economic survey (volume-1)

8/18/2019 Economic Survey (Volume-1)

http://slidepdf.com/reader/full/economic-survey-volume-1 1/46



Economy Survey (Volume - 1)

INDEX

1. Economic Outlook, Prospects and Policy challenges

2. The Chakravyuha Challenge of the Indian Economy

3. Spreading Jam across India's Economy

4. Agriculture: More from Less

5. Mother and Child

6. Bounties for the Well-off

7. Fiscal Capacity for the 21st Century

8. Preferential Trade Agreements

9. Reforming the Fertilizer Sector

10. Structural Changes in India's Labour Markets

11. Powering "One India"



www.iasscore.in

N o t e s

1Economic Survey

• Amidst the volatile economic environment globally, India is a stable economy & an outpost of opportunities backed by its stable microeconomic parameters founded on the Government's commitment to fiscalconsolidation and low inflation, reduced fiscal deficit & Current Account Deficit.

• However, to sustain its growth it require careful economic management which include monitoring of inflation & a balanced outlook toward it, Fiscal consolidation to maintain credibility and reduce debt,accelerated structural reforms at the Centre, the dynamism of competitive federalism, idea of goodeconomics being good politics, continuation of government's drive for public infrastructure.

• This year there is unusually volatile external environment with significant risks of weaker global activityand non-trivial risks of extreme events so to protect Indian Economy & a recalibration of expectationsis a necessity.

• As India is integrating with world economy so its growth is also tracking the global economic path since1991.

Government's Efforts to Stabilise the Economy & Enhancing the Growth:

• A sense of reduction in corruption at the centre is created which is reflected in transparent auctions of public assets and non-interference in regulatory decisions.

• FDI is liberalised & limits has been revised upward including Insurance & Defence sector.

• Efforts to ease the cost of doing business, which has improved India's cross-country competitivenessrankings.

Economic Survey (Vol. 1)

ECONOMIC OUTLOOK, PROSPECTS And

POLICY CHALLENGES



www.iasscore.in

N o t e s

2 Economic Survey

• Restoring stability and predictability in tax decisions;

• Implementing a major public investment program to strengthen the country's infrastructure and make upfor the deficiency of private investment;

• Instituting a major crop insurance program to cushion farmers against adversity;

• Limiting farm interventions which had a first-order effect in moderating overall inflation;

• Elevating to mission mode the financial inclusion agenda via the Jan Dhan Yojana & by opening payment& small banks.

• Advancing the game-changing JAM (Jan Dhan, Aadhaar, Mobile) agenda

• Attempting to change social norms in a number of areas: Open defecation, and voluntarism in giving upsubsidies.

• Undertaking comprehensive reforms of the power sector (especially the UDAY Scheme) & Avoidingpolicy reversals

Challenges which still Persists:

• Launching and better implementing schemes were privileged over policy changes and that policies tounlock India's full supply potential could have been more vigorously advanced.

• Approval for the game-changing GST bills is still pending;

• The disinvestment program fell short of targets, including that of achieving strategic sales;

• The next stage of subsidy rationalization is a work-in-progress.

• Critically, corporate and bank balance sheets remain stressed, affecting the prospects for reviving privateinvestment, a key engine of long term growth.

• The underlying anxiety is that, the Indian economy is not realizing its full potential.

How India can realise its potential ?

• First, by moving away from being reflexively anti-markets and uncritically pro-state to being pro-entrepreneurship and skeptical about the state. It should include enhancing genuine competition, eliminatingexemption Raj & corporate subsidies.

• Second, major investments in people- Their health and education-will be necessary to exploit India'sdemographic dividend, better delivery of essential services by expand the capacity and improve theefficiency of service delivery by states.

• Third, by focusing on agriculture as it provides income nearly to India's 42% households, especially small

farmers & landless labourers should be benefited by new crop insurance scheme.

India's optimism despite challenges:

• Competitive federalism is the key for this optimism. Performing states become "models and magnets."Other states are emulating the models of successful states.

• Optimism is reinforced by events of the last decade that have re-affirmed the dictum that good economics

is good politics. Not always and not everywhere but increasingly, Central and State governments, that have

delivered rapid growth and better governance tend to get re-elected and vice versa.

• Furthermore, optimism is also fuelled by the Indian decision-making process which allows-hopefully even

creates the pressures- for disappointments to be retrieved. The GST is within reach; new bankruptcy



www.iasscore.in

N o t e s

3Economic Survey

procedures, as well as the revival of some big stalled projects such as Dabhol, illustrate that the exit

problem can be solved; the infrastructure being created for the game-changing JAM agenda to be translated

into reality.

The Global Context:

• The task of economic management for India will remain challenging this year due to volatile & weak

external environment, although the major international institutions are yet again predicting that global

growth will increase from its current subdued level, they assess that risks remain tilted to the downside.

still the environment remains uncertain.

• There is a need to

consider the risk

involve & its analysis

seeing the trend of

major financial crises

which are shown intable.

• More flexible ex-

change rates, how-

ever, could moderate

full-blown eruptions

into less disruptive

but more prolonged

volatility. One tail

risk scenario that

India must plan for is a major currency

re-adjustment in Asia

in the wake of a

similar adjustment in

China, as such an

event would spread

deflation around the

world. Another tail

risk scenario could

unfold as a con-

sequence of policyactions-say, capital

controls taken to

respond to curb out-

flows from large

emerging market countries, which would further moderate the growth impulses emanating from them.

• In either case, foreign demand is likely to be weak, forcing India-in the short run- to find and activate

domestic sources of demand to prevent the growth momentum from weakening.



www.iasscore.in

N o t e s

4 Economic Survey

The Indian Context:

• Based on overall index of macro-economic vulnerability, which adds a country's fiscal deficit, current

account deficit and inflation. As per index India has reduced its macro-vulnerability since 2012 when India

was the most vulnerable of the major emerging market countries.

• For assessing country's attractiveness to investors, the growth rate was analysed by a simple Rational

Investor Ratings Index (RIRI) which combined 2 elements, growth serving as a gauge for rewards and the

macro-economic vulnerability index proxying for risks. Higher levels indicate better performance. India

performs well not only in terms of the change of the index but also in terms of the level, which compares

favourably to its peers in the ‘BBB’ investment grade and even its "betters" in the ‘A’ grade1. As an

investment proposition, India stands out internationally.

Review of Major Developments:

• As per, Central Statistical Office (CSO) , the growth rate of GDP at constant market prices is projectedto increase to 7.6% in 2015-16 from 7.2% in 2014-15, mainly because private final consumption expenditurehas accelerated. Although agriculture is likely to register low growth for the 2nd year in a row on accountof weak monsoons, it has performed better than last year. Industry has shown significant improvementprimarily on account of the surprising acceleration in manufacturing (9.5% vis-à-vis 5.5% in 2014-15).Meanwhile, services continue to expand rapidly.

• Nominal GDP (GVA) is likely to increase by just 8.6 (6.8)% in 2015-16. In nominal terms, constructionis expected to stagnate, while even the dynamic sectors of trade and finance are projected to grow by only7 to 73/4%.

• Inflation remains under control. The CPI-New Series inflation has fluctuated around 51/2%, while measuresof underlying trends-core inflation, rural wage growth and minimum support price increases-have similarlyremained muted. Meanwhile, the Wholesale Price Index (WPI) has been in negative territory since November 2014 because of large falls in international commodity prices, especially oil.

• The current account deficit has declined and is at comfortable levels; foreign exchange reserves have risento US$351.5 billion in early February 2016, India was consequently well-positioned to absorb the volatilityfrom the U.S. Federal Reserve actions to normalize monetary policy that occurred in December 2015

• The fiscal sector registered three striking successes: ongoing fiscal consolidation, improved indirect taxcollection efficiency and an improvement in the quality of spending at all levels of government.

• Despite the decline in nominal GDP growth relative to the Budget assumption (11.5% in Budget 2015-16 vis-à-vis 8.6% in the Advance Estimates), the central government will meet its fiscal deficit target of 3.9% of GDP, continuing the commitment to fiscal consolidation, Moreover, the consolidated revenuedeficit has also declined in the first 8 months.

• Government tax revenues are expected to be higher than budgeted levels. Direct taxes grew by 10.7% inthe first 9 months (9M) of 2015-16. Indirect taxes were also buoyant. In part, this reflected excise taxeson diesel and petrol and an increase in the Swachh Bharat cess. Tax performance also reflected animprovement in tax administration because revenues increased even after stripping out the additionalRevenue Measures (ARMs). Indirect tax revenues grew by 10.7% (without ARMs) and 34.2 per cent(with ARMs).

• The budget envisaged an improvement in quality by shifting expenditures away from current to capitalexpenditures.The main findings are that a welcome shift in the quality of spending has occurred fromrevenue to investment, and towards social sectors. Aggregate public investment has increased by about 0.6% of GDP in the first 8 months of this fiscal year, with contributions from both the Centre (54%) andstates (46%).



www.iasscore.in

N o t e s

5Economic Survey

Outlook

Real GDP growth:

• Real GDP growth for 2015-16 is expected to be in the 7 to 7 3/4 range. India's long-run potential GDP

growth is substantial, about 8-10% but its actual growth in the short run will also depend upon globalgrowth and demand. As India's exports of manufactured goods and services now constitute about 18%

of GDP, up from about 11% a decade ago. Reflecting India's growing globalization, the correlation

between India's growth rate and that of the world has risen sharply to reasonably high levels. Correlation

coefficient has doubled to 0.42.

• In other words, in the current global environment, there needs to be a recalibration of growth expectationsand consequently of the standards of assessment

• There is a need to examine each of the components of aggregate demand: exports, consumption, privateinvestment and government.

• Current projections by the IMF for marginal improvement in demand this year to about 2.8. On the

domestic side, increased spending from higher wages and allowances of government workers if 7th paycommission recommendations are accepted, agricultural incomes will improve if the monsoon returns tonormal, with attendant gains for rural consumption, the disappearance of much of last year's oil windfall,reduced Corporate sector profitability and Finally, the path for fiscal consolidation will determine thedemand for domestic output from government. The magnitude of the drag on demand and output will

be largely equal to the size of consolidation, assuming a multiplier of about 1.

• Risks of turmoil in the global economy, rise in oil prices more than anticipated and the most serious risk

is a combination of the above 2 factors. This could arise if oil markets are dominated by supply-relatedfactors such as agreements to restrict output by the major producers.

• Taking these factors together, real (GDP) growth is expected to be in the 7 to 73/4% range, with downside

risks because of ongoing developments in the world economy.

Inflation

• For most of the current fiscal year, inflation has remained within the RBI's target range of 4-6%. But willthe increase in wages and benefits (as recommended by 7th Pay Commission) destabilize prices andinflation expectations? Most likely, it will not, as was the case of 6th Pay Commission. Significant hikein salary & allowance during 6th pay commission did not affect the inflation much.

• Why would such a large wage increase have so little impact on inflation? There are 3 reasons. In principle,inflation reflects the degree to which aggregate demand exceeds aggregate supply. Government's commitmentto reduce fiscal deficit which determine a major part of demand, considerable slack in the private sector labour market and Finally modest impact of increase in House Rent Allowance (HRA) on the housing

component of the Consumer Price Index (CPI) would not add much to aggregate demand. On thedomestic side, another year of below-potential growth will mean that the output gap will widen further.As a result, there will be additional downward pressure on underlying inflation, which has already fallen

below 5%, as measured by services inflation excluding the oil-related sub-indices. Meanwhile, if themonsoon returns to normal, food prices will ease, especially since the government remains committed todisciplined increases in Minimum Support Prices (MSPs) for cereals, and rural wage growth remainsmuted.

• Further relief should come from abroad. Oil prices have plunged in the 1st 2 months of 2016, as have some

commodity prices, suggesting that input prices are likely to be lower next fiscal year. Beyond this factor

lie other deflationary forces. As growth in China continues to slow, excess capacity there could continue



www.iasscore.in

N o t e s

6 Economic Survey

to increase, which will put further downward pressure on the prices of tradable goods all around the world.

Part of this might be offset by upward pressure coming from a depreciation of the rupee, especially if the

Federal Reserve Bank continues to raise interest rates, prompting capital to reflow to the U.S, although the

prospects of aggressive Fedral Reserve action are receding. On balance the risk to imported pressures, as

with domestic pressures, remains firmly to the downside.

• All this suggests that the RBI should be able to meet its target of 5% by March 2017. Indeed, with the

current stance, there is a possibility of undershooting.

Medium-Term Fiscal Framework:

• The 2016-17 fiscal stance needs to be assessed in a medium-term context along with short term outlook to preserve fiscal sustainability and the government needs to be in a strong position tomorrow to repaythe debts it is incurring today.

• Governments adopt various targets to achieve and signal fiscal sustainability. These include the overalldeficit, the primary deficit, the revenue deficit, and the debt-to-GDP ratio.

• The indicator of the sustainable path is the direction of its debt-to-GDP ratio. If this ratio is declining,then the government's fundamental fiscal strength is improving. Annual deficits were eventually curtailed,

but macro imbalances nonetheless continued to grow, leading by 2013-14 to the 2nd impediment: a sharpexchange rate depreciation that inflated the rupee value of foreign debts.

• As a result, overall government debt continued to grow as fast as GDP, keeping the debt ratio of theconsolidated government (Centre plus states) near 67% of GDP. This ratio is high compared to somecountries in Emerging Asia, India's credit rating peers. Accordingly, the government is determined to break the post-GFC trend, and finally put the debt ratio on a downward path toward more comfortable levels.

• For this reason, there are strong arguments to stick to a path of aggressive fiscal consolidation as envisagedat the time of the last budget. Such a low deficit would not only curtail the debt accumulation, but would

also offer some wider advantages. To begin with, it would mean that the government would be deliveringon a commitment, thereby reinforcing its credibility, which is one of the most precious assets that anyauthority can command. Credibility and optimality seem to argue for adhering to the 3.5%t of GDPtarget.

However, there are also arguments on the other side. With respect to feasibility, 2 factors complicate the fiscaltask in 2016-17 and beyond:

• The 7th Pay Commission has recommended that government wages and allowances be increased significantly.Full implementation of this pay award--which the government will decide on would add about ½ percentof GDP to the Centre's wage bill.

• Public investment may need to be increased further to address a pressing backlog of infrastructure needs.

Such an increase would merely return spending to its 2010-11 level of around 2% of GDP, well belowthe level in other emerging markets.

• Taking these factors into account, the Centre's deficit could swell substantially. As a result, achieving theoriginal could prove difficult unless there are tax increases or cuts in expenditures. There is some scopeto increase receipts from disinvestment and spectrum auctions to realize which will require effort.

• Second, even the desirability of a strategy of aggressive fiscal consolidation could be questioned. This is because the current environment is fraught with risks, which threaten all the engines of India's growth, asexplained earlier. It would consequently seem important for the government to "purchase insurance"against these downside risks rather than reduce fiscal demand significantly and take the chance of precipitating their realization. Data uncertainty reinforces the need for purchasing insurance.



www.iasscore.in

N o t e s

7Economic Survey

• But if the deficit target were to be relaxed, 2 questions would need to be answered. 1st, what would happen

to interest rates? The lower the fiscal deficit, the lower the borrowing requirement, and possibly the lower

the interest rate on government securities, which would be very helpful to companies facing debt servicing

difficulties.

• What about short-term interest rates? Isn't there a risk that large pay awards could push up inflation,forcing the RBI to increase their policy rate? the risk seems small, as there's little evidence that public

sector pay increases are transmitted to prices, or even to wages in the private sector.

• In fact, the more significant risks to inflation would seem to be to the downside: from lower oil prices,

a slowing Chinese economy, and the impact of fiscal deficit reduction of any size on aggregate demand.

• Summing up the cyclical considerations, small differences in the degree of fiscal adjustment may not have

much impact on interest rates. Which means that any positive effects from a large adjustment ("austerity")

coming from lower interest rates could be offset by the direct negative impact on aggregate demand.

External Outlook

• A weak external environment was identified as a major medium- term risk. It turned out to be a short runrisk as well, and the prospects are that it might continue to be one in the period ahead. One of the puzzlesthis year has been how remittances have held up despite a dramatic decline in oil prices and hence in thehealth of countries that host overseas Indian workers. The Indian economy and foreign exchange earningswere buoyed by this non-decline in remittance flows. Still, prudence warrants monitoring this source of earnings because it is plausible that with oil prices remaining low in the near future, oil exporting countrieswill eventually be forced to curtail their use of foreign labour.

• Overall exports declined mainly because of falling commodity prices but the decline in non-oil dollar exports and export volume was still sizable. Exports of commercial services remained. As a result, growththis year was held back-by about 1-1.2% points relative to last year. for assessing prospects going forwardquestion is whether this recent export performance is explained mainly by a decline in global demand or

a decline in competitiveness, related to the exchange rate or other factors.

• It has been well documented that at the global level, trade has sputtered and more so than the world GDP.So, the question is whether India has fared worse than other exporters.

• One can answer this question by examining how India's exports relative to world GDP have fared comparedwith world exports. It is noteworthy that in the 2000s, India's exports of manufactured goods and serviceswere above the line of best fit but note that services outperformed manufacturing (services data pointsare more above the line than manufacturing data points). For the world, there is a similar but lesspronounced pattern, especially for services. In the last 2 years, however, Indian services exports have beenmore affected than Indian manufacturing exports and also world service exports.

• Put differently, all the focus on manufacturing exports has distracted attention from what might be a noless noteworthy development. It is India's exports of services that have changed in the most significant,and perhaps alarming, way. What makes this development puzzling is that in recent years the compositionof Indian exports of services is more favourable than that of Indian exports of manufactured goods. Moreof the former goes to the United States, and more of the latter to Asia. Since Asia has slowed down morerapidly, India's exports of manufactures should have been more affected. Furthermore, in the last year, therupee has depreciated strongly against the dollar which should have helped India's exports of services.

• These developments have longer-term implications. Realizing India's medium term growth potential of 8-10% will require rapid growth of exports. How rapid this should be is suggested by comparing India'sexport performance in services with China's performance in manufacturing at a comparable stage of thegrowth surge.



www.iasscore.in

N o t e s

8 Economic Survey

Trade Policy

The non-success of the Nairobi WTO negotiations, the seismic shifts in the international trade architecture

because of the emergence of mega-regional trade agreements, and a slowing world economy which creates

pressures on domestic industry combine to present India with a great opportunity to collectively self-interrogate

on the national near-consensus.

5 issues of Introspection include:

1. Providing support to farmers in light of WTO rules;

2. Mitigating the impact of erratic trade policy on farmer incentives;

3. Reconciling the "big but poor" dilemma that confronts India in trade negotiations;

4. Dealing with ongoing stresses brought on by the external environment;

5. Engaging more broadly with the world on trade.

Agriculture and the WTO

• The 2 key issues in the Doha Development Agenda (DDA): The Special Safeguard Mechanism (SSM) and

food security/public stockholding both of which affect farmer interests.

• The way forward on agriculture and the WTO can be thought of in the following conceptual terms.

• At the time of the Uruguay Round, India was a net importer of food and decided that it needed a lot

of room to maintain "border protection" (tariffs in particular) and was less concerned about providing

support to agriculture via domestic support (producer subsidies, minimum support prices etc). That was

India's choice.

• 20 years on, India's position in agriculture has changed : It has become more competitive in agricultureand it now relies relatively more on domestic support (and less on tariff protection) for agriculture both

to sustain domestic production and address low incomes for farmers.

• India's WTO obligations could predominantly be based on this domestic shift away from border protection

to domestic support. India could consider offering reduction in its very high tariff bindings and instead

seek more freedom to provide higher levels of domestic support: This would be especially true for pulses

going forward where higher minimum support prices may be necessary to incentivize pulses production.

This would be good for India, and India's trading partners should be more reasonable about accepting this

shift.

Volatile Trade Policy

• Agricultural policy, especially trade policy, is characterized by unusual volatility. The view is that in

agriculture, the interests of the producer and consumer have to be balanced. When world prices go up or

there is domestic scarcity, export restrictions or bans are imposed; when the reverse happens, import tariffs

are imposed.

• But this policy volatility actually ends up hurting farmers but eventually also consumers. This is because

farmers produce less because of the policy volatility which results in reduced domestic availability and

hence higher prices. Farmers are affected not only by the fact that on average they get less for their

produce but even more so by the policy uncertainty that dampens, even chills, the incentive to produce.

The notion that there is a trade-off between farmers and consumers is false except in the very short run.



www.iasscore.in

N o t e s

9Economic Survey

• Farm policy-Minimum Support Prices (MSP) and Import and Export Policy (IEP) should be announced

well in advance of the crop growing season and should not be altered during the course of the season

unless there are exceptional developments.

Broader issues: The "Big-but-Poor" Dilemma

• India also needs to address 2 broader issues. The 1st is what might be called the, big-but-poor, dilemma

• On the one hand, India's self-perception as a poor country translates into a reluctance to recognize andpractice reciprocity (give-and-take) in trade negotiations. On the other hand, India's policies have a significant

impact on global markets and it has become a large economy in which partner countries have a legitimatestake in seeking market access just as India should in relation to its partners' markets.

• In the 1970s and 1980s, India's engagement in the WTO was broadly non-reciprocal. This was possible because was small enough for trading partners to overlook this non-reciprocity. Today they do care becauseof India's market size, and India must respond, balancing the "big-but-poor" dilemma.

• Partner countries must show a serious interest in reviving multilateralism. Equally India and other emerging

market economies must make it attractive for trading partners to engage in the WTO. An important partof this will require India playing more of the reciprocity game and using its growing markets as leverageto attain its own market interests abroad, including the mobility of labor.

• The costs of reluctant engagement need careful review.

Dealing with ongoing stresses

• Trade policy is under stress also for reasons related to the ongoing turmoil in the international environment.

Global demand is weak, and one of the powerhouses of trade in recent times China is slowing down.Chinese slowdown has important implications for India. As the Chinese currency weakens, setting in trainreactions from other countries, India's external competitiveness across-the-board will come under pressure.

• India should resist calls to seek recourse in protectionist measures, especially in relation to items that couldundermine the competitiveness of downstream firms and industries.

• India could respond in 3 ways. 1st, the most effective instrument to respond to threats to overallcompetitiveness is the exchange rate. The rupee's value must be fair, avoiding strengthening

• 2nd, India should strengthen procedures that allow WTO consistent and hence legitimate actions againstdumping (anti-dumping), subsidization (countervailing duties) and surges in imports (safeguard measures)to be taken expeditiously and effectively.

• 3rd, India should eliminate all the policies that currently provide negative protection for Indian manufacturingand favour foreign manufacturing.

Broader issues: Prerequisites for Trade opening

• Foremost question is, can trade liberalization be a source of efficiency, dynamism and growth not just for services but also agriculture and manufacturing going forward?

• As every country wants more exports, But there is much more ambivalence about imports. The efficiency

effects of trade, however, work through imports: by exposing domestic industry to greater competition and by creating incentives domestically to move resources toward export sectors.

• Now, it is intrinsic to creating greater competition that there will be churn, stress, and dislocation, necessitating

some exit of uncompetitive firms and industries. Accepting the transitory costs of trade liberalization and

providing a cushion against them in the form of targeted assistance-will be necessary for India to be able



www.iasscore.in

N o t e s

10 Economic Survey

to negotiate credibly in the WTO today and if, India so decides, the Trans-Pacific Partnership (TPP)

tomorrow. That is why, the government's Skill India and Make in India initiatives are so important. Greater

trade opening will increase the size of the pie but it must be combined with assistance in the transition

phase to make everyone better off.



www.iasscore.in

N o t e s

11Economic Survey

Introduction

• ‘Chakravyuh Legend is a situation discussed in Mahabharata’ where a person knows, ability to enter but

not exit which leads to serious adverse consequences same is the situation faced by Indian firms today.

• India has undertaken many reforms since 1980’s to transform Indian economy from socialist to Market

economy, However most of the efforts of the government have been towards eliminating impediments

towards free entry however no attention is given to improve the exit procedure of Unviable Indian firms.

Till we do not address the issues of exit of firms our transition towards market economy would remain

incomplete.

Magnitude of the Problem

• To measure the real magnitude of problem we have to use indirect indicators. In this survey to measure

the problem of exit of firms they have used the principle that Productive and innovative firms should

expand and grow, forcing out the unproductive firm so surviving firm should be larger than the new ones.

• Thus when we use this principle we identify the magnitude of this problem in India ,since in the USA

the average 40 year old plant is 8 times large (in terms of employment) than the new one but in India

it is only 1.5 times larger than the new one.

• This situation has worsened over the years which could be seen from the fact that in 1998-99 the ratio

between the older and newer plant was 2:5. Taken together, these above figures indicate that there are not

enough big firms and there are too many firms that are unable to grow, the latter suggesting that there are

problems of exit.

What are the costs of delayed exit?

Delayed exit leads to 3 major costs:

• Fiscal cost: Exit is generally delayed due to government support which includes support in the form of

explicit subsidies like bailouts or implicit subsidies i.e. tariffs, loans from state banks. This represents a cost

to the economy as most of the firms supported are inefficient firms. Since these firms are inefficient firms

they will get less profit which would mean less tax revenue for the Government and then the government

will have to resort to borrowing to meet the shortfalls. This would mean greater deficits via greater interestcosts and reduced Private sector investment as government borrowing would mean that less money for

borrowing would be available for the private sector which increase the interest rates and reduce the private

investment.

• Economic cost: Due to the presence of so many sick firms in India the resources and factors of production

employed there could be better utilized if they are employed in some other viable firms. Capital in India

is scarce which should be utilized where its returns are optimum wasting it in loss making firms is the cost

to the economy. Also due to non exit of unviable firms the loans which are given to these firms have been

transformed into Non Performing Assets (NPA), Which reduces the ability of the banks to give fresh loans

which ultimately leads to less investment in the economy and slow growth.

Economic Survey (Vol. 1) Economic Survey (Vol. 1)

THE CHAKRAVYUHA CHALLENGE OF THE INDIAN

ECONOMY



www.iasscore.in

N o t e s

12 Economic Survey

• Political cost: The lack of exit could lead to considerable political cost for the government attempting

to reform since the benefits of delayed exit flows to the richer section of the society, this could give an

impression that government is pro-rich which politically limits the ability to undertake measures that will

benefit the economy but might be seen as further benefitting market.

Why there is problem of exit?

There are 3 reasons behind it:

(a) Interests

• Vested interests are the most important reason behind delay in exit, since imbalance and asymmetry

confers greater power to producers whose interests are concentrated since they bear heavy loss due to any

reform thus they prevent any reforms, on the other hand consumers interest are diffused as all of them

individually bear insignificant loss because of lack of exit however collectively there loss is significant.

Since consumers are not united and also there individual loss is limited they hardly lobby for reform.

Example being MNREGA where introduction of DBT on pilot basis has reduced much leakage however

perception was created by vested interest specially middleman that the programme was negative.(b) Institution

• Another important reason for delayed exit of firms is a combination of strong and weak institutions in

India.

• Example of weak institution includes legal procedures which increase the costs-time and financial cost-

of exit one example of it is Debt Recovery Tribunal (DRT) which is supposed to help financial to

institution recover bad debt quickly and efficiently. However rising NPA has over-burdened them which

is slowing down the redressal process and also led to accumulation of unsettled backlog cases.

Ideas/Ideology: The founding ideology of state-led development and socialism makes it difficult to phase out

entitlements even as those intended for the poor end up accruing to the relatively better off.

Solution to the problem

The Economic Survey 2015-16 suggests 5 possible ways to address this problem:

• The first is promoting competition via private sector entry rather than change of ownership from public

to private

• Secondly, Direct Policy Action through better laws like the Insolvency and Bankruptcy Code 2015 will

expedite exit.. Also institutions need to be made stronger but flexible by empowering bureaucrats and

reducing their vulnerability

• Thirdly, increase the use of technology to remove persistent distortions by bringing down human discretion

and layers of intermediaries.

• The fourth is increasing transparency and highlighting social costs and benefits of various schemes and

entitlements.

• Finally, showcasing exit as an opportunity towards a newer and better tomorrow.



www.iasscore.in

N o t e s

13Economic Survey

• 975 million individuals have an Aadhaar card - over 75% of the population and nearly 95% of the adult

population. Nearly 1/3rd of all states have coverage rates greater than 90%.

• Only in 4 states- Nagaland (48.9), Mizoram (38.0), Meghalaya (2.9) and Assam (2.4) penetration is less

than 50%.

• India's BC: population ratio is 1:6630 which is less than 3% of the Kenyan level of 1:172. The spatial

density of BC's in India is 17% the Kenyan level.

• The mobile penetration across India is strong. Only in Bihar (54%) and Assam (56%) is penetration lower than 60%. Moreover, there are approximately 1.4 million agents or service posts to serve the approximately

1010 million mobile customers in India, a ratio of about 1:720.

The Ingredients of JAM (Jan Dhan Yojana, Aadhaar and Mobile Number)

For transferring money and subsidies the government must be able to identify and transfer money to beneficiaries

and the beneficiaries must be able to easily access their money.

Failure in identification leads to inclusion errors and leakage - Benefits intended for the poor flow to rich and

"ghost" households, resulting in fiscal loss. Failure in transferring and having access to money leads to exclusion

errors - Genuine beneficiaries being unable to avail benefits.

A. First mile: Government – Beneficiary: the challenge of identification

• The government needs databases of eligible individuals to identify the beneficiaries. However, with

ghosts and duplicate names there have been leakages at this stage. The administrative and political

discretion involved in granting identity proofs have led to flaws. Here Aadhaar Card can be of good

use to replace human discretion.


SPREADING JAM ACROSS INDIA'S ECONOMY



www.iasscore.in

N o t e s

14 Economic Survey

• The issues here involve:

(a) Targeting: Targeted subsidies are harder to JAM than universal programs, as they require government

to have detailed information about beneficiaries. The Government needs to have detailed data about

the eligible individuals.

(b) Beneficiary databases: To identify beneficiaries, the government needs a database of eligible

individuals. The recently released Socioeconomic Census (SECC) contains information about household

asset-holding and occupation status can be put to use here for segregating the information.

(c) Eligibility: 3rd issue with Identification is the household-individual connection. Some benefits are for

households while others are for individuals. For this, it is necessary to identify eligible individuals and

households to reduce leakages.

B. Second mile: Government – Bank: The challenge of payment:

• After identifying beneficiaries, they need to be transferred money which is done by banks. Schemes such

as ‘Pradhan Mantri Jan Dhan Yojana’ have played significant role in this stage.

• The chief middle-mile issues are the administrative challenge of coordinating government actors and the

political economy challenge of sharing rents with supply chain interest groups.

• Within-government coordination: It is essential to have coordination between Ministries and State

government departments and share authority in administering subsidies and transfers.

• Third mile: Bank – Beneficiary: The last-mile challenge of getting money into people's hands

• It is done by last reach connectivity thorough which money is transferred to the people's hands. For this,

the RBI in 2015 licensed 23 new banks - 2 universal banks, 11 payment banks and 10 small finance banks.

• The Bank-Beneficiary connection still appears the weakest link in the JAM chain. To combat this, India

should take advantage of its deep mobile penetration and agent networks by making greater use of mobilepayments technology to not only transfer money quickly and securely, but also improve the quality and

convenience of service delivery.

• Last-mile issues relate to the risks of excluding genuine beneficiaries, especially the poor which depend

on vulnerability and financial inclusion of the beneficiaries. The exclusion errors can be substantial if few

beneficiaries have bank accounts and can easily access them.

C. Case study of 1st type of JAM -

DBT in LPG

• The government has achieved significant progress through Pahal Scheme which directly transfers LPG

subsidies into customers' bank accounts. Currently over 151 million beneficiaries receive LPG subsidiesvia DBT, and Rs. 29,000 crore have been transferred to beneficiaries till the date.

• The ghost and duplicate beneficiaries have been reduced. The use of Aadhaar has made black marketing

harder, LPG leakages have reduced by about 24% with limited exclusion of genuine beneficiaries. However,

diversion of LPG from domestic to commercial sources continues, because of the differential tax treatment

of "commercial" and "domestic" LPG. In other words, the ‘One Product One Price principle’ is still being

violated. Diversion could be further reduced by equalising taxes across end-uses.

• Seeing the size of the leakages and the central government control the scheme can be replicated in

fertilisers and with-in government fund transfers. This can be done by (DBT) Direct Benefit Transfer and

(BAPU)- Biometrically Authenticated Physical Uptake.



www.iasscore.in

N o t e s

15Economic Survey

• BAPU:

It is Biometrically Authenticated Physical Uptake. It is a process where beneficiaries certify their identity

through scanning their thumbprint on a (POS) Point of Sales System machine while buying the subsidised

product and then physically take the subsidised goods.

JAM Preparedness Index:

• It is an index to measure states' preparedness to implement (i) DBT in urban areas, (ii) DBT in rural areas,

and (iii) BAPU.

• It is not the average but the minimum of the respective indicators.

• The Rural DBT preparedness index adds an additional indicator: BC density as a ratio of the Kenyan level.

The DBT rural preparedness scores are significantly worse than the urban scores, with an average of 3%

and a maximum of 5% (Haryana). From this, it can be concluded that last-mile financial inclusion is the

main constraint to making JAM happen in much of rural India.

Indicators in the JAM preparedness index

Way forward

• Seeing the trends from DBT in LPG it can be seen that there is a March problem where unconsumed

subsidised cylinders are sold in the black market. Reducing the cap could significantly reduce this leakage.

• While banking correspondent networks develop and mobile banking spreads BAPU-Biometrically

Authenticated Physical Uptake could be a meanwhile step. This could be replicated in states where statepreparedness is high and with some policy push they can be well prepared for BAPU.

• For implementing the JAM agenda the centre should incentivise the states to invest in first-mile capacity

(by improving beneficiary databases), deal with middle challenges (by designing incentives for supply

chain interest groups to support DBT) and improve last-mile financial connectivity (by developing the BC

and mobile money space). To this end, states should be incentivised by sharing fiscal savings from DBT.

• The areas where centre has the highest control over the first- and middle-mile factors and leakages are high

can make use of JAM for transfers to reduce idle funds, lower corruption and improve the ease of doing

business with government.



www.iasscore.in

N o t e s

16 Economic Survey

• The JAM agenda is currently jammed by the last-mile challenge of getting money from banks into

beneficiaries' hands, especially in rural India. The centre can invest in last-mile financial inclusion via

further improving BC networks and promoting the spread of mobile money. For this licensing of small

and payment banks and reviewing of regulations governing the remuneration of BCs is needed so that

they remain active.



N o t e s

www.iasscore.in

17

Indian agriculture has come a long way since independence, with chronic food scarcity giving way to grain self-

sufficiency despite a two-and-a-half fold increase in population. In 1966-67, just before India's Green and White

Revolutions, Indian wheat and milk production were just about 1/3 rd of the US output. By 2013-14, Indian

wheat output was 60% higher than America's, while Indian milk output was 50% higher.

These tremendous increases in aggregate output however, mask some disquieting trends. At the heart of the

problem is one of lack of exit. Indian agriculture has become cereal-centric and as a result, regionally biased

and input-intensive, consuming generous amounts of land, water, and fertiliser.

Challenges faced by Indian agriculture sector:

There are a number of challenges being faced by Indian agriculture sector which are given below.

A. Challenge of Land availability:

There is sharp decline in cultivable land per person in India much sharper than in other countries. Over the

next 20 years, India's fast population growth will make the cross country comparison even less favorable for

India.

B. Water efficiency

Although water is one of India's most scarce natural resources, India uses 2 to 4 times more water to produce

a unit of major food crop than does China and Brazil. This constraint is exacerbated because, while Brazil and

China use approximately 60% of their renewable fresh water resources for agriculture, India uses a little over 90%.

• India uses "flood" irrigation method using canal and well irrigation facilities, which is an extremely inefficient

use of water.

• subsidies on power for agriculture that, apart from its benefits towards farmers, incentivizes wasteful use

of water and hasten the decline of water tables.

• According to an analysis by (NASA), India's water tables are declining at a rate of 0.3 meters per year.

The case of water export

• India, a water scarce country, has been "exporting water" as a result of distorted incentives. Water contentis embedded in crops at the time of trade. This is different from water used in production, which is much

higher.

• Water "embedded" in crops is the water content of each crop and once the crop is exported, it cannot

be recovered. In 2010, India exported about 25 cu km of water embedded in its agricultural exports. This

is equivalent to the demand of nearly 13 million people.

• The ratio of export to import of such virtual water is about (4: 0.1) for India & China China. China

imports water-intensive soya beans, cotton, meat and cereal grains, while exporting vegetables, fruits and

processed food. India, on the other hand, exports water-intensive rice, cotton, sugar and soya beans.


AGRICULTURE: MORE FROM LESS



N o t e s

www.iasscore.in

18

Solution to increase water efficiency : Micro Irrigation

As promising way forward, to increase productivity while conserving water (more for less), is to adopt micro

irrigation methods like sprinkler and drip irrigation rainwater harvesting (leveraging labour available under the

MGNREGS where possible). In drip irrigation for example, perforated pipes are placed either above or slightly

below ground and drip water on the roots and stems of plants, directing water more precisely to crops thatneed it.

An efficient drip irrigation system reduces consumption of fertiliser (through fertigation, the process of introducing

fertiliser directly into the crop's irrigation system) and water lost to evaporation and higher yields than traditional

flood irrigation.

As a result of micro-irrigation system there were substantial reductions in irrigation costs and savings on

electricity and fertilisers because:

• Water is efficiently supplied and hence pumps are used for a limited time.

• Water soluble fertilisers are supplied directly to the plant and hence there is less wastage.

• Yields of crops also went up - to 45% in wheat, 20% in gram and 40% in soyabean.

• The resulting improvement in net farm incomes is substantial.

Results from an impact evaluation of National Mission on Micro Irrigation (of the Ministry of Agriculture,

Government of India) conducted in 64 districts of 13 states - Andhra Pradesh, Bihar, Chhattisgarh, Gujarat,

Haryana, Karnataka, Maharashtra, Odisha, Rajasthan, Tamil Nadu, Sikkim, Uttar Pradesh and Uttarakhand

- Are revealing on the benefits of drip irrigation.

The key bottlenecks in the adoption of this technology are the high initial cost of purchase and the skillrequired for maintenance. However, the increase in yields and reduction in costs of power and fertiliser usecan help farmers recover the fixed cost quickly. Provisions for credit to farmers can incentivize greater adoption

of this technology.

• Until now micro-irrigation techniques, owing to high fixed costs of adoption, have mostly been used for high value crops. However, recent research has shown its feasibility even in wheat and rice.

• In order to facilitate this shift, the new irrigation technologies need to be accorded "infrastructure lending"status (currently accorded to canal irrigation) and both the centre and states need to increase publicspending for micro irrigation.

The consolidation of ongoing irrigation schemes - The Accelerated Irrigation Benefit Programme (AIBP),Integrated Watershed Management Programme (IWMP) and On Farm Water Management (OFWM) - Intothe Prime Minister's Krishi Sinchayi Yojana (PMKSY) offers the possibility of convergence of investments inirrigation, from water source to distribution and end-use.

C. Productivity challenge

The central challenge of Indian agriculture is low productivity, evident in modest average yields, especially inpulses.

• In wheat India's average yield in 2013 of 3075 kg/ha is lower than the world average of 3257 kg/ha.Although both Punjab and Haryana have much higher yields of 4500 kg/ha, most other Indian states haveyields lower than that of Bangladesh.

• In paddy, all Indian states have yields below that of China and most states have yields below that of Bangladesh. India's best state, Punjab, has paddy yield close to 6000 kg/ha whereas China's yield is 6709kg/ha.



N o t e s

www.iasscore.in

19

• This fact is exacerbated by the fact that wheat and rice are grown on the most fertile and irrigated areas

in the country. They use a large part of the resources that the government channels to agriculture, whether

water, fertiliser, power, credit or procurement under the MSP program.

• Even the key pulse producing state of Madhya Pradesh has yields (938 kg/ha) barely 3/5th that of China's

(1550 kg/ha). Given that India is the major producer and consumer of pulses, low productivity results intolarge imports.

How this low productivity affects agriculture ?

It results in precariousness in incomes of farmers and large tracts of land are locked in low value agriculture,

despite growing demands for high value products such as fruits, vegetables, livestock products because of

consumption diversification with rising incomes and urbanization.

According to (NSS) National Survey Sample data, the average annual income of the median farmer net of

production costs from cultivation is less than Rs. 20,000 in 17 states showing the low levels of returns from

agriculture.

Where are Crops Grown? A Double Blow for Pulses

"Situation of Agricultural Households Survey, 2013" by the NSSO shows that most of the land dedicated to

growing pulses in each state unirrigated. The national output of pulses comes predominantly from un-irrigated

land. In contrast, a large share of output in wheat, rice and sugarcane - In Punjab, Haryana and UP it is from

irrigated land.

Meeting the high and growing demand for pulses in the country will require large increases in pulses production

on irrigated land, but this will not occur if agriculture policies continue to focus largely on cereals and

sugarcane.

Solution to productivity problems :

India can significantly gain from convergence (convergence of productivity levels towards highest level) India

could make rapid gains in productivity through convergence within India. For example, in pulses, if all states

were to attain even Bihar's level of productivity, pulses production would increase by an estimated 41% on an

aggregate.

D. Policies challenges in Agriculture Sector :

i. Minimum Support Price and Procurement Policy issues

Effective MSP for few crops and farmers only

• When planting crops, farmers face several uncertainties in terms of their realized prices in the several

months following their harvest. In principle, a farmer could buy an option contract to reduce this priceuncertainty and make corresponding cropping decisions, but in reality this option is unavailable for all but

a miniscule fraction of India's farmers. Instead, future prices are guaranteed by the government through

the Marginal Support Price (MSP).

• The government announces MSP for 23 crops, effective MSP-linked procurement occurs mainly for

wheat, rice and cotton and indirectly for sugarcane where government fix the price.

• Even for these crops MSP is restricted to a subset of farmers in a few states.

• Thus, while in principle MSP exists for farmers for most crops, its realistic impact is quite limited for most

of the farmers in the country.



N o t e s

www.iasscore.in

20

• Public procurement at MSP has disproportionately focused on wheat, rice and sugarcane and perhaps even

at the expense of other crops such as pulses and oilseeds. This has resulted in buffer stocks of paddy and

wheat to be above the required norms, but also caused frequent price spikes in pulses and edible oils,

despite substantial imports of these commodities.

The absence of MSP procurement for most crops in several states implies either that farmers are selling their products to private intermediaries below the MSP, resulting in a regional bias in farm productions income.

This highlights the need for reorienting agriculture price policies, such that MSPs are matched by public

procurement efforts towards crops that better reflect the country's natural resource scarcities.

Solutions to the MSP and procurement problem

• One way of rationalizing MSP policy is to make these price signals reflect social rather than just private

returns of production.

The social returns take into account the negative externalities from using chemical fertiliser (soil depletion and

health), water (falling water tables), from burning crops (adverse health consequences). The returns to growing

wheat, sugarcane or paddy, are low whereas high for pulse production, because it not only uses less water and

fertiliser but fixes atmospheric nitrogen naturally and helps keep the soil porous and well aerated because of

its deep and extensive root systems.

• These positive social benefits should be incorporated into MSP estimates.

• Farmers can also be assured a floor price for their crops through a "Price Deficiency Payment". Under this

system if the price in an Agriculture Produce Market Committee (APMC) market fell below the MSP

then the farmer would be entitled to a maximum of, say, 50% of the difference between the MSP and

the market price.

• This subsidy could be paid to the farmer via Direct Benefits Transfer (DBT). Such a system would keep

the quantum of the subsidy bill in check and also be consistent with India's obligations to the WTO.

ii. Agricultural Research and Education

Agriculture research has been plagued by severe under investment and neglect after the green revolution period.

The system has been sapped by 3 weaknesses.

a) In states where agriculture is relatively more important agriculture education is especially weak if measured

by the number of students enrolled in agricultural universities especially in Northern and Eastern states

(except Punjab and Haryana). Universities also suffer from:

• Resource crunch

• Difficulty in attracting talented faculty,

• Limited linkages and collaborations with international counterparts,

• Weakening of the lab-to-land connect;

• Lack of innovation

As a result of this the extension system critical for dissemination of new innovations has been not able to

achieve its objective.

b) India's current spending on agriculture research is considerably below that of China and as a share of agriculture GDP even less than that of Bangladesh and Indonesia.



N o t e s

www.iasscore.in

21

c) The majority (63.5%) of scientists were having low to very low level of productivity.

d) Currently, the seed replacement rate for pulses are in the range of 19% to 34% highlighting the potentialfor innovations.

Solution

a) Investment in public agricultural research in India needs to be augmented.

b) There is a strong need to take steps to enhance research productivity among the scientists in public

agriculture research institutes by instituting performance indicators.

c) Participation from private sector should be secured and proper incentives should be given.

d) Technologies like mobile phones, drones should be leveraged for wider benefits in agriculture. Drones can

provide crucial information on crop health, irrigation problems, soil variation and even pest and fungal

infestations that are not apparent at eye level to farmers. Small efforts can go a long way in mitigating

farm losses and risks and maximizing income.

e) Genetically Modified (GM) crops offer great opportunities and should be adopted after addressing the

concerns and evolving regulatory process.

iii. Market Failure for Agricultural Output:

Market Segmentation

Market segmentation reduces overall welfare because, it prevents gains through competition, efficient resource

allocation, specialization in subsectors and fewer intermediaries. The causes of market segmentation are many-

• Differences in remoteness and connectivity (e.g. rural roads),

• Local market power of intermediaries,

• Degree of private sector competition,

• Propensity of regional exposure to shocks,

• Local storage capacity, mandi infrastructure and farmers access to it

• Storage life of the crop and crop specific processing cost.

Market segmentation results in large differences in producer and consumer prices. They result in higher costs

for both farmers and consumers alike and therefore creating price wedge. In addition to price wedges India's

price dispersion (the ratio of highest to lowest price of crops) across commodities is very high.

What are reasons for price wedge?

• The perishability of a product is an important factor driving the wedges. Horticulture crops have highest

followed by pulses and food grains.

• In addition to the price wedges across commodities there is also substantial variation in wedges for the

same commodities across states.

• This is a reflection of state specific effects - Which could range from rural infrastructure, storage capacities

to the rural political economy. For example, Karnataka, Madhya Pradesh, Maharashtra and Karnataka

appear to have higher markups across commodities.



N o t e s

www.iasscore.in

22

Solution

Greater market integration is essential for farmers to get higher farm gate prices. While the Goods and Service

Tax (GST) bill is a step in the right direction, a lot more needs to be done by the states, including, creating

better physical infrastructure, improved price dissemination campaigns, and removing laws that force farmers

to sell to local monopolies, etc. Nearly 70 years after Independence, India is still far from being one nation inagriculture.

Encouraging other crops, notably pulses (via a Rainbow Revolution to follow the Green and White Revolutions)

will be necessary to match supply with evolving dietary patterns that favor greater proteins consumption. At

the same time, rapid industrialization and climate change will require economizing on land and water, respectively-

getting "more from less" of these inputs



www.iasscore.in

N o t e s

23Economic Survey

Despite recent progress seen in the economic growth, India generally under-performs on maternal and child

health indicators: Pre-pregnancy weights and weight-gain during pregnancy are both low. The Infant Mortality

Rate (IMR) and Maternal Mortality Rate (MMR) are high when compared to other developing countries and

we are far ahead in achieving the goals of Mellennium Development Goals (MDG).

Why should India invest in mother and child health?

• India is currently in the middle of her demographic dividend- A period of time when population changes

gives economic growth a boost by expanding the working age share of the population. For this, it is

important to invest in maternal and child health as some of the highest economic returns to public

investment in human capital lies in these sectors.

• It has been reported that, countries with better maternal and infant health "at takeoff" grew faster over

the subsequent 20 years.

• Investment in human capital- physical health, education, skills and broader capabilities is a key to determinant

of a country's growth potential and is seen as investments in the productivity of tomorrow's worker.

• Tomorrow's worker is today's child or foetus, events which occur while a child is in uterus (in the womb)

or very young (below the age of 2) cast a long shadow over cognitive development and health status even

in adulthood.

• There are evidences that the most rapid period of physical and cognitive development in a person's life

occurs in the womb, a mother's health and nutritional status significantly affect the biological development

of the foetus. Besides, diseases during in utero period may be particularly difficult to recover from.

• Early life conditions affect cognitive development. A healthy mother is more likely to give birth to a

healthy baby who learns better and stays on in school longer.

• Programmes targeting younger children appear relatively cheap in comparison to investments made in

older children. Iodine supplementation is relatively cheaper compared to improving teacher quality or re-

designing institutions to raise school accountability, and also requires less service delivery capacity from

the state. As such, on both the benefit and the cost side, early-life investments represent a real opportunity.

State of child's play in India

• Height and cognitive development are partly determined by early life of environment and level of net

nutrition. However, there has been improvement over time in both urban and rural India but there is a


MOTHER AND CHILD



www.iasscore.in

N o t e s

24 Economic Survey

persistent rural-urban height gap which has not closed over the past decade. Despite the progress made,

India remains a negative outlier our children are on average to standard deviations shorter than the healthy

average.

• The indications of poor early life health have later-life human capital consequences. India's records show

no significant improvement in the health status.

State of maternal health

• A child's 1st 1000 days on earth are thought to be a "critical period" of physical and cognitive development

with long-run consequences. However, due to poor results India has a high neonatal mortality rate. Low

birth weight babies are one of the causes for high rate which occurs due to low weight gain during

pregnancy.

• 42.2% of Indian women are underweight at the beginning of pregnancy. Not only the Indian women too

thin when they begin pregnancy, they also do not gain enough weight during pregnancy to compensate for

low pre-pregnancy body mass. Figures suggest that women in India gain only about 7 kilograms during

pregnancy, which is substantially less than the 12.5- 18 kg gain that the WHO recommends for underweightwomen.

Causes

• Availability of resources not concerns much as even women from richer households who start pregnancy

heavier do not gain enough weight.

• Social norms which provide low status to young women in joint households and to younger daughter-in-

laws in families.

Improving maternal Health in India

• Government initiatives like the National Food Security Act of 2013 that legislated a universal cashentitlement for pregnant women of at least 6,000 rupees to help improve their nutrition during pregnancy.

• The cash payments from the government, need to be converted into more, higher-quality food and more

rest for pregnant women, so as to improve infants' birth weight.

• The cash transfers can be linked with conditional requirements and should be given in a single, lump-sum

payment early in pregnancy to avoid delays, reduce administrative costs, ensure that it is spent on better

food during pregnancy.

• Awareness should be created so as to see behavioural patterns like breast-feeding and corrective treatment.

Problem of open defecation

• The open defecation in India (61.3%) is much more common than in even much poorer countries as

compared to Nepal (37.5%), Pakistan(21.4%), Bangladesh (1.8%) and Sri Lanka (0).

• 61% of rural Indians defecate in the open in 2015, compared with only 32% of rural people in sub-Saharan

Africa.

• Income constraints are not the main determinant of open defecation. The rural households reject the pits

of latrines as they need to be emptied regularly. It is further complicated by India's history of untouchability.

• It leads to many diseases like diarrhoea and environmental enteropathy via spread of germs and also leads

to child stunting.



www.iasscore.in

N o t e s

25Economic Survey

Addressing open defecation

• Government initiatives: Building of more than 80 lakh toilets under Prime Minister's Swachh Bharat

Mission.

• UN's Sustainable Development Goals commit to end open defecation worldwide by 2030. However, for this the main focus needs to be on the rural areas.

• The major challenge is behavioural challenge. Though people have latrines but still they defecate in open.

So, it is necessary to overcome barriers to toilet adoption in rural India and promote latrine use.

Way forward

• Early life interventions can be an important policy tool for improving the health and human capital.

• It is necessary to bring a behavioural change as without it the use of physical capital will not be possible

in an effective way. The goverment interventions should be supported by behavioural change.

• There is a need to influence social norms in a wide variety of sectors persuading the rich to give up

subsidies they do not need, reducing social prejudices against girls, educating people about the health

externalities of defecating in the open, encouraging citizens to keep public spaces clean.

• The government can play a progressive role in changing norms by creating Nudge units.

Key terms

• Net nutrition: It is defined as the sum total of (i) The nutrition available from the mother in the womb

and during breastfeeding, (ii) The quantity and quality of the food that complements breast milk from 6-

24 months, (iii) Energy losses due to disease and infection and poor absorption of nutrients.

• Neonatal mortality: It is the number of infants that die in the first 30 days of life after birth.



N o t e s

www.iasscore.in

26

What is the article all about?

• Economic survey has highlighted that a number of policies provide benefits to the well-off.

• These benefits include the small savings schemes and the tax/subsidy policies on cooking gas, railways,

power, aviation turbine fuel, gold and kerosene, making assumptions about the definition of "well-off" and

the nature of neutral policies.

• Together these schemes and policies provide a bounty to the well-off of about Rs. 1 lakh crore.

What are subsidies?

• A subsidy is a grant or other financial assistance given by one party for the support or development of

another.

• Subsidy has been used by economists with different meanings and connotations in different contexts.

• According to one (OECD) Organisation For Economic Co-operation And Development definition, "A

subsidy is a measure that keeps prices for consumers below market levels, or keeps prices for producers

above market levels or that reduces costs for both producers and consumers by giving direct or indirect

support."

• Subsidies, as inverse of an indirect tax, constitute an important fiscal instrument for modifying market

determined outcomes.

• Subsidies affect the economy through the commodity market by lowering the relative price of the subsidised

commodity, thereby generating an increase in its demand.

• With an indirect tax, the price of the taxed commodity increases, and the quantity at which the market

for that commodity is cleared, falls, other things remaining the same.

• Taxes appear on the revenue side of government budgets, and subsidies, on the expenditure side. Subsidies

can have a major impact in augmenting welfare of the society provided these are designed and administered

efficiently to serve a clearly stated set of objectives.

• However, subsidies can also be very costly, if they are poorly designed and inefficiently administered.

Subsidies in areas such as education, health and environment are advocated on grounds that their benefitsare spread well beyond the immediate recipients, and are shared by the population at large, present and

future.

• Subsidies are also used with redistributive objectives, particularly for ensuring minimum consumption

levels of food and other basic needs.

Issues in different sectors

• The Survey classified the population on the basis of consumption data collected by National Sample

Survey. "Poor refer to the bottom 30% of the population and the rich the top 70%," it said in a footnote.

This categorises a sizeable portion of the non-poor as 'rich'.


BOUNTIES FOR THE WELL-OFF



N o t e s

www.iasscore.in

27

1. Small savings

• "Small" savings schemes were initially created to

mobilise saving by encouraging "small earners" to

save, and offered above market deposit rates in

accessible locations like post offices for thispurpose.

• This 1st set of "actually small" schemes ranges

from postal deposits to schemes for the elderly

and women. The second set is of "not so-small"

schemes, which includes the most important of

all - the Public Provident Fund (PPF). The 3 rd

category is "not-small-atall" schemes, which

includes tax-free bonds issued by designated public

sector companies like IRCL, IIFCL, PFC,

HUDCO, NHB, REC, NTPC, NHPC, IREDA,

NHAI and others, supposedly to finance

infrastructure projects.

• The interest rates (6.7) on most of these schemesare fixed (for year), but they vary in magnitudeand periodicity. Whatever the terms, the keydeterminant of their real return is their taxtreatment. Ideally, savings schemes should betaxed according to the "EET principle". The first("E") stands for tax Exemption of the contribution,the second (E) for Exemption of interest income,while (T) stands for Taxation of the principal (andinterest) when it is withdrawn.

• Most schemes in the "actually small" category are TTT - Neither the interest nor the contribution to thescheme are exempt from tax under Section 80C(4) of the Income Tax Act. By contrast, the PPF, whichis a "not-so-small" scheme is EEE: The interest is tax exempt, contributions are tax exempt, but up toa limit of Rs. 1.5 lakhs, and tax exempt at the time of withdrawal.

• We can indirectly infer how well-off beneficiaries of the PPF scheme are. In sum, the effective returnsto PPF deposits are very high, creating a large implicit subsidy which accrues mostly to taxpayers in thetop income brackets. The magnitude of this implicit subsidy is about 6% points - Approximately Rs.12,000 crore in fiscal cost terms.

2. Gold• Gold is a strong demerit good: The 'rich' consume most of it (the top 20% of population account for

roughly 80% of total consumption) and the poor spend almost negligible fraction of their total expenditureon it.

• Yet gold is only taxed at about 1-1.6% (States and Centre combined), compared with tax of about 26%for normal goods (the central government's excise tax on gold is zero compared with 12.5% for normalcommodities.)

• In other words, there is a huge subsidy of about 25% points (the difference between average tax on other commodities and tax on gold). About 98% of this subsidy accrues to the better-off and only 2% to the bottom 3 deciles.



N o t e s

www.iasscore.in

28

3. Railway

There is a difference between the subsidy for the better-off and the poor in railways, because fares vary in

different classes of travel. By combining the categories of A/C, first class, second class, sleeper as the primary

modes of rail travel by rich and unreserved category as mode of travel used primarily by the poor the subsidy

rate (implicit subsidy as a ratio of actual cost of journey to railways) amounts to 34% for the better-off and69% for the poor.

Hence some commodities are subsidised more for the poor than the rich, such as railway tickets (since there

are different categories of tickets), but even here, the rich avail of a subsidy of 34%.

4. LPG

• LPG consumers receive a subsidy of Rs. 238.51 per 14.2 kg cylinder (as in January 2016), which amounts

to a subsidy rate of 36% (ratio of subsidy amount to the market price).

• It turns out that 91% of these subsidies are accounted for by the better-off as their share of consumption

of LPG in the total consumption is about 91%; while the poor account for only 9% of LPG consumption

and hence only 9% of subsidies go to them.

• So, this subsidy, aimed at benefitting the poor, is hardly being used by them.

• Another important point to note is that LPG is subsidized heavily, as compared to other energy related

commodities like petrol, diesel etc which are taxed at very high rates, hence the effective subsidy to the

better-off on account of LPG is much more than the actual direct subsidy of 36% (more details in next

section).

5. ATF (Aviation Fuel)

• Aviation fuel is taxed at about 20% (on an average of tax rates for all states), while diesel and petrol are

taxed at about 55% and 61% (as in January 2016). The real consumers of ATF are those who travel byair, who essentially are the well off. Hence there is an implicit subsidy for air passengers (the difference

between taxes on diesel/petrol and aviation fuel) amounting to about 30% points.

6. Kerosene

• Kerosene makes up about 1% of the consumption basket of the poor; however about 50% of the

kerosene given under PDS (Public Distribution System) is consumed by the well-off and the rest by the

bottom 3 deciles, showing that half of the subsidy benefit goes to the well-off section.

• There is a subsidy of Rs. 9.16/litre (as in January 2016) on kerosene distributed under the public

distribution system, which translates into a subsidy rate of about 38% (subsidy per litre as a ratio of

nonsubsidized market price per litter) for both rich and poor.

Conclusion

• Hence while deciding the subsidies given by governments Two criteria: Equity and Effectiveness should

be considered.

• Goods that account for a large share of expenditures of poorer households, such as food should therefore

be taxed at low rates, made exempt from taxation, or even subsidized. But even if a good is a merit good,

policy makers should see how well targeted the implicit subsidy would be.

• There are a fair amount of government interventions that help the relatively better off in society. In many

cases, this help takes the form of explicit subsidization, which is surprisingly substantial in magnitude.



N o t e s

www.iasscore.in

29

Addressing these interventions and rectifying some egregious anomalies may be good not only from a

fiscal and welfare perspective, but also from a political economy welfare perspective, lending credibility

to other market-oriented reforms.

• The Rs. 1 lakh crore of subsidy going to the better-off merely on account of 6 commodities plus the

small savings schemes represent a substantial leakage from the government's kitty, an opportunity foregoneto help the truly deserving.



www.iasscore.in

N o t e s

30 Economic Survey

Considering the dramatic changes that, the Indian tax system is likely to witness in the coming time ahead suchas GST for encompassing goods and services, corporate tax to be scheduled to come down from 30% to 25%and phasing out of a wide range of exemptions and setting of new Tax Policy Council and Tax Research unitto improve tax administration, the fundamental question that arises is that how can India move from its currentsituation to one of increasing taxes and government spending as part of the process of building state capacity?

Assessing India's Taxation regime

The findings are nuanced but striking.

i. A simple comparison of aggregates with other countries indicates that India undertaxes and under-spends.

ii. The ratio of taxpayers to voters is only about 4%, whereas it should be closer to 23%.

Taxation is the key to long run political and economic development and helps in realising the promise of Indiandemocracy. The state's role is to create the conditions for prosperity for all by providing essential services andprotecting the less well-off via redistribution. For this, it must be levied tax on its citizens to maintainaccountability as taxation binds citizens in a necessary two-way relationship. Along with this, the challenge of moving to a better equilibrium needs focus as the tax and policy spending are related to actions by the stateto increase its legitimacy.

Cross-Country Taxation and Expenditure Patterns :

• India taxes and spends less than (OECD) Organisation for Economic Co-operation & Developmentcountries and its emerging market peers. Infact the spending and tax ratios are the lowest even amongcountries with comparable per-capita GDP e.g. Vietnam (28% and 22.2%), Bolivia (43.3% and 25.5%) andUzbekistan (33.4% and 25.6%) repectively.

• India's spending to GDP ratio (as well as spending in human capital i.e. health and education) is lowestamong BRICS and lower than both the OECD and EME (Emerging Market Economy averages. India'stax to GDP ratio at 16.6 per cent also is well below the EME and OECD averages of about 21% and34%, respectively.

• Over time too, India's tax to GDP ratio has increased by about 10% points over the past 6 decades fromabout 6% in 1950-51 to 16.6% in 2013-14 but it seems, India has made limited progress in increasing its

tax and spending capacity.• However, assessing India's growth on cross-country comparisons does not hold much significance as there

is a strong relationship between a country's fiscal capacity and level of economic development. So, thequestion is whether India's fiscal capacity is low given its level of economic development.

Analysis of Taxation and Expenditure Patterns

• The taxation and expenditure pattern can be analysed by plotting the relationship between various indicatorsof fiscal capacity and per capita GDP and see where India stands. This can be done by using 5 indicators-overall tax to GDP, direct tax to GDP, individual income tax to GDP, overall expenditure to GDP, andhuman capital expenditure to GDP. Analysing these parameters, it can be concluded that India does nothave a low fiscal capacity. It seems to do better than average.


FISCAL CAPACITY FOR THE 21

ST

CENTURY



www.iasscore.in

N o t e s

31Economic Survey

• India is a significant negative outlier when it comes to the tax to GDP ratio and significantly so with

respect to expenditures on health and education. In other words, controlling for democracy, India taxes less

and spends less (especially on human capital).

• India's overall tax to GDP is about 5.4% points less than that of comparable countries. India spends on

average about 3.4% points less vis-à-vis comparable countries on health and education.

• The state's capacity to deliver services is essential for the citizens to pay for them because if the state's

role is predominantly redistribution, the middle class will seek to exit and escape from paying taxes.

Number of Taxpayers: Is India an outlier ?

• Direct taxes hit people more than indirect taxes. In other words, people are more affected when their

income or assets are taxed. That is why, the accountability of citizens weaken if they do not pay for the

services the state provides.

• In India today, roughly 5.5% of earning individuals are in the tax net. India needs to cover to the largegap to become a full tax-paying democracy. Based on recent tax data, it is estimated that about 15.5%

of net national income excluding taxes (which is the national income accounts counterpart of the personalincome accruing to households) has been reported as gross taxable income indicating nearly 85% of the

economy to be outside the tax net.

• Examining the number of taxpayers (as a ratio of voting age population) controlling for the level of economic development, India is not an outlier. However, controlling for the level of democracy, India's

ratio of taxpayers to voting age population is significantly less than that of comparable countries. The

present percentage of population paying taxes needs to be increased in number.

• To bring more citizens into the individual income tax net it is necessary to set a reasonable threshold for

paying taxes and not changing it unduly by raising exemption thresholds frequently. India's tax-GDP

would have increased by 0.32% just by not having raised the threshold so generously according to a report.

Conclusion: Moving To A Better Equilibrium On Taxation And Spending

It is evident from the analysis in this chapter that, India has not fully translated its democratic vigour intocommensurately strong fiscal capacity. In the long run, if India is to stay "on the line" as its per capita incomegrows, it will need to build fiscal capacity. For this, it must refrain from raising exemption thresholds and allownatural growth in income to increase the number of taxpayers.

The following points can be considered in this regard:

• First, the government's spending priorities must include essential services that all citizens consume: Publicinfrastructure, law and order, less pollution and congestion, etc.

• Second, reducing corruption must be a high priority not just because of its economic costs but also

because it undermines legitimacy when citizens feels that the government is not performing its roleefficiently. In this sense, the government's efforts to improve transparency through transparent and efficientauctioning of public assets will help create legitimacy and over time strengthen fiscal capacity.

• Third, subsidies to the well-off need to be scaled back. The subsidies should be well targeted. The taxexemptions Raj which often amount to redistribution towards the richer private sector also need to bereviewed and phased out. And reasonable taxation of the better-off, regardless of where they get their income from-industry, services, real estate, or agriculture are also needed to help build legitimacy.

• Fourth, property taxation needs to be developed. Property taxes are especially desirable because they are

progressive, buoyant and difficult to evade, since they are imposed on a non-mobile good and can be

relatively identified. Higher rates (with values updated periodically) can be the foundation of local



www.iasscore.in

N o t e s

32 Economic Survey

government's finances, which can thereby provide local public goods and strengthen democratic

accountability and more effective decentralisation. Higher property tax rates would also put sand in the

wheels of property speculation. Smart cities require smart public finance and a sound property taxation

regime which is vital to India's urban future.



www.iasscore.in

N o t e s

33Economic Survey

(PTA) Preferential Trade Agreements has been increasing since the establishment of WTO in 1994. Since mid

2000's India's FTA (Foreign Trade Agreement) has doubled to about 42 today.

What is PTA?

• A Preferential Trade Area (also Preferential Trade Agreement, PTA) is a trading bloc that gives preferential

access to certain products from the participating countries. This is done by reducing tariffs but not by

abolishing them completely. A PTA can be established through a trade pact.

Key features of India's FTA

• Most of it is signed with Asian countries, the most important being ASEAN, Srilanka, Korea, Japan,

Malaysia. Outside Asia it has been signed with Chile and Mercosur.

• Most of the FTA are signed in goods rather than services.

• There are also differences in the degree of integration across recent FTA'S for example the India-Japan

agreement has chapters on Sanitary and phytosanitary measures, government procurement etc. but these

chapters are not included in the India-Korea (Comprehensive Economic Partnership Agreement CEPA).

Mega-regionalism

• Recently, a trend has emerged where Bilateral PTA'S have been replaced by Mega-Regional Agreements

like (Trans-Pacific partnership Agreement TPP) and (Transatlantic Trade and investment Partnership TTIP),while TPP is signed but not yet ratified and TTIP being negotiated.

• The TPP would comprise of 12 countries and will cover 40% of global GDP and 33% of world trade.TTIP

will include US and 7 European countries. India is not a part of both of it.

Likely Impact of TPP

• The World Bank estimates that by 2030, the TPP will raise member country GDP by 0.4-10% and by

1.1% on GDP Weighed average basis mainly because of reduced non-tariff barriers.

• The World Bank also estimates that, it would decrease the GDP of non-members due to shrinking market

access and greater competition in export markets.

• In case of India, the effect on export would be marginally positive but its impact on GDP would be -0.2%.

Key trends of India's FTA on Trade on the basis of empirical evidence:

• In this survey, they have considered 3 major countries and blocs for measuring impact of FTA on India.

These countries are Japan, Korea and ASEAN. Other countries are dubbed as non FTA since the bulk of

trade with such countries is not under an FTA with India. The results of the findings are following:

(a) Increased trade

The overall impact of FTA on trade is positive and significant. The cumulative effect between the year of the

FTA and 2013 on trade with ASEAN, Japan and Korea is approximately equal to 50%.


PREFERENTIAL TRADE AGREEMENTS



www.iasscore.in

N o t e s

34 Economic Survey

(b) Persistent effect:

When empirically tested the figure shows that within a year of the agreement coming into force, the effect

of FTA'S become positive and significant, with effects even increasing in the subsequent few years.

(c) ASEAN FTA had more impact on tradeASEAN FTA has most significant positive impact on trade which is due to greatest reduction in Indian import

tariff.

(d) Trade impact more on Imports

The FTA impact on export is 27% but is 63% for imports. In case of ASEAN FTA both exports and imports

increased after FTA though latter increased in much higher proportion, whereas Japan FTA has negative impact

on exports.

(e) Major impact on metals and textiles

When we analyze the impact of FTA on 4 major sectors i.e. Textiles, metals, automobiles and machinery. We

find that the on import side, a 10% reduction in FTA tariffs for metal and machinery increases imports by 1.4%

and 2.1% respectively, compared to other products from FTA or all products from non-FTA Countries. On

similar lines, textile exports to FTA countries increase by 2% relative to comparator group for 10% decrease

in tariffs.

Conclusion

It emerges from the above data that FTA'S have increased our trade with FTA signed countries; however

growth of our exports with PTA partners is much below that of imports. Trade increased more on import front

because India maintains relatively larger tariffs and hence had larger tariff reductions than its FTA partners.

This is not necessarily a bad thing, because imports are also necessary for our exports and to feed a growing

domestic market.

Way forward for India

(i) The arrival of the Trans-Pacific Partnership (TPP) driven by the US will push countries such as ours to

seek PTA’s as the way forward to enable the stable growth of our exports.

(ii) India should look forward to sign more FTA'S however they must be mixed with other WTO consistent

measures like imposition of anti-dumping and conventional duties and safeguard measures to ensure that

FTA'S are beneficial to India.



www.iasscore.in

N o t e s

35Economic Survey

Fertilizer sector is very important for growth of Agriculture. The sector is plagued by various issues like huge

subsidy burden, skewed pattern of use, inefficient and insufficient domestic production, leakages in subsidies

etc.

Overview of the sector

There are 3 basic types of fertiliser used Urea, Diammonium Phosphate (DAP), and Muriate of Potash (MOP).

In many ways, Urea dominates the sector.

• DAP and MOP producers and importers receive a Nutrient Based Subsidy (NBS) based on a formula thatdetermines the amount of N, P and K in a given amount of fertiliser.

• Per kg subsidies on DAP and MOP fertiliser are hence fixed-they do not vary with market prices.

• Imports of DAP and MOP are also not controlled.

• The prices farmers face are thus deregulated market prices adjusted by fixed nutrient subsidy.

• Government involvement in DAP and MOP is limited to paying producers and importers a fixed nutrient

based subsidy which works out to be roughly 35% of the cost of production.

The case of Urea is very different. The government intervenes in the sector in 5 ways:

• It sets a controlled Maximum Retail Price (MRP) at which Urea must be sold to farmers.

• It provides a subsidy to 30 domestic producers that is firm-specific on a cost plus basis, meaning that more

inefficient producers get larger subsidies.

• It provides a subsidy to importers that is consignment-specific;

• Imports are canalised-only 3 agencies are allowed to import urea into India;

• Finally, about half of the movement of fertiliser is directed- That is, the government tells manufacturers

and importers how much to import and where to sell their urea. with 50% under the Fertiliser Ministry's

movement control order compared with 20% for DAP and MOP.

Dominance of urea in the sector

• Of all the fertilisers, urea is the most produced (86%), the most consumed (74% share), and the most

imported (52%).

• It also receives the largest subsidies, in outlay terms (Government budgeted Rs. 73,000 crore- about 0.5%

of GDP- On fertilizer subsidies in 2015-16 and urea accounting for nearly 70% of total fertilisers subsidy)

and as proportion of actual cost of production (75% per kg, compared with about 35% for DAP and

MOP).

Thus in many ways urea dominated the sector.


REFORMING THE FERTILIZER SECTOR



www.iasscore.in

N o t e s

36 Economic Survey

2. Problems in fertilizer sector

These regulations create an environment which leads to a series of negative outcomes described below.

A) Black Marketing:

First, there are large subsidies based on end use-only agricultural urea is subsidised-which creates incentives todivert subsidised urea to industry and across the border. In fact, subsidised urea suffers from 3 types of leakage:

(i) 24% is spent on inefficient urea producers

(ii) Of the remaining, 41% is diverted to Non-agricultural uses and abroad;

(iii) Of the remaining, 24% is consumed by larger-presumably richer- farmers.

Canalisation further aggravates the situation. Canalisers are a instructed when to import, what quantities to

import, and in which districts to sell their goods. Every season the Fertiliser Department estimates how much

imports are required by forecasting domestic supply and demand. Forecasting fertiliser demand is a difficult

business, and misestimates- Especially shortages are difficult to correct because the system to procure imports

is time consuming.

• The entire process-from the time the Fertiliser Department decides to import to the time urea reaches

consumer centres takes about 60-70 days.

• These delays can exacerbate shortages, and are particularly costly during the peak demand period when

timely availability of urea is essential for proper plant growth. Farmers are thus pushed to purchase in the

black market.

B) It affects small farmers disproportionately

• These leakages imply that only 35% of the total reaches small and marginal farmers and the border state

farmers.• Secondly, the black market hurts small and marginal farmers more than large farmers since a higher

percentage of them are forced to buy urea from the black market.

• Black market increases the cost of fertilizer for small farmers and creates uncertainty in supply.

C) Inefficient Fertiliser Manufacturers

• A third source of leakage arises from some of the urea subsidy going to sustaining inefficient domestic

production instead of going to the small farmer.

• This has led to a model where the subsidy a firm receives is based on its cost of production: The greater

the cost, the larger the subsidy. As a consequence, inefficient firms with high production costs survive and

the incentive to lower costs is blunted.

D) Externalities of Urea Prices

• Under-pricing urea, relative to other fertilisers, especially P & K, encourages overuse, which has resulted

in significant environmental externalities, including depleted soil quality and health implications.

• Most states use almost twice more Nitrogen as compared to phosphorous than is recommended. This

pattern is also observed in the most productive states like Punjab, Haryana, UP and Gujarat.

Lastly the, multiple distortions-price and movement controls, manufacturer subsidies, import restrictions-feed

upon each other, making it difficult to reallocate resources within the sector to more efficient uses.



www.iasscore.in

N o t e s

37Economic Survey

Since 2014, important reforms have been implemented in the fertiliser sector. These include:

• The Neem-coating of Urea, which has likely reduced the diversion of fertiliser meant for Indian farmers;

• Gaspooling, which should increase efficiency of domestic urea production.

Both steps should help small farmers by improving their access to low cost fertiliser. They will also providegood building blocks for further fertiliser sector reform.

Reforms recommended for the sector:

A reform package would address each of the problems identified above- The 3 leakages and skewed mix of

fertilizer use with the primary aim of benefiting the small farmer.

• First, decanalizing urea imports- which would increase the number of importers and allow greater freedom

in import decision would allow fertilizer supply to respond flexibly and quickly to changes in demand. This

would be timely as climatic fluctuations are making it much more difficult for governments to forecast

agriculture conditions and centrally manage supply.

• Second, bringing urea under the Nutrient Based Subsidy program would allow domestic producers to

continue receiving fixed subsidies based on the nutritional content of their fertilizer, while deregulating the

market would allow domestic producers to charge market prices.

This would encourage fertilizer manufactures to be efficient, as they could then earn greater profits by

reducing costs and improving urea quality. This in turn would benefit farmer.

• Implementing direct transfers in fertilizers is to reduce leakages to the black market. The government's

policy of neem-coating urea is a step in exactly this direction. Neem-coating makes it more difficult for

black marketers to divert urea to industrial consumers.

Technology like JAM could be further used to curtail leakages and improve targeting of fertililzer subsidies.

• Universal subsidy with cap on number of bags.

Set a cap on the number of subsidized bags each household can purchase and require biometric

authentication at the Point of Sale (POS). It would make harder to conduct large-scale diversion.

Imposing a cap on the total number of subsidized bags each farmer can purchase would improve targeting.

Small farmers would still be able to get all their urea at subsidized prices but large farmers may have to

pay market prices for some of the urea they buy.

Conclusion

Fertilizer subsidies are very costly, accounting for about 0.8% of GDP. They encourage urea overuse, which

damages the soil, undermining rural incomes, agricultural productivity, thereby economic growth. Reform of the fertilizer sector would not only help farmers and improve efficiency in the sector. Decimalizing imports will

ensure timely availability of fertilizes, and universal Direct Benefit Transfer (DBT) to farmers based on

biometric identification with physical off take can reduce diversion of urea. This will help in use of saved

resources for infrastructure creation in rural areas. Also government must try to relocate plants in other

countries like Iran to ensure security of supplies.



www.iasscore.in

N o t e s

38 Economic Survey

India is Midway through its demographic dividend when demography gives a push to economic growth. To

exploit this dividend, India need good jobs which are safe and pay well. Which encourage workers and firms

to improve productivity. With these characteristics good jobs can mean creating more jobs in formal sector.

Analysis of India's employment growth between 1989-2010 :

The period between 1989 -2010 has seen significant changes in India's labour and industrial sector. It mains

characteristics are:

• Informal firms account for most of employment growth and increase in number of firms.• Of the 10.5 million new manufacturing jobs 35% were created in informal sector.

• Of the 4.2 million new establishments 98.8% were informal.

• Post 2000 trend changes and informal establishment count flattens and employment falls whereas, that of

formal sector employment picks up.

• This can be attributed to the use of contract labour.

Though informal sector can be credited for keeping unemployment rates low but suffers from several weaknesses

like:

• Wages are lower than formal sector.

• No employment history of workers is created, which otherwise can help them in getting cheaper credit.

What are factors inhibiting growth of formal sector jobs ?

• Labour regulations specifically "dismissal norms under IDA (Industrial Disputes Act)"

• The cumbersome nature of compliance with labour regulations.

• Numerous regulations encourage rent seeking behavior and bureaucratic hindrances.

Contractualization of labour force:

One of the main effects of regulatory bottlenecks has been Contractualization of labour force.

• In India the contract workers increased from 12% of all registered manufacturing in 1999 to 25% in 2010.

• This has happened more in states with rigid labour laws, indicating that it is done to avoid labour laws.

• This is more used by those firms employing more than 100 employees i.e. large firms. The firms which

once were restricted by labour laws are using contract labour to bypass them.

• Hiring contract labour provides some important benefits:

a) Subcontracting the work of following regulations and managing inspectors to the contracting firm.


STRUCTURAL CHANGES IN INDIA'S LABOUR

MARKETS



www.iasscore.in

N o t e s

39Economic Survey

b) Firm stays small enough to be exempt from labour laws as contract labour are employees of the

contractor.

c) Reduction in marginal labour costs and adjustment costs by firms.

Researchers have said that, it has also boosted manufacturing GDP by 0.5%. But the question is whether contract labour is the ideal solution. There are many problems associated with contract

labour:

• Hiring labour through contractor is more expensive (14% expensive according to Indian Cellular Association).

• Contract labour do not feel loyalty towards establishment.

• There is no incentive for employer to invest in their training or capacity building.

• It effects companies productivity tomorrow, because it is not "firm specific human capital".

• It impacts worker's protection and rights.

Competitive Federalism and labour laws :

• Labour reforms mostly fall in the states domain. With private investment lagging states are taking stepsto attract investments that will create jobs and boost economic growth.

• For this states like Rajasthan has amended labour laws and others like Maharashtra and Gujarat are

considering amendments.

• States must also focus on what kind of manufacturing sector they want to create. The benefit of entry

of a large manufacturing company goes beyond scale, depending upon what kind of products theymanufacture.

• However, there are concerns of competitive federalism becoming too much competitive, inducing a race

to the bottom with states pushing to give too many concessions.

• But India seems far away from such situation. For example state like Haryana are considering filing of

online returns which will improve compliance and workers welfare.

In Futuristic views, how would an export plays an important dimention?

– Knowledge of an advance technologies utilisation by Developed countries matters a lot.

– Becoming the part and parcel of the global supply chain & integrate with the wide range of Market

(For e.g Automobile Industry but rubber/Tyre Industry can’t be a part of it because of it’s monopoly.

– Brings it closer to the global frontier for the exported goods.

– These skills are transferable across industries.

– Like, China entered in electronics manufacturing through mobile phone assembly space by producing

electrical cables and connectors and is now producing sophisticated, high end smart phones.

Relocation: A case study of apparel industry.

Relocation means shifting the industries to 2nd and 3rd tier industries to avoid spatial mismatch in labour

availability, high cost real estate sector etc.

Apparel industry is labour intensive and India must be performing well because of abundant supply of cheap

labour. But in this also India is ceding space to countries like Bangladesh and Vietnam.



www.iasscore.in

N o t e s

40 Economic Survey

A) Why Indian apparel industry is suffering ?

• Indian apparel industry is dominated by informal firms.

• 2 million informal firms employ 3.3 mill workers whereas 2800 formal firms employ 330,000 workers.

• Informal firms are 15 times less productive than formal firms.

• This mushrooming for 1 person apparel establishments is because of spatial mismatch.

• Living costs are high in cities, leaving cost sensitive, labour intensive manufacturing uncompetitive.

• High transportation cost and week connectivity between metros and sub-urban areas preclude any possibilityof living outside the city and daily commuting.

B) How to improve productivity in apparel industry?

• Through reallocation of capital from less productive to more productive units.

• Adopting relocating to 2nd and 3rd tier cities.

This will also offer other advantages like:

• Spreading economic development to underdeveloped areas

• Reducing mismatch in the labour market (low skilled labour is available in these towns).

• Will raise competitiveness by raising firms access to low cost labour.

• Will offer jobs to women who forms 70% of workforce in apparel industry.

Women and labour force participation rate:

a. Most explanations for lower women participation in labour market focus on supply side constraints

like cultural norms that frown upon women working outside homes. b. Demand side explanations are ignored in this which is unavailability of suitable jobs.

c. Areas in India that have witnessed the greatest decline in female labour participation rate thosevillages which have seen urbanization and are now part of towns or small cities.

d. Farming jobs in these are no longer available but women centric service sector jobs are yet to emerge.

e. Suitable jos which are close to home and flexible have not emerged.

f. Relocation model solves this problem also.

A study by McKinsey has found that, improving Gender Parity in employment India's GDP can improve by

1.4%.This will provide other benefits too.

Role of Centre Government in creating 'Good Jobs' - Ensure worker centric regulations:

Role of Centre Government is to ensure labour regulations are worker centric by expanding choices andreducing mandatory taxes on formal sector employment.

A) Mandatory taxes on formal sector employment

• In a hypothesized scenario if 2 workers are earning a basic salary of Rs. 5500 and 55000 per month, thedifference between the gross salary and net in hand salary is 45% in case lower paid worker and only 5%in case of higher paid.



www.iasscore.in

N o t e s

41Economic Survey

• This is because of mandatory deductions in form EPF (Employees Provident Fund).

Many see EPF as unnecessarily taxing low income employees. 70% of employees surveyed said that, they

would love to take their EPF contribution home as cash instead of deducting it.

• It is because they are financially constrained and face liquidity constraints.• They face problems in accessing EPF accounts and funds.

• Frequent job changes make EPF accessibility problematic.

• Firms also face EPF related transaction costs. 35% of surveyed firms found EPF related regulations

challenging. These more cumbersome for small firms with no special administrative staff.

• High administrative costs of EPF which amounts to service charge of 3.54 % which are higher than the

rates of most private mutual funds.

• EPF is a kind of tax subsidy for rich. EPF is mandatory for those with income less than Rs. 15000. Such

people are out of tax bracket.

• But rich for whom it is optional, use it for tax saving purpose as EPF in ax exempted at contribution,

accrual of interest and withdrawal stage.

Therefore there is need to review the EPF considering that, whether lower income group can be exempted from

mandatory contribution at the same time keeping the contribution from employer intact.

• It would bring competition in the market for savings and can improve service standards of EPFO.

• Such a step would reduce the tax on formal sector labour while leaving informal labour sector cost

unchanged.

Conclusion

If regulation induced taxes on formal workers and spatial mismatch between workers and jobs is solved good

jobs can be created in India. All the stakeholders' governments, private sector must work in consonance to find

the solutions to the problems faced by Indian manufacturing and help in creating good jobs which is essential

for reaping demographic dividend.



www.iasscore.in

N o t e s

42 Economic Survey

The power sector has seen a number of new initiatives and efforts to improve the availability of power to all

and overall health of the sector. Some of them are:

• Reduction in peak deficit to 2.4% because of record increase in generation capacity of 16.5GW in 2014-

15.

• Reduced congestion on electricity grid and single price on power exchange.

• Indian Railway attempting to shift to open access (open access is the mechanism which allows consumers

more than 1MW load to directly purchase from producers)• Launch of UDAY scheme in attempt to solve the financial problem of discoms.

• Increasing the renewable target to 175GW by 2022. The tariffs under National Solar Mission have reached

a all time low of Rs. 4.34/kWh.

Challenges which are still facing the sector are:

• Complexity of tariff schedule prevents economic actors from responding sufficiently to price signals.

• Average tariff set below average cost of supply in many cases.

• High industrial tariffs and variable quality of electricity

• Price and non-price barriers hampering single-nationwide price through open access

• Determination of progressive tariff schedule for domestic consumers.

• Nearly 5cr. households without electricity access.

The reforms in the sector becomes more challenging because of federal character of the polity wherein clear

cut responsibilities are defined between center and state (Center can't intervene in determining the consumer tariffs and improve discoms financial health).

Issues plaguing the sector are:

A) Transparency and simplicity in Retail electricity Tariffs

• There are too many tariff brackets for different set of consumers like farms, poultry, MSMEs etc.

• This complexity prevents consumers from fully responding to tariffs because of high cost of processing

information.

• When energy production is characterized by single price, there should not be too many slabs at distributionlevel. Otherwise this leads to cross-subsidization or no pass through of cost.

B) Tariffs and costs

• The high debt of discoms acts as a bottleneck for the overall sector. Average tariff in many states is lower than average cost of supply, even after deducting ATC (Aggregate Technical and Commercial Losses).


POWERING "ONE INDIA"



www.iasscore.in

N o t e s

43Economic Survey

How power sector affects 'Make in India' ?

• High tariff and erratic supply leads to industries moving towards captive generation. It increases the cost

of production. 47% of the firms report using diesel generators.

• The diesel generators capacity in India is 72GW and increasing at the rate of 5GW per year.• 20% of firms have identified electricity as a major constraint in the states.

• The (CAGR) Compound Annual Growth Rate (CAGR) of captive power generation is 9.3% and 4.6%

for electricity purchase from discoms.

• Reduced cost of crude oil and renewable energy may further exacerbate the trend.

Status of Open Access

• Open access policy was introduced under Electricity Act, 2003 allows consumers with electricity load of

above 1MW to procure electricity from electricity markets.

• It helps in aggregation of country wide demand and supply on the same platform and thus helps increating single market and discovery of single price.

• But some states impose significant barriers in the form of cross-subsidy surcharge and additional surcharge

on purchase of electricity from power exchange.

• Several non-price barriers also exist in Open Access (OA) in states like Maharashtra, Uttar Pradesh and

West Bengal because discoms derive bulk of their revenue from industries.

Currently the plant load factor is at its lowest ebb (approx.60%) and financial health of discoms prevents them

from purchasing electricity. therefore enough opportunities lies for absorption of excess demand through Open

Access.

Exploiting progressivity to lower tariffs for the poor

At present there are no guidelines on the intra category subsidization.

• The progressivity of tariff is less and as result average billing rate is lower than average cost of supply,

resulting into under-recovery for all slabs.

• The ratio of highest to lowest tariff rates in India is 1:2, whereas it is 4:2 in Sri Lanka, 2:9 in Brazil and

5:3 in Korea.

• There is scope for cross-subsidization within the residential consumers as done in countries like Korea,

Vietnam and Bangladesh. It helps not only in recovery for costs but also provide quality electricity to poor.

• This can be done because relatively inelastic price elasticity for rich. Rich consumers will continue tomaintain their consumption even after price increases.

Recent schemes in the sector

UDAY:

• Improving operational efficiency like through proper metering, using energy efficient equipments

• Reducing costs by rationalizing coal linkages, improved coal output etc.

• Reducing interest costs of discoms by partial takeover of debt by state and leftover be reissued at lower

interest.



www.iasscore.in

• Limit on future debt by discoms by limiting it to 25% of their revenue and for working capital requirement

only.

• Future automatic takeover of 50% losses of discoms.

DDUGJY (Deendayal Upadhyaya Gram Jyoti Yojana):• Electrification of all villages

• Metering of unmetered connections

• Separation of feeder

• Improvement in sub-transmission and distribution network

IDPDS (Integrated Power Development Scheme) : Scheme for urban areas.

• Metering of unmetered connections

• Strengthening of sub-transmission and distribution network • IT enablement of distribution network

DELP (Domestic Efficient Lighting Programme) :

• 77cr. LED bulbs to replace household and street light incandescent bulbs

NTP (National Tariff Policy) :

• Cross subsidy formula revised.

• State regulator to devise 24X7 power supply trajectory.

economic survey (volume-1)

Documents