Daily Current Capsules - 03^rd February 2020

Economic Development
Key Highlights of Economic Survey 2019-20 (PART - I)

Wealth Creation: The Invisible Hand Supported by the Hand of Trust

Survey posits that India's aspiration to become a $5 trillion economy depends critically on:

• Strengthening the invisible hand of the market.
• Supporting it with the hand of trust.

Strengthening the invisible hand by promoting pro-business policies to:

• Provide equal opportunities for new entrants.
• Enable fair competition and ease doing business.
• Eliminate policies unnecessarily undermining markets through government intervention.
• Enable trade for job creation.
• Efficiently scale up the banking sector.
• Introducing the idea of trust as a public good, which gets enhanced with greater use.
• Survey suggests that policies must empower transparency and effective enforcement using data and technology.

Know! about Invisible Hand

• The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand.

• The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of Nations'.

• He assumed that an economy can work well in a free market scenario where everyone will work for his/her own interest.

Know! Adam Smith's concept of invisible hand

• An economy will comparatively work and function well if the government will leave people alone to buy and sell freely among themselves.
• If people were allowed to trade freely, self interested traders present in the market would compete with each other, leading markets towards the positive output with the help of an invisible hand.
• In a free market scenario where there are no regulations or restrictions imposed by the government, if someone charges less, the customer will buy from him.
• Therefore, you have to lower your price or offer something better than your competitor.
• Whenever enough people demand something, it will be supplied by the market and everyone will be happy. The seller end up getting the price and the buyer will get better goods at the desired price.

Entrepreneurship and Wealth Creation at the Grassroots

• Entrepreneurship as a strategy to fuel productivity growth and wealth creation.
• India ranks third in number of new firms created, as per the World Bank.
• New firm creation in India increased dramatically since 2014:
• Survey examines the content and drivers of entrepreneurial activity at the bottom of the administrative pyramid - over 500 districts in India.
• New firm creation in services is significantly higher than that in manufacturing, infrastructure or agriculture.
• A 10 percent increase in registration of new firms in a district yields a 1.8 % increase in Gross Domestic District Product (GDDP).
• Entrepreneurship at district level has a significant impact on wealth creation at the grassroots.
• Birth of new firms in India is heterogeneous and dispersed across districts and sectors.
• Literacy and education in a district foster local entrepreneurship significantly:

- Impact is most pronounced when literacy is above 70 per cent.
- New firm formation is the lowest in eastern India with lowest literacy rate (59.6 % as per 2011 Census).

• Ease of Doing Business and flexible labour regulation enable new firm creation, especially in the manufacturing sector.
• Survey suggests enhancing ease of doing business and implementing flexible labour laws can create maximum jobs in districts and thereby in the states.

Pro-business versus Pro-markets

• Survey says that India's aspiration of becoming a $5 trillion economy depends critically on:

 

1. Promoting ‘pro-business' policy that unleashes the power of competitive markets to generate wealth.
2. Weaning away from ‘pro-crony' policy that may favour specific private interests, especially powerful incumbents.

 

• Viewed from the lens of the Stock market, creative destruction increased significantly post-liberalisation:

1. Before liberalisation, a Sensex firm expected to stay in it for 60 years, which decreased to only 12 years after liberalisation.
2. Every five years, one-third of Sensex firms are churned out, reflecting the continuous influx of new firms, products and technologies into the economy.

• Despite impressive progress in enabling competitive markets, pro-crony policies destroyed value in the economy:
• Pro-crony policies such as discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while competitive allocation of the same post 2014 ended such rent extraction.
• Similarly crony lending that led to wilful default, wherein promoters collectively siphoned off wealth from banks, led to losses that dwarf subsidies for rural development.

Undermining Markets: When Government Intervention Hurts More Than It Helps

• Government intervention, though well intended, often ends up undermining the ability of the markets to support wealth creation and leads to outcomes opposite to those intended.

 

• Four examples of anachronistic government interventions:

 

1. Essential Commodities Act (ECA), 1955:

Frequent and unpredictable imposition of blanket stock limits on commodities under ECA distorts:

• The incentives for the creation of storage infrastructure by the private sector.
• Movement up the agricultural value chain.
• Development of national market for agricultural commodities.

The Ministry of Consumer Affairs must examine whether the ECA is relevant in today's India.

2.Drug Price Control under ECA:

• The regulation of prices of drugs, through the DPCO 2013, led to increase in the price of the regulated pharmaceutical drug vis-à-vis that of an unregulated but similar drug.
• The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops.
• These findings reinforce that the outcome is opposite to what DPCO aims to do - making drugs affordable.
• Government, being a huge buyer of drugs, can intervene more effectively to provide affordable drugs by combining all its purchases and exercising its bargaining power.
• Ministry of Health and Family Welfare must evolve non-distortionary mechanisms that utilise Government's bargaining power in a transparent manner.

 

3.Government intervention in Grain markets:

Policies in the food-grain markets led to:

• Emergence of Government as the largest procurer and hoarder of rice and wheat.
• Crowding out of private trade.
• Burgeoning food subsidy burden
• Inefficiencies in the markets, affecting the long run growth of agricultural sector.
• The food-grains policy needs to be dynamic and allow switching from physical handling and distribution of food-grains to cash transfers/food coupons/smart cards.

 

4.Debt waivers:

Analysis of debt waivers given by States/Centre:

• Full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver, compared to the partial beneficiaries.
• Debt waivers disrupt the credit culture.
• They reduce formal credit flow to the very same farmers, thereby defeating the purpose.

Survey suggests that:

1. Government must systematically examine areas of needless intervention and undermining of markets; but it does not argue that there should be no Government intervention.
2. Instead it suggests that the interventions that were apt in a different economic setting may have lost their relevance in a transformed economy.
3. Eliminating such instances will enable competitive markets spurring investments and economic growth.

Creating Jobs and Growth by Specializing in Network Products

• Survey says India has unprecedented opportunity to chart a China-like, labour-intensive, export trajectory.
• By integrating "Assemble in India for the world" into Make in India, India can:

1. Raise its export market share to about 3.5 % by 2025 and 6 % by 2030.
2. Create 4 crore well-paid jobs by 2025 and 8 crore by 2030.

• Exports of network products can provide one-quarter of the increase in value added required for making India a $5 trillion economy by 2025.
• Survey suggests a strategy similar to one used by China to grab this opportunity:

1. Specialization at large scale in labour-intensive sectors, especially network products.
2. Laser-like focus on enabling assembling operations at mammoth scale in network products.
3. Export primarily to markets in rich countries.
4. Trade policy must be an enabler.

 

• Survey analyses the impact of India's trade agreements on overall trade balance:

1. India's exports increased by 13.4 % for manufactured products and 10.9 % for total merchandise
2. Imports increased by 12.7 % for manufactured products and 8.6 per cent for total merchandise.
3. India gained 0.7 % increase in trade surplus per year for manufactured products and 2.3 % per year for total merchandise.

Targeting Ease of Doing Business in India

• A jump of 79 positions to 63 in 2019 from 142 in 2014 in World Bank's Doing Business rankings.
• India still trails in parameters such as Ease of Starting Business, Registering Property, Paying Taxes and Enforcing Contracts.
• Survey has numerous case studies:

1. For merchandise exports, the logistics process flow for imports is more efficient than that for exports.
2. Electronics exports and imports through Bengaluru airport illustrate how Indian logistical processes can be world class.

 

• The turnaround time of ships in India has almost halved to 2.48 days in 2018-19 from 4.67 days in 2010-11.

 

• Suggestions for further Ease of Doing Business:

1. Close coordination between the Logistics division of the Ministry of Commerce and Industry, the Central Board of Indirect Taxes and Customs, Ministry of Shipping and the different port authorities.
2. Individual sectors such as tourism or manufacturing require a more targeted approach that maps out the regulatory and process bottlenecks for each segment.

Golden jubilee of bank nationalisation: Taking stock

• Survey observes 2019 as the golden jubilee year of bank nationalization
• Accomplishments of lakhs of Public Sector Banks (PSBs) employees cherished and an objective assessment of PSBs suggested by the Survey.
• Since 1969, India's Banking sector has not developed proportionately to the growth in the size of the economy.
• India has only one bank in the global top 100 - same as countries that are a fraction of its size: Finland (about 1/11th), Denmark (1/8th), etc.
• A large economy needs an efficient banking sector to support its growth.

The onus of supporting the economy falls on the PSBs accounting for 70 % of the market share in Indian banking:

1. PSBs are inefficient compared to their peer groups on every performance parameter.
2. In 2019, investment for every rupee in PSBs, on average, led to the loss of 23 paise, while in NPBs it led to the gain of 9.6 paise.
3. Credit growth in PSBs has been much lower than NPBs for the last several years.

Solutions to make PSBs more efficient:

• Employee Stock Ownership Plan (ESOP) for PSBs' employees
• Representation on boards proportionate to the blocks held by employees to incentivize employees and align their interests with that of all shareholders of banks.
• Creation of a GSTN type entity that will aggregate data from all PSBs and use technologies like big data, artificial intelligence and machine learning in credit decisions for ensuring better screening and monitoring of borrowers, especially the large ones.

Financial Fragility in the NBFC Sector

• Survey investigates the key drivers of Rollover Risk of the shadow banking system in India in light of the current liquidity crunch in the sector.
• Key drivers of Rollover Risk:

1. Asset Liability Management (ALM) Risk.
2. Interconnectedness Risk.
3. Financial and Operating Resilience of an NBFC.
4. Over-dependence on short-term wholesale funding.

• Survey computes a diagnostic (Health Score) by quantifying the Rollover risk for a sample of HFCs and Retail-NBFCs (which are representative of their respective sectors).

The analysis of the Health Score has the following findings:

1. The HFC sector exhibited a declining trend post 2014 and overall health of the sector worsened considerably by the end of FY2019.
2. The Score of the Retail-NBFC sector was consistently below par for the period 2014 -19.
3. Larger Retail-NBFCs had higher Health Scores but among medium and small Retail- NBFCs, the medium size ones had a lower score for the entire period of 2014-19.

• Survey suggests that the Health Score provides an early warning signal of impending liquidity problems.
• Equity markets react favourably to increase in Health Score of individual HFCs and Retail-NBFCs.
• The Survey prescribes this analysis to efficiently allocate liquidity enhancements across firms (with different Health Scores) in the NBFC sector, thereby arresting financial fragility in a capital-efficient manner.

Privatization and Wealth Creation

• Survey examines the realized efficiency gains from privatization in the Indian context and bolsters the case for aggressive disinvestment of CPSEs.
• Strategic disinvestment of Government's shareholding of 53.29 per cent in HPCL led to an increase of around Rs. 33,000 crore in national wealth.

Survey presents an analysis of the before-after performance of 11 CPSEs which underwent strategic disinvestment from 1999-2000 to 2003-04:

• Financial indicators such as net worth, net profit, return on assets (ROA), return on equity (ROE) etc of the privatized CPSEs, on an average, have improved significantly.
• Privatized CPSEs have been able to generate more wealth from the same resources.

Survey suggests aggressive disinvestment of CPSEs to:

• Bring in higher profitability.
• Promote efficiency.
• Increase competitiveness.
• Promote professionalism.

Thalinomics: The Economics of a Plate of Food in India

• An attempt to quantify what a common person pays for a Thali across India.
• A shift in the dynamics of Thali prices since 2015-16.
• Absolute prices of a vegetarian Thali have decreased significantly since 2015-16 across India and the four regions; though the price has increased during 2019-20.
• Post 2015-16:
• Average household gained close to Rs. 11, 000 on average per year from the moderation in prices in the case of vegetarian Thali.
• Average household that consumes two non-vegetarian Thalis gained close to Rs. 12, 000 on average per year during the same period.
• From 2006-07 to 2019-20:
• Affordability of vegetarian Thalis improved 29 %.
• Affordability of non-vegetarian Thalis improved by 18 %.

KEY HIGHLIGHTS OF UNION BUDGET 2020-21 (PART-I)

Three prominent themes of the Budget

• Aspirational India - better standards of living with access to health, education and better jobs for all sections of the society
• Economic Development for all - "Sabka Saath , Sabka Vikas , Sabka Vishwas".
• Caring Society - both humane and compassionate; Antyodaya as an article of faith.

Three broad themes are held together by:

• Corruption free, policy-driven Good Governance.
• Clean and sound financial sector.

Ease of Living underlined by the three themes of Union Budget 2020-21.
Three components of Aspirational India

• Agriculture, Irrigation, and Rural Development
• Wellness, Water, and Sanitation
• Education and Skills

Sixteen Action Points for Agriculture, Irrigation and Rural Development
Rs. 2.83 lakh crore to be allocated for the following 16 Action Points:

• Rs. 1.60 lakh crore for Agriculture, Irrigation & allied activities.
• Rs. 1.23 lakh crore for Rural development & Panchayati Raj.

Agriculture credit:

• Rs. 15 lakh crore target set for the year 2020-21.
• PM-KISAN beneficiaries to be covered under the KCC scheme.
• NABARD Re-finance Scheme to be further expanded.

Comprehensive measures for 100 water-stressed districts proposed.
Blue Economy:

• Rs. 1 lakh crore fisheries' exports to be achieved by 2024-25.
• 200 lakh tonnes fish production targeted by 2022-23.
• 3477 Sagar Mitras and 500 Fish Farmer Producer Organisations to involve youth in fisheries extension.
• Growing of algae, sea-weed and cage culture to be promoted.
• Framework for development, management and conservation of marine fishery resources.

Kisan Rail to be setup by Indian Railways through PPP:

• To build a seamless national cold supply chain for perishables (milk, meat, fish, etc.
• Express and Freight trains to have refrigerated coaches.

Krishi Udaan to be launched by the Ministry of Civil Aviation:

• Both international and national routes to be covered.
• North-East and tribal districts to realize Improved value of agri-products.

One-Product One-District for better marketing and export in the Horticulture sector.
Measures for organic, natural, and integrated farming:

• Jaivik Kheti Portal - online national organic products market to be strengthened.
• Zero-Budget Natural Farming (mentioned in July 2019 Budget) to be included.
• Integrated Farming Systems in rain-fed areas to be expanded.
• Multi-tier cropping, bee-keeping, solar pumps, solar energy production in non-cropping season to be added.

PM-KUSUM to be expanded:

• 20 lakh farmers to be provided for setting up stand-alone solar pumps.
• Another 15 lakh farmers to be helped to solarise their grid-connected pump sets.
• Scheme to enable farmers to set up solar power generation capacity on their fallow/barren lands and to sell it to the grid.

Village Storage Scheme:

• To be run by the SHGs to provide farmers a good holding capacity and reduce their logistics cost.
• Women, SHGs to regain their position as Dhaanya Lakshmi.

NABARD to map and geo-tag agri-warehouses, cold storages, reefer van facilities, etc.
Warehousing in line with Warehouse Development and Regulatory Authority (WDRA) norms:

• Viability Gap Funding for setting up such efficient warehouses at the block/taluk level.
• Food Corporation of India (FCI) and Central Warehousing Corporation (CWC) to undertake such warehouse building.

Financing on Negotiable Warehousing Receipts (e-NWR) to be integrated with e-NAM.
State governments who undertake implementation of model laws (issued by the Central government) to be encouraged.
Livestock:

• Doubling of milk processing capacity to 108 million MT from 53.5 million MT by 2025.
• Artificial insemination to be increased to 70% from the present 30%.
• MNREGS to be dovetailed to develop fodder farms.
• Foot and Mouth Disease, Brucellosis in cattle and Pest Des Petits ruminants (PPR) in sheep and goat to be eliminated by 2025.

Deen Dayal Antyodaya Yojana - 0.5 crore households mobilized with 58 lakh SHGs for poverty alleviation.
Wellness, Water and Sanitation

• Rs. 69,000 crore allocated for overall Healthcare sector.

Rs. 6400 crore (out of Rs. 69,000 crore) for PM Jan Arogya Yojana (PMJAY):

• More than 20,000 hospitals already empanelled under PM Jan Arogya Yojana (PMJAY).
• Viability Gap Funding window proposed for setting up hospitals in the PPP mode.
• Aspirational Districts with no Ayushman empanelled hospitals to be covered in the first phase.
• Targeting diseases with an appropriately designed preventive regime using Machine Learning and AI.

Jan Aushadhi Kendra Scheme to offer 2000 medicines and 300 surgicals in all districts by 2024.
TB Harega Desh Jeetega campaign launched - commitment to end Tuberculosis by 2025.
Rs. 3.60 lakh crore approved for Jal Jeevan Mission:

• Rs. 11,500 crore for the year 2020-21.
• Augmenting local water sources, recharging existing sources, and promoting water harvesting and de-salination.
• Cities with million-plus population to be encouraged to achieve the objective during the current year itself.

Rs.12, 300 crore allocation for Swachh Bharat Mission in 2020-21:

• Commitment to ODF-Plus in order to sustain ODF behaviour.

Emphasis on liquid and grey water management.

• Focus also on Solid-waste collection, source segregation, and processing.
• Education and Skills
• Rs. 99,300 crore for education sector and Rs. 3000 crore for skill development in 2020-21.
• New Education Policy to be announced soon.
• National Police University and National Forensic Science University proposed for policing science, forensic science, and cyber-forensics.
• Degree level full-fledged online education program by Top-100 institutions in the National Institutional Ranking Framework.
• Up to 1-year internship to fresh engineers to be provided by Urban Local Bodies.
• Budget proposes to attach a medical college to an existing district hospital in PPP mode.

Special bridge courses to be designed by the Ministries of Health, and Skill Development:

• To fulfill the demand for teachers, nurses, para-medical staff and care-givers abroad.
• To bring in equivalence in the skill sets of the workforce and employers' standards.

150 higher educational institutions to start apprenticeship embedded degree/diploma courses by March 2021.
External Commercial Borrowings and FDI to be enabled for education sector.
Ind-SAT proposed for Asian and African countries as a part of Study in India program.

Economic Development
Industry, Commerce and Investment

• Rs. 27,300 crore allocated for 2020-21 for development and promotion of Industry and Commerce.
• Investment Clearance Cell proposed to be set up:
• To provide "end to end" facilitation and support.
• To work through a portal.

• Five new smart cities proposed to be developed.
• Scheme to encourage manufacture of mobile phones, electronic equipment and semi-conductor packaging proposed.
• National Technical Textiles Mission to be set up:
• With four-year implementation period from 2020-21 to 2023-24.
• At an estimated outlay of Rs 1480 crore.
• To position India as a global leader in Technical Textiles.
• New scheme NIRVIK to be launched to achieve higher export credit disbursement, which provides for:
• Higher insurance coverage
• Reduction in premium for small exporters
• Simplified procedure for claim settlements.

• Turnover of Government e-Marketplace (GeM) proposed to be taken to Rs 3 lakh crore.
• Scheme for Revision of duties and taxes on exported products to be launched.
• Exporters to be digitally refunded duties and taxes levied at the Central, State and local levels, which are otherwise not exempted or refunded.
• All Ministries to issue quality standard orders as per PM's vision of "Zero Defect-Zero Effect" manufacturing.

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