27 Aug 2020: Hindu Editorial Analysis

The Hindu Editorial Analysis
27 August 2020

1) Sobering assessment: On RBI’s annual report-

 

GS 3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

 

CONCEPTS:

  1. A revenue expenditure is a cost that is charged to expense as soon as the cost is incurred. By doing so, a business is using the matching principle to link the expense incurred to revenues generated in the same reporting period. This yields the most accurate income statement results.
  2. The impact of budget deficits on private investment is an unsettled issue. If budget deficits are to be financed by borrowing, interest rates must rise so that capital markets can reach equilibrium. High interest rates, in turn, result in a decreased investment, hence the crowding-out effect. On the other hand, if budget deficits help boost economic growth, investors could become more optimistic and decide to invest more, hence the crowding-in effect. Finally, if an increase in deficits due to tax cuts today is to be matched by tax increases in the future, interest rates and investment may not change. In this paper we employ cointegration analysis and data from nine European countries to test the impact of budget deficits on private investment.

 

CONTEXT:

Three weeks after its monetary policy committee decided to hold fire(refrain from comment) on interest rates amid accelerating retail inflation, the RBI has forecast more pain for the economy.

 

WORRYING FUTURE:

  1. Its assessment of the economic landscape and its prognosis(prediction) for near-term prospects posit(proposes) a stark picture.
  2. Demand being hollowed out by the severe shock to private consumption, public finances strained by the imperative(need) of funding mitigation(reducing) measures, anaemic(weak) appetite for investment among corporates and credit-flow-impeding risk aversion(prevention) among bankers, to name but a few.
  3. The COVID-19-induced economic contraction that manifested itself in the fiscal first quarter, is now almost certain to extend through the July-September period, the RBI said in its Annual Report.
  4. RBI observed that the “reimposition or stricter imposition of lockdowns” in different parts of the country in July and August had mainly contributed to damping the tentative revival in momentum seen in the preceding two months,
  5. It said several recent high-frequency indicators pointed to an unprecedented retrenchment(reduction) in activity.
  6. Noting that the services sector has been a prime mover of the Indian economy, the central bank flagged the fact that whatever consumption had survived the shock was now manifesting as essential spending with services including transport and hospitality almost completely eviscerated(deprieved).

 

 

“CROWD IN” PRIVATE INVESTMENT:

  1. The Central government, which has gamely attempted ‘pandemic proofing’ demand by increasing its net revenue expenditure by a third in the first quarter, is, however, likely to find itself strapped for resources in the coming months.
  2. As a result, it would have little leeway(freedom) to continue to undergird momentum.
  3. States too are expected to find their finances so tightly squeezed as to have to cut capital spending.
  4. In its prescription to overcome the funds crunch, however, the central bank appears to run into a contradiction.
  5. The RBI suggests that the government should help “crowd in” private investment through targeted public investment that could be funded by monetising assets in steel, coal, power, land and railways.
  6. But given that private companies have been either too highly in debt and therefore keen to use gains from the government’s corporate tax rate cut to repay loans, or loath(reluctant) to raise capital spending when saddled with excess capacity, it is hard to see the government raising much out of its privatisation efforts.
  7. Ultimately, as Expenditure Secretary has acknowledged, the Centre may opt to marshal its meagre resources more prudently and wait for the curve of infections to start flattening before committing to any further stimulus spending.

 

CONCLUSION:

  1. A revival will ensue(follow) only once consumers regain confidence to go out and spend. And that, as of now, seems a fair distance away.
  2. The RBI’s annual report makes clear there is more pain in store for the economy.

 

 

2) A shot in the dark: On Pakistan’s terror claim-

 

GS 2- India and its neighborhood- relations

 

CONTEXT:

India’s strong protest to the U.N. Security Council over Pakistan’s so-called “statement” to a special discussion on terrorism is explained by a number of factors.

 

 

ABSURD STATEMENTS:

  1. First, the statement, which Pakistan’s mission to the U.N. published as something delivered at an “open” debate on a report by the U.N. Secretary General, was never actually delivered.
  2. The only countries invited to the discussion were permanent and non-permanent members of the UNSC and officials briefing them.
  3. Neither does the UNSC take cognisance of statements by non-participating countries. The statement, then, appeared to be an exercise by Pakistan in repeating its allegations against India.
  4. In the letter, Pakistan’s Ambassador sought to portray Pakistan as a victim of “cross-border terrorism”, and claimed that Pakistan is “responsible” for “decimating” al-Qaeda in the region.
  5. As India’s mission at the U.N. retorted, the envoy could not have forgotten that Osama bin Laden and other leaders of the terror group were all found in Pakistan.
  6. The statement then went on to list “four types of terrorism” Pakistan confronts, each of which was attributed to India.
  7. The first included some of the attacks in Pakistan carried out by the Tehrik-e-Taliban Pakistan (TTP), a group that according to Pakistan’s unsubstantiated claim has been funded by an “Indian terror syndicate” based in Afghanistan.
  8. That claim has been rejected by the UNSC in part already, as two of the four names forwarded by Pakistan weren’t accepted into the terror designations list.
  9. The second allegation was that India has “hired” mercenaries to carry out attacks, in operations Pakistan claims have been organised by Kulbhushan Jadhav, a former naval officer.
  10. Next is Pakistan’s contention that policies of the government amount to “Hindutva terrorism”, with specific references to the Citizenship Amendment Act and the Ram temple construction.
  11. Finally, there is the oft-repeated allegation(blame) about Indian government actions in Jammu and Kashmir which it refers to as “state terrorism”.

 

KEEPING POWDER DRY:

  1. India has described these allegations as “preposterous(ridiculous)” and “laughable”.
  2. It need not worry about its reputation, given its acclaimed role in fighting terror and cooperating on the international stage to deny terrorists funding and safe haven.
  3. Pakistan has consistently done the opposite, and its continued grey-listing at the Financial Action Task Force (FATF), as well as the presence of the names of hundreds of Pakistani terror groups and individuals on U.N. terror lists, are proof of that.
  4. Even so, it is important that the government take the Pakistani attempt to build its case seriously.
  5. India should pre-empt(prevent) Pakistan’s larger strategy of painting India in a poor light ahead of its tenure at the U.N. Security Council 2021-2022 and the upcoming scrutiny process at the FATF.

 

CONCLUSION:

Pakistan’s allegations have little merit, but India must take its diplomatic strategy seriously.

 

 

 

3) Making agricultural market reforms successful-

 

GS 3- transport and marketing of agricultural produce and issues and related constraints; e-technology in the aid of farmers

 

CONTEXT:

  1. The recent reforms in agricultural marketing have brought a sea change in policy.
  2. The removal of restrictions under the Essential Commodities Act (ECA) should help attract private investment in agriculture and help farmers of cereals, pulses, oilseeds, onion and potato, who have been adversely affected by the policy regime hitherto that discouraged private investment.
  3. The two new ordinances are expected to enable inter-State trade and promote contract farming, thereby providing a large number of options to farmers.

 

 

POLICY CREDIBILITY PROBLEM:

  1. However, there are several difficulties that need to be addressed before the full benefits of these policies are realised.
  2. The first one is what the behavioural economists call the ‘time-inconsistency’ problem, or in simple terms, the policy credibility problem.
  3. This situation arises when a decision maker’s preferences change over time in such a way that the preferences are inconsistent at different points in time. Why is this problem relevant in the present context?
  4. Because the policy signals are not very clear in the last few years as relates to agricultural marketing, as we will see below.
  5. In 2016, the electronic national agricultural market (e-NAM) was launched with a lot of fanfare.
  6. The e-NAM was intended to be a market-based mechanism for efficient price discovery by the farmers.
  7. In the first phase, 585 markets across 16 States and 2 Union Territories were covered.
  8. States needed to amend their respective Agricultural Produce Market Committee (APMC) Acts to put in place three prerequisites for the success of this programme — a single licence across the State; a single-point levy of the market fee; and electronic auctioning in all the markets.
  9. Several States could not or did not carry out these amendments and the e-NAM proved to be far less effective than desired.

 

 

POLICY REVERSALS:

  1. As a result, the government reverted back to public price support by launching an ambitious programme, PM-AASHA, in September 2018.
  2. The main objective of this programme was to provide an assured price to farmers that ensured a return of at least 50% more than the cost of cultivation.
  3. The programme was confined to pulses and oilseeds to limit the fiscal costs, although many other crops, which did not receive the benefits of the MSP-procurement system, also needed this coverage.
  4. Public procurement, deficiency payments and private procurement were the main planks of this programme. However, only public procurement was carried out in a meaningful way.
  5. Deficiency payments were only implemented on a pilot basis in Madhya Pradesh and private procurement was not initiated, even on a pilot basis, in any State.
  6. However, the initial budgetary outlay did not match the level of ambition of the programme. An outlay of only ₹4721 crore was made in 2018-19.
  7. A study by the Institute of Economic Growth at the time showed that the programme needed a much larger outlay to provide comprehensive coverage.
  8. The initial outlay further dwindled to ₹321 crore in 2019-2020 and only ₹500 crore have been earmarked in 2020-2021.
  9. In addition to the PM-AASHA programme, two Model Acts were formulated by the Central government in 2017 and 2018 to promote agricultural marketing and contract farming in States.

 

MODEL ACTS:

  1. States were required to legislate these Model Acts.
  2. However, progress has been tardy(poor) and many States have not adopted the Model Acts. This uninspiring performance of PM-AASHA necessitated a more radical and direct approach.
  3. Thus evolved the PM-KISAN, a direct cash transfer programme, in the interim Budget of 2019-2020 (February 2019).
  4. This programme involved a fixed payment of ₹6,000 per annum to each farm household with a budgetary outlay of ₹75,000 crore.
  5. This programme has worked reasonably well so far with many States topping up the amount at their end. With the onset of the COVID-19 crisis, improving the market functioning received renewed attention.
  6. E-NAM has been scaled up to cover 415 more markets, farmers have been allowed to sell and transport directly from registered warehouses and Farmer Produce Organisations (FPOs) and app-based transport services have been devised.
  7. Taking this thrust further, the government announced a slew of reforms on May 15, including the major marketing reforms mentioned above.
  8. However, some of the issues that impeded the success of the earlier initiatives still remain.
  9. The frequent flip-flops in farm policy — from a market-based e-NAM to a public funded PM-AASHA and now back to market-based measures — may not inspire much confidence in the minds of private investors about the continuance of the present policies.
  10. This may result in the investors adopting a wait-and-watch approach.

 

BETTER COORDINATION:

  1. The second issue is the Centre-State and State-State relations.
  2. Although the Ordinances were passed by the Central Government using the constitutional provisions, the implementation of the same vests with the States.
  3. Also, inter-State trade involves movement of goods across the State boundaries.
  4. Thus, coordination between the Central and the State governments, and also among various States becomes crucial.
  5. Also, the States must have faced several problems in legislating and implementing the earlier Model Acts.
  6. Thus, the Centre must engage with the States about these constraints in order to iron out the potential problems in implementation of the ordinances.
  7. Such a consultative and conciliatory(appeasing) approach will also minimise friction between the Centre and the States when the ordinances come up before Parliament.
  8. The third important issue is the multiple market failures and the resultant inter-linkage of rural markets.
  9. Absence or failure of credit and insurance markets may lead a farmer to depend upon the local input dealer or the middleman to meet his/her farming needs.
  10. This, in turn, may tie him to these intermediaries and constrain his choice of output markets.
  11. Similarly, the widespread restrictions on land leasing in many States lead to inefficient scale of production.
  12. Thus, reforms in the output market alone are not sufficient and must be supplemented and complemented with liberalisation of the lease market and better access to credit and insurance markets.

 

CONCLUSION:

In conclusion, consistency in policy, collaborative approach and complementary reforms are necessary for the success of the recent agricultural market reforms.