Limited scope for Sharpe recovery
Paper: GS II & GS III
Topic: Government Policies and Interventions and issues arising out of their Design and Implementation.
For Prelims: Union Budget, GDP etc.
For Mains: The status of economy, Economic Development, Need for change in structure of reform.
Why in News: The National Statistical Office (NSO) released the first advance estimates of the national income that projected growth in India’s GDP at market prices for 2019-20 at 4.98% in “real” terms. It’s official now GDP rate seen slumping to 5%.
The first advance estimate of the National Statistical Office (NSO)
- The first advance estimate pegs India’s economic growth at 5% in 2019-20 the slowest since the global financial crisis of 2008.
Slowdown can be attributed
- While one may quibble over whether the actual print may be lower or higher, the cause of the slowdown can be attributed to subdued private consumption and investment activity.
- The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical factors.
- Despite largely stagnant incomes, private consumption, which is the largest driver of growth, has been financed over the past few years through progressively lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led payouts.
- The household savings rate has dipped to 17.2 % of GDP in FY18, from 22.5% in FY13.
- After the recent NBFC crisis, overall credit in the system has dried up as incremental resources from NBFCs to commercial sector were at (-) Rs1.3 trillion in the first half of FY20 compared to Rs 0.9 trillion in first half of last year.
- The rural economy has been reeling from low wage growth and largely stagnant farmers’ incomes.
- Rural wage growth has averaged around 4.5 % over the past five years, but adjusting for inflation it has been only 0.6%.
- The rural population, which was dependent on urban real estate/construction, has faced headwinds in the recent past with lower private sector investments and a weak real estate sector.
Looking at the key drivers of growth in the short term and long term
There is limited scope for a sharp recovery.
- The slowdown in private consumption is a structural issue linked to low household income growth. That, in turn, is linked to the basic problems of low job creation, and stagnant farm incomes. None of these factors are likely to change immediately.
- Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households.
- The government consumption, which has been supporting growth over the past few years, remains under stress.
- The combined Centre and states’ fiscal deficit is close to 6.5% of GDP. Along with an additional 2.0-2.5 % of GDP of central PSE borrowings, the public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.
- Supply-side measures: The government to its credit has shown a clear preference to rely on supply-side measures to support growth. Yet, expectations will be high that the upcoming Union budget addresses the demand side concerns as well.
- The government will possibly need to choose between income tax rate reductions, and substantially increasing allocation to the rural sector.
- Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.
- Based on filings for the assessment year 2019, out of around 58 million tax filers, only 15 million tax filers had a return income above Rs 0.5 million.
- The impact on consumption would vary widely depending on the relative gains across income brackets.
- On the other hand, spending on rural infrastructure and employment (MGNREGA, PM-KISAN, and PMGSY) can help alleviate some of the pain in rural areas.
- The recovery will depend on the utilisation of the fiscal space, and also the health of the financial sector, especially that of NBFCs.
- The PSU banks are being nursed back to health, but credit flow from NBFCs to certain segments such as MSMEs needs to pick up.
- Addressing India’s long term growth concerns and to push the country into the middle-income group of economies requires a broad-basing of the income and consumption profile.
- Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers. The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.
- The huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.
In four key areas of infrastructure:
- Electricity (generation, transmission, and distribution)
- Transport (airports, roads, railways, metros)
- Telecom, and
- Water (irrigation, sanitation, sewage, water supply)
- The private sector’s involvement is largely restricted to generation in electricity, inter-city roads, airports in transport, and telecom. The rest are largely in the hands of the Centre, state, and local governments.
Conclusion
- The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical factors.
- Government must choose between tax reductions and increasing rural spending.
- The degree and nature of the growth slowdown, policymakers should continue to focus on measures that raise the potential growth of the economy.
Way Forward
- It is important to note that creating an enabling environment is to a large extent in the purview of the state and local governments.
- Policies need to focus on ownership (which is largely government dominated) and pricing (which provides the private sector with a remunerable internal rate of return).
- Reforms that increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services, and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus.
Mains Question
The first advance estimate of the National Statistical Office (NSO) pegs India’s economic growth at 5% in 2019-20 the slowest since the global financial crisis of 2008. Explain.
Approach:
Question Demand: Question demands to write about reform needed to boost demand in the economy of India. The slowing economy and the estimated growth show the future decline of growth. So, what are the corrective measures that can be adopted by the government to boost the slowing Indian economy?
Introduction: Mention the slowing economy and heavy burdened fiscal target that Indian economy to meet.
Body:
- Explain the current status of the economy and what the structural flaws are.
- Issues in correcting the economic slowdown.
- Improving the fiscal stimulus so that the target to achieve 5 trillion economies could be easier.
Conclusion: Suggest the steps that need to be adopted by the government proactively in mitigating the huge gap in fiscal deficit, slowing investment and how to revive the Indian economy, and judicious use of finances.
Mining deep: on Cabinet easing mining laws
Coal comfort
GS Paper III
Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Prelims:
Mains: coal sector in India
What’s the News?
The Union Cabinet has relaxed the regulations for coal mining in India.
The ordinance:
- The ordinance amends the existing provision that allowed only companies engaged in iron and steel, power, coal washing sectors and others to bid for coal mines.
- Now all end-use restrictions have been removed, easing the entry of companies not engaged in any coal-use industry in coal mining.
Reasons behind easing regulations:
- Until now there were restrictions on who could bid for coal mines, only those in power, iron and steel and coal washery business could bid for mines and the bidders needed prior experience of mining in India.
- This effectively limited the potential bidders to a select circle of players and thus limited the value that the government could extract from the bidding.
- End-use restrictions inhibited the development of a domestic market for coal. The ordinance essentially democratises the coal industry.
Background of coal sector:
- Coal is the most important and abundant fossil fuel in India. It accounts for 55% of the country’s energy needs.
- The country’s industrial heritage was built upon indigenous coal. Commercial primary energy consumption in India has grown by about 700% in the last four decades.
- India is one of the largest coal producers in the world with an output of 729 million tonnes in 2018-19. However, despite sluggish economic growth, import shipments have surged.
- This surge in coal imports, along with oil and electronics imports, has exerted pressure on the country’s current account in recent years.
Its implications:
- The removal of these restrictions is in line with the objective of facilitating commercial coal mining in the country.
- Development of domestic market: Existing private owners will now be able to sell their surplus coal in the market. 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 infusion of sophisticated mining technology, especially for underground mines, if multinationals decide to invest. It makes it attractive for merchant mining companies, including multinationals such as BHP and Rio Tinto, to look at India.
- The relaxation in regulations, along with previous initiatives such as allowing 100 per cent 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 issues plaguing coal sector:
- Delayed environment and forest clearances: Environment ministry in past has classified ecological sensitive areas in ‘Go and No Go areas’ and there was total prohibition on mining in no go areas. Further there are other clearances required from State and Central Governments. Land Acquisition problems.
- Lack of adequate technology: Allocation process was arbitrary, discretionary and non-transparent. There was no consideration of Merit, no Price discovery mechanism for national resources. 4/6 Till now, the PSU, Coal India was the only commercial miner in the country for more than four decades which has shown monopolistic tendencies in the sector. Monopoly in mining sector was incapable of meeting domestic demands.
- Low productivity of Coal India is still a concern.
- Coal plants have higher operation and maintenance costs because of strict regulatory issues. India’s power regulators are not regularly updating prices to accommodate increases in operational costs due to regulation.
- State Pollution Control Boards are ineffective at monitoring or enforcing compliance.
- Expansion in power generation in India has been largely based on state financing i.e many coal power plants in India are constructed through massive debt financing from state-owned banks. It shows that international investment in coal generation assets in India has been very less.
Government initiatives:
- The Ministry of Coal has launched UTTAM (Unlocking Transparency by Third Party Assessment of Mined Coal) Application for coal quality monitoring. The app aims to ensure transparency and efficiency in coal quality monitoring process and bring coal governance closer to people.
- The Cabinet Committee on Economic Affairs (CCEA) has approved a new coal linkage policy to ensure adequate supply of the fuel to power plants through reverse auction. The new policy will help in ensuring fuel supplies to the power plants in an organised manner.
- Ministry of Coal has developed Online Coal Clearances System to provide a single window access to its investors to submit online applications for all the permissions / clearances and approvals granted by Ministry of Coal.
- Coal Allocation Monitoring System (CAMS) is developed to monitor the allocation of coal by CIL to States, States to SNA and SNA to such consumers in a transparent manner.
- Opening up of commercial coal mining for Indian and foreign companies in the private sector.
- The CCEA approved the methodology for auction of coal mines/ blocks for sale of the commodity on 20 February 2018. The move has been defined as the most ambitious reform of the sector since its nationalisation in 1973.
- The auction will be done on an online transparent platform. The bid parameter will be the price offer in Rupees/ Tonne, which will be paid to the State government on the actual production of coal.
- This reform is expected to bring efficacy into the coal sector by moving from an era of monopoly to competition. It will increase competitiveness and allow the use of best possible technology in the sector.
Steps needed:
- The government needs to do more such as whittling the time taken for approvals of mining leases and also easing the procedures for clearances.
- The test would come when 46 producing mines, whose leases expire in March, come up for bidding shortly.
- The opening up of coal mining effectively ends Coal India’s (CIL) monopoly status. CIL is a Maharatna PSU and tremendous public resources have been invested in the company over the years.
- It is the government’s responsibility to ensure that CIL is not compromised the way BSNL has been by the opening up to private players. The company employs about three lakh people, is listed and is a national asset. It has to be nurtured even as private players are welcomed.
Conclusion:
- Easing of regulations for mining is welcome. Government should now ensure speedy auctions, and faster clearances, that have complicated the process so far.
- In the long term, India needs to look at coal to gas i.e. more clean energy sources. Clean coal as an idea has huge potential in India because of the age and inefficiency of some of our plants.
- With government’s efforts to push renewable energy due to international conventions on climate change, increase in carbon cess and other initiatives for lesser use of coal, there is a need for ‘Vision 2030 for the coal sector’, which takes into account the environmental factors such as reduction of carbon footprint, abatement of global warming.
Mains question:
‘’The Union Cabinet has relaxed the regulations for coal mining in India easing the entry of companies not engaged in any coal-use industry in coal mining.’’ In the light of this statement comment on the issues plaguing coal sector in India.