Note4Students
From UPSC perspective, the following things are important :
Prelims level: Types of fiscal deficits
Mains level: Paper 3- Push for the growth in the Budget, but concerns with the fiscal deficit remains
The Budget will aid the growth in the aftermath of the pandemic, however, concerns remain over the fiscal deficit.
Concerns about fiscal deficit
- The Budget, taken as a whole, has provided reasonable stimulus to growth through a change in the composition of expenditure and other measures to improve the climate for investment.
- But concerns remain about fiscal deficit.
High expenditure growth
- Proposed growth in central expenditure, both in 2020-21 Revised Estimates (RE) and in 2021-22 Budget Estimates (BE), indicates the extent of contemplated fiscal stimulus.
- For reaching the projected 2020-21 RE levels, the growth required in the last quarter of the current fiscal year over the corresponding period of the previous year appear extraordinary.
- This involves transferring on to the Budget, the accumulated food subsidies amounting to ₹2,54,600 crore given to the Food Corporation of India through National Small Savings Fund (NSSF) loans.
- The balance of subsidies amounting to ₹1,68,018 crore would be the food subsidy pertaining to 2020-21 (RE).
- This is a desirable change towards transparency.
- Taking revenue expenditure figures as budgeted and adjusting for the NSSF-accumulated food subsidy amount, the growth is 6.7% in revenue expenditure in 2021-22 (BE) over 2020-21(RE).
- A good part of expenditure for the last quarter of 2020-21 may also pertain to clearing unpaid dues of various stakeholders including the private sector, autonomous bodies and government-aided institutions.
- Clearing these payments is desirable and would add to demand.
- The main expenditure push comes through a budgeted growth of 26.2% in capital expenditure in 2021-22.
- Relative to GDP, capital expenditure is expected to increase from 1.6% in 2019-20 to 2.3% in 2020-21 RE and 2.5% in 2021-22 BE, signalling a significant change in priority.
Increase in receipts
- Significant increases are planned in non-tax revenues and non-debt capital receipts.
- This increase is mainly predicated on higher dividends from non-departmental undertakings and spectrum sales.
- From a contraction of 35.6% in 2020-21 (RE), non-tax revenues are budgeted to grow by 15.4% in 2021-22.
- In the case of non-debt capital receipts, mainly covering disinvestment, a budgeted growth of 304.3% in 2021-22 stands in contrast with the contraction of 32.2% in 2020-21 (RE).
- Disinvestment initiatives have so far yielded minimal results.
- Budgeted increase in the Centre’s gross tax revenues is dependent on nominal GDP growth of 14.4%, with a buoyancy of 1.6 for direct taxes and 0.8 for indirect taxes.
Steps towards asset monetisation
- An important initiative pertains to the launching of a National Monetisation Pipeline.
- The time lags involved in starting yielding revenue remain unpredictable because of various potential disputes and claims involving government-owned land.
- A transparent auction process needs to be set up to facilitate suitable price discovery.
Other institutional initiatives
- The Budget includes central government’s share to the National Infrastructure Pipeline.
- However, success of the infrastructure expansion plan would depend on other stakeholders of the pipeline playing their due role.
- The Budget also proposes setting up of a Development Finance Institution (DFI), to serve as a catalyst for facilitating infrastructure investment.
- The DFI would have an initial capital of ₹20,000 crore.
- In order to manage non-performing assets of public sector banks, there is a proposal to set up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
- Much depends upon the fine-tuning the operations of these institutions.
Finance Commission’s recommendations
- In the action taken report, the Union government has accepted the recommended vertical share of 41% for the States in the shareable pool of central taxes.
- The government has accepted the Fifteenth Finance Commission’s recommendation for revenue deficit grants, local body grants and disaster-related grants.
- The scope of revenue deficit grants has been extended to cover 17 States in the initial years.
- The determination of these grants is not based on equalisation principle although some norms have been used in the assessment exercise.
- However, the government has put on hold the consideration of State-specific and sector-specific grants including performance-based incentives.
- The substantive issue pertains to the mode of transfers in terms of general-purpose unconditional transfers against specific purpose and conditional transfers.
- States had shown a preference for the former mode and it is for this reason that the 14th Finance Commission had raised the States’ share from 32% to 42%.
- The reduction from 42% to 41% is only on account of the consideration of 28 States excluding Jammu and Kashmir because of its new status.
- The imposition of cesses which are almost permanent has reduced the shareable pool.
- In fact, the States’ share in the Centre’s gross tax revenues is only 30% in 2021-22 (BE).
Way forward
- The Fifteenth Finance Commission has also proposed a revised fiscal consolidation road map for the Centre and States.
- The Fifteenth Finance Commission has recommended the setting up of a High-Powered Intergovernmental Group to re-examine the fiscal responsibility legislations of the Centre and States.
- Giving up the prudential norms will be a wrong lesson to learn from the crisis.
- The issue of debt sustainability can be certainly re-examined by taking into account the evolving profiles of debt, interest payments, and primary deficits relative to GDP.
Conclusion
Fiscal deficit must be related to household savings in financial assets and the interest payments to revenue receipts. It should not be forgotten that in fiscal 2021-22, interest payments to total revenue receipts will be 45.3%, pre-empting a significant proportion of revenue receipts. We must be conscious of the burden of the rising stock of debt.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Types of fiscal deficits
Mains level: Paper 3- Paradigm shift in the budget and challenges in realising them
The article deals with the marked departures in this year’s Budget and the challenges in realising the changes.
Three paradigm shifts from past in this the Budget
1)Increased infrastructure spending
- The main theme of the budget is a big thrust on infrastructure spending and public investment.
- If the budgeted numbers are realised, capex would have grown from 1.6 per cent of GDP pre-COVID to 2.5 per cent in two years.
- With India’s investment/GDP ratio falling by 5 percentage points over the last decade, a sustained public investment push — with its large multiplicative effects — is a much-needed impetus to reinvigorate growth and create jobs.
Implications of increased spending
- The certainty sustained public investment is likely to crowdin private investment.
- The certainty of investment-led employment that is likely to reduce household precautionary savings.
- However, higher capex spend is being paid for by disinvestment and privatisation.
- Effectively, non-core public-sector assets that don’t generate positive externalities — and, in fact, potentially distort the sectors they compete in — are expected to be replaced with much-needed physical and social infrastructure.
- This newly created physical and social infrastructure emanate positive externalities and necessarily suffer from under-provisioning by the private sector.
- If successfully executed — this will not be a case of selling the family silver to pay a credit card bill.
- Instead, it will be akin to a productivity-enhancing asset swap on the public sector’s balance sheet.
2) Shift in the way for financing infrastructure
- In stark contrast to the PPP model, infrastructure will now be financed off public sector balance sheets and, once operational and viable, will be monetised so as to recycle proceeds into the next project.
- In theory, this is the appropriate division of public-private risk sharing.
- It combines the public sector’s ability to better mitigate upstream risk while taking advantage of the glut of global liquidity potentially attracted to downstream projects.
3) Shift is towards more conservative and transparent fiscal accounting
- There has been much focus on bringing the Food Corporation of India (FCI) liabilities back on the budget.
- Less appreciated is the conservatism with which tax revenues have been budgeted for.
- Revised estimates peg this year’s gross taxes at 9.9 per cent of GDP.
- But for that to happen, taxes, net of excise, will need to contract by 20 per cent in the last quarter.
- So it’s very likely gross taxes will end up 0.5 per cent of GDP higher this year.
- Not only is this a welcome departure from the past when revenues were consistently over-budgeted, but it sets the base for next year.
- With nominal GDP expected to grow in double digits, it’s likely taxes, net of excise, will experience a higher-than-unitary-elasticity to growth, especially given the increased formalisation that COVID has spawned.
- Tax collections are, therefore, likely to exceed budgeted levels in 2021-22.
- It behooves a very uncertain macroeconomic environment and creates some buffer if crude prices keep rising or other revenues don’t materialise.
- Credible accounting over time will bring down risk premia in bond yields, and paradoxically generate a stimulative impulse.
Three challenges in realising these changes
1) Execution challenge
- The budget’s impact on shaping the macroeconomic narrative will depend on the speed and efficacy of simultaneously building and selling public assets.
- It will be important, for instance, to front-load disinvestment and strategic sales to take advantage of buoyant equity markets before global central banks become more cautious.
- With debt likely to rise to almost 90 per cent of GDP this year, it’s now incumbent on all stakeholders to consistently deliver the 10 per cent nominal GDP growth that’s needed to first stabilise debt at these levels and then bring it down.
- Viewed from this lens, it is a budget where execution is vital.
2) Withdrawal of the policy support at appropriate time
- While fiscal policy is being appropriately counter-cyclical at the moment, it must be equally nimble in the other direction.
- When the recovery gets more entrenched, policy support should be withdrawn with equal speed and alacrity.
3) Role of monetary policy
- With fiscal policy playing a primary role, monetary policy must slowly take a back seat.
- The combination of a more relaxed fiscal path and domestic private sector savings normalising after the COVID surge could result in equilibrium bond market yields rising [fall in the price of bond] — but that is a cost worth incurring for a meaningful public investment push.
- In the near term, the RBI may focus on ensuring this new equilibrium is reached in a non-disruptive manner.
- Given the current slack in the economy, it’s understandable if fiscal and monetary are temporarily complementary.
- But as confidence in the recovery grows, fiscal and monetary must quickly become substitutes — with the RBI progressively normalising liquidity to wardoff financial stability and fiscal dominance concerns — so as to safeguard macroeconomic stability.
Consider the question “This year’s Budget marked many departures from the past Budgets. However, there are several challenges in realising these departures. What are such departures and identify the challenges in realising them?”
Conclusion
The budget must be commended for embarking on important paradigm shifts. But its success, and in turn the sustainability of India’s recovery, will now come down squarely to policy execution and coordination.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: IBC 2016
Mains level: Paper 3- Analysing the working of IBC
The article analyses whether or not the Insolvency and Bankruptcy Code is delivering on its objectives.
Criticism of IBC
- The Insolvency and Bankruptcy Code (IBC), 2016 was enacted to resolve the stress of companies.
- However, the corporate insolvency resolution process (CIRP) has been criticised as it rescues only about 25 per cent of companies and leads to liquidation for the rest.
Is IBC delivering on its mandate
Let’s analyse how Insolvency and Bankruptcy Code (IBC) 2016 is working towards value maximising outcomes.
1) It enables the market to attempt to resolve
- The CIRP enables the market to attempt to resolve stress through a resolution plan whereby the company survives.
- When it concludes that there is no feasible resolution plan to rescue the company, the company proceeds for liquidation.
- The market usually rescues a viable company and liquidates an unviable one.
- There are quite a few companies which have negligible assets and/or are defunct when they enter CIRP.
- Many of these are beyond rescue for a variety of reasons, including creative destruction, and their continuation is a cost to the economy.
- In such cases, the code enables liquidation to release available resources to alternate uses.
- It is welcome, as it releases the assets as well as the entrepreneur stuck up in an unviable company, which is a key objective of the code.
2) Look at the total asset value not the number of companies
- In terms of absolute numbers, 25 per cent of companies were rescued and 75 per cent proceeded for liquidation.
- In value terms, however, 75 per cent of the assets were rescued and 25 per cent of assets proceeded for liquidation.
- Of the companies sent for liquidation, 75 per cent were either sick or defunct, and of the companies rescued, 25 per cent were either sick or defunct.
3) Look at the overall impact, not just final numbers
- Third, the stress that a company suffers is like an illness which can be treated by a variety of options.
- Normally, recovery is better if diagnosis and treatment start early.
- Likewise, the health of the company deteriorates if the resolution process is delayed.
- The percentage of rescue at this later stage may not be significant.
- The credible threat of CIRP that a company may change hands has redefined the debtor-creditor relationship.
- Faced with the possibility of the CIRP, a debtor makes all-out efforts to prevent the stress, or resolve it much before it translates into a default, or settles the default.
- Even after an application is filed, a debtor continues efforts to resolve the financial stress midway through settlement, review, mediation, or withdrawal to avoid the consequences of CIRP.
- The number of companies that recover before filing the application as a percentage of those that get starts the insolvency process would give the fair idea about the efficacy of the IBC.
Consider the question “The IBC has often been criticised for liquidating the companies rather than rescuing them. Do you agree with this criticism? Give reasons in support of your argument.”
Conclusion
Liquidation or rescue is an outcome of the market forces; the law is only an enabler giving choices and nudging a company towards value maximising outcomes. The “invisible hands” of the market works towards the best outcome, which we should respect and accept.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: GLOF
Mains level: Climate change impact
A massive glacier burst at Chamoli in Uttarakhand yet again bringing back our focus to the dangers of climate change.
A wake-up call!
Uttarakhand is often at the heart of various Himalayan disasters such as flash floods, cloud bursts, avalanches and earthquakes.
The Chamoli incident signifies the dawn of ugly faces of climate disaster for which the mankind is clueless. At last, someone has to be blamed, isn’t it?
What is the news?
- Experts are uncertain about what caused the massive glacier burst at Chamoli in Uttarakhand.
- It is unclear whether there was an avalanche in the area recently or whether the lake breach was the result of construction, anthropological activities, climate change etc.
What is GLOF?
- A GLOF is a type of outburst flood that occurs when the dam containing a glacial lake fails.
- An event similar to a GLOF, where a body of water contained by a glacier melts or overflows the glacier, is called a jökulhlaup.
- The dam can consist of glacier ice or a terminal moraine.
- Failure can happen due to various factors such as:
- Erosion, a buildup of water pressure
- Avalanche of rock or heavy snow
- Earthquake or volcanic eruptions under the ice or
- Displacement of water in a glacial lake when a large portion of an adjacent glacier collapses into it
Possible causes for Chamoli
Avalanche
- An avalanche is falling masses of snow and ice which gathers pace as it comes down the slope.
- But an avalanche is unlikely to result in the rise of water of that magnitude what Chamoli witnessed.
Cloudburst
- What happened in Uttarakhand in 2013 was a multi-day cloudburst.
- It is a sudden, very heavy rainfall accompanies by a thunderstorm. But it generally happens in monsoon.
- In fact, the season in which such a disaster was witnessed has surprised experts as there is no immediate trigger that can be pointed to as the reason why water level rose to that level washing away two hydro projects.
Why always Uttarakhand?
- Human activities profoundly affect the earth’s climate and mountains are a sensitive indicator of that effect.
- The mountain ecosystem is easily disrupted by variations in climate owing to their altitude, slope and orientation to the sun.
- As the earth heats up, mountains glaciers melt at unprecedented rates.
- Several scientists believe that the change occurring in the mountain ecosystems may provide an early glimpse of what could come to pass in a lowland environment.
Conclusion
- The current policy of the government of pursuing hydro-power projects indiscriminately cannot be ignored.
- The entire State of Uttarakhand is categorised as falling in Zone-IV and V of the earthquake risk map of India.
- The potential of the cumulative effect of multiple such projects has turned out to be more environmentally damaging than sustainable.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not Much
Mains level: Social media as a lobbying tool
The Centre has issued notice to Twitter after the micro-blogging site restored more than 250 accounts that had been suspended earlier on the government’s ‘legal demand’.
Take this new term “Hashtags Activism”.
What is the news?
- Twitter was asked to block accounts and controversial hashtags that spoke of an impending ‘genocide’ of farmers for allegedly promoting misinformation about the protests, adversely affecting public order.
- Twitter reinstated the accounts and tweets on its own and later refused to go back on the decision, contending that it found no violation of its policy.
Concerns with the directive
- This direction presents a clear breach of fundamental rights but also reveals a complex relationship between the government and large platforms on the understanding of the Constitution of India.
- The specific legal order issued is secret.
- This brings into focus the condition of secrecy that is threshold objection to multiple strands of our fundamental rights.
- It conflicts against the rights of the users who are denied reasons for the censorship.
- Secrecy also undermines the public’s right to receive information, which is a core component of the fundamental freedom to speech and expression.
- This is an anti-democratic practice that results in an unchecked growth of irrational censorship but also leads to speculation that fractures trust.
- The other glaring deficiency is the complete absence of any prior show-cause notice to the actual users of these accounts by the government.
- This is contrary to the principles of natural justice.
- This again goes back to the vagueness and the design faults in the process of how directions under Section 69A are issued.
Are platforms required to comply with legal demands?
- Cooperation between technology services companies and law enforcement agencies is now deemed a vital part of fighting cybercrime and various other crimes that are committed using computer resources.
- These cover hacking, digital impersonation and theft of data.
- The potential of the misuse has led to law enforcement officials constantly seeking to curb the ill-effects of using the medium.
- Therefore, most nations have framed laws mandating cooperation by Internet service providers or web hosting service providers and other intermediaries to cooperate with law and order authorities in certain circumstances.
What does the law in India cover?
- In India, the Information Technology Act, 2000, as amended from time to time, governs all activities related to the use of computer resources.
- It covers all ‘intermediaries’ who play a role in the use of computer resources and electronic records.
- The term ‘intermediaries’ includes providers of telecom service, network service, Internet service and web hosting, besides search engines, online payment and auction sites, online marketplaces and cyber cafes.
- It includes any person who, on behalf of another, “receives, stores or transmits” any electronic record. Social media platforms would fall under this definition.
What are the Centre’s powers, vis-à-vis intermediaries?
- Section 69 of the Act confers on the Central and State governments the power to issue directions “to intercept, monitor or decrypt…any information generated, transmitted, received or stored in any computer resource”.
The grounds on which these powers may be exercised are:
- in the interest of the sovereignty or integrity of India, defence of India, the security of the state,
- friendly relations with foreign states,
- public order, or for preventing incitement to the commission of any cognizable offence relating to these, or
- for investigating any offence
How does the government block websites and networks?
- Section 69A, for similar reasons and grounds, enables the Centre to ask any agency of the government, or any intermediary, to block access.
- Any such request for blocking access must be based on reasons given in writing.
- Procedures and safeguards have been incorporated in the rules framed for the purpose.
Obligations of intermediaries under Indian law
- Intermediaries are required to preserve and retain specified information in a manner and format prescribed by the Centre for a specified duration.
- Contravention of this provision may attract a prison term that may go up to three years, besides a fine.
- When a direction is given for monitoring, the intermediary and any person in charge of a computer resource should extend technical assistance in the form of giving access or securing access to the resource involved.
- Failure to extend such assistance may entail a prison term of up to seven years, besides a fine.
- Failure to comply with a direction to block access to the public on a government’s written request also attracts a prison term of up to seven years, besides a fine.
Is the liability of the intermediary absolute?
- Section 79 of the Act makes it clear that “an intermediary shall not be liable for any third-party information, data, or communication link made available or hosted by him”.
- This protects intermediaries such as Internet and data service providers and those hosting websites from being made liable for content that users may post or generate.
- However, the exemption from liability does not apply if there is evidence that the intermediary abetted or induced the commission of the unlawful act involved.
Judicial intervention in this regard
- In Shreya Singhal Case (2015), the Supreme Court read down the provision to mean that the intermediaries ought to act only upon receiving actual knowledge that a court order has been passed.
- This was because the court felt that intermediaries such as Google or Facebook may receive millions of requests, and it may not be possible for them to judge which of these were legitimate.
- The role of the intermediaries has been spelt out in separate rules framed for the purpose in 2011.
Legislative efforts
- In 2018, the Centre favoured coming up with fresh updates to the existing rules on intermediaries’ responsibilities, but the draft courted controversy.
- This was because one of the proposed changes was that intermediaries should help identify originators of offensive content.
- This led to misgivings that this could aid privacy violations and online surveillance.
- Also, tech companies that use end-to-end encryption argued that they could not open a backdoor for identifying originators, as it would be a breach of promise to their subscribers.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPCs
Mains level: Entreneurship promotion
In her Budget speech, the Union Finance Minister had announced measures to ease norms on setting up one-person companies (OPCs).
Q.What are One-Person Companies (OPCs)? Discuss how they will help startups and non-resident Indians?
What is an OPC?
- As the name suggests, a one-person company is a company that can be formed by just one person as a shareholder.
- These companies can be contrasted with private companies, which require a minimum of two members to get going.
- However, for all practical purposes, these are like private companies.
- It is not as if there was no scope for an individual with aspirations in business prior to the introduction of OPC as a concept.
- As an individual, a person could get into the business through a sole proprietorship mode, and this is a path that is still available.
Why do we need such companies?
- A single-person company and sole proprietorship differ significantly in how they are perceived in the eyes of law.
- For the former, the person and the company are considered separate legal entities. In a sole proprietorship, the owner and the business are considered the same.
- This has an important implication when it comes to the liability of the individual member or owner. In a one-person company, the sole owner’s liability is limited to that person’s investment.
- In a sole proprietorship set-up, however, the owner has unlimited liability as they are not considered different legal entities.
- Some see the proposal as a move to encourage corporatization of small businesses. It is useful for entrepreneurs to have this option while deciding to start a business.
Is this a new idea?
- Such a concept already exists in many countries. In India, the concept was introduced in the Companies Act of 2013.
- Its introduction was based on the suggestions of the J. Irani Committee Report on Company Law, which submitted its recommendations in 2005.
- Pointing out that there was a need for a framework for small enterprises, it said small companies would contribute significantly to the Indian economy.
- But because of their size, they could not be burdened with the same level of compliance requirements as large public-listed companies.
Features of OPCs
- The law on one-person companies that took shape, as a result, exempted such companies from many procedural requirements, and, in some cases, provided relaxations.
- For instance, such a company does not need to conduct an annual general meeting, which is a requirement for other companies.
- A one-person company also does not require signatures of both its company secretary and director on its annual returns. One is enough.
- There was, however, criticism that some rules governing a one-person company were restrictive in nature. This year’s Budget has dealt with some of these concerns.
How many OPCs does India have?
- According to data compiled by the Monthly Information Bulletin on Corporate Sector, there were 34,235 OPCs out of a total number of about 1.3 million active companies in India (Dec 2020).
- Data also show that more than half of the OPCs are in business services.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Hope Mission
Mains level: Mars mission worldwide and their success
The first Arab interplanetary mission is expected to reach Mars’ orbit on February 9 in what is considered the most critical part of the journey to unravel the secrets of weather on the Red Planet.
Try this question from CSP 2014:
Q.Which of the following pair is/are correctly matched?
| Spacecraft |
Purpose |
| 1. Cassini-Huygens |
Orbiting the Venus and transmitting data to the Earth |
| 2. Messenger |
Mapping and investigating the Mercury |
| 3. Voyager 1 and 2 |
Exploring the outer solar system |
Select the correct answer using the code given below.
a) 1 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Hope Mission
- The Emirates Mars Mission called “Hope” was announced in 2015 with the aim of creating mankind’s first integrated model of the Red planet’s atmosphere.
- Hope weighs over 1500 kg and will carry scientific instruments mounted on one side of the spacecraft, including the Emirates exploration Imager (EXI), which is a high-resolution camera among others.
- The spacecraft will orbit Mars to study the Martian atmosphere and its interaction with outer space and solar winds.
- Hope will collect data on Martian climate dynamics, which should help scientists understand why Mars’ atmosphere is decaying into space.
Objectives of the mission
- Once it launches, Hope will orbit Mars for around 200 days, after which it will enter the Red planet’s orbit by 2021, coinciding with the 50th anniversary of the founding of UAE.
- The mission is being executed by the Mohammed bin Rashid Space Centre, UAE’s space agency.
- It will help answer key questions about the global Martian atmosphere and the loss of hydrogen and oxygen gases into space over the span of one Martian year.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Trans fats
Mains level: Health threats posed by Trans Fats
The FSSAI has amended its rules to put a cap on trans fatty acids (TFAs) in food products just weeks after it tightened the norms for oils and fats.
What are the new rules?
- Food products in which edible oils and fats are used as an ingredient shall not contain industrial Trans fatty acids more than 2% by mass of the total oils/fats present in the product, on and from 1st January 2022.
- In December, the FSSAI had capped TFAs in oils and fats to 3% by 2021, and 2% by 2022 from the current levels of 5%.
- The 2% cap is considered to be the elimination of trans fatty acids, which is to be achieved by 2022.
What are Trans Fats?
- Trans fatty acids are created in an industrial process that adds hydrogen to liquid vegetable oils to make them more solid, increase the shelf life of food items and for use as an adulterant as they are cheap.
- They are present in baked, fried and processed foods as well as adulterated ghee which becomes solid at room temperature.
- They are the most harmful form of fats as they clog arteries and cause hypertension, heart attacks and other cardiovascular diseases.
Why need such regulation?
- As per the World Health Organisation (WHO), approximately 5.4 lakh deaths take place each year globally because of intake of industrially-produced trans-fatty acids.
- The WHO has called for the elimination of industrially-produced trans-fatty acids from the global food supply by 2023.
- The latest FSSAI rules signal the completion of the process of regulating trans fats in India.
- The move will make a big difference in the health harm caused by this unwanted ingredient.
- This allows FSSAI and the State-level food safety machinery to focus on implementation and enforcement of the WHO recommendations.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Types of fiscal deficits
Mains level: Paper 3- Key feature of the Budget
The article highlights the three key feature of the Budget which makes it historic.
1) Disinvestment
- Budget 2021-22 will begin the process of the withdrawal of the state from business.
- Bank nationalisation in 1969 signalled a new era — just more than 50 years later, India has changed course for the better.
- The budget signals that the process towards the goal of greater economic freedom, and faster and more equitable economic development, and maturity, has well and truly begun.
2) Changed role of fiscal deficit in economic policy
- Many of us forgot the original meaning of fiscal deficits and their importance.
- When there is an unemployment, a considerable portion of deficit financing can go towards growth, rather than inflation.
- The relegation of the fiscal deficit to a secondary role in economic policy was the second big departure from a conventional budget.
- The conventional argument was that fiscal deficit was something to really worry about, hence taxes must be raised to keep the deficit within limits.
- There was serious talk of a COVID cess, a wealth tax, and increase in the tax rate for the rich.
- There is no increase in tax rates to increases tax revenue.
- Rather, the finance minister took the extra-bold step of reducing corporate taxes in September 2019.
- India awaits a comprehensive reform of the Direct Tax Code. It did not happen. But the stage is set for such a reform.
3) Transparency in fiscal math
- If the government borrows from the Food Corporation of India (to finance MSP purchases, what else), it will now appear as part of expenditures and as part of the deficit.
- Also, the GDP growth estimates for 2021-22, forecasted at 14.5 per cent (nominal).
- Normally, finance ministers in India tend to over-estimate, and most often, fall short.
- Budget 2021-22 might be the first to significantly exceed the forecasts.
Criticism of the budget
- One of the issues with the budget cited by the critics is that its forecasts would be in error because of problems of “execution and implementation”.
Conclusion
With many firsts, it is a budget that lays the foundation for sustainable recovery in GDP growth and welfare improvement.
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From UPSC perspective, the following things are important :
Prelims level: NAIP
Mains level: Paper 3- Use of technology to increase milk production in India
The article highlights the issues facing the dairy sector and explains the utility of IVF technology for crossbreeding.
Importance of dairy sector
- The dairy sector assumes significance on account two reasons:
- 1) It has to do with the socio-cultural affinity towards cows and dairy products in large parts of the country.
- 2) As an industry, it employs more than 70 million farmers.
- Need of the hour is for us to identify ways in which we can enhance the return on investment for our farmers.
India’s journey from milk deficit country to one of surplus
- Initiated in 1970, Operation Flood transformed India into one of the largest milk producers.
- The per capita availability of milk in 2018-19 was 394 grams per day as against the world average of 302 grams.
- Today with an annual production of 187.75 million tonnes India accounts for about 22% of the world’s milk production.
- However, India is yet to join the ranks of major milk exporting nations, as much of what we produce is directed towards meeting domestic demands.
Making India milk exporting nation
- Indigenous cows produce 3.01kgs of milk per cow per day, while the yield of exotic crossbred cows is 7.95kgs.
- Crossbreeding has taken off in a big way because of the advancements in reproductive technologies like In vitro fertilization (IVF), embryo transfer process, and artificial insemination.
- Out of these processes, IVF and artificial insemination have proven to be the most popular and effective methods.
- The NAIP (Nationwide Artificial Insemination Programme) Phase-I was launched in September 2019.
- Every animal in the programme was assigned a 12-digit unique identification number under the Pashu Aadhar scheme.
- NAIP Phase-II was initiated on 1 August 2020 with an allocation of ₹1,090 crore in 604 districts covering 50,000 animals per district and is on track to be completed by the 31 May 2021.
- Under the programme, 9.06 crore artificial inseminations will be performed and is expected to lead to the birth of 1.5 crore high yielding female calves.
- Consequently, 18 million tonnes of additional milk will be produced as average productivity will be enhanced from 1,861kg per animal per year to 3,000kg per animal per year.
- Artificial insemination (AI) technology has been the most used method in India, but its success hinges upon accuracy in heat detection and timely insemination.
- And this is where In Vitro Fertilization (IVF) technology will prove to be more effective.
Conclusion
In keeping with our ethos of ‘Jai Kisan, Jai Vigyan’ the marriage of rural farming with the latest innovations in technology will usher in unprecedented transformation in our dairy industry.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Essential Commodities Act
Mains level: Paper 3- Ensuring growth while protecting the farmers
The article suggests the two steps to ensure growth while protecting the poor. The first is the creation of social safety net and next is factor market reforms.
Issue of farmers’ income
- An Indian engaged in industry or any aspect of the services sector (this includes a waiter in a restaurant) earns more than an average farmer.
- This is an anomaly.
- So, despite all the pro-farmer laws and protection, why do farmers in India earn less?
- A recent study by RBI showed that across all crops, the farmgate price is 40-60 per cent less than the consumer price.
- The real challenge is how to encourage growth while protecting the poor.
Encouraging growth while protecting the poor: 2 steps
- 1) A social safety net needs to be created to provide direct income transfers to the vulnerable.
- 2) Factor markets involving labour and agricultural land need to be reformed to ensure productivity-enhancing growth.
- Only way to ensure growth which benefits the poor is through employment creating in the manufacturing and services sector.
1) Social safety nets in India
- Despite a narrow tax base, India has created a comprehensive social safety net, which can cushion growth-enabling market reforms.
- Accurate targeting under India’s Food Security Act to the bottom 67 per cent through Aadhaar identification and digital ration cards paired with E-POS machines has considerably reduced the leakage of subsidised grains.
- The National Social Assistance programme intends to provide direct income support to over 40 million elderly landless agricultural workers, poor women-headed households and families with physically-challenged children.
- India also provides income support annually to 145 million farmers, paying out Rs 75,000 crore.
- This benefits all farmers while MSP benefits only 6 per cent of farm produce.
2) Factor market reforms
- If state support for social safety net has to become sustainable, wide-ranging growth, which will broaden the tax base, is essential.
- India’s growth itself can be designed to reduce the number of people who need state support.
- The agriculture and labour reforms recently passed create the conditions for productivity-enhancing growth, benefiting millions of small farmers and unorganised workers.
Let us take a look at what the farm laws achieve and how they will change the status quo
1) Amendment to Essential Commodities Act
- The stock limits under the Essential Commodities Act do not enable large tur or moong and rice processors to procure in bulk for their entire season’s processing requirements.
- This restricts large-scale processing units which can run throughout the non-harvest season.
- This draconian anti-farmer rule has now been done away with.
- This will enable the expansion of agro-processing and supply chains.
- A larger share of the produce procured for agro-processing increases its shelf life, enabling the farmer to retain a greater value.
- 30-40 per cent of the post-harvest value, particularly in vegetables and fruits, is lost due to inadequate storage, processing and transportation facilities.
- Removal of stock limits and the accompanying contract farming act will bring in investments to tap the wasted resource.
2) APMC regulation
- The second law, removes another distortion: Only traders registered in APMCs can buy farmers produce.
- Even though conditions for perfect markets exist, the APMC regulation creates this bottleneck.
- Intermediaries extract a greater share of value as they are price makers while farmers are price takers.
- This situation is further aggravated as farmers are restricted to selling within the taluka boundaries or limits of the APMC, and if they have to sell in other APMC, they have to pay the APMC tax.
- The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill 2020 confines the authority of the APMC to levy fees and give trader licences within the boundary of the market yard.
- Farmers will continue to have the option to sell in APMCs but any private market/non-APMCs registered trader can also set up an agricultural market and compete with APMCs to buy the same produce.
- Karnataka implemented the Uniform Market portal in 2014, enabling trade across taluka APMC limits without APMC fees.
- An analysis by researchers at the MIT Sloan School of Management has shown that prices of many agricultural goods increased by 3.5 to 5.1 per cent.
- Significantly, profit margins of small farmers increased by more than 36 per cent.
Labour reforms
- Apart from agriculture, the abundance of labour is the second greatest comparative advantage of India.
- However, multiple labour laws instead of encouraging employment, have created disincentives for job creation due to high costs of compliance.
- While India’s employment elasticity with respect to GDP growth is only 0.2, China’s is at 0.44. Even for Bangladesh, the elasticity is 0.38.
- India’s path-breaking labour reforms leverage the true comparative advantage of the country’s factor endowments to promote growth with higher employment elasticity.
- The old labour laws protected existing jobs at the cost of preventing new job creation through creative destruction.
- Bangladesh has shown the way to increase formal jobs by legalising fixed-term employment and banning union activity in FDI industries.
- Raising the threshold for seeking prior permission for laying off workers will enable capital and land locked in sunset industries to move freely to new sunrise industries.
Consider the question “An Indian engaged in industry or any aspect of the services sector earns more than an average farmer. What are the factors responsible for this anomaly? Suggest ways to achieve growth that could ensure sustainable safety net?”
Conclusion
The need of the hour is to continuously communicate with those unhappy with the reforms to explain how the current status quo is hurting farmers and informal workers.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Toolkit
Mains level: Social media as a lobbying tool
The Delhi Police filed an FIR on charges of sedition, criminal conspiracy and promoting hatred against the creators of a ‘toolkit’ on farmer protests, which was shared by climate activist Greta Thunberg.
Q.What do you mean by a social media toolkit? Discuss its potential mis-uses.
What is a Toolkit?
- A toolkit is essentially a set of adaptable guidelines or suggestions to get something done. The contents differ depending on what the aim of the toolkit is.
- For example, the Department for Promotion of Industry and Internal Trade (DPIIT) has a toolkit for the implementation of Intellectual Property Rights (IPR).
- This includes basics such as the guidelines to follow when investigating IPR violations, applicable laws, and definitions of terms such as counterfeit and piracy.
- In the context of protests, a toolkit usually includes reading material on the context of the protest, news article links and methods of protest (including on social media).
Why have they gained prominence?
- While toolkits have been around for decades, the accessibility of social media has brought them into the spotlight over the past few years.
- References to toolkits for protesters can be found in the Occupy Wall Street protests of 2011, in the Hong Kong protests of 2019, several climate protests across the world, anti-CAA protests across India.
- During the Hong Kong protests, toolkits advised participants to wear masks and helmets to avoid being recognised and ways to put out tear gas shells.
- During the anti-CAA protests, a toolkit suggesting twitter hashtags to use, places to hold protests, and a guide on what to do and carry with you if you are detained by the police were shared on social media.
Toolkit tweeted by Greta Thunberg
- The 18-year-old shared a toolkit on Twitter on the anti-farm law protests in India.
- This came on the heels of singer-businesswoman tweeting a news article on internet curbs near protest sites in and around Delhi.
- The toolkit tweeted by Thunberg was later deleted, with the activist saying it was being updated by people on the ground in India.
- The toolkit asked those interested to start a ‘Twitter storm’ to share solidarity photo/video message by social media users.
It is being speculated that the document was proof that an international conspiracy is being hatched to defame India and the central government over the ongoing farmers’ protest.
What is the recent apprehension?
- The police have said that during the inquiry it appears that the toolkit was created by Poetic Justice Foundation.
- It says the prior action section delineated the action plan for January 26, when violence was seen at several areas as a group of farmers diverted from the set route and started marching towards the Red Fort.
- The unfolding of events over the past few days, including the violence of 26th January, has revealed copycat execution of the ‘action plan’ detailed in the tool kit.
- The intention of the creators of the tool kits appeared to be to create disharmony among various social, religious and cultural groups and encourage disaffection and ill-will against the state and the nation at large.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Political Parties and their types
Mains level: Political Parties in India
The contribution reports of only 78 (3.39%) of the total 2,301 registered unrecognized political parties are available in the public domain for 2018-19 reports the Association For Democratic Reforms (ADR).
Classification of Political Parties in India
(A) National parties
A registered party is recognised as a national party only if it fulfils any one of the three conditions listed below:
- A party should win 2% of seats in the Lok Sabha from at least three different states.
- At a general election to Lok Sabha or Legislative Assembly, the party polls 6% of votes in any four or more states and in addition, it wins four Lok Sabha seats.
- A party gets recognition as a state party in four states.
- A party recognised as a National party can be derecognized if it fails to maintain the criteria.
(B) State parties
A party has to fulfil any of the following conditions for recognition as a state party:
- A party should secure at least 6% of valid votes polled in an election to the state legislative assembly and win at least 2 seats in that state assembly.
- A party should secure at least 6% of valid votes polled in an election to Lok Sabha and win at least 1 seat in Lok Sabha.
- A party should win a minimum of three per cent of the total number of seats or a minimum of three seats in the Legislative Assembly, whichever is higher.
- A party should win at least one seat in the Lok Sabha for every 25 seats or any fraction thereof allotted to that State.
- Under the liberalized criteria, one more clause that it will be eligible for recognition as state party if it secures 8% or more of the total valid votes polled in the state.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Parivar Pehchan Patra
Mains level: UID and privacy issues
Amid concerns over the Parivar Pehchan Patra scheme, the Haryana govt. says enrolment is voluntary. But residents have little choice as the delivery of even birth and death certificates is linked to it.
Practice question for mains:
Q.What is Parivar Pehchan Patra (PPP) recently rolled out by Haryana Govt.? How it is beneficial compared to the Aadhaar?
What is Parivar Pehchan Patra (PPP)?
- It is an 8-digit Unique Identity Card number meant for each family to enable smooth and automatic delivery of several citizen-centric services.
- The government will establish the scheme-wise eligibility of a particular family using this 8-digit code according to the information available in the PPP of the family.
- The benefits, according to the schemes, shall automatically be transferred to the family using the same code.
- PPP will ensure that not a single beneficiary is left out from the government benefits that they are entitled to.
How is PPP different from the Aadhaar card?
- The PPP, mathematically, is an integral number of Aadhaar.
- While Aadhaar represents an individual as a unit, a PPP represents a family as a unit. Most of our government schemes are structured around the family.
- It is not structured around an individual.
- For example, ration eligibility is there for the family but the family can split it into various members as long as they are above 18 years and say they are separating entitlements for all individuals.
Will it be mandatory for every family of Haryana to get PPP?
- No, it will not be mandatory for every family of the state to obtain a PPP.
- But, PPP is mandatory for families availing benefits under government schemes.
- Also, whenever a family wants to avail any government scheme, it will have to first get a PPP to be eligible.
The logic behind
- Haryana officials said although there is a union government’s Aadhaar card, it contains individual’s details and does not cater to the entire family as a unit.
- In certain circumstances, it may not be possible for a state government to keep track of all the families residing in the state.
- Although the ration card system is there, it is not updated and does not contain adequate family records.
- With the PPP, it will be easier for the state government to maintain a complete database of all the state dwellers.
How would it work?
- To begin with, the government has already linked PPP with three social security schemes – old age Samman allowance, divyang pension, and the widow and destitute women pension scheme.
- For instance, when a family member turns 60, they will automatically get a message through the software and will automatically start getting benefits of the old-age pension if they meet the required criteria.
- Similarly, the teenagers will get messages on turning 18 years old and shall become eligible for various government schemes that will be notified to them through the software.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Energy Island
Mains level: Energy Island Concept
The Danish government has approved a plan to build an artificial island in the North Sea as part of its effort to switch to green energy.
The Energy Island concept provides an innovative solution for countries like India grappled with the scarcity of land required for RE projects!
What is Energy Island?
- An energy island is based on a platform that serves as a hub for electricity generation from surrounding offshore wind farms.
- The idea is to connect and distribute power between Denmark and neighbouring countries.
What is the Danish project?
- Denmark has already entered into agreements with the Netherlands, Germany and Belgium to begin the joint analysis of connections in the energy island.
- The project is being called the largest construction project to be undertaken in Denmark’s history with an estimated cost of DKK 210 billion.
- In June 2020, the Danish Parliament decided to initiate the construction of two energy islands, which will export power to mainland Denmark and neighbouring countries.
- One of these islands will be located in the North Sea and the second island, called the island of Bornholm, will be located in the Baltic Sea.
- The artificial island will be located about 80 km into the North Sea and the majority of it will be owned by the Danish government.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Government Securities (G-Secs), T-Bills etc
Mains level: Government Securities (G-Secs)
The RBI has said that it would allow retail investors and other small investors direct access to its government securities trading platform.
What are G-Secs?
- These are debt instruments issued by the government to borrow money.
- The two key categories are:
- Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
- Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years
Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.
Why G-Secs?
- Like bank fixed deposits, g-secs are not tax-free.
- They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
- However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
- Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Who can invest in Corporate Bonds and Government Securities?
- Pension Funds: Pension funds can also invest in both corporate bonds and government securities to ensure long-term stability and growth in their investment portfolio. .
- Retail Investors: Retail investors, including individual investors, can invest in both corporate bonds and government securities.
- Insurance Companies: Insurance companies can invest in both corporate bonds and government securities as part of their investment portfolio. The search results indicate that insurance companies often invest in a mix of low-risk and high-yield assets, with government securities providing lower risk and corporate bonds offering higher returns.
Retail investors and G-Secs
- Small investors can invest indirectly in g-secs by buying mutual funds or through certain policies issued by life insurance firms.
- To encourage direct investment, the government and RBI have taken several steps in recent years.
- Retail investors are allowed to place non-competitive bids in auctions of government bonds through their Demat accounts.
- Stock exchanges act as aggregators and facilitators of retail bids.
Try this PYQ:
Consider the following statements:
- The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
- Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
- Treasury bills offer are issued at a discount from the par value.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 Only
(c) 2 and 3 only
(d) 1, 2 and 3
Why the current proposal?
- The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. These entities trade in lot sizes of Rs 5 crore or more.
- So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes.
- In other words, there is no easy way for them to exit their investments.
- Thus, currently, direct g-secs trading is not popular among retail investors.
What will the current proposal do?
- The details are not out yet. However, the RBI’s intention is to make the whole process of g-sec trading smoother for small investors.
- By allowing people to open accounts in RBI’s e-kuber system, it is hoping to create a market of small investors who will invest in these instruments.
Why such a move?
- The RBI is the debt manager for the government.
- In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market.
- When the government demands so much money, the price of money (i.e., the interest rate) will move up.
- It is in the government’s and RBI’s interest to bring this down.
- That can only happen by broadening the base of investors and making it easier for them to buy g-secs.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: HSS scheme
Mains level: Textile sector of India
The Ministry of Textiles introduced the technology up-gradation scheme called Hathkargha Samvardhan Sahayata (HSS) Yojana.
Much recently, in the budget, the Mega Investment Textiles Parks (MITRA) Scheme was launched.
HSS Yojana
- This scheme is introduced as an up-gradation scheme under National Handloom Development Programme (NHDP) and Comprehensive Handloom Cluster Development Scheme (CHCDS) in 2015-16.
- It aims to provide upgraded looms/accessories to handloom weavers to improve the quality of the fabric and enhance productivity.
- Under the scheme, the Union Govt bears 90% of the cost of looms/accessories.
- It is designed for all the weavers, including SC/ST/OBC and women.
- The performance of this scheme will be evaluated by independent third-party agencies.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: MCA
Mains level: Digital India
The Ministry of Corporate Affairs (MCA) will launch data analytics-driven MCA21 Version 3.0.
What is MCA 21?
- MCA21 is an e-Governance initiative of Ministry of Corporate Affairs (MCA) that enables easy and secure access of the MCA services to the corporate entities, professionals and citizens of India.
- It is the first Mission Mode e-Governance project of GoI.
Try this PYQ:
Q.Which one of the following is not a feature of Limited Liability Partnership firm?
(a) Partners should be less than 20
(b) Partnership and management need not be separate
(c) Internal governance may be decided by mutual agreement among partners
(d) It is a corporate body with perpetual succession
MCA21 3.0
- MCA21 V3 is a technology-driven forward-looking project, envisioned to strengthen enforcement, promote Ease of Doing Business, enhance the user experience, and facilitate seamless integration and data exchange among Regulators.
- The project will have Micro-services architecture with high scalability and capabilities for advanced analytics.
- It will have additional modules for e-Adjudication, e-Consultation and Compliance Management.
- Aligned with global best practices and aided by emerging technologies such as AI and ML, MCA21 V3 is envisioned to transform the corporate regulatory environment in India.
Components of MCA21 V3
- E-Scrutiny: MCA is in process of setting up a Central Scrutiny Cell which will scrutinise certain Straight Through Process (STP) Forms filed by the corporates on the MCA21 registry and flag the companies for more in-depth scrutiny.
- E-adjudication: E-adjudication module will provide a platform for conducting online hearings with stakeholders and end to end adjudication electronically.
- E-Consultation: To automate and enhance the current process of public consultation on proposed amendments and draft rules etc., e-consultation module of MCA21 v3 will provide an online platform.
- Compliance Management System (CMS): CMS will assist MCA in identifying non-compliant companies/LLPs, issuing e-notices to the said defaulting companies/LLPs etc.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Seed Funding
Mains level: Startup promotions in India
Startup India Seed Fund Scheme (SISFS) has been approved for the period of next four years starting from 2021-22.
Seed Fund Scheme
- The scheme aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization.
- 945 Crore corpus will be divided over the next 4 years for providing seed funding to eligible startups through eligible incubators across India.
- The scheme is expected to support about 3600 startups.
Q.Discuss various inherent non-policy challenges to Start-ups in India.(150W)
What is Seed Funding?
- Seed funding or seed-stage funding is a very early investment which aims at helping a business grow and generating its own capital.
- Also referred to as seed money or seed capital, investors often get an equity stake in exchange for the capital invested.
- The investors can themselves be the founders and use their savings as seed money for their new company — also known as bootstrapping.
Why Seed Funding matters?
- It is a fact that starting a new business and lifting it up off the ground is a huge ask for most entrepreneurs and it only gets tougher with capital constraints.
- Seed funding helps get things started before the business earns any revenue.
- It is an effective solution for startups and growing businesses as it provides the much-needed early monetary support.
- It can cover everything from infrastructure costs, marketing and development costs as well as the cost of initial hiring. Investment is the fuel of any business and seed funding is the first drop of this fuel.
- As seed money becomes much-needed cash reserve or working capital, not having it is one of the main reasons for failure.
Various options for Seed Funding
- Crowdfunding
- Corporate seed funds
- Incubators Accelerators
- Angel investors
- Personal Savings
- VC Funding
- Angel Funds or Angel Networks
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Fiscal deficit
Mains level: Paper 2- Challenges posed by high debt levels
The article discusses the challenges associated with the Budget with a high fiscal deficit.
Change in government’s stance
- India’s economy has suffered more than most from the covid pandemic and so have its people.
- Its economic contraction has put pressure on its government, like so many others, to respond.
- Until this week, government’s response had been relatively restrained.
- The government implied that any welfare-promoting and growth-enhancing measures had to stand on a solid macro-economic foundation.
- The federal budget for the next financial year, 2021-22, with the fiscal deficit for the current fiscal at 9.5% of gross domestic product (GDP) has changed that optimistic narrative.
- The government has effectively abandoned its long-term commitment to bring the deficit down to close to 3% of GDP, pitching instead for a gentle descent to 4.5%—six years from now.
Implications of high fiscal deficit
- Once the covid pandemic retreats, India might end up with a debt-to-GDP ratio of about 90%, compared to the low 70s at present.
- It would be saddled with a permanently elevated fiscal deficit and a financial system bogged down by high levels of bad debt.
- Consumer price inflation has topped the Reserve Bank of India’s target zone of 2%-6% since the covid lockdown began last year.
- Unlike the US or China, countries in India’s position—which have neither a reserve currency nor strong growth momentum—cannot grow rapidly while exploding their debt.
- They can’t afford to ignore rating agencies because of their supposed bias, or cock a snook at bond markets and just run the currency presses instead.
- They need to grow in order to reduce their debt. That’s a very different dynamic.
- India isn’t so attractive that it can expect vast sums of investment to arrive even if its macro-economic numbers look bad and its sovereign rating is junk.
- We don’t have a history of deflation, we aren’t hitting the zero lower bound.
- It’s quite the opposite; we have an economy prone to sustained high inflation.
- India is not in a position in which it could build really productive assets using sustained deficit.
- This is still a developing economy, which especially in bad times should tread carefully rather than throw caution to the winds.
Rationale behind high spending
- The government is hoping that increased spending will help India grow out of this predicament.
- The only way India can pull itself out of this jam is if private investment pours into the country, financing projects that push up the country’s potential growth rate.
- Yet the government, already monopolizing domestic financial savings, seems to want to go to war with global markets as well.
Consider the question “Fiscal deficit figures for FY21 marks the end of India’s departure from the path of fiscal consolidation. Discuss the challenges posed by such high fiscal deficit to the Indian economy.
Conclusion
India’s greatest strength had been his commitment to fiscal responsibility. The path of fiscal adventurism could end up leaving India’s macroeconomy vulnerable.
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