THE CONTEXT: United Nations General Assembly (UNGA) on 07 April 2022 suspended Russia from the UN Human Rights Council over reports of gross and systematic violations and abuses of human rights by invading Russian troops in Ukraine. This article analyses the issue in detail.

AN ANALYSIS OF THE DEVELOPMENT

REASONS BEHIND THE SUSPENSION

• Russia was suspended from the UN Human Rights Council after the 193-member General Assembly voted to adopt a resolution moved by the United States over allegations that Russian troops killed civilians while pulling back from towns around the Ukrainian capital of Kyiv.
• In the 193-member UNGA, 93 nations voted in favour of the resolution, while 24 were against it. Fifty-eight countries, including India, abstained from the process.
• This met the two-thirds majority benchmark in which only the voting members, not abstentions, are counted from the 193-member General Assembly.

THE PROCEDURE AND HISTORY

• As per the rules, the United Nations General Assembly (UNGA) can suspend the rights and privileges of any Council member that it decides has persistently committed gross and systematic violations of human rights during its term of membership.
• To suspend a member, one needs a two-thirds majority vote by the General Assembly.
• This is only the second time the UNGA has suspended a country from the 47-member UN Human Rights Council after its formation in 2006. In 2011, Libya was thrown out through a resolution adopted by UNGA through consensus.
• But for the first time, one of the permanent members has lost its membership rights in a UN body.

INDIA’S STAND

India chose to abstain from the vote, saying that any such decision must follow the “due process” of investigation first. However, India also sharpened its criticism of Russia by reiterating the need to respect the three red lines in international relations:

• “Respect for the sovereignty and territorial integrity of states”,
• “UN Charter” and
• “International law”.

AN ANALYSIS OF THE VOTE

• Less than half the members of the UNGA voted in favour of the resolution, but it was enough to pass the resolution. The Russian permanent mission to the UN voiced its opinion on the social media platform that the adoption of the resolution was an “illegal and politically motivated step” to punish a country that pursues an independent foreign policy and also announced that Russia was voluntarily “terminating” its membership in UNHRC with immediate effect.
• Some countries even voted against the resolution for the reasons being:
• Heavier pressure from Russia for outright opposition to the resolution, rather than abstentions especially the countries having close ties with Moscow.
• The precedent of removing a country from the UNHRC because of human rights violations – while it may seem like an obvious step – would be controversial for a number of countries such as Kazakhstan and Uzbekistan both have faced criticisms for violations of human rights at home (both are members of UNHRC currently).
• Russia was in its second year of a three-year term on the Geneva-based council, which cannot make legally binding decisions. However, the council’s decisions send important political messages and can authorise investigations.
• Furthermore, India abstained from the resolution albeit reiterating the condemnation of the civilian killings in Bucha and supported the call for an independent investigation.

THE UNITED NATIONS HUMAN RIGHTS COUNCIL

ABOUT

• The Human Rights Council is an inter-governmental body within the United Nations system responsible for strengthening the promotion and protection of human rights around the world.

FORMATION

• The Council was created by the United Nations General Assembly in 2006. It replaced the former United Nations Commission on Human Rights.
• The Office of the High Commissioner for Human Rights (OHCHR) serves as the Secretariat of the Human Rights Council.
• Headquartered in Geneva, Switzerland.

MEMBERS

• It is made up of 47 United Nations Member States which are elected by the UN General Assembly (UNGA).
• The Council’s Membership is based on equitable geographical distribution. Seats are distributed as follows:

ü  African States: 13 seats

ü  Asia-Pacific States: 13 seats

ü  Latin American and Caribbean States: 8 seats

ü  Western European and other States: 7 seats

ü  Eastern European States: 6 seats

• The UNGA takes into account the candidate States’ contribution to the promotion and protection of human rights, as well as their voluntary pledges and commitments in this regard.
• Members of the Council serve for a period of three years and are not eligible for immediate re-election after serving two consecutive terms.

MECHANISMS

• Universal Periodic Review: UPR serves to assess the human rights situations in all United Nations Member States.Currently, no other universal mechanism of this kind exists.
• Advisory Committee: It serves as the Council’s “think tank” providing it with expertise and advice on thematic human rights issues.
• Complaint Procedure: The complaint procedure addresses communications submitted by individuals, groups or non-governmental organizations that claim to be victims of human rights violations or that have direct, reliable knowledge of such violations.
• The Council also established various subsidiary expert mechanisms to provide the Council with thematic expertise and forums providing a platform for dialogue and cooperation. These bodies focus mainly on studies, research-based advice or best practices.

THE SIGNIFICANCE OF THE UNHRC

UNHRC has played the role of a political platform which aims to ensure that human rights remain a top priority within the UN.

GLOBAL REACH

• UNHRC has a wide mandate which facilitates it to respond to human rights cases across the globe. In doing so, it also brings the members of civil society together for voicing concerns related to human rights in their respective local regions.

SPECIAL PROCEDURES

• The Human Rights Council’s Special Procedures mandate-holders are made up of special rapporteurs, independent experts or working groups composed of five members who are appointed by the Council and who serve in their personal capacity. Special procedures undertake country visits; act on individual cases and concerns of a broader, structural nature by sending communications to States and other actors bringing alleged violations or abuses to their attention
• These independent experts report at least once a year to the Council on their findings and recommendations, as well as to the UN General Assembly. At times they are the only mechanism alerting the international community to certain human rights issues.
• There are two types of Special Procedures mandates: the thematic mandates, such as water and sanitation, arbitrary detention, the rights of migrants, violence against women, torture and human trafficking, and the country-specific mandates.

UNIVERSAL PERIODIC REVIEW

• The Universal Periodic Review motivates nation-level dialogues on human rights and also mandates that every UN member state examines human rights on a regular basis. It ensures transparency and accountability in the functioning of UNHCR.
• i.e. the Universal Periodic Review (UPR) is a unique process which involves a review of the human rights records of all UN Member States. The UPR is a State-driven process, under the auspices of the Human Rights Council, which provides the opportunity for each State to declare what actions they have taken to improve the human rights situations in their countries and to fulfil their human rights obligations.

CONDEMNING THE VIOLATIONS

• In the recent past, the resolutions adopted by the UNHRC have highlighted and condemned distinctive violations despite the efforts to the contrary by some members of the HRC. For example, in the midst of the Arab Spring, the Human Rights Council voted unanimously to suspend Libya’s membership. More recently, the Council did not permit Syria to bid for a seat on grounds of human rights violations and appointed an investigation there.

ISSUE-BASED COALITIONS

• There are an increasing number of countries from all parts of the world which have started working together to further human rights, irrespective of their shared history and regional politics. The regional bloc voting practices have become a matter of the past and considered discussion along with collective action is becoming possible.

DEBATE ON CONTROVERSIAL SUBJECT AREAS

• Controversial subject areas have also been addressed at the HRC, including LGBTIQ rights and religious discrimination. South Africa’s efforts to acknowledge the rights of LGBTIQ faced strong opposition from neighbouring countries but it was supported by far-away countries like Brazil, Colombia, the United States, and many others.

THE CRITICISM OF THE UNHRC

BIASED FOCUS ON THE ISRAEL-PALESTINE CONFLICT

• The UNHRC is accused of an anti-Israel bias as it passes resolutions that focus on alleged Israeli human rights violations while ignoring similar allegations against the Palestinian side. Most recently the 49^th session of UNHRC that ended on 01 April 2022 passed a total of 35 resolutions and 3 of them were concerned with the Israel-Palestine issue (All 3 of them were in favour of Palestine).

MEMBERS WITH QUESTIONABLE HUMAN RIGHTS RECORDS

• Just like the UN Commission on Humans Rights, the UN Human Rights Council also elects members like China, Pakistan and Russia who have poor or questionable track records on Human rights. It raises questions on how effective or unbiased the organisation is.

NEXUS FORMATION

• It was reported in 2008 that the UNHRC was being controlled by a few Middle-East and African nations with support from China and Russia, in order to shield each other from criticism.

LACK OF STANDARDS

• The USA withdrew from the council during the Trump regime but again joined in the present regime. The powerful member nations taking such steps also undermine the credibility of the global body.

GLOBAL REPRESENTATION

• Although the geographical quota system addresses the disparities in global representation, it is also the Council’s most serious flaw.
• With a few honourable exceptions, the overwhelming majority of countries outside Western Europe and other groupings have flawed-to-abysmal human-rights records and policies. Many are not democracies. Few have representative governments. Fewer still have an incentive to pursue and commit to universal human rights.

INDIA AND THE UNHRC

• India was elected for the sixth time to the Council for a three-year term with an overwhelming majority that began on January 1, 2022.
• As part of the third stage of the Universal Periodic Review (UPR) process, India’s National Human Rights Commission delivered its mid-term report to the Council in 2020.
• A number of UN Special Rapporteurs have also written to the Indian government, voicing their concerns about the draft Environment Impact Assessment (EIA) notification 2020. Though there are several concerns with the draft, a few of which are related to human rights are mentioned below:
• Opens the Floodgates of Violations: The environmental lawyers have argued that the Post-Facto Clearance of the Projects is likely to encourage industries to commence operations without bothering clearance and eventually get regularized by paying the penalty amount and thus opening the floodgates of violations.
• Strengthens the Government but Weakens the Public: The draft offers no remedy for the political and bureaucratic stronghold on the EIA process, and thereby on industries. Instead, it proposes to bolster the government’s discretionary power while limiting public engagement in safeguarding the environment. Also, the draft, by limiting public consultation, is not in consonance with protecting the rights of tribals, among others.
• Reduced Time means Reduced Awareness: The reduced notice period for a public hearing from 30 days to 20 days will only make it difficult to study the draft EIA report, more so when it is not widely available or provided in the regional language. Moreover, the reduction of time would particularly pose a problem in those areas where information is not easily accessible or areas in which people are not that well aware of the process itself.
• UNHRC Chief also voiced concerns and criticisms against India on various occasions such as:
• The impact of actions by the government of India on the human rights of the Kashmiri people, including restrictions on internet communications and peaceful assembly, and the detention of local political leaders and activists.
• Arbitrary use of the Unlawful Activities (Prevention) Act throughout India.
• The National Register of Citizens verification process in the northeast Indian state of Assam, caused great uncertainty and anxiety among the people.
• The unprecedented farmers’ agitation at the borders of the national capital over the three farm laws also drew the attention of the UN human rights chief.
• India was quick and firm to present counter statements in defence of India’s stand on such issues and stated that:
• The UNHRC needs to be uniform, consistent, and even-handed when it comes to human rights abuse or denial of civil rights to people across the world and should not resort to a selective approach to seeking accountability for civil rights from different member states.
• India is also of the view that human rights shall be implemented in a non-selective manner and with due respect to non-interference in internal affairs.

THE RECENT DEVELOPMENTS

• India recently abstained from a vote at the United Nations Human Rights Council in Geneva. The Council passed a resolution calling for the formation of an international commission to investigate Russia’s conduct in Ukraine.
• India abstained from voting on resolutions concerning Russia – Ukraine crisis, on as many as six occasions including the International Atomic Energy Agency (IAEA) resolution concerning the safety of four nuclear power plants and a number of nuclear waste sites, including Chernobyl, because the Russians had taken control of them.

THE WAY FORWARD – IMPROVING THE WORKING OF UNHRC

• The impact of the crisis had been felt beyond the region, with increasing food and energy costs, especially for developing countries, and it is in everyone’s collective interest to work constructively, within the UN and outside, towards seeking an early resolution to the conflict.
• No solution can be arrived at, by shedding blood and at the cost of innocent lives and it is peremptory to choose the side of peace and collectively work towards an immediate end to violence.
• UNHRC does not have a separate Secretariat. Though UNHRC and OHCHR function in tandem, both the bodies should have separate specialized secretariat staffs which will further enhance their functioning.
• The decisions on resolutions of the UNHCR are taken, based on the voting of the member nations. Consensus building might prove to be a more feasible approach in a multilateral body.
• To strengthen the global trust in the organisation it is imperative not to have a nation with a bad human rights record as a member of UNHRC.

THE CONCLUSION: Over a decade ago, when the UNHRC recommended the suspension of Libya to the General Assembly, there had been no vote since the resolution was adopted by consensus. The resolution against Russia is passed with 93 votes in favour, 24 against and 58 abstentions i.e with consensus. A hasty move at the General Assembly, which forces countries to choose sides, will aggravate the division among member states, intensify the confrontation between the parties concerned and could be adding fuel to the fire. The move to expel Russia may not contribute to reaching a peaceful resolution of the Ukraine war and could further escalate the polarisation in the international community. The credibility and legitimacy of the multilateral platforms will be enhanced with concrete steps to end the conflict, merely ousting a member would not be sufficient. The response/retaliation from Russia is yet to be seen which will further define the course of history.

THE CONTEXT: On 26 February 2022 Ukraine lodged a case against Russia at the ICJ which was centred on the interpretation of a 1948 treaty on the prevention of genocide, signed by both Russia and Ukraine. The court is named in the treaty itself as the forum for resolving disputes related to genocide and Ukraine’s suit argues that Russia has misinterpreted the treaty in several ways. This article explains the whole issue in detail and analyses the efficacy of ICJ in the present times.

WHAT IS THE INTERNATIONAL COURT OF JUSTICE (ICJ)

ABOUT ICJ

• The ICJ is the principal judicial organ of the United Nations (UN). The International Court of Justice is also known as the World Court.It was established in June 1945 by the Charter of the United Nations and began work in April 1946.
• The seat of the Court is at the Peace Palace in The Hague (Netherlands).Of the six principal organs of the United Nations, ICJ is the only one not located in New York (United States of America).
• Its official working languages are English and French
• All members of the UN are ipso facto parties to the statute, but this does not automatically give ICJ jurisdiction over disputes involving them. The ICJ gets jurisdiction only on the basis of the consent of both parties. The Charter of the United Nations was signed on 26 June 1945, in San Francisco, at the conclusion of the United Nations Conference on International Organisation and came into force on 24 October 1945. The Statute of the International Court of Justice is an integral part of the Charter.

Figure 1 Charter of the United Nations

ITS ORIGIN

• The court is the successor to the Permanent Court of International Justice (PCIJ), which was brought into being by the League of Nations, and which held its inaugural sitting at the Peace Palace in The Hague, Netherlands, in February 1922.
• After World War II, the League of Nations and PCIJ were replaced by the United Nations and ICJ respectively.
• The PCIJ was formally dissolved in April 1946, and its last president, Judge José Gustavo Guerrero of El Salvador, became the first president of the ICJ.

ITS COMPOSITION

• The ICJ consists of a panel of 15 judges elected by the United Nations General Assembly (UNGA) and United Nations Security Council (UNSC) for nine-year terms. These organs vote simultaneously but separately. In order to be elected, a candidate must receive an absolute majority of the votes in both bodies. The Court does not include more than one national of the same State. Moreover, the Court as a whole represents the main forms of civilization and the principal legal systems of the world.
• One-third of the Court is elected every three years; Judges are eligible for re-election.
• The 15 judges of the Court are distributed in the following regions:
   Three from Africa.
   Two from Latin America and the Caribbean.
   Three from Asia.
   Five from Western Europe and other states.
   Two from Eastern Europe.

ROLES AND RESPONSIBILITIES

• The Court settles legal disputes submitted to it by States, in accordance with international law. It also gives advisory opinions on legal questions referred by authorised UN organs and specialised agencies. Judgments in disputes between States are binding.
• The Court decides disputes between countries, based on the voluntary participation of the States concerned. If a State agrees to participate in a proceeding, it is obligated to comply with the Court’s decision.

WORKING OF THE COURT

• States have no permanent representatives accredited to the Court. They normally communicate with the Registrar through their Minister for Foreign Affairs or their ambassador accredited to the Netherlands.
• The sources of law that the Court must apply are international treaties and conventions in force; international custom; the general principles of law; judicial decisions; and the teachings of the most highly qualified publicists*. Moreover, if the parties agree, the Court can decide a case ex aequo et bono, i.e., without confining itself to existing rules of international law.

A *publicist is an international law scholar or a scholarly organization (e.g., American Law Institute). However, Article 38 of the ICJ Statute indicates that only teachings (writings) of “the most highly qualified publicists” are considered to be a source of international law. Thus, not every article or book about an international law topic would be considered a source of international law.

A CRITICAL ANALYSIS OF THE FUNCTION AND RESPONSIBILITIES OF ICJ

• The International Court of Justice (ICJ) is the international community’s legal guardian.The ICJ is frequently called upon to defuse crisis situations, help normalize relations between states, and reactivate stalled negotiation processes. It resolves legal disputes submitted to it by States in accordance with international law, as well as provides advisory opinions on legal questions referred to it by authorized United Nations organs and specialized agencies. Within its limited jurisdiction, the ICJ has resolved significant international disputes, thereby contributing to international peace and security.
• In carrying out its mandate, the Court not only contributes to the strengthening of international law’s role in international relations but also to its development and is increasingly being used as a forum for the resolution of environmental disputes, particularly those involving transboundary harm, as well as other disagreements affecting the conservation of living resources, environmental protection, or potentially adverse effects on human health.
• Albeit the court cannot enact new laws in the same way that a regulator can, the Court can clarify, refine, and interpret international law rules. In the present scenario of Russia’s military action on Ukraine ICJ’s decision is binding on Russia and constitutes part of its international legal obligations. If Russia continues its military actions, it will be a brazen violation of international law.

DISCOURSE ON UKRAINE’S CASE AGAINST RUSSIA AT ICJ

UKRAINE’S APPLICATION AGAINST RUSSIAN FEDERATION

• Ukraine contends that Russian Federation has falsely claimed that acts of genocide have been committed in the Luhansk and Donetsk oblasts of Ukraine and based on such claims Russia initiated a special military action and recognized the so-called ‘Donetsk People’s Republic’ and ‘Luhansk People’s Republic’.
• Ukraine “emphatically denies” that such genocide has occurred and states that Russia has no lawful basis to take action in and against Ukraine for the purpose of preventing and punishing any purported genocide.
• Ukraine used the clause of the Genocide Convention of (1948) to get the ICJ to hear the case. The top court of the United Nations has ordered Russia to “immediately suspend” its military operations in Ukraine.
• It is a “provisional measures” order – an emergency ruling made before the court hears the whole case. Provisional measures are binding. It means even if Russia maintains incorrectly that the invasion is legal, it is now breaching international law anyway by failing to comply with the ICJ’s order. However, a binding ruling is not the same as an enforceable one. Just as there is no global government to give the ICJ more power, there is no global police to enforce its decisions.

Article I of the Convention on the Prevention and Punishment of the Crime of Genocide (Genocide Convention), 1948 as interpreted by the ICJ in the past makes it an obligation for any state not to commit genocide and also gives an extraterritorial scope to signatory states to prevent genocide. (This became the basis for Russia to initiate a special military action against Ukraine.) Ukraine also contends this interpretation and says that no rule in international law automatically gives one state a right to invade another state to stop genocide.
Article VIII states that any contracting party can unilaterally approach the competent organs of the United Nations in matters related to the acts of genocide.
Article IX states that “Disputes between the Contracting Parties relating to the interpretation, application or fulfilment of the present Convention, including those relating to the responsibility of a State for genocide or for any of the other acts shall be submitted to the International Court of Justice at the request of any of the parties to the dispute.” (This became the basis for Ukraine to unilaterally approach ICJ as both Ukraine and Russia are parties to the Genocide Convention.)

• Russia has rejected the order by the ICJ to immediately suspend its military operations in Ukraine by saying that:
   Both sides had to agree to end the hostilities for the ruling to be implemented.
   The ruling was not valid as no consent from both sides can be obtained in this case.
   Though Russia boycotted a hearing on the case but argued in a written filing that the court didn’t have jurisdiction and also said it was acting in self-defence with the invasion.

STANCE OF JUSTICE DALVEER BHANDARI ON THE ISSUE

• Bhandari was one of the two judges at the world court whose vote is contrary to their respective countries’ stance at the United Nations General Assembly (UNGA).
• At the United Nations (UN), India’s stand has been that diplomacy and dialogue are the solutions to the conflict between Russia and Ukraine. At the UN General Assembly on 2 March 2022, India urged both sides to focus on diplomacy to end the war and abstained from voting on the matter.
• Unlike in the UN, in the ICJ, there is no option of abstention and ICJ judges vote in their individual capacities, and they vote on the merits of that. A judge’s opinion at the world court is in his or her individual capacity and does not reflect their respective countries’ stand on the issue.

INDIA AND ICJ

ACCEPTING THE JURISDICTION OF ICJ

• In September 2019 India declared the matters over which it accepts the jurisdiction of the ICJ. This declaration revoked and replaced the previous declaration made in September 1974 and September 1959.
• Among the matters over which India does not accept ICJ jurisdiction are: “disputes with the government of any State which is or has been a Member of the Commonwealth of Nations”, and “disputes relating to or connected with facts or situations of hostilities, armed conflicts, individual or collective actions taken in self-defence…”
• The declaration, which includes other exceptions as well, has been ratified by Parliament.

PARTY TO A CASE AT ICJ

India has been a party to a case at the ICJ on six occasions, four of which have involved Pakistan. They are:

• Right of Passage over Indian Territory (Portugal v. India, culminated 1960) – Ruling in India’s favour.
• Appeal Relating to the Jurisdiction of the ICAO Council (India v. Pakistan, culminated 1972) – ICJ rejected Pakistan’s objection.
• Trial of Pakistani Prisoners of War (Pakistan v. India, culminated 1973) – Pakistan choose not to move ahead with the proceedings.
• Aerial Incident of 10 August 1999 (Pakistan v. India, culminated 2000) – ICJ rejected Pakistan’s contention.
• Obligations concerning Negotiations relating to Cessation of the Nuclear Arms Race and to Nuclear Disarmament (Marshall Islands v. India, culminated 2016) – The court ruled that it does not have any jurisdiction on the issue in the absence of a dispute between the two countries
• Kulbhushan Jadhav (India v. Pakistan, culminated 2019) – The ICJ held that Pakistan was in clear violation of the rights and obligations described under the Vienna Convention on Consular relations 1963 and ruled in favour of India. Jadhav still remains in Pakistan Jail.

INDIANS AS MEMBERS OF ICJ

• Four Indians have been members of the ICJ so far:
   Justice Dalveer Bhandari, former judge of the Supreme Court, has been serving at the ICJ since 2012.
   Former Chief Justice of India R S Pathak served from 1989-91.
   Former Chief Election Commissioner of India Nagendra Singh from 1973-88. Singh was also president of the court from 1985-88 and vice-president from 1976-79.
   Sir Benegal Rau, who was an advisor to the Constituent Assembly, was a member of the ICJ from 1952-53.

LIMITATIONS ON THE FUNCTIONING OF ICJ

ICJ suffers from certain limitations, these are mainly structural, circumstantial and related to the material resources made available to the Court.

JURISDICTION TO TRY INDIVIDUALS

• It has no jurisdiction to try individuals accused of war crimes or crimes against humanity.
• As it is not a criminal court, it does not have a prosecutor able to initiate proceedings.

HUMAN RIGHTS VIOLATION ALLEGATIONS FROM INDIVIDUALS

• The International Court of Justice differs from other courts such as:
   The Court of Justice of the European Union (Luxembourg), whose role is to interpret European Community legislation uniformly and rule on its validity,
   The European Court of Human Rights (France) and the Inter-American Court of Human Rights (Costa Rica), which deal with allegations of violations of the human rights conventions under which they were set up.

These three courts can entertain applications from individuals as well as from States which is not possible for the International Court of Justice.

NOT A SPECIALIST COURT

• The jurisdiction of the International Court of Justice is general and thereby differs from that of specialist international tribunals, such as the International Tribunal for the Law of the Sea (ITLOS).
   ITLOS is an independent judicial body established by UNCLOS to adjudicate disputes arising out of the convention.
   United Nations Convention on the Laws of the Sea (UNCLOS) was adopted in 1982 to establish jurisdictional limits over the ocean areas and regulate activities in international waters, including sea-bed mining and cable laying etc.

NOT A SUPREME COURT

• The Court is not a Supreme Court to which national courts can turn; it does not act as a court of last resort for individuals nor is it an appeal court for any international tribunal. It can, however, rule on the validity of arbitral awards.

CANNOT INITIATE PROCEEDING SUO MOTO

• The Court can only hear a dispute when requested to do so by one or more States.
• It cannot deal with a dispute on its own initiative.
• Neither is it permitted, under its Statute, to investigate and rule on acts of sovereign States as it chooses.

DO NOT HAVE A COMPULSORY JURISDICTION

• The ICJ only has jurisdiction based on consent, not compulsory jurisdiction.

DO NOT ENJOY FULL POWERS

• It does not enjoy a full separation of powers, with permanent members of the Security Council being able to veto enforcement of cases, even those to which they consented to be bound.

ABOUT GENOCIDE CONVENTION

• The Convention on the Prevention and Punishment of the Crime of Genocide (Genocide Convention) is an instrument of international law that codified for the first time the crime of genocide. It was the first human rights treaty adopted by the General Assembly of the UN on 9 December 1948.
• It signified the international community’s commitment to ‘never again’ after the atrocities committed during the Second World War and its adoption marked a crucial step towards the development of international human rights and international criminal law as we know it today.
• According to the Genocide Convention, genocide is a crime that can take place both in times of war as well as in the time of peace. The definition of the crime of genocide, as set out in the Convention, has been widely adopted at both national and international levels, including in the 1998 Rome Statute of the International Criminal Court (ICC).
• Importantly, the Convention establishes on State Parties the obligation to take measures to prevent and punish the crime of genocide, including by enacting relevant legislation and punishing perpetrators, “whether they are constitutionally responsible rulers, public officials or private individuals” (Article IV). Those obligations, in addition to the prohibition not to commit genocide, have been considered norms of international customary law and therefore, binding on all States, whether or not they have ratified the Genocide Convention.
• India is a signatory to this convention.

THE WAY FORWARD

• The ICJ can only hear a dispute when requested to do so by one or more States and cannot deal with a dispute on its own initiative. The power of the court shall be expanded in regard to international laws to take Suo moto cognizance and initiate proceedings to maintain international peace and order.
• ICJ shall also be given the power to hear the matters which have already been decided by other international tribunals.
• Though the ICJ can only hear cases by the states it shall also accept applications from individuals as well as international organizations.
• The rulings of the court are binding but not enforceable on states and the onus lies on other UN organs for their implementation. This leads to a lack of confidence in the efficacy of the court. The court shall be given some institutional powers to make it more efficient.

THE CONCLUSION: While the court did not decide on whether Russia has breached the Genocide Convention, as this is a question of merits, it did express doubt over whether a country can unilaterally use force against another country for punishing or preventing an alleged act of genocide. This indicates that Russia’s use of force is difficult to justify under the Genocide Convention. Just because authoritarian populist leaders don’t care for international law does not diminish its significance. International law, even if not sufficient, is necessary to maintain global order. The ICJ decision is an impactful step in that direction.

THE CONTEXT: The Ukraine crisis has crossed a critical point, with Russia following up its recognition of rebel regions in eastern Ukraine (Donbas region)- Donetsk and Luhansk with a full-fledged invasion to “demilitarise” and “denazify” Ukraine.The United Nations Security Council (UNSC), on 27 February 2022, voted to convene an emergency special session of the General Assembly to consider a resolution on the situation in Ukraine, vetoed by Russia.

ABOUT UNITED NATIONS SECURITY COUNCIL (UNSC)

United Nations Security Council was established by 51 UN founding countries in 1945.

• It has primary responsibility, under the UN Charter, for the maintenance of international peace and security.
• The Security Council is made up of fifteen member states, consisting of five permanent members (P5)—China, France, Russia, UK, and the USA—and ten non-permanent members elected for two-year terms by the General Assembly on a regional basis.
• Election of non-permanent members: non-permanent members are elected by a two-thirds vote of the UN General Assembly. The main criterion for eligibility is contribution “to the maintenance of international peace and security,” often defined by financial or troop contributions to peacekeeping operations. Present non-permanent members are mentioned in the table.
• Subsidiary organs that support the Council’s mission include:
  Counter-Terrorism Committee, Sanctions Committee, Peace Keeping Operations, International Courts, and Tribunals.
• UNSC and UNGA:
   The Council also makes recommendations to the General Assembly to appoint a new Secretary-General and to admit new members to the UN. Security Council decisions are formal expressions of the will of the Council.
   The Security Council, the United Nations’ principal crisis-management body, is empowered to impose binding obligations on the 193 UN member states to maintain peace.
   The Council’s presidency rotates on a monthly basis, ensuring some agenda-setting influence for its ten non-permanent members, which are elected by a two-thirds vote of the UN General Assembly.
   The unconditional veto possessed by the five permanent members has been seen as the most undemocratic character of the UN.
   “Veto power” refers to the power of the permanent member to veto (Reject) any resolution of the Security Council.
   Critics claim that veto power is the main cause for international inaction on war crimes and crimes against humanity.
   Supporters of the veto power regard it as a promoter of international stability, a check against military interventions, and a critical safeguard against U.S. domination.

SUCCESSES OF UNSC

• Since 1948, the UN has helped end conflicts and foster reconciliation by conducting successful peacekeeping operations in dozens of countries, including Cambodia, El Salvador, Guatemala, Mozambique, Namibia and Tajikistan.
• UN peacekeeping has also made a real difference in other places with recently completed or on-going operations such as Sierra Leone, Burundi, Côte d’Ivoire, Timor-Leste, Liberia, Haiti and Kosovo. By providing basic security guarantees and responding to crises, these UN operations have supported political transitions and helped buttress fragile new state institutions. They have helped countries to close the chapter of conflict and open a path to normal development, even if major peacebuilding challenges remain.

CASES IN THE RECENT PAST WHERE THE UN SYSTEM APPEARS TO HAVE FAILED QUITE VISIBLY.

COUP IN MYANMAR

• Myanmar Military (Junta) last year in February took over the democratically elected government, putting the elected leaders in prison, slapping them with national security cases and even declaring full emergency.
• UNSC has held at least 3 rounds of discussions on the issue but has taken no action yet against the Junta for the coup.
• All this comes against the already persisting and unresolved situation of the Rohingya Refugees and humanitarian crises.

TALIBAN TAKEOVER OF AFGHANISTAN

• So far there have been three discussions in UNSC over the issue and one resolution but have not been able to deliver any binding or punitive statement rather at present the resolution shows the Taliban as the default force ruling the country.
• The UN has also failed to instil the idea of UN-led Transitional Council unlike in the case of East Timor where it ran the transitional Council until it handed over after the independence of the country.

RUSSIA’S MILITARY ACTION ON UKRAINE

• Russia vetoed a UN Security Council resolution, that would have demanded that Moscow immediately stop its attack on Ukraine and withdraw all troops.
• This significantly clears the doubt surrounding the abuse of veto powers being used by P5 countries.

ISSUES AND PROBLEMS WITH UNSC

GROUP OF ELITES

• The winners of WW2, P5 members (France, Russia, United Kingdom, China and the United States) hold the veto powers and all the members are nuclear powers, only addressing the strategic interests and political motives of the permanent members.

ANACHRONISM OF PRESENT TIMES

• The veto powers that the UNSC’s five permanent members enjoy are an anachronism in this age. The UNSC in its current form has become a constraint in understanding the international changes and dynamics in the area of human security and peace

POWER PLAY IN UNSC

• Divisions among the P5 i.e. there is a deep polarization within the UN’s membership, so decisions are either not taken, or vetoed.
• Frequent divisions within the UNSC P5 end up blocking key decisions.
• Example: With the coronavirus pandemic emergence, the UN, the UNSC, and WHO failed to play an effective role in helping nations deal with the spread.

ABSENCE OF RECORDS AND TEXTS OF MEETINGS

• The usual UN rules don’t apply to the UNSC deliberations, and no records are kept of its meetings.
• Additionally, there is no “text” of the meeting to discuss, amend or object.

IRONIC CONDITION

• The main purpose of the UN is to maintain peace and stability in the world. Five permanent members of the UN Security Council are the top five largest arms dealing countries in the world.

EFFECTIVENESS AND RELEVANCE

• Unable to respond effectively to the emerging international conflicts and other humanitarian crises.

AN UNDER-REPRESENTED ORGANISATION

• The existing gaps in terms of the under-representation of regions especially from Africa, Asia and Latin America are crippling the UNSC as a global institution governing international peace and security.
• The absence in the UNSC of the globally important countries – India, Germany, Brazil and South Africa – is a matter of concern.

REFORMS IN UNSC

WHAT SHOULD BE THE APPROACH

• Reforms must reflect contemporary global realities and for this purpose, the reform of the UN including the expansion of the UNSC in both permanent and non-permanent categories is essential

REGIONAL REPRESENTATION

• European bias in P-5 is due to the presence of the UK, France and Russia while regions like Latin America, Caribbean group, Arabs and Africa do not have a single permanent member.
• There is a need to overcome the European and Western hegemony and have equitable geographical representation.

CHANGING GEOPOLITICS

• The victors of World War II shaped the United Nations Charter in their national interests, dividing the permanent seats, and associated veto power, among themselves.
• It has been 76 years since the foundation of UNSC and the geopolitical realities have changed drastically and the structure of UNSC should also reflect the same.

QUESTION OF VETO

• Veto power is grossly misused by the permanent members in their own interests. This also badly affects the conduct of the business of UNSC as many important proposals involving substantive issues get blocked. The Veto shall be rarely and cautiously used by world leaders.

TRANSPARENCY AND WORKING METHODS

• While the expansion of the Security Council has been hotly debated across the world, debate on the working methods of the Council is an equally important aspect of reform to many member states.
• The participative, consultative and democratic approach of the functioning of the UN in general and UNSC, in particular, should be adhered to.

KOFI ANNAN MODEL FOR REFORMS – 2005

In 2005, the Former UN secretary-general presented two models for a total of 24 seats in the Council.
Model A: Six new permanent seats, with no veto being created, and three new two-year term non-permanent seats, to have representation from all regions.
Model B: No new permanent seats but create a new category of eight 4-year renewable-term seats and one 2-year non-permanent and non-renewable seat.

CHALLENGES FOR REFORMS

AMENDMENT TO UN CHARTER

This amendment involves a two-stage process:

• Stage I: General Assembly must approve the reform by a two‑thirds majority (i.e. at least 128 states).
• Stage II: amended Charter must then be ratified by at least two‑thirds of the member states, including the five permanent Council members.
• This process includes all Security Council’s permanent members, and they may not take a step to curb their own powers.

POLITICAL WILL AND INTEREST OF P5

• Every country’s actions are based on its national interests and no one likes to get its power diluted.
• There has been no consensus reached among the UN members including the P5, on how to adjust the Security Council’s structure and in particular how to increase the number of new permanent members.

INTERGOVERNMENTAL NEGOTIATIONS

• There is no coherence in the approach of supporters of UN reforms, The G4 bid has been opposed by a few countries, whereas other groups like Coffee Club opposed adding countries as permanent members.
• The 13-member group that includes Pakistan and is known as United for Consensus (UfC) has been in opposition to adding more permanent members to the Council.

INDIA AND UNSC

Why India should be admitted as a permanent member?

• The expansion of the Security Council, in the category of both permanent and non-permanent members, and the inclusion of countries like India as permanent members, would be a first step in the process of making the United Nations a truly representative body.
• At the core of India’s call for reformed multilateralism, lies the reform of the UN Security Council, reflective of the contemporary realities of today. When power structures continue to reflect the status quo of a bygone era, they also start reflecting a lack of appreciation of contemporary geopolitical realities.
• The Charter of the United Nations, alongside the call for a geographically balanced distribution of seats, also expressly states that countries that make considerable contributions to the UN should be members of the Security Council.
• India’s performance as a non-permanent member of the Security Council during 2011- 2012 has also significantly strengthened India’s claim to permanent membership
• By any objective criteria such as population, territorial size, GDP, economic potential, civilizational legacy, cultural diversity, political system, India is eminently suited for permanent membership of an expanded UNSC.

Why should India bid for a permanent seat in UNSC?

• The largest democracy in the world.
• 3rd largest economy.
• Home to 1/6th of the total world population.
• One of the largest peacekeeping contributors to the UN.

INDIA IN UNSC AS A NON-PERMANENT MEMBER FOR THE EIGHTH TERM (2021-2022)

INDIA’S 5-S APPROACH • SAMMAN – Respect

• SAMVAD – Dialogue
• SAHYOG – Cooperation
• SHANTI – Peace
• SAMRIDDHI – Prosperity

NEW OPPORTUNITIES FOR PROGRESS

• As a rule-abiding democracy and a positive contributor to the security of the global commons, India should work constructively with partners to bring innovative and inclusive solutions to foster development.
• India calls for greater involvement of women and youth to shape the new paradigm.

EFFECTIVE RESPONSE TO INTERNATIONAL TERRORISM

• Addressing the abuse of ICT by terrorists.
• Disrupting their nexus with sponsors and transnational organised criminal entities.
• Stemming the flow of terror finance.
• Strengthening normative and operative frameworks for greater coordination with other multilateral forums

COMPREHENSIVE APPROACH TO PEACE AND SECURITY

India’s vision for international peace and security is guided by:

• Dialogue and cooperation.
• Mutual respect.
• Commitment to international law.

INDIA ON RUSSIA-UKRAINE ISSUE

• India strongly emphasized the need for all sides to exercise the utmost restraint and intensify diplomatic efforts to ensure a mutually amicable solution.
• India abstained from voting on the UNSC resolution condemning Russia’s aggression on Ukraine.

OUTCOMES OF INDIA’S PRESIDENCY

• The event was the first time when there was a comprehensive debate on the holistic concept of maritime security.
• Two other signature events – on Peacekeeping and Technology on August 18 and the briefing on Islamic State on August 19.
• India exchanged a Memorandum of Understanding (MoU) with the UN in support of the ‘Partnership for Technology in Peacekeeping’ initiative and to UN C4ISR Academy.
• For the first time, the Security Council held an open debate focused exclusively on how technology can aid in peacekeeping and for the first time, it adopted a presidential statement on the topic of technology and peacekeeping.
• India drafted a resolution on peacekeeping focused on ensuring accountability for crimes against peacekeepers. The resolution was sponsored by 80 member states, including all 15 members of the UNSC.
• First resolution being adopted by the Council on the situation in Afghanistan following the takeover of Kabul by the Taliban.
• The UNSC successfully steered the discussions on various peace and security issues that are on its agenda, including Myanmar, Syria, Yemen, and the Middle East Peace Process.

WHAT SHOULD INDIA DO?

• India should leverage its past experiences as a non-permanent member.
• India also needs to revitalise its engagement with its traditional partners in the “global south” by voicing its peace and security concerns in the UNSC. In this context, two sub-groups of the global south should be of particular interest: the Small Island States and Africa.
• The G4 nations of India, Brazil, Germany and Japan have reaffirmed that it is “indispensable” to reform the Security Council through an expansion in permanent and non-permanent seats to enable the UN organ to better deal with the “ever-complex and evolving challenges” to the maintenance of international peace and security.
• It’s been clear for some time now that the global multilateral order is not fit for its purpose. The Covid pandemic, Afghan issue, Nagorno-Karabakh issue and now Russia’s military action on Ukraine have only made the world more aware of the real-time consequences of this gradual decay. The United Nations Security Council has faced a lot of flak for not representing today’s international power realities and for not being able to shape the global discourse on the changing nature of security. Reforms in the UNSC and other multilateral institutions are the need of the hour.

THE WAY FORWARD FOR UNSC

• UNSC should be reformed to incorporate the adequate representation of every region of the world.
• Permanent seats in council should be increased.
• Council is acting like it’s 1945, this approach should be changed.
• Countries like India (Largest democracy in the world), Germany (Largest Economy of Europe), Brazil (Largest of Latin America) and one member from Africa continent should be the part of council with veto power.
• In order to enhance regional representation, there is consensus that the council must be enlarged to improve the current makeup, giving more weight to regions such as Africa, the Asia-Pacific and Latin America/Caribbean states, especially when most agenda issues centre on these regions.
• While an enlarged Council should address any democratic deficit and improve multilateralism, a modest increase has been preferred by P5 members to ensure it remains effective and does not descend into a talk shop unable to act quickly.
• Council should take lesson from the recent Russian attack and for future, it should be ready to stop such invasions.
• Permanent members of council should think beyond their interest to peacemaking.

THE CONCLUSION: The reform of the UNSC is a crucial issue on the current international agenda. Its progress will determine the effectiveness of the work of the whole UN system for the foreseeable future. The efforts in this area should be aimed, first of all, at enhancing the Council’s ability to promptly and effectively react to emerging challenges. This becomes even more relevant today as we witness multiple crises and conflicting situations.

THE CONTEXT: India promised to install 100 gigawatts of solar power by 2022. But the country will not be able to deliver on this climate pledge. According to a new report, India will miss this target by 27%. Also, India is likely to miss its solar energy target of 300 GW (gigawatt) for 2030 by around 86 GW, a new report by the Institute for Energy Economics and Financial Analysis (IEEFA) and JMK Research. In this context, this article analyzes the present scenario of the Solar energy sector in India.

WHAT DOES THE REPORT SAY?

• As of April, only about 50% of the 100GW target, consisting of 60GW of utility-scale and 40GW of rooftop solar capacity, has been met.
• Nearly 19 GW of solar capacity is expected to be added in 2022 — 15.8GW from utility-scale and 3.5GW from rooftop solar. Even accounting for this capacity would mean about 27% of India’s 100GW solar target would remain unmet.
• A 25GW shortfall in the 40GW rooftop solar target is expected compared to 1.8GW in the utility-scale solar target by December 2022. Thus, it is in rooftop solar that the challenges of India’s solar-adoption policy stick out.

REASONS FOR MISSING INDIA’S SOLAR ENERGY TARGET:

• In its early years, India’s rooftop solar market struggled to grow, held back by lack of consumer awareness, inconsistent policy frameworks of the Centre/ State governments and financing. Recently, however, there has been a sharp rise in rooftop solar installations thanks to falling technology costs, increasing grid tariffs, rising consumer awareness and the growing need for cutting energy costs.
• Other Factors impeding rooftop-solar installation include:
• Pandemic-induced supply chain disruption to policy restrictions.
• Limits to net-metering (or paying users who give back surplus electricity to the grid). Regulatory roadblocks.
• Taxes on imported cells and modules, unsigned power supply agreements (PSAs) and banking restrictions; financing issues plus delays in or rejection of open access approval grants; and the unpredictability of future open access charges.

OVERVIEW OF INDIA’S RENEWABLE ENERGY SECTOR:

• At COP26 in Glasgow, our prime minister announced 500 gigawatts (GW) of non-fossil fuel capacity and 50% of energy from renewable sources by 2030, coupled with a net-zero target by 2070.
• Presently, India has installed 152.90 GW of renewable energy capacity projects (including large hydro) until February. It includes 50.78 GW from solar power, 40.13 GW from wind power, 10.63 GW from Bio-power, 4.84 GW from small hydropower and 46.52 GW from large hydropower.

IMPORTANCE OF SOLAR ENERGY FOR INDIA

• India’s share of global energy demand is predicted to double to 11% in 2040, making it imperative to enhance energy security and self-sufficiency in power generation without increasing environmental costs.
• This increase in power demand is likely to increase India’s reliance on coal, oil and natural gas as a source of energy. However, additional imports of oil and increased domestic production of coal will fall short of energy demand and entail economic and environmental costs.
• These are likely to hit harder than anticipated to an economy ravaged by COVID-19. Expansion of solar power units and increased reliance on solar power allows India to enhance energy security in the face of rising demand.
• India is dealing with an aggressive air pollution problem. In 2020, Delhi’s Air Quality Index (AQI) stood at 328, indicating severe pollution. Solar production does not cause any toxic emissions and can help mitigate the pollution caused by fossil fuel usage.
• India is likely to face increasing water security issues and thus must shift to energy sources that don’t rely extensively on water. The groundwater levels in India declined by 61% between 2007 and 2017, with the majority of this water being used for irrigation. This is a major red flag for coal production which relies heavily on water for steam production and cooling. Solar power is neither dependent on groundwater supplies nor does it strain them.

WHAT IS INDIA’S SOLAR POLICY?

SOLAR ROOFTOP SCHEME

• Under the rooftop scheme executed by SECI (Solar Energy Corporation of India), 200 MW of projects has been allocated. SECI launched a tender that is the largest global one offering 30% subsidy to the residential sector, private not-for-profit educational organizations, social sector, and the health institutions.

SOLAR PARK SCHEME

• parks to facilitate the creation of infrastructure required to set up new solar power projects in terms of land allocation, transmission, access to roads, availability of water, etc. MNRE has come up with a scheme to set up a number of solar parks across several states, each with a capacity of almost 500 MW. The Scheme proposes to offer financial support by the Government of India to establish solar

SOLAR ENERGY SUBSIDY SCHEME

• Under this Scheme, financial assistance and capital subsidy will be provided to the applicant to the extent of 50 per cent, 75 percent and 90 percent of the basis of basic cost of the solar energy plant. The Government Yojana explains that a person is eligible for a subsidy if he has solar panels installed on the rooftop. The subsidy is decided as per the capacity of the solar power plant.

PRADHAN MANTRI- KISAN URJA SURAKSHA EVAM UTTHAAN MAHABHIYAN

• It Aims to provide financial and water security to farmers through harnessing solar energy capacities of 25,750 MW by 2022.
• Solarisation of water pumps is a step in distributed power providing at the consumer’s doorstep.

THE JAWAHARLAL NEHRU NATIONAL SOLAR MISSION (JNNSM)

• The Jawaharlal Nehru National Solar Mission (JNNSM), also known as the National Solar Mission (NSM), which commenced in January 2010, marked the government’s first focus on promoting and developing solar power in India.

GROWTH OF THE SOLAR SECTOR

• Since 2011, India’s solar sector has grown at a compounded annual growth rate (CAGR) of around 59% from 0.5GW in 2011 to 55GW in 2021.

RANKING OF INDIA

• India currently ranks fifth after China, U.S., Japan and Germany in terms of installed solar power capacity.

PRESENT STATUS

• As of December 2021, India’s cumulative solar installed capacity is 55GW, which is roughly half the renewable energy (RE) capacity (excluding large hydro power) and 14% of India’s overall power generation capacity.
• Within the 55GW, grid-connected utility-scale projects contribute 77% and the rest comes from grid-connected rooftop and off-grid projects.

What should be done to achieve the targets?

• The need for focused, collaborative and goals driven R&D to help India attain technology leadership .
• The need for a better financing infrastructure, models and arrangements to spur the PV industry and consumption of PV products.
• Training and development of human resources to drive industry growth and PV adoption.
• With solar panels and solar systems getting more efficient vs their earlier generation, customers are wanting to invest in a technology that is getting them better output per square meter of the space they have.
• So there is a constant need to invest in research & development of more efficient solar ecosystem involving energy storage systems. Like shark bifacial panels generating electricity from both front and back of the solar panel.
• As India is making strides to fulfil its solar dream, Loom Solar and its smart methodologies shall continue to provide the Indian solar industry with much-needed assistance for ‘Mission 2030’.

SCOPE OF INDIA’S SOLAR SECTOR

• The generation of solar energy has tremendous scope in India. India being a tropical country, receives solar radiation throughout the year. With 3,000 hours of sunshine, this is equal to more than 5,000 trillion kWh of solar radiation per square meter.
• India has vast solar potential; it is a lucrative opportunity for entrepreneurs to start a solar business in India. With the growing economy, India’s power consumption is going to rise, so the solar energy business in India is the ideal way to manage the balance between economic growth and sustainable development.
• The government is constantly pushing and supporting the solar business in India through various programs and initiatives by enabling an increase in solar power at a subsidized cost.

THE CONCLUSION: Boosting solar capacity post-pandemic in a struggling economy will pose a whole new challenge. It will require innovative financing techniques and policies to bolster domestic production in the face of increasing environmental concerns.

THE CONTEXT: The present government has focussed on the transport sector with various schemes for improving transportation in India. In this article, we will see how the transport sector can play an important role in a region’s development and what are the lacunae that the Indian transport sector is facing.

COMPONENTS OF INDIAN TRANSPORT SECTOR

The Indian transport system includes different modes such as

• Railways
• Roads
• Air Transport
• Coastal Shipping etc.

HOW TRANSPORT SECTOR INFLUENCES REGIONAL DEVELOPMENT

1. Core: The most fundamental impacts of transportation related to the physical capacity to convey passengers and goods and the associated costs to support this mobility. This involves setting routes that enable new or existing interactions between economic entities.
2. Operational : Improvement in the time performance, notably in terms of reliability and reduced loss or damage. This implies a better utilisation level of existing transportation assets benefiting its users as passengers and freight are conveyed more rapidly and with fewer delays.
3. Geographical: Access to a broader market base where economies of scale in production, distribution, and consumption can be improved. Increases in productivity from the access to a larger and more diverse base of inputs (raw materials, parts, energy, or labor) and broader markets for diverse outputs (intermediate and finished goods).

IMPACTS OF TRANSPORT

1. Direct impacts: The outcome of improved capacity and efficiency where transport provides employment, added value, larger markets, and time and costs improvements. The overall demand of an economy is increasing.
2. Indirect impacts: The outcome of improved accessibility and economies of scale. Indirect value-added and jobs result from local purchases by companies directly dependent upon transport activity. For example – office supply firms, equipment and parts suppliers, maintenance and repair services, insurance companies, consulting, and other business services.
3. Induced impacts: The outcome of the economic multiplier effects where the price of commodities, goods, or services drops and their variety increases. For instance, the steel industry requires the cost-efficient import of iron ore and coal for the blast furnaces and export activities for finished products such as steel booms and coils. Manufacturers, retail outlets, and distribution centers handling imported containerised cargo rely on efficient transport and seaport operations.

IMPACT ON DIFFERENT SECTORS

1. Agriculture Sector: It facilitates the connection between topographical and economic regions and creates new areas to commercial focus. It leads to the creation of a market, promotes the distribution of goods, and creates additional opportunities.
2. Industrial Sector: It helps connect industries to each other and to the world markets. Also, this leads to employment generation and dispersal of wealth.
3. Education Sector: A reliable transport sector ensures that students can reach the school premises. This ensures that the student continues his/her education and thus works for the nation’s development.

PROBLEMS FACED BY INDIAN TRANSPORT SECTOR

1. Quality of Road Infrastructure: The majority of Indian highways have two lanes leading to congestion. Roads are of low quality and road maintenance remains underfunded.
2. Rural Areas have Poor Access: The rural road network is extensive still some 33 percent of Indian villages do not have access to all-weather roads and remain cut off during the monsoon season. The problem is more acute in India’s northern and northeastern states, which are poorly linked to the country’s major economic centers.
3. Railway Capacity Constraint: All the country’s high-density rail corridors face severe capacity constraints. Also, freight transportation costs by rail are much higher than in most countries as freight tariffs in India have been kept high to subsidise passenger traffic.
4. Port Congestion: The capacity utilisation in some major ports remains as low as 58-60% as per World bank.
5. Airport Infrastructure: Air traffic has been growing rapidly leading to severe strain on infrastructure at major airports, especially in the Delhi and Mumbai airports which account for more than 40 percent of nation’s air traffic.

THE WAY FORWARD

1. Capacity Building: Government needs to improve the capacity of the transport system by investing in infrastructure.
2. SIMSystem: A SIMSystem promotes interoperability between modes of transport to avoid potentially uncoordinated or conflicting investments, assets, standards, rules and technologies.

SIMSYSTEM EXPLAINED

A SIMSystem promotes interoperability between modes of transport to avoid potentially uncoordinated or conflicting investments, assets, standards, rules and technologies.

Principles of SimSystem:

1. User-centred: The system is designed and operated to meet the collective and individual needs of all the users it serves.
2. Designed to be adaptable: It will adapt to the capabilities and conditions of the place it is deployed in, to the behaviours and needs of its users, and to improvements in technology.
3. Open standards and protocols: The private sector will need to play a leading role in establishing open standards and protocols for the creation of mobility-related data exchanges and application programming interfaces.
4. Public-private collaboration: Governments should act as conveners to increase collaboration within and between governments and the private sector, which will enable a SIMSystem to operate across transport types, geographies and functionalities.
5. Participation and value: Maintaining the ability for the private sector to derive value from their products, services and intellectual property will encourage broad-based participation and enable the full realization of a SIMsystem.
6. Agile governance: Governments should reduce institutional complexity and create more focused governance models, to facilitate agile coordination with the private sector and other governments.
7. Funding and financing: Governments should create innovative funding instruments and business models that enable private-sector actors to underwrite the cost of a SIMSystem and share in the monetary benefits.
8. Performance measurement: Standardized performance indicators should be established to measure the impact of a SIMSystem on accessibility, affordability, sustainability, safety, efficiency and integration.
9. Learning and improvement: An international public-private coalition should be formed and tasked with the frequent sharing of knowledge and best practices across geographies.
10. Scaling and growth: A public-private working group of leaders should be established to define and address fundamental framing decisions and enable SIMSystem pilots in various geographies.

CASE STUDY SHOWING IMPACT OF TRANSPORT SECTOR

A group of tribal belonging to nine different villages came together to construct a ghat road for connecting their hamlet to Vishakhapatnam’s agency area. These people lacked electricity and medical services due to lack of road connectivity. After working tirelessly for 3 weeks, they created a 7km long kutcha road that provide connectivity to certain Eastern ghat habitations. The road has led to reduced deaths in the region as medical services are possible and the youth can go to town for education and employment. The three tribes of Muka Doras, Konda Doras and Kondus have benefited from this.

THE CONCLUSION: Transportation links together the factors of production in a complex web of relationships between producers and consumers. A nation’s growth moves through its roads and thus the best way to increase growth rate is by improving the infrastructure. India needs to learn from China which have gained immensely by investing in its infrastructure.

THE CONTEXT: Prime Minister Narendra Modi announced an economic package totalling Rs 20 lakh crore to tide over the Covid-19 crisis under ‘Atmanirbhar Bharat Abhiyan’. The Rs 20 lakh crore package (10% of GDP) includes the government’s recent announcements on supporting key sectors and measures by Reserve Bank of India. The special economic package would focus on land, labour, liquidity and laws.

PRIME MINISTER’S VISION

• Call for आत्मनिर्भरर्ारतअनर्यािor Self-Reliant India Movement
• Five pillars of Atmanirbhar Bharat – Economy, Infrastructure,
  System, Vibrant Demography and Demand
• Special economic and comprehensive package of Rs 20 lakh
  crores – equivalent to 10% of India’s GDP
• Package to cater to various sections including cottage industry,
  MSMEs, labourers, middle class, industries, among others.
• Bold reforms across sectors will drive the country’s push towards self-reliance
• It is time to become vocal for our local products and make them global.

THE KEY FEATURES OF ATMNIRBHAR BHARAT ABHIYAN (ANBA)

The goal

• To become self-reliant.

Five pillars

1. Economy
2. Infrastructure
3. Technology driven system
4. Vibrant demography
5. Demand

The Five phases

• Phase-I: Businesses including MSMEs
• Phase-II: Poor, including migrants and farmers
• Phase-III: Agriculture
• Phase-IV: New Horizons of Growth
• Phase-V: Government Reforms and Enablers

Explaining Self-reliance

• Self-reliance implies that product and factor markets are made flexible in order to allow the Indian economy to adapt to the problems and opportunities of an emerging post-COVID world.

All inclusive

• India’s self-reliance there is a concern for the whole world’s happiness, cooperation and peace, self-reliance, does not advocate for a self-centred system.
• Active participation in post-COVID global supply chains as well as the need to attract foreign direct investment.

Decentralised localism 

• LOCAL IS VOCAL
• Freeing Indian entrepreneurship and innovation from bureaucratic hurdles.
• Decentralised localism takes pride in local brands, emphasises resilience and flexibility, and encourages local capacity-building and indigenisation.

Commitment to privatisation

• There is an unapologetic commitment to privatisation of non-strategic public sector entities, opening up of new sectors like space to private investment, decriminalisation of most aspects of corporate law, greater flexibility in labour laws, and so on.

ABOUT THE PACKAGE

The first tranche

• ₹3 lakh crore collateral free loan scheme for businesses, especially micro, small and medium enterprises (MSMEs).
• Global tenders will not be allowed for government procurement up to ₹200 crore, as the goal is self-reliant.
• NBFCs, housing finance companies and microfinance institutions will be supported through a ₹30,000 crore investment scheme fully guaranteed by the Centre, and an expanded partial credit guarantee scheme worth ₹45,000 crore, of which the first 20% of losses will be borne by the Centre.
• Power distribution companies, which are facing an unprecedented cash flow crisis, will receive a ₹90,000 crore liquidity injection.
• Employee Provident Fund (EPF) support, provided to low-income organised workers in small units under the PMGKY is being extended for another three months and is expected to provide liquidity relief of ₹2,500 crore.

The second tranche-Migrant workers (₹3,500 crore)

• Free food grains for the next two months to migrant workers who do not have ration cards. This is an extension of the Pradhan Mantri Garib Kalyan Yojana.
• One Nation One Ration card to enable a migrant beneficiary to purchase grains from any ration shop in the country
• Extension of credit facilities for urban housing, street vendors and farmers.
• An interest subvention scheme for small businesses
• Affordable housing for migrants and urban poor via a scheme under PMAY and affordable rental housing complexes (ARHC) under PPP mode.

The third tranche- Agriculture sector (₹1,50,000 Cr)

• A central law to permit barrier-free inter-State trade of farm commodities.
• To ensure a legal framework to facilitate contract farming.
• Deregulating the sale of six types of agricultural produce, including cereals, edible oils, oilseeds, pulses, onions and potatoes, by amending the Essential Commodities Act, 1955,
• Allow private players to invest in inputs and technology in the agricultural sector.
• To build farm-gate infrastructure and support logistics needs for fish workers, livestock farmers, vegetable growers, beekeepers and related activities.

The fourth tranche- industry, aviation and space.

• To enhance self-reliance in defence production,indigenise defence production by banning the import of some weapons and platforms.
• The FDI limit in defence manufacturing under automatic route will be raised from 49% to 74%.
• Introducing commercial mining in the coal sector, liberalise the mineral sector, ease airspace restrictions.
• Encourage private involvement in space and atomic energy projects.
• ₹8,100 crore to be provided as a hiked 30% viability gap funding to boost private investment in social sector infrastructure.
• Power distribution companies in union territories will be privatised.

ANBA- REDESIGNING OF THE INDIAN ECONOMY

• Self-reliance is about resilience, leveraging internal strengths, personal responsibility, and a sense of national mission (or “Man Making” to use the late 19th century expression of Swami Vivekananda).
• Self-reliance also means a commitment to resilience at multiple levels — at a national level, an industry level, and at an individual level. For example, the government has indicated that it would provide various forms of incentives and protection to key industries — for example, inputs for the pharmaceuticals industry.
• From Globalisation to decentralised localism that takes pride in local brands, emphasises resilience and flexibility, and encourages local capacity-building and indigenisation.It’s not shutting off India from the world. It creates new openness to ideas, investment, and trade.
• Farm sector reform includes the scrapping of the ECA-APMC system which enables localised decision-making by farmers even as they can participate in a national common market or export to the global market. Similarly, traders can now invest in supply-chains and agri-businesses without the fear of being arbitrarily labelled a hoarder. The government still has a role but it is as an enabler, providing soft and hard infrastructure
• The incentive structure of defence procurement has been changed to encourage indigenisation even as foreigners are encouraged to manufacture in India.
• Resilience in individuals and vulnerable social groups, calls for the creation of safety nets. The effort to create a health insurance system (Ayushman Bharat), and the direct benefit transfer mechanism based on Jan Dhan-Aadhaar-Mobile (JAM).
• Labour reforms emphasise flexibility on the one hand but on the other hand are also pitching for more stringent norms for safety and working conditions.
  Thus, ANBA is about standing up confidently in the world, and not about isolationism behind “narrow domestic walls”.

THE CHALLENGES OF ANBA

Financial limitations

• At present, there is no sure-shot way of knowing what will be the final level of government spending at the end of this financial year.
• Most calculations suggest that far from the promised level of 10% of the GDP — the actual government expenditure in the Atmanirbhar Bharat Abhiyan is just 1% of GDP.
• And we still don’t know if this 1% (of GDP) expenditure is over and above the Budgeted expenditure or will it be funded by expenditure cuts elsewhere.

Declined GDP

• In this pandemic situation India’s GDP will decline by 12.5% under the Base case scenario.
• To lift growth, the governments would have to spend more and counteract the natural downward spiral of the economy.

Demand Supply Gap

• Many economists have opined that the government stimulus tries to resolve only supply-side issues. There is nothing to generate demand. This could only be done by putting money in the hands of people.

Threat to trade liberalisation

• “Self-reliance” may reorient the economic structure towards ensuring “self-sufficiency” by falling back on the decades-old failed policy of import substitution.
• The shift towards protectionism, threatening to undo decades of trade liberalisation may be underway.

Mixing of RBI and Government

• The actions of RBI were included as part of the government’s fiscal package whereas government expenditure and RBI’s actions cannot be clubbed together.

Resource crunch

• India’s welfare state does not lack intentions but lacks resources. No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.

AN OLD WINE IN NEW BOTTLE OR A NEW AGE OF SELF-RELIANCE

India has tried self-reliant policy since independence. Even during the Freedom Struggle Movement, there was Swadeshi Movement.

The past experiences have not been very encouraging especially since independence
1. The socialist pattern is seen as among the main cause of backwardness of the Indian economy
2. The phase of liberalisation is seen as Indian economy awakening
3. The recent initiative like ‘MAKE IN INDIA’ has not been very effective

Therefore, again talking about self-reliant seems to be an old wine in new bottle.

THE WAY FORWARD

It is not that if something has failed in past so it will fail again. Rather it should be taken more as a resolve by the people of India to work for a resilient India by making it more self-reliant rather than dependent. No country has grown without role of its citizen to make the country self-reliant. After the imitative of the ATMANIRBHAR BHARAT, now India has today created a capacity of producing 2 lakh PPE kits daily, which is also growing steadily from zero production of Personal Protection Equipment (PPE) before March 2020,
Additionally, India has demonstrated how it rises up to challenges and uncovers opportunities therein, as manifested in the re-purposing of various automobile sector industries to collaborate in the making of life-saving ventilators. The clarion call given by the Hon’ble PM to use these trying times to become Atmanirbhar (self-reliant) has been very well received to enable the resurgence of the Indian economy.
At the same time there should be continuity of the policy and the resolve. It should not be a crisis-ridden policy initiative rather it should be taken as a necessity if India wants to become a globally competitive economy, reduce its reliance on other economies and have its own innovation and technology especially for defence sector.

THE CONTEXT: The Fifteenth Finance Commission, headed by Mr NK Singh has submitted its main report for the period of 2021-2026 on March 2021 to the President. Earlier the commission has also presented an interim report for the period 2020-2021. This writes up discusses the various recommendations of the commission in the main report and examines whether it was able to perform the role of the balancing wheel of fiscal federalism.

THE TERMS OF REFERENCE OF THE XVth FINANCE COMMISSION

• The Fifteenth Finance Commission was constituted on 27 November 2017 against the backdrop of the abolition of Planning Commission, removal of the distinction between plan and non-plan expenditure and the introduction of GST.
• These developments have redefined the federal fiscal relations and the terms of reference (ToRs) of the commission reflect these realities.
• Apart from the mandatory ToRs provided under Art 280 of the constitution, the commission was given additional ToRs by the union government. These are outlined below.

TRADITIONAL TERMS OF REFERENCE

• The distribution of net proceeds of taxes in the divisible pool between the Union and the states and the states inter se.
• The principles governing the Grants in Aid to the revenue of the states.
• The measures needed to augment the resources of the local bodies of the states on the basis of the recommendation of the State Finance Commission

ADDITIONAL TERMS OF REFERENCE

• Review the current status of the finances of the union and states and suggest a fiscal consolidation roadmap.
• Examine if revenue deficit grants should be provided to the states by the Union government.
• While making recommendations the commission needs to keep in mind the demand on the resources of the union due to defence, internal security, climate change, and National Development Programme-New India 2022.
• The conditions that the Union required to impose on the borrowing programme of the states under Art 293(3).
• Performance-based incentives to states on factors like tax net under GST, population management, progress in implementation of centre’s flagship programmes, quality of capital expenditure, ease of doing business etc.
• The population data of the 2011 census will be used by the commission in arriving at its recommendations
• Review the pattern of financial contribution by the Union and states under the Disaster Management Act 2005.

THE RECOMMENDATIONS OF THE 15TH FINANCE COMMISSION

SHARE OF STATES IN CENTRAL TAXES

• The share of states in the central taxes also known as vertical devolution, for the 2021-26 period is recommended as 41%.

CRITERIA FOR DEVOLUTION

• The commission has chosen Income distance, area, population, demographic performance, forest and ecology, tax and fiscal efforts as criteria for horizontal devolution.

RECOMMENDATION FOR VARIOUS GRANTS

• Revenue deficit grants: 17 states will receive grants worth Rs 2.9 lakh crore to eliminate the revenue deficit.
• Sector-specific grants: Sector-specific grants of Rs 1.3 lakh crore will be given to states for eight sectors: (i) health, (ii) school education, (iii) higher education, (iv) implementation of agricultural reforms, (v) maintenance of PMGSY roads, (vi) judiciary, (vii) statistics, and (viii) aspirational districts and blocks. A portion of these grants will be performance-linked.
• State-specific grants: The Commission recommended state-specific grants of Rs 49,599 crore. These will be given in the areas of: (i) social needs, (ii) administrative governance and infrastructure, (iii) water and sanitation, (iv) preservation of cultural and historical monuments, (v) high-cost physical infrastructure, and (vi) tourism.
• Grants to local bodies: The total grants to local bodies will be Rs 4.36 lakh crore (a portion of grants to be performance-linked) including:
   Rs 2.4 lakh crore for rural local bodies, (ii) Rs 1.2 lakh crore for urban local bodies, and (iii) Rs 70,051 crore for health grants through local governments.
   The grants to local bodies will be made available to all three tiers of Panchayat- village, block, and district.
   Grants to local bodies (other than health grants) will be distributed among states based on population and area, with 90% and 10% weightage, respectively.
   The Commission has prescribed certain conditions for availing these grants except health grants.
• Disaster risk management: It recommended retaining the existing cost-sharing patterns between the centre and states for disaster management funds. The cost-sharing pattern between centre and states is: (i) 90:10 for north-eastern and Himalayan states, and (ii) 75:25 for all other states.

FISCAL ROADMAP

• For the centre, the commission recommended a fiscal deficit of 4% of GDP by 2025-26. For states, it recommended the fiscal deficit of: (i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26.
• If a state is unable to fully utilise the sanctioned borrowing limit, the unutilised borrowing amount can be availed in subsequent years.
• Following this fiscal deficit path will reduce the total liabilities of the centre and states from 62.9% of GDP in 2020-21 to 56.6% in 2025-26, and the states on aggregate from 33.1% of GDP in 2020-21 to 32.5% by 2025-26 respectively.
• Extra annual borrowing of 0.5% to states which fulfil power sector reforms like reducing operational losses and DBT mode of transfer of subsidy etc.
• It recommended forming a high-powered inter-governmental group to review the Fiscal Responsibility and Budget Management Act and recommend a new FRBM framework for the centre as well as states and oversee its implementation.
• The inverted duty structure between intermediate inputs and final outputs present in GST needs to be resolved. . Rate structure should be rationalised by merging the rates of 12% and 18%. States need to step up field efforts for expanding the GST base and for ensuring compliance.

MANAGEMENT OF PUBLIC FINANCES

• A comprehensive framework for public financial management should be developed. An independent Fiscal Council should be established with powers to access records from the centre as well as states. Governments can adopt accrual-based accounting and they must desist from off-budget financing.

HEALTH

• States should increase spending on health to more than 8% of their budget by 2022. Primary healthcare expenditure should be two-thirds of the total health expenditure by 2022. All India Medical and Health Service should be established.

FUNDING OF DEFENCE AND INTERNAL SECURITY:

• A dedicated non-lapsable fund called the Modernisation Fund for Defence and Internal Security (MFDIS) will be constituted. It will have a contribution from the consolidated fund of India and disinvestment proceeds from defence undertakings etc.

CENTRALLY-SPONSORED SCHEMES (CSS)

• Develop mechanisms to phase out CSS that has outlived its utility or has insignificant outlays. Third-party audit of CSS should be done in a time-bound manner.

ANALYSIS OF THE RECOMMENDATIONS

CONTINUITY IN FISCAL FEDERALISM

• The commission has continued the enhanced devolution of taxes to states as started by the XIVth FC (42%). The 1% reduction is due to J and K becoming a UT which enhanced the fiscal load of the union government.

BALANCING NORTH-SOUTH DIVIDE

• Along with the use of population data of 2011 which catered to the resource needs of northern states, the commission also assuaged the concerns of southern states by incentivising demographic performance.

REVENUE DEFICIT GRANTS TO STATES

• One of the terms of reference of the commission was whether revenue deficit grants be provided to the states. But the commission has not made these grants conditional on any factors. It has also recommended that 70% of these grants are to be disbursed during the current and next financial year owing to the management of the pandemic.

PROVISION OF ADDITIONAL GRANTS

• Sector and state-specific grants in areas like administration, education, water etc can not only improve the resource position of the states but also encourage them to implement vital reforms.

FISCAL CONSOLIDATION

• The commission has advocated an overhauling of the FRBM acts both at the central and state level. The emphasis on a Fiscal Council could bring fiscal accountability to public finances. Also, the extended timelines for meeting Fiscal Deficit and public debt targets can provide fiscal space to the governments in Covid times.

REFORMS IN THE TAX FRONT

• Rationalizations of GST slabs, measures to boost stamp duty, computerization of property registration along the criteria of tax and fiscal efforts can improve tax revenues.

LOCAL BODY FINANCES

• The commission has recommended grants for all the tiers of PRIs and made them conditional (except health) on executing various reforms in their functioning. For instance, the timely constitution of the state finance commission and adopting a streamlined accounting system etc will improve their functioning.

ADDRESSING FISCAL CONCERNS OF SECURITY

• The non-lapsable fund for defence and internal security will address the resource needs of these sectors on a sustainable basis. The commission has allayed the concerns of states as there is no mandatory contribution from the states to this fund.

CRITICISM OF THE RECOMMENDATIONS

DECLINE IN STATES’ KITTY

• Share of 10 states has declined relative to that of the 14th finance commission. The total tax devolution to the states for the period 2021 2022 will be lower than what they got during 2017-2018.

DOMINANCE OF CONDITIONAL GRANTS

• The government has not yet accepted the recommendation pertaining to sector and state-specific grants. Moreover, the FC has increased the share of conditional grants sharply. As a result, 57% of the grants accepted by the govt are conditional relative to 17% by the previous commission

IMPACT ON DEMOCRATIC AND FISCAL DECENTRALISATION.

• 84% of the grants to the local bodies are conditional. These conditions include setting up and implementing the recommendations of SFCs failing which the local bodies will be deprived of the grants. Secondly,60% of the grants are tied to water and sanitation which are the pet schemes of the centre that affects local priorities and needs.

VIOLATION OF CONSTITUTIONAL SPIRIT

• Internal security and defence are the centre’s responsibilities. The setting up of a fund for this purpose means the revenue share of the states will be reduced. The constitution does not envisage a situation where the FC earmark funds for the centre’s obligation.

PARTISAN FEDERALISM

• States’ devolution is linked to its tax performance while the centre’s tendency to forego tax revenues through a sharp reduction in corporate tax and others is left untouched. This shows a bias towards the centre on the part of the commission.

OUTDATED CRITERIA FOR DEVOLUTION

• The criteria used by the commission has been evolved during a production centred tax system. But post GST the system has changed into a consumption centred tax regime. The failure of the commission to look into this aspect has significant implications for fiscal positions of the states.

BORROWING CAPACITY OF STATES

• The states have demanded more borrowing space especially in the context of a depleted fiscal base due to Covid 19. But the commission has recommended only .5% additional borrowing subject to reforms taken by states. This is less than a 1% additional borrowing window provided after the covid crisis.

A COMPARISON BETWEEN 14TH AND 15TH FINANCE COMMISSION

Item – 14th Fc – 15th Fc
Criteria
Devolution – 42% – 41%
Sector Specific Grants – Discontinued – Recommended
Defence Funds – Not Part Of To Rs. – Provided
Share Of Conditional Grants – 17% – 57%
Grants To Local Bodies – Only To Gram Panchayat – All Tiers Of PRIs
Fiscal Council – Recommended – Recommended
FRBM – Amend FRBM, or replace it with Debt Ceiling and Fiscal Responsibility legislation. – A New FRBM Framework Recommended
Fiscal road map for the Union – Fiscal deficit target 3% from 2016-17 through the entire award period. – Fiscal deficit target of 4% in 2025-2026.

CRITERIA – 14th FC 2015-20 – 15th FC 2020-21 – 15th FC 2021-26
Income Distance – 50.0 – 45.0 – 45.0
Area – 15.0 – 15.0 – 15.0
Population (1971) – 17.5 –  –
Population (2011) – 10.0 – 15.0 – 15.0
Demographic Performance – 12.5 – 12.5
Forest Cover – 7.5 – –
Forest and Ecology – 10.0 – 10.0
Tax and fiscal efforts – 2.5 – 2.5
Total – 100 – 100 – 100

FOR A NEW NORMAL IN FISCAL FEDERALISM IN INDIA: FINANCE COMMISSION AND BEYOND

COLLABORATIVE FEDERALISM

• The Finance commission’s terms of reference should be finalised after effective consultation with the states so that the commission is seen to be “Union Finance Commission” rather than “Central Finance Commission”.

MONITORING THE IMPLEMENTATION OF THE AWARD

• States often complain that timely release of funds as per the recommendations of the commission are not followed. Thus a mechanism, like a midterm review by an independent body must be put in place to ensure that the accepted recommendations are adhered to by the centre in letter and spirit.

FAIR VERTICAL DEVOLUTION

• The union’s decision to cut the corporate taxes in 19-20 led to a reduction of around 150000 crores of tax revenue. This has resulted in the states losing 65000 crores as their share of devolution. While the centre has options to generate revenues from many other sources, states do not have such luxury. Thus, due to the union’s tax policies states fair share should not suffer.

BALANCING THE USE OF CESSES AND SURCHARGES

• The share of cesses and surcharges as part of the Gross tax revenue of the Union has reached about 20% by 2021. The revenue realized from them does not form a part of a divisible pool thereby need not be shared with states. The progressive increase in their share and the reduction in the share of taxes in the divisible pool result in subversion of the Finance commission’s recommendations.

RESOURCE SHARING WITH STATES

• The centre can share a portion of proceeds from disinvestment, spectrum sales etc with states in the spirit of cooperative federalism. This is also suggested by MM Puncchi Commission on centre-state relations in 2011.

STATES’ ROLE IN RESOURCE AUGMENTATION

• The constitutional mandate of “Equalisation levy (revenue deficit) to the states in a way made the states complacent in fiscal management. The states must take effective measures to reduce wasteful expenditure and improve their public financial management.

FEDERALISM WITHIN STATES

• The states must treat their Local Bodies in a similar way they are treated by the centre. It means the federal division of financial resources must be extended to local governments. For this, state finance commissions must be set up and their recommendations need to be accepted in a time-bound manner.

THE CONCLUSION: The finance commission is the most significant instrument in transforming political federalism into fiscal federalism. The resource requirements of the Union has risen in the context of its enhanced responsibilities and a depleting treasury in the midst of a pandemic while the mismatch between states’ demands and revenue has worsened. In such a challenging scenario, the commission has done a commendable job in addressing most of the concerns of the constituent parts of Indian polity although it has missed an opportunity in revamping the devolution ecosystem in the backdrop of a GST regime.

THE CONTEXT: The impact of COVID-19 on the economy is devastating and the government is forced to opt to borrow for spending more in order to support vulnerable households and engineer economic recovery. In this article, we’ll discuss Former RBI Governor D. Subbarao’s opinion on whether Fiscal Council is needed in India or not.

CURRENT SCENARIO:

• COVID 19 pandemic has resulted in weakening of fiscal situation of centre and states. Tax revenues have reduced due to subdued economic activities. Whereas, expenditure has risen due to spending on healthcare, social security and economic revival, to tackle the fallout of the pandemic.
• As a result, the fiscal deficit of the centre is estimated to double from budgeted 3.5% of GDP to around 7% as per the IMF. This steep rise in fiscal deficit will impact medium term growth prospects due to interest burden.
• In addition, ratings agencies consider fiscal deficit as a parameter in ratings which impact capital flows into the country. These concerns impose restrictions on expansionary fiscal policy strategy to tackle pandemic.
• In such a situation, many economists have pointed out that fiscal deficit limits should not constrain spending to stimulate the economy. They suggest expansionary fiscal policy during pandemic combined with fiscal consolidation plan post pandemic will help retain market confidence. Yet such a strategy may still lead to ratings downgrade and resultant capital outflows.
• To increase the confidence in fiscal consolidation, a fiscal council which enforces fiscal discipline is suggested. This can signal intent to maintain discipline in medium to long term which can reassure markets and credit agencies.

WHAT IS A FISCAL COUNCIL?

Fiscal councils are independent public institutions aimed at strengthening commitments to sustainable public finances through various functions, including public assessments of fiscal plans and performance, and the evaluation or provision of macroeconomic and budgetary forecasts.

Recommendations for Fiscal council in India:

• 13th and 14th Finance commission advocated the establishment of independent fiscal agencies to review the government’s adherence to fiscal rules and to provide independent assessments of budget proposals.
• In 2017, the N.K. Singh committee on the review of fiscal rules set up by the finance ministry suggested the creation of an independent fiscal council that would provide forecasts and advise the government on whether conditions exist for deviation from the mandated fiscal rules.
• In 2018, the D.K. Srivastava committee on fiscal statistics established by the National Statistical Commission (NSC) also suggested the establishment of a fiscal council that could co-ordinate with all levels of government to provide harmonized fiscal statistics across governmental levels and provide an annual assessment of overall public sector borrowing requirements.

Current global scenario:

• According to the International Monetary Fund (IMF), about 50 countries around the world have established fiscal councils with varying degrees of success.
• Fiscal Council in these countries is a permanent agency with a mandate to independently assess the government’s fiscal plans.
• It also gives projections against parameters of macroeconomic sustainability and put out its findings in the public domain.

India’s need for a fiscal council:

• There is a need for coordination between the finance commission as well as the GST Council.
• There is a lack of demand for accountability, and instruments such as a fiscal council may help address this issue.
• It needs an alternative institutional mechanism like the Fiscal Council to enforce fiscal rules and keep a check on Centre’s fiscal consolidation and check over borrowings of the centre.
• The economic slowdown due to the COVID-19 has made it the dire need of the hour to have a fiscal council for a healthy, future foreseeing economic revival.
• A fiscal council will give an independent and expert assessment of the government’s fiscal stance, and thereby aid an informed debate in Parliament.
• To fix these problems of overestimates and underestimates in budgets is to institute an independent and statutory watchdog to oversee the state of public finances and to come up with its own assessments, if not its own projections, of government revenues and expenditures. (Explained below)
• An International Monetary Fund (IMF) working paper published in 2018 showed that the presence of an independent fiscal council tends to boost accuracy of fiscal projections even as it helps countries stick to fiscal rules better.

Issue of overestimates and underestimates in budgets

• One standout feature in much of the discussion around the Union budget every year—both before and after the budget—has been the concern with the credibility of the budget numbers.
• Historically, interim budgets in India have consistently overestimated revenue growth and underestimated expenditure growth.
• An analysis of the projected, revised, and actual budget figures since 1991 by EPW Research Foundation showed that deviations from budget estimates tend to be extraordinarily high for budget estimates presented in interim budgets .
• Usually, these estimates undergo sharp revisions in the next budget (when revised estimates are presented) and the deviation from budget estimates persists in the actual (and final) figures.
• While interim budgets are a special case of budgetary mismanagement, the finance ministry’s overall record in forecasting projections has been consistently poor under successive finance ministers.
• The over-ambitious revenue targets combined with the lack of transparency in tax administration lead overzealous taxmen to exceed their brief in a quest to fulfil unrealistic targets.
• Unsurprisingly, a 2017 CAG report found that the tax department had resorted to ‘irregular’ and ‘unwarranted’ methods to meet targets.

Council’s mandate:
As per that, the fiscal council’s mandate will include, but not be restricted to,

• making multi-year fiscal projections
• Preparing fiscal sustainability analysis.
• Providing an independent assessment of the Central government’s fiscal performance and compliance with fiscal rules.
• Recommending suitable changes to fiscal strategy to ensure consistency of the annual financial statement and taking steps to improve the quality of fiscal data.
• Producing an annual fiscal strategy report which will be released publicly.

Composition and How should they function? (Recommendations by 14th FC)

The 14th Finance Commission recommended that an independent Fiscal Council should be established through an amendment to the FRBM Act, by inserting a new Section mandating the establishment of an independent Fiscal Council to undertake ex ante assessment of budget proposals and to ensure their consistency with fiscal policy and Rules.
1. The council is supposed to be appointed by, and report to, Parliament and should have its own budget.
2. The functions of the council include ex ante evaluation of the fiscal implications of the budget proposals which includes evaluation of how real the forecasts are and their consistency with the fiscal rules and estimating the cost of various proposals made in the budget.
3. The ex post evaluation and monitoring of the budget was left to the CAG.

Arguments in favour:

• An independent fiscal council can bring about much needed transparency and accountability in fiscal processes across the federal polity.
• In its role as a watchdog, it will prevent the government from gaming the fiscal rules through creative accounting.
• The committee should have the limited mandate of scrutinising the budget after it is presented to Parliament for its fiscal stance and the integrity of the numbers and give out a public report.
• The committee will be wound up after submitting its report leaving no scope for any mission creep.
• India needs better macroeconomic management and it cannot be left entirely to monetary policy, as regular monetary policy statements themselves testify, with their articulation of how contingent their decisions are on what the government does.
• A fiscal council could do the same for fiscal policy, what MPC doing it for Monetary Policy with regular meetings that produce assessments.
• Further, the working of a fiscal council would help harmonise fiscal policy with monetary policy.
• International experience suggests that a fiscal council improves the quality of debate on public finance, and that, in turn, helps build public opinion favourable to fiscal discipline.
• Although most fiscal councils don’t have the powers to stall the budgetary process, but they are able to discipline lawmakers through ‘comply or explain’ obligations—which entail governments to at least explain why they diverge from the fiscal council’s views.
• Also, it is supposed to report to the parliament regarding the practicability of government forecasts in the budget. This will make executive more responsible in budget preparation.
• Fiscal Council would also boost confidence of global credit rating agencies about government’s fiscal commitment.

CHALLENGES TO FISCAL COUNCIL OR ARGUMENTS AGAINST

Lack of Political will leading to Chronic fiscal irresponsibility

• Back in 2003 when FRBM was enshrined into law, it was thought of as the magic cure for fiscal ills.
• The FRBM enjoins the government to conform to pre-set fiscal targets, and in the event of failure to do so, to explain the reasons for deviation
• The government is also required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance
• However, there is lack of in-depth discussion in Parliament on fiscal stance and the submission of the FPSS often passes off without even much notice.

Its working may create confusion

• Fiscal council will give macroeconomic forecasts which the Finance Ministry is expected to use for the budget, and if the Ministry decides to differ from those estimates, it is required to explain why it has differed.
• Besides, forcing the Finance Ministry to use someone else’s estimates will dilute its accountability.
• If the estimates go wrong, Finance Ministry will simply shift the blame to the fiscal council.

Duplication of Work

• As of now, both the Central Statistics Office (CSO) and RBI give forecasts of growth and other macroeconomic variables, questions will be raised about need for Fiscal Council’s projections
• Another argument made in support of a fiscal council is that it will act as watchdog & prevent the government from gaming the fiscal rules through creative accounting.
• However, there is already an institutional mechanism in form of CAG to do the job of auditing & fiscal watchdog of government spending.

WAY FORWARD: Starting with small steps

• A week before the scheduled budget presentation, let the CAG, a constitutional authority, appoint a three-member committee for a five-week duration with a limited mandate of scrutinising the budget after it is presented to Parliament
• The committee will scrutinise government’s fiscal stance and the integrity of the numbers, and give out a public report
• The CAG’s office will provide the secretarial and logistic support to the committee from within its resources.
• The Finance Ministry, the RBI, the CSO and the Niti Aayog will each depute an officer to serve in the secretariat.
• The committee will be wound up after submitting its report

CONCLUSION: Given the growing demand for accurate and transparent fiscal statistics, the incoming government would do well to establish such a council, so that budget numbers meet with less scepticism than they do today.

“GST has been a milestone in the economic landscape of India. It has decreased the number of taxes, compliance burden and overall tax burden on the common man while significantly increasing transparency, compliance and overall collection.”#4yearsofGST.

                                                                                                                            ———-PM Narendra Modi

THE CONTEXT: On 1st July 2021, India marked the fourth anniversary of the Goods and Services Tax (GST). The date 1st July has been designated by the Central Government as ‘GST Day’, which is celebrated every year to mark the roll-out of the historic tax reform. This article will look into achievements, challenges, and expectations related to the GST regime.

MORE ON THE NEWS:

On May 28th, 2021, at the 43rd meeting of the GST Council, finance ministers of many states raised various concerns like delay in payment of GST compensation to states, unilateral decisions, and the overall distrust between central and state governments.Four years after giving up their freedom to tax goods and services in favor of the GST Council, states are of the view that they have been short-changed and their voices muzzled.

ACHIEVEMENTS OF GST

COOPERATIVE FEDERALISM

• One of the biggest triumphs associated with GST is cooperative federalism, which has demonstrated successful collective decision-making through the GST Council.
• India has served as an example to the world by successfully implementing one of the most complex tax transformation projects for the country.

FUNCTIONING OF GST COUNCIL

• The GST Council made corrections to law, issued clarifications on complex issues, rationalized GST rates, and introduced relaxations for dealing with the Covid-19 pandemic, which establishes that the GST Council structure has been very functional and agile.

WIDENED TAX BASE

• India’s tax base has almost doubled from 66.25 lakhs to 1.28 crores in the last four years.
• GST revenue collection in India has been over the Rs 100,000 crore mark for eight consecutive months.

EASE OF DOING BUSINESS

• India’s ease of doing business ranking has improved significantly in the last four years. Before GST was implemented, India’s Ease of Doing Business ranking was 130 in 2016. In 2020, India was ranked 63rd on the list.

RATE RATIONALISATION

• Over four years GST rates have been reduced on 400 goods & 80 services.
• According to GOI combined Centre & States rates were above 31% on most items in the pre-GST regime.
• An RBI report of 2019 estimated that the effective weighted average GST rate declined from 14.4 percent at the time of the introduction of the GST to 11.6 percent.

LOGISTICAL EFFICIENCY, PRODUCTION COST CUT

• Over 50% of logistics effort and time is saved since GST has ensured the removal of multiple checkpoints and permits at state border checkpoints. As a result, more road hours and faster delivery have been added which has enhanced the business efficiency in the country.
• GST has almost ended the era of the multiplicity of taxes and its cascading effect which has sufficiently reduced production costs, leading to better margins for the industry, which were passed on to the consumers in the form of better products or lower prices.

E-WAY BILL

• The introduction of the E-way bill resulted in the national unification of permit bill systems, allowing logistics to experience fewer interruptions en route making delivery quick and hassle-free.

COMPETITIVENESS AND COMPLIANCE

• GST has improved the competitiveness of domestic industries in the international market by removing hidden and embedded taxes.
• GST helped in achieving better tax compliance by subsuming multiple taxation and reduction in taxation burden in the last four years.

E-INVOICE

• The E-invoicing system helped reduce fake invoicing. The use of technology with online bill generation has resulted in smoother consignment movement and much fewer disputes with officials.
• After the introduction of E-invoice, GST collections have risen steadily since November 2020, surpassing the Rs. 1 lakh crore mark on several occasions.

REDUCED  TRANSACTION COSTS

• After the introduction of GST, there has been a significant reduction in transaction costs. While earlier, all the interstate transactions were loaded with an additional cost of 2% (Central Sales Tax), this has now been reduced to 0%.
• This reduction has been a huge breakthrough in the interstate movement of products, allowing the country to boast of a single national unified market for businesses.

CHALLENGES/PROBLEMS OF GST

CONCERNS  HIGHLIGHTED BY THE 15^TH FINANCE COMMISSION REPORT

• The multiplicity of tax rates
• The shortfall in GST collections vis-à-vis the forecast
• High volatility in GST collections
• Inconsistency in the filing of returns
• Dependence of States on the compensation from Centre

CONCERNS RAISED BY STATE FINANCE MINISTERS

• Delay in payment of GST compensation to states.
• The issue of reduction in GST on Covid vaccines and essentials.
• Unilateral decisions such as the imposition of cesses (whose proceeds go to only the Centre)
• Vertical split on party lines on key issues.
• Veto powers of the centre on GST Council decisions.

COMPENSATION CONUNDRUM

• The biggest reason states agreed to give up their autonomy to tax goods and services was an assurance by the central government that it would compensate them for any revenue loss from subsuming indirect taxes such as sales tax/VAT into GST.
• The GST (Compensation to States) Act, enacted in 2017, guarantees states 14 percent annual growth in GST revenue over base year FY16 for five years between July 2017 and June 2022.
• While this worked well till FY19, problems cropped up in FY20 when the Centre started finding it tough to pay states as economic slowdown affected its revenues. The Covid-19 outbreak aggravated the problem by putting huge pressure on both Centre and states.

TAX UNILATERALISM

• Cess revenue is not shared with states.
• Close to 18 percent of central government revenue is being raised from cess and not distributed (among states). Total control of finances is with the central government.
• It needs to be discussed and reviewed.

EXPERTS CONCERNED OVER GST GROWTH

• Experts believe the government has been unable to widen the tax net, which is why GST collections have not increased beyond a certain limit.
• Some experts suggest that the GST net may not widen further as many small businesses have not enrolled under the tax regime due to complex paperwork.

CONSTANT AMENDMENTS

• Over the last few years, the GST law has seen many amendments. Till date, more than 1,000 notifications/circulars/instructions/orders have been issued by the government machinery.
• All these revisions often confused the taxpayer and as well the tax administrators which created misunderstandings and misconceptions.

TECHNICAL GLITCHES

• Continuous system failures and unexpected glitches faced by the industry have forced Government to extend due dates, waiver of late fees and interest liabilities. Late announcements of waiver in late fee have come out as dissatisfaction amongst the honest taxpayers also.
• Small and medium businesses are still grappling to adapt to the tech-enabled regime. The fundamental principles on which the GST law was built viz. seamless flow of input credits and ease of compliance has been impaired by IT glitches.

IMPLEMENTATION DELAYS

• The late implementation of E-invoicing, QR code and E-way Bill blemished the original idea behind this which was contemplated as a revolutionary change in the tax system to curb tax evasion.

NON-IMPLEMENTATION OF GSTR-2

• GSTR which was the only control for systemic reconciliation was never implemented. To prevent any bogus claim of ITC, reconciliations are required to be controlled by the system. However, since it was never implemented now taxpayers are asked to provide self-attested offline reconciliations maintained in annual return GSTR 9 or GSTR 9C.

REFUND DELAY ISSUES

• Automatic processing of export refunds has always been an area of major concern under GST. Since there are manual approvals involved in the existing process, there are chances of a discrepancy, human error, and delay in refund processing which goes against the expectations of the exporters from the system.

LOW REVENUE

• Widespread non-compliance and non-filing of GST returns were considerable in the first three years of GST which led to low revenue collections.

WAY FORWARD

• The GST structure needs an overhaul for the revenue-enhancing promise to be met. The union can at minimum do three things.

1. Reaffirm its commitment to cooperative, consultative principles of federalism by reforming the functioning of the GST Council.
2. Offer the FY21 compensation cess as a transfer, not a back-to-back loan with the caveat that the compensation rate will be re-negotiated.
3. Be transparent about the current macro-economic scenario through an honest appraisal that revisits revenue projections.

• Pandemic has had severe impacts on GST also and led to economic contraction. Certain structural level changes to the law may help boost the business and economy.
• The policymakers need to contemplate the inclusion of petroleum and related products within the GST
• The GST Appellate Tribunal should be constituted as all taxpayers do not have the finances or means to approach the High Court for every practical difficulty faced.
• Streamlining of anti-profiteering measures and simplification of compliance procedures also needs to be revisited to ensure that the cost efficiency and reduction in prices envisaged under GST law finally reach the common man.

THE CONCLUSION: Although the shortcomings must be swiftly resolved, it needs to be understood that it takes time to reap the benefits of such a mammoth structural change. The law is still a ‘work-in-progress’ and the process of evolution. The union government must act now to deliver on its promise of a ‘Good & Simple Tax’ in the times to come.

THE CONTEXT: In this article, we’ll discuss the issue of GST compensation cess and why after three years of the transition to the goods and services tax (GST), there is a strong case to strengthen the GST Council for the constitutional body to take informed decisions to reform the tax structure, rates and broaden the tax base.

THE BODY: A policy paper by the Pune International Centre, The GST Compensation Cess: Problems & Solution, by V Bhaskar and Vijay Kelkar recommends the creation of an independent GST Council Secretariat to offer professional advice on tax matters.

It also essentially calls upon the Centre to borrow more to deliver on its promise to compensate the states for five years from 2017-18 for any shortfall in GST collections in relation to the past trend, notwithstanding the fiscal pressures faced by it due to the corona pandemic. Both suggestions make eminent sense.

What is a GST Council?

• Goods & Services Tax Council is a constitutional body for making recommendations to the Union and State Government on issues related to Goods and Service Tax.
• Article 279A says that President shall by order constitute a Council to be called the Goods and Services Tax Council.

Composition of GST Council:

GST Council which will be a joint forum of the Centre and the States, shall consist of the following members: –

• The Union Finance Minister – Chairperson;
• The Union Minister of State in charge of Revenue or Finance – Member;
• The minister in charge of finance or taxation or any other minister nominated by each state government – members.
• One-half of the total number of members of GSTC form quorum in meetings of GSTC.
• Decision in GSTC are taken by a majority of not less than three-fourth of weighted votes cast.
• The council is devised in such a way that the centre will have 1/3^rd voting power and the states have 2/3^rd.

Vision:

To establish highest standards of co-operative federalism in the functioning of GST Council, which is the first constitutional federal body vested with powers to take all major decision relating to GST.

Mission:

Evolving by a process of wider consultation, a Goods and Services Tax structure, which is information technology driven and user friendly.

Mandate of GST Council:

• The Goods and Services Tax Council shall make recommendations to the Union and the States on.
• The taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax.
• The goods and services that may be subjected to, or exempted from the goods and services tax.
• Model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under article 269A and the principles that govern the place of supply.
• The threshold limit of turnover below which goods and services may be exempted from goods and services tax.
• The rates including floor rates with bands of goods and services tax.
• Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster.
• Special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and any other matter relating to the goods and services tax, as the Council may decide.
• The Goods and Services Tax Council shall recommend the date on which the goods and services tax be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.

What is the purpose of GST act?

• As per the GST Act, states are guaranteed compensation for any revenue shortfall below 14% growth for the first 5 years ending 2022.
• The compensation is calculated keeping the base year as 2015-16.
• GST compensation is paid every 2 months by the Centre to states.

Compensation cess fund

• A compensation cess fund was created from which States would be paid for any shortfall.
• An additional cess would be imposed on certain items and this cess would be used to pay compensation.
• The Act states that the cess collected and “such other amounts as may be recommended by the [GST] Council” would be credited to the fund.
• In the first two years of this scheme, the cess collected exceeded the shortfall of States.
• In the third year, 2019-20, the fund fell significantly short of the requirement.

The problem and its source

•  A key source of the problem is that the 2017 Act guaranteed a tax growth rate of 14%, which is unachievable this year.
• The 14% target was too ambitious to start with.
• Given the government’s inflation target at 4%, this implied a real GDP growth plus tax buoyancy of 9%.
• But the Central government is constitutionally bound to compensate States for loss of revenue for five years.

What are the issues related to compensation?

• The impact of the pandemic on the revenue receipts of the Central and state governments has been devastating.
• The total average collection of GST revenue in April and May is only Rs 94,323 crore, just 46 per cent of the previous year’s average bimonthly receipts.
• The states have been guaranteed 14 per cent annual growth in GST revenue over the base year of 2015-16. Any shortfall has to be compensated from the receipts of Compensation Cess imposed on selected commodities that attract a GST of 28 per cent .
• The Compensation Cess Fund had already been under severe stress as the GST revenues have been far from buoyant.
• The increase in revenue in 2019-20 has been a meagre 3.8 per cent compared to the previous year. The result is that even after paying Rs 1.2 lakh crore as compensation, the payments were three months in arrears at the end of the financial year.
• And now with the pandemic, the fund requirement for compensation has dramatically increased. The payments are in arrears by more than Rs 1 lakh crore already.
• If fund requirements have been ballooning on the one hand, fund availability has been shrinking on the other. This raises a fundamental question: How can the gap between fund availability and fund requirement be bridged?

Possible solutions

Revise the compensation formula

• It was after much deliberation that the 14 per cent growth was guaranteed to the states. But the optimistic mood regarding the buoyancy of GST prevailing then has not been borne out by the actual outcome even after three years.
• The implementation has been lacklustre, with the IT backbone yet to be completed and tax administration handicapped by too many impediments.
• Further, the pre-election sharp reductions in tax rates without serious examination of the revenue implications have also contributed to the fall in revenue. The current rates are not revenue neutral.
• It is in this context that the 15th Finance Commission Chairman formally proposed in the GST Council that it should revisit the formula.
• The Council refused to even consider the proposal and was unanimous in rejecting it. The response would not be different even now.

Increase the Compensation Cess rate or bring additional commodities in its net

• However, there is very little chance for any proposal to increase tax rates to be approved during the pandemic slump period.
• Even the proposal for resolving the inverted duty structure of cloth, footwear and fertiliser, which is creating serious problems for the manufacturing sector, was rejected by the Council because it involved an upward shift of the final products to a higher tax bracket.

GST Council or the Compensation Fund must be empowered to borrow funds from the market

• The period of the Compensation Cess can be extended for a year or an additional period long enough for repayment of the funds borrowed.
• The advantage of the this option is that it would not affect the Centre’s finances.
• Since the loans are not taken by the Centre, it has no fiscal deficit implications. And the liabilities would be liquidated automatically from the collection of the Cess during the extended period.

Constitution could be amended

• The Constitution could be amended to reduce the period of guarantee to three years thus ending June 2020.
• But most States would be reluctant to agree to this proposal.
• It could also be seen as going back on the promise made to States.

Centre could fund shortfalls

• The Central government could fund this shortfall from its own revenue.
• The Centre’s finances are stretched due to shortfall in its own tax collection combined with extra expenditure to manage the health and economic crisis.

Agree that 14% growth target is unrealistic

• The Centre could convince States that the 14% growth target was always unrealistic.
• If the Centre can negotiate with States through the GST Council to reset the assured tax level, it could then bring in a Bill in Parliament to amend the 2017 Act.

WAY FORWARD: To strengthen the GST Council?

• The council needs neutral, unbiased advice from top-notch professionals in the field.
• The finance ministry’s budget-making wing on indirect taxes, called the Tax Research Unit, should be brought under the GST Council.
• Rightly, roping in competent tax-research officers from states, and having a taxation expert of national stature as the Secretary General (currently steered by the Revenue Secretary) will help strengthen the council’s secretariat.
• GST subsumed 17 central and state taxes and 23 cesses. It creates multiple audit trails on the income and production chain — throwing up voluminous data. Big-data analytics must be deployed to follow these trails to tax potential.
• The transaction chain of key raw materials such as metals and petrochemicals must be followed up to unearth the value added escaping tax at the moment.
• The council should move towards the overall direction to lower and converge rates and prune exemptions that break the GST chain and clutter the tax system. This will minimise classification disputes and make compliance easy.
• Rate changes should be based on rigorous data analysis. The council must not delay the inclusion of petroleum products, real estate and electricity duty in the GST framework, to widen the tax base, and probably double its current size.

CONCLUSION: The Constitution makes it obligatory for the Centre to make up for shortfall by the States. The cess collected will not be sufficient for this purpose. The GST Council, which is a constitutional body with representation of the Centre and all the States, should find a practical solution to this. Simultaneously, there is a need to strengthen the GST Council.

THE CONTEXT: The central and state governments are faced with an acute challenge of raising revenues. The Governments need to come up with newer ways of managing its cash flows without burdening the common man.In this context, the monetisation of assets is a viable option.
In 2012, to erase India’s metropolitan problems and open up enormous revenue, monetising of excess government land from port trusts, railways and public sector undertakings was suggested by a government team led by Vijay Kelkar. This fiscal solidification plan was also advised by the SK Roongta Committee formed by the Planning Commission.
Monetisation of land is slowly gaining currency as stakeholders are warming up to the idea of unlocking the tremendous benefits of leasing of land.

MEANING & PURPOSE OF LAND MONETISATION

Asset or land monetization is basically a business transaction that converts a dead/idle asset or land into an income generating one. This is basically done through leasing of land to private individuals or commercial undertakings. Land monetisation enables the retention of land ownership while realising market rent (if the revision of rent is periodic and on agreed principles).
For example, Railways owns a great deal of land in india. Most of them are lying idle, giving no incomes to it. Now, if Railways gives them to private commercial ventures on a lease basis, this is called monetization of land assets.
The purpose of land monetization is to unshackle the value of investment in lands which have not produced proper returns.

Benefits:

• Open up a stream of revenue for governments, PSUs and local bodies, unburdening them of lower collection of revenue and higher expenditure.
• Put land to better uses
• Speed up the process of private investment creating lakhs of jobs that India needs
• Fuel the demand for social infrastructure such as school, hospitals, retail and banking.
• It can also solve the problem of residential projects in urban areas
• It also contributes to planned urbanization, boosts tourism and generates employment
• Land monetization has cascading effects on economic development and quality of life of citizens.

Steps:

• Identify and locate such lands that could be monetized for better uses
• Clear encroachments, if any, and secure possession
• Map the vacant lands across the country, update records and enlist these in the public domain.
• The real estate developers and relevant stakeholders in the segment should be involved for better realization of land value
• It warrants leveraging public-private partnerships (PPP). The PPP model has emerged as a viable option for development over the past few years, as it combines the best of both entities—public interest of the public sector and professionalism and expertise of the private sector.

WHO OWNS IDLE LANDS IN INDIA?

In India, idle lands are owned by various ministries and departments of central government as well as state government. They are also lying with enterprises of central government and state government.
The defence and railway ministries are the chief landlords of central government. The ministry of defence has approximately 18 lakh acres, of which around 1.5 lakh acres are inside 62 cantonments and about 16.5 lakh acres outside their boundaries. The railway ministry possesses approximately 11.8 lakh acres, of which around 10.54 lakh acres are under operational handling and about 1.26 lakh acres are not in use. 13 major port trusts have 100,000 hectares of land, the International Airports Authority of India has 20,400 hectares of (additional) land.

Hurdles:

1. Absence of accurate records of assets: All government firms should preserve an asset register according to the provisions of the Fiscal Responsibility and Budget Management Act, 2003. But for many years, the Comptroller and Auditor General of India recurrently showed a red card to government associations for not even keeping a modest list of fixed assets at their original cost.
   Although government entities are supposed to maintain a register of all the fixed assets they possess along with details of the original purchase price and related costs, it is an open secret that maintaining proper records is not the government’s forte. Lack of vigorous complete database places these organisations in a dangerous position and they cannot assess the magnitude of their landholding.
2. Infringement of land: For instance, the ministry of railways holds a lot of land in principal residential areas and some in the suburbs. The Railway Land Development Authority (RLDA) is a distinct unit entrusted with the exclusive job of monetising of unemployed land owned by the railway ministry. Regrettably, neither the ministry nor the RLDA could sell or lease the land, leading to numerous trespassers intruding into these properties.
3. Non-existence of ownership documents or records
4. Political powerlessness to take conclusive decisions
5. Policy ambiguities

WAY FORWARD:

• A process needs to be set up by which, as a first measure, detailing the land assets for all government organizations should be undertaken. Once a detailed list of all such assets can be streamlined, it will help bring transparency to the process.
• The government should approach and invite proposals from global advisers to assist in monetising of land, buildings and miscellaneous operational properties by firms owned by different states.
• Consulting companies could then get involved in the process so that the type of “value that can be unlocked” can be detailed for different parcels of land.
• The government should present the idea of a special purpose vehicle or a land bank. This is similar to the Chinese model where a single agency will handle all the landholdings of public sector units.
• The government can consider a lease-only model so that it can reap the benefits of annuity income without bearing any political cost. If one successful project can be showcased, its learning can be used to drive other similar projects in states.
• Earlier efforts to raise resources through disinvestment have kicked up storms over allegations of assets being undervalued and the process being fixed. In order to prevent a repeat of the past, sufficient checks and balances should be incorporated in such an exercise and all the stakeholders including the public should be sensitised.

CONCLUSION:

All these measures can be taken only when land owning agencies first locate, identify and clear infringements of land. A proper land record must be maintained by them before they take a plunge. If properly implemented then monetisation of land can be a game changer for Government revenues.

THE CONTEXT: The government has extended the ambit of the production-linked incentive (PLI) scheme to 10 more sectors to promote domestic manufacturing. These sectors are pharmaceuticals, automobiles and auto components, telecom and networking products, advanced chemistry cell batteries, textile, food products, solar modules, white goods, and specialty steel.

The PLI scheme across these 10 key specific sectors will make Indian manufacturers globally competitive, attract investment in the areas of core competency and cutting-edge technology; ensure efficiencies; create economies of scale; enhance exports and make India an integral part of the global supply chain.

Endowed with a potential of multiple benefits, the PLI scheme can be boon for turning the fortune of manufacturing sector in India.

ABOUT THE PLI SCHEME

India’s initial brush of PLI was on 1st of April,2020 when the government launched the scheme worth Rs 50,000 crore for large scale electronics manufacturing (in particular, mobile phones), medical devices and pharmaceutical ingredients. Now, the scheme has been extended for ten more sectors of the economy.

• The PLI will be available to all new manufacturing units and also to existing manufacturing units for their extra production, additional over baseline output. For example, existing mobiles and electronics manufacturers are entitled to PLI benefit for whatever they produce over and above the 2019-20 level production in the next five years.
• The manufacturing units will have to apply, register and go through a vetting process and enter into proper agreement with the Government so as to ensure that only eligible manufacturers get the incentive for actual local manufacturing.

Apart from incentivising foreign companies to set up shop, the scheme aims to encourage local manufacturing units to set up or expand manufacturing units. This scheme provides incentives on incremental sales to existing and new units.

EVIDENCES OF BENEFITS

Following the launch of PLI scheme for electronic manufacturing (in particular, mobile phones), medical devices and pharmaceutical ingredients, there has been now a positive response from global manufacturing giants.

They have been submitting their applications to set-up their plants in India. This is expected to boost production, export and foreign investment creating jobs in manufacturing sector of the economy. Since incentives would be provided on incremental sales, a boost is R& D and capacity creation is also expected.

• Ministry of Electronics and Information and Technology (MeitY) said it had approved 16 eligible applicants under the Production Linked Incentive (PLI) Scheme for large scale electronics manufacturing .
• The international mobile phone manufacturing companies that are approved under Mobile Phone (invoice value Rs.15,000 and above) segment are Samsung, Foxconn Hon Hai, Rising Star, Wistron and Pegatron.
• Out of these, three companies — Foxconn Hon Hai, Wistron and Pegatron are contract manufacturers for Apple iPhones. Apple (37 per cent) and Samsung (22 per cent) together account for nearly 60 per cent of global sales revenue of mobile phones and this Scheme is expected to increase their manufacturing base manifold in the country
• Anticipated to be a push for the government’s notion of Atmanirbhar Bharat (self-reliant India), 215 applications from 83 pharmaceutical manufacturers and 28 applications from 23 medical device manufacturers were sent in response to the government’s Production Linked Incentive (PLI) scheme for bulk drugs and medical devices.

AN EXTENSION

An extension of the scheme to 10 more sectors of the economy is expected to change the manufacturing landscape in India. A brief summary of these industrial along with their potential has been presented as below:

• ACC battery manufacturing represents one of the largest economic opportunities of the twenty-first century for several global growth sectors, such as consumer electronics, electric vehicles, and renewable energy. The PLI scheme for ACC battery will incentivize large domestic and international players in establishing a competitive ACC battery set-up in the country.
• India is expected to have a USD 1 trillion digital economy by 2025. Additionally, the Government’s push for data localization, Internet of Things market in India, projects such as Smart City and Digital India are expected to increase the demand for electronic products. The PLI scheme will boost the production of electronic products in India.
• The automotive industry is a major economic contributor in India. The PLI scheme will make the Indian automotive Industry more competitive and will enhance globalization of the Indian automotive sector.
• The Indian pharmaceutical industry is the third largest in the world by volume and 14th largest in terms of value. It contributes 3.5% of the total drugs and medicines exported globally. India possesses the complete ecosystem for development and manufacturing of pharmaceuticals and a robust ecosystem of allied industries. The PLI scheme will incentivize the global and domestic players to engage in high value production.
• Telecom equipment forms a critical and strategic element of building a secured telecom infrastructure and India aspires to become a major original equipment manufacturer of telecom and networking products. The PLI scheme is expected to attract large investments from global players and help domestic companies seize the emerging opportunities and become big players in the export market.
• The Indian textile industry is one of the largest in the world and has a share of ~5% of global exports in textiles and apparel. But India’s share in the manmade fibre (MMF) segment is low in contrast to the global consumption pattern, which is majorly in this segment. The PLI scheme will attract large investment in the sector to further boost domestic manufacturing, especially in the MMF segment and technical textiles.
• The growth of the processed food industry leads to better price for farmers and reduces high levels of wastage. Specific product lines having high growth potential and capabilities to generate medium- to large-scale employment have been identified for providing support through PLI scheme.
• Large imports of solar PV panels pose risks in supply-chain resilience and have strategic security challenges considering the electronic (hackable) nature of the value chain. A focused PLI scheme for solar PV modules will incentivize domestic and global players to build large-scale solar PV capacity in India and help India leapfrog in capturing the global value chains for solar PV manufacturing.
• White goods (air conditioners and LEDs) have very high potential of domestic value addition and making these products globally competitive. A PLI scheme for the sector will lead to more domestic manufacturing, generation of jobs and increased exports.
• Steel is a strategically important industry and India is the world’s second largest steel producer in the world. It is a net exporter of finished steel and has the potential to become a champion in certain grades of steel. A PLI scheme in Specialty Steel will help in enhancing manufacturing capabilities for value added steel leading to increase in total exports.

FEATURES OF PLI THAT MAKE IT AN EXTRA-ORDINARY SCHEME

There are certain marked features of the PLI scheme that should make it effective in implementation and predictable in results.

• First, the scheme is outcome-based, which means that incentives will be disbursed only after production has taken place in the country. The scheme is thus purely result-oriented.
• Second, the calculation of incentives will be based on incremental production to be achieved at a high rate of growth. To achieve this incremental production, beneficiaries will be required to make additional investment in establishing green-field facilities or carrying out expansion of existing facilities.
• Third, the scheme focuses on size and scale by selecting those players who can deliver on volumes. The targeted nature of the scheme will make it highly effective and the beneficiaries are likely to become globally competitive. Fourth, the selection of sectors covering cutting-edge technology, sectors for integration with global value chains, job-creating sectors and sectors closely linked to the rural economy, is highly calibrated. Overall, the scheme is designed to comprehensively cover not only sectors of strength but also sectors of opportunities where India can gain substantially in the coming years.
• Lastly, addressing fiscal disabilities of companies and helping them achieve size and scale would allow Indian products to become competitive in global markets and lead to an increase in exports.

CONCERNS:

• As the PLI benefit has been assured only for five years, the investor has to assess the financial viability of the project beyond the PLI period. Once a manufacturing unit has been set up with a lot of fixed investment, recovery may be difficult. So the five-year period has to be utilised to make life easy for all businesses and job creators. In other words, the “ease of doing business” has to improve substantially.
• The Government expects that it may be called upon to pay about Rs 2 lakh crore, which means a total sale/export of about Rs 40 lakh crore (assuming five per cent PLI rate) during the next five years. This PLI will increase local manufacturing of eligible goods by an output equal to about 20 per cent of the current GDP.
• Thus, the second concern is changing growth dynamics and the global demand scenario, especially in the post-pandemic world. To get free cash of Rs 2 lakh crore from the Government, specified goods worth about Rs 40 lakh crore would need to be produced in India and a matching demand would be needed in a world where the cut-throat competition is going to deepen.
• The third concern is about how much of the PLI benefit would boost the investor’s actual post-tax income. The percentage of PLI benefit may vary across beneficiaries and depending on the competition, the post-tax actual benefit could vary from investor to investor. The PLI scheme, therefore, needs supplementation by sustained investor facilitation and improvement in ease of doing business.

WORD OF CAUTIONS:

• Given the exit problem in India, these incentives should be well-crafted and temporary so that the industries receiving support can mature and become economically viable without protection. Keeping them in place for too long may slow down, rather than accelerate growth in these sectors.
• Since such support is also meant to incentivise foreign players to set up manufacturing units in India, it is imperative that they are provided with a transparent and predictable policy. Policy incoherence and frequent changes in regulatory landscape deter foreign players from committing to large-scale investments in India.
• The sectors that don’t get an incentive are now at a comparative disadvantage, and the government should work doubly hard to improve the business, tax and policy environments in which all businesses can benefit.

CONCLUSION:

The PLI scheme focuses on incentivising firms to grow fast. Some of these incentives are meant to help industries where India already has a comparative advantage, like auto components; others for industries where India has the potential to become a world leader, like food; and most importantly, the PLI scheme is for sectors where India has an uncomfortable dependence on Chinese imports.

The PLI scheme reflects the government’s intent to improve the prospects of domestic manufacturing in India. It has elements of incentivising firms to grow big and increase investments and become part of the global supply chain. This is a welcome change from the kind of support that has been given in the past to MSMEs, which have incentivised them to remain small.

Traditionally, we have tried to attract investors with investment subsidies like giving land at concessional rates and subsidy on plant and machinery cost at a fixed percentage of say 15 per cent to 20 per cent of price. Thereafter, if the unit does not properly run, the subsidy goes waste. The PLI scheme is result-oriented. The cash incentives will be paid only if the manufacturers make the goods. It is a better alternative from the Government’s view point.

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.