Daily Editorial Analysis for 1st February 2020

Economic Survey: Path to Prosperity

Paper: GS-III

Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

For prelims: Economic Survey 2020-21.

For Mains: Major Highlights of the Economic Survey 2020-21.

Why in news?

• A day ahead of Budget2020-21, the Economic Survey tabled in Parliament advocated a counter-cyclical fiscal policy, which in other words, means giving spending a boost to spur demand and revive growth.

Economic Survey:

• The Economic Survey is usually a document that reviews the major developments in the economic fortunes of the country over the past year. Over the past five years, it has also become a vehicle for the Chief Economic Adviser to present ideas and suggestions for the future through analysis based on in-house and external research.
• The Survey is thus presented in two volumes:

1. Volume I is a collection of thought pieces on ideas for the future while;
2. Volume II reviews economic developments over the past year.

• The Survey faithfully describes the ongoing growth slowdown as well as the unfolding fiscal implosion. Where the Survey appears to be clutching at straws is in its attempts to provide explanation for the growth slowdown.
• The Survey acknowledges this with the further note that the growth slowdown severely limits the government’s options in terms of maintaining the fiscal target.
• Unsurprisingly, however, the Survey understates the deterioration of the fiscal position by not describing the borrowings of public sector undertakings.

Comparison between Economic Survey 2020-21 and 2019-20:

• Last year’s Economic Survey, unveiled in July, had projected India’s GDP growth for 2019-20 at 7 per cent, while stating that the political stability from the renewed mandate for the government would help revive “animal spirits” and “increase investment activity”.
• The latest official estimate of growth is at 5 per cent, down from 6.1 per cent for 2018-19, with gross fixed capital formation also falling to 28.1 per cent of the current GDP, the lowest since 2003-04.
• The Finance Ministry’s latest flagship annual document sees the economy growing by 6-6.5 per cent in 2020-21, while emphasizing risks both on the downside (continued global trade conflicts, crude prices rising from escalating US-Iran tensions, widening fiscal deficits causing bond yields to go up) and upside (the September corporate tax rate cuts beginning to attract manufacturing investments, merger of public sector banks leading to increased financial strength and reduced risk aversion).
• To boost the sluggish demand and consumer sentiments, counter cyclical fiscal policy may have to be adopted to create additional fiscal headroom according to the Survey. It can be achieved by rationalizing food subsidy, estimated at Rs 1.8 lakh crore in 2019-20.
• The economy hadcontinuously powered down over the last six quarters from 8.1 per cent in January-March 2018 to 4.5 per cent in July-September 2019.
• While Finance Minister estimated the fiscal deficit for 2019-20 at 3.3 per cent of the GDP, the Survey gave enough indications this would be breached. Fiscal deficit target may have to be relaxed for the current year, pointing to the imperative of boosting domestic demand, which is crucial to revive growth.

Major Highlights of the Economic Survey 2020-21:

1. Investments in Infrastructure:

• The Survey expresses the hope that the Rs 102 lakh crore investment in infrastructure planned in the National Infrastructure Pipeline (NIP) will help raise productivity and remove bottlenecks.
• The private-public-partnership (PPP) model that financed the bulk of our infrastructure boom in the first decade of the 2000s sowed the seeds for the explosion of non-performing assets (NPAs) of public sector banks.

2. Returns to Infrastructure:

• In terms of the returns to infrastructure, the evidence from India is not good. It finds that almost half of all NPAs today are concentrated in three sectors of the economy: Basic metals, construction and electricity, gas and water.
• These three sectors exhibit strange patterns in their interaction with banks: NPAs tend to rise when productivity rises while banks tend to increase their lending to these sectors when their productivity is low.
• One reason why infrastructure investment in India ran into problems was the anaemic growth in sectors that would have been the main source of demand for infrastructure.
• In the absence of robust growth in effective demand for infrastructure, the firms that borrowed to invest in it were unable to recover payments from their customers.
• We need a balanced push for reforms rather than focusing on infrastructure alone. That might lead us back down the path to another round of NPAs.

3. International Trading:

• As per the Survey, along with domestic credit conditions, the uncertain international trading environment due to the US-China trade war as well as a global slowdown in growth are the main downside risks to India’s growth prospects.
• The fact that trade is a very small part of India’s economy is conveniently glossed over, as is India’s rising protectionist tendency.

4. Fiscal Situation:

• The Survey’s description of the fiscal situation has an air of resignation to it. The tax revenue data till November 2019 shows that net tax revenues that were budgeted to grow by 25 per cent in this fiscal year have increased by a meager 2.6 per cent between April and November 2019.

5. Tax Collection:

• Unless there is a dramatic improvement in tax collection in the remainder of the year, the fiscal position is going to deteriorate very sharply this year.
• The Survey also said that the recommendations of the Fifteenth Finance Commission on tax devolution would have implications for Central government finances.

6. Power of Wealth:

• It pulls in various historical sources to argue that India may have forgotten its rich history of entrepreneurship and wealth creation. The chapter makes an eloquent case for policies to enable wealth creation, recognise wealth creators and encourage entrepreneurship.
• It does an admirable job of linking the liberalisation of the 1990s to wealth creation and the upliftment of living standards of people since then. Along the way, it also issues a shout out to the rewards of an open trading regime.

7. Role of trust in an economy:

• It makes the valid point that such trust is an important feature of market economy. Unfortunately, the Survey fails to note that citizens also need to be able to trust the government.
• Survey devotes an entire chapter to trying to prove that GDP in India has not been overestimated since 2011. The fundamental issue is that the public doesn’t believe the official statistics. That is due to the breakdown of trust in government on account of its meddling with the data collection and dissemination process.

8. Ease of doing business:

• For employment generation, the Survey called for policies that promote ease of doing business and flexible labour regulations, and foster entrepreneurial activity, especially in the manufacturing sector.
• It further said that ‘Assemble in India’ for the world should be integrated with ‘Make in India’ to raise India’s export market share to about 3.5 per cent by 2025 and 6 per cent by 2030. In the process, India would be able to create about 4 crore jobs by 2025 and about 8 crore jobs by 2030.

9. Revenue Expenditure:

• The Survey called for cutting non-committed revenue expenditures like subsidies, but warned against cutting capital expenditure. Since a considerable proportion of revenue expenditure like interest payments, wages and salaries and pensions is committed in nature, this leaves a little fiscal headroom for manoeuvre. Therefore, the focus of the government should lie on rationalization of non-committed revenue expenditure like subsidies. It also advocated aggressive disinvestment to “facilitate creation of fiscal space and improve the efficient allocation of public resources”.

10. Nifty India Consumption Index:

• Listing ten positive factors such as picking up of Nifty India Consumption Index for the first time this year, an upbeat secondary market, higher FDI flows, build-up of demand pressure, positive outlook for rural consumption, rebound of industrial activity, steady improvement in manufacturing, growth in merchandise exports, higher build-up of foreign exchange reserves and positive growth rate of GST revenue collection, the Survey said the uptick in second half of 2019-20 will be mainly due to these factors.

11. Public Sector Banks:

• Pointing to dwarfism in the banking sector, the Survey called for improving governance in public sector banks and the need for more disclosure of information to build trust. To further make it easier to do business, it suggested removing the red tape at ports to promote exports as well as measures to make it easier to start a business, register property, pay taxes and enforcing contracts.

Conclusion:

• Survey called “India’s aspiration to become a $5 trillion economy depends critically on strengthening the invisible hand of markets together with the hand of trust that can support markets.

Thinking beyond farm sops

GS Paper III

Topic: Issues related to direct and indirect farm subsidies and minimum support prices

Mains: effectiveness of farm subsidies

What’s the News?

Recent economic slowdown and the spiralling onion and vegetable prices burdened consumers (including farmers) shows that agriculture is in crisis and India needs well-tailored farm measures to balance the national requirement with farmers’ aspirations

Effectiveness of agricultural input subsidies:

• Agricultural input subsidies aim to make inputs available to users at below market costs as a way of incentivising adoption, increasing agricultural productivity and profitability, increasing food availability and access and ultimately reducing poverty and stimulating economic growth.
• Adequate use of agricultural inputs such as improved seeds and inorganic fertilisers has been identified as one way of enhancing agricultural productivity.
• However, these inputs can be financially unaffordable or unattractive to many poor farmers in developing countries.

Government launched the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) with a record allocation of Rs 75,000 crore in the year 2019.

Later in the same year there was a disaster for the agriculture sector as many parts of the country witnessed drought and floods.

The economic slowdown and the spiralling onion and vegetable prices burdened consumers (including farmers), providing a short respite to only a section of farmers.

This clearly reflects that the populist measures have a low bearing on the economy and despite several measures to reduce vulnerability of climate-induced disasters, the farm sector and farmers continue to suffer losses.

Reasons behind low effectiveness:

• Inefficient subsidies: Free electricity provided by the government will further encourage unrestricted pumping of groundwater, and will further aggravate the problem of a steady decline of groundwater levels.
• Due to the excessive use of fertilizers, groundwater is getting polluted and chemical bioaccumulation problem is impacting health of people.
• Absence of land records: Farmers who cultivate the small scale landholdings often do not have a formal lease agreement due to the absence of land records.
• The absence of such land records does not allow these farmers to access formal credit or be eligible for government benefits such input subsidies or crop insurance schemes.
• Leading to populist democracy: subsidy once extended becomes a politically sensitive issue and governments suffer huge political risk if they phase out such subsidies. Overtime, new subsidies are extended which pile up on older ones and they soon consume scarce revenue resources of government. This takes a heavy toll on other expenditure of the government.
• Low priority to climate–smart agriculture- Recent economic slowdown and the spiralling onion and vegetable prices burdened consumers (including farmers) shows that agriculture is not climate resilient.

Subsidies are not panacea for the agriculture sector and it should be aimed at specific development objectives. On achievement of these objectives subsidies should be phased out. It is only then that subsidies can go well with an undistorted market economy.

Steps required:

• Focusing on allied sectors:

• The disparity in agriculture expenditure and growth drivers, mainly the subsidiary sectors, must be addressed.
• Despite higher growth in livestock and fisheries sector, only moderate to low expenditure was recorded.
• Expenditure on livestock and fisheries must be increased, as they are mainly connected with resource-poor families in rural areas and also to raise the decelerating growth rate.
• Raising expenditure on research and development in agriculture: It needs to be raised from nearly 0.40% of agriculture GDP to 1% as it pays huge dividends in the long run in ameliorating poverty and improving livelihoods compared to any other investment.
• Strengthening the Farmer Producer Organizations (FPOs):

FPOs currently facing structural and operational issues may be strengthened by bringing them under one institution, preferably an FPO Development and Regulatory Authority.

• A structured impetus must be given to build block chain based e-market places connecting farmers, traders, agencies, institutions and exporters on a common platform to check price fluctuations and harness decentralisation.
• Affordable technologies must be developed and deployed particularly in rural and remote areas where digital literacy of farmers has improved considerably.
• Involving private sector:
• Small-scale investment measures or an incentive-based system is essential to scale up sustainable practices such as agroforestry, climate-smart agriculture, ecosystem services, conservation agriculture and others.
• Increasing corporate social responsibility will help to tap more private investments besides encouraging private players in potential areas where production sustainability is possible.
• Farm data agency:
• It can consolidate, collate and maintain farm data available at various platforms.
• Access to farm agency data for scientific institutions and all other relevant stakeholders can hasten the process of technology dissemination and aid research systems for better policies.
• Developing ease of farming index: It is necessary to ascertain the progress made by national and State governments on the key indicators of farming which may foster cooperative and competitive federalism besides encouraging States which are lagging behind to catch up.
• Welfare commissions:
• A national agricultural development council on the lines of the Goods and Services Tax Council under the chairmanship of Prime Minister for effective coordination and convergence of States on key reforms and policies.
• Farmers’ welfare commissions (both at the Centre and State level), as an independent institutional mechanism which will act as a neutral platform for assessing all agriculture-related issues and schemes.
• Involvement of centrally-funded research organisations as knowledge partners would help to coordinate and refine existing developmental schemes in agriculture and allied sectors.
• Commissioning Indian Agricultural Service’ on the lines of the Agricultural Research Service of the United States Department of Agriculture. In addition, to deal effectively with increasing droughts and floods and other extreme events, transfer of some subjects to the concurrent list is of prime importance.

Conclusion:

• In the era of global uncertainty and domestic glitches, we need well-tailored farm measures beyond short-run sops to balance the national requirement with the farmer’s aspirations.
• Moreover, the right mix of direct benefits and price support with focused investment on resource conservation will bring stability in a farmer’s income.
• The promised achhe din for all must include farmers too which is only possible with steps engaging all stakeholders and sectors.

Mains question:

‘’Recent economic slowdown and the spiraling onion and vegetable prices burdened consumers (including farmers) shows that agriculture is in crisis’’. In the light of this statement discuss what India needs to do to balance the national requirement with farmers’ aspirations.