THE CONTEXT: on January 10^th 2020, the Mineral Laws (Amendment) Ordinance, 2020 was promulgated. This ordinance could re­sult in a paradigm shift in the coal mining sector.

• The Ordinance amends the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and the Coal Mines (Special Provisions) Act, 2015 (CMSP Act).
• The Mines and Minerals (Development and Regulation) Act, 1957regulates the mining sector in India and specifies the requirement for obtaining and granting mining leases for mining operations.
• The Coal Mines (Special Provisions) Act, 2015provides for the auction and allocation of mines whose allocation was cancelled by the Supreme Court in 2014.  Schedule I of the Act provides a list of all such mines; Schedule II and III are sub-classes of the mines listed in the Schedule I.  Schedule II mines are those where production had already started then, and Schedule III mines are ones that had been earmarked for a specified end-use.

OBJECTIVES OF THE AMENDMENTS

1. Enhancing the ease of doing business.
2. Democratization of coal mining sector by opening it up to anyone willing to invest.
3. Offering of unexplored and partially explored coal blocks for mining through prospecting license-cum-mining Lease (PL- cum-ML).
4. Promoting Foreign Direct Investment in the coal mining sector by removing the restriction and eligibility criteria for participation.
5. Allowing of successful bidder/allottee to utilise mined coal in any of the plant of its subsidiary or holding company
6. Attracting large investment in coal mining sector as restrictions of end use has been dropped.

UNDERSTANDING AMENDMENTS IN DETAIL

REMOVAL OF RESTRICTION ON END-USE OF COAL

• Currently, companies acquiring Schedule II and Schedule III coal mines through auctions can use the coal produced only for specified end-uses such as power generation and steel production.
• The Ordinance removes this restriction on the use of coal mined by such companies.
• Companies will be allowed to carry on coal mining operation for own consumption, sale or for any other purposes, as may be specified by the central government.  They may also utilise such coal in their subsidiaries’ plants.

ELIGIBILITY FOR AUCTION OF COAL AND LIGNITE BLOCKS

• The Ordinance clarifies that the companies need not possess any prior coal mining experience in India in order to participate in the auction of coal and lignite blocks.
• Further, the competitive bidding process for auction of coal and lignite blocks will not apply to mines considered for allotment to:

(i) A government company or its joint venture for own consumption, sale or any other specified purpose; and

(ii) A company that has been awarded a power project on the basis of a competitive bid for tariff.

COMPOSITE LICENSE FOR PROSPECTING AND MINING

• Currently, separate licenses are provided for prospecting and mining of coal and lignite, called prospecting license, and mining lease, respectively.  Prospecting includes exploring, locating, or finding mineral deposit.
• The Ordinance adds a new type of license, called prospecting license-cum-mining lease.  This will be a composite license providing for both prospecting and mining activities.

NON-EXCLUSIVE RECONNAISSANCE PERMIT HOLDERS TO GET OTHER LICENSES

• Currently, the holders of non-exclusive reconnaissance permit for exploration of certain specified minerals are not entitled to obtain a prospecting license or mining lease. Reconnaissance operations mean preliminary prospecting of a mineral through certain surveys.
• The Ordinance provides that the holders of such permits may apply for a prospecting license-cum-mining lease or mining lease.  This provision will apply to certain licensees as prescribed in the Ordinance.

TRANSFER OF STATUTORY CLEARANCES TO NEW BIDDERS

• Currently, mining leases for specified minerals (minerals other than coal, lignite, and atomic minerals) can be transferred to new persons through auction upon expiry.  Such new persons are required to obtain statutory clearances before starting mining operations.
• The Ordinance provides that the various approvals, licenses, and clearances given to the previous lessee will be extended to the successful bidder for a period of two years.  During this period, the new lessee will be allowed to continue mining operations.  However, the new lessee must obtain all the required clearances within this two-year period.

REALLOCATION AFTER TERMINATION OF THE ALLOCATIONS

• The CMSP Act provides for termination of allotment orders of coal mines in certain cases.  The Ordinance adds that such mines may be reallocated through auction or allotment as may be determined by the central government.
• The central government will appoint a designated custodian to manage these mines until they are reallocated.

PRIOR APPROVAL FROM THE CENTRAL GOVERNMENT

• Under the MMDR Act, state governments require prior approval of the central government for granting reconnaissance permit, prospecting license, or mining lease for coal and lignite.
• The Ordinance provides that prior approval of the central government will not be required in granting these licenses for coal and lignite, in certain cases.  These include cases where:

(i) the allocation has been done by the central government, and

(ii) the mining block has been reserved by the central or state governments to conserve a mineral.

ADVANCE ACTION FOR AUCTION

• Under the MMDR Act, mining leases for specified minerals (minerals other than coal, lignite, and atomic minerals) are auctioned on the expiry of the lease period.
• The Ordinance provides that state governments can take advance action for auction of a mining lease before its expiry.

IMPLICATIONS OF THE AMENDMENTS

• India is the second largest importer of coal in the world. The amendments will help to increase domestic production of India. It will also help India achieve its targets set. The GoI plans to increase coal production to 1 billion tonnes by 2024. For the financial year 2019-20, the target set is 660 million tonnes.
• It will also encourage private players to participate in the auctions that are to be held to reallocate the captive coal blocks that were cancelled by the Supreme Court in 2014.So far, only 29 of the 204 blocks that were cancelled have been auctioned.
• The country may also benefit from the infusion of sophisticated mining technology, especially for underground mines, if multinationals decide to invest.
• Large investment in mining will create jobs and set off demand in critical sectors such as mining equipment and heavy commercial vehicles.
• The relaxation in regulations, along with previous initiatives such as allowing 100% foreign direct investment through the automatic route in commercial coal production, can aid in boosting coal production in the country and help reduce imports.

OTHER GOVERNMENT INTERVENTIONS TO BOOST MINING

• Na­tional Min­eral Pol­icy (NMP) was ap­proved in 2019, to ensure trans­parency in the al­lot­ment of min­ing blocks. NMP 2019 emphasizes on themes such as sus­tain­able min­ing, boost­ing ex­plo­ration, en­cour­ag­ing the use of state-of-the-art tech­nol­ogy and skill de­vel­op­ment.
• In Septem­ber 2019, 100% FDI un­der the au­to­matic ap­proval route was allowed for the sale of coal and coal min­ing ac­tiv­i­ties in­clud­ing as­so­ci­ated pro­cess­ing in­fra­struc­ture.

CHALLENGES

• There is no clarity on pricing.Without a remunerative price, few would be willing to invest billions of dollars in the latest mining techniques.
• Miners have to currently pay huge amounts upfront to get a mine after winning an auction. Due to this, often there are no bidders for the auction.
• The other problem is that coal has a‘dirty fuel’ tag and few global lenders are willing to put their money into the sector.

WAY FORWARD

• Over the last few years, ex­plo­ration by pri­vate play­ers has come to a near stand­still. In­ter­ven­tions such as in­tro­duc­ing a seam­less tran­si­tion from ex­plo­ration to min­ing license, per­mit­ting the sale of license at any stage, and al­low­ing pri­vate com­pa­nies to proac­tively ap­proach government of India for ex­plo­ration ar­eas will help over­turn this trend.
• Stream­lin­ing the auc­tion process will also lead to greater ef­fi­ciency and more ef­fec­tive out­comes.
• Min­ing com­pa­nies in In­dia are sub­ject to much higher fi­nan­cial levies than other countries, (due to high roy­alty rates, mul­ti­plic­ity of levies and dou­ble tax­a­tion). Therefore, roy­alty rates should be re­duced in line with in­ter­na­tional bench­marks.
• The government must en­sure that all pol­icy in­ter­ven­tions take cognizance of emerging global trends in min­ing, such as smart mines, deep-sea min­ing and the chang­ing com­po­si­tion of the mining work­force.

CONCLUSION: The amendments are a welcome step towards liberalization of the mining sector and attracting the much needed foreign investment. The liberalized policy will allow global players to look for investment opportunities which in turn will allow the country to leverage their technical capabilities for effective utilisation of natural resources for the benefit of people at large.

THE CONTEXT: The government will soon come out with a policy on strategic sectors and simultaneously kick into motion a process of complete privatisation for companies in the non-strategic sectors such as BPCL, Air India, Container Corporation of India, and Shipping Corporation of India.

THE DEVELOPMENT

In a big step towards privatisation of many state-owned firms, the Modi government has identified 18 strategic sectors, including banking, insurance, steel, fertiliser, petroleum and defence equipment, where it will retain only a limited presence. If implemented in its entirety, it will mean the government is completely exiting non-strategic sectors through privatisation or strategic disinvestment. Even in strategic sectors, there will be a maximum of four public sector units and a minimum of one unit operating.

This is the first time since 1956 that the government has said it will not have state-owned companies in the non-strategic sector — and that the number in the strategic sectors too, would be reduced.
Banking, insurance, defence, and energy are likely to be part of the strategic sector list.

What are Strategic and Non-strategic Sectors of India?

• An industry is considered strategic if it has large innovative spillovers and if it provides a substantial infrastructure for other firms in the same or related industries.
• Earlier, the strategic sectors were defined on the basis of industrial policy.
• The government classified Central Public Sector Enterprises (CPSEs) as ‘strategic’ and ‘non-strategic’ on the basis of industrial policy that keeps on changing from time-to-time.

According to this, the Strategic sector PSUs are:

• Arms & Ammunition of defence equipment
• Defence aircraft & warships
• Atomic energy
• Applications of radiation to agriculture, medicine and non-strategic industry
• Railways

Banking, insurance, defence, and energy are likely to be part of the strategic sector list. All other PSUs apart from the strategic sectors fall under Non-strategic Sector including Power Discoms.

Disinvestment vs Privatization

• Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU (Public Sector Undertaking).
• Disinvestment indicates only a partial dilution of control by the Govt and still retaining overall ownership of a particular enterprise, whereas privatisation for all purposes signify relinquishing the entire ownership in favour of private parties.

Details of the new PSU Policy

Announcing the Atmanirbhar Bharat economic support package in May, Finance Minister Nirmala Sitharaman had said that the proposed policy would notify the list of strategic sectors requiring the presence of at least one state-owned company along with the private sector.
This is expected to be a long-term process rather than a one-time move on the privatisation of companies. After inter-ministerial consultations to finalise strategic sectors, the policy will be put up before approval of the Union Cabinet.
The Department of Investment and Public Asset Management (DIPAM) functioning under the finance ministry, which moved a cabinet proposal in July on ‘Redefining Public Sector Participation in Commercial Sector Enterprise’, has classified 18 strategic sectors into three broad segments — mining and exploration, manufacturing, processing and generation, and the services sector.

1. In the mining and exploration segment, the areas where government will retain limited presence are coal, crude oil and gas, and minerals and metals.
2. Similarly, in manufacturing, processing and generation segment, the areas where the government will retain limited presence are defence equipment, steel, petroleum (refinery and marketing), fertilisers, power generation, atomic energy and ship building.
3. And, in the services sector, the areas identified are — power transmission, space, development and operation of airports, ports, highways and warehouses and gas transportation and logistics (not including gas and petro-chemicals trading), contract and construction and technical consultancy services related to strategic sectors and subsectors, financial services for infrastructure, export credit guarantee, energy and housing sectors, telecommunications and IT, banking and insurance.

The biggest fallout is expected to be on sectors like banking, where a large number of state-owned banks operate. Even after the merger of 10 state-owned banks into four last year, and the mergers in 2017 and 2018, there are still 12 state-owned banks in India.

Private investors can prove to be a game-changer

• According to the plan, even in sectors that the government proposes to continue its presence, it will hold only that much stake in a firm that is required to retain control.
• But the timing of the government’s exit will depend on a number of factors, including market conditions and the feasibility of the proposal.
• Government has said that private sector participation will infuse private capital, technology, innovation and bring in best management practices.
  o The privatisation will give a big boost to the economy by generating jobs.
  o The sectors have huge potential, which is not being realised now because of various reasons. Private investors can prove to be a game-changer in such a scenario.
• According to the DIPAM proposal, unlocking of resources by strategic disinvestment of public sector enterprises could be used to finance social sector and development programmes.
• India has 348 public sector enterprises and the net worth of the government’s holdings in these firms is around Rs 7 lakh crore, according to government estimates. If implemented in its entirety, it would be the government’s most ambitious disinvestment plan since 2000 when the Atal Bihari Vajpayee government had started the process of completely exiting public sector firms.

Mix of further mergers of banks and privatisation likely

• The finance ministry will notify the policy within one month of cabinet approval. However, the actual implementation will take much longer. Initially, steps will have to be taken to bring down stakes in these PSUs and eventually exit.
• On the banking sector, the government’s first priority at present is to offload its remaining stake in IDBI Bank as announced in the budget.
  o In 2018, the Life Insurance Corporation had picked up a majority stake in the bank leaving the government with around 46 per cent shareholding.
  o The state-owned life insurer infused Rs 21,624 crore into the bank.
• Hence, there could be a mix of further mergers among banks and privatisation to bring down the number of state-owned banks to four.
• A holding company structure could also be used to house equity of smaller banks in one entity.
• The government has shifted its focus to having a few very large banks under its fold, and a decision regarding the smaller banks is expected after the policy is unveiled.

Where the policy will not apply

• Sources in the government said the proposed policy will not apply to autonomous organisations or trusts, regulatory authorities, refinancing institutions — many of which have been created through Acts of Parliament — such as major port trusts, Airports Authority of India, among others.
• It will also not apply to central public sector enterprises that provide support to vulnerable groups through financing of SCs, STs, minorities and backward classes, security printing and minting, organisations like railways and posts that undertake commercial operations with a development mandate.
• Department and organisations like railways, airports, ports and National Highways Authority of India, which are not covered under this policy but have undertaken asset monetisation or privatisation of various operations or activities, will continue to do all these.

But why not disinvest, rather than privatize?

• The government’s disinvestment strategy fail to address the basic issue, one of maximising value for taxpayer monies.
• Government equity in PSUs is nothing but capital invested by India’s taxpayers — it is therefore incumbent on the government to ensure maximum value for the investment made.
• A disinvestment programme, which is linked to a budgetary revenue target, is simply inefficient way of achieving it. Markets have cycles and a budgetary target necessitates equity sale even during weak market years.
• The result is either extraction of less-than-optimum value or (as is the case very often) a left-pocket right-pocket transaction of PSUs (and/or LIC) picking up disinvestment offers.
• Another problem in disinvestment is that it does not ensure a change in management of the enterprise. To make PSUs efficient, there is a need to bring in private management that runs it with the aim of maximizing profit.
• The Centre has had some success with disinvestment over the years. Of late, most of the disinvestments are funded by the Life Insurance Corporation of India.
• Thus, privatization is important and disinvestment a second-best alternative that yields revenues for the Centre, but does not improve the condition of the enterprise.

Benefits of privatisation

• The main argument for privatisation is that private companies have a profit incentive to cut costs and be more efficient.
• Most PSUs are making losses and are funded by the largesse of taxpayers. The public resources spent on them could be better utilized elsewhere, especially for development.
• Selling them can also yield non-tax revenue, which could be used to augment public infrastructure. Moreover, their turnaround by the private sector can generate tax revenue for the government.
• It is argued that political interference make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. Private sector is free from such unavoidable interference.
• A government many think only in terms of the Short-term view or next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term.
• It is argued that a private firm has pressure from shareholders to perform efficiently. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.
• Often privatisation of state-owned monopolies occurs alongside deregulation and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution of gas and electricity.

Arguments against Privatisation

Private Sector is Inefficient too

• There are some good number of PSEs that are not loss-making enterprises; instead, some of them generate revenues. If PSEs are allowed to grow in an independent way, managers of these enterprises are expected to respond according to the changed requirements.
• Further, there is no evidence that can suggest that the Indian private sector performs satisfactorily. Private sector is inefficient too.
• During 1950-1990, India’s private industrialists functioned under the protective umbrella without putting much effort in increasing factor productivity. These industrialists felt no urgency in modernising their industries; they used old and obsolete technology which made this sector an inefficient one.
• There is no statistical evidence that can show a positive relationship between ownership and performance. In fact, performance is not be related to the ownership of industries.
• What is needed is the competitive environment in which any sector public sector and private sector can grow.

Financial burden in future

• There are so many private industries that are lying sick. Sometimes, private industrialists deliberately make their organisations ‘sick’—so that they can receive financial help from public sector institutions to tide over the crisis.

Infrastructures may not grow in Abundance

• Economic growth crucially depends on the growth of infrastructures. Infrastructures both economic and social and economic growth are positively linked to each other.
• Since infrastructure investments are lumpy in character, private capital shies away from such investments and thrives on state- support infrastructures.
• Therefore, move towards greater and greater privatisation means country’s slow and haphazard growth of infrastructural facilities.

Public interest

• There are many industries which perform an important public service, e.g., health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry.

Problem of regulating private monopolies

• A natural monopoly occurs when the most efficient number of firms in an industry is one. For example, tap water has very significant fixed costs. Therefore, there is no scope for having competition amongst several firms. Therefore, in this case, privatisation would just create a private monopoly which might seek to set higher prices which exploit consumers.
• This needs effective regulations to prevent abuse of monopoly power. Therefore, there is still need for government regulation, similar to under state ownership.

Peripheral Social Responsibility

• Private sector is completely guided by the profit motive. This sector will invest in those areas that yield quick return the low priority industries.
• Above all, social responsibility or welfare objective of business is side-lined by the private industrialists.

Danger of Employment Loss

• Employment loss seems to be another argument against privatisation as far as present employment scenario is concerned.
• In the name of more and more profit, private industrialists have adopted ‘hire and fire’ policy of employment as well as labour-saving technologies.
• Further, private businessmen exploit workers in many forms (like extending working hours or increasing work load, sabotaging the power of the workers to negotiate with the employers, etc.). All these impact on wages. Income inequality, thus, gets widened.

Alternatives to privatisation (With past examples)

A firesale privatisation, as is prescribed by free market evangelists, is an also less efficient method of value maximization, besides being completely impractical in India’s political economy. Neither disinvestment nor the few outright privatisations that have taken place seem to have really maximised value for the key shareholder — the taxpayer of India.
The case for privatisation is trickierand the trick lies likely elsewhere – in control. Within the Indian landscape, there are examples, albeit few, where significant (or even majority) government ownership has not prevented the company from creating enormous value for shareholders. Since Independence, while most government-funded enterprises were set up as public sector undertakings, mostly under enabling legislations, there were other models explored too.

1. Maruti Udyog was set up as a Joint Venture of the government of India with Suzuki of Japan, with the latter initially holding a minority stake. But the cornerstone of the structure was on management control – government, despite its majority stake, allowed a very substantial amount of management and operational freedom to Suzuki to manage the company on commercial lines.
2. A second model used often, mostly in financial services, has been that of indirect ownership — via other PSUs while allowing private sector-level management and operational freedoms. The Industrial Credit and Investment Corporation of India (ICICI), the erstwhile parent company of ICICI Bank was set up as a joint venture of public sector banks, insurance companies and the World Bank.
3. UTI Bank (known as Axis Banknow) was sponsored by the government owned UTI-1, a special purpose vehicle created out of the restructuring of Unit Trust of India.
4. HDFC, the mortgage lender, was initially sponsored by ICICI, with minority shareholdings with IFC (part of the World Bank group) and the Prince Aga Khan foundation.

WAY FORWARD: Given the stupendous success of all three examples quoted above – all four are market leaders in their respective business lines and have created enormous amount of wealth not only for their private shareholders but also for the Indian taxpayer (who directly and/or indirectly owns significant parts of these companies).
While there would be several reasons for the success, a key common thread running across all the four cases is one of management control. The respective management teams (and/or minority stakeholders with domain expertise) were given full flexibility to run the enterprises on commercial lines.

CONCLUSION: In a country like India, Privatization in today’s concept is seen as a means of increasing output, improving quality, reducing unit costs, curbing public spending and raising cash to reduce public debt. However, privatisation takes a number of forms and has been approached in various ways with both pros and cons. Disadvantages of privatization should be balanced with proper rules and regulations. Privatisation must be accompanied by competition in the post-privatised scenario. In order to improve the performance of inefficient units, the creation of a competitive market environment is absolutely essential. Moreover, Privatisation of Public sector enterprises is a viable option only in case of ‘value subtracting enterprises’ but the process must not be in haste, just for the sake of meeting the disinvestment targets set by the Finance Ministry.

THE CONTEXT: The government has set its sights on an aggressive plan to sell its equity holdings in State-owned enterprises from which it hopes to rake in Rs 1.75 trillion. In order to so, the govt has significantly widened the scope of its privatization plan by unveiling a new policy for strategic disinvestment of public sector enterprises that will provide a clear roadmap for disinvestment in all non-strategic and strategic sectors.

THE PRESENT PRIVATISATION POLICY OF THE GOVERNMENT

Fulfilling the governments’ commitment under the AtmaNirbhar Package of coming up with a policy of strategic disinvestment of public sector enterprises, with following feature

• Strategic Sector : Bare minimum presence of the public sector enterprises and remaining to be privatised or merged or subsidiarized with other CPSEs or closed.
• Strategic sector :an industries considered strategic if it has large innovative spill overs and if it provides a substantial infrastructure for other forum in the same or related industry
• Following 4 sectors to come under it :

• • • Atomic energy, Space and Defence
    • Transport and Telecommunications
    • Power, Petroleum, Coal and other minerals
    • Banking, Insurance and financial services
• Non- Strategic Sector : In this sector, CPSEs will be privatised, otherwise shall be closed.

Non-strategic sector

• will include hotel and tourist services transportation vehicle and equipment industrial and consumer goods trading and marketing and transport and logistics

The policy of government on the 18 strategic sectors Other sectors

18 strategic sectors under 3 different classificatory types are

• mining and exploration
• processing and generation and
• the service sector

Policy regarding PSU by the govt

• Govt will completely exit non-strategic sector
• in strategic sector govt will keep maximum of 1-4 PSU and subsequently opt for strategic disinvestment

PRIVATISATION OF PSU SINCE 2014 INCLUDING BANKS

With the increase of supply of PSU stocks and the constrained investor appetite had started affecting the prices. The trade-off between the political objective to privatize and revenue maximization was witnessed the most in this period. Resultantly, the government resort to Strategic Sales.

However, in departure from past govt is also disinvesting profit making venture with a rationale that disinvestment of profit-making enterprises by public offering of shares is desirable as it leads to dispersed shareholding and avoids concentration of economic power.

However, in case of bank , an amalgamation policy was followed which reduced the number of national bank from 28 to 12 by merging various bank .

• But even after this there was no meaningful resolution of NPA crisis.
  • In fact, post the covid crisis this problem will increase as small banks are facing the problem of balancing credit growth and risk.
  • With the spectre of insolvencies looming at the start of pandemic-led lockdown, there was a flight of deposits from small banks to bigger ones.
• In view of this , the govt has focused on to take PSBs out of government control

Overall approach

Since 2014, Modi government’s strategic disinvestment approach was to sell minority stakes in public companies to raise revenue, while retaining management control. During the 2014-2019 period, the government raised Rs. 2,79,622 crore from the disinvestment of public sector enterprises (PSEs), compared to Rs 1,07,833 crore collected during 2004-14. However, this has changed now. Recently, five companies were up for 100 per cent disinvestment, including three large profitable companies such as Bharat Petroleum Corporation Ltd. (BPCL), the Container Corporation of India and the Shipping Corporation.

THE EVOLUTION OF PSU SINCE 1956 TO 1999

Historical antecedents: Industrial Policy in India

• National Economic Planning Committee set up by the All India Congress Committee in 1937 : suggested vigorous efforts for India’s industrial development through a mixed economy with a dominant role for the public sector.
• Peoples Plan’ prepared by Mr M N Roy: all-in-all role to public sector and financing of the industrial plan through internal resources
• Bombay Plan (Tata-Birla plan) recommended government support for industrialization, including a direct role in the production of capital goods. It had called for a substantial role of the private sector in the industrial development
• Defence of India Rules (interim rule ): The plan suggested by the interim government for industrial development categorized industries into four divisions of which two were exclusively reserved for public sector and these related to core and heavy industrial sectors. Of the remaining two, public and private sectors were allowed access to intermediate industries forming the third sector while the consumer goods industry was reserved for the private sector

[ Trivia : first Industrial Policy Statement of 1948 was a restatement of the 1945 categorization as adopted by the interim government.]

Industrial Policy Statement – 1948

Industries were divided into four broad categories

• Exclusive State: Monopoly included the manufacture of arms and ammunition, production and control of atomic energy and the ownership and management of railway transport
• State Monopoly for New Units
• State Regulated category
• Unregulated private enterprises

Industrial Policy Resolution – 1956

• It was shaped by the Mahalanobis Model of growth, which suggested that emphasis on heavy industries would lead the economy towards a long term higher growth path. The Resolution widened the scope of the public sector. The objective was to accelerate:
• Bombay Plan prepared by leading Indian industrialists in 1944-45 had recommended government support for industrialization, including a direct role in the production of capital goods.
• economic growth and boost the process of industrialization as a means to achieving a socialistic pattern of society.
• The Industrial Policy Resolution – 1956 classified industries into three categories

• The first category comprised 17 industries exclusively under the domain of the Government. These included inter alia, railways, air transport, arms and ammunition, iron and steel and atomic energy.
• The second category comprised 12 industries , which were envisaged to be progressively State owned but private sector was expected to supplement the efforts of the State.
• The third category contained all the remaining industries and it was expected that private sector would initiate development of these industries but they would remain open for the State as well industries but they would remain open for the State as well

Despite the demarcation of industries into separate categories, the Resolution was flexible enough to allow the required adjustments and modifications in the national interest.

Industrial Policy Measures in the 1960s and 1970s

• Industrial Licensing Policy Inquiry Committee (Dutt Committee), constituted in 1967, recommended that larger industrial houses should be given licenses only for setting up industry in core and heavy investment sectors, thereby necessitating reorientation of industrial licensing policy.
• The new Industrial Licensing Policy of 1970 classified industries into four categories.
• First category, termed as ‘Core Sector’, consisted of basic, critical and strategic industries.
• Second category termed as ‘Heavy Investment Sector’, comprised projects involving investment of more than Rs.50 million.
• The third category, the ‘Middle Sector’ consisted of projects with investment in the range of Rs.10 million to Rs.50 million.
• The fourth category was ‘De- licensed Sector’, in which investment was less than Rs.10 million and was exempted from licensing requirements.

The industrial licensing policy of 1970 confined the role of large business houses and foreign companies to the core, heavy and export oriented sectors.

Industrial Policy Statement – 1980

The industrial Policy Statement of 1980 placed accent on promotion of competition in the domestic market, technological up-gradation and modernization of industries

A number of measures were initiated towards technological and managerial modernization to improve productivity, quality and to reduce cost of production. The public sector was freed from a number of constraints and was provided with greater autonomy. There was some progress in the process of deregulation during the 1980s. In 1988, all industries, excepting 26 industries specified in the negative list, were exempted from licensing. The exemption was, however, subject to investment and locational limitations. The automotive industry, cement, cotton spinning, food processing and polyester filament yarn industries witnessed modernization and expanded scales of production during the 1980s.

PRIVATISATION FROM 1991 TO 2014 AND PROS AND CONS

Phases of Disinvestment Policy in India

Phase 1 91 to 99

Disinvestment was mainly through Sale of Minority Shareholding in CPSEs. Mostly, the auction method was adopted for the sale of minority shareholding, though Global Depository Receipts issues have been resorted to as well in the last two years of that phase. There were no Strategic Sales in this period. Ideological focus was on gradual privatization.

Further the focus was also on modernization of PSUs, in order to increase their ‘efficiency’ while protecting the interests of employees. But, the main aim was to mitigate fiscal deficits of the government. It never focused on revenue maximization.

However with Rangarajan Committee a shift from public offerings to strategic / trade sales was witnessed in the field of core and non-core.

Phase 2 99 to 03

The ambit of disinvestment was widened the most during the second phase. Targets higher than ever before were set, a Department of Disinvestment was constituted on 10th December, 1999 and later a full-fledged ministry was set up, an aggressive disinvestment policy was pursued and the government exited several PSUs completely.

Consequently, with higher supply of  PSUs’ shares in still-developing market, prices of equity sold were low, subsequently destroying the value of PSUs, resulting in  government failure to achieve the disinvestment targets.

Phase 3 03 to 009

The government adopted the National Common Minimum Programme (NCMP) and following are the aspects of the programme that related to the public sector5:

• Government was to retain the existing “Navratna” companies.
• The programme stated that profit making PSUs will not be privatized and in line with this disinvestment through strategic sale of profit making CPSEs was called off.
• Public Sector companies and nationalized banks were encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors.

There were no targets fixed and the total receipts. Disinvestment was majorly done through the Offer for Sale or Sale route . It was in this phase that the National Investment Fund (NIF) was constituted. All the proceeds from disinvestment of central PSUs were transferred into this fund and 75% of the annual collections of the fund had to be invested in social sectors. The management of it was assigned to public sector mutual funds.

Phase 5 09-14

The disinvestment process restarted with full vigor but the government didn’t resort to the Strategic Sale route. In most years, the sale of minority shares was done through offer for sale.

How not to disinvest?

A model is followed in India , which neither qualifies as disinvestment nor privatisation. In such transaction—where one PSU is buying out another take place. This result in a transfer of resources already with the public sector to the government and did not lead to any change in the stake of the public sector or government in disinvested PSUs. It can be seen as merely money making exercise  merely money-making measures.(ONGC-LIC, HPCL-ONGC)

Further, government is not exiting completely in many of the PSU thus creating contrived confusion in the policy framework( Air India )

THE CRITICAL ANALYSIS OF PRIVATISATION POLICY BY THE PRESENT GOVERNMENT

Is privatization of bank panacea for success

• Private players in the financial sector are prone to failure: this fact gave the world economic shock of astronomical proportion, which was overreaching created by private bank
• Private banks fail all the time In the 20 years from 2001 to 2020, as many as 559 private banks with assets of $721 billion failed in the US
• The principle followed by private banks is when they make profits, it goes to shareholders: When they make losses, it gets socialised and falls in the lap of the government to make good the deposits either through insurance or taxpayer bailout. (Yes Bank, Federal Deposit Insurance Corporation (FDIC), bailed out the above bank.)
• Big private banks can fail any time: There is a myth that if a bank gets large enough, it will not fail. While one can agree that the larger the bank, the greater its ability to absorb losses, this does not mean it cannot fail. The axiom “Higher you go, harder the fall” applies best to private banks. Yes Bank, Citi Bank, Washington Mutual Bank are all such examples.

Looking at the larger interest

• The move towards divesting ownership in strategic sectors will have long term consequences. A diluted public sector would possibly mean that India missing out on the opportunity to capitalise on the global distrust against Chinese supply lines in the wake of the current crisis.
• Moreover the valuation of PSU is at the all time low. At the start of NDA-2 the valuation of PSU at the BSE was 22% which has reduced to 9.4% at oct 2020.
• At present, because of the crisis presented by the pandemic, it is highly unlikely that more than 10 per cent of the shares of the LIC is subscribed, as the market may not be able to absorb more.

whether privatisation is the only option for PSUs

PSU models in different countries

PSUs exist virtually everywhere. In, Asia where PSUs have played an important role in shaping the economy. According to OECD report ,PSUs pull plenty of economic might —

• in China they account for 30% of GDP,
• in Vietnam 38%,
• and they account for roughly a fourth of GDP in India and Thailand.
• PSUs are also big employers in many of these countries — 15% in China, 5% in Malaysia.
• PSUs play an important role in BRIICS economies.
  • According to a recent KPMG report, of the 2,000 largest companies globally, 260 are from BRIICS economies.
  • About 123 or 47% of the largest BRIICS enterprises are PSU. The market value of PSU amounts to 32% of GNIs (gross national income) among all BRIICS countries.

All the above example shows that privatization is not the only panacea for bringing efficiency, improving productivity , and building productive assets.

THE GLOBAL PRACTICES

Reshaping the PSU buy other countries

Three former planned economies have set up centralized holding entities — SASAC in China in 2003, SCIC in Vietnam in 2007 and Druk Holdings and Investments in Bhutan. In 2006, the Philippines pioneered the development of an PSU governance scorecard which has become an important tool for pushing PSU reforms. Since 2004, Malaysia has rolled out a comprehensive ‘transformation programme” to overhaul its PSUs.

An incorporated holding company Temasek to better manage its assets on a commercial basis was launched in Singapore . This allowed its Ministry of Finance to focus on policymaking. At inception, Temasek’s initial portfolio was of S$354 million, spanning 35 companies. Thereafter began the process of restructuring SOEs. Some were corporatized and privatized, others were allowed to go for big global expansions.

THE CHINA EXAMPLE: 

In 2003, a holding company, the State-Owned Assets Supervision & Administration Commission (SASAC) was created to manage the SoEs. The agency, which controls nearly 100 of the largest SOEs, lies “at the heart of China’s industrial deep state

WAY FORWARD: WHAT INDIA CAN LEARN?

Negative bids :

• The government should permit negative bids: a bid where government pays someone to take the company off its hands. Negative bids were an important part of the massive privatization which took place in Germany after the end of socialism and helped to get productive assets rapidly into the hands of efficient managers in the private sector.

MOU models :

• In  South Korea PSUs with high social obligation operates with private sectors wit the help Of MOUs.
• But one of the most important thing, that is forgotten in the outright privatization of CPSUs is that it is unaccompanied by the necessary reforms in the overall regulatory framework in which they operate. Reforms of the regulatory frameworks and the markets are crucial for the performance of both PSUs and private companies, ensuring a rule-based competitive structure covering entry, exit, bankruptcy and competition among existing companies, as manifested by the the British privatization of 1980s and 90s.

CONCLUSION:

While experience of other countries is available to India by way of guidance, it would have to evolve its own techniques, best suited to its level of development. The historic, cultural, and institutional context influences the way in which and the pace at which privatization is implemented. Where market economy is not fully developed, ways would have to be found to safeguard the interests of consumers and investors, which would ensure a fuller play to the wealth-creating role of the entrepreneurs.

THE CONTEXT: The new currency driving governance today is data. Whether it is the debate on the hunger index or the arguments regarding the caste census, data is at the centre of these controversies: how it is coll­ected, interpreted, and constructed into an index is being vociferously debated by everyone, including those who have only a rudimentary understanding of data. The pandemic management that relies heavily on numbers in terms of testing, vaccinating or tracking recoveries and deaths has only heightened this fascination with data.

EVIDENCE-BASED POLICY

• The reason for this obsession with data is because evidence-based policy (EBP) making or data-based governance has been touted as a rational form of governance that bases its decisions not on populist pressures but on objective data.
• This requires evidence-based data at all stages of policymaking. EBP is viewed as especially important for deve­loping countries where public resources are often scarce or limited. It requires both data and the process of data collection to be scientific, rigorous and validated both in the process of the collection as well as analysis. However, the entire process of data collection and its interpretation often tends to be imbued with political economy issues in deve­loping countries.

DATA TO DATA POLITICS

• Information and communication technologies (ICTs) have had a defining impact on how data is currently viewed as “it rec­onfigures relationships between states, subjects, and citizens”.
• Today, big data, machine learning and algorithms are the frameworks within which citizens operate—oblivious to the manner in which this digital interface is converting them into data to be used by unknown entities.
• In this age of data politics, new players like transnational corporations that control ICT’s and social media domains are becoming more important forces than the state.
• This is alarming as, unlike the checks and bala­nces that limit the state’s influence, these large, transnational corporations are not constrained or held accountable by any such mechanisms. This merits a deeper inquiry.

DATA-BASED GOVERNANCE

• Amassing large, granular data about the citizens by the state through census, periodic surveys, etc. Now through digital convergence has continued unabated and gained further traction in the context of EBP.
• Data-based governance aims to facilitate the use of research and evidence to inform programmatic funding decisions.
• The goal is to further ­invest in what works to improve outcomes for citizens based on prior evidence. In general, data-based governance assumes the existence of a system of reliable, rigorous and validated data with associated infrastructure.
• However, in reality, the governance process is often messy and riddled with political compulsions as governance involves both formal and informal dom­ains, rules and actors.
• This makes governance outcomes even more challenging to measure.
• This is especially because governance outcomes combine tangible outputs and intangible processes.
• Measuring only tangible outputs without capturing the intangible processes is likely to provide misleading inferences. For example, if one is trying to assess women’s participation in a gram sabha, the number of women participants (outcome) needs to be captured and the nature of participation (process) should be documented.
• Often, quantitative data collections focus only on quantifiable measures, thus omitting qualitative processes that give mea­ning to those numbers.

WHY DATA CENTRIC GOVERNANCE (EVIDENCE BASED POLICY MAKING) IS IMPERATIVE FOR DEVELOPING NATIONS

Evidence from randomised evaluations can yield insights and conclusions into questions at the heart of controversial policy debates. Since the past decade or so, evidence-based policy-making has gained traction, with some governments and NGOs having institutionalised processes for rigorously evaluating innovations and incorporating evidence into decision-making.

CASE STUDY:

• The seminal and pioneering work of Noble Prize winner of Abhijit Banerjee, Esther Duflo and Michael Kremer in development economics using randomised evaluations to test the effectiveness of social programmes and policies with the objective of reducing poverty marks a definite shift in discerning development from an entirely theoretical perspective.
• The path-breaking approach that they follow is popularly known as randomised control trial (RCT), which is used to test the effect of small interventions on individual behaviour. The lab has transformed the field of development economics from being mainly theoretical to empirical with high-quality evidence that has influenced piloting, testing, and scaling of effective policies around the globe. For example, with support from Jameel Poverty Action Lab (J-PAL), the Ministry of Education in Peru formed a dedicated unit to identify, test and scale low-cost interventions to improve educational outcomes.
• J-PAL is promoting the scale-up and replication of effective programmes. Randomised evaluations allow researchers to learn not only about the impact of a particular programme but also to draw out the mechanisms behind its success to help derive general lessons that can be applied in the same context.

IMPACT OF THE STUDY:

• From randomised evaluations in India, Ghana and Kenya, researchers learnt why children are behind in school and thereby built a range of cost-effective strategies based on the insight of regrouping students by their current learning level rather than by their age group.
• On the other hand, the Government of Zambia has been able to apply the general idea of “Teaching at the Right Level” (TaRL, an approach developed by Indian NGO Pratham) to inform the design of its own remedial programs. This has significantly improved the learning opportunities in both India and Africa.

IMPORTANCE OF THE STUDY

Cases that highlight the value of EBP in developing nations: one where evidence-based policies transformed lives and the other where the lack of an evidence-based response has caused widespread death.

• First, the Government of Tanzania has implemented various health service reforms informed by the results of household disease surveys. This EBP contributed to over 40% reductions in infant mortality in two pilot districts.
• Second, the AIDS/HIV crisis has aggravated in some countries because respective governments have ignored the evidence of what causes the disease and how to prevent it from spreading further.

EXAMPLES OF EVIDENCE POLICY MAKING IN INDIA

• CENSUS BY MINISTRY OF HOME AFFAIRS
• SWACHH SARVEKSHAN BY MINISTRY OF HOUSING AND URBAN AFFAIRS
• NATIONAL FAMILY HEALTH SURVEY BY MINISTRY OF HEALTH AND FAMILY WELFARE.
• MULTI-DYNAMIC POVERTY INDEX BY NITI AAYOG
• SDG RANKING OF STATES BY NITI AAYOG
• ASER REPORT BY PRATHAM NGO

CHALLENGES OF POLICY MAKING

• States routinely gather vast quantities of administrative data. However, large proportions of these data remain unutilised or are unusable as ­often these administrative data are not validated or updated.
• At times, the same data is collected by different agencies with different identifiers making integration or consolidation of data difficult. To avert duplication of data, which is costly both in terms of human as well as financial resources, it is essential to standardise data collection across departments.
• Data starts to become scarce and variable at lower tiers of governance, for instance, the devolution of funds at the sub-block level is often opaque and self-reported without external validation. This makes matching of funds, particularly untied grants with specific functions at the sub-block level challenging as funds are often fungible.
• Administrative data is generally inaccessible to the public and researchers for scrutiny or analysis. Citing the example of Denmark, where opening up of administrative data on tax collection gave significant insights that led to key tax reforms, advocate encouraging and incentivising governments to share the administrative data, especially in the context of Sustainable Development Goals (SDGs).
• Measuring governance is a challenging proposition. This is particularly true in the domain of law and order, which is an essential aspect of governance. Two studies aiming to measure governance across states in India by developing a composite governance index lay bare the challenges of choosing appropriate indicators and their measurement and interpretations.

WHY DATA-CENTRIC GOVERNANCE IS THE RIGHT STEP TO CHOOSE AND HOW INDIA CAN ACHIEVE IT?

• India is mired in a data-driven world. Governance is increasingly being pushed to become data-centric.
• Data-centric governance or policymaking is a step in the right direction. However, the paradox of data-centric governance in India right now is that it is caught between two countervailing forces—a rel­entless churning of digital and other forms of data that are often unreliable and/or prone to errors on the one hand and a steady erosion of credible, scientific sources of data on the other.
• If governance decisions are to be data-centric, there is a need to ensure a good, robust and reliable database system. With several national statistical bases, such as the National Sample Surveys, that provide an interim glimpse into the trajectory of the economy in between the decadal census counts, getting eroded either through delays or data suppression, the danger of a “statistical vacuum” has been raised by some scholars (like Drèze) and others who have advocated a decentralised system of data collection process where states take the lead in building their own bottom-up databases.
• This requires individual states to invest heavily in both human and technical infrastructure with built-in quality control measures to ensure those policy decisions are based on robust and rigorous data.
• Finally, it is equally essential to ack­nowledge that policymaking is a contested space that is interactive, discursive and, therefore, a negotiated process.
• In the global South, the rigorous, constant implementation of data-based governance or policymaking is likely to be challenging. The government often discretionary policy decisions need to be taken by the government by prioritising one group over the other to redress historical inequalities.
• Thus, data-based governance req­uires not just validated and scientific data but also requires the policymakers to use it wisely by contextualising it to ensure equality and equity.

THE WAY FORWARD:

• Data-driven governance is being touted globally as a new approach to governance, one where data is used to drive policy decisions, set goals, measure performance, and increase government transparency.
• Evidence-based policymaking (EBP) assists in making decisions about projects, programmes and policies by placing the best available evidence from research conducted at the heart of policy development and implementation. It also makes explicit what is known through scientific evidence.
• In contrast to opinion-based policymaking, evidence-based policymaking needs an evidence base at all stages in the policy cycle to define issues, shape agendas, make action choices, identify options, deliver them, and monitor their impact and outcomes. Basically, it is a set of methods that informs the policy process, rather than aiming to directly affect the eventual objectives of the policy directly. Thereby, EBP advocates a more systematic, rational and rigorous approach to produce better outcomes.
• The pre-requisite for evidence-based policy is that the data must be trustworthy, and it depends upon the quality of the data and the quality of the professional statisticians.
• Credible statistics is important for good governance and decision-making in all sectors of society. Therefore, policy-makers are more likely to use evidence in decision-making if that evidence is unbiased, rigorous, substantive, relevant, timely, actionable, easy to understand, cumulative and easy to explain to constituents. EBP approaches can dramatically help reduce poverty and improve economic performance in developing nations.
• Impact evaluations of social programmes have emerged as an important tool to guide social policy in developing polities as they allow for accurate measurement and attribution of impact can help policy-makers identify programmes that work and those that do not work, so that effective and performing programmes can be promoted and ineffective ones can be discontinued.

THE CONCLUSION: The EBP has the potential for high impact change that India shouldn’t ignore. Thereby, systemic institutionalisation of EBP is the way forward in eradicating poverty and improving economic performance, education, health care, and social assistance for millions of people. But, if governance decisions are to be data-centric, there is a need to ensure a decentralised, robust, reliable database system. Data-based governance requires not just validated and scientific data but also requires the policymakers to use it wisely by contextualising it to ensure equality and equity.

The Context: Amid widespread economic disruptions caused by Covid 19 pandemic, the discussions on Universal Basic Income (UBI) and its forms have gained momentum. Recently, NHRC had informed UNHRC that the idea of UBI is being actively considered by the Union government. UNDP, in a recent report, recommended immediate introduction of a Temporary Basic Income for the world’s poorest so that people could stay at home amidst rising number of cases.

What is UBI?

• According to Basic Income Earth Network (BIEN), “A basic income (BI) is a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement.” (A means test determines eligibility of a person or household to receive welfare benefits)
• Basic income (BI) is a fixed income an adult receives from government by the virtue of being citizen. It is “basic” because it is just enough to provide for basic consumption and income security. The idea is that a society should look out for its people’s survival.
• UBI has three components: universality, unconditionality, and agency(by providing support in the form of cash transfers to respect, not dictate, recipients’ choices).

What are different forms of UBI?

• Forms vary on the funding proposal, the level of payment, the frequency of payment, and the particular policies proposed around it.
• Each of the parameters (a universal, unconditional, individual, regular and cash payment) is fundamental.
• In Indian discussions, the term is frequently used but most discussions revolve around some sort of a Quasi UBI which is based on exclusion rather than inclusion criteria. (The rich are excluded rather than including the poor).
• A Guaranteed Basic Income is a guaranteed, non-universal income transfer to the poor which is enough to provide for their basic needs. Its only difference with UBI is ‘universality’.

Defining characteristics of UBI

• Periodic
• Cash payment
• Universal
• Individual
• Unconditional

DIFFERENT UBI PROPOSALS

Universal Basic Income (UBI)

An unconditional cash transfer to all residents in a country.

Guaranteed Minimum Income (GMI)

A social assistance means-tested scheme similar to UBI but targeted to the poor.

Quasi Universal Basic Rural Income (QUBRI)

Proposed by Arvind Subramanian, to tackle the agrarian and rural distress in India. 75% of the rural population (farmers and non-farmers) can be covered by not targeting IN the deserving poor but excluding OUT the demonstrably non-poor.  It is advocated as a more effective policy than MSP and loan waivers.

Partial Basic Income (PBI)

Any income guarantee set at a level that is less than enough to meet a person’s basic needs.

Negative Income Tax (NIT)

Proposed by Milton Friedman. It is an income support payment for individuals with no income. The amount reduces with increasing income. Break-even point is fixed at a certain level of income and after that point taxes start.

IS THIS A NEW IDEA?

• The idea was first suggested by Sir Thomas More in 16th century and in 1970s, it was advocated by free-market economists such as Friedrich Hayek and Milton Friedman.
• ‘Industry 4.0’ may permanently reduce the demand for labour leading to job losses, stagnant incomes and worsening inequality.
• Previously, technological developments mostly affected less skilled workers which required greater investment in education and skilling.
• The fears are that new digital technology is also destroying higher-skilled, better-paid jobs.
• Hence it will no longer be possible for governments to deal with unemployment, insecure work and stagnant incomes by usual measures.
• In India a Planning Commission study of 1962 led by Pitambar Pant analysed how every citizen could be guaranteed a minimum standard of living by 1977.
• The idea was discussed by the 2016-17 Economic Survey. It was part of manifesto of Congress Party (NYAY) in 2019 Lok Sabha elections.
• Basic income has moved into the mainstream of public debate in contemporary times mainly as a a response to two concerns which aggravate each other:
  1. Structural changes in the global economy – low wages and insecure employment with increasing the mobility of capital and increasing incomes from ownership of capital resulting in high inequalities. Thomas Piketty and Oxfam have drawn attention to this.
  2. ‘Industry 4.0’ and associated technological changes are expected to worsen these problems especially in developing countries.
• UBI is argued to be a better and efficient policy alternative to combat poverty, rising inequalities and unemployment.
• Its advocates range across the ideological spectrum. It is by both developed and developing countries for reasons which are briefly discussed in the table below.

JUSTIFICATIONS FOR DEVELOPED AND DEVELOPING COUNTRIES

DEVELOPED COUNTRIES

• Ageing population, stagnant median incomes, demand slump
• Increased automation (industrial revolution 4.0), rise of gig economy and job insecurity

DEVELOPING COUNTRIES

• Poverty alleviation
• Failure of trickle down model
• Reduction of market distortion caused by government subsidies
• Administrative efficiency

How the context of present discussions is different?

• Covid‐19 presents the need for rapid and immediate relief. An income support can provide immediate help due to its design simplicity.
• Growth Contraction – Global growth is projected to be -4.9% (IMF, WEO, June update) in 2020. India’s GDP growth is projected at -4.5% (IMF, WEO, June update), lowest since 1961.
• Unemployment – the lockdown may push almost 40 crore people into poverty (ILO). Unemployment, already at a 45-year high in 2018, will only rise post-Covid-19. Even if there is a faster recovery, employment growth will take longer to recover.
• Large unorganized sector – Almost 90% of India’s workforce is in the informal sector characterized by less than minimum wages and no social security. This sector has also witnessed widespread job losses. Present schemes serve only pre-existing set of beneficiaries and a large number of deserving individuals are left out.
• The economic consequences of the virus will remain for several months ahead. Governments around the world are considering income transfers to ensure basic sustenance for the poor and vulnerable groups and boost domestic demand, at least till the economy normalises.

What is the case for Basic Income?

A) Social Justice

• UBI promotes a just and non-exploitative society.
• A society that fails to guarantee a decent minimum income to all citizens will fail the test of justice (John Rawls).
• UBI respects all individuals as free and equal. It promotes liberty because it is anti-paternalistic.
• It also promotes equality by reducing poverty.

B) Poverty Reduction

• A Basic Income may be the fastest way of reducing poverty.
• UBI is also more feasible in a low middle income country like India, as relatively low levels of guaranteed income can yield immense welfare gains.
• Such a scheme can address intra-household poverty and vulnerable sections such as small and marginal farmers, informal and low skilled workers and women.
• It can also act as a safety net against events like sudden job losses, income shocks and health issues which can trap individuals into poverty.

C) Agency

• The current welfare system reduces dignity of the poor by assuming that they cannot take correct economic decisions.
• As different individuals face different dimensions of poverty, the state is not in the best position to take economic decisions for them.
• BI releases citizens from paternalistic and clientelistic relationships with the state. A basic income treats them as active agents, not passive recipients.

D) Employment

• BI can provide minimum income security in an era of uncertain employment generation.
• It can create flexible and non-exploitative labour markets since individuals will no longer be forced to accept unjust working conditions for subsistence.
• It would not result in withdrawal of beneficiaries from the labour force if the income support is not too large.
• In fact, it can promote employment and economic activities as extra income can be used as interest-free working capital.
• While programmes like MNREGS lock up beneficiaries in low-productivity work, income support will provide them the opportunity for skilling and better employment options.

E) Administrative Efficiency:

• Existing welfare schemes suffer from defects like misallocation, leakages and exclusion errors.
• When the JAM trinity is fully adopted, a more administratively efficient mode of welfare delivery can be implemented.
• An income support scheme is better due to its in-built simplicity. (Abhijit Banerjee)

F) Alleviating rural distress

• LPG reforms have largely passed agriculture, rural India and the poor. This has resulted in agrarian and rural distress.
• The latest NSS All India Debt and Investment Survey (2013) show over 70% rural population is indebted.
• The poor borrow to meet consumption as well as contingency needs and rarely for productive purposes. They rarely accumulate assets.
• A guaranteed income transfer will reduce their vulnerability, boost rural demand without affecting labour-supply.

WHAT IS THE CASE AGAINST BASIC INCOME?

A) Reduces the incentive to work

• An income guarantee will discourage potential workers.
• Necessity is one of the dominant motivations for work without which workers will choose leisure over work.
• It has potential to create labour market distortions by affecting labour mobility like MGNREGA.
• But a minimal level of income support is unlikely to be a disincentive to work.
• Basic income is not meant to replace employment. One cannot live entirely on basic income.

B) Should income be detached from employment?

• Traditionally income and employment have been aligned in most societies
• But, society already delinks income from employment the rich and privileged in the form of inheritance or non-work related income.

C) Reciprocity

• Society is a “scheme of social cooperation” and income should be conditional to individual’s contribution to society (eg MNREGS and Food for Work programmes)
• But, social objectives dictate to create a society where extreme poverty doesn’t exist.

A Brief Summary of arguments

Favour

• Poverty and vulnerability reduction
• Choice and Agency
• Better targeting (inclusion) of poor.
• Insurance against income and other shocks.
• Improved financial inclusion due to greater usage of bank accounts and higher profits for banking correspondents (BC). Access to credit will improve due to increased incomes.
• Psychological benefits
• Administrative efficiency

Against

• Conspicuous and wasteful spending.
• Moral hazard (reduction in labour supply)
• Increased gender disparity as men are likely to exercise control over spending.
• Difficult implementation due to the current status of financial inclusion among the poor.
• High fiscal cost given political economy of exit. It may become difficult for the government to withdraw the scheme in case of failure.
• Opposition may arise from inclusion of rich individuals.
• Exposure to market risks (cash vs. food)

What is the evidence from empirical studies?

Various pilots and experiments have been conducted. Two of them are discussed below:

India

A pilot project conducted between 2010 and 2013, by SEWA, UNICEF and UNDP covering 6,000 beneficiaries in Delhi and Madhya Pradesh.

Findings

• An unconditional income support was not a major disincentive to work.
• Beneficiaries became more productive as they shifted from wage labour to own cultivation which resulted in increased agricultural production and land cultivated.
• Improved nutritional uptake, school enrolment and attendance of female students and reduced incidence of indebtedness were observed.
• No statistical evidence of any increase in economic “bads” such as consumption of alcohol and tobacco.
• The study also shows that a right amount as a basic income has disproportionately higher positive effect than the monetary value.

Finland

Introduced its version of the UBI in 2017 as a social-welfare experiment for the unemployed section of society with roughly $600 every month as financial aid.

Findings

• Beneficiaries enjoyed greater financial security and mental health but there was no disincentive to work.
• They were free to do work they found meaningful, they were more able to take flexible but insecure opportunities
• But the trials have been inconclusive, showing psychological improvements among recipients but limited success in achieving economic or social objectives.

Recently, the Spanish government has decided to implement a national minimum income. People in around 1 million low-income households will get roughly $500 a month in income. The plan aims to reach 2.3 million people, and is expected to cost the government about 3 billion euros a year.

How a Basic Income Scheme is better than in-kind schemes?

A) What are the drawbacks of existing schemes?

• Large number of schemes – The Union government runs about 950 central sector and centrally sponsored sub-schemes accounting for about 5% of the GDP.Besides, most of the central sector schemes were ongoing for at least 15 years and 50% of them were over 25 years old. (Economic Survey 2015-16)
• Misallocation of resources across districts – The poorest districts receive a lower share of government resources when compared to their richer counterparts. The backward districts together accounts for 40% of the poor but receive 33% of the resources.
• Exclusion of genuine beneficiaries – Misallocation would mean that then some genuine beneficiaries would be excluded. For instance, Bihar, Madhya Pradesh, Rajasthan, Orissa and Uttar Pradesh account for over 50% of the poor in the country but access only a third of the resources spent on the MGNREGS in 2015-16.

B) How can income transfers overcome these Issues?

a) Misallocation

• The UBI, by design, should effectively tackle issues related to misallocation.
• The simplicity of the process also implies that the success of a UBI depends much less on local bureaucratic ability than other schemes.

b) Out of system leakage

• Could be reduced as direct transfers are made to the beneficiaries’ bank accounts.
• Since discretionary powers of authorities are eliminated almost wholly, the scope for diversion is reduced considerably.

c) Exclusion error

• Given the link between misallocation and exclusion errors, exclusion errors should be automatically reduced.
• Due to expanded coverage, exclusion errors under the scheme should be lower than existing targeted schemes.
• Most of these schemes are non-universal targeted programmes whose main problem is identification.
• Narrowly-targeted programmes are prone to exclusion and inclusion errors out of system leakages.

The core arguments over a universal basic income remain but Covid 19 pandemic makes a case for emergency temporary income payments targeted at the poor.

How the poor can be targeted?                                                                                                                                     

• India’s record of targeting has been poor with evidences of data manipulation and corruption, exclusion of the poor and leakages to the rich. Targeting was both inefficient and inequitable.
• Recognizing this, individual states- like Tamil Nadu and Chhattisgarh – universalized the PDS and a few other government schemes. The NFSA (2013) also mandated access to the PDS to nearly 70% of all households, choosing to exclude only the identifiably well-off.
• Empirical evidence suggests that the higher the coverage, the lower the leakages. Thus there is a gradual move towards greater inclusion error in order to avoid exclusion issues.
• But if basic public services are maintained, there is limited fiscal space for direct income support. It will have to be limited to some extent. Instead of targeting IN the poor, demonstrably well off should be targeted OUT.
• Datasets like SECC, 2011 can be used. It can be complemented by other datasets like the Agriculture Census, 2015-16 (small and marginal farmers), MGNREGA rolls from 2019 and those covered by Jan Arogya and Ujjwala schemes. Aadhaar can be used to rule out duplications.
• But none of these lists are perfect. The priority should be to err on the side of being inclusive.

Where is the fiscal space to finance a BI scheme?

• Indian economy was struggling even before the Covid-19 crisis. The fiscal deficit was already higher (4.6% of the GDP) than the limit prescribed by the FRBM Act (3.8%). Due to economic slowdown, revenue collection will also be certainly lowered this fiscal.
• Yet most observers have argued that in these extraordinary circumstances, if India believes that a basic income is required, then it should be able to find the money for it.
• Former Chief Economic Adviser Arvind Subramanian has suggested various measures to create the fiscal space like reallocation of budget outlays, external borrowing, issuing government bonds and direct monetization of government deficit (having the Reserve Bank “print money” in exchange for government bonds).
• An analysis of budgetary allocations revealed that reduction of allocation by half to 11 departments, such as the election commission, department of posts etc could free up funds up to about 1% of the GDP.

ILO Recommended Financing Mechanisms

• Re-allocating public expenditures
• Increasing tax revenues
• Lobbying for aid and transfers
• Eliminating illicit financial flows
• Using fiscal and central bank foreign exchange reserves
• Restructuring existing debt

a) Streamlining inefficient subsidies

• Fiscal space for a basic income scheme can be created by streamlining and removing some extremely inefficient and difficult–to-remove middle class subsidies like the subsidy to Air India and fertilizer subsidy (Abhijit Banerjee)
• Estimates by NIPFP suggest that subsidies (central plus state) that mainly go to better-off people (‘non-merit subsidies’) amount to about 5% of GDP. The Economic Survey 2016-17 estimates that central subsidies for the non-poor/middle class households are equivalent to about 1% of GDP.
• A basic income should be additional to the poor’s existing consumption which includes consumption from public programs (PDS, MNREGA, etc.).
• Healthcare, education, water conservation and other merit subsidies should not be reduced to fund income transfers as these are meant for long-term improvement in human development.

b) Taxation

• ‘Revenues foregone’ (primarily tax concessions to companies) in the Union Budget are about 6% of GDP (2014-15 actuals). At least one-third of these revenues foregone can be made available.
• There is also scope for more taxation. India has a low tax-to-gdp ratio (around 10.6%) which is substantially lower than in China, Brazil and some other developing countries.
• Arvind Subramanian argues for redistributive equality for financing a basic income scheme by relying on a wealth tax of 1.5% for billionaires, a tax on properties worth more than Rs 1 crore and eliminating some “middle class subsidies”.

c) Merger of existing schemes

• The top 10 centrally sponsored or central sector schemes (not including subsidies) cost about 1.4% of GDP (2014-15 actuals) and the remaining 940-odd sub-schemes account for 2.3%.
• Many of these schemes have overlapping objectives and can be merged.
• Some resources may also be released by terminating some of the wasteful welfare programmes, but programmes like ICDS, mid-day meals, and MGNREGA should not be replaced.

d) State’s contribution

• The Central and state governments should work together because the Centre can provide resources more easily while the states will have a critical role in implementation.
• Initially, a minimum UBI can be funded wholly by the centre.
• The centre can then adopt a matching grant system wherein the centre’s contribution is equal to the state’s contribution.

While the fiscal space exists for a basic income scheme, the government will have to decide what expenditures to prioritize. Though BI may seem to be an attractive policy option, it should not take over the fiscal space for a well-functioning state. As the present crisis will persist for some time, former RBI Governor Urjit Patel has advocated that the government should keep some fiscal space open. At the same time adequate funding should be made available to help those suffering from severe deprivation.

How should an UBI should be designed and implemented?

The design should incorporate lessons learned through pilots and other experiments. It should consider the following constraints and guiding principles.

Constraints

• maximum possible coverage but no strict universality
• containing fiscal costs
• difficulty of exit from existing programmes
• the implementation capability of the Indian state

Guiding Principles

• De jure universality, de facto quasi-universality – to reduce the powerful resistance and high fiscal costs produced by complete universality, the scheme should approach targeting from an exclusion of the non-deserving perspective than the current inclusion of the deserving perspective.
• Gradualism – the UBI must be embraced in a deliberate, phased manner, weighing the costs and benefits at every step.

Schemes similar to UBI in India

• National Social Assistance Programme
• DBT for various scholarships and LPG subsidy
• PM Garib Kalyan package
• PM-KISAN
• Rythu Bandhu
• KALIA
• Rythu Bharosa

Considering the above some of the probable approaches are mentioned below:

• Start by offering UBI as a choice to beneficiaries of existing programs.
• UBI for women – Empirical evidence shows the higher social benefits and the multi-generational impact by investing in women.
• Universalize across groups – Basic Income first for certain vulnerable groups – widows, pregnant mothers, the old and the infirm.
• Redistributive resource transfers to states – A part of the redistributive resource transfers may be transferred by the centre directly into beneficiaries’ accounts.
• UBI in urban areas – These areas are less likely to suffer from poor banking infrastructure and lack of individuals with bank accounts.

Prerequisites for Success: JAM

• Effective financial inclusion and expansion of banking infrastructure is crucial for the success of basic income scheme.
• To reduce leakages a transparent and safe financial architecture that is accessible to all is required which can be provided by JAM.
• Success of the BI depends on the success of JAM.

How should UBI be determined?

• The 2016-17 Economic Survey calculated an income of Rs 7620/ individual/year based on the 2011-12 poverty estimates (Suresh Tendulkar).
• As the methodology adopted by the Suresh Tendulkar committee faced severe criticisms, there is a need to reassess what constitutes the minimum consumption basket.
• Although there is no universal principle of determination but a target a transfer should represent about 1/3rd of the current consumption of the poorest 40%.
• Income transfers can have various slabs as per multiplicity of deprivations and degree of vulnerability (as per SECC data).
• As Abhijit Banerjee has argued, the key is to create fiscal space first.

How to shield the income transfers from politics and inflation?

• To protect the ‘real’ value of cash transfers from inflation it should be revised periodically by indexing it to CPI.
• A politically neutral mechanism should be created to insulate the amount from blowing up due to competitive politics. For this income transfers could be set as a constant proportion of GDP.
• Alternatively, a special fund financed on a permanent basis from wealth and property taxes and the revenues from elimination of middle class subsidies can be created. (Subramanian)

What are the implementation challenges and concerns?

A) Financial Inclusion

• Financial inclusion in India has progressed substantially since the PMJDY but still nearly 1/3^rd of adults, mostly women, SCs, STs and elderly still do not have a bank account.
• Researchers have found that 53% of poor women in India don’t have PMJDY account.
• Last mile concerns – In a majority of states people are 3-5 km away from any form of access point (bank branches, ATMs and BCs). 26% of poor women live more than 5 km away from their nearest banking point
• In terms of JAM preparedness, considerable ground has been covered, but there is quite some way to go.
• Independent evaluations of the pilot exercises of DBT in lieu of PDS in Chandigarh and Pondicherry emphasize the need for an improved digital financial infrastructure.

B) High Fiscal Costs

• Cash transfers offering even poverty-line income are estimated to cost around 10% of GDP.
• In theory, non-merit subsidies could be abolished but in practice, this is politically unlikely. Therefore cash transfers may be over and above current expenditure.
• Also, the fiscal deficit has already breached the limit and government revenues are expected to decline sharply this fiscal.
• Additional borrowing can be counter-productive as higher fiscal deficit will fuel inflation which will hurt the poor the most.

C) Political challenges

• Vested interests against replacing existing welfare programmes are too strong.
• Once implemented, competitive politics will ensure the continuation of schemes like BI, even if it fails.
• Electoral competition will push the amount of BI further at the risk of fiscal imbalance.

D) Authentication errors

• While Aadhar is designed to solve the identification problem, it cannot, on its own, solve the targeting problem.
• While Aadhaar coverage has improved but some states report authentication failures: 49% failure rates are estimated for Jharkhand which has led to starvation deaths.
• Failure to identify genuine beneficiaries result will in exclusion errors.

E) Supply side and capacity problems

• A basic income can address the problems of demand and purchasing power, but not supply-side and capacity problems.
• Without addressing supply-side bottlenecks, income support will be inflationary.
• But inflationary pressures may trigger a virtuous cycle with entrepreneurs responding to the assured demand.

F) Leakages

• While evidence supports universalization of in-kind transfers reduced leakages in India, it is not clear if a cash transfer will necessarily result in lower leakages.
• Due to very large amount of cash flowing through the system, there could be a perverse incentive resulting in greater corruption.
• It is an open question if a basic income today will necessarily work better than simply universalizing other in-kind transfers it tends to replace.

Way Forward

Basic income may be a good idea which can lead to improved health and educational outcomes and a more productive workforce. But it is untested anywhere with India’s level of income disparity and inequality. There is need for good large scale pilots of sufficient time to generate empirical evidence.

At the same time, basic income system is not a substitute for state capacity; it is a way of ensuring that state welfare transfers are more efficient. In the long run, state capacity needs to be enhanced to provide a whole range of public goods. State institutions must be strengthened to deliver the universal basic services (7 core services: health care; education; shelter; food; transport; legal and democracy; and information – which should be available to all citizens regardless of their ability to pay) and to regulate delivery of services by the private sector. Direct transfers should not be at the expense of these services.

BI should not decrease the incentive for real reforms like land and labour reforms, justice system reforms, logistics and connectivity infrastructure etc. Jobs creation remains crucial and focus should be on deepening and widening the labour market. A BI could remain as a safety net, but not as an alternative to employment generation.

For now, a targeted income support should be the priority rather than universal one because poorer households require more help than richer ones. Income support would boost demand as well as provide a safety net.The situation surely justifies temporary emergency income payments rather than a permanent income stream. The recent UNDP report concludes that the measure is feasible and urgently needed. A guaranteed basic income system can be a source of basic security for the poor. It should be paid at least for the duration of the pandemic and economic slowdown.

Raghuram Rajan has also advocated a temporary income transfer scheme. But Jean Dreze is skeptical that an emergency BI scheme can be quickly implemented. He voices concern if income transfers are meant to replace programmes like PDS and MGNREGS.

Rapid and inclusive economic growth is the most powerful poverty-reduction tool in the long term. In the interim, the core complementarity between income and in-kind transfers should be understood. A mix of cash as well as in-kind transfers like food is vital for an efficient response to the crisis.

THE CONTEXT: In order to deal with the Covid-19 pandemic, governments across the world have imposed measures like lockdown and social distancing. However, these measures have caused collateral damage to almost every sector of the economy, so much so that the IMF held the current economic crisis could be the worst ever since the Great depression 1929. There is a need for the preservation of the socio-economic system during the Great Lockdown. The government of India can think of implementing Emergency Basic Income (EBI). EBI is a kind of Universal Basic Income provided during a crisis like the Covid-19, but subject to a rollback when normalcy returns.

THE PRESENT ECONOMIC CRISIS DUE TO COVID-19

The present situation poses a unique economic challenge. Unlike a normal slump, when policies can be tailored to finance and raise demand, here, the challenge is of keeping productive capacity intact, even as many firms and workers remain idle.The global economic system that has taken shape over the past four decades is much more fragile than in 1918. What further distinguishes the current crisis from earlier ones, including the 2008 financial crisis is that this one is not just economic but also a social one, instantly affecting the lives of everyone in more ways than one. Millions are going to lose their incomes and will not be able to get daily necessities for survival.

According to Nobel Prize-winning economist Paul Krugman called the present situation “coronacoma”, means it the economic equivalent of a medically induced coma, “in which some brain functions are deliberately shut down to give the patient time to heal.”

As Krugman argued, the economic response to the crisis will have to include two parts:

1. An immediate disaster relief component- that ensures the survival of both firms and workers who have been rendered idle.
2. A stimulus component – that aims to repair and restart production lines during the exit phase of the lockdown.

For a country like India, with a large informal sector and a weak social safety net, the immediate disaster relief component is going to be much tougher than the stimulus component.India’s informal economy has about 50 crore working persons and would be among the most affected by the COVID-19 related shutdowns.

THE RELIEF MEASURES BY INDIA

The Union and state governments have announced some relief measures, they appear to be grossly inadequate to meet the challenge. Compared to most other countries, India’s relief-cum-stimulus measures so far appear puny.

India’s measures are very lower than the fiscal packages announced by various countries.

• The US announced a $2.2 trillion stimulus on a $20 trillion GDP base.
• Malaysia, whose per capita income is four times that of India, has announced a package that is 16 times bigger.
• Even poorer neighbour Pakistan has a much larger covid-19 response package (as share of its GDP) compared to India.
• Thailand, whose per capita income (PPP) is a little more than two times that of India, has announced a package that is 10 times bigger (as a share of GDP) than India.

EBI IS NEED OF THE HOUR

Due to the present lockdown, millions may lose their incomes and face difficulty in receiving things of daily necessities for survival, resulting in social unrest. The Emergency Basic Income (EBI) could solve this unrest.

The Emergency Basic Income (EBI) is a kind of

What is Universal Basic Income?

• The Economic Survey of India 2016-17 has advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty.
• Idea behind the Universal Basic Income is that every person should have a right to a basic income to cover his needs, just by virtue of being a citizen.

The components of UBI

UBI has three components

• Universality- It is universal in nature.
• Unconditionality- There are no preconditions attached with the cash transferred to the beneficiary.
• Agency – Respecting the poor persons’ decision making ability and not having a paternalistic attitude towards them.

Universal Basic Income(UBI) provided during a crisis like the Covid-19, but subject to a rollback when normalcy returns.

• The EBI provided through the direct cash transfer mechanism will not only arrest potential social unrest but also ensure that there is continued aggregate demand to sustain the economy.

Some of the states have announced the enhancement of rations under the Food Security Act.

• While providing additional foodgrains is useful, with broken supply chains and crumbling logistics, it may have its own challenges.
• Also, the circumstances, risk and shocks in which people are trapped in lockdown are varied. The EBI allows that individual to decide how such risks should be mitigated and how priorities are to be set.
• Thus, EBI will complement the steps (providing essential goods through PDS) taken by the government.

The lockdown has dragged many people into the poverty trap. Thus, EBI may simply be the fastest way of reducing poverty induced by the lockdown.

Existing welfare schemes are riddled with misallocation, leakages and exclusion of the poor. However, the trinity of Jan-Dhan, Aadhaar and Mobile (JAM) can enable proper implementation of EBI and can reduce inclusion and exclusion issues to a larger extent.

CHALLENGES

• Although most people have a unique ID by now (Aadhaar), the most vulnerable section of society doesn’t have Aadhar and a functional bank account or access to mobile or internet (for e-transfers).
• The latest district-wise data on these parameters come from the National Family Health Survey for 2015-16. It showed that despite gains in access to bank accounts and mobile phones, there were still significant disparities across districts. Internet access was limited across most districts.

• The Union Government has sought to provide Rs 500 per month to women in a household (during the lockdown). However, the amount is quite low to call it a significant income support.
• Already Indian government has been facing a financial crunch with respect to social sector schemes. Thus, providing an EBI may add to the fiscal burden of the government.

WAY FORWARD

The EBI programme with a fixed and transparent clause can inspire the confidence of both ordinary citizens and help resolve the trade-off between lives and livelihoods. EBI must also include an in-kind transfer component. The ratio of cash to in-kind transfers is something that is best left for states to decide. The Union Government can channelize the savings from the global crude oil price fall to fund EBI, without compromising macroeconomic fundamentals. There is need for a functional JAM (Jan Dhan, Aadhar and Mobile) system, as it will ensure that the cash transfer directly into the account of a beneficiary.

CONCLUSION: In the outbreak of COVID-19, several countries are considering massive fiscal stimulus packages to blunt the concurrent crises of the pandemic and the unravelling economic depression. In such situation, Emergency basic income will not only arrest potential social unrest but also ensure that there is continued aggregate demand to sustain our economy. Like other countries, India too could explore unconventional options, such as a special purpose vehicle, to fund this programme as long as the Great Lockdown lasts.

THE CONTEXT: In June 2021, the export of about 500 tonnes of rice from India has triggered an uproar in several European countries on the grounds that it was genetically modified (GM) rice. It was due to the use of one ingredient: rice flour with genetically modified (GM) contamination that allegedly originated in India, according to notifications on the European Commission’s rapid alert system.

However, the Indian government has denied this possibility with a Commerce Ministry spokesperson alleging that the contamination may have happened in Europe “to cut costs”. In this backdrop, India has indicated that it will commission an investigation involving its scientific bodies.

In this article, we will analyse, what are GM crops, their merits, implications, causes and their way forward for India.

WHAT IS THE ISSUE?

India asks European Commission to back up GM-rice claims with evidence

The Centre has identified a Maharashtra based exporter as Omprakash Shivaprakash, a wholesaler from Akola in Maharashtra.

Also, it’s stated, “There is no possibility of cross-contamination even during inland transit as the final sample was prepared at the port of loading by an independent inspection agency which is internationally accredited, which after proper testing and verification have obtained a non-GMO proof prior to shipment, the certificate was issued by Bureau Veritas (India) Pvt Ltd.

“GMO contamination was suspected in rice flour that was processed in the European Union, and they themselves are not sure of the exact source of the contaminant. Exported from India,” a commerce ministry statement said. Broken white rice, which is reportedly one of the possibilities, has passed through several hands before reaching the actual processors in the European Union.

Reiterating that GM rice is not grown commercially in India, the ministry has asked genetic and rice experts including the Indian Agricultural Research Institute (IARI) to conduct an investigation.

WHAT ARE GM CROPS?

• Genetically Modified Organisms are defined as organisms including plants, animals, and micro-organisms in which the genetic material (DNA) is altered in a way that does not occur naturally by mating or natural recombination.
• The technology used is referred to as gene technology, genetic engineering, or recombinant DNA technology. GM crops are those crops whose DNA has been modified by introducing alien genes in the seeds to get desired effects such as resistance to pest attacks.
• Unlike what plant breeders did traditionally in cross-breeding by combining genes from the same or closely related plant species, GM technology does not restrict trait selection. Genes from any living organism, be it plants or animals, is used to arrive at the desired traits.
• India has approved the commercial cultivation of only one GM crop, Bt cotton. No GM food crop has ever been approved for commercial cultivation in the country. However, confined field trials have been allowed for at least 20 GM crops.

GM CROPS IN INDIA

Golden rice:

It is a variety of rice produced through genetic engineering to biosynthesize beta-carotene, a precursor of vitamin A, in the edible parts of rice. It is intended to produce a fortified food to be grown and consumed in areas with a shortage of dietary vitamin A.

Vitamin A deficiency causes xerophthalmia, a range of eye conditions from night blindness to more severe clinical outcomes such as keratomalacia and corneal scars, and permanent blindness. It also increases the risk of mortality from measles and diarrhoea in children.

In 2013, the prevalence of deficiency was the highest in sub-Saharan Africa (48%; 25–75), and South Asia (44%; 13–79).

Although golden rice has met significant opposition from environmental and anti-globalisation activists, more than 100 Nobel laureates in 2016 encouraged the use of genetically modified golden rice which can produce up to 23 times as much beta-carotene as the original golden rice

Bt Cottons:

Bacillus thuringiensis (Bt) cotton is a genetically modified plant. For the time being, the genetically modified crop that is under cultivation in India is Bt cotton which is grown over 10.8 million hectares. Bt Cotton was first utilize in India in 2002.

Bt Brinjal:

The Genetic Engineering Appraisal Committee (GEAC) in 2007 recommended the commercial release of Bt Brinjal, which was developed by Mahyco (Maharashtra Seeds Company) in collaboration with the Dharwad University of Agricultural Sciences & the Tamil Nadu Agricultural University. But the proposal was blocked in 2010.This has been commercially grown in Bangladesh since 2013.

GM Mustard:

Dhara Mustard Hybrid-11 or DMH-11 is a genetically modified selection of mustard developed by the Delhi University’s Centre for Genetic Manipulation of crops plants.

The researchers at Delhi University have created hybridized mustard DMH-11 using “barnase or barstar” technology for genetically modification. GM Mustard is an herbicide Tolerant (HT) crop.In 2017, GEAC has recommended the commercial approval of our first food biotech crop. With the decision pending with the environment ministry, the farming and scientific community hopes that GM mustard will get clearance soon. If approved by the centre, this will be the second GM crop, after Bt Cotton, and the first transgenic food crop to be acceptable for cultivation in the country.

WHAT IS THE LEGAL POSITION OF GENETICALLY MODIFIED CROPS IN INDIA?

• Constituted under the ‘Rules for the Manufacture, Use /Import /Export and Storage of Hazardous Microorganisms/Genetically Engineering Organisms or Cells, 1989’ notified under the Environment (Protection) Act, 1986.
• In India, the Genetic Engineering Appraisal Committee (GEAC) is the apex body that allows for the commercial release of GM crops.
• In 2002, the GEAC had allowed the commercial release of Bt cotton. More than 95 per cent of the country’s cotton area has since then come under Bt cotton.
• Use of the unapproved GM variant can attract a jail term of 5 years and a fine of Rs 1 lakh under the Environmental Protection Act,1989.
• In August 2020, FSSAI had also issued the order that 24 food crops the country imports would need a ‘non-GM-origin-cum-GM-free certificate’.
• FSSAI is the authorized body to regulate the imported crops in India.

ADVANTAGES OF GM CROPS

• The Main advantage of genetically modified foods is that crop yields become more consistent and productive, allowing more people to be fed. According to Oxfam, the world currently formed about 20% more food calories than what is required for every human being to be healthier.
• It improves production and raises farmers income. Indian farmers are still practising the traditional procedure of seeding and cultivation, which required scientific moves for raising their production. Hence, it is one of the moves to develop farm production.
• GM foods have a longer shelf life. This enhances the ease of transportation and storage. Also, GM crops are high yielding crops but the problem lies in the fragmentation of land.
• GMOs may have fewer pesticides. Many GMO crops have been altered to be less vulnerable to insects and other pests. For example, Bt-cornis a GMO crop that has a gene added from Bacillus thuringiensis, a naturally occurring soil bacteria. This gene causes the corn to produce a protein that kills many pests and insects, helping to protect the corn from damage.
• GMOs are usually cheaper. GMO crops are bred to grow efficiently – this means that farmers can produce the same amount of food using less land, less water, and fewer pesticides than conventional crops. In some cases, the costs of foods like corn, beets, and soybeans may be cut by 15% to 30%.
• GMOs may have more nutrients. Certain GMO crops are designed to provide more nutrients like vitamins or minerals. For example, researchers have been able to create a modified form of African corn that contains:
• 2 times as much folate when compared to traditional crops
• 6 times as much vitamin C when compared to traditional crops
• 169 times more beta-carotene than traditional crops. This may be especially helpful in regions where people suffer from nutritional deficiencies.

CONCERNS OF GM CROPS

• The production imposes high risks to the disruption of ecosystem and biodiversity because the ‘better’ traits formed from the engineering genes can affect the favouring of one organism. Hence, it can eventually disrupt the natural procedure of gene flow.
• GM Crops increase the cost of cultivation and are more inclined towards marketization of farming that works in immoral profits.
• The transgenic crops endanger not only farmers but also the trade, and the environment as well.
• GMOs may cause allergic reactions. Because GMO foods contain DNA from other organisms, it’s possible that the new DNA can trigger allergies in people who wouldn’t normally be allergic to the food. In one instance, a GMO soybean crop created using DNA from a Brazil nut was unsafe for people with nut allergies and couldn’t be released to the public.
• GMOs may increase antibiotic resistance. When GMO scientists insert new DNA into plant cells, they will often add in an additional gene that makes the modified cells resistant to antibiotics. They can then use an antibiotic to kill off any plant cells that didn’t successfully take in the new DNA.

THE WAY FORWARD

Government should set up an independent regulator at the earliest: In 2014, more than 18 million farmers in 28 countries planted GM crops on 181.5 million hectares. While that in itself is not reason enough for India to push transgenic crops, the government should go beyond what is politically expedient and set up an independent regulator at the earliest. The charged atmosphere surrounding GM crops notwithstanding, the government’s policy should be led by science, not emotions.

Need for Refined Policies, a major global seed maker, says the policy on GM crops needs to be clearly defined, and the government should provide a level-playing field to both public and private sector companies.

Lack of Research & Awareness: Besides the increased incidence of pest attacks, Srinivas has not seen an adverse impact from Bt cotton on his soil or groundwater. His observation may just be anecdotal, but there is not enough conclusive research to counter him. A 2013 study by Italian researchers of 1,783 studies published between 2002 and 2012 did not find any significant hazard to human health, biodiversity, or the environment caused by GM crops.

Niti Aayog released a report that said, “As a part of its strategy to bring a Second Green Revolution, India must return to permitting proven and well tested GM technologies with adequate safeguards. Additionally, India urgently needs a technological breakthrough in oilseeds and pulses.”

Pew Research Centre survey published in January 2015, 88% of American scientists polled found GM foods safe. “GM crops go through the kind of rigorous testing that no other Agri product goes through. There is no evidence of their impacting biodiversity or soil health,”

Similarly, the 2015-2016 Economic Survey has also called for a faster rollout of GM crops: “Concerns about the affordability of hybrids and GM seeds, environmental and ethical issues in the cultivation of GM crops, risks to the food chain, disease spread and cross-pollination have resulted in their non-introduction. These issues need to be debated, tested, evaluated, so that introduction of hybrids is facilitated in the next three to six months.”

THE CONCLUSION

• The second decade of the 21st century, 2011 to 2020, has turned out to be the lost decade for India, as far as agriculture biotechnology is concerned. The GEAC has held only 35 meetings in 10 years and even recommended trials were not held.This contrasts sharply with the previous decade, when the GEAC held almost 81 meetings, and over a dozen GM crops were in various stages of development.
• This is a complete reversal of the fundamental legal philosophy of modern civilisation, which holds that one is innocent unless proven guilty. The yardstick now being used for GM crops is that these crops are inherently dangerous, and therefore presumed guilty unless it can be shown that they are not. But a negative can never be proven.
• The illegal cultivation of HT Bt cotton, Bt brinjal and gave us a clear indication that there is a trend of GM crops from field trials ending up in our farms and food. It is an unfortunate truth that our regulatory system has been found ineffective in curbing this. It is also shocking that GEAC has failed to take effective action to even identify those behind seed supply.
• Indian farmers are the true representatives of Aatmanirbhar Bharat, and their product is the original ‘Make in India’, long before these slogans were coined.

Value Addition:

India’s Rice Export:

India holds more than 85% share of global Basmati Rice exports

• India already accounts for a lion’s share of Basmati rice exports. More than 85% of the global Basmati exports (by quantity and by value) are from India. In India, the quantity of Basmati exported is about 37% of the total rice exported by quantity and 60% by value in 2018-19. During the same period, in Pakistan, Basmati exports comprised 13% of rice exports by quantity and almost 29% by value.
• India’s annual rice exports amount to 18 million tonnes worth Rs 65,000 crores and reach more than 75 countries.
• After exporting a record 17.71 million tonnes of rice in 2020-21, an increase of 86% over the previous year’s 9.5 million tonnes, India is set for another good season of exports in 2021-22 as well, despite high freight costs.

THE CONTEXT: Addressing the nation from the Red Fort on the 75th Independence Day, Prime Minister said, “Be it the rice distributed through ration shops or the rice provided to children in the mid-day meal, the rice available through every scheme will be fortified by the year 2024.” In this article, we will analyse what is biofortification and its role in tackling the hidden hunger across the life cycle.

ALL YOU NEED TO KNOW ABOUT BIOFORTIFICATION

What is Biofortification?

• Biofortification is the process by which the nutritional quality of food crops is improved through agronomic practices, conventional plant breeding, or modern biotechnology.
• Biofortification differs from conventional fortification in that biofortification aims to increase nutrient levels in crops during plant growth rather than through manual means during processing of the crops.
• Biofortification may therefore present a way to reach populations where supplementation and conventional fortification activities may be difficult to implement and/or limited.

Examples of Biofortification projects include:

• Iron-biofortification of rice, beans, sweet potato, cassava and legumes;
• Zinc-biofortification of wheat, rice, beans, sweet potato and maize;
• Provitamin A carotenoid-biofortification of sweet potato, maize and cassava; and
• Amino acid and protein-biofortification of sorghum and cassava.
• The far bowl on the right contains Golden Rice, an example of biofortification using genetic engineering. The golden color of the grains comes from the increased amounts of beta-carotene a precursor of vitamin A.

FORTIFICATION Vs BIOFORTIFICATION

FORTIFICATION

• Fortification is the deliberate addition of key vitamins and minerals such as Iron, Iodine, Zinc, Vitamins A & D to staple foods such as rice, wheat, oil, milk and salt to improve their nutritional content.
• These nutrients may or may not have been originally present in the food before processing or may have been lost during processing.
• It does not alter the characteristics of the food like the taste, aroma or the texture of the food.
• Hence fortification of food is a safe method of improving nutrition among people as the addition of micronutrients to food does not pose a health risk to people.

BIOFORTIFICATION

• Biofortification is a feasible and cost-effective means of delivering micronutrients to populations that may have limited access to diverse diets and other micronutrient interventions. Research efforts have demonstrated that this agriculture-based method of addressing micronutrient deficiency through plant breeding works.
• Biofortification is targeted primarily to the rural poor who rely heavily on locally produced staple foods as their primary source of nutrition, and who often have restricted financial or market access to commercially processed fortified foods

IMPORTANCE OF NUTRITION

• Essential nutrients are compounds that the body can’t make or can’t make in sufficient quantity. According to the World Health Organization, these nutrients must come from food, and they’re vital for disease prevention, growth, and good health.
• Despite this there is a decline in the percentage of the number of women and children suffering from anaemia in the past few years, the high absolute numbers are worrying. Incidentally, anaemia accounts for 20% of the maternal deaths that take place in the country.
• As such, biofortification is seen as an upcoming strategy for dealing with deficiencies of micronutrients in low and middle-income countries. In the case of iron, the WHO estimated that biofortification could help curing the 2 billion people suffering from iron deficiency-induced anemia.

NUTRITIONAL STATUS OF INDIA

Global Hunger Index 2021

• In the 2021 Global Hunger Index, India ranks 101st out of the 116 countries with sufficient data to calculate 2021 GHI scores. With a score of 27.5, India has a level of hunger that is serious,   published by Concern Worldwide and Welthungerhilfe.
• It is calculated on the basis of four indicators:  Child nourishment, Child wasting, Child Stunting and Child Mortality.

The Food and Agriculture Organization (FAO) estimates that 194.4 million people in India (about 14.5% of the total population) are undernourished.

According to the National Family Health Survey (NFHS-4):

• 4% of children (6-59 months) are anemic
• 1% women in the reproductive age group are anemic
• 7% of children under 5 are underweight
• Also, It is estimated that 50-70% of these birth defects are preventable. One of the major causes is deficiency of Folic Acid.

HIDDEN HUNGER AND EMPTY CALORIES

• Hidden hunger is the term use to describe the deficiencies in micronutrients such as zinc, iron and vitamin A can cause profound and irreparable damage to the body—blindness, growth stunting, mental retardation, learning disabilities, low work capacity, and even premature death.
• The effects of hidden hunger are acute during the first 1,000 days of a child’s life—from conception to the age of two years. Micronutrient deficiencies are especially damaging to women. Five hundred million women aged 15 to 49, at the peak of their productive years, are anemic due to iron deficiency. This condition reduces their productivity, decreases their economic potential, and affects their reproductive health outcomes. With the fast growing urbanisation, and urban to rural migration paves the way for packaged food items and readily consumables that are need to be addressed with nutritional values.
• This approach may have advantages over other health interventions such as providing foods fortified after processing, or providing supplements. Although these approaches have proven successful when dealing with the urban poor, they tend to require access to effective markets and healthcare systems which often just do not exist in rural areas. Biofortification is also fairly cost effective after an initial large research investment – where seeds can be distributed, the “implementation costs [of growing biofortified foods] are nil or negligible”, as opposed to supplementation which is comparatively expensive and requires continued financing over time, which may be jeopardized by fluctuating political interest.
• Research on this approach is being undertaken internationally, with major efforts ongoing in Brazil, China and India.

HOW BIOFORTIFICATION HELPS IN ADDRESSING INDIA’S DEFICIENCY?

• Biofortified crops are rich in iron and have the potential to improve iron status and cognition. That helps in improving the overall health of human.
• Biofortified crops are also often more resilient to pests, diseases, higher temperatures, drought and provide a high yield.
• Biofortification fills an important gap as it provides a food-based, sustainable and low-dose alternative to iron supplementation. It does not require behavior change, can reach the poorest sections of the society, and supports local farmers.
• After the initial investment to develop the biofortified seed, it can be replicated and distributed without any reduction in the micronutrient concentration. This makes it highly cost-effective and sustainable.
• Considering the various implementation barriers faced by genetically modified crops in India, biofortification which can be done through non-genetically-modified methods as well can be a better alternative. So far we are focusing on

VARIOUS MEASURES TAKEN BY THE GOVERNMENT

• National Nutrition Strategy by NITI Aayog, Government of India envisages alleviation of malnutrition in the country through food-based solution.
• Integrated Child Development Services (ICDS) by Women and Child Development Ministry which provides a package of six services namely supplementary nutrition, pre-school non-formal education, nutrition & health education, immunization, health check-up and referral services.
• Inclusion of these biofortified cereals in different government sponsored programmes such as National Food Security Mission,Rashtriya Krishi Vikas Yojana as well as nutrition intervention programme such as Integrated Child Development Services scheme, ‘Mid-day meal’ and Nutrition Education and Training through Community Food and Nutrition Extension Units would help in providing the much needed balanced food to poor people.
• National Nutrition Mission: To reduce stunting and wasting by 2 per cent per year (total 6 per cent until 2022) among children and anaemia by 3 per cent per year (total 9 per cent until 2022) among children, adolescent girls and pregnant women and lactating mothers.
• The central government has recently declared millets (sorghum, pearl millet, foxtail millet, finger millet, kodo millet, proso millet, little millet and barnyard millet) besides two pseudo millets (buck-wheat and amaranthus) which have high nutritive value as ‘Nutri Cereals’.
• The inclusion of biofortified products in these government-sponsored schemes would especially benefit the children, pregnant women and elderly people, and would help in their quick dissemination.

CHALLENGES FOR BIOFORTIFICATION IN INDIA

• Lack of consumer acceptance due to color changes (e.g. golden rice) and last mile reach of fortified food remains a big challenge.
• Adoption of farmers and cost involved in the process of fortification also poses a challenge for biofortification in India.
• Though biofortification can be done using non-genetically-modified methods it is a slower process than genetic modification.
• The lack of an effective seed and rural extension system for multiplication and dissemination of new varieties will also pose a challenge.

RECENT DEVELOPMENTS

• Vallabhhai Vasrambhai Marvaniya, a farmer scientist from Gujarat has developed Madhuban Gajar, a biofortified carrot variety with high β-carotene and iron content.(He has been conferred with a National Award by the President of India during Festival of Innovation (FOIN) in 2017 and was also conferred with Padma Shri in 2019 for his extraordinary work in this field).
• Madhuban Gajar has been cultivated in over 1000 hectares of land in Gujarat, Maharashtra, West Bengal, Rajasthan and Uttar Pradesh.
• It is used for several value-added products like carrot chips, juices, and pickles.
• It possesses a significantly higher root yield and high plant biomass.
• It has been tested by National Innovation Foundation (NIF) of India, an autonomous institute under the Department of Science and Technology during 2016-17.

THE WAY FORWARD:

• The lack of nutrition is not only a denial of a fundamental human right, but it is also poor economics. Biofortification is a partial solution, which must go hand in hand with efforts to reduce poverty, food insecurity, disease, poor sanitation, social and gender inequality.
• Increasing Maternal Health Literacy, ending societal discrimination faced by women and adolescent girls, making healthcare and proper sanitation accessible will also help in eradicating malnutrition.
• The government should facilitate public-private partnerships. Private sector engagement can leverage technological solutions for scaling up food fortification initiatives, and complement the government’s outreach efforts through mass awareness and education campaigns in communities.
• There is a need to shift dietary patterns from cereal dominance to the consumption of nutritious foods such as livestock products, fruits and vegetables, pulses, etc. Diverting a part of the food subsidy on wheat and rice to more nutritious foods can help.
• Strategies for delivery of biofortified crops must be tailored to the local context for each crop–nutrient pair.
• New Agricultural techniques: Achieving zero hunger requires agriculture and food systems to become more efficient, sustainable, climate-smart and nutrition-sensitive. India must adopt new agricultural technologies of bio-fortifying cereals, such as zinc-rich rice, wheat, iron-rich pearl millet, and so on.

THE CONCLUSION: Biofortification is a delicate technique that needs elaborate study to assess effect of alteration on human body. Thus, biofortification is indeed a novel way to reduce global hunger in areas of large population and high poverty. Proper planning and implementation can contribute towards reducing poverty using biofortification.

THE CONTEXT: After the repealing of three farm laws in November 2021, farmers are now demanding for the legalized Minimum Support Price for their crops.  Although, India is already providing MSP for some crops but Farmers are demanding a legal status for MSP for all crops. In this article, we will analyse the issue in detail.

HOW MANY CROPS DOES THE MINIMUM SUPPORT PRICE COVER?

• The Central Government sets a minimum support price (MSP) for 23 crops every year, based on a formula of one-and-a-half times production costs. This considers both paid-out costs (A2) such as seeds, fertilizers, pesticides, fuel, irrigation, hired workers and leased-in land, as well as the imputed value of unpaid family labour (FL).
• Farm unions are demanding that a comprehensive cost calculation (C2) must also include capital assets and the rentals and interest forgone on owned land as recommended by the National Commission for Farmers.
• There is currently no statutory backing for these prices, nor any law mandating their enforcement.
• The government only procures about a third of wheat and rice crops at MSP rates (of which half is bought in Punjab and Haryana alone), and 10%-20% of select pulses and oilseeds.
• According to the Shanta Kumar Committee’s 2015 report, only 6% of the farm households sell wheat and rice to the government at MSP rates. However, such procurement has been growing in the last few years, which can also help boost the floor price for private transactions.

WHY DO FARMERS WANT A LAW ON MSP?

• Farmers are saying that MSP based on a C2+50% formula should be made a legal entitlement for all agricultural produce, so that every farmer of the country can be guaranteed at least the MSP announced by the government for their entire crop.
• According to them, most of the cost should be borne by private traders, noting that both middlemen and corporate giants are buying commodities at low rates from farmers and slapping on a huge mark-up before selling to end consumers.
• Farmers want a law that simply stipulates that neither the government nor private players will be allowed to buy produce from the farmer at a rate lower than MSP.
• All farmers groups seeking legal backing for MSP also want it extended to fruit and vegetable farmers who have been excluded from benefits so far.

WHAT IS THE GOVERNMENT’S POSITION?

• The Prime Minister announced the formation of a committee to make MSP more transparent, as well as to change crop patterns, often determined by MSP and procurement, and to promote zero budget agriculture which would reduce the cost of production but may also hit yields.
• The panel will have representatives from farm groups as well as from the State and Central Governments, along with agricultural scientists and economists.
• The government has assured that the MSP regime is here to stay, even while dismissing any need for statutory backing.

SHOULD MSP BE LEGALIZED?

YES, MSP SHOULD BE LEGALISED?

TO DECIDE THE MINIMUM PRICE OF A CROP

• The demand for a guaranteed remunerative Minimum Support Price is not about the government procuring products from every farmer in the country at the MSP.
• It is indeed preposterous to think so. It is about reinstating the MSP as the bottom price for all agriculture produce through an Act so that farmers are able to realise at least this minimum price, whoever buys the product.

FREEDOM TO SELL

• A legalized MSP means even as the government agencies continue to remunerate the farmers at the MSP; the private sector would also have to do the same.
• Farmers will have a right to the MSP, even as they continue to enjoy the freedom to sell anywhere.

HIGHER-INCOME TO FARMERS

• The corporate world has welcomed the three farm laws and reiterated that it would benefit the farmer by higher incomes. The government also claims the same. But it is not willing to legalise and institutionalise the only instrument that can guarantee this higher income, the MSP.

PRESENT MSP REGIME SHOWS BETTER RESULT

• Farmers in States with MSP procurements and APMC controlled mandis realise better prices than in States like Bihar, which did away with the APMC.
• A free open market is a traders’ delight but can never be a farmers’ choice, if it cannot guarantee remunerative prices.

A STANDARD MECHANISM

• It will also have to set up stand-by mechanisms to intervene in the market when traders show reluctance to buy.
• Kerala, for instance, has announced base prices for 16 vegetables, fruits and tuber crops, though it does not procure them.
• Still it has allocated ₹35 crore as a market intervention fund, in case they have to procure or compensate to intervene in a price crash situation.
• Similarly, post the Indo-Asean agreement, the price of rubber fell drastically, and Kerala has now a budget head with an allocation to compensate the farmers for price loss.

MARKET ITSELF CAN’T GIVE AN APPROPRIATE PRICE TO FARMERS

• According to the Shantha Kumar Committee on restructuring FCI, only 6 per cent of the farmers benefit from procurement. This figure is outdated after decentralised procurement that now covers 23 States for paddy and 10 States for wheat, out of which 10 States for paddy and five for wheat contribute significantly. Still the number of farmers realising MSP rates is between 15-25 per cent.
• This means most of India’s farmers have to sell their produce at much lesser prices, dictated by the markets.

TO MAKE INDIA A $5 TRILLION ECONOMY.

• India can’t be a five-trillion economy without improving its farm sector and for that a good price policy for farmers cropping is a must.
• Seventy years’ experience shows that the government needs to intervene in cropping patterns in India to ensure a better price for farmers crops.

MSP should not be legalized because of the following reasons-

THE ISSUE OF INFLATION

• A law barring purchases of the other 21 crops below MSPs by any private trader will immediately fuel high inflation.
• Every one percentage point increase in MSPs leads to a 15-basis point increase in inflation.
• Higher MSPs could also upend the Reserve Bank of India’s inflation targets, hurting economic growth.

IMPACT ON PRIVATE TRADERS

• If it is not profitable for traders to buy at MSPs, then the private sector will exit the markets.
• A mandatory MSP means that it will be illegal for anyone to buy any notified commodity at below MSP anywhere in India.
• Traders might find it safer to stay away from the market and wait for the government to offload stocks in the market.

GOVERNMENT WILL BE THE SOLE TRADER

• If private buyers will not purchase, the government then becomes the sole trader.
• It would be a disastrous situation as the government will purchase all the commodities.

FISCAL BURDEN ON THE GOVERNMENT

• The value of the 23 crops presently covered under MSP works out to about Rs 7 lakh crore.
• But after a legalized MSP for all crops, it will cost the government only an additional Rs 47,764 crore (2017-18 data).

NOT IN FAVOUR OF COMPETITION

• Mandatory MSPs will render India’s agri- exports non-competitive because the government’s assured prices are way higher than both domestic and international market prices.

WTO RULING

• Surplus cereals can’t be exported without a subsidy, which invites the World Trade Organization (WTO)’s objections. WTO rules cap government procurement for subsidised food programmes by developing countries at 10% of the total value of agricultural production based on 1986-88 prices in dollar terms.

NEED FOR REFORMS IN PRESENT MSP REGIME

Bias in favour of surplus states

The MSPs benefited farmers in only a few states. Nearly all states in India grow rice, and approximately 20 states grow wheat. However, FCI procures approximately 95 percent of wheat from three states: Punjab, Haryana and (Western) Uttar Pradesh. Approximately 85 to 90 percent of rice is procured from 5 states: Punjab, Andhra Pradesh, Haryana, Uttar Pradesh and Tamil Nadu.

Adverse impact on Investment

Hike in procurement prices leads to an additional expenditure by the government. Given the overall resources constraint, the additional expenditure comes at the cost of a decline in fixed investments. While this additional expenditure on stocks favours only rice and wheat (as it is the procurement price of these two crops that has been raised considerably year after year), the decline in fixed investments adversely affects the demand for many non-agricultural sectors.

Distortions in cropping pattern

As pointed out in the Report on Currency and Finance, 2001-02, the agricultural price policy of the government has led to distortions in the cropping pattern. This is because the MSP of rice and wheat (particularly of wheat) has generally been higher than the cost of production. This has made the cultivation of rice and wheat more attractive than pulses and coarse cereals leading to a diversion of area towards them.

Bias in favour of large farmers

Increases in MSP and procurement prices over the years have acted as an incentive to producers to increase their output. However, most of the benefits have been cornered by the large farmers who could implement the new agricultural strategy and easily obtain credit and other inputs.

Economically Unsustainable

The economic cost of procured rice comes to about Rs 37/kg and that of wheat is around Rs 27/kg. However, rice and wheat market prices are much lower than the economic cost incurred by the Food Corporation of India (FCI). Due to this, the FCI’s economic burden is touching Rs 3 lakh crore. This amount eventually will have to be borne by the Union government and may subsequently lead to divergence of funds from being invested in agriculture infrastructure.

HOW CAN INDIA ADDRESS THE ISSUE OF CROPS PROCUREMENT?

DEFICIENCY PAYMENT

• Making MSP a legal entitlement makes it a justifiable right, and there are two ways of ensuring this. The first is through physical procurement by the government. The second is to allow farmers to sell in the private market and if they get a lower price than MSP, then to reimburse the difference between the two. Such a payment is called ‘deficiency payment (DP)’.
• Procurement is the best option for ensuring MSP. However, there are two major constraints to this physical storage capacity and administrative capability (governance), limiting the quantum of procurement. Thus, farmers also need to be supported through DPs.

DIRECT PAYMENTS

• It is important to explore other options that may be fiscally prudent and administratively convenient. One such is direct payments to farmers. However, a different approach is needed for non-staple food commodities. For many of non-staple commodities, MSPs are announced with little or no procurement. This is really ineffective. Thus, a gradual movement to an income-based support system is needed. PM-KISAN is currently attempting this, but the support under the programme is grossly inadequate.

GOVERNMENT SHOULD NOT COME OUT FROM THIS MECHANISM

• However, it needs to be noted that during the Covid-19 crisis as well as earlier food crises in 1975 and 2008, India’s buffer stock system served the country exceedingly well. There is also a large PDS of 80 crore beneficiaries to cater to. Thus, the MSP procurement system needs to be continued for staple food grains and, if possible, be extended to pulses.

Apart from the above measures, the agriculture sector needs some more measures for a permanent solution

• Devise ways to address price- and production-related risks. In addition to insurance and immediate relief for crop loss, the government can make a “deficiency price payment” when prices crash. Under such a system, farmers get the difference between the market price and a pre-agreed price that will act as a form of price insurance. Restructure the marketing framework to allow free movement of farm products.
• Connect the lab to the field: agriculture cannot grow without modern scientific research.
• Pay attention to resource-use efficiency in water and fertilizers. Increase irrigation-related investments in rain-fed areas as the monsoon uncertainties are here to stay.
• Undertake long-term research on how the crop cycle can be aligned with the changing monsoon. Improve availability of early maturing, drought resistant and short duration crops that can handle weather uncertainties.
• Provide alternative jobs to farmers as it is difficult to earn a living from small pieces of land (average land holding is a little over one hectare in India). Liberalize land lease markets as small farms are not viable. Inject funds into rural India to kick-start demand. Announce a package that can revive wage employment by creating rural infrastructure.
• Bring extension services back on the agenda. Farmers need to know about better seeds, proper use of fertilizers, and access to better technologies. Information and communications technology-based services like kisan call centres aren’t enough.
• Make crop insurance more effective. Increase penetration and subsidize premiums so that farmers can avail insurance; carry out damage assessment at the field level to settle claims.

THE CONCLUSION: public procurement needs to continue for staple cereals, but farmers of non-staple food crops need to be provided with direct income transfers, these are fiscally prudent, obviate the need for physical procurement and storage by the government, do not distort current production, and provide a basic income to farmers. These will also address the main concern over the recent farm laws related to the vulnerability of small and marginal farmers and may help these farmers to avoid distress sales.

JUST ADD TO YOUR KNOWLEDGE

ALL ABOUT MSP

MSP

• It is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
• A guarantee price for farmers produces from the government.

Objectives of MSP?

• To protect the producer – farmers – against excessive fall in price during bumper production years.
• To support the farmers from distress sales and to procure food grains for public distribution.
• If market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

History of MSP

• First time announced by the Government of India in 1966-67  for the wheat in the wake of the Green Revolution and extended harvest, to save the farmers from depleting profits.

How MSP is decided?

The government decides the support prices for various agricultural commodities after taking into account the following:

• Recommendations of Commission for Agricultural Costs and Prices
• Views of State Governments
• Views of Ministries
• Other relevant factors
• Fixing the MSP Policy

Current status

26 commodities are currently covered.

They are as follows.

• Cereals (7) – Paddy, Wheat, Barley, Jowar, Bajra, Maize And Ragi
• Pulses (5) – Gram, Arhar/Tur, Moong, Urad And Lentil
• Oilseeds (8) – Groundnut, Rapeseed/Mustard, Toria, Soyabean, Sunflower Seed, Sesamum, Safflower Seed And Niger seed
• Copra
• De-Husked Coconut
• Raw Cotton
• Raw Jute
• Sugarcane (Fair And Remunerative Price)
• Virginia Flu Cured (VFC) Tobacco

Point to be noted

• Sugarcane is a kharif crop.
• 60% of India’s food grain and oilseeds grown in Kharif Season.

WHAT IS PROCUREMENT PRICE

• At this price FCI will purchase foodgrain for PDS distribution system.
• Procurement prices always higher than MSP.

OPEN ENDED PROCUREMENT (CONDUCTED BY FCI)

For Wheat and Rice (Conducted)

Government will buy AT MSP, from any farmer who comes forward to sell. (even if market prices are running higher than MSP)

other crops (not conducted)

Government will buy ONLY when their prices fall below MSP in open market.

THE CONTEXT: The Union government has a noble objective of doubling farmer income by 2022 Thus the Indian agriculture sector has been witnessing a slew of reforms especially on corporate and contract farming. Against this backdrop, this article comprehensively discusses the issues of corporate and contract farming by adopting an in-depth approach.

UNDERSTANDING CORPORATE FARMING

• Corporate farming refers to agricultural operations that involve the production of food on an exceptionally large scale.
• It also involves a wide range of additional services that are important to the marketing of the foods produced.
• Thus this concept is not limited to the actual production of food but also includes the entire agriculture production system like marketing, distribution, etc.
• In other words, corporate farming deals with all the operations from “the farm to the fork”.
• These companies also influence agricultural education, research, and public policy through funding initiatives and lobbying efforts which are also needed to be considered while analyzing the concept of corporate farming.

UNDERSTANDING CONTRACT FARMING

• Contract farming means agriculture production carried out as per an agreement between a buyer and farmer.
• The contract sets out the rights and obligations of both parties concerning production, marketing, etc.
• The buyer agrees to buy the product at a mutually decided price from the farmer subject to conditions like timeliness, quality, etc.
• In some cases of contract farming, the buyer also provides seeds and other inputs including technical assistance.

ADVANTAGES AND DISADVANTAGES OF CORPORATE FARMING

ADVANTAGES

• It provides greater scope for investment in agriculture by big businesses and MNCs. This will improve Gross capital Formation in the Agriculture value chain especially in the food processing segment
• As per Economic Survey 19-20, farm mechanization in India is only 40%. Thus the entry of corporates will improve the status of farm mechanization which will improve production and productivity.
• It will promote the Industrialization of agriculture through the rapid production of crops to meet the needs of the economy. It will improve the GVA of agriculture in the overall GDP.
• Nearly 40 percent of the food produced in India is wasted every year due to fragmented food systems and inefficient supply chains as per Food and Agricultural Organisation.
• Timely harvesting of crops helps avoid wastage of food, increases the yield which leads to a decrease in food prices.
• The government subsidy for agriculture including MSP for farmers has huge fiscal implications. Corporate farming will reduce the fiscal burden of the exchequer.
• Many Indian corporates are involved in Agriculture in many African countries due to facilitative laws and local factors.
• For instance, the Tata group and RJ Corp have a significant presence in the Agri sector in Uganda.
• It enables reaping the benefits of economies of scale especially in the context of the high fragmentation of lands in India.

DISADVANTAGES

• It can adversely affect the livelihood opportunities of small and marginal farmers who form around 85% of the farming community in India.
• It can compromise the nutritional value of the food by increased usage of pesticides, insecticides, coloring agents, chemical and hormone injections, etc.
• Corporates farming poses the dangers of monopoly or cartelization in the Agri economy by dominating the whole Agri system value chain. This can impact the needs of food security of millions of poor people in India.
• The production techniques adopted interfere with the natural and biological processes of the environment.
• Moreover, corporate farming can be a threat to the water bodies that will quickly dry up from excess irrigation, polluting of fisheries by disposal of chemical wastes, and also pollutes the soil.
• The methods of corporate farming also pose challenges to human and animal health due to the extensive use of growth-stimulating drugs and chemicals
• The problem of Anti-Microbial Resistance is a case in point.
• Corporate farming heavily depends on Industrial agriculture which contributes to climate change.
• The IPCC report on Climate Change and Land 2019 points out how changing land-use patterns and food systems are driving anthropogenic emissions.
• In economies thriving on this type of farming, farmers face problems of reduced profits or increased costs. They then are forced to enter into a contract on unfavorable terms

ADVANTAGES AND DISADVANTAGES OF CONTRACT FARMING

ADVANTAGES

• The assured market for farmers for their produce. This captive market lowers the marketing and other transaction costs by eliminating middlemen.
• The farmers are saved from the vagaries of price volatility in the market due to assured procurement at the defined price
• Can make small farming competitive as they can access technology, credit, various farming inputs and can also open up new marketing channels
• Contract farming agreements assure the seamless supply of inputs to agri businesses which reduces the costs of their operations.
• It enables direct private investment in agriculture thereby making the Agri sector competitive and remunerative.
• For instance, it can promote investments in post-harvest management segments.
• The consumers will also be benefited as they can have more choices available at reasonable prices with good quality.
• It will have a wholesome influence on the socio-economic life in the rural area due to improved livelihood securities and income from farming.
• Companies/buyers provide farmers good quality products, such as breeds and best advisors to give efficient advice to the farmers.

DISADVANTAGES

• The greatest disadvantage of contract farming from the perspective of farmers is the loss of bargaining power.
• Due to the guaranteed markets, the contractors keep prices very low for farmers to earn maximize profit.
• Farmers get bound and they have to produce a certain amount of the crop at a specific time period. Thus the scope for alternative crop production is lost.
• The farmers cannot take advantage of the increase in prices of the crops in the markets due to a pre-determined price structure.
• Farmers don’t have the opportunity to get feedback from the consumer, and this leads to no improvements in production due to no communication between consumers and farmers.
• Environmental risks will increase due to the practice of monocropping which inter alia impact soil fertility and productivity. This is the long run would increase the cost of farming operations.
• The threat of creating monopolies in agriculture due to the domination of the value chain can have serious repercussions on food availability at affordable prices.
• The Big business has the wherewithal to decide the terms of the contract which put the farmers, especially the small and marginal ones  in a highly vulnerable position

INDIAN SCENARIO

CORPORATE FARMING

• Agriculture is a state subject and many states have land ceiling laws that limit the area of land one can own.
• Many state governments in India have attempted liberalization of these land laws, especially land ceiling laws and land leasing laws.
• The states of Gujarat, Madhya Pradesh, Karnataka, and Maharashtra have allowed agribusiness firms to buy and operate large land holdings for R&D, and export-oriented production purposes.
• The states of Maharashtra and Gujarat have also enacted laws to allow corporate farming on government wastelands by providing large tracts of these lands to agribusiness companies on a long-term (20 years) lease.
• But, in general, corporate farming is not well-established practice in India.

CONTRACT FARMING

• Under the Model, APMC Act, 2003, contract farming was permitted and the Agricultural Produce Marketing Committees (APMCs) were given the responsibility to record the contracts.
• So far, 21 States like Andhra Pradesh, Arunachal Pradesh, Assam, and Chhattisgarh, etc have amended their Agricultural Produce Marketing Regulation (APMR) Acts to provide for contract farming. Of them, only 13 States have notified the rules to implement the provision.
• Currently, contract farming requires registration with the APMC in a few states. This means that contractual agreements are recorded with the APMCs, which can also resolve disputes arising out of these contracts.
• But the current law passed by the parliament related to contract farming (The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services act, 2020) has changed this system.
• Recently, In Madhya Pradesh, hundreds of farmers have lodged complaints against a private firm that has cheated and disappeared after entering into a contract in 2018.

SUCCESSFUL EXAMPLES OF CORPORATE AND CONTRACT FARMING

CORPORATE FARMING

DOMESTIC

• The Jamnagar Farms, the 1700 acre agri-forestry, Agri horticulture farm set up in previously arid land near the RIL refinery is a sterling example of a successful corporate farming business model. It is the largest Mango orchard in Asia. Though initially taken up as part of the plan to improve the environment, the company has now become a profitable proposition. Recently, it has been allotted government and community-owned land for its 5000 crores project which is oriented towards export-oriented farming.

INTERNATIONAL

• In some of the oil-rich Middle East countries, corporate farming including large-scale irrigation of desert lands for cropping, are carried out mostly through partially or fully state-owned companies
• Three American corporate companies namely Cargill, Archer Daniels Midland Company (ADM), and Bunge control more than 50% of the agrarian market of the world through vertical integration and corporate farming.

CONTRACT FARMING

DOMESTIC

• In India, contract farming effectively began in 1989 when Pepsi Co has established a tomato processing plant in Hoshiarpur, Punjab.
• A Karnataka case study on contract farming of baby corns and chilies has found positive impacts on income, access to technology, and credit for contract farmers compared to non-contract farmers.
• Landcraft agro a Kolhapur based agree startup established by IITians carryout aquaponics & hydroponics farming. The company grows more than 40 varieties of exotic plants and vegetables which are sent across various cities in India. This success of the company shows that corporate farming can also be conducted on relatively small scale of land.

INTERNATIONAL

• An FAO report documents a success story of contract farming in Kenya about the South Nyanza Sugar Company (SONY) in Kenya.
• The company places a strong emphasis on field extension services to its 1 800 contracted farmers, at a ratio of one field officer to 65 sugar-cane growers. The extension staff’s prime responsibilities are focused on the managerial skills required when new techniques are introduced to SONY’s farmers. These include transplanting, spacing, fertilizer application, cultivation, and harvesting practices. Also, SONY promotes farmer training programmes and organizes field days to demonstrate the latest sugar-cane production methods to farmers.

CHALLENGES IN CORPORATE AND CONTRACT FARMING

CORPORATE FARMING

• The land ceiling laws in states put restrictions on the landholding size. Also, there are problems with the acquisition of agricultural land on a large scale.
• Since the companies would offer prices that may be too tempting for the poor farmers to resist. They may not be able to negotiate fair prices for their land. Landowners, therefore, would run the risk of becoming landless
• Tenant farmers, Agri laborers’ women or children, may run the risk of losing access to land and therefore food security and social status. This has serious gender implications in an already gender-biased rural context.
• When governments transfer wastelands to corporates either on sale or on a lease, often it is found that they include Common Property Resources in it. Thus there is popular resistance against such transfer of land.
• The benefits of efficiency, productivity, and greater capital formation through corporate farming are not supported by conclusive evidence.
• Corporate farming needs large land parcels which require land consolidation. But highly fragmented nature of the Indian Agri landscape makes this process extremely difficult.
• Also, there are challenges of diversion of land into non-agri purposes, environmental degradation, monopolistic behavior, etc.

CONTRACT FARMING

• The manner of the passage of farm bills without adequate discussion in parliament and consultation with states created a hostile atmosphere in the country about contract farming, especially among farmers.
• Only last year, a few Gujarat farmers were sued for more than Rs 1 crore for illegally growing and selling a potato variety registered by PepsiCo. The incidence left a question mark over the future of contract farming in which resource-poor farmers were pitted against a powerful multinational.
• Price settings are not transparent and both producers and consumers are often cheated. Word-of-mouth contracts are observed in the breach. Thus farmers often become apprehensive to enter into contracts.
• Small and marginal farmers may not benefit from the contract farming system as they cannot provide the farm produce in such large quantities. Thus it is often criticized for bias towards large farmers.
• It may lead to a situation of Monopsony in the Agri market having only one buyer and multiple sellers (farmers). This distorts competition and efficient price discovery in the economy.
• The dispute resolution mechanisms provided under the state laws or in the current Union law have numerous complexities which can disincentive the stakeholders to enter into contract farming.

INTERNATIONAL EXPERIENCES: A LEARNING CURVE

• Around 9 states in the USA have enacted laws to prevent or restrict corporate farming. Yet the U.S. agriculture suffers from abnormally high levels of concentration. It means just a handful of corporations control nearly all of the food production, processing, and distribution.
• If the concentration ratio is above 40%, economists believe competition is threatened and market abuses are more likely to occur. Almost every sector in agriculture is well above these levels.
• The razor-thin profit margins on which farmers are forced to operate often push them to “get big or get out”—either expanding into mega-operations or leaving the land altogether
• Studies in the USA indicate that farmers are pressurized by corporations; they are paid low prices for their products such as soya, wheat, and maize, and they pay high prices for seeds, pesticides, energy, fertilizers, and animal feed.
• In the case of the developing world, many Brazilian farmers are indebted to the American corporate giant Bunge; which now has a claim on their harvest and land. Land grabbing has particularly affected Africa and South America where small-scale farming families are brutally evicted from their lands and the area is sold or leased to foreign (private) investors.

WHAT SHOULD BE THE WAY FORWARD?

CRUCIAL ROLE OF GOVERNMENT

• The government and its agencies should play the role of a third party and as a facilitator between the farmers and the companies.
• It should not act as a mouthpiece for the companies but must ensure the landowners/farmers receive a fair deal. This is crucial in the current scenario of farmer’s prolonged agitation against the recently enacted farm laws.

ADDRESSING ISSUES OF DOMINATION

• Competition in the agricultural systems across the value chains should be ensured through proper regulation.
• The role of the Competition Commission of India becomes vital in this regard which needs to develop strategies and rules to prevent abuse of dominant position in the food economy.

ENSURING FOOD SECURITY

• Food security including nutrition security for millions of poor Indians impinges on affordability and accessibility of food.
• Corporate and contract farming poses a threat to these aspects by excessive profiteering by the companies. Government must ensure that PDS and MSP operations must not suffer due to private participation in agriculture.

ADDRESSING ENVIRONMENTAL CONCERNS

• The threats of monoculture, land and water pollution, global warming, and poisoning of food chains through bioaccumulation, etc need to be addressed. This requires effective control of land-use change and a comprehensive environmental management plan.

PROTECTING AGRICULTURAL DIVERSITY

• Different foods and food groups are good sources for various macro and micronutrients. Thus a diverse diet best ensures nutrient adequacy and human health.
• This requires that the corporations must be prevented from destroying the Agri diversity by an extreme emphasis on economies of scale through intensive agriculture.

INTRODUCING POLICY CLARITY

• The National Agriculture Policy 2010 aims at increasing private participation in agriculture for a sustainable Agri growth of 4 % per annum.
• Thus the government needs to come out with specific policies dealing with corporate farming and also address the concerns of all stakeholders concerning the legal aspects of contract farming.

PARTNERSHIP WITH STATES

• Agriculture is a state subject and the legal/policy measures taken at the union level should be built on consensus building with states.
• Also, the states must revisit/modify the land ceiling and tenancy regulations along with enacting/reforming laws related to private sector participation in the agricultural system.
• States must encourage the utilization of NABARD’s special to refinance packages for contract farming arrangements aimed at promoting increased production of commercial crops and creation of marketing avenues for the farmers.

CONCLUSION: The need for greater involvement of private players in the agriculture sector is a foregone conclusion. But the debate is about the manner and the extent of the participation. In the quest for greater capital formation and improved agriculture production and productivity, the dysfunctional aspects of corporate and contract farming must not be neglected. A comprehensive policy regime rooted in the ethos of “the last man on the street” formulated through wide-ranging and effective participation of all relevant stakeholders can take agriculture to new heights in India.

THE CONTEXT: Recently the Government of India has passed three farm bills that are being widely criticised by many farmer organisations. The farm bills are criticised for being pro market reforms that has the potential of harming farmer’s interest in the long run.

HISTORICAL BACKGROUND

• Since 1991, economic liberalisation and reforms by successive governments across the political spectrum – except during the lost decade of 2004-14 – have enabled a return to these core economic principles.
• That these timeless principles – advocated in as disparate Indian literature as the Arthashastra and the Thirukural – work is seen in the enormous prosperity well-regulated markets have delivered since 1991. Even the Chinese economic miracle is testimony to the role of markets in enabling economic prosperity for citizens.

WHAT IS FARM BILL 2020?

• In September 2020, the Indian government passed three agricultural bills, which are – Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bil, 2020, Farmers (Empowerment and Protection) Agreement of Price Assurance, Farm Services Bill, 2020, and the Essential Commodities (Amendment) Bill, 2020.
• The new farmers’ bill allows the farmers to sell their products directly to private buyers breaking the monopoly of man is regulated by the government. The people get empowered to get into a legal deal with the companies and produce agro-products for them. The farmers’ bill India also allows stocking of food articles by the agri-businesses removing the ability of the government to impose arbitrarily.

The three farm acts:

1.Farmer’s Produce Trade and Commerce (Promotion and Facilitation) Act, 2020

• This act allows farmers to engage in trade of their agricultural produce outside the physical markets notified under various state Agricultural Produce Marketing Committee laws (APMC acts). Also known as the ‘APMC Bypass Bill’, it will override all the state-level APMC acts.
• Promotes barrier-free intra-state and inter-state trade of farmer’s produce.
• Proposes an electronic trading platform for direct and online trading of produce. Entities that can establish such platforms include companies, partnership firms, or societies.
• Allows farmers the freedom to trade anywhere outside state-notified APMC markets, and this includes allowing trade at farm gates, warehouses, cold storages, and so on.
• Prohibits state governments or APMCs from levying fees, cess, or any other charge on farmers produce.
• The three farm acts are likely to have a significant impact on farmers and agriculture in the country.

2. Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020

• The act seeks to provide farmers with a framework to engage in contract farming, where farmers can enter into a direct agreement with a buyer (before sowing season) to sell the produce to them at pre-determined prices.
• Entities that may strike agreements with farmers to buy agricultural produce are defined as “sponsors’’ and can include individuals, companies, partnership firms, limited liability groups, and societies.
• The act provides for setting up farming agreements between farmers and sponsors. Any third parties involved in the transaction (like aggregators) will have to be explicitly mentioned in the agreement. Registration authorities can be established by state governments to provide for electronic registry of farming agreements.
• Agreements can cover mutually agreed terms between farmers and sponsors, and the terms can cover supply, quality, standards, price, as well as farm services. These include supply of seeds, feed, fodder, agro-chemicals, machinery and technology, non-chemical agro-inputs, and other farming inputs.
• Agreements must have a minimum duration of one cropping season, or one production cycle of livestock. The maximum duration can be five years. For production cycles beyond five years, the period of agreement can be mutually decided by the farmer and sponsor.
• Purchase price of the farming produce—including the methods of determining price—may be added in the agreement. In case the price is subject to variations, the agreement must include a guaranteed price to be paid as well as clear references for any additional amounts the farmer may receive, like bonus or premium.
• There is no mention of minimum support price (MSP) that buyers need to offer to farmers.
• Delivery of farmers’ produce may be undertaken by either parties within the agreed time frame. Sponsors are liable to inspect the quality of products as per the agreement, otherwise they will be deemed to have inspected the produce and have to accept the delivery within the agreed time frame.
• In case of seed production, sponsors are required to pay at least two-thirds of the agreed amount at the time of delivery, and the remaining amount to be paid after due certification within 30 days of date of delivery. Regarding all other cases, the entire amount must be paid at the time of delivery and a receipt slip must be issued with the details of the sale.
• Produce generated under farming agreements are exempt from any state acts aimed at regulating the sale and purchase of farming produce, therefore leaving no room for states to impose MSPs on such produce. Such agreements also exempt the sponsor from any stock-limit obligations applicable under the Essential Commodities Act, 1955. Stock-limits are a method of preventing hoarding of agricultural produce.
• Provides for a three-level dispute settlement mechanism: the conciliation board—comprising representatives of parties to the agreement, the sub-divisional magistrate, and appellate authority.

3. Essential Commodities (Amendment) Act, 2020

• An amendment to the Essential Commodities Act, 1955, this act seeks to restrict the powers of the government with respect to production, supply, and distribution of certain key commodities.
• The act removes cereals, pulses, oilseeds, edible oils, onion, and potatoes from the list of essential commodities.
• Government can impose stock holding limits and regulate the prices for the above commodities—under the Essential Commodities, 1955—only under exceptional circumstances. These include war, famine, extraordinary price rise, and natural calamity of grave nature.
• Stock limits on farming produce to be based on price rise in the market.  They may be imposed only if there is: (i) a 100 percent increase in retail price of horticultural produce, and (ii) a 50 percent increase in the retail price of non-perishable agricultural food items. The increase is to be calculated over the price prevailing during the preceding twelve months, or the average retail price over the last five years, whichever is lower.
• The act aims at removing fears of private investors of regulatory influence in their business operations.
• Gives freedom to produce, hold, move, distribute, and supply produce, leading to harnessing private sector/foreign direct investment in agricultural infrastructure.

ARGUMENTS SUPPORTING THE FARM LAWS

The purpose of the new farm laws is to end the historic exploitation of farmers at the APMC markets and free them from the clutches of the middlemen.Farmers who sell their produce to mandi merchants, or ‘arhatiyas’, at agricultural produce market committee (APMC) markets still receive informal white slips with the transaction amount scribbled on them, making the record non-transparent.The purpose of the new farm laws is to end the historic exploitation of farmers at the APMC markets and free them from the clutches of the middlemen.

1. Economic history of exploitation at mandis

• Fifty-five years since the APMCs were introduced, the country’s farmers are still receiving a low share of the consumer’s rupee as indicated by an Reserve Bank of India study covering mandis in 16 states, 16 food crops and 9,400 farmers, traders, retailers.
• The farmers’ shares were 28 per cent for potato, 33 per cent for onion, 49 per cent for rice, an crop with minimum support price (MSP) guarantee.
• The provision of MSP alone will not ensure farmers to draw a greater share of the consumer’s rupee because supply is greater than demand.
• The demand is also influenced by schemes such as national food security mission, where food grains are offered free or at low prices. When rice and wheat are offered virtually free of cost, why will the consumer buy ragi, jowar, bajra at a higher price?
• Injecting competition by widening farm markets will benefit farmers which the three farm laws aim at.

2. Inefficiencies in APMCs

• The APMCs still don’t issue formal receipts which are supposed to mention the price, quantity or quality of the produce.
• Further, due to interlocked markets, farmers are forced to sell to those middlemen who they have borrowed money from, starting off a vicious circle of exploitation in times of distress sales.
• Buyers make a large income from informal lending. Such illegal paired with unfair deductions, undercover sales, cartels and collusions at APMCs have continued denying remunerative prices to the farmers.

3. Widened markets benefit farmers

• Due to green revolution technologies, supply has increased but is limited to APMCs for handling. This causes the prices to be capped at a lower value. Permission to buy or sell outside APMCs will benefit farmers by creating new supply or value chains.
• The nominal protection coefficient (domestic price divided by international price) for agriculture is 0.87. This implies that farmers can get at least 13 per cent higher prices in international markets by exporting.

4. Infringement of rights

• Farmers’ right to sell their produce to whomever, wherever, whenever and in whichever quantity cannot be infringed upon. The elasticity of price transmission between  that at APMCs and farmgate price (market value minus selling cost) is impressive. Thus, buyers outside APMC will have to compete with APMC prices and vice versa to attract farmers’ produce.

5. No interference with state

• Entry 26 of the state list enables states to regulate trade in agricultural commodities within their boundary. But this is subject to entry 33 in the concurrent list, which allows both the Centre and the states to frame these regulations.
• Such market reforms can double farmer incomes. Also, with Article 249, the Centre can enact law in national interest of saving farmers from exploitation by middleman.

6. Multiple markets and competition

• Allowing buyers outside APMC mandis promotes competition and halts exploitation. At present, while consumers are paying higher price, farmers are still receiving lower returns due to inefficiencies and imperfections. Thus, setting the markets right is crucial through the new laws.
• Unified market platform (UMP) in Karnataka resulted in increase of prices by 38 per cent. This implies that current market prices are depressed by 38 per cent due to lack of adequate competition. Opening up the markets can push the APMCs to offer competitive prices.
• Competition in procurement and distribution cost can also reduce from 30 per cent to 15 per cent.

7. Bihar’s impressive performance

• Economic reforms in Bihar in 2005 that removed the APMC act resulted in impressive agricultural and overall performance.
• Before 2005, Bihar’s economy grew at a rate of 5.3 per cent while India’s economy grew at 6.8 per cent. After the reforms, Bihar’s economy grew at 11.7 per cent with 4.7 per cent agriculture boost, while India’s economy grew at 8.3 per cent with agricultural growth at 3.6 per cent.
• Between the pre and post-reform period, average wholesale price of paddy increased by 126 per cent, maize by 81 per cent and wheat by 66 per cent.
• Considering the impact of reforms on crop output, in the pre-reforms (2000 to 2007) and post-reforms (2008 to 2015) period, the growth rates of output of field crops (1.53 per cent, 4.29 per cent) were higher than that of horticulture crops (-3.51 per cent, 2.85 per cent), with an impressive growth rate of overall output of agriculture and allied sectors (2.57 per cent, 4.66 per cent).

8. Contract farming

• Contract farming enabled farmers to offer produce at a predetermined price. When the market price is above contractual price, farmers have the liberty to sell at the higher price.
• Small farmers have benefitted more than large farmers in contract farming as income derived per acre was the highest for small farmers.

9. Agriculture markets starved of 3Cs

• Agricultural markets are starved of capital, competition and commitment. Capital injection postpones operation of the law of diminishing marginal returns.
• The gross private capital formation in agriculture is 75 per cent. Investment in marketing infrastructure, processing, logistics benefits society, where private sector has potential. For these, political will is crucial and hence, the Union government should not repeal the three laws.
• New provisions of Essential Commodities Act enable scale economies in agricultural marketing attract private sector investment.

10. National overseeing authority

• Farmers cannot be left to the free will of competitive markets due to skewed asset distribution. A national body, national agricultural marketing board similar to TRAI and SEBI, needs to be created to enhance the bargaining power of farmers and protect them, along with purchasers, sellers and consumers from possibilities of exploitation.

WHY ARE THE FARMERS PROTESTING AGAINST THE FARM BILLS?

• More than half of all government procurement of wheat and paddy in the last five years has taken place in Punjab and Haryana, according to Agriculture Ministry data. More than 85% of wheat and paddy grown in Punjab, and 75% in Haryana, is bought by the government at MSP rates. Farmers in these States fear that without MSPs, market prices will fall.
• These States are also most invested in the APMC system, with a strong mandi network, a well-oiled system of arthiyas or commission agents facilitating procurement, and link roads connecting most villages to the notified markets and allowing farmers to easily bring their produce for procurement. The Punjab government charges a 6% mandi tax (along with a 2.5% fee for handling central procurement) and earns an annual revenue of about ₹3,500 crore from these charges.
• The very right of the Centre to enact legislation on agricultural marketing. Article 246 of the Constitution places “agriculture” in entry 14 and “markets and fairs” in entry 28 of the State List. But entry 42 of the Union List empowers the Centre to regulate “inter-State trade and commerce”. While trade and commerce “within the State” is under entry 26 of the State List, it is subject to the provisions of entry 33 of the Concurrent List – under which the Centre can make laws that would prevail over those enacted by the states.
• Entry 33 of the Concurrent List covers trade and commerce in “foodstuffs, including edible oilseeds and oils”, fodder, cotton and jute. The Centre, in other words, can very pass any law that removes all impediments to both inter- and intra-state trade in farm produce, while also overriding the existing state APMC Acts.

ISSUE REGARDING THE BILL

• Yes, there were many flaws in the decades old APMC Act, but critics believe that the need was to plug the loopholes instead of introducing a new system altogether. A similar system has already been introduced in America and some European countries where it has failed miserably, we can only hope this does not happen in India and government will not repeat those mistakes.
• From the attitude of government, the stand of government is very clear that it is not going to change anything because already it has been termed as Masterstroke. Right now, it is just an Act both are results are possible; farmers income becomes double as said by the government, or their conditions worsen as feared by farmers. History is the best judge. While the intent of Government is laudable, we will be able to see the results of these new Acts after few years only. Right now, everything is just a speculation.
• The  bill have triggered strong protests all over the country. Let’s have a look at the issues that are triggering so many protests across the nation.
• These new farmers’ bills might end MSP or minimum support prices and this bothers the farmers.
• Another concern is the lack of bargaining capability with big companies. The people involved in farming might get the freedom to deal with the biggest of the companies but due to the lack of knowledge, he/ she might not be able to negotiate the best possible terms.
• Outside the mandis or government-regulated markets, there is hardly any regulation, and grievance re-dressal system is also not present there.
• The new farmers’ bill may weaken the APMC system which is considered to be very helpful for small farmers.
• As per the suggestions of agricultural economists, the focus should be given on strengthening APMCs rather than transferring everything to private entities.
• Many are fearing that the people involved in agriculture might be turned into slaves due to contractual farming.
• Due to the removal of restrictions on food storage, big companies may store agro products in huge quantities and create artificial hikes in price.

WAY FORWARD

Three fundamental reforms are necessary to make India’s growth more just and more inclusive.

• The first is, policymakers must listen to the less powerful people in markets. Therefore, institutions that represent small people — associations and unions of farmers, informal workers and small enterprises — must be strengthened, not repressed. When reforms are supposedly in their interests, they have a right to be heard.
• The second is the formation of cooperatives of producers and workers. By aggregating the small into larger-scale enterprises owned by themselves, not only do the producers have more power in negotiations with their buyers, suppliers, and with government, they are also able to retain a larger part of the value they generate and increase their own incomes and wealth. Government regulations must encourage the formation of strong cooperatives, and improve their ease of doing business.
• The third is, market reformers must clean up their ideological lenses and see the reality of where power lies in markets. As Barbara Harriss-White, a scholar of India’s agricultural markets once observed, “deregulated imperfect markets may become more, not less, imperfect than regulated imperfect markets.”

CONCLUSION:

• Farmers are debt ridden, starved of funding and of assured price mechanism. The three legislations if taken together accentuate the crisis even further. In the absence of a guaranteed support price mechanism, the legislations even fail to mention a very strong support for the MSP as a benchmark price as a fundamental condition for open agriculture trade and winding up of mandis.For years farmers have demanded statutory support price for their produce from the government.
• There is a need to restore the shaken confidence of the agrarian sector. In order for that to happen the government of India needs to give an iron clad guarantee on holding the price line 100% over and above the inflation-linked cost of production to the primary producer and not allowing any players to offer a price below that line to them. Only such a guarantee will ensure the confidence of the farmers in the system.
• We need to understand that if the country has to come out of her grave economic crisis, the answer does not lie in the economies of the urban or of the extractive economies of the capital. The answer decisively lies in the revival of the rural with dignity and respect. The country, it must be understood, cannot survive if the rural falls and chances of such an event happening today can only be averted with a considered policy response initiated with empathy and care.

THE CONTEXT: The recent farmer agitation has brought the issue of farmer distress front and centre in the public consciousness. The time seems ripe to find new solutions to the structural challenges facing farmers. One of the solution is to support farmers by Direct Income Support (DIS) but in recent time several reports highlighted that such schemes are facing many challenges. In this article, we will discuss that what should be the way forward for the effective implementation of these scheme.

INCOME SUPPORT SCHEME IN INDIA FOR FARMERS

• In agriculture, there are two major types of government support measures. The first one is price support measure and the second is income support measures.
• Price support means the government is procuring the agricultural produce from farmers at a remunerative price. India’s Minimum Support Price based procurement is a classic example of price support scheme.

DIRECT INCOME SUPPORT

• The second type of support is DIRECT INCOME SUPPORT (DIS).In this scheme,government transfers direct payment to the poor farmers.
• Under the WTO terminology, it is called Direct payments to farmers or Decoupled Income Support. Decoupled means such an income transfer to farmers will not influence (or minimum influence) production and price of the respective crops.

PM KISAN SAMMAN SAMMAN NIDHI

• The Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) is the first universal basic income-type of scheme targeted towards landed farmers.
• It was introduced in December 2018 to manage agricultural stress.

Initially, the scheme was targeted at small and medium landed farmers, but with the declining growth in gross value added of the agricultural sector, it was extended to all farmers in May 2019.

• This direct benefit transfer scheme was aimed at addressing the liquidity constraints of farmers in meeting their expenses for agricultural inputs and services.

Features of the scheme:

• Income support: The primary feature of this Yojana is the minimum income support it provides to farmers. Each eligible farmer family is entitled to receive Rs.6000 per annum across India. However, the amount is not disbursed at once. It’s divided into three equal instalments and meted out four months apart.
• Funding: PMKSNY is an Indian government-sponsored farmer support scheme. Therefore, the entirety of its funding comes from the Government of India.
• Identification responsibility: While the responsibility of funding lies with GOI, the identification of beneficiaries is not under its purview. Instead, it’s the responsibility of State and Union Territory governments.

BENEFITS OF DIRECT INCOME SUPPORT

Direct Income Supports’ ability to encourage farmers to raise production is less. At the same time, it has some positives:

• There is no leakage – income is transferred through DBT.
• There is protection for farmers against income loss and adverse terms of trade impact on agriculture.
• It is less distortionary and is WTO combatable; there is less influence on production and price.
• Farm income support is superior to price support as it is crop neutral. The farmer is getting reward for continuing with agriculture whatever may be the crop he is cultivating. On the other hand, India’s MSP historically, favored wheat and rice farmers as procurement was concentrated on these two crops.

PM KISAN AFTER TWO YEARS: A CRITICAL REVIEW

The PM KISAN scheme has completed two years (seven installments are released of the scheme) but facing several crises.  The scheme is a useful vehicle to provide support to farmers and it was included in the Pradhan Mantri Garib Kalyan Package during lockdown but, was this a useful way of relieving distress during the lockdown?  A survey by NCAER National Data Innovation Centre in June 2020 provides some useful insights in this regard:

Findings of the survey

• Lower level of economic distress among farmers than among other groups.
• While farmers faced some logistical challenges in transporting and selling their produce, 97 per cent of them continued to harvest Rabi crops and prepared for the Kharif season.
• Nearly 75 per cent of the cultivators who usually hire labourers for agricultural activities continued to do so.
• The farmers were relatively immune to the economic impact of the lockdown as nearly 32 per cent of them experienced a large income loss which is much lower compared to the proportion among casual wage workers and business households.
• The proportion of households that had to borrow to meet their day-to-day consumption needs during the lockdown was relatively low for the farmers.
• While 7 per cent of farm households suffered from occasional unavailability of food during the lockdown, this figure was much higher for casual workers and business households.

Performance of PM-KISAN during the Pandemic

• Only 21 per cent households received cash transfers through PM-KISAN.
• Around two-thirds reported receiving Rs 2,000 and about a fourth received Rs 4,000, possibly because family members engaged in agricultural activities may be co-residing within a household.
• About 35 per cent of rural PM-KISAN recipients suffered income losses to a large extent in comparison to more than half of the non-recipients.
• A little more than a third of PM-KISAN recipients borrowed money during this period as against 48 per cent of non-recipients.

WHAT ARE THE ISSUES WITH THE SCHEME AND WHY THE SCHEME IS NOT PERFORMING AS PER THE EXPECTATIONS?

Lack of DataBase

• The scheme was hurriedly announced right ahead of the 2018 elections and then the government did not have proper database of farmers.
• There are nearly 14.5 crore families in India but govt did not has proper database of these families. Many states like West Bengal, have delayed or did not submit the data related to farmers.

Difficulty in Identifying Beneficiary Farmers

• According to agricultural census of 2015-16, number of landholdings in the country was projected at Rs 14.65 crore. But landholding do not determine the number of farmer families present in the country as there are multiple owners for a single land. In such scenario, all the farmer families which own the land are eligible for the scheme.
• Number of landholdings in Punjab according to agricultural census were 10.39 lakh but number of beneficiaries’ farmers in PM-kisan database list were 17.52 lakh till October 23, 2019.
• It may happen that a single farmer holds multiple lands. The agricultural census may record multiple land holdings which PM-Kisan scheme would otherwise recognise as single farmer.

Census Issue

• Other problem includes the agricultural census that counts the number of operational landholdings. Which is the piece of land being used for cultivation without considering the title of land. Whereas PM-kisan scheme considers the farmer families recognised as land holders under the state or union territory.
• Further, around 14.3 crore landless farmers (census 2011) will not be able to avail this scheme. Mainly due to the fact they are not the land holders and are contract farmers.
• However, the government is trying to release fund to farmers by linking their account to Aadhaar card. Government extended the date to seed the adhaar account to November 30 2019.

Others

1. Intended Farm Households are not covered: PM-KISAN is not reaching all farmer households as intended as most of the farmers in UP, Haryana and Rajasthan own land and should be receiving benefits but only 21 per cent of the cultivators interviewed reported receiving the benefit.
2. Not a pro-poor scheme: it is not pro-poor since recipients of PM-KISAN seemed to be better off than the general rural population even before the lockdown.
3. Lack of digitized land records: In many States, land records are not updated regularly and therefore, there could be instances where the cultivating farmers would have partitioned their holdings from other family members, but would not have the records-of-right to claim the benefit instantly.
4. Overlapping of with other schemes: Various state governments have launched schemes with similar benefits such as Rythu Bandhu (Telangana), Annadata Sukhibhava (Andhra Pradesh), KALIA Scheme (Odisha) and Bhavantar Bhugtaan Yojana (Madhya Pradesh).

WHAT SHOULD BE THE WAY FORWARD?

Proactive role of Banks

• There are reports that after the loan waiver in Maharashtra or transfer of first instalment to the Bank accounts of farmers under KALIA scheme in Odisha, concerned bank branches adjusted the deposit money against past liabilities of few farmers.
• This kind of scenarios may lead to subversion of the objectives of the income support scheme, which is clearly intended to assist the farmers with some disposable cash for purchase of inputs.
• Banks involved in primary sector lending or disbursement of crop loans, etc need to be sensitized properly on their critical role in implementation of PM-KISAN.

Strengthening IT backbone

• Needless to say that States with robust computerized land records data base and a good IT infrastructure will be in a better position to implement PM-KISAN.
• With ICT usage and direct transfer of money to farmers’ bank accounts, pilferage would also be less.
• Farmers not having bank accounts should be encouraged to open ‘no-frills’ accounts under the Jan-Dhan Yojana. Linking Aadhaar data base will further strengthen the system and analytics later on from this big-data eco-system could assist decision making empirically.

Targeting benefits and updation of land records

• In many States, land records are not updated regularly and therefore, there could be instances where the cultivating farmers would have partitioned their holdings from other family members, but would not have the records-of-right to claim the benefit instantly.
• These kind of genuine cases need to be redressed by revenue authorities so that eligible cases are not deprived.
• Similarly, fraudulent claims should also be avoided. Involving the Gram Panchayats, wherever possible in targeting of beneficiaries may be explored.

LESSON FROM STATES POLICIES

• Odisha’s KALIA scheme offers some important lessons for the effective implementation of the scheme.
• Odisha used a three-step framework to identify beneficiaries. These are:
• Unification: The first step involved unifying state databases with “green forms” which were essentially applications from farmers who wanted to opt in.
• Verification: The second step involved verification of information through databases like the Socio-Economic Caste Census, National Food Security Act and other databases; de-duplication through Aadhaar; and bank account verification through bank databases.
• Exclusion: The third step involved excluding ineligible applicants like government employees, tax payers, large farmers, and those that voluntarily opted out.
• The use of technology and non-farm databases meant that KALIA could include sharecroppers, tenant and landless farmers as beneficiaries, which is a significant step towards inclusive agricultural policy-making.
• KALIA has now laid the foundation for a state-wide farmer database with 100 per cent Aadhaar, mobile number and financial address seeding. This database can be leveraged for targeted scheme delivery beyond DIS, issuing customised agri-advisories and improving financial access.

CONCLUSION: PM- KISAN is India’s first direct support scheme, which should be surely successful. But for this, govt of India should learn some important lessons from other sources like the KALIA scheme and for that technology can play a vital role. The potential of technology to transform social welfare delivery is exciting. An approach that leverages data to maximize citizen benefits, while ensuring privacy, security and access, must be the way forward if we are to truly realize the power of digital to serve every Indian.

JUST ADD TO YOUR KNOWLEDGE

THE MSP AS A PRICE SUPPORT MEASURE

• WTO calls these subsidies as amber box subsidies that distorts trade. Such subsidies should be reduced as they may make a high cost producer a big produce and the country may export its produce.
• According to the WTO, a support (subsidy) by the government that influences production and price is trade distorting and it should be reduced.

PM-KISAN (DIRECT INCOME SUPPORT)

• In this case; the government will be giving direct payment to the farmers for their low income from farming.
• Under the WTO terminology, it is called Direct payments to farmers or Decoupled Income Support.
• Decoupled means such an income transfer to farmers will not influence production and price of the respective croops.
• Under Agreement on Agriculture (WTO), the direct payment to farmers comes under the Green Box.
• The Green Box subsidies can be given by a government or in other words they need not be reduced.

THE CONTEXT: In June 2021, the Group of Seven (G7) major developed economies held their first in-person summit since 2019 in Cornwall, UK. The discussion focused on addressing the Covid-19 crisis, climate change, global taxation, etc. This article analyses the tax-related outcome in detail.

GLOBAL MINIMUM TAX

• The June 4-5 agreement between the G7 Finance Ministers to plug the cross-border tax loopholes used by the giant multinational companies (MNCs) to evade taxes has immense potential to reform and revolutionize the global tax system.
• The reform blueprint is based on two pillars:
• To distribute the profits equitably among countries where these are generated, enabling them to tax such profits
• Adoption of a minimum corporate tax rate of at least 15 percent globally.

The G7 proposal

• Besides proposing a global minimum tax rate of 15 percent, the G7 communique states that multinational companies, which have a 10 percent profit margin, will be taxed on at least 20 percent of the profits which exceed this figure, in countries where they operate.
• It underlines that for the new tax system to take effect, countries like India, which charges a two percent equalization levy on digital companies, will have to abolish their existing taxes on digital services.

WHY THE MOVE

• Using a tax avoidance strategy called Base Erosion and Profit Shifting (BEPS), MNCs have been artificially ‘shifting’ their profits year after year from higher-tax jurisdictions to tax-havens where they pay little or no tax, thus ‘eroding’ the ‘tax bases of the former.
• Countries like Ireland, Luxembourg, Cyprus, Caribbean countries like the British Virgin Islands, Bahamas or Cayman Islands, and Central American countries like Panama have used their tax rate arbitrage to attract the MNCs- About 40 percent of MNCs’ overseas profits are estimated to be shifted to low-tax countries in this way.

LOSS DUE TO PRESENT RULING

• The tax losses are stupendous – estimated to be $50 billion for the USA and over $10 billion for India.
• A global minimum tax rate of 15 percent would preclude countries from undercutting each other, yielding an estimated $50 billion $80 billion in extra tax annually from the MNCs.

RESENT TAX RATES

• The US tax rate was cut down to 21 percent from 35 percent by then President Donald Trump in 2017, which his successor Joe Biden now proposes to increase to 28 percent.
• The average OECD corporate tax rate in 2020 was 21.5 percent, with 18 out of 37 members charging higher rates. Only three countries charge rates lower than 15 percent: Ireland (12.5 percent), Hungary (eight percent), and Switzerland (8.5 percent).
• The average tax rate for Asian countries is around 23 percent; while China and South Korea charge 25 percent, Singapore charges only a 17 percent rate.
• In 2019, India also sharply reduced its corporate tax rates to 22 percent for domestic companies (15 percent for new manufacturing companies) without any deductions, aligning its corporate tax rate to global standards.

WHAT WILL CHANGE AFTER NEW TAX SLABS?

• It can bring to an end the decades-long “race to the bottom” in which some countries compete with each to attract corporate giants with ultra-low tax rates and exemptions, depriving the governments of other countries where the MNCs reap most of their profits of billions of dollars in taxes.
• It will also bring to an end a very lucrative business model of these MNCs that park most of their profits in tax havens, bring to an end the golden era of the heavens themselves.
• The tech giants which operate remotely through digital mediums like Google, Amazon, Facebook, Apple, etc. would start feeling the pinch.

WHAT ARE THE INDIA’S CONCERNS?

SOVEREIGN ISSUE

• The G7 proposal interferes with India’s sovereign right to determine its tax policy. However, in today’s digitally interconnected world, such an approach is anachronistic.

INVESTMENT

• Countries such as Ireland, and Singapore have managed to position themselves as attractive investment destinations by offering low tax rates. This investment, in turn, helps them generate demand by efficiently utilizing resources and creating employment. The Indian government’s decision to slash corporate tax rates in 2019 is a tacit recognition of this larger economic impact of taxation.

TAX COLLECTION REDUCTION

• Since the economic reforms of 1991, the corporate tax rate in India has never come down below 22 percent for domestic companies.
• The tax cuts in 2019 are expected to cost the Indian exchequer Rs 1.45 lakh crore annually. Therefore, the likelihood of the Indian government further reducing the corporate tax rate appears slim as it risks widening the fiscal deficit.

BUT IT CAN BE A GAME-CHANGER FOR INDIA

• The high tax rates in India have meant that corporations devise innovative structures to avoid paying their share. As per the Tax Justice Network, India loses out approximately $10 billion, which is about 0.41 percent of the GDP, on tax revenues annually. As a result, the already-stretched Indian tax administration is engaged in costly litigation with multinationals for decades.
• India is likely to gain in tax revenue on this account, given the size of its market and the growth opportunities it offers. The country has been at the forefront to legislate in her domestic tax laws the concept of ‘significant economic presence (SEP) to create the ability to levy tax on income generated in India (from Indian customers) by foreign digital commerce companies.
• A global minimum corporate tax rate of 15 percent is also expected to be beneficial to India. The Tax Justice Network estimates the country to gain at least $4bn (Rs 300 bn), equivalent to ~6 percent of FY21 corporate tax collections.
• Besides, it would not hurt FDI to India or create any adverse or incremental tax liability in the hands of foreign investors given that the minimum tax rate for new manufacturing business has recently been legislated at 15 percent (plus surcharges).
• At the same time, in respect of outbound investments, it will prevent base erosion of tax in the country as the government will be able to claw back any shortfall in tax paid below 15 percent by an overseas business owned by an Indian resident, once the global threshold rule becomes operational.

ABOUT THE SUMMIT

DATE OF SUMMIT

11-13 June 2021

PARTICIPATION

• Apart from seven G- 7 members (Including UK, USA, Canada, Germany, Japan, Italy, and France), This year the United Kingdom has invited the leaders of four other prominent democracies to the Summit, these are
• Australia
• India
• The Republic of Korea
• South Africa

MAJOR OUTCOMES OF THE SUMMIT

• Climate change: G7 nations are moving closer on their climate strategies, but differences over key details will prevent more concerted action for now.
• Building back better, and greener: G7 countries will channel more international development finance into infrastructure and climate change projects, but they refused to label the initiative as a direct rival to China’s Belt and Road Initiative (BRI).
• Shifting approach towards China: The official communiqué directly mentioned competition with China for the first time—a notable shift from previous summits, although countries differ in their approach.
• Global Covid-19 vaccine rollout: G7 countries are ramping up their vaccine diplomacy efforts. G7 states have lost the public relations battle to China and Russia.
• Global tax agreement remains elusive: Leaders endorsed the 15% global minimum corporate tax plan.

INDIA AT THE SUMMIT

PM took part in two sessions of Summit: ‘Building Back Together—Open Societies and Economies’ and ‘Building Back Greener: Climate and Nature’.

Highlights of PM speech

• India is a natural ally for the G7 countries in defending the shared values from a host of threats stemming from authoritarianism, terrorism and violent extremism, disinformation, and economic coercion.
• Democracy and freedom were a part of India’s civilizations ethos.
• Need to ensure that cyberspace remains an avenue for advancing democratic values and not of subverting them.
• Developing countries need better access to climate finance and emphasized that the planet’s atmosphere, biodiversity, and oceans cannot be protected by countries acting in isolation.
• The planet’s atmosphere, biodiversity, and oceans cannot be protected by countries acting in silos and called for collective action on climate change.
• Indian Railways is committed to achieving Net Zero Emissions by 2030.
• India is the only G-20 country on track to meet its Paris commitments.
• India is increasing the effectiveness of the two major global initiatives nurtured by India i.e. the CDRI and the International Solar Alliance.
• Developing countries need better access to climate finance.
• India’s ‘whole of society’ approach to fighting the pandemic, and also committed support to improve global health governance.

AN ANALYSIS OF THE SUMMIT

ON COVID AND VACCINATION

Positives

• On Covid-19, G7 is right to focus on vaccinating the world. After all, it is now conventional wisdom that no one is safe until everyone is safe.

Negatives

G7 ignores the three immediate actions recommended

1. One billion vaccine doses by September 2021 and two billion doses by end of 2022;
2. Waiving intellectual property rights (IPR)
3. Committing 60% of the $19 billion required for Access to Covid-19 Tools (Act) Accelerator in 2021 for vaccines, therapeutics, diagnostics, and strengthening of health systems.

G7 falls short significantly on all three counts.

• By providing for a paltry one billion vaccine doses over the next year, G7 has effectively indicated that even by the end of 2022, not everyone on this planet will be vaccinated.

ON CLIMATE

• On climate, the question was not whether G7 countries would commit to net zero emissions by 2050. That was the basic minimum that they were expected to do, and which they have done.
• The real question related to climate finance is how will the world’s richest countries meet their Paris Accord commitment of $100 billion every year to finance the energy transition of developing and least developed countries?
• Here again, the communique comes up with the vaguest of language, referring to increasing and improving climate finance to 2025 and reaffirming the developed country’s goal to mobilize $100 billion.

ON CHINA

• While G7 wish to cooperate with China on issues such as climate but called for respect to respect human rights in Xinjiang and autonomy for Hong Kong. Taiwan also gets a mention for the first time.
• G7 has made a valiant attempt to counter the Belt Road Initiative with its Build Back Better for the World (B3W) plan.
• The biggest signal for China is the “Open Societies Statement” signed by G7 and guest countries.
• The statement spells out the unconditional commitment of these countries to human rights for all, democracy, social inclusion, gender equality, freedom of expression, and rule of law.
• This is a welcome move and is perhaps the best sign that democracies can unite based on these universal values.

HOW SHOULD INDIA READ THE G7 SUMMIT?

A TEMPLATE FOR INDIAN ENGAGEMENT WITH THE WEST

• PM Narendra Modi’s statement that India is a natural ally of G7, with an emphasis on its civilizational commitment to democracy, freedom of thought, and liberty, will be welcomed by India’s friends all over the world.
• The PM’s statement should put these doubts about India’s commitment to rest.

ON CLIMATE

• On climate finance, India has a mountain to climb.
• India will come under pressure at the COP 26 meeting in Glasgow to commit to net-zero emissions by 2050.
• Not just this, the communique appears to endorse the idea of “carbon leakage” and hence gives implicit approval to the European Union’s idea of a carbon border tax. This is particularly unwelcome for India.

FAIRTRADE AND FREE TRADE

• The communique harps on “fair trade” much more than it does on “free trade”.
• Fairtrade, by definition, stresses labor and environmental standards and the communique says as much. How these will be implemented without resort to protectionism remains to be seen.
• Similarly, G7 endorses plurilateral initiatives at the World Trade Organization, something India hitherto has studiously avoided. Things will come to a head at the 12th Ministerial Conference of the WTO in December.

WAY FORWARD:

• The Indian government would do well to engage with the multilateral ecosystem to ensure that future multilateral rules do not disadvantage developing economies, instead of outrightly rejecting them.
• India should focus on capacity building and timely resolution of disputes.
• A minimum global tax rate would disincentives corporations to artificially shift their profits to low-tax jurisdictions. It will also reverse the trend of offshore incorporation in Indian entities by eliminating tax arbitrage. The Indian government can consider suggesting carve-outs to the proposal that can mitigate any unintentional adverse impact.
• India’s 2022-23 presidency of the G20 presents an opportunity for the country to articulate a forward-looking vision for fair and comprehensive global tax rules.

CONCLUSION: India’s engagement with the west and the recent tax proposal by G7 is the opportunity for India to overcome the challenge that occurred after Covid-19. Although, India’s concerns are justified, surely, the global minimum tax would be a game-changer for countries like India. The proposal indicates a political momentum and a desire to fast-track structural taxation reforms that could improve India’s economic competitiveness and lower jurisdictional tax arbitrage.

THE CONTEXT: After recent months of back and forth attempting to negotiate a better trade agreement for India to join the Regional Comprehensive Economic Partnership (RCEP), the Indian government decided not to join the trade forum and be excluded from what has been seen as one of the biggest plurilateral free-trade partnerships in the world.

India had been a part of negotiations for almost nine years till it pulled out in November 2019, stating that inadequate safeguards and lowering of customs duties will adversely impact its manufacturing, agriculture and dairy sectors.

However, by staying out, India has blocked itself from a trade bloc that represents 30% of the global economy and world population, touching over 2.2 billion people.

Further, as the summary of the final agreement shows that the pact does cover and attempt to address some issues that India had flagged, including rules of origin, trade in services, movement of persons. Therefore, this makes the case of India to review its decision and look RCEP through the lens of economic realism.

REASONS FOR INDIA’S NOT SIGNING RCEP

India’s withdrawals from RCEP may be attributed to its trade and technical concerns:

TRADE CONCERNS

INDIA’S BILATERAL TRADE-DEFICIT WITH RCEP COUNTRIES

India has already a bilateral Free Trade Agreements (FTAs) with South Korea, ASEAN countries and Japan which are the part of RCEP. Though trade has increased the post-Free Trade Agreement with these countries, imports have risen faster than exports from India.

According to a paper published by NITI Aayog, India has a bilateral trade deficit with most of the member countries of RCEP.

TRADE & STRATEGIC CONCERNS WITH CHINA

India has already signed FTA with all the countries of RCEP except China. Trade data suggests that India’s deficit with China, without any trade pact with it, is higher than that of the remaining RCEP constituents put together.

India already has a massive trade deficit with China and a lower custom duty-invoked by this trade agreement, would have made its commodity markets extremely vulnerable to an influx of Chinese goods. This trade deficit is the primary concern for India, as after signing RCEP cheaper products from China would have flooded the Indian market.

Further, from a geopolitical perspective, RCEP is China-led or is intended to expand China’s influence in Asia.

PROTECTION OF DOMESTIC INDUSTRY

India’s withdrawal from RCEP is due to its possible negative effects on small and medium scale farmers, traders and industries, which are already experiencing a chronic slowdown. India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products like dairy, steel etc. For instance, the dairy industry is expected to face stiff competition from Australia and New Zealand. Currently, India’s average bound tariff for dairy products is on average 35%.The RCEP binds countries to reduce that current level of tariffs to zero within the next 15 years.

TECHNICAL CONCERNS

UNAVAILABILITY OF THE MOST FAVORED NATION (MFN) CLAUSE

One key issue for India was the unavailability of the Most Favored Nation (MFN) clause that would have made India to give the same treatment to RCEP nations that it gave to others.

NON-ACCEPTANCE OF AUTO-TRIGGER MECHANISM

To deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism.Auto-trigger Mechanism would have allowed India to raise tariffs on products in instances where imports cross a certain threshold. However, other countries in the RCEP were against this proposal.

LACK OF CONSENSUS ON RULES OF ORIGIN

India was concerned about a “possible circumvention” of rules of origin. Rules of origin are the criteria used to determine the national source of a product. Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs.

WHY INDIA SHOULD HAVE SIGNED RCEP?

More than the technical reasons, it is the concerns of cheaper inflows of imported goods from RCEP countries and trade deficit with them that may have given reasons to India for not signing this agreement. However,

• If India is not part of trade pacts with major countries, and the WTO process is in trouble, it will quite quickly run out of countries to trade with. Sure, India can continue to export to these countries, but it will suffer a disadvantage since, with the pact-countries, there will be no/low import duties on most goods traded while this will not hold for India.
• What makes an exports push all the more critical is that India’s high GDP growth in the past has been directly related to exports growth, not that of local consumption. In the boom years of 2003-08, JP Morgan chief India economist Sajjid Chinoy points out, India’s real exports growth averaged 17.8% annually while (public and private) consumption grew just 7.2%; a similar point has also been made by former chief economic advisor Arvind Subramanian.

Analysis by Pravin Krishna of Johns Hopkins University, for the period 2007 to 2018, shows that India’s trade deficit—as a share of its total trade deficit—with the ASEAN fell from 9.9% to 6.6%. For all bilateral agreements that India has, such as with Japan, Korea, etc, this fell from 12.6% to 7.5%. Interestingly, the sharpest deterioration in India’s deficit is with China, a country with which it has no FTA.

INDIA’S POOR COMPETITIVENESS IS THE REAL ISSUE:

• The real issue that comes out is that of India’s poor competitiveness, and that has little to do with FTAs. To understand this better, let’s keep India out of the equation, just look at the overall exports of various countries.
• In the last 20 years (see graphic), India’s exports grew 9 times while those of China rose 13 times—on a base that is 5.5 times India’s—and Vietnam’s rose 23 times; as a result, from a mere 32% of India’s in 1999, Vietnam’s exports are 81.5% of India’s today. In other words, whether or not we sign a trade pact with these countries, chances are their exports will grow faster than India’s; the fact that their exports are growing faster than ours means they are more competitive.
• The same result, of lack of competitiveness, as it happens, is visible from India’s overall exports. From 16.8% of GDP in FY12, India’s exports fell to 10.9% in FY20; and while imports fell from 26.8% to 16.5%, imports are significantly higher than exports.
• Indeed, the production linked incentive (PLI) scheme that the government has finalised for mobile phones—and plans to do for 10 other sectors soon—is itself recognition of this reality since the PLI offered are meant to offset a part of the disadvantage of producing in India. One of the studies on the disadvantage in the case of mobile phones put this at 9.4-12.5% versus manufacturing in Vietnam; the cost of electricity (based on the amount used for production) added one per cent to the cost of production of a phone in India, expensive bank loans added 1.5-2% to the costs, logistics 0.5%, land one per cent, etc.

REASONS FOR INDIA TO REVIEW

GLOBAL ECONOMIC STAGNATION DUE TO COVID-19

With global trade and the economy facing a steep decline due to Covid-19 pandemic, RCEP can serve as a bulwark in containing the free fall of the global economy and re-energising economic activity.Further, the RCEP presents a unique opportunity to support India’s economic recovery, inclusive development and job creation even as it helps strengthen regional supply chains.

NEED FOR ECONOMIC REALISM

India should deter seeing RCEP only from the Chinese perspective.India should acknowledge that the trade bloc represents 30% of the global economy and world population, touching over 2.2 billion people, and staying out of RCEP may result in suboptimal economic growth without leveraging Asia-Pacific demand.

In this regard, India can draw inspiration from Japan & Australia, as they chose to bury their geopolitical differences with China to prioritise what they collectively see as a mutually beneficial trading compact.

STRATEGIC NEED

It is not just because gains from trade are significant, but the RCEP’s membership is a prerequisite to having a say in shaping RCEP’s rules. This is necessary to safeguard India’s interests and the interests of several countries that are too small to stand up to the largest member, China. Moreover, staying out of RCEP may also affect India’s Act East policy.

CONCLUSION: According to some experts, one of the ways India can offset the trade and strategic loss due to signing out of this RCEP is by signing FTA with both the USA and the EU. While it is theoretically possible India’s exports can grow faster should there be an FTA with both the US and EU—even so, China and Vietnam’s higher competitiveness is an issue—it is by no means a given that such an FTA can be signed quickly. Indeed, for decades, India has resisted opening up sectors that the US and EU have been interested in. That something like the import duties on Harley Davidson motorcycles was allowed to become a friction point between India and the US despite no serious manufacture of these motorcycles in India indicates just how inflexible India has been; imagine its ability to open up sectors or reduce duties in sectors where there are a large number of local producers who will be hit.

Given the economic and market power India wields, the RCEP members have left the door open for India. It would be in India’s interest to dispassionately review its position on RCEP and carry out structural reforms that will help India to mitigate some of the repercussions arising from the RCEP.

THE CONTEXT: India experienced a power crisis in October 2021, as the stock of coal held by the country’s thermal power plants has hit critically low levels. Many power plants are operating with zero reserve stock or with stocks that could last just a few days. Some States have witnessed partial load-shedding aimed at saving power. This article analyses the reasons behind the coal shortage and provides the way forward for ensuring an uninterrupted power supply in the country.

ABOUT THE COAL CRISIS

How bad is the problem?

• According to data released by the Central Electricity Authority, as of 13^th October 2021, India’s 135 thermal power plants overall had on average coal stock that would last just four days.
• The government usually mandates the power plants to hold stocks that would last at least two weeks. It has, however, reduced this requirement to 10 days now to avoid hoarding and ensure a more equitable distribution of coal among the plants.
• India relies on coal to meet over 70% of its power needs, and Coal India Limited (CIL) supplies over 80% of the total coal.
• The current coal crisis comes amid a broader energy crisis across the world, with the prices of natural gas, coal and oil rising sharply in the international market.

Is it a “crisis” or shortage?

• “Crisis” is a subjective term. There are no objective criteria for determining whether there is a crisis or not. However, “shortage” can be determined objectively.
• No one can deny the fact that the supply of coal in India is well below the demand. Whereas the demand is nearly a billion million tonnes (MT), the country’s supply is well below 800 MT.
• When this shortage becomes acute, in terms of the availability of coal at power plants, it is sometimes called a crisis.
• The acute shortage can be on account of production, increased demand or a failure of supply chain management when the stocks are sufficient at the pit head but requisite supply is not made to the power plants.

ANALYSIS

What are the reasons behind the present crisis?

• The current crisis in the availability of coal has been the result of lacklustre domestic production and a sharp drop in imports over the last few years.

• According to BP Global Energy Statistics, domestic coal production in India has stagnated since 2018. At the same time, the amount of coal imported from other countries to meet domestic demand, too, has dropped significantly. In fact, the government last year said it would stop all coal imports by FY24.
• Reasons also include short-term issues like flooding in coal-mining areas, transport issues, labour disruptions in major coal-mining countries and the sudden rise in power demand as the economy revives from the pandemic.
• Stagnating supply did not cause trouble last year, with the economy shut down to tackle the COVID-19 pandemic. But the rise in power demand this year has exposed the government’s inability to push domestic production or compensate for insufficient domestic production by increasing imports.

What are the structural problems in coal sector and power industry?

• Populist politics has ensured that the price that many consumers pay for power is not commensurate with the production costs. In FY19, for instance, the revenues of distribution companies covered only about 70% of their total costs.
• This has discouraged private investment in power generation and distribution even as the demand for power continues to rise each year.
• It has also increased the debt burden on public sector distribution companies as they have not been compensated for their losses while selling power at subsidized rates.
• The mining of raw materials such as coal is nearly monopolized by public sector companies like CIL that are not run primarily for profits. In fact, CIL has kept its coal price low even as international prices have risen significantly this year.
• The financial crisis is brewing in the power sector. GENCOs have a receivable of more ₹2,00,000 crore from distribution companies. They, in turn, owe more than ₹20,000 crores to CIL.

What can we expect in the near future?

• In recent years, many countries have been trying to cut down on their fossil fuel consumption in order to meet emission targets. But with the current energy crunch, which is prevalent not just in India, fossil fuels are likely to make a strong comeback.
• India and China, the top two consumers of coal in the world, are expected to further increase the production of fossil fuels.
• The Indian government has been pushing CIL to ramp up production to meet the rising demand and cut down on the country’s reliance on imported coal. However, it is expected to ease restrictions on imported coal in the near future to tide over the crisis.
• China, which consumes half of the world’s coal output and has committed itself to reduce its carbon emissions by 65% by 2030, is set to install more coal-powered power plants to meet its rising energy needs.

THE WAY FORWARD:

1. Increase the coal production to meet the increased demand:

• Ironically, all the coal resides in States that are ruled by non-National Democratic Alliance (NDA) parties. Officers from the Union Government will have to go down to the States, convey a value proposition and sit with State-level officers to resolve issues related to land acquisition and forest clearances.
• The Union Government will also have to take up clearance-related issues with the Ministry of Environment, Forest and Climate Change.
• Funds will have to be arranged to CIL for the expansion of existing mines as well as the opening of new ones.
• First, the Union Government should stop squeezing more funds out of CIL as it has done during the past few years by way of dividends to balance its budget when this money should have been used to open new mines and expand existing ones.
• Second, it should consider providing cash to CIL against the dues owed by GENCOs.
• Non- CIL production will have to be augmented.
• An inter-ministerial Coal Project Monitoring Group (CPMG), which was set up in 2015 to fast-track clearances, became dormant. This will need to be revived.

2. Ease restrictions on imported coal and compulsory use of imported coal: The government recently mandated the thermal power plants to blend imported coal with domestic coal up to a limit of 10%.
3. Reducing the power losses from the transmission and improving the efficiency & management of power DISCOMS.
4. Shifting towards renewable energy sources for power production and integrating them into national grid. India has the ambitious target of installing 450 GW capacity by 2030 from renewable sources. This will also help to meet the NDCs committed to Paris Agreement.
5. Working on demand-side management to optimize the demand of power especially in domestic and agriculture sector Power-efficient appliances should be promoted and solar energy for irrigation pumps used by farmers (PM KUSUM scheme).

THE CONCLUSION: The coal crisis may be temporarily over, but if the fundamentals of the crisis are not taken care of, it is likely to recur. Uninterrupted supply of power is of paramount importance for economic growth in the country. Therefore, the government of India should address the structural problems in the coal sector and power sector so as to avoid any energy crisis in the near future.

THE CONTEXT: As per the data released by the RBI on 4th June 2021, India’s foreign exchange reserves have crossed the milestone $600 billion marks for the first time in the country’s history. As per the data released by the RBI on 16th July, 2021 forex reserves rose to a record $612.73 billion with which India becomes the 4th largest forex reserves holder globally. A rise in forex is mainly due to a rise in Foreign Currency Assets (FCA).

MORE ON THE NEWS:

• Currently, China has the largest reserves followed by Japan and Switzerland. India has overtaken Russia to become the fourth largest country with foreign exchange reserves.
  1. China – $3,349 Billion
  2. Japan – $1,376 Billion
  3. Switzerland – $1,074 Billion
  4. India – $612.73 Billion
  5. Russia – $597.40 Billion
• To increase the foreign exchange reserves, the Government of India has taken many initiatives like Aatma-Nirbhar Bharat. The government also has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc. Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment.
• Although our foreign exchange reserves have been increasing continuously for the last three decades, the growth has become faster than ever in the last 18 months.
• Compared with 1991, when India faced a situation of acute shortage of foreign exchange, such that our reserves were not enough to pay for imports of even seven days, today the situation is such that our foreign exchange reserves are enough to pay for 18 months of imports.

ALL YOU NEED TO KNOW: FOREX RESERVES

WHAT ARE FOREX RESERVES?

• Forex reserves are external assets in the form of gold, SDRs, and foreign currency assets accumulated by India and controlled by the Reserve Bank of India.
• Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
• RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.

THE COMPONENTS OF FOREX RESERVES

• The Forex reserves of India consist of four categories:
  1. Foreign Currency Assets(capital inflows to the capital markets, FDI, and external commercial borrowings)
  2. Gold
  3. Special Drawing Rights (SDRs of IMF)
  4. Reserve Tranche Position

SIGNIFICANCE OF FOREX RESERVES

• The IMF says official foreign exchange reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
• It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

WHAT DOES THE RBI DO WITH THE FOREX RESERVES?

• The RBI functions as the custodian and manager of forex reserves and operates within the overall policy framework agreed upon with the government.
• The RBI allocates the dollars for specific purposes. For example, under the Liberalized Remittances Scheme, individuals are allowed to remit up to $250,000 every year.
• The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens.

WHERE ARE INDIA’S FOREX RESERVES KEPT?

• The RBI Act, 1934 provides the overarching legal framework for the deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers, and counterparties.
• As much as 64 percent of the foreign currency reserves are held in the securities like Treasury bills of foreign countries, mainly the US.
• 28 percent is deposited in foreign central banks and 7.4 percent is also deposited in commercial banks abroad.

IS THERE A COST INVOLVED IN MAINTAINING FOREX RESERVES?

• The return on India’s forex reserves kept in foreign central banks and commercial banks is negligible.
• While the RBI has not divulged the return on forex investment, analysts say it could be around one percent, or even less than that, considering the fall in interest rates in the US and Eurozone.

WHY IS FOREX RISING DESPITE THE SLOWDOWN IN THE ECONOMY?

RISE IN FPI AND FII

• The major reason for the rise in FOREX reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs). For example, last year- Reliance Industries subsidiary -Jio Platforms – has witnessed a series of foreign investments totaling 97,000 crores.

CRASH IN OIL PRICES

• The fall in crude oil prices has brought down the oil import bill, saving the foreign exchange.

FALL IN OVERSEAS REMITTANCES AND FOREIGN TRAVEL

• Overseas remittances and foreign travels have fallen steeply, down 61 percent in April from $12.87 billion.

WHAT WE CAN DO WITH EXCESS RESERVES

ACQUIRING STAKES IN DEVELOPED COUNTRY FIRMS

• While keeping the forex reserves in the treasury is costly for the country with low interests in it, countries need to use the funds to acquire stakes in firms of developed countries to increase profit.

SETTING UP FUNDS

• The recent surge in reserves is mostly a result of speculative capital inflows on the capital account. Rather than ‘sovereign wealth’, these inflows are ‘liabilities’ and are therefore vulnerable to sudden outflows by foreign investors amid an increase in domestic or global risk aversion. These funds such as Stabilisation funds or Pension funds can help the economy during outflow.

USING AS A TOOL OF INTERNATIONAL POLITICS

• The US bonds have been used by China for a long time as a tool for achieving its interests concerning the US. India too needs to learn and use it for favorable terms in trade and solving challenges such as Pakistan.

GROWTH AND DEVELOPMENT OF NATIONS

• The forex reserves can be utilized for reaching the SDG goals given that an adequate amount of funds are maintained for any unforeseen circumstance.

ISSUES RELATED TO RISING FOREX RESERVES

• According to the former RBI Governor YV Reddy, there are some differences among academics on the direct as well as indirect costs and benefits of the level of forex reserves, from the point of view of macro-economic policy, financial stability, and fiscal or quasi-fiscal impact.
• China’s foreign exchange reserves increased mostly thanks to a balance of payments (BOP) surplus of China with most of their trading partners. To some extent, they also grew due to foreign direct investment. Whereas in India’s case, the increases in India’s foreign exchange reserves are mainly due to foreign direct investment (FDI) and foreign portfolio/ institutional investment (FPI). Generally, our balance of payments remains in huge deficit.
• Economists agree that the best option as a source of foreign exchange is the balance of payments surplus.
• Even if the foreign exchange is obtained through investment in the stock markets, then also it has many side effects like-
• It causes volatility not only in the stock markets but also in the exchange rate. Its result can be ominous for the country.
• The country has to pay a heavy price for this inflow of foreign exchange as these investors take back the huge profits to their countries of origin even as the value of their assets keeps increasing.
• While foreign institutional investors have invested a total of $281 billion in India to date, the total valuation of their assets has reached $607 billion as of March 31, 2021. They can sell their $607 billion worth of shares and bonds and go back at any moment and all our foreign exchange reserves can run out in a jiffy. That is why portfolio investment is also called ‘hot money”.
• Foreign investment, foreign loans are taken by private companies, and remittances by Indians are all important for increasing foreign exchange reserves. But not all these sources have a similar effect on the reserves.
• Remittances by Indians normally do not have any repayment obligations and generally, all these amounts remain in India forever.
• Foreign investors (Both foreign direct investors or portfolio investors) repatriate huge amounts of money. In the last ten years (2010-11 to 2019-20), these foreign investors have withdrawn $390 billion, in the form of dividends, royalties, technical fees, interest, and salaries and this amount has been increasing year after year.
• There is no stability in portfolio investment. It is not possible to estimate how much foreign exchange the portfolio investors will bring in and when they will withdraw. Their volatility affects the exchange rate, causing huge losses. Not only this, these investors cause huge volatility in the stock markets as well.

SHOULD FOREX RESERVES FINANCE STIMULUS TO THE INDIAN ECONOMY?

YES 

• The sufficiency of forex reserves is sometimes measured by how many months’ worth of imports a country can afford. While forex reserves amounting to import cover of six months is considered sufficient by the RBI, India import cover is enough to sustain imports up to 18 months.
• In case of a credit shock, India can mitigate any balance of payment crisis, as there are sufficient arrangements for foreign exchange reserves in the form of a credit line from the IMF and many Central bank liquidity swap agreements with countries like Japan.
• As there is a lack of considerable space both on the monetary and fiscal front to support economic growth, part of the country’s forex reserves can be used for stimulating the economy.
• Economist has theorized that holding high forex reserves are unnecessary. Not using them for mega-projects (like financing infrastructure projects) are lost opportunities.

NO

• In the future oil prices might increase further. With the rise of 1$ per barrel of crude oil prices, India has to additionally pay nearly Rs 15000 crore. Given this, India should deter using forex reserves for providing economic stimulus.
• The rise in current forex reserves is due to the massive inflow of FIIs. However, FIIs by their nature are investments based on speculation. Therefore, the current surge in forex reserves should not be treated as permanent nature.
• High forex reserves also help India to maintain its global rating, especially in the context of falling GDP growth rate. The depletion in forex reserves may harm these ratings, which in turn may reduce foreign investment inflows into India.
• RBI has been fundamentally using India’s foreign exchange to ensure rupee stability. Given the fluctuation in the Indian rupee vis-a-vis the dollar, the Indian rupee has become one of Asia’s worst currencies. Thus, RBI will need enough forex reserves to maintain the stability of the Indian Rupee.
• An economic stimulus is ineffective without structural reforms. Even using forex reserves would not resolve all the challenges facing Indian infrastructure development.

WAY FORWARD:

• Over-reliance on forex reserves to provide economic stimulus may prove to be dangerous for the economic stability of the Indian economy.
• Foreign investors are repatriating huge profits from India while the country’s returns from these foreign exchange reserves are very negligible. Avenues will have to be found for gainful use of foreign exchange reserves beyond a limit.
• Since there’s continuously the fear that these outside organization speculators may take off with their “hot money” anytime. In this respect, an arrangement of a ‘lock-in period’ can be forced on them. On the off chance that they still need to require their cashback, at that point an arrangement can too be made to levy tax on them. This charge was recommended by an economist named James Tobin; subsequently, it is additionally called ‘Tobin Tax’.

CONCLUSION: Over-reliance on forex reserves is problematic; not using them is a lost opportunity. If the government intends to use forex reserves as an emergency fund, it should ensure that they do not shrink just when they are most needed. Apart from it, there is a need for separate attention to carry out structural reforms that can pull out the Indian economy from a persistent slowdown.

THE CONTEXT: The concept and practice of gig economy has gained wide currency across the globe. In India, the entry of various food delivery apps, cab aggregators and others have revolutionized this segment of the economy. While they provide huge scope for freelance/part time jobs for India’s demographic dividend, the management practices of these platforms have raised concerns of labour exploitation. In this context, this write up examines how gig economy results in informalisation of labour on the one hand and provides freedom of work on the other.

OPPORTUNITY AND POTENTIAL OF GIG ECONOMY IN INDIAN CONTEXT

• The Indian gig economy has the potential to serve up to 90 million jobs in the non-farm sectors of India and can add 1.25 per cent to the country’s GDP.
• Startups like Ola,Uber, Zomato,Swiggy have established themselves as the main source of gig economy in India. The gig sector has the potential to grow to US $455 billion at a CAGR of 17 per cent by 2024, an ASSOCHAM report says.
• The gig economy is understood as the process in which labour or money is exchanged between two individuals or companies through digital platforms for a short period of time and on the basis of payment by task.
• Independence and flexibility are two special features of gig economy. Those who want to earn extra money or like flexibility in working condition will prefer the format.
• Gig workers could be the rideshare and delivery boys, handymen, grocery shoppers, graphic designers, writers, developers and the list goes on.
• All the independent workers from the sectors of e-commerce, technology, food and beverages, home services fall into the category of gig economy.
• Gig workers have a better potential to earn than the regular job owners. The gig workers can enhance their income by upgrading their skills.
• The concept is catching up with the young generation as they find flexibility of work convenient. India is the biggest market for flexi staffing as the survey of the Indian economy 2021.

DEVELOPING CONCEPTUAL UNDERSTANDING

WHAT IS GIG ECONOMY?

• The gig economy is a job market which consists of short-term or part-time work done by people who are self-employed or on temporary contracts.
• Section 2(35) of the Code on Social Security 2020 defines a gig worker as a person who participates in a work arrangement and earns from such activities outside of a traditional employer-employee relationship
• As per the World Economic Forum, gig economy is defined by its focus on workforce participation and income generation via “gigs”, single projects or tasks for which a worker is hired.
• The term “gig” is a slang word for a job that lasts a specified period of time; it is typically used by musicians.
• Examples of gig employees in the workforce could include work arrangements such as freelancers, independent contractors, project-based workers and temporary or part-time hires.
• As there is no employer-employee relationship, the gig workers are not tied to any particular employer and therefore have greater flexibility in terms of the work they can choose and the hours they dedicate.
• Businesses have flexibility when they are not dependent on a set of employees for executing tasks, and additionally benefit from avoiding the cost of social security and fixed remuneration provided to employees.
• The service sector fuelled by digital economy has been the most resilient segment of the gig economy. The size of the gig economy is projected to grow at Compounded Annual Growth Rate of 17% and is likely to hit a gross volume of $455 billion by 2023, as per ASSOCHAM.

WHAT IS PLATFORM WORK?

• Platform work means a work arrangement in which an organization or an individual uses online platforms to provide goods and services to consumers. For example, Uber, Ola, Zomato etc.
• The Code on Social Security 2021 defines platform work as a work arrangement outside the traditional employer-employee relationship in which organisations or individuals use an online platform to access other organisations or individuals to solve specific problems or to provide specific services in exchange for payment.
• Section 2(61) of the Code on Social Security defines a platform worker as someone engaged in or undertaking platform work.
• In general, platform workers are the most visible and vulnerable faces of the gig economy. The gig work includes platform work also and often these terms are used interchangeably. For the purpose of our discussion, we also take a similar approach

WHAT IS MEANT BY INFORMALISATION OF LABOUR?

• When the share of the informal workers in the total labour force increases, the situation is called informalisation of labour.
• It is a process of consistent decline in the percentage of formal sector labour force and consistent increase in the percentage of informal sector labour force in the economy.
• The Economic Survey of 2018-19, released in July 2019, said “almost 93%” of the total workforce is “informal”.
• These workers are engaged in economic activities with lower productivity resulting in lower incomes. They are also engaged in activities with less stable employment contracts (including the self-employed) and fewer or nil social security benefits.

WHAT IS THE MEANING OF FORMAL AND INFORMAL SECTOR?

• It must be made very clear that there is no universally accepted definition of formal and informal or organised and unorganised sector in India (http://iamrindia.gov.in/writereaddata/UploadFile/org_unorg.pdf read for further information)
• In general, the informal sector of the economy is characterised by irregular and low income, precarious working conditions, no access to social safety nets, lack of legal safeguards etc.
• While the formal sector has fixed working conditions, social security benefits and labour law being applied to them.

DEFINITION OF LABOUR FORCE

• Persons who are either ‘working’ (employed) or ‘seeking or available for work’ (unemployed) or both during a major part of the reference period, constitute the labour force. In simple words persons who are employed and unemployed are included in labour force (15-60 in general).

DEFINITION OF WORKFORCE

• The Work force on the other hand includes only the employed and excludes the unemployed. People who are actually working are included in workforce. The difference between labour force and workforce is the total number of unemployed persons.

HOW GIG ECONOMY LEADS TO INFORMALISATION?

OUTSIDE THE PURVIEW OF REGULATORY FRAMEWORK

• The gig economy is outside the ambit of almost all the regulations applicable to the other sectors of the economy. The formal sector employment has been a tightly regulated one and even the informal sector faces some regulation. There is near absence of regulation in the area of gig economy especially in the context of labour rights.

UNCLEAR EMPLOYMENT RELATIONSHIP

• In gig economy, the traditional employer and employee’s relationship is replaced by vague ideas of “partners, independent contractors and the like “. These companies call themselves as “aggregators and not employers” which provides escape route from the application of labour laws to them

EXPLOITATIVE SERVICE CONDITIONS

• The remuneration and working conditions are arbitrarily set by the companies and workers often complain unwarranted deduction from their salaries. There exists no grievance mechanism to raise the concerns of the workers. For instance, a Swiggy delivery boy earlier received 50 rupees for an order which has been progressively reduced to 20(10 in some cases) rupees on weekdays.

SUBJUGATION TO ALGORITHMS

• The platform workers’ work life is controlled by the software application. It decides everything from when and where to onboard (log in), how much time is allowed for delivery, calculation of incentives and even imposition of penalty! The gig worker has no voice in deciding any of these aspects and the Application exerts total control over the workers.

NON EXISTENT SOCIAL SAFETY NET

• None of the social security benefits available to the traditional workers are available to gig workers. Even the adhoc group insurance is available only on “on duty days’.  The workers are vulnerable to risks of accidents and many have lost lives during the course of their duties. The companies don’t even have any data on how many of its partners have succumbed to Covid 19 or were infected by the virus.

DEMAND AND SUPPLY MISMATCH

• when the labour supply is high and more disposable, the gig workers have no power to influence payment offerings, and freedom to choose becomes an illusion. In the interplay of demand and supply mechanisms, the gig workers always lose out. Thus, as platforms become more popular among gig workers, more of them join the pool, which leads to companies dictating the terms and conditions of work. The All India Gig Workers union has been protesting against the wage reduction by Swiggy but to no avail.

NO SCOPE FOR COLLECTIVE BARGAINING

• The problem lack of a formal relationship within the gig economy landscape is accentuated by lack of effective unionization of the workers. The temporary nature of work, disaggregated location of workers etc do not make it feasible for a collective airing of grievances. Even the recently formed Indian federation of App based Transport workers’ protests did not change the status quo

EXERCISING CONTROL WITHOUT ACCOUNTABILITY

• The companies claim that its workers are self-employed, and they can choose when and how long they wish to work. This is not true as for instance, Swiggy does not allow “home log in” and the worker has to reach a “hot zone” for log in. When a worker logs out or is irregular, then the frequency of the orders he receives is reduced. In other words, the companies exercise almost all the control of a traditional employer without commensurate responsibility to workers.

GIG ECONOMY AND THE FREEDOM OF WORK

FREEDOM OF CHOICE

• The employees have the freedom to choose from a host of firms operating in the sector. For instance, a delivery executive can choose Swiggy, Zomato or any other food delivery app. This choice is also available in the case of e- commerce companies or cab aggregators and others. This freedom to choose can help the workers to look for greener pastures.

FLEXIBLE WORKING HOURS

• There are no mandatory working hours in these sectors and the worker is free to join in or out any time. This flexibility provides scope for control over one’s work which can be harnessed by those looking for part-time job like students, under employed etc,

NO FORMAL TRAINING REQUIRED

• The gig economy generally does not demand any formal education, skills or formal training for carrying out these jobs. For instance, a smart phone and a bike is enough for getting work in food delivery apps (of course subject to company policies). Thus it provides great livelihood opportunities for the unskilled and semi-skilled.

INCENTIVISATION OF HARD WORK

• The gig economy works on the principle of ‘the more you work, the more you earn’. This approach encourages those having the zeal for hard work by providing incentives on a par with the output of work. The scope for extra earning works as a great motivator.

GENDER EMPOWERMENT

• The technology based platforms enable women to be a part of workforce by virtue of their openness.
• Women could utilize the informal nature of the platforms especially factors like no restriction of time and place for their advantages. Studies indicate that women students and even housewives have been harnessing the opportunities for financial independence and supporting family during pandemic.

HOW TO BRING ELEMENTS OF FORMALIZATION IN GIG ECONOMY?

DATA ON THE SIZE OF THE GIG WORKFORCE

• Any step towards addressing the issue of informalisation in gig economy require proper data on the size of the workforce. The Parliamentary Standing Committee on Labour has criticized the labour ministry for its lackadaisical attitude relating to data collection. Data driven policy making and governance need to be the core of reforming the sector.

LEGAL INTERVENTIONS

• Regulation by the State of this sector without undermining its animal spirit is the need of hour. The Code on Social Security although defines the gig and platform workers, is silent on the aspect of regulation. A separate regulatory regime for gig sector can be brought which must balance the interest of both the companies and workers.

PROVIDING CONCRETE SOCIAL SAFETY MEASURES.

• The companies need to be persuaded to set up social security system for the workers. Alternatively, they can be legally mandated to contribute to the fund established by Centre or state governments.
• For instance, the Code on Social Security, 2020, mandate companies employing gig or on-demand workers, to allocate 1-2% of their annual turnover or 5% of the wages paid to gig workers.

CLARIFYING THE RELATIONSHIP BETWEEN COMPANY AND THE WORKERS

• It is necessary to define clearly the nature of relation between these platform companies and the workers. Taking shelter under terms (partner etc) which have no legal basis will only lead to conflicts between workers and the companies and eventually impact the business prospects of the companies.

LEARNING FROM INTERNATIONAL JUDICIAL INTERVENTIONS

• In 2021, the UK Supreme Court ruled that Uber’s drivers were entitled to employee benefits; in 2018, the California Supreme Court specified a test for determining an employer-employee relationship, which effectively designated gig workers are employees.  Indian courts must take a leaf out of these progressive judicial interventions.

UNIONIZATION OF THE WORKERS

• There is strength in numbers and the workers need to organize themselves to press for legitimate demands from the government and the companies. A federation of all gig workers must be established to work as a pressure group and a forum for constructive suggestions in improving the work culture and business practices.

BEST PRACTICES OF THE STATE GOVERNMENTS.

• Karnataka govt is in the process of drafting a law to provide minimum wages and social security benefits to the gig workers. It also formed a company, inter alia, to promote gig economy companies. The Karnataka Digital Economy Mission, a company with 51% stake for the industries aim to promote the gig economy through various facilitative measures. These types of positive interventions can be replicated in other states also.

THE WAY FORWARD

• The gig economy rides on the innovative and entrepreneurial spirit of the business leaders. Light-touch regulation of the sector which focuses on enabling the companies to accommodate the concerns of the labour rather than coercing them need to be adopted.
• The huge success of the Initial Public Offerings of Swiggy and Zomato in Bombay Stock Exchange point out to the enthusiasm and trust of investors in the growth prospects of the sector. The listing of these companies means they have to disclose details of business practices under SEBI’s business responsibility and sustainability reporting (BRSR) requirements. This may nudge/force the companies to address the concerns of forced labour as the employees are paid below minimum wages in many cases.
• Although the Social Security Code 2020 aims to provide social security benefits to the gig workers, these are not legally guaranteed. It means the benefits will be available to the workers as and when government formulates the schemes. It is high time the good intentions are translated into concrete actions. The Industry is also in line with this approach as in a recent report, ASSOCHAM had suggested that gig workers should be entitled to potable benefits.
• Neoliberal policies adopted by governments world over have put capital in high pedestal over labour. In India also the condition is not different as the race to attract private capital and investment have led to dilution of workers’ rights and their progressive informalisation. This is clearly visible in the context of the criticism of the four labour codes brought in by the government and the data provided by Periodic Labour Force Survey 19-20. Therefore, a Welfare State and Compassionate Capitalism must work in tandem for equitable distribution of surplus among the management and labour.

THE CONCLUSION: The Economic Survey 2021 has appreciated the role played by gig economy in terms of service delivery and provision of employment to the labour force in the pandemic period. This sector holds out huge promise especially in the context of governments’ push towards digital economy through Digital India. It is true that the freelance nature of the work and other attributes may not strictly fit into the traditional employer-employee matrix. But that does not mean the labour should be left for exploitation and suffer from poor working conditions. It is in the interest of all stakeholders; the promoters, management, workers, the shareholders the consumers and others that adequate concreate measures be adopted for a win situation for all.

THE CONTEXT: Three decades ago, India embarked on a new economic journey when Manmohan Singh, then Finance Minister, placed the reform Bill and echoed Victor Hugo, “No power on earth can stop an idea whose time has come,” in Parliament. Since then, the crisis-hit economy has come a long way and marked its firm presence in the global platform. In this article, we will analyse India’s Journey in these three decades.

AN INTRODUCTION OF THE ECONOMIC REFORMS

• Economic reforms in India refer to the structural adjustments initiated in 1991 to liberalise the economy and accelerate its economic growth rate. The Narsimha Rao Government, in 1991, introduced economic reforms to restore internal and external confidence in the Indian economy.
• The reforms aimed at bringing in greater participation of the private sector in the growth process of the Indian economy. Policy changes were introduced with respect to industrial licensing, technology up-gradation, removal of restrictions on the private sector, foreign investments, and foreign trade.
• The reforms aimed to attain a high rate of economic growth, reduce the rate of inflation, reduce the current account deficit, and overcome the balance of payments crisis. The important features of the economic reforms were Liberalisation, Privatisation and Globalisation, popularly known as LPG.

NEED FOR ECONOMIC REFORMS

The need for the introduction of the reforms was because of the following factors:

POOR PERFORMANCE OF THE INDUSTRIAL SECTOR

Before the introduction of economic reforms, the industrial sector suffered due to bureaucratic controls. The industries had to obtain several licenses and permissions for any undertaking activity such as setting up a new firm, starting a new product line, expanding existing business, foreign investments, etc. Many public sector enterprises were incurring huge losses due to poor productivity.

The main objectives of the industrial policy introduced in 1991 were:

 I. To unshackle the Indian industrial sector from the cobwebs of unscrupulous bureaucratic controls.

II. To introduce liberalisation to integrate the Indian economy with the world economy.

III. To remove restrictions on foreign investments and relieve the entrepreneurs from the restrictions of the MRTP Act.

IV. To shed the load of public enterprises that were incurring heavy losses.

ADVERSE BALANCE OF PAYMENTS

• India faced a severe economic crisis during the end of the 1980s. India was unable to meet its international debt obligations and was pushed to a situation of near bankruptcy.
• The foreign exchange reserves were insufficient to pay the import bills. The Balance of Payments deficit could not be financed beyond a certain point.

Some of the factors responsible for the crisis were:

  I. The rising level of expenditure over revenue.

 II. Heavy government borrowing.

III. Inefficient utilisation of resources.

 IV. Excessive protection to domestic industries.

 V. Inefficient management of public sector enterprises.

 VI. Lack of technological development and innovation

 VII. Lack of investments in research and development.

RISE IN FISCAL DEFICIT

• This was mainly due to the increase in the non-developmental expenditure of the government. The government had to borrow a huge sum of money to finance the deficit and meet these debts’ interest obligations.
• The government was in a debt trap. Thus, there was a need to bring in reforms to reduce the non-developmental expenditure and to bring about a fiscal discipline.

INFLATION

• Due to continuous borrowing by the government to meet its mounting expenditure, there was a rapid increase in the money supply.
• The government resorted to deficit financing wherein the RBI financed the borrowings by the Government of India by printing currency notes.
• This leads to a rise in the money supply. When the money supply increased, the demand for goods and services also rose, increasing their prices and causing an inflationary situation.

THE GULF WAR

• The Gulf war during 1990-91 had a significant impact on the supply of oil. As a result, the price of oil shot up, increasing India’s foreign currency outlays. The Gulf crisis also affected the flow of foreign currency into India.
• The NRI deposits were moving out of India and remittances from Indians employed abroad were also affected during the war.

THE ECONOMIC REFORMS

Economic reforms in India were implemented to change the pattern of economic activities to liberalise the Indian economy and accelerate the rate of economic growth. These new economic reforms brought about a structural change in the share of different sectors in the national income.

The new economic reform policies mainly focused on structural reforms in the agricultural sector, industrial sector, financial sector, and global trade. Such economic reforms were possible with the help of broad and comprehensive policies on liberalisation, privatisation and globalisation.

LIBERALISATION – MEANING AND FEATURES

The main objective of liberalisation was to unshackle the industrial sector from the cobwebs of unnecessary bureaucratic controls.

The main features of liberalisation policy were

ABOLITION OF INDUSTRIAL LICENSING

• The new industrial policy of 1991 abolished the industrial licensing for all the industries except for a selected 18 industries due to security and strategic concerns.

REMOVAL OF RESTRICTIONS

• Other than those 18, all industries could set up and sell shares without any restrictions; they could expand their business and start a new product line without obtaining any license.

RELAXATION OF MRTP RESTRICTIONS

• The Monopolies and Restrictive Trade Practices (MRTP) Act aimed at controlling monopoly practices to prevent concentration of economic power.
• The MRTP Act has now been replaced by the Competition Act, 2002, which came into effect in 2009. The Competition Act checks all anti-competitive practices and prohibits abuse of dominance. To protect consumer interest at large, it aims at promoting and sustaining competition in the market.

FOREIGN INVESTMENT

• The reforms reduced several procedural bottlenecks for foreign investments. Approval was given for foreign direct investment up to 51 percent of the equity in high priority industries.

FOREIGN TECHNOLOGY

• Automatic approval was provided to Indian industries with respect to foreign technology agreements, especially in the case of high priority industries.
• Permissions were not required for hiring foreign technicians and experts and for foreign testing of indigenously developed technologies.

GLOBALISATION – MEANING AND FEATURES:

Globalisation may be defined as the integration of the domestic economy with the world economy to facilitate the free movement of goods, services, people, ideas, technology, etc. It refers to the opening of the economy to international competition.

The major features of globalisation measures as undertaken in 1991 were:

Reduction of Trade Barriers

• With the introduction of globalisation measures, trade barriers restrictions were reduced.
• It provided immense opportunities to Indian industries to expand their markets abroad and offered Indian consumers a wide variety of quality goods at competitive prices.
• The export-import policy announced for the period 1992-97 removed all restrictions on external trade and enhanced the export capabilities of the Indian industries.

Promotion of Foreign Direct Investment:

• Many Indian industries were opened to foreign direct investment.
• India became a favourable investment destination for foreign investors due to the low cost of production and availability of cheap labour resources.
• The government of India further initiated a series of measures to promote foreign technical collaborations in case of high priority industries and for the import of foreign technology. Foreign Investment Promotion Board (FIPB) was set up to facilitate foreign direct investments in India.

To Encourage Efficiency

• Globalisation encouraged domestic industries to become more competitive and efficient to face competition at the global level.
• The domestic industries had to produce quality goods at low cost to compete with the foreign producers’ cheaper and superior quality goods.

Diffusion of Technology

• An opportunity to India to have access to global technology and India could utilise the technologies of developed countries without many investments in research and development.

PRIVATISATION-MEANING AND FEATURES:

Privatisation refers to the introduction of private ownership in public sector enterprises. The government holding in public sector enterprises was sold to increase private participation.

Many public-sector units were incurring losses due to inefficiencies in management and lack of innovation and investments in research and development. Privatisation measures enabled modern technology, improved the quality of service, and led to efficient utilisation of resources.

Various privatisation measures introduced in India included:

1. Transfer of ownership of public sector units, either fully or partly, to private hands through denationalisation.
2. Transfer of control to the private sector through disinvestment policies.
3. Opening of areas that were exclusively reserved for public sector.
4. Transfer of management to the private sector through franchising, contracting, and leasing.
5. Limiting the scope of the public sector.

The privatisation wave in India, which was a part of the economic reforms of 1991, increased the role of the private sector and restricted the public sector to priority areas which included:

1. Physical and social infrastructure
2. Mining and oil exploration
3. Manufacture of products that were of strategic importance and where security concerns were involved like in the case of manufacture of defence equipment, and
4. Investments in technologies that required huge outlay and where private sector investment was inadequate.

Privatisation measures were introduced in India as part of the economic reforms in 1991 for the following reasons:

To Reduce the Burden of the Government

• Many public sector units were only functioning to protect the interests of the laborers. Privatisation offloaded this burden from the government and reduced the strain on resources.

To Promote Efficiency

• Many public sector companies were also struggling due to inefficient management, lack of transparency and corruptive practices.
• Privatisation measures got rid of these problems and enabled the public sector units to achieve optimum productivity.

To Enhance Investment Opportunities

• Privatisation helped in reducing the inconsistencies in management and improved the economic status of many public sector units. This brought in good returns and attracted investments.

To Facilitate Growth of Infrastructure

• Privatisation of industries led to the growth of industrial sector on modern lines. The private enterprises, to provide competitive products and services, initiated and facilitated the improvement of the infrastructure.

To Reduce Unnecessary Bureaucratic Interventions

• Privatisation reduced unnecessary government intervention in the management, thereby giving the private enterprises more autonomy in management and operations. This enhanced their efficiency and profitability.

SUCCESS AND FAILURE OF REFORMS: AN ANALYSIS

THE SUCCESS:

SIZE OF GDP AND GROWTH

From a GDP of $512.92 billion in 1991, India had grown to $2.70 trillion by 2020. Besides, the average annual growth rates in GDP, post the 1990s, have been around 6.25 per cent against 4.18 per cent for the three decades prior to the reforms.

RATE OF INFLATION

The average annual inflation rates in the post-reform period were significantly lower at around 5 per cent and the gross fiscal deficit was below 4.80 per cent of GDP. While curbing automatic monetisation of deficits and strong monetary measures contributed to lower inflation, disinvestment via privatisation and fiscal restraint in the form of lower subsidies arrested the deficits.

IMPORT- EXPORT

On the external front, the reforms made a significant impact too. Firstly, India’s trade openness increased from a meagre 13 per cent in 1990-91 to 42 per cent in 2020. The exports, driven by the devaluation of the rupee in 1991 and further depreciation in later years, have increased from $17.96 billion in 1990 to $324.43 billion in 2019.

FOREIGN INVESTMENT

Abolition of licence-raj and curbing of excessive regulations saw rewards in terms of better foreign investment. From $236.69 million in 1991, the net FDI inflows stood at $50.61 billion in 2020. With more foreign companies entering India, domestic consumers benefited from healthy market competition. For Indian manufacturing, the foreign collaborations meant access to technology and, thereby, efficient production. Also, there has been a significant improvement in forex reserves, which are now sufficient to cover 15 months’ imports.

REDUCING POVERTY

The reforms had a telling impact on India’s socio-economic fabric. From about 45 per cent of the population below the national poverty line in 1994, the rates fell to 21.9 per cent in 2011. There have also been improvements in literacy rates, gross enrolments ratio and life expectancy, among others.

AVERAGE MONTHLY PER CAPITA HOUSEHOLD CONSUMPTION EXPENDITURE

It was Rs 243.5 and Rs 370.3 in July-Dec 1991 and this stood at Rs 1,430 and Rs 2,629.7 from July 2011 to June-2012 for rural and urban areas.

FOREIGN EXCHANGE RESERVE

Increased $1.1 billion in 1991 to $642 billion in 2021.

PER CAPITA INCOME

Increased $300.10 to $2200.60 in 2020.

However, opening up the economy makes it susceptible to external shocks. Within a few years after the reforms, the first challenge for India came from its East Asian neighbours in 1997. In a span of three years, the world economy was hit by the dot-com bubble, and the third challenge came in the form of the global financial crisis in 2008. It was prudent economic policies and disciplined financial markets that helped the Indian economy to resist and recover quickly from all three crises.

THE FAILURES:

INCONSISTENT PERFORMANCE

• India’s growth rate and its progression as one of the leading developing economies of the world is inconsistent with the Human Development Index (131st rank in 2020), Global Hunger Index (94th position in 2020), Gender Inequality Index (122nd rank in 2018) and Environmental Performance Index (168th rank in 2020).

RICH-POOR DIVIDE

• It has widened the gap between rich and poor. The World Bank estimates show that the Gini index, a measure of income inequality, had deteriorated marginally from 31.7 in 1993 to 35.7 in 2011.
• According to NSSO consumption surveys, while the bottom 20 per cent of the population contributed to 9.20 per cent of consumption expenditure in 1993-94, their contribution had declined to 8.10 per cent in 2011-12. Further, the share of the top 20 per cent of the population has fattened from 39.70 per cent to 44.70 per cent during the same time.

POVERTY RATE

• As per the Tendulkar Committee estimations, India’s 21.92% of the population was living below the poverty line in 2011-12. However, as per the National Family Health Survey-4 (2015-16), the multi-dimensional poverty rate stood at 27.9%.
• The poverty rate, which was 45% in 1994, declined, especially during 2004-2011 when India implemented substantive anti-poverty measures and rights-based initiatives to uplift the poor.
• This has been affected by the pandemic due to loss of work and earnings and the people, especially informal and daily wage labourers, are pushed into the vicious cycle of poverty.
• A study conducted by the Azim Premji University (2021) finds that “230 million additional individuals slipped below the poverty line defined by the national floor minimum wage” and took away the anti-poverty efforts that were in place during the pandemic for the last 25 years.

UNEMPLOYMENT

• The reduction in poverty rate during 2004-2012 was due to the employment shift from farm to non-farm, especially in the services sector. The construction sector absorbed many informal/unskilled labour resulting in the real wages enhancing the purchasing power of the people.
• On the other side, the number of jobs created during this period was very less, ie, 0.6% per year than the growth of the working-age population.
• According to the International Labour Organization’s ILOSTAT database, India’s unemployment rate in 2020 was the highest since 1991 with 7.11%.

MORTALITY RATE

• Surely economic liberalisation should result in better care for our children, the country has made considerable progress on that front, with the under-five mortality rate coming down from 125.8 per thousand in 1990 to 47.7 per thousand in 2015. But neighbouring Bangladesh and Nepal, much poorer than India, have brought down their under-five mortality rates more than India.

SHARE OF MANUFACTURING IN GDP%

• One would have expected that the New Industrial Policy would have been a pivotal moment for the manufacturing sector and India would soon take its place among the manufacturing powers of East Asia. Still, while, in 1989-90, the share of manufacturing in the gross domestic product was 16.4%, it reduced to 16.2% in 2015-16.

COMBINED FISCAL DEFICIT OF CENTRE AND STATES

• One underlying reason for the crisis of 1991 was the indiscriminate rise in government borrowing in earlier years. It was only to be expected therefore that after the crisis, the government would do all it could to curb its fiscal deficit and that of the states. Unfortunately, that didn’t happen. By 2000-01, the combined fiscal deficit of the centre plus the states, as a percentage of GDP, had risen beyond the 1991 level.

TAX TO GDP RATIO

• One reason why government deficits remained high is that, despite robust economic growth, tax revenues weren’t buoyant. The central government’s gross tax revenues as a percentage of the gross domestic product have remained below the 1991-92 level.

DOES INDIA NEED ANOTHER REFORM?

Successive governments have built on LPG reforms, but a lot more needs to be done if India is to achieve its full potential. A look at the key areas that need urgent intervention to address long-standing issues to help the country achieve double-digit growth.

EDUCATION

• Possibly the most pressing focus area given the urgency to leverage human resources.
• Total revamp from primary level to higher education with equal emphasis on skills.
• Outcome- and learning-based education so that only those eligible progress to the next level.
• Along with health, education should get much higher funding.

HEALTHCARE

• Needs reorganisation and more funding.
• Expensive out-of-pocket health spending major cause of poverty.
• Massive public healthcare supported by insurance for critical care is needed.

JUDICIAL REFORMS

• Inadequate court capacity & judicial delays undermining the economy.
• More courts, better processes, and simpler laws to reduce caseload.

(Vacancies of Judges- 38.70%)

(Pending cases- 63,146 in SC, 56.43 lakh in High Courts and 3.71 Cr in Districts and Subordinate Courts)

TAX REFORMS

• Direct tax reforms progressing as per template.
• GST needs a makeover; all items should be included.

POWER SECTOR

• Unbridled populism has made power expensive, unreliable and inadequate.
• State finances are in disarray in many cases due to power subsidies.
• Users must pay for power; DBT for those states want to support.
• Privatise discoms, enforce open access, continue focus on renewables.

INNOVATION

• Unshackle the startup system totally.
• Provide funding missions for startups in innovation areas crucial to India.
• Encourage blockchain technology in payment systems.

UNIVERSAL BROADBAND

• Reach broadband across the country, keep it affordable.
• Go for satellite broadband in remote areas.

EASE OF DOING BUSINESS

• Much progress made, but the cost of doing business is still high.
• Multiple last-mile hurdles, particularly in the states.
• Massive review of policy, rules and regulations to simplify business.
• Use technology for governance and nonintrusive oversight.

SOME OTHER TARGET AREAS

• Comprehensive social security, which would also make labour reforms easier.
• Steps towards low carbon economy; continued emphasis on EVs and renewables.
• Further relaxation of foreign investment where possible.
• Massive privatisation to reduce state sector.
• Clear framework to bring back private investment in infrastructure.
• Framework for dispute resolution and enforceability of contracts.

THE WAY FORWARD

• The journey of three decades of economic reforms has certainly transformed our economy from a slow and regulated to a fastened and liberalised path of growth. During this process, what was really missed out was the large workforce of the informal sector. This non-inclusive approach is one of the limitations of the trickle-down economic growth model and needs serious revision.
• The 1991 reforms have provided the required dynamism to the economy. However, it has fallen short in sustaining the pace of growth owing to structural and institutional deficits, including the model of development and centralised governance. 91% of the labour force participation working in the informal sector needs to be provided better avenues of employment by leveraging the inherent potentials of agriculture and allied sectors.
• In spite of the pandemic, the expenditure on the health sector is still low compared with our neighbours like Bangladesh and Sri Lanka, which are ahead of India in terms of human development. Social and political (governance) reforms are imperative to achieve the goal of sustainable and equitable economic growth.

THE CONCLUSION: While Covid-19 has been a big blow, the economy was already showing signs of deteriorating growth even in periods preceding the pandemic. This would require immediate intervention to tackle the predicaments of unemployment, poverty, and other social issues. The pandemic has also raised concerns over existing health infrastructure and the future of education. The government must make higher investments in these sectors.

JUST ADD TO YOUR KNOWLEDGE

Disinvestment:

This is one of the most important strategies adopted by the Government of India as a part of its privatisation measures. A disinvestment is an act by which the government sells its complete or a part of its holding in a public sector unit to the private sector.

The disinvestment policies of the government also enable it to raise huge revenue to finance its fiscal deficit. About Rs. 20,000 cores were raised through disinvestment in public sector units between the period of 1991-92 to 2001-02.

The funds raised through disinvestment are also used:

1. To shut down the industries declared sick by the Board of Industrial and Financial Reconstruction (BIFR) and settle their claims.

2. To restructure and modernise the public sector enterprises.

3. To settle the public debt.

The disinvestment policies of the government, by bringing in private participation, improve the efficiency of public sector units by lowering their costs of production. It enables access to modern technology, thus, improving the quality of products and services. Disinvestment can be carried out through the public issue of equities to retail investors through Initial Public Offer (IPO).

THE CONTEXT: Fifteenth Finance Commission Chairperson NK Singh on 19 April 2022 delivered a lecture in Delhi School of Economics and warned about how the politics of freebies could lead to fiscal disasters. Over the years the politics of freebies has become an integral part of the electoral battles in India and the scenario was no different in the recently held assembly polls in five states, Uttar Pradesh, Uttarakhand, Goa, Punjab and Manipur. This article analyzes the socio-economic costs of freebies by distinguishing it from the concept of “expenditure on the public good, having overall benefits.”

THE IDEA OF FREEBIES

• The literal meaning of freebie is something that is given free of charge or cost.
• Political parties are outdoing each other in promising free electricity and water supply, laptops, cycles, electronic appliances, etc. These are called ‘freebies’ and are characterized as unwise for long term fiscal stability.
• However, during the pandemic, governments (both Union and states), as well as the RBI, took several measures to mitigate pandemic effects. This included expansion of the food security scheme for two full years; cash transfer schemes for farmers, expansion of the jobs scheme etc.

THE COMPLEX ISSUE OF FREEBIES

• There is great ambiguity in what “freebies” mean.
• Merit goods Vs. Public goods: We need to distinguish between the concept of merit goods and public goods on which expenditure outlays have overall benefits such as the strengthening and deepening of the public distribution system, employment guarantee schemes, support to education and enhanced outlays for health, particularly during the pandemic.
• Around the world, these are considered to be desirable expenditures.
• It is important to analyse, not how cheap the freebies are but how expensive they are for the economy, life quality and social cohesion in the long run.

Merit goods: are those public goods which results in interference with consumer choices. Here the government will be providing the goods (merit) to specific section of the society because of their backward status, poverty etc (depending on their merit, like the Sarva Shiksha Abhiyan).

Public goods: refer to those goods which satisfy public wants. The main attribute of public good is that they are supplied by the government jointly for the entire public.Examples for public goods are defense services, pollution control, streetlight etc.

REASONS FOR THE RISE OF FREEBIE CULTURE DURING ELECTIONS

CONSTITUTIONAL MANDATE FOR THE WELFARE OF THE CITIZENS

• It is based on the principles of equality and is keen to provide equal opportunity to all. It also aims to ensure equitable distribution of wealth.The 4th century BC treatise on the art of statecraft laid out a framework for good governance and welfare, however in present times it is imperative to draw a line between dole or a handout and spending on the public good having greater benefits.

POLITICAL MANDATE

• Political parties contesting the polls release their manifesto stating their aims and plans for every section of the society albeit having much of the focus on announcing schemes for their largest chunk of the votebank i.e. the lower strata of the society.
• Freebies are often used as a tool to conceal the poor performance of the incumbent government on the socio-economic parameters and provide an opportunity to alter the voter’s mindset from real issues to short term gains.

HISTORICAL BAGGAGE

• Since independence, parties have been promising some form of freebies to attract voters.
• Even if a new party comes to power, then also it can’t rationalize or outrightly abolish the freebie commitments of prior governments.
• For e.g., Several State Governments have been forced to continue power and irrigation subsidies due to political pressure. Governments fear that discontinuance will antagonize their voter base.

COMPETITIVE POLITICS AND DOMINO EFFECT

• The rise in coalition era politics since the 1990s has witnessed a rise of new political parties. These small and new parties have to offer more freebies than larger parties to lure the voters. Moreover the increase in competition among the parties to seek the votes, each party tries to outdo the others in terms of populist promises.

ARGUMENTS IN SUPPORT OF FREEBIES

WELFARE STATE

• The Constitution places an obligation on the State to take proactive measures for the welfare of the poor and downtrodden.
• For instance, Art. 39(b) of The Constitution of India calls for resource distribution for achieving a common good.

GLARING INEQUALITY IN THE SOCIETY

• In India, there is a wide inequality between the rich and the poor in terms of income and wealth. The OXFAM report 2021 showed that the income of 84% of households in the country declined in 2021, but at the same time the number of Indian billionaires grew from 102 to 142.

STRUCTURAL HURDLES AND MAKING THE BENEFITS OF GROWTH TO REACH THE LOWEST LEVEL

• They gave up land for cities, roads, factories and dams. However, they largely became landless workers and slum dwellers. Several economists argue that the gains of development have hardly trickled down to the most marginalized section of the society, especially after 1991. The cost of freebies offered is a fraction of what the poor lose.
• The World Bank recognized in the 1980s that the prevalent policies marginalize the poor and a ‘safety net’ (freebies) is needed.

ECONOMIC PUSH

• They help increase the demand that prevents the rate of growth from declining further. Free education and health are anyway justified because they are cases of ‘merit wants’ and increase the productivity of labour.

SOCIAL STABILITY

• Freebies enable the government to release the growing discontent in the marginalized section. They keep a lid on societal disruption which would be far more expensive.

INCENTIVES FOR THE RICH

• The well-off and businesses get ‘freebies’ that are euphemistically called ‘incentives’. Since 2006, the Union Budget estimates these to be between Rs 4-6 lakh crore each year. If the well-off who don’t really need freebies can get so much, why can’t the marginalized (especially women and youth) get a fraction of it?

CUSHION DURING EMERGENCIES

• COVID-19 has been one of the biggest health emergencies in the world for over a century. Such extreme events warrant state support to prevent chaos and disruption in society e.g., the free COVID-19 vaccination for every individual in India led to more prudent management of the pandemic.

ARGUMENTS AGAINST FREEBIES

UNDERMINES THE SPIRIT OF DEMOCRACY

• This is the primary concern as many people tend to vote for parties based on the free incentives offered by them. They fail to judge them on their performance and don’t utilize their franchise as per merit. Even the Supreme Court has observed that freebies shake the root of free and fair elections.

FALL IN PRODUCTIVITY

• Freebies create a feeling in the masses that they can live with minimal effort. This decreases their productivity towards work e.g., a trend has been created that whoever avail loan from banks does not repay them, expecting a waiver of loans during the election. This gives rise to moral hazard and an incentive to default.

FISCAL STRESS

• Freebies generally form part of revenue expenditure. Excess allocation towards them leaves little to spend on capital expenditure which is a prerequisite for achieving long-term growth.
• A case in point is the states which have been rolling out freebies in keeping with poll promises and ended up increased public debt with unsustainable fiscal conditions.

DISCOURAGES THE HONEST TAXPAYER

• It creates a sense of discontentment in the mind of an honest taxpayer whose money is used to fund the freebie expenditure. This feeling is more dominant especially when the State is unable to improve the public services due to freebie commitments.

SECTORAL COLLAPSE

• The populist measures of loan waivers have put significant pressure on the banking sector.
• Similarly, rising power subsidies have enhanced pressures on Discoms who are failing to sustain themselves.

WASTAGE OF RESOURCES

• Promises of free water and electricity create severe stress on the water table and lead to over-exploitation as seen in the states of Punjab and Haryana.
• NITI Aayog has cautioned that 21 major cities of India are on the verge of running out of groundwater in a few years.

ALLEGED INFRINGEMENT OF CONSTITUTIONAL PROVISIONS

• Promise/distribution of irrational freebies from the public fund before election unduly influences the voters, shakes the roots of the free-fair election, disturbs level playing field, vitiates the purity of election process and also allegedly violates Articles 14, 162, 266(3) and 282.

LANGUOR AMONG THE MASSES

• Recurring nature of the freebies in Indian socio-political scenario also make the masses develop the habit of acting irresponsibly and dampen their spirit to work hard.

THE ANALYSIS OF THE ISSUE

• India could face the prospect of sub-national bankruptcies if States continued to dole out freebies to influence the electorate, Fifteenth Finance Commission Chairperson NK Singh cautioned, terming the political competition over such sops a “quick passport to fiscal disaster”.
• We must strive instead, for a race to efficiency through laboratories of democracy and sanguine federalism where states use their authority to harness innovative ideas and solutions to common problems which other states can emulate.
• If the political parties go for effective economic policies where the welfare policies or government schemes have good reach without any leakages or corruption and it is targeted at the right audience, then infrastructure and development will take care of itself and the people will not require such kinds of freebies.
• Central government’s debt-to-GDP ratio is supposed to be 40% but now it has crossed 90%of the GDP, while the states have managed to keep their debt-to-GDP ratio at almost 27% in FY2020. Hence the problem of fiscal stability is more pressing at the level of the centre.
• Political parties shall also provide the roadmap for achieving the targets mentioned in the manifesto and also the rationale behind for enlisting such targets.
• Certain freebies are important to cushion or safeguard the socio-economic fabric such as the basic healthcare facilities, school education, subsidized ration etc. Such interventions by the government, guide the economy in the long term growth by strengthening the human capital.
• Freebies during the crises situation also help in sustaining the economic cycle through demand pull growth such as in COVID times.
• Qualified freebies such as the ascribed conditions of creating public assets through MGNREGA also contribute in more than one way in economic growth by increasing the productive capacity of the population.

THE WAY FORWARD:

• There should be a strengthening of internal party democracy so that promises of development and not freebies are made in the elections. This would also reduce the magnitude of the criminalization of politics.
• The Election Commission should be given greater powers like the power to deregister a political party, power of contempt etc. This would curtail the distribution of liquor and other goods during elections and ensure expenditure as per the desired limit.
• The Government should use the money spent on freebies towards job creation and infrastructure development as advised by Madras HC in 2021. This will lead to social upliftment and progression of the State.
• The focus should now be tilted on improving the efficiency of public expenditure. This requires focusing on outcomes and not merely outlays. One good example is the Pradhan Mantri Ujjwala Yojana:
• Arresting the health hazards associated with cooking based on fossil fuels thereby reducing the out of the pocket expenditure on health.
• Employment for rural youth in the supply chain of cooking gas.
• Improving India’s performance on Sustainable Development Goals-SDG 3 (Good Health and Well-being) and SDG 5 (gender equality) and specially SDG 7, which aims to ensure access to affordable, reliable, sustainable, and modern energy for all.
• Distribution of LPG subsidy through direct benefit transfer (DBT) also led to a decline in the subsidy bill.
• In the long run, eradication of unnecessary freebie culture requires an attitudinal change in the masses. It is high time that the ruling government should be made accountable for using tax revenue because freebies always prove to be a burden on taxpayers.
• The idea rendered by Vice President M Venkaiah Naidu has called for a wider debate on the freebies promised during polls and the possibility of making election manifestos legally binding. This will restrict the poll parties from making extravagant promises.

THE CONCLUSION: India has experienced the politics of freebies for a long time and the outcome of those policies has been sub-optimal, inefficient, and unsustainable. Therefore rather than doling out money, the focus should be on spending it efficiently. It is high time the discourse on improving public expenditure efficiency should take centre stage while discussing the role of fiscal policy in India. However, until that is achieved, reliance on acceptable freebies like health, education etc. can’t be completely stopped.

THE CONTEXT: On August 23^rd 2021, Union Minister for Finance and Corporate Affairs launched the asset monetisation pipeline of Central ministries and public sector entities – National Monetization Pipeline.

WHAT IS MONETISATION?

• In a monetisation transaction, the Government transfers revenue rights to private parties for a specified transaction period in return for upfront money, a revenue share, and commitment of investments in the assets. On the other hand, Disinvestment is pulling out the money invested in the company by selling the stake, either partially or fully. Disinvestment involves dilution of ownership of the business / PSU.
• Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), for instance, are the key structures used to monetise assets in the roads and power sectors.
• These are also listed on stock exchanges, providing investors liquidity through secondary markets as well.
• While these are structured financing vehicles, other monetisation models on PPP (Public Private Partnership) basis include: Operate Maintain Transfer (OMT), Toll Operate Transfer (TOT), and Operations, Maintenance & Development (OMD). OMT and TOT have been used in the highways sector, while OMD is being deployed in the case of airports.

ALL YOU NEED TO KNOW ABOUT THE NATIONAL MONETISATION PIPELINE

INTRODUCTION

• Union Budget 2021-22 has identified the monetisation of operating public infrastructure assets as a key means for sustainable infrastructure financing.
• The Budget provided for the preparation of a ‘National Monetisation Pipeline (NMP)’ of potential brownfield infrastructure assets. NITI Aayog, in consultation with infra line ministries, has prepared the report on NMP.
• NMP aims to provide a medium-term programme roadmap for public asset owners, along with visibility on potential assets to the private sector.
• The end objective of this initiative is to enable ‘Infrastructure Creation through Monetisation’ wherein the public and private sector collaborate, each excelling in their core areas of competence, to deliver socio-economic growth and quality of life to the country’s citizens.
• The report on NMP has been organised into two volumes.

ü  Volume I is structured as a guidebook, detailing the conceptual approaches and potential models for asset monetisation.

ü  Volume II is the actual roadmap for monetisation, including the pipeline of core infrastructure assets under Central Govt.

FRAMEWORK

• The framework for monetisation of core asset monetisation has three key imperatives.

ESTIMATED POTENTIAL

• Considering that infrastructure creation is inextricably linked to monetisation, the period for NMP has been decided to be co-terminus with the balance period under National Infrastructure Pipeline (NIP).
• The aggregate asset pipeline under NMP over the four years, FY 2022-2025, is indicatively valued at Rs 6.0 lakh crore.
• The estimated value corresponds to ~14% of the proposed outlay for the Centre under NIP (Rs 43 lakh crore).
• This includes more than 12 line ministries and more than 20 asset classes. The sectors included are roads, ports, airports, railways, warehousing, gas & product pipeline, power generation and transmission, mining, telecom, stadium, hospitality and housing.
• Sector-wise Monetisation Pipeline over FY 2022-25 (Rs crore):

• The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and telecom (6%).
• Regarding annual phasing by value, 15% of assets with an indicative value of Rs 0.88 lakh crore are envisaged to be rolled out in the current financial year (FY 2021-22).

Indicative value of the monetisation pipeline year-wise (Rs crore):

IMPLEMENTATION & MONITORING MECHANISM

• The programme is envisaged to be supported through necessary policy and regulatory interventions by the Government to ensure an efficient and effective asset monetisation process.
• These will include streamlining operational modalities, encouraging investor participation and facilitating commercial efficiency, among others.
• Real-time monitoring will be undertaken through the asset monetisation dashboard, as envisaged under Union Budget 2021-22, to be rolled out shortly.
• The assets and transactions identified under the NMP are expected to be rolled out through various instruments. These include direct contractual instruments such as public-private partnership concessions and capital market instruments such as Infrastructure Investment Trusts (InvIT).
• The sector will determine the choice of instrument, nature of the asset, the timing of transactions (including market considerations), target investor profile, the level of operational/investment control envisaged to be retained by the asset owner, etc.
• The monetisation value that is expected to be realised by the public asset owner through the asset monetisation process may either be in the form of upfront accruals or by way of private sector investment.
• The potential value assessed under NMP is only an indicative high-level estimate based on thumb rules. This is based on various approaches such as market or cost or the book or enterprise value etc., as applicable and available for respective sectors.

BENEFITS

• Ensures resource efficiency in infrastructure operations and maintenance by creating capital assets and addressing the country’s infrastructure needs.
• It aims to provide a transparent system that allows public authorities to monitor private players’ performance and investors to plan their future actions.
• Because these are brownfield initiatives, there is less risk for the private sector. As a result, there will be no significant delays due to land and environmental approvals.
• Globally, government-led capital creation has been a vital force in overcoming the COVID-19 pandemic-induced economic slump.
• NITI Aayog’s efforts to add coherence to contracts will improve the ease of doing business, particularly in contract enforcement.
• Assist in the creation of high-quality jobs in the various industries as envisioned by the programme.

CHALLENGES

ASSET-SPECIFIC CHALLENGES

• The MNP framework notes that other critical impediments to the monetisation process are asset-specific challenges, such as an identifiable revenue stream. This is specifically relevant to the railway sector, which has seen limited PPP success as a project delivery model.
• Konkan Railway, for instance, has multiple stakeholders, including state governments, which own a stake in the entity. Creating an effective monetisation transaction structure could be a bit challenging in this case.
• Other Asset-specific Challenges are:

ü  Low level of capacity utilisation in gas and petroleum pipeline networks.

ü  Regulated tariffs in power sector assets.

ü  Low interest among investors in national highways below four lanes.

SLOW PACE OF PRIVATISATION

• The slow pace of privatisation in government companies including Air India and BPCL. Further, less-than-encouraging bids in the recently launched PPP initiative in trains indicate that attracting private investors’ interest is not that easy.

REALISING ADEQUATE VALUE

• The other challenge is whether the adequate value from the assets will be realised or not. This depends on the quality of the bidding process and whether enough private players are attracted to bid.

MONOPOLISTIC OUTLOOK

• The only way of ensuring that asset monetisation doesn’t lead to cronyism is to make the bidding conditions such that the people eligible to bid are not a minor, predetermined set.  However, because of the project’s capital intensity, not everybody is going to be able to bid.

EXECUTION RISK

• There will be execution risk in such a large programme. However, this is exactly why NMP is not adopting a one-size-fits-all approach.

TAXPAYERS’ MONEY

• The taxpayers have already paid for these public assets — and, so, why should they pay again to a private party to use them.

THE LACK OF CLEAR THINKING ON SOME OF THE DEEPER ISSUES

• A greater problem is the lack of clear thinking on some of the deeper issues that may arise as a result of such monetisation. Take the monetisation of hill /mountain railways sought to be done through the Operate, Maintain and Develop (OMD) based PPP model for a period of 30-50 years, which may be extended.
• While the concessionaire is required to maintain the heritage nature of project assets, they would not just get the right to earn fare and non-fare revenues for 30-50 years through train operations but would also be allowed to charge user charges and sub-lease rights on the station and adjoining real estate on railway land for 30-50 years.
• This has the potential to jeopardise the rights of the locals living in these areas and cause protests.

A DROP IN THE OCEAN

• Such monetisation, however well-intentioned, is a drop in the ocean. It is expected to finance no more than 5-6% of the CAPEX (of Rs. 111 lakh crore) under the National Infrastructure Pipeline over the period.
• More importantly, 13 sectors, each with multiple assets, are sought to be monetised over the next four years—when the Government has been missing its disinvestment targets year on year, even when it involves blue-chip companies like BPCL.

LITTLE CLARITY ON USE PROCEEDS

• There is a larger question of where within the Budget will such proceeds from monetisation be accounted for and how these proceeds will be spent.
• The NMP document does speak about these proceeds being used to finance further infrastructure. There are no specific guidelines/rules, however, on how these proceeds could be used. Could they be used (more importantly not used) for paying salaries, giving pensions and subsidies, etc., thereby incurring revenue expenditure?

THE LITTLE ATTENTION ON IMPLEMENTATION

• The big miss is the little attention paid to the issue of how the NMP would be implemented and a precise scenario planning based on the Government’s experience in Disinvestment.
• The 101-page Volume II document with only one page devoted to an Implementation Plan, in a nutshell, maybe the biggest challenge of the NMP.

EMPLOYMENT

• The document has been silent on maintaining the current level of jobs in assets that will be monetised.

THE WAY FORWARD

• EXECUTION IS THE KEY TO SUCCESS: While the Government has attempted to solve several difficulties due to the NMP framework’s infrastructure development, the plan’s execution remains critical to its success.
• APPROACH WITH MULTI-STAKEHOLDER: Other stakeholders must do their part if the infrastructure expansion plan is to succeed. State governments and their public-sector enterprises, as well as the private sector, are among them. In this regard, the Fifteenth Finance Commission has advocated the formation of a High-Powered Intergovernmental Group to re-examine the Centre’s and States’ fiscal responsibility legislation.
• OTHER METHODS OF RAISING RESOURCES: Other strategies for raising funds include establishing a development finance institution (DFI) and increasing the percentage of infrastructure investment in the federal and state budgets.
• DISPUTE RESOLUTION MECHANISM: The importance of strengthening judicial systems cannot be overstated. The design and implementation of NMP will naturally and automatically benefit from efficient and effective conflict resolution processes.
• STREAMLINE PPP: Based on recent experience, public-private partnerships (PPPs) now feature transparent auctions, a clear understanding of the risks and payoffs, and an open field for all interested parties. As a result, the value of PPP in greenfield projects should not be overlooked.
• TRANSPARENT BIDDING: Maintaining transparency is critical to achieving a sufficient realisation of asset value.
• NITI AAYOG RECOMMENDATIONS:
  • Bringing InvITs Under Insolvency and Bankruptcy Code (IBC):Extending IBC provisions to InvITs would help lenders access a faster and more effective debt restructuring and resolution option.
  • Tax Breaks:Tax-efficient and user-friendly mechanisms like allowing tax benefits in InvITs would attract retail investors (individual/non-professional investors).

THE CONCLUSION: Raising financial resources upfront is a bold, proactive, and confident policy statement when global economic conditions remain unpredictable and uncertain. It sends a strong message to the rest of the world that India is open to business while protecting the public purse and its inhabitants.

THE CONTEXT: Given a very poor and pessimistic fiscal situation in the economy a discussion was doing the round as to the use of ‘monetisation of deficit’. Even the finance minister of India remarked that the government is keeping this option too in its mind.

Usually, market borrowing is resorted to by the government to tide over its fiscal deficit. We need to understand if we have reached the point where borrowings are no longer a viable and feasible option.

PRESENT DEFICIT SCENARIO

• Indian economy is passing through an unprecedented phase, and so is the fiscal health of the country.
• Apparently, the government will not be able to achieve its FY21 fiscal deficit target of 3.5% of GDP.
• The exchequer is facing a revenue crunch due to falling tax revenue post the lockdown.
• There is also difficulty in realising the disinvestment target in an uncertain market.
• Adding to it, the RBI has projected a negative GDP growth rate for the Indian economy in FY21.
• The Government has even raised its gross market borrowing for FY21 by 54% (Rs 7.8 – 12 lakh crore).
• Given these, the fiscal deficit as a percentage of GDP may even cross the double-digit mark.
• The government stimulus package of Rs 20 lakh crore also seems to be inadequate to revive the economy.
• As is seen, a large part of it accounts for liquidity-boosting measures by the RBI.
• Because, the weak fiscal position has forced the government to restrict the stimulus.
• It is in this scenario, that the need for monetisation of deficit has been widely felt.

WHAT IS MONETISATION OF DEFICIT?

• Monetising of deficit is also called deficit financing in India. It simply refers to printing of new currencies by the RBI equal to help the government meet its expenditure. In other words, this means printing more money by the central bank, in order to give them to the government for its expenditure.
• In other way, deficit monetisation happens when the RBI buys government securities directly from the primary market to fund government’s expenses.

HOW HAVE THE MODES EVOLVED?

• Monetisation of deficit was in practice in India since 1955.
• It remained in force till 1997.
• Monetisation of debt or deficit is also known as deficit financing in India.
• Back then, the central bank automatically monetised government deficit.
• It does it through the issuance of ad-hoc treasury bills.
• However, two agreements were signed between the government and RBI in 1994 and 1997.
• This was to completely phase-out funding through ad-hoc treasury bills.
• Later on, with the enactment of FRBM Act, 2003, RBI was completely barred from subscribing to the primary issuances of the government from April 1, 2006.
• It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO (open market operations) route.
• [OMOs involve the sale and purchase of government securities to and from the market by the RBI to adjust the rupee liquidity conditions.]
• The implied understanding was that the RBI would use the OMO route not so much to support government borrowing.
• Instead, it would be used as a liquidity instrument.
• This was to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

HOW DOES IT WORK?

• Government issues ad-hoc T-Bills which are subscribed by the central bank in the primary market. The government gets money directly from the central bank against those bills.
• Direct monetisation (or simply ‘monetisation’) of the deficit does not mean the government is getting free money from the RBI. However, the interest rate could be much lower as compared to market rate of interest.

DOWNSIDE OF MONETIZATION OF DEFICIT

• Since monetisation of deficit increases money supply, the move is replete with the danger of causing inflation.
• The central bank looses its control over money supply and finds it difficult to ensure stability of price.
• Monetisation of deficit puts a downward pressure on domestic currency leading to its depreciation.
• The government has no incentives to check its unnecessary expenditure.
• If, despite these, the government decides to go ahead, markets will fear that the constraints on fiscal policy are being abandoned.
• They may see the government as planning to solve its fiscal problems by inflating away its debt.
• If that occurs, yields on government bonds will shoot up, which is the opposite of what is sought to be achieved.
• If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure.

WHAT GOES IN FAVOUR OF MONETISATION OF DEFICIT?

• The strongest argument given against ‘monetisation of deficit’ is that it causes expansion in money supply which could be inflationary. As long as inflation is kept under control, it is hard to argue against monetisation of the deficit in a situation such as the one we are now confronted with. For this, the RBI can issue bonds in the market to absorb excess liquidity.
• Secondly, this objection has little substance in a situation where aggregate demand has fallen sharply and there is an increase in unemployment. In such a situation, monetisation of the deficit is more likely to raise actual output closer to potential output without any great increase in inflation.
• Debt to GDP ratio would remain unchanged as a result of monetisation. Rating agencies will not downgrade our rating if we are able to control inflation and engender growth.
• It is a cost-effective way of overcoming deficit.

CONCLUSION:

The idea of monetising government deficit by the central bank is not a new one. We were using this before 1997 when this was put to an end following an agreement between the government and the RBI. Later on, FRBM Act, 2003 took this power of the RBI to subscribe to the government bonds in primary market since 2006. The economy experienced an enormous benefits of doing away with direct monetisation of government deficit by the RBI.

Then what is the reasoning for jeopardising the hard-won gains of this move? Has India exhausted its entire option and left with only monetisation of deficit?

The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause which permits monetisation of the deficit under special circumstances. The case for invoking this escape clause is that there just aren’t enough savings in the economy to finance government borrowing of such a large size.

The situation on the ground is not that grim. There is no reason to believe that we are anywhere close to the above-mentioned situation. At present, India is a saving surplus economy with no so strong demand for funds by the private sector. The government can borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.

If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure for specific purpose.

With the economy now showing positive vibes, coming on track and realization of GST increasing, monetisation of deficit is looking like a distant probability.

THE CONTEXT: Unprecedented fall in GDP in the first quarter of current financial year has brought back the importance of fiscal policy into limelight. With monetary policy not producing the desired result; consumption and private investment expenditure remaining subdued, the onus of reviving the economy rests on the fiscal policy. The expansionary fiscal policy (huge government expenditure or a cut in tax rate) can bring about a visible and concrete change in the status of Indian economy.

The government is expected to shun the path of fiscal orthodoxy and make a meaningful expenditure to arrest the decline in GDP or income. Fiscal stimulus seems to be the need of the hour.

The present article analyses the rationale and feasibility of fiscal support that the economy needs to mitigate the impact of covid-induced recession.

REASONS FOR A FISCAL BOOST

• The unprecedented 23.9% decline in the gross domestic product (GDP) in the first quarter of 2020–21, mainly due to the stringent lockdown enforced after the COVID-19 outbreak, is the main reason demand for a massive fiscal stimulus has arisen.
• Taking into consideration the activities in the informal sector of the economy, the decline could be much larger than reported. This is because quarterly estimation of GDP does not capture informal sector which accounts for almost half of our GDP.
• The largest decline was in manufacturing, construction, and trade, hotels, transport, and communication where output fell by 39.3%, 50.3% and 47%, respectively. These three segments ­account for almost three-fourths of the total workers employed outside of agriculture and the sharp fall in output would have wiped out millions of jobs.
• Similarly, the expenditure-side numbers indicate a sharp fall in both consumption and investments. While private consumption, the biggest component, has declined by almost a quarter, the gross fixed capital formation or investment has almost halved. This urgently necessitates huge government stimulus.
• The economy had already slipped into a crisis even before the pandemic struck. In fact, the quarterly GDP has steadily decelerated for nineth consecutive quarters and brought down growth rates from a high of 8.1% in the last quarter of 2017–18 to a low of -23.9% in the first quarter of 2020-21. And, given the current trends, it can now be safely assumed that the GDP will shrink substantially, maybe even by double digits, in the fiscal year 2020–21.
• Historically, India’s GDP has shrunk four times since the early 1950s, with the sharpest and the most recent one being in 1979–80 when GDP declined by 5.2%. But, the current decline is both much more extensive and severe. There is a simultaneous fall in consumption, investments, and exports and only concerted and radical interventions by the government can ensure that the growth bounces back closer to double digits.
• The pandemic has also exposed many lacunae in the economy, especially in the health and social security network. very few informal workers in the economy, who account for around 92.4% of the total workforce, have any social security benefits like paid leave or other non-wage benefits that will help them tide over a crisis.
• International commitments towards SDG should also be reasons for enlarging government expenditure.

FISCAL RESPONSE SO FAR

The government’s response to the pandemic so far has been slow and inadequate.

Despite the havoc heaped by the pandemic, on both business and employment, and the millions of migrants fleeing to the safety of their villages, the government delayed any substantial relief till the third week of May. And, though the stimulus package announced in May 2020 was as large as `20 lakh crore, or around 10% of the GDP, most measures were focused on monetary policy interventions. Fiscal support was only a little more than 1% of the GDP. The government clung on to fiscal orthodoxy even as the economy suffered one of the biggest hits ever.

So, the burden of recovery was shifted largely on to the central bank, which steadily cut rates and pumped up credit flows to productive sectors. But, as consumer inflation steadily rose to exceed the central bank’s targets, mainly due to high taxes on fuel and bottlenecks in food supply, the Reserve Bank of India was soon forced to pause the rate cuts.

Many economists and commentators have mentioned that Government announcement on the stimulus of Rs 20 lakh crores tries to resolve only supply-side issues. There is nothing to bring in an additional demand.

INDIA’S FISCAL STIMULUS IS INADEQUATE AS COMPARED WITH DEVELOPED AS WELL AS ITS DEVELOPING PEERS

Across the world, country stimulus responses vary from 1 percent of GDP to 12 percent of GDP as of now. Rich countries seem to have announced larger stimulus packages (5 to 10 percent) and poor countries have announced smaller packages (2 to 5 percent). In case of India, it is a bit more than only 1 per cent of its GDP.

DO WE HAVE A FISCAL SPACE?

There is no denying the fact that the fiscal space with the government to deal with recession is limited. Corporate tax has already been cut and, now, with growth slumping into negative territory, the ability of the government to raise tax revenue in coming months would further get hampered.

In this dire situation, the increased expenditure on fiscal stimulus can be dealt with by raising market borrowings. India has already raised its estimated fiscal deficit from 7.8 lakh cr to 12 lakh cr.

DOES THE CENTRAL GOVERNMENT HAVE MORE CAPACITY TO BORROW?

Yes. The following points illustrate this;

• Surplus liquidity and limited private credit demand will ensure that government bond auctions remain well subscribed.
• India is running a current account surplus. That’s compounded by strong capital flows. So we have the pool of savings. Banks don’t want to lend to the real economy. There is a presumption here that those resources will ultimately be channelled into government bonds.
• In addition, the government can choose to roll-over the treasury bills issued in the first half of the year. The government has borrowed and issued close to Rs 5 lakh crore in treasury bills already. One way the government can finance more of its deficit is by rolling over those treasury bills.

Eventually, the extent to which the government can allow its debt burden to build up during the pandemic will depend on the expected trend growth in the economy.

If India’s growth is at 7% over the next five years, India can absorb a much larger stimulus this year and in the medium term, debt-to-GDP come down. If India’s trend growth settles at 5%, even a muted fiscal response this year will result in debt to GDP rising enormously. So we should not lose sight of the fact that trend growth matters a lot.

WAY FORWARD:

Government can carve out more fiscal space to boost spending without any downside risks. It must release funds through a multi-year asset sale programme.The public authorities in India have a good amount of shares in public sector undertakings (PSUs), public land, and foreign exchange reserves. There is scope and anyway a need for reducing public holdings of these assets.

Disinvestment:

The market return on investments in PSUs is very low and it is doubtful if even the social returns are large; there is a rationale for disinvestment or privatisation (Dutta 2010). Indeed, the GOI has been engaged in a disinvestment programme for quite some time.

Monetising Public Land:

public authorities in India hold excess land; 13 major port trusts have 100,000 hectares of land, the International Airports Authority of India has 20,400 hectares of (additional) land, the Ministry of Defence has 283,280 hectares of land, and the Indian Railways has 43,000 hectares that is valued roughly at a whopping Rs. 3 trillion, which is significantly more than the true fiscal component of the big financial package of about Rs. 21 trillion announced in May 2020. So, here again, we have a way to mobilise funds by selling excess land – more so when the market price of land in India is more than the fundamental value of land.

Forex Reserve:

Finally, let us come to the foreign exchange reserves with the RBI. These stand at US$ 560 billion or Rs. 42.5 trillion as on 30 October 2021 (this is about 2 times the size of the relief package announced by the GOI in May 2021). It has been argued that these reserves can be reduced significantly without endangering macro-financial stability.

All this suggests that the public authorities have considerable fiscal space if we consider their assets.

CONCLUSION:

Nobody is advocating that India does the kind of stimulus that the UK or Germany or other developed countries are able to adopt, because we don’t have the kind of hard currency that they have. However, a meaningful demand-driven expenditure could be made to turn the course of the economy.

• Basic income in terms of cash transfer to a selected group of people, like women, will go a long way in addressing the demand side .
• Government should spend on creation of social and economic infrastructure which will not only generate employment abut also crowd-in private investment.
• Building an efficient social security network to protect all workers from economic instabilities.
• Rolling out programmes to scale up medical coverage across the country to ensure better protection from future pandemics.

Clearly, the government’s efforts to provide relief and revive the economy have now reached a dead end, and the only way to kick-start a steady recovery is to launch a massive fiscal stimulus package to stem the fall and ensure a quick recovery.

THE CONTEXT: Recently, there is a debate on illusion of rating agencies. Basically, the issues are -their necessities, flaws & fragilities, and the need for regulation. Similarly, credit score has also become complicated due to the current covid induced financial crisis.

WHAT IS A RATING AGENCY?

Credit rating is an informed opinion of a recognised entity on the relative creditworthiness of an issuer or instrument. In other words, it is an opinion “on the relative degree of risk associated with the timely payment of interest and principal on a debt instrument”. Such recognised entity is known as Credit Rating Agencies (CRAs).

CRAs typically rate on the basis.

• Debt securities
• Short term debt instruments, like commercial papers
• Structured debt obligations
• Loans and fixed deposits

WHY THERE ARE ISSUES OF ILLUSION?

IDEOLOGICAL BIASES

• CRAs might lower ratings for left governments as a strategy to limit negative policy and market surprises as they strive to keep ratings stable over the medium term.
• For e.g. a panel analysis of Standard & Poor’s, Moody’s, and Fitch’s rating actions for 23 Organisation for Economic Co-Operation and Development (OECD) countries from 1995 to 2014 shows that left executives and the electoral victory of nonincumbent left executives are associated with significantly higher probabilities of negative rating changes.

CONFLICT OF INTERESTS

• CRAs are funded by the very companies they rate.

LACK OF ABILITY TO PREDICT

• CRAs follow the market, so the market alerts the agencies of trouble. This reason can be attributed to CRAs ability to predict frequent near default, default, and financial disasters.

NEGLIGENCE & INCOMPETENCE

• The methodology of CRAs has come under question. For example, even after using different methodologies, the result for sovereign debts comes the same. It is also alleged that CRAs can make a sound judgement on rating, but they didn’t make an effort to do it.
• For e.g. Moody accepted that it did not have a good model on which it could have estimated a correlation between mortgage-backed securities, so they made them up.

POLITICALLY MOTIVATED

• It has also been alleged that CRAs, through their rating mechanism, force the govt to follow the path they prescribe.
• For e.g. during the turmoil in Tunisia, S&P issued a report warning of “downward rating pressures” on neighbouring governments if they tried to calm social unrest with “populist” tax cuts or spending increases. Further, after Crimea annexation, rating agencies downgraded the rating of Russia.

POLICY MEDDLING

• In 203, to stop predatory lending state of Georgia brought a law. Other state of the USA, were to follow suit until S&P retaliated. And it is well known that predatory lending is responsible for the financial crisis of 2008-09.

HOW A RATING AGENCY FUNCTION

1. FOR COMPANIES

It is evident from the Above picture that credit rating agencies depend upon the audited statements. The agencies are only as effective the as honesty of their clients.

2. FOR COUNTRY

Following are the parameters on which a country is rated

• Regulatory framework
• Tariffs
• Fiscal Policy
• Monetary Policy
• Foreign Currency Control
• Physical and human Infrastructure
• Financial Markets
• Macro Factors (Consumer spending, Inflation, Interest Rates)

WHY RATING AGENCY IS REQUIRED

From the 80s onwards, as the financial system became more deregulated, companies started borrowing more and more from the globalised debt markets, and so the opinion of the credit ratings agencies became more and more relevant.

ROLE OF THE CRAs

REDUCE INFORMATION ASYMMETRY

• Since CRAs get access to the company’s management and confidential information about its working, they can give an informed opinion about the ability of an instrument to meet its obligations.

UTILITY FOR ISSUERS

• Issuer concisely communicates the quality of their issue through the rating of the CRAs, which help it establish its creditworthiness.

GATEKEEPERS FOR FINANCIAL MARKETS

• CRAs provide tangible benefits to financial market regulators by reducing the costs of regulation. Regulators such as RBI use CRAs to improve the awareness and decision-making of their regulated entities. For instance, credit ratings are used to determine the capital adequacy of banks the resolution of stressed assets.

PURVEYORS OF REGULATORY LICENSES

• Some financial regulators mandate that certain instruments must be rated mandatorily before they are issued. Extensive integration of CRAs into the financial system transforms their role as purveyors.

MORAL SUASION

• It compels developing countries to pursue more prudent and sensible monetary and fiscal policies.

INSTANCES WHEN RATING AGENCIES FAILED

• The financial collapse of New York City in the mid-1970s
• Asian financial crisis
• Enron scandal,
• Global Financial Crisis
• During the global financial crisis, hundreds of billions of dollars worth of triple-A-rated mortgage-backed securities were abruptly downgraded from triple-A to “junk” (the lowest possible rating) within two years of the issue of the original rating.
• The US Financial Crisis Inquiry Commission called them “key enablers” of the financial crisis and “cogs in the wheel of financial destruction.”

THE HISTORY OF RATING AGENCY

• Credit rating agencies were first established after the financial crisis of 1837 in the US. Such agencies were then needed to rate the ability of a merchant to pay his debts, consolidating such data in ledgers.
• Systematic credit rating started with the rating of US railroad bonds by John Moody in 1909.

COMPARATIVE RATING SYMBOLS FOR LONG TERM RATINGS

DEGREE OF SAFETY  –   RATING  –   Meaning

Highest – AAA – Timely payment of financial obligations

High – AA – Timely payment of financial obligations

Adequate – A – Changes in circumstances can adversely affect such issues more than those in the higher rating categories.

Moderate – BBB – Changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal.

Inadequate – BB – Less likely to default in the immediate future

Greater likelihood of default – B – While currently financial obligations are met, adverse business or economic conditions would lead to a lack of ability or willingness.

Vulnerable to default – C – Timely payment of financial obligations is possible only if favourable circumstances continue

In default or are expected to default – D – Such instruments are extremely speculative and returns from these instruments may be realised only on reorganisation or liquidation.

Some factors which render instruments outstanding meaningless – NM – Factors include reorganisation or liquidation of the issuer; the obligation is under dispute in a court of law or before a statutory authority etc.

CREDIT RATING AGENCIES IN INDIA

CRISIL

• This full-service rating agency is India’s major credit rating agency, with a market share of more than 60%.
• It is offering its services in the financial, manufacturing, service, and SME sectors.
• The headquarter of CRISIL is in Mumbai.
• The majority stake of CRISIL was held by the world’s largest rating agency, Standard & Poor’s.

CREDIT ANALYSIS AND RESEARCH LIMITED RATINGS (CARE) RATINGS

• Credit Analysis and Research Limited Ratings was established in 1993.
• It is supported by Canara Bank, Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), and other financial and lending institutions.
• This is considered the second-largest credit rating company in India.
• The headquarter of Credit Analysis, and Research Limited Ratings is in Mumbai.

SMALL AND MEDIUM ENTERPRISES RATING AGENCY (SMERA)

• It is a rating agency entirely created for the rating of Small Medium Enterprises.
• It is a joint enterprise by SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B), and some chief banks in India.
• The headquarter of SMERA is in Mumbai
• It has accomplished 7000 ratings.

ONICRA CREDIT RATING AGENCY

• Mr. Sonu Mirchandani incorporated it in 1993
• It investigates data and arranges for possible rating solutions for Small and Medium Enterprises and Individuals.
• The headquarter of ONICRA Credit Rating Agency is located in Gurgaon
• It has broad experience in performing a wide range of areas such as Accounting, Finance, Back-end Management, Analytics, and Customer Relations. It has rated more than 2500 SMEs.

FITCH (INDIA RATINGS & RESEARCH)

• Fitch Ratings is a global rating agency dedicated to providing the world’s credit markets with independent and prospective credit opinions, research, and data.
• The headquarter of Fitch Ratings is in Mumbai.

ICRA

• It was created in 1991 by prominent financial institutions and commercial banks in India with a devoted crew of experts for the MSME sector
• Moody’s, which is considered as the international credit rating agency holds the major share.

DIFFERENT BUSINESS MODELS OF CREDIT RATING AGENCIES

MODELS

ISSUER PAY MODEL

ADVANTAGE

• Ratings are available to the entire market free of charge and will greatly aid small investors.
• It gives the rating agencies access to high-quality information that enhances the quality of analysis.

DISADVANTAGE

• It can lead to serious conflict of interest since the company pays the CRAs to get the rating. The CRAs may inflate the rating to satisfy the company.
• It may lead to ‘Rating Shopping’ which refers to the situations where an issuer approaches different rating agencies for the ratings and then choose to publish the most favourable ratings to disclose it to the public via media while concealing the lower ratings.

INVESTOR PAYS MODEL

ADVANTAGE

• It would avoid the serious conflict of interest of the CRAs.
• This would enable the investors to get the credit rating based on the company’s true and actual financial condition.

DISADVANTAGE

• Ratings would be available only to those investors who can pay for them and takes ratings out of the public domain and thus affects the small investors.
• The company may not always share all the necessary information with the CRAs which can have an adverse impact on the quality of the ratings.
• It can pose serious conflict of interest involving the investors themselves. If investors are the payees, they can influence CRAs to give lower-than-warranted ratings to help them negotiate higher interest rates.

REGULATOR PAYS MODEL

ADVANTAGE

• It eliminates the conflict of interest as seen in both Issuer Pay Model and Investor Pay Model.

DISADVANTAGE

• The problem with this model lies in choosing the CRA and payment to be fixed.
• The CRA chosen by the regulator may not provide the best credit rating. Further, if the regulator pays less amount of money to the CRA, the CRA may find it difficult to continue with its business and could have an adverse impact on the quality of the ratings issued.

SHOULD RATING AGENCIES BE REGULATED?

• RATING SHOPPING: It has often been seen that both issuer and investor are involved in rating shopping. CRAs inflate the rating particularly for structured product markets for getting more market share and profit margins.
• OLIGOPOLISTIC TENDENCIES: Around 95% of the market is controlled by only 3 CRA VIZ. S&P, MOODY’S and  Further, they use expansionist marketing. For e.g. Hannover Re lost a big chunk of the market share when it didn’t pay the service fee. (CRAs promised it free service).
• HEGEMONIC CONTROL: As the big three CRAs are located in north America, America exerts a great control on the functioning of CRAs. When CRAs downgraded USA, CRAs were fined. Further, rating of country is not done objectively. UK was rated lower than USA, even when the fiscal deficit of UK was lower than USA.
• CONTROL: CRAs have great control on the world economy as their rating can result in the flight of the capital.
• ACCOUNTABILITY: CRAs are not accountable to any country and their functioning is not transparent

CHANGES THAT IS IMPERATIVE FOR BETTER FUNCTIONING

DODD FRANK ACT

In response to the Global Financial Crisis of 2008-2009, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. It encourages CRAs to invest in due diligence, strengthen internal controls and corporate governance, and improve their methodology. But some of the following provision of it are still unimplemented:

• legal liability of credit rating agencies should be increased.
• Use of credit ratings in regulations that set capital requirements and restrict asset holdings for financial institutions should be removed or replaced.
• Internal controls, conflicts of interest for credit analysts, standards for credit analysts, transparency, internal conflict of interest, and rating performance statistics should be ruled based and regulated.

THE WAY FORWARD

• A ratings agency run by the UN, funded by pooled contributions from both lenders and borrowers should be established. Ratings business must be made a utility, rather than a semi-cartel that intimidates elected politicians and rakes in excess profits
• With the help of technology, open-source models with fully transparent inputs and outputs should be created and promoted. Credit Risk Initiative of National University of Singapore Risk Management Institute is one such example.

THE CONCLUSION: CRAs play a valuable role in financial markets by analysing credit for many investors, but their inaccurate ratings can create problem of enormous proportion for world economy. A unified, integrated effort by all the country is needed to avoid another economic meltdown which would severe repercussion for both, any country or its citizen