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  • Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

    Need to address farmers’ apprehensions

    op-ed snap | Agriculture | Mains Paper 3: Transport & Marketing Of Agricultural Produce

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: APMC Act

    Mains level: Paper 3- Addressing the farmers apprehension about MSP

    Farmers are protesting the farm laws which brought changes in the agri-produce marketing and the contract farming. Farmers are also demanding the legal backing of MSP. The article analyses the issues and suggests the measures to address them.

    Analysing merits and feasibility of demands of protesting farmers

    1) The Farmer Produce Trade and Commerce (Promotion and Facilitation) Act

    • The Act creates a new “trade area” outside the APMC market yards/sub-yards.
    • Any buyer with a Permanent Account Number (PAN) can buy directly from farmer sellers outside APMC market.
    • The state government can’t impose any taxes on such a transaction.
    • Therefore, it is expected that this would lower buying costs for buyers and that would automatically mean higher prices for farmers.

    Concerns with the law

    • Buyers buying at lower cost does not necessarily mean they would pass on the cost saved on procurement to selling farmers.
    • The claim is also made that now farmers would have a choice of channels.
    • However, the majority of the farm produce across India with the exception of states like Punjab and Haryana does not go through APMCs.
    • Anybody with a PAN card allowed to buy agricultural produce could mean a free-for-all situation, which is not desirable.

    2) The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act

    What necessitated law on contract farming?

    • Contract farming has shown that marginal and small farmers are generally excluded.
    • The problems they face include the following-
    • Highly one-sided i.e. pro-contracting agency contracts.
    • Delayed payments.
    • Undue rejections and outright cheating.
    • Poor enforcement of contract farming regulation by the state governments.

    Concerns with the law

    • The Act defined FPOs (farmer producer organisations) as farmers, which restricts them to the supply side.
    • But there is hardly any FPO in farm production.
    • Further, the contract farming Act does not provide for remedies when companies cancel contracts or there is delay in taking delivery of produce.
    • The Act says that sponsor would also pay, besides the minimum guaranteed price, a premium or bonus which will be linked to APMC or e-trading price.
    • This goes against the very concept of contract farming.
    • The contract price should be left to the contracting parties to decide.
    • Further, if the understanding is that mandis are not discovering prices well, then why peg the contract price to such mandi price?

    Lessons from 2003 APMC Act

    • The government must go back to the 2003 Model APMC Act, which also had model contract agreement with mandatory and optional provisions in a contract.
    • In the 2003 Model APMC Act, the APMC was supposed to resolve the disputes.
    • Further under 2003 APMC Act when a licence is given to a trader or commission agent, there is a counterparty risk assurance.

    Apprehensions about MSP

    • The Shanta Kumar Committee report and the CACP reports had suggested reducing procurement and an end to open-ended procurement from states like Punjab to cut down costs of FCI.
    • It is feared that FCI itself may start procuring directly from the new trade area to cut down buying costs like market fees and arhtiya commission.
    • It is more about the changes in the “social contract” between the state’s farmers and the Union government.
    • The demand for legal backing to MSP also arises from the fact that the government has been announcing MSP for 23 crops, but procurement is limited to a few crops.
    • Also, CACP in one of its reports in 2017-18 (kharif) suggested that “to instil confidence among farmers for procurement of their produce, a legislation conferring on farmers ‘the right to sell at MSP’ may be brought out.”
    • Punjab’s amendments to farm Acts — making MSP mandatory for wheat and paddy are ill-advised as this law will discourage private buyers from buying.
    • It is difficult to enforce such a law. Private agricultural markets cannot be run through such diktats.
    •  By creating stringent rules (fine or imprisonment), the government may create a situation where farmers would not be able to sell at all.
    • Maharashtra attempted this legality in 2018 in its APMC Act but had to reverse it after protests by traders.

    Consider the question “What are the factors that necessitated the robust contract farming Act? What are the issues related to the Act? Suggest the measures to address these issues.”

    Conclusion

    Apprehension among the farmers related to the farm laws needs to be addressed and the concern in the laws need to be addressed.

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  • Foreign Policy Watch: India-Middle East

    Geopolitical turbulence in the Middle East and consequences for Indian subcontinent

    op-ed snap | International Relations | Mains Paper 2: Effect Of Policies & Politics Of World On India’S Interests,India & Its Neighborhood – Relations

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Countries of the Middle East

    Mains level: Paper 3- Trends from the Middle East and implications for the Indian subcontinent

    Three broad trends emerging from the Middle East and its implication for the region have been discussed here.

    Growing vulnerability of Iran and implications for subcontinent

    • The brazen murder of a top Iranian nuclear scientist highlights the Islamic Republic of Iran’s growing strategic vulnerabilities.
    • This geopolitical turbulence in the Middle East has major consequences for the subcontinent.
    • Whether they want to or not, India, Pakistan and Bangladesh must deal with three broad trends that define the new Middle East.

    3 Trends in the Middle East

    1) Iran’s growing isolation

    •  The Trump administration and the Republicans, Israel and the Gulf Arabs have a shared interest in preventing the next US President from renewing nuclear diplomacy with Iran and ending Tehran’s isolation.
    • The assassination of Fakhrizadeh is about achieving that political objective.
    • If Iran retaliates vigorously, it will invite an all-out confrontation with Israel and the US.
    • Holding back will expose Iran’s weakness and sharpen internal divisions between pragmatists who want to engage the US and the hardliners.
    • The frequent attacks on high-profile Iranian targets indicate hostile penetration of its society such that domestic opponents of the regime are now willing to collaborate with foreign security agencies, including Israel’s Mossad.
    •  Iran’s internal political weakness is compounded by the massive economic pain imposed by the Trump administration through sanctions.
    • Iran has much goodwill in South Asia, but India and its neighbours have no desire to get sucked into Tehran’s conflicts with the Arabs or the US.

    2)  Transformation of Arab relations with Israel

    • The fear of Iran has been driving Gulf Arabs to embrace Israel.
    • In the last few months, Bahrain and the United Arab Emirates have normalised ties with Israel.
    • There is speculation of an impending normalisation of ties between Israel and Saudi Arabia.
    • Pakistan’s Prime Minister has talked of pressure, apparently from Saudi Arabia and the UAE, on recognising Israel.
    • If Pakistan recognises Israel, Bangladesh would not want to be left behind.
    • Economic and technological collaboration with Israel will give Bangladesh’s economy and foreign policy a big boost.
    • For Israel, having Bangladesh and Pakistan, two of the world’s largest Islamic nations, recognise it would be a great ideological and political bonus
    • An India that proclaims the virtues of engaging all sides in the Middle East can’t grudge the same privilege for Israel in South Asia.

    3) Rivalry between Saudi Arabia and Turkey

    • While Saudi Arabia, Egypt, and the UAE want to return the Middle East towards political and religious moderation, the once secular Turkey has become the new champion of political Islam.
    • Turkey’s contestation with Saudi Arabia is already having an impact on India and Pakistan.
    • Turkey is now hostile to India and has joined Pakistan in taking up the Kashmir question at international forums.
    • For Pakistan, this seemed a useful counter to the Gulf Arabs, who were ramping up strategic ties with India.
    • However, UAE and Saudi Arabia have the option to put massive costs on the Pakistani economy that can’t be plugged by Turkey or Malaysia.

    Conclusion

    Although India has made some important adjustments to its engagement with the Middle East in recent years, Delhi can’t take its eyes off the rapid changes in the region.

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  • Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

    The perils of deregulated imperfect agrimarkets

    op-ed snap | Agriculture | Mains Paper 3: Issues Related To Farm Subsidies & Msp,Transport & Marketing Of Agricultural Produce

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: FPTC Act 2020

    Mains level: Paper 3- Agri marketing and related issues.

    The article examine issue of agriculture produce marketing. The passage of FPTC Act 2020 sought to address the challenges faced by the farmers. However, these are several issues the Act fails to resolve. These issues are discussed here.

    Why do farmers sell outside mandis?

    • Official data show that even for paddy and wheat, respectively, only 29% and 44% of the harvest is sold in a mandi.
    • In other words a large proportion of Indian harvest is not directly sold in a mandi.
    • Farmers are forced to sell outside the mandis for two reasons.

    1) There are not enough mandis

    • The National Commission on Agriculture (NCA) had recommended that every Indian farmer should be able to reach a mandi in one hour by a cart.
    • Thus, the average area served by a mandi was to be reduced to 80 km2.
    • For this, the number of mandis was to increase to at least 41,000.
    • But there were only 6,630 mandis in 2019 with an average area served of 463 km2.
    • Using another set of criteria, a government committee in 2017 had recommended that India should have at least 10,130 mandis.
    • So, by all counts, India needs not less but more mandis.

    2) Transport cost

    • Most small and marginal farmers, do not find it economical to bear the transport costs to take their harvests to mandis.
    • Thus, they end up selling their harvest to a village trader even if at a lower price.
    • Even if private markets replace mandis, small and marginal farmers will continue to sell to traders in the village itself.
    • The situation will change only if economies of scale rise substantially at the farm-level.

    Why there is poor private investment in markets?

    • Already, 18 States have allowed the establishment of private markets outside the APMC; 19 States have allowed the direct purchase of agricultural produce from farmers; and 13 States have allowed the establishment of farmer’s markets outside the APMC.
    • Despite such legislative changes, no significant private investment has flowed in to establish private markets in these States.
    • The reason for poor private investment in markets is the presence of high transaction costs in produce collection and aggregation.
    • When private players try to take over the role of mandis and the village trader, they incur considerable costs in opening collection centres and for salaries, grading, storage and transport.
    • Corporate retail chains face additional costs in urban sales and storage, as well as the risk of perishability.
    • This is why many retail chains prefer purchasing from mandis rather than directly from farmers.

    Issue of mandi tax

    • Many commentaries treat taxes in mandis as wasteful. This assertion is not fully true for two reasons:
    • 1) Much of the mandi taxes are reinvested by APMCs to improve market infrastructure.
    • A fall in mandi taxes would reduce the surplus available with APMCs for such investment.
    • 2) In States such as Punjab, the government charges a market committee fee and a rural development fee.
    • The Punjab Mandi Board uses these revenues to construct rural roads, run medical and veterinary dispensaries, supply drinking wate etc.
    • Such rural investments will also be adversely affected if mandis are weakened.

    Weakening of MSP regime

    • Many policy signals point to a strategic design to weaken the MSPs.
    • 1) Rising input and labour costs necessitates a regular upward revision of MSPs to keep pace with costs of living.
    • However, MSPs are rising at a far slower rate over the past five to six years than in the past.
    • 2) The government has not yet agreed to fix MSPs at 50% above the C2 cost of production.
    • As a result, farmers continue to suffer a price loss of ₹200 to ₹500 per quintal in many crops.
    • 3) The Commission for Agricultural Costs and Prices (CACP) has been recommending to the government that open-ended procurement of food grains should end.
    • These policy stances have set alarm bells ringing among farmers.
    • The farmers Punjab, Haryana and western Uttar Pradesh feel that if mandis weaken and private markets with no commitment to MSPs expand, they fear a gradual erosion of their entitlement to a remunerative price.

    Steps to be taken

    • 1) India needs an increase in the density of mandis, expansion of investment in mandi infrastructure and a spread of the MSP system to more regions and crops.
    • 2) This increase in density should happen hand-in-hand with a universalisation of the Public Distribution System.
    • 3) APMCs need internal reform to ease the entry of new players, reduce trader collusion and link them up with national e-trading platforms.
    • The introduction of unified national licences for traders and a single point levy of market fees are also steps in the right direction.

    Consider the question “The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 was passed with a view to address the challenges faced by the farmers in selling their produce. However, there are concerns with the provision of the Act and its efficacy to addresss these challenges. What are the issues with the Act? Suggest the measures to address these issues.” 

    Conclusion

    The government’s must try to allay the fears of farmers over the Farm Bills and it is never too late to rethink. Unconditional talks with farmers would be an appropriate starting point.

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  • Climate Change Negotiations – UNFCCC, COP, Other Conventions and Protocols

    The Paris agreement is no panacea

    op-ed snap | Enviro & Biodiversity | Mains Paper 3: Conservation, Environmental Pollution & Degradation, Eia

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Kyoto Protocol, Rio Declaration, Copenhagen Accord etc

    Mains level: Paper 3- Paris Agreement and issues with it

    The article highlights the fact that the provisions of the Paris Agreement would not be enough to avert the catastrophic and irreversible changes resulting from the global emissions. 

    Past efforts for environmental protection

    • The most hopeful time for global cooperation in protection of the planet was between the time of the Stockholm Conference (1972) and the time of the Rio Conference (1992).
    •  Scientific evidence about role anthropogenic emission in global warming led to political initiatives to harmonise development and environment.
    • The historic consensus in Rio led to the adoption of the UN Framework Convention on Climate Change (UNFCC).
    • A distinction was made between the “luxury emissions” of the developed countries and the survival emissions of the developed countries, which were allowed to increase.
    • Moreover, a huge financial package was approved to develop environment-friendly technologies in developing countries.

    Copenhagen Accord: Abandonment of Rio Principles

    • After the adoption of UNFCC, Conference of the Parties was held in Berlin in 1995 where developed countries backed off from their commitments.
    • Though the G-77 was split, the Rio principles were maintained.
    • The Kyoto Protocol enshrined the Rio principles.
    • It fixed emission targets for developed countries and a complex set of provisions was included to satisfy their interests.
    • The end of the Kyoto Protocol and the abandonment of the spirit of the Rio principles were reflected in the Copenhagen Accord (2009).
    • Argument given was that a global climate action plan would be possible only if all reductions of the greenhouse gases were made voluntary.

    Paris Agreement: Making emission reduction voluntary

    • The Paris Agreement moved away from the principle of common but differentiated responsibilities.
    • All countries were placed on an equal footing by making reduction of greenhouse gas emissions voluntary.
    • It requires all parties to put forward their best efforts through nationally determined contributions (NDCs)

    Shortcomings in Paris Agreement

    • The NDCs so far submitted will not result in the desired objective of limiting increase of global warming to below 2°C.
    • The Paris Agreement requires that all countries — rich, poor, developed, and developing — slash greenhouse gas emissions.
    • But no language is included on the commitments the countries should make.
    • Nations can voluntarily set their emissions targets and incur no penalties for falling short of their targets.
    •  Further temperature rise, even of 1.5°C, may result in catastrophic and irreversible changes.
    • Even a 1°C hotter planet is not a steady state, says a report of the Intergovernmental Panel on Climate Change (IPCC).

    Conclusion

    The IPCC report acknowledges that “the pathways to avoiding an even hotter world would require a swift and complete transformation not just of the global economy but of society too”. This will only be possible if the world rejects nationalism and parochialism and adopts collaborative responses to the crisis. The Paris Agreement falls short of that imperative.

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  • Hunger and Nutrition Issues – GHI, GNI, etc.

    Stepping out of the shadow of India’s malnutrition

    op-ed snap | Economics | Mains Paper 3: PDS, Buffer Stock & Food Security

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: National Food Security Act 2013

    Mains level: Paper 3- Food Security

    The article takes stock of the food insecurity and malnutrition in India with the aid of two recently published reports.

    Reports about food security in India

    • Two recent reports — “The State of Food Security and Nutrition in the World 2020” by the Food and Agricultural Organization of the United Nations and the 2020 Hunger report, “Better Nutrition, Better Tomorrow” by the Bread for the World Institute  – document staggering facts about Indian food insecurity and malnutrition.
    • The reports use two globally recognised indicators, Prevalence of Undernourishment (PoU) and the Prevalence of Moderate or Severe Food Insecurity (PMSFI).
    • Using these indicators, the reports indicate India to be one of the most food-insecure countries, with the highest rates of stunting and wasting among other South Asian countries.

    Comparing rate of reduction in malnutrition with neighbouring countries

    • Malnutrition in India has not declined as much as the decline has occurred in terms of poverty.
    • On the contrary, the reduction is found to be much lower than in neighbouring China, Pakistan, Nepal and Bangladesh.
    • The decline in China is way higher than that of India, even though it had started with lower levels of PoU in 2000.

    Food security during pandemic and National Food Security Act 2013

    • Two crucial elements still got left out in the National Food Security Act – 2013.
    • These two elements are the non-inclusion of nutritious food items such as pulses and exclusion of potential beneficiaries.
    • Because of this, the current COVID-19 pandemic would make the situation worse in general, more so for vulnerable groups.
    • Though States have temporarily expanded their coverage in the wake of the crisis, the problem of malnutrition is likely to deepen in the coming years.
    • Hence, a major shift in policy has to encompass the immediate universalisation of the Public Distribution System which should definitely not be temporary in nature.

    Conclusion

    The need of the hour remains the right utilisation and expansion of existing programmes to ensure that we arrest at least some part of this burgeoning malnutrition in the country.

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  • Direct Benefits Transfers

    Linking Aadhaar to residence for targeted aid

    op-ed snap | Governance | Mains Paper 2: Government Scheme/Policies,Schemes For Vulnerable Sections

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: PM-Kisan

    Mains level: Paper 2- Geo-targeted aid during disasters

    The article suggests the provision for a safety net with geographic targeting in case of disasters as most disasters are location specific.

    Safety net in the U.S.

    • The US Congress enacted in March a Coronavirus Aid, Relief and Economic Security (CARES) Act to sends $1,200 to each individual below the income threshold of $75,000.
    • Nonetheless, as The Washington Post reported, even in October, millions of households were yet to receive their stimulus payments.
    • The tax authorities who were charged with disbursing the funds had no way of knowing how to send the cheques.
    • But the poor had to cross several hurdles to get this money and the computer system did not make it easy for them to register their claim.

    Safety net in India and issues with it

    • In contrast to U.S., 23 per cent of Indians living in Delhi-NCR received a payment of Rs 500 in their Jan Dhan accounts within three weeks of the lockdown being declared.
    • Farmers registered for PM-KISAN also received Rs 2,000 in their accounts immediately.
    • However, there were some issues for example, recipients of PM-KISAN were not amongst the poorest households, nor were these the households that were most affected by the COVID-related lockdown.
    • The PM-Kisan Yojana applies to landowners, thereby excluding agricultural labourers as well as the urban informal sector workers who were most affected by the lockdown.
    • Similarly, for the PMJDY payment, BPL and non-BPL households record similar receipt transfers.

    Twin challenges in designing social safety nets

    • Unless a registry containing data about individuals and their bank accounts exists, money cannot be transferred expeditiously.
    • 1) Registries based on specific criteria (for example, identified BPL households) may not identify individuals most vulnerable to crises.
    • 2) Factors that contribute towards alleviating poverty may differ from the ones that push people into it — indicating the challenge of targeting welfare beneficiaries in response to shocks.
    • About 40 per cent of the poor in 2012 were pushed into poverty by special circumstances and would not have been classified as being poor based on their 2005 conditions.
    • Such exclusion errors can get magnified in the event of large-scale disasters when using pre-existing databases, since many people are likely to fall into poverty from an economy-wide negative shock, leading to coverage errors.

    Way forward

    • Recent estimates from the World Bank suggest that 88 to 115 million people could slide into poverty in 2020.
    • These observations suggest that in a disaster response situation, we cannot rely on registries based on individual characteristics to identify beneficiaries.
    • Most disasters are geographically clustered.
    • If there is a way for us to set up social registries that identify individuals, their place of residence, and their bank accounts, these linkages can be used to transfer funds to everyone living in the affected area quickly.
    • Aadhaar linkages of individuals and bank accounts already exist.
    • If residential information in the Aadhaar database can be efficiently structured, this would allow for geographic targeting.
    • Issue of violation of individual privacy can be addressed by providing that such social registries store only basic information such as location, instead of more sensitive identifiers.

    Consider the question “Disasters underscores the importance of social safety nets. However, designing a social safety net that identifies and reach the vulnerable suffers from several challenges. What are these challenes. Suggest ways to address these challenges.” 

    Conclusion

    As we try to disaster-proof future welfare programmes, these are some of the considerations that deserve attention.

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  • Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

    Putting India-U.S. trade ties on new footing

    op-ed snap | Economics | Mains Paper 3: Inclusive Growth & Issues

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Trade Policy Forum

    Mains level: Paper 3- India-U.S. trade ties

    After tumultuous years of Trump administration in trade policies, the article examines the new possibilities under the next U.S. President in trade ties with India.

    Approach towards WTO and India

    • The new U.S. administration will have more constructive stance on multilateral issues in the World Trade Organization (WTO).
    • The Trump administration went out of its way in seriously undermining WTO institutions when the organisation was already in need of reform and new direction.
    • The Biden administration is less likely to engage in unilateral tariff increases and more likely to pursue remedies in the WTO.
    • In case of India, the Trump administration it pursued an aggressive approach to resolve market access concerns through threats to eliminate India’s benefits under the Generalized System of Preferences programme.
    • However, the follow-through was weak.
    • The administration was on the brink of concluding a historic bilateral trade deal, yet it lost focus.

    5 likely developements

    • 1) It is clear that Mr. Biden plans to focus on domestic concerns first.
    • There may be trade aspects to some of these efforts, but they may have limited early relevance for a future U.S.-India trade policy.
    • 2) Two, as it turns to trade policy, the Biden administration is not likely to place India among its top few priorities.
    • Among top priorities will include formulating its approach with China, such as finding alternatives to the Regional Comprehensive Economic Partnership to set new global standards that address China’s practices.
    • That said, India should be among the priorities at the next level down.
    • 3) The trade deal still pending with the Trump administration remains compelling.
    • There could be an early opportunity to conclude these negotiations and for the Biden administration to get credit.
    • A bilateral deal will not lead to serious consideration of FTA negotiations any time soon.
    • But this first trade agreement could pave the way for later additional small agreements.
    • 4) The existing Trade Policy Forum (TPF) met only once over the last four years.
    • It seems likely that the Biden administration will see the TPF’s value as a venue for more regular discussions on a range of trade issues.
    • 5) A reinvigorated TPF will present new opportunities for the two countries to take up a range of cutting-edge trade issues that will be critical in determining whether the U.S. and India can converge more over time or will drift further apart.
    • These include digital trade issues, intellectual property rights and approaches to nurturing innovation, better health sector alignment, and more regular regulatory work on science-based agricultural policies.

    Conclusion

    The future looks bright for U.S.-India trade under a Biden administration, but that does not mean it will be any easier. It will be critical for leadership on both sides to commit to strong efforts to put the trade relationship on a new footing, which will have to involve a ‘can-do’ attitude to solving problems.

    Back2Basics: Trade Policy Forum

    • It was established in 2005.
    • The Forum is part of the overall United States-India Economic Dialogue, replacing the Trade Policy Working Group pillar.
    • It  convenes on a regular basis.
    • The Forum provides an opportunity to work together to expand trade between the two countries.
    • The agenda could cover the following subjects: tariff and non-tariff trade barriers; foreign direct investment; subsidies; customs procedures; standards, testing, labeling and certification intellectual property rights protection; sanitary and phytosanitary measures; government procurement; and services.

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  • Banking Sector Reforms

    Mistake in allowing industrial houses to own banks

    op-ed snap | Economics | Mains Paper 3: Indian Economy

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much

    Mains level: Paper 3- Challenges in allowing industrial houses to own an operate banks

    The article analyses the risks involved in allowing the corporate houses to own and operate the banks.

    Context

    • An internal working group of the RBI has recently made a recommendation to permit industrial houses to own and control banks.

    Encourage bank but not owned by banks

    • According to the report, the main benefit is that industry-owned banks would increase the supply of credit, which is low and growing slowly.
    • Credit constraints are indeed a real problem, and creating more banks is certainly one way of addressing the issue.
    • But this is an argument for encouraging more banks but it is not an argument for creating banks specifically owned by industry.
    • The other powerful way to promote more good quality credit is to undertake serious reforms of the public sector banks.

    Problems in allowing industrial houses in banking

    • The problem with banks owned by corporate houses is that they tend to engage in connected lending.
    • This can lead to three main adverse outcomes:

    1) Over-financing of risky activities

    • Lending to firms that are part of the corporate group allows them to undertake risky activities that are not easily financeable through regular channels.
    • Precisely because these activities are risky, they often do not work out.
    • And when that happens, it is typically taxpayers who end up footing the bill.
    • In principle, connected lending can be contained by the regulatory authority.
    • However, experiences in other nations show that regulating connected lending is impossible convincing most advanced countries that regulating connected lending is impossible.
    • Indonesia tried to regulate the practice: It banned the practice.
    • The only solution is to ban corporate-owned banks.
    • Regulation and supervision need to be strengthened considerably to deal with the current problems in the banking system before they are burdened with new regulatory tasks.

    2) Lack of exit

    • The economic landscape is littered with failed firms, kept alive on life support, making it impossible for more efficient firms to grow and replace them.
    • While some progress was initially made under the Insolvency and Bankruptcy Code (IBC), this had stalled even before the pandemic, largely because existing promoters and owners mounted a stiff resistance.
    • If industrial houses get direct access to financial resources, their capacity to delay or prevent exit altogether will only increase.

    3) Increasing dominance

    • The Indian economy already suffers from over-concentration.
    • We not only have concentration within industries, but in some cases the dominance of a few industrial houses spans multiple sectors.
    • If large industrial houses get banking licences, they will become even more powerful, not just relative to other firms in one industry, but firms in another industry.

    Impact on regulator and government

    • The power acquired by getting banking licences will not just make them stronger than commercial rivals, but even relative to the regulators and government itself.
    • This will aggravate imbalances, leading to a vicious cycle of dominance breeding more dominance.

    Impact on quality of credit

    • Indian financial sector reforms have aimed at improving not just the quantity, but also the quality of credit.
    • The goal has been to ensure that credit flows to the most economically efficient users, since this is the key to securing rapid growth.
    • If India now starts granting banking licences to powerful, politically connected industrial houses we will effectively be abandoning that long-held objective.

    Impact on economy and democracy

    • Indian capitalism has suffered because of the murky two-way relationship between the state and industrial capital.
    • If the line between industrial and financial capital is erased, this stigma will only become worse.
    • Corporate houses that are already big will be enabled to become even bigger allowing them to dominate the economic and political landscape.
    • A rules-based, well-regulated market economy, as well as democracy itself — will be undermined, perhaps critically.

    Consider the question “What are the challenges and opportunities in allowing the industrial houses to own and operate the banks.”

    Conclusion

    The conclusion is clear. Mixing industry and finance will set us on a road full of dangers — for growth, public finances, and the future of the country itself.

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  • Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

    Steps needed to achieve Comparative advantage in Manufacturing

    op-ed snap | Economics | Mains Paper 3: Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much

    Mains level: Paper 3- Policy approach for industrial development

    The article suggests the policy approach to achieve industrial growth while avoiding the isolationist approach in pursuit of AtmaNirbharBharat.

    Issue of policy binary

    • The goals of the Make in India initiative and now the AatmaNirbharBharat Abhiyan are driving a major shift in policy.
    • Import duties are being raised.
    • Production-linked incentives are being offered to firms across a wide canvas of 10 priority sectors.
    • At the same time, there is considerable unease at the rolling back of trade liberalisation.
    • This binary is not very useful.

    Steps needed to gain competitive advantage

    1) Infrastructure

    • It would still take India many years to develop its physical infrastructure to the levels required for international competitiveness.
    • Until then, large industrial parks for textiles, electronics, toys or shipbuilding need to be developed by state agencies with soft financing.
    • Competitive logistics are essential.
    • This was critical for the success of the information technology (IT) industry where world-class infrastructure was created within the software parks.
    • High-speed broadband real-time connectivity to the US market was provided through public investment.
    • This was done well before general telecom modernisation began.

    2) Closing the financing gap

    • Long-term financing for world-class infrastructure is still a gap.
    • The central government can either use one of its existing financial institutions or create a new development financial institution to provide long-term low-interest rate debt.
    • The sovereign needs to provide risk-mitigation through an implicit guarantee. It can afford to do so.

    3)  Prevent real exchange rate appreciation

    • Before considering specific increases in import duties, real exchange appreciation should be undone.
    • This would have the effect of raising tariffs across the board.
    • It is high time the government and the Reserve Bank of India (RBI) agreed on this objective.

    4) Change the regime for SEZ

    • Allow SEZ to sell into the domestic area with import duties at the lowest applicable rate with any trading partner and the same value-addition norms.
    • Tax exemption on profits could be dispensed with while continuing to provide a duty-free import regime.
    • This would create a level-playing field for production vis-à-vis competitive locations overseas.
    • Large zones would have to be developed by the state.
    • The private sector can be partners in the process, but achievement of scale is only possible by the state.
    • Production for the domestic as well as the global market would become easier.

    5) Encourage domestic value addition

    • Domestic value-addition can be incentivised by-
    • 1) Reducing duties to zero for all primary raw materials and inputs.
    • 2) then progressively higher rates for intermediates with the highest rate for the finished product.
    • In short, have just the opposite of the inverted duty structure we have had for computers.
    • This would change investment and production decisions if other costs of production in India have been made competitive.

    6) Commitment of procurement of full production

    • In some industries, commitment of procurement of full production for a few years would suffice to get investment.
    • Bids could be invited for solar panels, or for battery storage for the grid, for annual supply for, say, five years with the condition that full value-addition has to be done in India.
    • Such commitment would provide for amortisation of the capital investment and make it a risk-free investment.
    • If the bid size is large enough, the best global firms would come and invest.
    • If the bids are repeated, prices would come down and a competitive industry structure would be created.

    7) Encourage public investment

    • Public investment in firms should not be ruled out altogether.
    • In some cases, it may be the best way to create competitive capacity.
    • Maruti Suzuki is a good example in India.
    • Volkswagen was set up by a state government in Germany, which is still a substantial shareholder.
    • This is a policy instrument that can be used to create competitive advantage.

    8) Creation of fund

    • There should also be willingness to create a fund that looks at modest returns, but aims at creating national and global champions through start-ups.

    Conclusion

    The foundation of China’s incredible success was laid by Deng Xiaoping with the maxim on economic policy that one should not bother about the colour of the cat as long as it caught mice. India’s policies have tended to be doctrinaire. We need a heavy dose of pragmatism to achieve our full potential.

    Source:-

    https://www.financialexpress.com/opinion/industrial-growth-the-right-policy-mix-for-success/2136735/

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  • Cashless Society – Digital Payments, Demonetization, etc.

    NPCI caps UPI transactions on third-party apps at 30%

    op-ed snap | Economics | Mains Paper 3: Indian Economy

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: UPI

    Mains level: Paper 3- Cap on UPI transactions by TPAPs and issues with it

    The article deals with the recent NPCI decision to cap the number of transactions by third party application providers (TPAPs).

    Context

    • The National Payments Corp of India (NPCI), in its recent guidelines imposed a 30% volume-based cap on the share of transactions by TPAPs and payment service providers (PSPs), effective from January 2021.

     5 issues with the volume-based cap

    1) It undermines cashless economy

    • The growth and recognition of UPI would not have been possible had a cap been in place.
    • Typically, customers limit themselves to one or two TPAPs of their choice.
    • A transaction cap that forces users to use multiple apps may result in more transaction failures and dilute UPI’s popularity and impact.
    • Lack of accessibility and user-friendliness would push users away from UPI towards other payment methods, or even cash.

    2) It’s an anti-consumer decision

    • Open markets and user choice have been crucial factors in the exponential increase seen in UPI adoption and its transactions.
    • A volume-based cap would compel TPAPs to either limit the number of transactions on their platforms or stop enrolling new users, which in turn would restrict the customer’s use of UPI.
    • TPAPs will likely be forced to redact customer incentives like cashbacks, coupons and the like.
    • This could go against consumer interests by reducing choice.

    3) It will also make the Indian market less attractive for investors:

    • The cap would raise compliance and regulatory costs for players in the sector, which could deter new investors from entering.
    • It would also adversely affect the growth potential of existing UPI players.

    4) No regulatory impact assessment

    • The idea of a volume-based cap does not appear to have undergone an assessment of its impact on the sector.
    • As a general principle, before any such rule is imposed, an RIA (Regulatory Impact Assessment) needs to be undertaken.
    • Systemic risks are not restricted to UPI and are common in all financial systems; yet, a similar cap has not been suggested for, say, retail bank transactions.

    5) Impact on Atmanirbhar Bharat

    •  In order for Indian businesses to grow and compete at the global level, we need to integrate business processes with the global economy.
    • Indian start-ups, in particular, need tools and infrastructure that lets them gain an international edge.
    • Atmanirbhar Bharat envisions a self-reliant India that thrives on innovation, technology and entrepreneurship.
    • But this vision cannot be fulfilled if our policies restrain the growth of a cashless economy.

    Conclusion

    India’s UPI ecosystem is nascent, but has demonstrated significant growth and has had a positive impact on the economy by providing the backbone needed to move towards cashless commerce. Any policy decision by regulators at this point should aim at catalysing innovation in this space. Stifling it would serve India badly.

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