAM?

    • Lack of internet connectivity is another issue impeding progress.
    • Farmers feel more comfortable with physical trading rather than going online as they face issues with transportation for their produce.
    • Only 8.42 per cent of the total mandis are connected through the e-NAM platform.

    Issues with grading

    • There are no scientific sorting/grading facilities or quality testing machines.
    • The grading process makes farmers bring a sample of their produce that is evaluated and graded by agricultural assessors.
    • A report on the sample can be accessed by any buyer in any state before making the purchase, once graded by assessors.
    • The government realized the complexities allowed for gradation from a warehouse nearest to them and farmers need not commute to a mandi from remote areas.
    • It is, however, still not clear whether produce can be graded at the warehouse or not.

     

  • A different economic approach

    Context

    The Covid-19 pandemic and subsequent 21-day lockdown by India has forced us to resolve the public health versus economic health trade-off.

    The debate over lockdown

    • No clear idea on number of lives saved: As it fights COVID-19 with its meagre healthcare resources, India has chosen to bring the economy to a near halt with no clear idea of how many lives can be saved in this manner.
    • What is going to be the cost of this decision? The 21-day lockdown will reduce the gross value added (GVA) during this period to near zero.
    • More than half the GVA is contributed by the unorganised sector.
    • A disproportionate burden of the economic cost has fallen on this large segment.
    • Debate: The suffering of the stranded migrant labourers has set off a debate: is the disruption and the economic pain justified?
    • Is it worth sacrificing the economy to save lives?
    • And at the core of such questions is a policy dilemma: should public health matter more than economic health?

    So, what should be the policy objectives?

    • In time, a vaccine will become available. But the economy cannot remain shut until that happens.
    • A prolonged lockdown will extract a huge economic cost.
    • Therefore, the policy objective must be to find ways of ensuring that the lockdown ends early without compromising on public health.
    • Following are the policies that could ensure the twin objective of not ending lockdown without compromising on public health.

    1 The policy of aggressive testing and isolation

    • The economic cost of combating COVID-19 can be reduced by combining aggressive testing and isolation, a strategy proposed by economist Paul Romer for the U.S.
    • For it to work, people must be tested in large numbers.
    • Those who test positive must be isolated. This will make it unnecessary for the rest of the population to stay home and it will allow the economy to restart.
    • After ending the lockdown too, testing of randomly selected people must go on in large numbers, so that those found infected can be isolated.
    • Eliminating the fear of isolation: The success of this will depend on eliminating the fears associated with isolation. Such fears can be reduced only if isolation facilities are good.

    2 Ramp up the manufacturing capacity

    • The second precondition is the substantial ramping up of manufacturing capacities for medical-grade masks, gloves, gowns, ventilators, testing labs, etc.
    • This ought to be on a scale large enough for domestic use and, if possible, for exports for costs to be low.
    • The strategy calls for fully operational hospitals to be constructed in every district of the country in a matter of weeks.
    • Problem-solving of an unprecedented order will be required.
    • Recently, garment manufacturers in Coimbatore were asked to explore the possibility of re-purposing production lines to make masks.
    • There’s been no progress on this front, as the special-grade fabric required is difficult to source.
    • What about the funding? In normal times, governments wrestle with dilemmas such as whether to allocate the limited available tax money to education, health, public transport or a sop that could change the outcome of the next election in their favour.
    • But during a public health crisis, all resources must be used to ramp up healthcare capacities.

    Way forward

    • Investment in healthcare can resolve trade-off: Since the state of the lockdown is not a normal condition, the usual policy levers become ineffective.
    • Loan moratoriums and cash transfers can fend off bankruptcy and defaults for a few months and buy time on non-performing assets in banks.
    • But they cannot make good the GDP lost due to the economic shutdown because liquidity and cash released by monetary and fiscal policies cannot get transmitted to the real sector during an economic shutdown unless they are funnelled into the sector that is still active, which is healthcare.
    • If the public health sector can be the economy’s main engine for six months, the public health versus economic health trade-off can be resolved. The spread of COVID-19 will slow down.
    • The economic pain of combating the virus will reduce.
    • There will be jobs, including for low-skilled construction labourers. If planned and executed smartly, the severe health infrastructure deficit will get addressed.
    • Remove the price controls: Sadly, India’s economic policies for fighting COVID-19 are the opposite of what’s needed.
    • In a crisis, the first instinct of policymakers is to slap controls. Just about everything from masks to kits has been placed under price controls.
    • This has removed the incentive for private labs to ramp up capacities.
    • The government should fully subsidise testing: At zero MRP, more people with symptoms will come forward to get tested. Private labs will quickly ramp up capacities if they don’t have to worry about losses. The number of suppliers will increase. Costs will reduce. Private enterprise and technological innovations will come up with cheaper tests that produce results quicker.

  • [pib] Biofortified Carrot ‘Madhuban Gajar’

     

    Madhuban Gajar

    • It is a biofortified carrot variety with high β-carotene and iron content developed by Shri Vallabhhai Vasrambhai Marvaniya, a farmer scientist from Junagadh district, Gujarat.
    • The variety is being cultivated in more than 1000 hectares of land in Gujarat, Maharashtra, Rajasthan, West Bengal, Uttar Pradesh during the last three years.
    • It is a highly nutritious carrot variety developed through the selection method with higher β-carotene content (277.75 mg/kg) and iron content (276.7 mg/kg) dry basis.
    • It is used for various value-added products like carrot chips, juices, and pickles.
    • This carrot variety possesses a significantly higher root yield (74.2 t/ha) and plant biomass (275 gm per plant) as compared to check variety.

  • Farmers are at their wits’ end

    Context

    As global trade falls and supply disruptions persist, a prolonged lockdown will adversely affect food security.

    Fears of food crisis and impact of COVID-19 on agriculture

    • The COVID-19 pandemic has led to global concerns on the state of agriculture and food security.
    • Warning of food crisis: On the one hand, the Food and Agriculture Organization (FAO) has warned of a “food crisis” if countries do not protect vulnerable people from hunger and malnourishment.
    • On the other, farmers face a stalemate as they are unable to work on their land, earn remunerative prices and gain access to markets.

    We can try to understand the impact of COVID-19 on agriculture with three questions.

    • One, does the world have enough food to feed its people?
    • Two, is food available at affordable prices?
    • Three, how are farmers coping with the lockdown?

    Food stocks and prices in the world

    • Cereal stock in the world: According to the FAO, as on April 2, 2020, the total stock of cereals in the world was about 861 million tonnes. This translates to a stocks-to-use ratio (SUR) — i.e., the proportion of consumption available as stocks — of 30.7%.
    • The FAO considers this “comfortable”. The SURs for wheat, rice and coarse grains were 35.3%, 35.1% and 26.9%, respectively.
    • Variation among nations: World stocks are different from national stocks. About 52% of the global wheat stocks is held by China, and about 20% of the global rice stocks is held by India.
    • Rice importers may suffer: If the major holders of global stocks decide to turn precautionary and stop exporting, and if the lockdown is prolonged, countries dependent on rice imports will suffer.
    • Restriction on wheat export: Kazakhstan, a major wheat exporter, has banned exports. Russia, the largest wheat exporter, is expected to restrict its exports.
    • Restriction on rice export: Vietnam, the third-largest rice exporter, has stopped its exports, which will reduce the global rice exports by 15%.
    • If India and Thailand too ban exports, the world supply of rice will sharply fall.
    • In March 2020, the Philippines and the European Union, major rice importers, had inventories of rice enough to feed their populations for about three months.
    • Others, however, had inventories to hold on for about one month only. If the lockdown continues beyond a month, these countries will face food shortages.

    Stocks with India and output projections

    • India’s foodgrain output is projected to be about 292 MMT in 2019-20.
    • Stock with FCI: On March 1, 2020, the total stock of wheat and rice with the Food Corporation of India (FCI) was 77.5 MT.
    • Buffer stock norms: The buffer norms for foodgrain stocks — i.e., operational stock plus strategic reserves — is 21.04 MT.
    • Similarly, for pulses, India had a stock of 2.25 MT in mid-March 2020.
    • In both cases, the rabi harvest is slated to arrive in April 2020, and the situation is expected to ease further.

    Price fluctuation of food in the world

    • Fall in demand and supply and price fluctuation: There is always an element of uncertainty on how prices will behave if both demand and supply fall together.
    • Prices in different markets fluctuate considerably given differences in the extent of production, stocks, arrivals and supply disruptions.
    • According to the FAO, the world food price index fell by 4.3% and world cereal price index fell by 1.9% between February and March 2020 due to the weakening demand for food and the sharp fall in maize prices owing to poor demand for biofuels.
    • Price rise in Western economies: Retail prices of rice and wheat have been rising in the Western economies in March 2020.
    • The major reasons identified are panic buying by households, export restrictions by countries and continuing supply chain disruptions.
    • Retail prices of beef and eggs have also been rising.

    Demand and price fluctuation in India

    • WPI and CPI for food in India were rising from mid-2019 onwards, reflecting a rise in vegetable prices, especially onion prices.
    • January and February 2020 saw a moderate fall in these indices, but vegetable prices have remained high.
    • If food prices rise due to the lockdown, it will be on top of an already rising price curve.
    • However, unlike in the West, food prices in India have not risen after the lockdown.
    • While supplies have declined, demand has fallen too. This is because there has been a sharp fall in the consumption of foodgrains and vegetables. Similarly, the consumption of milk has fallen by 10-12%.

    The crisis in the harvesting and marketing of the crops

    Harvesting and marketing of crops are in crisis across India, because of-

    • Disruptions in the procurement of foodgrains by government agencies.
    • Disruptions in the collection of harvests from the farms by traders.
    • Shortage of workers to harvest the rabi crops.
    • Shortage of truck drivers.
    • Blockades in the transport of commodities.
    • Limited operations of APMC mandis; and
    • Shutdowns in the retail markets.

    Conclusion

    The world and India have adequate food stocks. But as global trade shrinks and supply disruptions persist, a prolonged lockdown will adversely affect food security in many countries. Concurrently, farmers face acute labour shortages, falling farmgate prices and lack of access to input/output markets. It is unclear who is benefiting, but farmers, workers and the poor are at their wits’ end.

  • Euro Zone ‘Coronabonds’

    The coronavirus pandemic has revived the acrimonious debate between euro zone countries about jointly issuing debt through instruments called Coronabonds.

    Coronabonds

    • Coronabonds are proposed debt instruments amongst EU member states, with the aim of providing financial relief to Eurozone countries battered by the coronavirus.
    • They aim to meet healthcare needs and address the deep economic downturn that is set to follow.
    • The funds would be mutualised and supplied by the European Investment Bank, with the debt taken collectively by all member states of the European Union.
    • The euro zone jointly issues debt through its bailout fund, the European Stability Mechanism, which borrows on the market against the security of its paid-in and callable capital provided by euro zone governments.

    Back2Basics

    What is Eurozone?

    • The Eurozone officially called the euro area is a monetary union of 19 of the 27 European Union (EU) member states which have adopted the euro as their common currency and sole legal tender.
    • The monetary authority of the Eurozone is the Eurosystem.
    • It consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

  • A niggardliness that is economically unwarranted

    Context

    The Centre can afford to step up its COVID-19 assistance to a higher scale; fiscal deficit is no worry.

    Comparison with the US

    • Unemployment benefit in the US: In the United States, for instance, where the lockdown has raised the number of persons filing unemployment claims from 2.8 lakh to 6.6 million in a matter of days, those affected can fall back on unemployment benefit.
    • Comparison of packages: The US government has approved a package of ameliorative steps costing roughly 10% of that country’s GDP to cope with the crisis.
    • In India by contrast, the Finance Minister’s package comes to less than 1% of its GDP; and much of it is just a repackaging of already existing schemes.
    • New expenditure comes to just a little over half of the ₹1.7-lakh crore earmarked for the package.
    • Migrant workers are not the beneficiary: Besides, none of the steps will help the migrant workers; not even the larger foodgrain ration which in principle could, because most of them would have ration cards back home rather than in the places where they stay.

    What can be done?

    Consider the cash transfer

    • Many economists and civil society activists had suggested a cash transfer of ₹7,000 per month for a two-month period to the bottom 80% of households to tide over the crisis, in addition to enhanced rations of foodgrains and the inclusion of certain other essential commodities within the ration basket.
    • The cost of their proposed cash transfers alone would come to ₹3.66-lakh crore, which is more than 10 times the cash transfers provided in the Finance Minister’s package.
    • Providing assistance on the scale proposed by civil society organisations is necessary; it will no doubt pose logistical problems, but not financial problems.
    • Two possible effects of cash transfer: Even if all of it is financed through a fiscal deficit for the time being, the economic implications of such an enlarged deficit would not be forbidding.
    • These implications can manifest themselves in two ways: one is through inflation, and the other by precipitating a balance of payments problem. Let us consider each of these.

       Effect of cash transfer on inflation

    • As long as supplies of essential commodities are plentiful and these are made available through the Public Distribution System to the vast majority of the people so that they are insulated against the effects of inflation, any inflation per se should not be a matter of great concern. This is the case in India at present.
    • Foodgrain stocks with the FCI: The supply of the most essential of goods, food grains, is plentiful. Currently, there are 58 million tonnes of foodgrain stocks with the government, of which no more than about 21 million tonnes are required as buffer-cum-operational stocks.
    • This leaves a surplus of 37 million tonnes which can be used for distribution as enhanced ration, or for providing a cushion against inflation.
    • The rabi crop is supposed to be good; as long as it is safely harvested, this would further boost the government’s food stocks.
    • Rise in demand of other commodities: Likewise, the supplies of other essential commodities which consist of manufactured goods and where output has been demand-constrained all along will get boosted in response to higher demand; and in special cases, imports may have to be resorted to.
    • There is in short no reason to think that inflation of a worrisome magnitude will follow if the fiscal deficit is increased.
    • What about the multiplier effect? There is an additional factor here. The increase in total demand caused by an initial increase in demand, which is financed by a fiscal deficit, is a multiple of the latter.
    • Now in a situation like the present, when even if the lockdown is lifted social distancing and restrictions on social activities will continue, the value of the multiplier will be lower than usual.
    • People, in short, would hold on to purchasing power to a much greater extent than usual because of the continuing restrictions on demand, which would act as an automatic anti-inflationary factor.
    • Of course, there will be shortages of some less essential commodities and also hoarding on account of such shortages. But since these shortages will be expected to be temporary, a result of the pandemic unlikely to last long, there will be a damper on hoarding.

    Effect of cash transfer on deficit

    • The price rise of non-rationed commodities: If inflationary expectations are strong and persistent, then the prices of non-rationed commodities may rise sharply for speculative reasons.
    • How the government can prevent the price rise? But the government can prevent such expectations, by adopting measures such as bringing down petro-product prices, taking advantage of the collapse of world oil prices.
    • A larger fiscal deficit, therefore, need not cause disquiet on account of inflation.
    • Balance of payment issue: On the balance of payments front, the worry associated with a larger fiscal deficit is financial flight caused by frightened investors.
    • Some financial flight is already happening, with the rupee taking a fall.
    • Rush to dollar: This flight is not because of our fiscal deficit but because, whenever there is panic in financial markets, the tendency is to rush to dollars, even though the cause of the panic may lie in the United States itself.
    • Using foreign exchange reserves: India has close to half a trillion dollars of foreign exchange reserves. These can be used, up to a point, to check the flight from the rupee to the dollar.
    • Restriction on capital outflow: If the flight nonetheless persists, then India will have a legitimate reason for putting restrictions on capital outflows in the context of the pandemic.

    Way forward

    • The Centre must not worry about its fiscal deficit; and since the State governments will bear a substantial expenditure burden on account of the pandemic.
    • The Centre must make more resources available to the states.
    • The centre should raise their borrowing limits, perhaps double their current limits as a general rule, apart from negotiating the magnitude of fiscal transfers it should make towards them.

    Conclusion

    If the hardships of the people are not ameliorated through larger government expenditure, because of the fear that the larger fiscal deficit required for it would frighten finance into fleeing, then the privileging of finance over people would have reached its acme.

     

  • Oil in a post-Covid world

    Context

    In the post-COVID world, India will, once again, confront the challenge of oil and gas supply security. We should, therefore, ask: What will be the landscape of the petroleum sector, post-COVID? And what should India do now to prepare for an uncertain and contingent energy future?

    Oil war and the death knell of OPEC

    • The concept of MAD (Mutually Assured Destruction) deterred the nuclear powers during the Cold War. It has had no such effect on the oil powers.
    • Implications of the decision of Saudi Arabia and Russia: At a time when the virus had pushed the global economy into recession, Russia and Saudi Arabia took a set of decisions last month that knocked the economic props from under the oil market.
    • What were the reasons behind the decisions: The Saudis decided to flood the market to hold onto market share and the Russians accepted the consequent decline in prices to push the US shale industry to the wall.
    • Future of OPEC: Both may achieve their objectives but they have sounded the death knell of OPEC and possibly that of the oil industry as well.

    Two reasons for the decline in the oil prices

    • Today, the price of oil, at just above $30/bbl , is at its lowest in a decade, and volatile downwards. The average price in 2019 was $64/bbl.
    • The reason is two-fold.
    • One, the Saudis have ramped up production from 9.8mbd (before the March meeting) to in excess of 12 mbd today.
    • Two, there has been an unprecedented COVID-induced crash in demand. This is because of the lockdown of the two main drivers of oil consumption — transportation and industry.
    • It is estimated that oil consumption in the current quarter will fall by approximately 25 mbd.
    • This is almost as much as OPEC’s production.
    • The Saudis and Russia may still come to an understanding that rallies the price.
    • There will be three major implications for the oil-producing countries.

    1. Budgetary crisis

    • Every major oil-exporting country will face a budgetary crisis.
    • Qatar has the most robust balance sheet of all OPEC members. But it still needs an oil price of around $40/bbl to balance its books.
    • Algeria has the weakest. It needs an excess of $100/bbl.
    • Saudi Arabia is at the Algerian end of the spectrum requiring a price of around $80/bbl.
    • Abundant foreign reserves: This does not mean these countries are about to go financially belly up. Most of them, the Gulf producers, in particular, have abundant sovereign reserves.
    • But what it does mean is they will be hard-pressed to sustain their social and economic commitments.
    • They will have to cut back on subsidies, raise taxes and the citizens will be required to tighten their belts.
    • What India should do? India should build into its oil supply plans with the likelihood of civil strife in these countries.

    2. Reconfiguration of the oil industry will take place

    • Already, at current prices, a large number of companies are finding it difficult to cover their cash costs and have been forced to cut production and shutter operations.
    • At even lower prices, they will become bankrupt.
    • Whatever the final outcome, one fact is clear. Those that survive the carnage will have substantially slimmed balance sheets and reduced valuations.
    • Exxon’s market capitalisation has, for instance, halved over the past month.
    • Implication for India: Against this backdrop, we should drop the expectation of international interest in BPCL. Or for that matter ME investment into India.
    • Ratnagiri refinery: The $40-billion Ratnagiri refinery project by Saudi Aramco and UAE will certainly not see the light of day.
    • We should also expect a drop in the intensity of domestic exploration.

    3. Behavioural changes and uncertainties

    • The world, post-COVID will be different from the world pre-COVID. Behaviours will shift and these will deepen uncertainties.
    • “Social distancing” may change the dynamics of “shared mobility”.
    • Teleporting may reduce business travel.
    • Heightened awareness of the porosity of national boundaries may accelerate the push towards decarbonisation? These uncertainties will push the petroleum market deeper into no man’s land.

    Way forward for India

    • Whatever be the shape of the post- COVID international petroleum market, India will be dependent on it to secure its domestic energy requirement. The question should, therefore, be asked. What should the decision-makers do today to respond to such a contingent and uncertain future?
    • 1. Increase the strategic reserves: It should fill the oil caverns with strategic reserves. Prices may fall further but rather than bottom fish, it should leverage the availability of capacity to secure discounted supplies.
    • The world has run out of storage capacity and producers may pay premium dollar to find space for their unsold cargoes.
    • 2. Reduce the dependency and risk: India should increase its imports of gas (LNG ) from Australia, Africa and the US.
    • This will reduce the political risks of dependency on oil supplies from the Middle East.
    • Gas is also now economically competitive. The landed price of LNG is low enough to kick-start some of the stranded gas-based power plants.
    • 3. Increase operational efficiency of oil companies: It should unthread the “patchwork quilt of authority” exercised by bureaucrats, regulators and politicians, which today stifles management and operational efficiency of the petroleum companies.
    • 4. Integrated energy policy: India should create an institutional basis for an integrated energy policy. If there is one message we must internalise from COVID, it is the importance of collaboration and coordination.

  • Restarting the economy after lockdown

      (This newscard is the excerpt from an article published in the TOI, authored by former RBI governor Raghuram Rajan. It discusses a series of reformative measures to boost our economy once the lockdown restrictions are eased.)

    Context

    • Economically speaking, India is faced today with perhaps its greatest emergency since Independence.
    • The global financial crisis in 2008-09 was a massive demand shock but our financial system was largely sound, and our government finances were healthy.
    • None of this is true today as we fight the coronavirus pandemic.
    • With the right resolve and priorities, and drawing on India’s many sources of strength, it can beat this virus back and even set the stage for a much more hopeful tomorrow.

    To begin with: 21 day Lockdown

    • The immediate priority, of course, is to suppress the spread of the pandemic through widespread testing, rigorous quarantines, and social distancing.
    • The 21-day lockdown is a first step, which buys India time to improve its preparedness.
    • The government is drawing on our courageous medical personnel and looking to all possible resources – public, private, defence, retired – for the fight, but it has to ramp up the pace manifold.
    • It will have to test significantly more to reduce the fog of uncertainty on where the hotspots are, and it will have to keep some personnel and resources mobile so that they can be rushed to areas where shortages are acute.

    Restarting with caution

    • The 21 day lockdown is about a week ahead to get lifted. It is hard to lockdown the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities.
    • Restarting requires better data on infection levels, as well as measures to protect those returning to work.
    • Healthy youth, lodged with appropriate distancing in hostels at the workplace, maybe ideal workers for restarting.

    Pacing up manufacturing

    • Since manufacturers need to activate their entire supply chain to produce, they should be encouraged to plan on how the entire chain will reopen.
    • The administrative structure to approve these plans and facilitate movement for those approved should be effective and quick – it needs to be thought through now.

    Most crucial: Ensuring workforce sustenance

    • In the meantime, policymakers need to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive.
    • Direct transfers to households may reach most but not all, as a number of commentators have pointed out.
    • Furthermore, the quantum of transfers seems inadequate to see a household over a month.
    • The state and Centre have to come together to figure out quickly some combination of public and private participation and DBTs that will allow needy households to see through the next few months.
    • We have already seen one consequence of not doing so – the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise.

    Gearing up for fiscal shocks

    • Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation.
    • This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year.
    • Unlike the US or Europe, which can spend 10% more of GDP without fear of a ratings downgrade, we already entered this crisis with a huge fiscal deficit, and will have to spend yet more.
    • A ratings downgrade coupled with a loss of investor confidence could lead to a plummeting exchange rate and a dramatic increase in long term rates in this environment, and substantial losses for our financial institutions.

    Channelizing expenditures

    • So we have to prioritise, cutting back or delaying less important expenditures, while refocusing on immediate needs.
    • At the same time, to reassure investors, the government could express its commitment to return to fiscal rectitude.
    • The govt. must back up its intent by accepting the setting up of an independent fiscal council and setting a medium term debt target, as suggested by the NK Singh committee.

    Boosting up Industries

    1) MSMEs

    • Many MSMEs already weakened over the last few years, may not have the resources to survive.
    • We need to think of innovative ways in which bigger viable ones, especially those that have considerable human and physical capital embedded in them, can be helped.
    • SIDBI can make the terms of its credit guarantee of bank loans to SMEs even more favourable, but banks are unlikely to want to take on much more credit risk at this point.
    • The government could accept responsibility for the first loss in incremental bank loans made to an SME, up to the quantum of income taxes paid by the SME in the past year.

    2) Large industries

    • Large firms can also be a way to channel funds to their smaller suppliers. They usually can raise money in bond markets and pass it on.
    • Banks, insurance companies, and bond mutual funds should be encouraged to buy new investment-grade bond issuances, and their way eased by the RBI.
    • The government should also require each of its agencies and PSUs, including at the state level, to pay their bills immediately, so that private firms get valuable liquidity.

    Looping in everyone’s participation

    • The government should call on people with proven expertise and capabilities, of whom there are so many in India, to help it manage its response.
    • It may even want to reach across the political aisle to draw in members of the opposition who have had experience in previous times of great stress like the global financial crisis.
    • If, however, the government insists on driving everything from the PMO, with the same overworked people, it will do too little, too late.

    Conclusion

    • Globally, it is said that India reforms only in crisis.
    • Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society, and will focus our politics on the critical economic and healthcare reforms we sorely need.

  • Comparing current crisis with Great Depression, 1929

     

    With the novel coronavirus pandemic severely affecting the global economy, some experts have begun comparing the current crisis with the Great Depression — the devastating economic decline of the 1930s that went on to shape countless world events.

    Looming depression ahead

    • Experts have warned that unemployment levels in some countries could reach those from the 1930s era, when the unemployment rate was as high as around 25 per cent in the United States.
    • Currently, unemployment levels in the US are already estimated to be at 13 per cent, highest since the Great Depression.

    What was the Great Depression?

    • The Great Depression was a major economic crisis that began in the United States in 1929, and went to have a worldwide impact until 1939.
    • It began on October 24, 1929, a day that is referred to as “Black Thursday”, when a monumental crash occurred at the New York Stock Exchange as stock prices fell by 25 per cent.
    • Though the crash was triggered by minor events, the extent of the decline was due to more deep-rooted factors such as a fall in aggregate demand, misplaced monetary policies, and an unintended rise in inventory levels.
    • In the United States, prices and real output fell dramatically. Industrial production fell by 47 per cent, the wholesale price index by 33 per cent, and real GDP by 30 per cent.

    What caused Great Depression?

    The causes of the Great Depression are extremely complex and disputed to this day. The three main factors are:

    1. Financial instability and credit cycles: A period of stability encouraged more borrowing and lending than prudent, sowing the seeds for future instability.
    2. Monetary contraction, the gold standard, and bank runs: Monetary policy, driven in large part by the gold standard, tightened credit at the wrong time fueling bank-runs and economic slowdown.
    3. Debt deflation: Excess private debt created a dangerous condition where no one wanted to spend, causing deflation and economic weakening.

    Worldwide impact

    • The havoc caused in the US spread to other countries mainly due to the gold standard, which linked most of the world’s currencies by fixed exchange rates.
    • In almost every country of the world, there were massive job losses, deflation, and a drastic contraction in output.
    • Unemployment in the US increased from 3.2 per cent to 24.9 per cent between 1929 and 1933. In the UK, it rose from 7.2 per cent to 15.4 per cent between 1929 and 1932.

    Latent outcomes

    • The Depression caused extreme human suffering, and many political upheavals took place around the world.
    • In Europe, economic stagnation that the Depression caused is believed to be the principal reason behind the rise of fascism, and consequently the Second World War.
    • It had a profound impact on institutions and policymaking globally and led to the gold standard being abandoned.

    How did Great Depression impact India?

    • The Depression had an important impact on India’s freedom struggle.
    • Due to the global crisis, there was a drastic fall in agricultural prices, the mainstay of India’s economy, and a severe credit contraction occurred as colonial policymakers refused to devalue the rupee.
    • The effects of the Depression became visible around the harvest season in 1930, soon after Mahatma Gandhi had launched the Civil Disobedience movement in April the same year.

    1) Rural India mainstreamed into freedom struggle

    • The fallout made substantial sections of the peasantry rise in protest and this protest was articulated by members of the National Congress.
    • There were “No Rent” campaigns in many parts of the country, and radical Kisan Sabhas were started in Bihar and eastern UP.
    • Agrarian unrest provided a groundswell of support to the Congress, whose reach was yet to extend into rural India.

    2) INC gained momentum

    • The endorsement by farming classes is believed to be among the reasons that enabled the party to achieve its landslide victory in the 1936-37 provincial elections held under the Government of India Act, 1935.
    • This is marked as a significant event in the history of INC as it flourished the party’s political might for years to come.

    Back2Basics

    Slowdown vs recession vs depression

    •  Slowdown simply means that the pace of the GDP growth has decreased.  During slowdown, the GDP growth is still positive but the rate of growth has decreased.
    •  Recession refers to a phase of the downturn in the economic cycle when there is a fall in the country’s GDP for two quarters.   It is a period of decline in total output, income, employment and trade, usually lasting six months to a year.
    • Depression is a prolonged period of economic recession marked by a significant decline in income and employment.   It is a negative GDP growth of 10% of more, for more than 3 years.

  • States at centre

    Context

    Concerned over the impact on their revenues, several state governments planned cuts in salaries of government employees.

    State finances showing the signs of stress

    • The fiscal crisis stemming from the disruption in economic activity due to the coronavirus is now beginning to show.
    • Concerned over the impact on their revenues, several state governments planned cuts in salaries of government employees.
    • The stress to state finances stems from multiple sources.
    • First, as economic growth falters, their own income streams, for instance, revenues from petroleum products, real estate transactions, will slow down further, as will GST collections, and the amount collected through the compensation cess will not be enough to meet budgeted expectations.
    • Second, as the Centre’s own revenues also slow down, transfers to states will take a hit. It is quite likely that tax devolution to states, which has been budgeted at Rs 7.8 lakh crore in 2020-21, will not materialise.
    • Collectively, state expenditure far outstrips that by the Centre, with revenues falling short, any cutbacks in their spending, at a time when there is a need for a bold fiscal expansion, will further aggravate the economic stress.
    • Need assurance of adequate resource: Thus, states, which are at the frontline of fighting the public health crisis, need to be assured of adequate resources.

    Increase in the WMA limit will not address the issue

    • Limit increased by 30%: The Reserve Bank of India decided to increase the ways and means advances (WMA) limit by 30 per cent for state governments.
    • What is WMA? The WMA is a temporary liquidity arrangement with the RBI which helps governments tide over their short-term liquidity woes.
    • A short term measure: While states have been averse to opting for this facility in the past, and the new WMA limits may need to be revised further if the mismatch rises, this is a short-term measure, and does not address the underlying issue of significant revenue slippages.
    • Contradictory impulse: Under the existing fiscal deficit constraint, the collapse in revenues will force states to cut back on spending, imparting a contractionary impulse to the economy.

    Way forward

    • The Centre must take several steps to ensure an adequate flow of resources to states.
    • First, it must immediately clear all its pending dues to state governments.
    • Second, while it is cheaper for the Centre to borrow and transfer to states, even though the spreads between state and central government bonds have now widened, making state borrowing more costly, states must be allowed to borrow more.
    • Third, as some state chief ministers have suggested, the fiscal deficit limits imposed on states must be relaxed.