Readings for Mains

Civil Service Mains Economy Questions set – 2

Question 2: What is back series GDP data? Why such data is needed? What are the new lights thrown by Sudipto Mundle Committee’s calculation of back series data?

For hints see:

Article by Prof. Arun Kumar, Courtesy the Hindu, dated August 27, 2018

The larger picture on GDP numbers

The new data on GDP have raised a political storm, with the back series for GDP growth since 1993-94 becoming available. Its importance lies in the fact that in 2015, a new series was announced which showed India’s GDP growing faster than the earlier series had shown. This was politically advantageous to the National Democratic Alliance (NDA) government which came to power in 2014.

The NDA claimed that the second United Progressive Alliance (UPA II) government had messed up the economy and it had turned it around. But, in the new series, the rate of growth during the last two years of UPA II was also higher than what the old series showed so that the economic performance under the UPA also did not look so bad. What the new series also showed was that the NDA had inherited an economy with GDP growing at 8.4% in the second quarter of 2014. Most macroeconomic variables had also recovered from their lows in 2013.

Data show that after the NDA took over, the rate of growth fell and then rose to a peak of 8.65% in 2015-16 Q4. After that it fell for five consecutive quarters — to 5.57% by 2017-18 Q1. The two shocks to the economy (demonetisation and then the GST) had a big negative impact on the rate of growth. This is not even captured in the new data since a shock requires a change in methodology for calculation of GDP. The political slugfest between the Bharatiya Janata Party and the Congress is due to data showing that the average growth rate under the UPA I and II was higher than what has been achieved during the present NDA regime.

Points to the issue

There are three distinct aspects to the controversy. First, why was the back series —now the bone of contention — needed? Second, what do the data show? And, third, why was the rate of growth during the UPA regimes higher?

An economy produces a large number of goods and services and new ones are added all the time. The production of all these items has to be estimated in order to calculate the rate of growth of the economy. This requires lots of data, which is a tall order. So, a select set of items is taken to represent the entire production. The question which arises is: How accurate are the data?

Technology poses another challenge. Older items become redundant and newer ones need to be included.

So, as time passes, the earlier series of data does not represent the true growth rate of the economy and needs to be modified. That is why the old series is replaced by a new one periodically. The earlier series (from 2004-05) was replaced by a new series (from 2011-12). Another question arises: How do the data from the new series compare with those of the old series? Is it that growth was also higher earlier? Analysts have demanded a back series whenever a new series is prepared. There were problems with the new series which is why the back series was not generated automatically. This is also why the new committee (which has presented its report) was set up.

The difficulty with the new series (2011-12) was because it not only changed the bundle of items used to calculate growth but also used a more extensive data base (of companies) called MCA21. This data base was available from 2006-07. However, it kept changing every year and did not stabilise till 2010-11 — so it was not comparable across years and could not be used to generate the back series. This is also why the task of the committee was a difficult one and it could not mechanically generate the back series.

The committee had to use a new method which has its own assumptions, which are likely to be debated by experts. A bias in the results seems to be that the growth rate in the new time series for the earlier part (the 1990s) is lower than in the old series whereas it is higher for the later part (the 2000s). It is also unable to take the black economy and the changes in the unorganised sectors into account. The report has been submitted to the National Statistical Commission which will finalise it. Therefore, government functionaries are arguing that the data cited by the media are not final.

Quarrel about causes

It is interesting that the criticism is more about the causes of the higher rate of growth under the UPA than the methodology of the study. The implicit admission is that the economy did grow faster under the UPA but due to wrong policies (allowing the fiscal deficit to rise, undue expansion of bank loans, etc). The argument is that these have led to non-performing assets (the twin balance sheet problem), higher inflation and current account deficit.

But the higher growth was on the back of a 38% rate of investment and a 36% rate of savings achieved by 2007-08. These are now down to 32% and 30%, respectively. The 2007-08 crisis was a global one but the Indian economy continued to grow when many other economies were slowing down due to increase in fiscal deficit from its record low in 2007. The crisis of 2012-13 was due to the rise in petroleum prices and largely due to international factors.

However, the current slowdown is largely policy induced and less due to international factors. The twin shocks (demonetisation and the GST) have played havoc with the unorganised sector (not yet captured in the data). Household savings have declined sharply and the investment climate remains poor with large numbers of dollar millionaires leaving the country. The government might consider leaving the data debate to experts and not making it a political one.

Arun Kumar is Malcolm S. Adiseshiah Chair Professor, Institute of Social 

Question 3 : Critically analyze the new MSP announced by the government of India in July 20118.

See the following article for answer.

Authored by Banjot Kaur, Courtesy Down To Earth, July 0, 2018

New MSP: Govt fails to meet Swaminathan standards, yet again

The Narendra Modi cabinet made a big ticket announcement of increasing the minimum support price (MSP) of 14 kharif crops on Wednesday (July 4). Farmer agitations all across the country in the past few months have been focused on demanding that MSP be increased so it is at par with 1.5 times the cost of production. The government claimed that it has fulfilled this demand.

A close look at the declared prices revealed that the prices have not been fixed according to the formula recommended by Swaminathan Commission. There are two formulae to calculate cost of production. One is to include cost of seed, labour (human, animal and machine), fertiliser, manure, insecticides and other miscellaneous costs which is denoted as A2 and add to it the family labour (FL). The other formula addition of cost on imputed rent and interest on owned land to A2+FL. So the final cost of production would be C2=A2+FL+cost imputed on rent and interest on owned land. The farmers have been demanding that MSP should be 1.5 times of C2, which was what the Swaminathan Commission had also suggested, and not 1.5 times of A2+FL. While the Press Information Bureau (PIB) release claimed that rent paid for leased land has been included, the calculation done by Down To Earth shows otherwise.

Take for instance, paddy. The government announced that it has increased Rs 200 per quintal on paddy (common variety) and now the MSP would be Rs 1750/quintal. The Commission for Agriculture Costs and Prices (CACP), a body working under Union ministry of Agriculture and Farmers’ Welfare has projected that the cost of production (CoP) of the paddy, according to C2 formula, would be Rs 1560 per quintal in 2018-19. MSP, when calculated by multiplying CoP by 1.5 as per the recommendation of Swaminathan Commission, should be Rs 2340 per quintal. Thus, the MSP declared by the government is Rs 590 per quintal short of the same

The case of Arhar is no less different. It’s CoP, according to C2 formula would be Rs 4981 per quintal for 2018-19, and, therefore, the MSP should have been Rs 7471.5 per quintal. However, the government hiked the MSP to Rs 5675 per quintal.  Thus, the MSP was Rs 1796.5 per quintal less than what should have been according to the Swaminathan formula.

DTE calculated the MSP for all the 14 crops by taking into account the C2 formula and multiplying it by 1.5 times. As startling as it may sound, not a single crop’s MSP turns out to be 1.5 times of the cost of production using the C2 formula as suggested by Swaminathan Commission. The difference between the MSP declared and the one calculated according to Swaminathan formula ranges between Rs 36  per quintal and Rs 2830.5 per quintal depending upon the crop.

Farmers across India had organised a 10-day strike earlier this month demanding MSP according to Swaminathan formula, and today’s announcement has not made them happy. Rakesh Tikait, national spokesperson of Bhartiya Kisan Union, said, “This is simply a dejection. While the government can blow the trumpet that it has hiked the MSP, it does not conform to the Swaminathan Formula. We will not be fooled by this and we would continue our agitation.” Bhartiya Kisan Union is one of the biggest farmer bodies of India.

The government, nonetheless, termed the announcement as “historic” as it increased MSP on all the 14 crops. “The decision of the Cabinet Committee on Economic Affairs is a historic one as it redeems the promise of the pre-determined principle of fixing the MSPs at a level of at least 150 per cent of the cost of production announced by the Union Budget for 2018-19,” the release said.

The government also said while hiking the MSP, it took into account factors such as hired human labour, bullock labour/machine labour, rent paid for leased land, expenses incurred on use of material inputs like seeds, fertilisers, manures, irrigation charges, depreciation on implements and farm miscellaneous expenses, and imputed value of family labour. The government claimed that the increase in MSPs of Nigerseed at Rs 1,827 per quintal, moong by Rs 1,400 per quintal, sunflower seed by Rs 1,288 per quintal and cotton by Rs 1,130 per quintal is “unprecedented”.

Amongst cereals and nutri cereals, in terms of absolute increase, MSP of paddy (common) has been raised by Rs 200 per quintal, jowar (hybrid) by Rs 730 per quintal and ragi by Rs 997 per quintal. The highest percentage increase in MSP over the previous year is for ragi (52.47 %) followed by jowar hybrid (42.94%). For pulses, apart from moong, MSP of arhar (tur) has been raised by Rs 225 per quintal. The prices of urad and bajra have also been hiked.

Farmers’ concern is just not about MSP but its implementation. “Every crop season, the government declares MSP. But with only exceptions of wheat and paddy which the government itself procures, hardly any crop which are brought in open mandis by traders, fetches even the MSP which is minimum selling price declared by the government. So what is the point of declaration of MSP without bringing a law that it has to be mandatorily followed,” Tikait asks.


Question 4: What are the salient features of Draft Agricultural Export Policy brought forward by the Commerce Ministry?

See the following article for answer.

Courtesy: The Business Line, dated March 19, 2018

Draft Agri Export Policy seeks to end curbs to bring in stability

The Commerce Ministry has sought to put an end to any kind of export restriction — including minimum export price (MEP) and export duty — on commodities not categorised as essential in order to build a more stable trade policy regime.

A draft Agri Export Policy circulated by the Commerce Ministry on Monday proposed that consultation among stakeholders and Ministries will be initiated to identify commodities which are essential from food security perspective and barring these, the effort would be to ensure that no other produce is brought under any kind of export restrictions.

“India is seen as a source of high quality agricultural products in many developing nations and ASEAN economies and changes in export regime on ground of domestic price fluctuations, religious and social belief can have long-term repercussions. This is particularly important for commodities such as onions, rice, wheat, oilseeds, pulses and sugar,” the draft stated.

Export restrictions could be ended straight away on processed agricultural products and all kinds of organic products, and a policy assurance given that these would not be brought under the ambit of any kind of export restriction such as MEP, export duty, export ban, etc even though the primary agricultural product or non-organic agricultural product is brought under some kind of export restrictions, the draft said.

The National Agriculture Export Policy is being formulated in line with the vision to double the farmer’s income and increase the share of agricultural exports from $30 billion to $60 billion by 2022.

While the draft policy has been prepared after consultations with stakeholders, it has been put up for wider consultations and comments have been invited till April 5, 2018, following which the final policy would be drafted.

Quality issues

To minimise rejections on quality issues — sanitary and phytosanitary (SPS) and technical barriers to trade (TBT) barriers — the draft proposes to develop a common portal to monitor all export rejections and provide a platform to different nodal agencies to take up a root cause analysis, take corrective action and if required, respond to the partner country regarding action taken.

It suggests creation of an institutional mechanism under the aegis of Department of Commerce with representation of relevant Ministries and Agencies to address India’s market access request, calibrate it with the trading partner’s market access request for accessing the Indian market and quickly respond to SPS/TBT barriers.

Highlighting the need to bring about reforms in APMC Act and streamlining of Mandi fee, the draft proposed using the DGFT field offices, Export Promotion Councils, Commodity Boards and Industry Associations to act as advocacy forum for reform by all the States.

The draft policy also talks about development of export-centric clusters, promoting value added exports through incentives, special focus on value added exports of organic products, developing uniform packaging for organic products, marketing and promotion of ‘produce in India’ through Geographical Indication (GI) registration and putting in place post-harvest infrastructure support for smooth logistical movement of agri produce.


Q5- What are the recommendations of Deepak Mohanty Committee on financial inclusion?

The Reserve Bank of India (RBI) constituted (2015) a committee under the Chairmanship of Deepak Mohanty, RBI executive director, with the objective of working out a medium-term (five-year) measurable action plan for financial inclusion. The terms of reference  included reviewing the existing policy of financial inclusion, including supportive payment system and customer protection framework, taking into account the recommendations made by various committees set up earlier. The Committee also aimed at studying the cross-country experience in financial inclusion to identify key learnings, particularly in the area of technology-based delivery models, that could inform policies and practices. The committee will also suggest a monitorable medium-term plan for financial inclusion in terms of its various components like payments, deposit, credit, social security transfers, pension and insurance. It must be reminded that when this committee was formed, the government, in collaboration with banks, launched the Pradhan Mantri Jan Dhan Yojana in August 2014. Banks had opened about 167.3 million accounts till July 8, 2014. The balance in those accounts was about Rs 20,000 crore. About 51.1 per cent of these accounts were zero-balance accounts.

The Reserve Bank of India (RBI) released the Report on Medium-term Path on Financial Inclusion submitted by 14-member committee headed by RBI Executive Director Deepak Mohanty in December 2015.

Key recommendations

  • Augment the government social cash transfer in order to increase the personal disposable income of the poor. It would put the economy on a medium-term sustainable inclusion path.
  • Sukanya Shiksha Scheme: Banks should make special efforts to step up account opening for females belonging to lower income group under this scheme for social cash transfer as a welfare measure.
  • Aadhaar linked credit account: Aadhaar should be linked to each individual credit account as a unique biometric identifier which can be shared with with Credit information bureau to enhance the stability of the credit system and improve access.
  • Mobile Technology: Bank’s traditional business model should be changed with greater reliance on mobile technology to improve ‘last mile’ service delivery.
  • Digitisation of land records: It should be implemented in order to increase formal credit supply to all agrarian segments through Aadhaar-linked mechanism for Credit Eligibility Certificates (CEC).
  • Nurturing self-help groups (SHGs): Corporates should be encouraged to nurture SHGs as part of Corporate Social Responsibility (CSR) initiative.
  • Subsidies: Government should replace current agricultural input subsidies on fertilizers, irrigation and power by a direct income transfer scheme as part of second generation reforms.
  • Agricultural interest subvention Scheme: It should be phased out.
  • Crop Insurance: Government should introduce universal crop insurance scheme covering all crops starting with small and marginal farmers with monetary ceiling of Rs. 2 lakhs.
  • Multiple Guarantee Agencies: Should be encouraged to provide credit guarantees in niche areas for micro and small enterprises (MSEs). It would also explore possibilities for counter guarantee and re-insurance.
  • Unique identification of MSME: It should be introduced for all MSME borrowers and information from it should be shared with credit bureaus.

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