1 | Economy Note

1. Shanta Kumar Committee of FCI Restructuring:

Economic Survey Summary: Shanta Kumar Committee Report
This is summary of Shanta Kumar Committee Report on FCI , The high Level Committee
(HCL) on restructuring of Food Corporation of India (FCI),major issue before the Committee
was how to make the entire food grain management system more efficient by reorienting the
role of FCI in MSP operations, procurement, storage and distribution of grains under
Targeted Public Distribution System (TPDS).
This post contains summary from Economic Survery Vol 2 .
Procurement related issues:
The FCI should hand over all procurement operations of wheat, paddy, and rice to
states that have gained sufficient experience in this regard and have created
reasonable infrastructure for procurement. The FCI will accept only the surplus (after
deducting the needs of the states under the NFSA) from these state governments (not
millers) to be moved to deficit states. The FCI should move on helping those states
where farmers suffer from distress sales at prices much below MSP, and which are
dominated by small holdings.
Centre should make it clear to states that in case of any bonus being given by them on
top of MSP, it will not accept grains under the central pool beyond the quantity
needed by the state for its own PDS and OWS.
The statutory levies including commissions need to be brought down uniformly to 3
per cent, or at most 4 per cent of MSP, and this should be included in the MSP itself
(states losing revenue due to this rationalization of levies can be compensated
through a diversification package for the next three-five years);
The Government of India must provide better price support operations for pulses and
oilseeds and dovetail their MSP policy with trade policy so that their landed costs are
not below their MSP.
Cash transfers in PDS should be gradually introduced, starting with large cities with
more than 1 million population; extending it to grain surplus states; and then giving
deficit states for the option of cash or physical grain distribution.
On PDS- and NFSA-related issues:
Given that leakages in the PDS range from 40 to 50 per cent, the GoI should defer
implementation of the NFSA in states that have not done end to end computerization; have
not put the list of beneficiaries online for anyone to verify; and have not set up vigilance
committees to check pilferage from PDS.
Coverage of population should be brought down to around 40 percent.
BPL families and some even above that they be given 7kg/person.
On central issue prices, while Antyodya households can be given grains at ` 3/2/1/kg for
the time being, but pricing for priority households must be linked to MSP.
On stocking and movement related issues:
FCI should outsource its stocking operations to various agencies.
Covered and plinth (CAP) storage should be gradually phased out with no grain stocks
remaining in CAP for more than 3 months.
Silo bag technology and conventional storages wherever possible should replace CAP.
On Buffer Stocking Operations and Liquidation Policy:
DFPD/FCI have to work in tandem to liquidate stocks in OMSS or in export markets,
whenever stocks go beyond the buffer stock norms. A transparent liquidation policy is the
need of hour, which should automatically kick-in when FCI is faced with surplus stocks than
buffer norms.
Greater flexibility to FCI with business orientation to operate in OMSS and export
markets is needed.

2 | Economy Note

On direct subsidy to farmers:

Farmers be given direct cash subsidy (of about Rs 7000/ha) and fertilizer sector can then
be deregulated.
On end to end computerization:
The HLC recommends total end-to-end computerization of the entire food management
system, starting from procurement from farmers, to stocking, movement, and finally
distribution through the TPDS.
On the new face of the FCI:
The new face of the FCI will be akin to an agency for innovations in the food management
system with the primary focus of creating competition in every segment of the foodgrain
supply chain, from procurement to stocking to movement and finally distribution under the
TPDS, so that overall costs of the system are substantially reduced and leakages plugged and
it serves a larger number of farmers and consumers.
2. PJ Nayak Committee on Bank Governance:
Autonomy for public sector banks has remained a perpetual goal for banks as well as
policymakers.
Reform agenda has attracted its fair share of supporters and critics; autonomy in the
current context is in terms of freedom for PSBs independent of their government ownership
A crucial issue has been the dependence of PSBs on government owners for more capital
Top management of PSBs has not been able to resist political will, according to many
estimates.
P.J. Nayak Committee Report
The P. J. Nayak Committee report was constituted by the RBI for making recommendations
regarding corporate governance in PSU banks
Recommendations of the Nayak Committee
The committee has submitted its report on 12th May 2014 and made the following main
recommendations:
Scrapping and removal of Bank Nationalisation Acts, SBI Act and SBI(Subsidiary
Banks) Act
Conversion of PSBs into Companies as per the Companies Act
Formation of a Bank Investment Company/BIC under the Companies Act; transfer of
shares by the central government in PSBs to the BIC
BIC in turn would have over the controlling power to boards of PSBs
Government will only control earning return on investment
Fair return on investment to the Central government would be the responsibility of
BIC.
Appointments of CEOs, Inside Directors and top Executives of PSBs would be the
responsibility of the Bank Boards Bureau constituting three serving or retired bank
chairmans and the government would not be involved in this decision in any way
Nayak committee also recommends proportionate voting rights to all shareholders
and reduction of governmental shareholding to 40%
Points Against the Committee:
Bankers in disagreement with the report said that in many banks, government holding was
above 51% which could be diluted to bring more equity
Also, there is no need for reducing the government stake below 51% when markets are
conducive for equity raising
Proper examination is needed for director appointments and board should spend more
time on policy issues; Nayak panel suggested government and RBI should not be part of the

3 | Economy Note
appointment process and both should withdraw their director nominees from the boards of
PSBs
All board level appointments are the responsibility of RBI and taking away this
responsibility could have negative repercussions if PSB boards are not well governed
Points in Favour of Committee:
Bankers in support of the committee recommendations indicated its provisions would
ensure more professionalism in decision making at a point where bad assets are on the rise
and the need for capital is essential
Banks will also be able to become more efficient and raise funds rather than depending
upon budgetary support
Moreover, the government suffers from various constraints when it comes to providing
capital for the PSBs; this can be eliminated if the Nayak committee report is accepted
Panels recommendations will enhance the quality of directors in the bank and improve the
governance and accountability of independent directors in decision making
Facts and Stats
Nayak panel estimates that by 2018, PSBs will need an infusion of INR 5.87 lakh crore
PSBs are committed to retain stake of government at 52% or above
Innovative means will be used to acquire additional capital to meet Basel III capital
adequacy norms and meet higher provisioning requirements
Budget 2015 has also conferred autonomy on PSBs; holding company will be able to
leverage its holding of quality shares thereby raising money for even those PSBs which are at
a disadvantage
Government has also run out of options for funds for the recapitalisation of PSBs and the
fiscal responsibilities of the government will persist even after the shares are transferred to
NOFHC, as per the 14th Finance Commission
Budget 2015 has set aside INR 7940crore for capitalisation of banks which is lower than
what the budget had sanctioned in the previous year
This is higher than INR 6990 crore allocated this fiscal to group of 9 PSBs measuring
efficiency of parameters laid down by the government
Autonomy for PSBs will remain tough till they gain financial independence.

3. SARFAESI Act to cover NBFC:

The Budget proposal to treat non-banking financial companies (NBFCs) as financial
institutions under the SARFAESI Act (The Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 ) will be a big boost to the sector. A
long-standing demand of the industry, this will allow NBFCs to enjoy the benefits that
presently apply only to banks.
It is proposed that NBFCs registered with RBI and having asset size of Rs.500 crore and
above will be considered for notifications as financial institution in terms of the SARFAESI
Act, 2002.
Present Scenario:

4 | Economy Note

Currently, NBFCs are not covered under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act.
Though the Reserve Bank of India has tightened the NPA recognition norms, it has
not laid out clear guidelines either on the recovery mechanism or the provisions for
NBFCs to take action against defaulters under SARFAESI Act.
Most of the NBFCs are unable to recover bad debts. There have been lakhs of cases
that are dragged to court every year by NBFCs. Hence, the working group of RBI,
headed by Usha Thorat, had recommended that the Act be extended to cover the
NBFCs also.

SARFAESI Act:
This act allows banks and financial institutions to auction properties (residential and
commercial) when borrowers fail to repay their loans. It enables banks to reduce their nonperforming assets (NPAs) by adopting measures for recovery or reconstruction.
Upon loan default, banks can seize the securities (except agricultural land) without
intervention of the court.
SARFAESI is effective only for secured loans where bank can enforce the underlying
security. In such cases, court intervention is not necessary, unless the security is
invalid or fraudulent. However, if the asset in question is an unsecured asset, the
bank would have to move the court to file civil case against the defaulters.
The SARFAESI Act also provides for the establishment of Asset Reconstruction
Companies (ARCs) regulated by RBI to acquire assets from banks and financial
institutions.
The Act provides for sale of financial assets by banks and financial institutions to
asset reconstruction companies (ARCs). RBI has issued guidelines to banks on the
process to be followed for sales of financial assets to ARCs.
The Act provides three alternative methods for recovery of non-performing assets, namely:
1. Securitisation
2. Asset Reconstruction
3. Enforcement of Security without the intervention of the Court
The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1lac.
NPA loan accounts where the amount is less than 20% of the principal and interest are not
eligible to be dealt with under this Act.
The Act empowers the Bank:
To issue demand notice to the defaulting borrower and guarantor, calling upon them
to discharge their dues in full within 60 days from the date of the notice.
To give notice to any person who has acquired any of the secured assets from the
borrower to surrender the same to the Bank.
To ask any debtor of the borrower to pay any sum due or becoming due to the
borrower.
Any Security Interest created over Agricultural Land cannot be proceeded with. If the
borrower fails to comply with the notice, the Bank may take recourse to one or more of the
following measures:
Take possession of the security
Sale or lease or assign the right over the security
Manage the same or appoint any person to manage the same

5 | Economy Note

4. The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015:

The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 was
introduced in Lok Sabha on March 20, 2015 by the Minister of Finance, Mr. Arun
Jaitley.

The Bill will apply to Indian residents and seeks to replace the Income Tax (IT) Act,
1961 for the taxation of foreign income. It penalizes the concealment of foreign
income, and provides for criminal liability for attempting to evade tax in relation to
foreign income.

Tax rate: A flat rate of 30 per cent tax would apply to undisclosed foreign income or
assets of the previous assessment year. No exemption, deduction or set off of any
carried forward losses (as provided under the IT Act) would apply. This would apply
from April 1, 2016 onwards.

Scope of income to be taxed: The total undisclosed foreign income and asset of
an individual would include: (i) income, from a source located outside India, which
has not been disclosed in the tax returns filed; (ii) income, from a source outside
India, for which no tax returns have been filed; and (iii) value of an undisclosed asset,
located outside India.

One - time compliance opportunity: A one-time compliance opportunity to

persons who have any undisclosed foreign assets (for all previous assessment years)
will be provided for a limited period. Such persons would be permitted to file a
declaration before a tax authority, and pay a penalty at the rate of 100%.

Tax Authorities: The relevant tax authorities and their jurisdiction would be as
specified under the IT Act. They would have powers of inspection of documents, and
evidence. The proceedings are to be judicial.

Penalty for offences:

o

Undisclosed foreign income/assets: The penalty for nondisclosure of

foreign income or assets would be equal to three times the amount of tax
payable, in addition to tax payable at 30%.

Failure to furnish returns: The penalty for not furnishing income tax
returns in relation to foreign income or assets is a fine of Rs 10 lakh. This would
not apply to an asset, with a value of five lakh rupees or less.

Undisclosed or inaccurate details of foreign assets: If a person who has

filed tax returns does not disclose his foreign income, or submits inaccurate
details of the same, he has to pay a fine of Rs 10 lakh. This would not apply to
an asset, with a value of five lakh rupees or less.

Second time defaulter: Any person, who continues to default in paying tax
that is due, would be liable to pay an amount equal to the amount of tax arrears.

6 | Economy Note
o

Other defaults: If a person fails to abide by the tax authority in (i) answering
questions, (ii) signing off on a statement, (iii) attending or producing relevant
documents, he is to pay a fine between Rs 50,000 to two lakh rupees.

Prosecution for certain offences:

o

Wilful attempt to evade tax: The punishment would be rigorous

imprisonment from three to 10 years, and a fine.

Wilful attempt to evade payment of tax: The punishment would be rigorous

imprisonment from three months to three years, and a fine.

Failure to furnish returns: or non disclosure of foreign assets in returns: The

punishment is rigorous imprisonment of six months to seven years, and fine.

Punishment for abetment: The punishment is rigorous imprisonment of six

months to seven years, and fine.

Liability of company: For any offence under this Act, every person responsible
to the company is to be liable for punishment. His liability is absolved if he
proves that the offence was committed without his knowledge.

5. The Payment and Settlement Systems (Amendment) Bill, 2014

The Payment and Settlement Systems (Amendment) Bill, 2014 was introduced in Lok
Sabha on December 8, 2014 by the Minister of Finance, Mr. Arun Jaitley. It was
passed by Lok Sabha on December 9, 2014.

The Bill amends the Payment and Settlement Systems Act, 2007, which was enacted
to regulate and supervise payment systems in India. The Act designates the Reserve
Bank of India (RBI) as the authority to regulate such systems. These systems include
inter-bank transfers such as the National Electronics Funds Transfer (NEFT) system,
the Real Time Gross Settlement (RTGS) System, ATMs, credit cards, etc.

The Bill seeks to extend the application of the Act to a designated trade repository, or
issuer, in relation to payment systems. In this regard, it introduces three definitions:

Issuer: A person who issues a legal entity identifier or similar unique identification,
as specified by the RBI from time to time.

Legal entity identifier: A unique identity code assigned to a person by an issuer to

identify that person in such derivatives or financial transactions, as specified by the
RBI.

Trade repository: A person who is engaged in the business of collecting, collating,

storing, processing or disseminating electronic records or data relating to such
derivatives or financial transactions, as specified by the RBI.

7 | Economy Note

The Act stipulates that payment obligations and settlement instructions among
system participants is to be determined in accordance with gross or netting
procedure, as approved by the RBI while issuing authorisation to a payment system.

The Bill amends this provision to specify that such payment system would be either
that under the provision which deals with the issue or refusal of authentication or
under any other provision of the Act.

The Act states that where a court has declared a system participant as insolvent, or is
dissolved or wound up, the settlement which is final and irrevocable would not be
affected. Further, the right of the system provider to appropriate any collaterals
contributed by the system participant towards its settlement etc. would also not be
affected. This provision would override that of the Companies Act, 1956, Companies
Act, 2013 and the Banking Regulation Act, 1949.

The Bill modifies this provision to add that the final settlement would not be affected
even in cases where the court or tribunal has appointed a liquidator. It further
clarifies that this would apply to any settlement made prior to such order or
immediately thereafter.

The Bill introduces a new provision for settlement and netting in relation to central
counter parties (who is a system provider who by way of novation interposes between
system participants). It states that upon an order of declaration of insolvency,
dissolution or winding up in relation to a central counter party, the payment
obligations and settlement instructions between the central counter party and the
system participants is to be determined by the central counter party in accordance
with the gross or netting procedure or any other provision of this Act.

This must be approved by the RBI while issuing authorization and such
determination would be final and irrevocable. This provision would override that of
the Companies Act, 1956, Companies Act, 2013 and the Banking Regulation Act,
1949.

The Bill clarifies that the liquidator of the central counter party must: (a) not reopen
any determination that has become final and irrevocable; (b) return the collaterals
held in excess, after appropriating the collaterals provided by the system participants
towards their settlement etc.

The Bill introduces a new provision which empowers the RBI to direct system
providers of a payment system to ensure protection of funds collected from
customers. To this end, system providers must: (i) deposit in a separate bank
account; or (ii) maintain liquid assets of an amount equal to such percentage of the
amounts collected by the system provider from its customers and remaining
outstanding, as specified by the RBI.

6. How to reduce NPA: all steps:

NPAs can be classified in three categories:
Sub_standard Assets: With effect from March 31, 2005, a substandard asset would be
one, which has remained NPA for a period less than or equal to 12 months.

8 | Economy Note
Doubtful Assets: With effect from March 31, 2005, an asset would be classified as doubtful
if it has remained in the sub_standard category for a period of 12 months.
Loss Assets - A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written off wholly. In
other words, such an asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some rescue or
recovery value.
Reasons for Occurrence of NPAs
NPAs can be termed as "Bad Loans" or defaults. It is the failure to meet financial obligations,
non-payment of a loan installment. These loans can occur due to the following reasons:
(i) Normal banking operations
(ii) Bad lending practices
(iii) Incremental component (due to internal bank management, like credit policy, terms of
credit, etc...)
(iv) Competition banks are enormously selling unsecured loans
The Problems caused by NPAs: NPAs do not just reflect badly in a bank's account books, they
adversely impact the national economy.
Following are some of the impacts of NPAs:
1. Depositors do not get rightful returns and many times may lose uninsured deposits. Banks
may begin charging higher interest rates on some products to compensate Non-performing
loan losses
2. Bank shareholders are adversely affected
3. Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy
suffers due to loss of good projects and failure of bad investments
4. When bank do not get loan repayment or interest payments, liquidity problems may
ensue.
Result of NPAs on an organization
1. Decrease profitability.
2. Reduce capital assets and lending limits.
3. Increase loan loss reserves.

9 | Economy Note
How to reduce NPA? - Non Performing Assets can be reduced by taking some major steps
by the banks. Some steps are as follows by which bank can reduce NPA 1. SARFAESI ACT 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to
recover their non-performing assets without the intervention of the Court.
The Act provides three alternative methods for recovery of non-performing assets, namely: i. Securitisation
ii. Asset Reconstruction
iii. Enforcement of Security without the intervention of the Court.
The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00
lac. NPA loan accounts where the amount is less than 20% of the principal and interest are
not eligible to be dealt with under this Act.
Non-performing assets should be backed by securities charged to the Bank by way of
hypothecation or mortgage or assignment. Security Interest by way of Lien, pledge, hire
purchase and lease not liable for attachment under sec.60 of CPC, are not covered under this
Act
The Act empowers the Bank:
(i.) To issue demand notice to the defaulting borrower and guarantor, calling upon them to
discharge their dues in full within 60 days from the date of the notice.
(ii.) To give notice to any person who has acquired any of the secured assets from the
borrower to surrender the same to the Bank.
(iii.) To ask any debtor of the borrower to pay any sum due or becoming due to the
borrower.
(iv.) Any Security Interest created over Agricultural Land cannot be proceeded with.
If on receipt of demand notice, the borrower makes any representation or raises any
objection, authorised officer shall consider such representation or objection carefully and if
he comes to the conclusion that such representation or objection is not acceptable or tenable,
he shall communicate the reasons for non acceptance WITHIN ONE WEEK of receipt of
such representation or objection.
A borrower / guarantor aggrieved by the action of the Bank can file an appeal with DRT and
then with DRAT, but not with any civil court. The borrower / guarantor has to deposit 50%
of the dues before an appeal with DRAT.

10 | Economy Note
If the borrower fails to comply with the notice, the Bank may take recourse to one or more of
the following measures:
(i) Take possession of the security
(ii) Sale or lease or assign the right over the security
(iii) Manage the same or appoint any person to manage the same
2. Lok Adalats: Lok Adalat is for the recovery of small loans. According to RBI guidelines
issued in 2001, they cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed are
covered.
3. Compromise Settlement: It is a scheme which provides a simple mechanism for
recovery of NPA. It is applied to advances below Rs. 10 Crores.
4. Credit Information Bureau: A Credit Information Bureau help banks by maintaining
a data of an individual defaulter and provides this information to all banks so that they may
avoid lending to him/her.
5. DEBT RECOVERY TRIBUNALS: The debt recovery tribunal act was passed by Indian
Parliament in 1993 with the objective of facilitating the banks and financial institutions for
speedy recovery of dues in cases where the loan amount is Rs. 10 lakhs and above.

7. What is corporate governance?

Corporate governance refers to the set of systems, principles and processes by which a
company is governed. They provide the guidelines as to how the company can be directed or
controlled such that it can fulfil its goals and objectives in a manner that adds to the value of
the company and is also beneficial for all stakeholders in the long term. Stakeholders in this
case would include everyone ranging from the board of directors, management, shareholders
to customers, employees and society. The management of the company hence assumes the
role of a trustee for all the others.
What are the principles underlying corporate governance?
Corporate governance is based on principles such as conducting the business with all
integrity and fairness, being transparent with regard to all transactions, making all the
necessary disclosures and decisions, complying with all the laws of the land, accountability
and responsibility towards the stakeholders and commitment to conducting business in an
ethical manner. Another point which is highlighted in the SEBI report on corporate
governance is the need for those in control to be able to distinguish between what are
personal and corporate funds while managing a company.
Why is it important?
Fundamentally, there is a level of confidence that is associated with a company that is known
to have good corporate governance. The presence of an active group of independent directors

11 | Economy Note
on the board contributes a great deal towards ensuring confidence in the market. Corporate
governance is known to be one of the criteria that foreign institutional investors are
increasingly depending on when deciding on which companies to invest in. It is also known
to have a positive influence on the share price of the company. Having a clean image on the
corporate governance front could also make it easier for companies to source capital at more
reasonable costs. Unfortunately, corporate governance often becomes the centre of
discussion only after the exposure of a large scam.
8. Fiscal Policy:
Tools of fiscal policy
Components of Spending:
Maintenance (including staff salaries): This component cant be altered in short-run and
hence is hardly a part of policy making, however, in long-run, through VRS and reducing
new jobs in public sector or vice versa, this expenditure can be altered.
Loan payments: This again is a component, which cant be touched in short-run, however,
governments in long-run can reduce these payments or eliminate them by running the
budget surplus.
Subsidies: This component is a major part of policy as it can be altered in short-run, but
unfortunately, subsidies as policy instrument, have been abused in India. These are used by
politicians as poll promise and political instruments to gain more popular support. Ideally
only meritorious subsidies shall be in operation and all the wasteful subsidies must be
phased out, for example, fertilizer subsidy and power subsidy benefits the large farm holder
and capitalist farmers instead of the needy ones. Similarly, the recent example of Aam Aadmi
Party manifesto is a good example, how subsidies should not be used. In place of these,
subsides for health programs, renewable energy, public transport shall be encouraged to
ensure good health and sustainable growth.
Welfare schemes: These are one of the policy options that once introduced cant be removed
due to their populist nature. Similarly, in most of the cases these are necessary too and
important instrument of social welfare and economic growth. However, it is the
implementation part, which is key, as these schemes generally suffer from poor
implementation and massive corruptions and loopholes. Thus, despite being meritorious
expenditure in nature, these at time appears as waste.
Wasteful expenses: Needless to say these are the expenditures that must be curbed with
immediate effect; however, no government in world has neither shown the intention to curb
them, though there are efforts to reduce them from time to time under public pressure. For
example, full page government advertisements in newspaper to generate favorable public
opinion.
Components of Earning
Tax- single: Single most important source on government revenue is also a very important
policy measure as elaborated in the policy combinations above.
Borrowing: Borrowing is a necessary source of funds, though not a desirable one.
Particularly, in developing countries, as tax/GDP ratio is low due to less per capita income.
However, it becomes an important part of monetary policy as well due to its impact on
interest rates and credit creation and thus, overall money supply.

12 | Economy Note

Proceeds from sale/lease of assets: This is a both a one-time and regular source of income.
For example, lending government buildings for private use, or other assets such as telecom
spectrum or lease of a mine block for certain years, is a regular source of income, whereas
sale of PSUs is a onetime income. These however, are good sources of revenue, as they
provide government more room to spend without increasing taxes.
Profits from PSU: Profits from PSUs can also be a potential source of revenue, however,
since most of PSUs are generating losses, Indian government usually ends up subsidizing
them. At times PSUs are deliberately kept in losses to keep prices low and ensure wider
outreach for social welfare, example, PSU banks in pre-reform era and post-offices.
Similarly, at other times, they are in losses due to inefficiency and wasteful expenditure.
Most striking case in India, is of ministerial corruption to keep PSUs in loss deliberately to
benefit private sector, for example, CAG report says that, Indian Airlines was deliberately
kept in losses by avoiding flights on profitable routes to benefit private airlines during UPA
governments rule. Similarly, in previous NDA government, BSNL was deliberately pushed
into loss, by increasing tariffs to provide competitive edge to a newly launched company by
one of the biggest business conglomerate in India.
Various combinations of fiscal policies
Reduction in Government Spending and no Change in Tax Rates (Contractionary fiscal
policy): This policy is useful in moderate inflation, which though is part of governments
priority, is not the foremost objective. This would affect the growth little and sometimes even
boost growth due to cut in inflation.
Reduction in Government Spending and Increase in Tax Rates (Contractionary fiscal policy):
This policy is useful in high inflation, when curbing inflation is the foremost objective, even
above the economic growth in the short run.
Rigid Government Spending and Increasing Tax Rates (Contractionary fiscal policy): This is
used when economy is overheated (When a prolonged period of good economic growth and
activity causes high levels of inflation as producers overproduce and create excess production
capacity in an attempt to capitalize on the high levels of wealth) due to too much excitement
on the part of investors. Increase in taxes and interest rates (through monetary policy) would
curb the investments in short-run and prevent economy from going into recession after overheating.
Reduction in Government Spending and an Equivalent Reduction in Taxes (Balanced Fiscal
Policy): This, is a balanced budget approach, when a government decides to reduce its size
and level of its intervention in economy, then this policy can be adopted. It simply means
government is managing less money and hence less impact on markets and business.
Increase in government spending and tax rates (Balanced fiscal policy): This would be
opposite to the previous policy as it would increase the size of government. A government on
the path of socialization would adopt such policy.
Increase in government spending and decrease in tax rates (Expansionary fiscal policy): This
would be adopted to give economy a stimulus though injection of funds, first the government
decreases taxes and leaves more income with people to spend and invest, then it also spends
more to give further boost to demand through additional income generated through
government work. This is only possible in short-run as this policy leads to massive deficits
and thus, should be used when situation is alarming.

13 | Economy Note
Increase in government spending and no change in tax rates (Expansionary fiscal policy):
This is also a stimulus policy (through public sector), but a more moderate one, which can be
used for a bit longer compared to previous.
Rigid Government spending and decrease in tax rates (Expansionary fiscal policy): This
policy is usually adopted to give incentive to private sector to invest and boost growth. Again,
a short-run stimulus policy like previous two.
9. MGNREGA: Sustainable Development v/s Populism:
The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is a social
security measure that guarantees of Right to Work to Indian citizen. Enacted by legislation
on 25 August 2005; the scheme provides a legal guarantee for at least one hundred days of
employment in every financial year to adult members of any rural household willing to do
public work-related unskilled manual work at the statutory minimum wage.
Aim: It aims at addressing causes of chronic poverty through the works (projects) that are
undertaken and thus ensuring sustainable development. Finally, there is an emphasis on
strengthening the process of decentralization through giving a significant role to Panchayati
Raj Institutions (PRIs) in planning and implementing these works.
Key features:
Legal right to work: Unlike earlier employment guarantee schemes, the Act provides a legal
right to employment for adult members of rural households. At least one third beneficiaries
have to be women. Wages must be paid according to the wages specified for agricultural
labourers in the state under the Minimum Wages Act, 1948.
Time bound guarantee of work and unemployment allowance: Employment must be
provided with 15 days of being demanded failing which an unemployment allowance must
be given.
Decentralized planning: Gram-Sabhas must recommend the works that are to be
undertaken and at least 50% of the works must be executed by them. PRIs are primarily
responsible for planning, implementation and monitoring of the works that are undertaken
Work site facilities: All work sites should have facilities such as crches, drinking water and
first aid.
Transparency and accountability: There are provisions for proactive disclosure through
wall writings, citizen information boards, Management Information Systems and social
audits. Social audits are conducted by gram sabhas to enable the community to monitor the
implementation of the scheme.
Funding: Funding is shared between the centre and the states
MGNREGA was implemented in phases, starting from February 2006, and at present it
covers all districts of the country with the exception of those that have 100% urban
population. The Act provides a list of works that can be undertaken to generate employment
related to water conservation, drought proofing, land development, and flood control and
protection works.
Achievements of MGNREGA:
Ensuring livelihood for people in rural areas.
Large scale participation of women, Scheduled Castes and Scheduled Tribes (SCs/STs) and
other traditionally marginalized sections of society. SCs/STs account for 51% of the total
person-days generated and women account for 47% of the total person-days generated.
Increasing the wage rate in rural areas and strengthening the rural economy through the

14 | Economy Note
creation of infrastructure assets.
Facilitating sustainable development, and
Strengthening PRIs by involving them in the planning and monitoring of the scheme.
CAG report on MGNREGA
Some of the findings of the CAG are highlighted below:
A. Inefficient Planning: According to the MGNREGA guidelines, the responsibility for the
implementation of the scheme and the primary unit of planning is the Gram Panchayat (GP).
The CAG audit however found a number of inefficiencies with this planning process. Several
states, annual plans at the GP level were either not prepared or prepared in an incomplete
manner. The CAG also noted significant delays at every level in the submission of the annual
plans.
B. Shortfall and Delays in Execution of Works:
The effectiveness of the planning has to be measured against the actual execution. The audit
report observed large variations in some states between planned employment generations
(as per the labour budget) and actual employment generated.
C. Human Resource Shortfall and Capacity: The MGNREGA guidelines envisage Gram
Rozgar Sahayaks (GRS) appointed at the village level to assist the GP in the implementation
of the scheme. These GRS are responsible for maintaining all documents, overseeing the
process of registration, distribution of job cards, allocation of works, payment of wages and
ensuring monitoring of the scheme through social audits. The audit report found widespread
shortages in GRS posts. Further, funds for training personnel were highly under-utilized in
many states.
D. Specific problems related to wages and MGNREGA works: Job cards were not issued to
households in various states. Photographs on job cards (an important identifier against fraud
and misrepresentation) were missing. Non-payment or under payment, delayed payment of
wages was noticed
E. Record Keeping and Monitoring: The audit found poor record maintenance at not just the
GP level but also at the block and district levels.
F. Beneficiary Analysis: While at an all India level the total women beneficiaries is 33% (as
per the norm), this ratio was less than 1/5th in Gujarat, Madhya Pradesh, Odisha, Uttar
Pradesh, West Bengal, Jammu and Kashmir and Mizoram. Around 70% of respondents were
aware of the timeliness within which wages are to be paid. Only half of the interviewed
beneficiaries were aware of the prescribed quantum of work which entitled them to full wage
payment.
Recommendations of the Standing Committee on Rural Development:
Regulation of job cards
Participation of women
Participation of people with disabilities:
Utilization of funds
Context specific projects and convergence
Payment of unemployment allowance
Regular monitoring
Training of functionaries
The future of MGNREGA is uncertain as the new Government at Center has shown its
inclination towards complete restructuring of the scheme. It has proposed to limit

15 | Economy Note
MGNREGA programmes within tribal and poor areas. Fund disbursement has been reduced
by 45%, since the new government has taken charge.
They central point of their argument was, Despite numerous hurdles, the MGNREGA has
achieved significant results. At a relatively small cost (currently 0.3% of India's GDP), about
50 million households are getting some employment at NREGA worksites every year. A
majority of NREGA workers are women, and close to half are Dalits or Adivasis. A large body
of research shows that the NREGA has wide-ranging social benefits, including the creation of
productive assets.
On the other hand some analysts argue, MGNREGA belittles the long-term development of
the worker by paying out cash for unproductive labour and discourages skill development
which alone can lead to long-term and sustainable employment of the rural poor. Instead the
money can be used for skill development, e.g., painting, polishing, assembling, packaging,
and equipment handling, among others, to cite a few. This would enable the poor and needy
to become self-dependent and become a contributor, rather than a burden on exchequer.
The current debate is also important from the point of view of the political viewpoint; as
from the recent election results, people have voted out government that promised social
change through grants, subsidies, and doles. While MGNREGA is not exactly a dole program,
the poor planning by village level authorities and dysfunctional Gram Sabha have made it so
as the asset creation is very poor and the money is just spent on social welfare, instead of
rural infrastructure.
10. Hunger:
Hunger is the physical sensation of desiring food. However when we talk about people
suffering from hunger we usually refer to those who, for sustained periods, are unable to eat
sufficient food to meet basic nutritional needs. i.e. for weeks, even months, its victims must
live on significantly less than the recommended nutritional levels that the average person
needs to lead a healthy life.
How much food do you need: The energy and protein that any person needs varies according
to age, sex, body size, physical activity and to some extent climate. On average, the body
needs more than 2,100 kilocalories per day per person to allow a normal, healthy life. Extra
energy is needed during pregnancy and lactation.
What causes hunger?
In purely quantitative terms, there is enough food available to feed the entire global
population of 7 billion people. And yet, one out of every eight people is going hungry (about
850 million people worldwide). The reasons are:
Poverty Trap: The poverty hunger nexus is considered the most important factor in causing
hunger among people. The poverty-stricken do not have enough money to buy or produce
enough food for themselves and their families. In turn, they tend to be weaker and cannot
produce enough to buy more food. Thus the poor are hungry and their hunger traps them in
poverty.
Politics of Distribution: Amartya Sen Won a Nobel Prize in part for demonstrating that
hunger in modern times is not typically the product of a lack of food. Rather, hunger usually
arises from food distribution problems, or from governmental policies in the developing
world. It has since been broadly accepted that world hunger results from issues with the
distribution as well as the production of food, with Sen's 1981 essay Poverty and Famines: An
Essay on Entitlement and Deprivation having played a prominent part if forging the new
consensus

16 | Economy Note
Food wastage is very high In developed countries a lot of food items are wasted due to
improper eating habits. Whereas high losses in developing nations are mainly due to a lack
of technology and infrastructure as well as insect infestations, microbial growth, damage and
high temperatures and humidity.
Socio Cultural Factors: World Bank studies consistently find that about 60% of those who
are hungry are female. The apparent explanation for this imbalance is that, compared to
men, women more often forgo meals to feed their children. Also lack of awareness among
people about proper dietary requirements and nutritional value of various food items causes
malnourishment.
Indian effort to combat Hunger:
With frequent famines and stagnant agricultural growth feeding the huge population of India
was a major concern after independence. So the 1st 5year plan focused mainly on agriculture
to increase the food production. However India still had to depend on food aid like PL480 of
USA. It was only after green revolution India attained self-reliance and also surplus in food
grain production.
Currently India is facing a paradoxical situation where at one side it has a record production
of food grains with overflowing godowns and on the other hand having the largest number of
hungry people in the world. To overcome this situation and combat the chronic hunger and
malnutrition the government has undertaken several initiatives. Some of which are:
The Targeted public Distribution system of India along with Antodaya anna Yojana aims to
provide access to food grains to the most vulnerable sections of our society
There are a number of food-for-work programmes and employment guarantee schemes, the
largest of which is the Mahatma Gandhi National Rural Employment Generation Scheme
(MNREGA) aims to increase income levels to provide access to food and nutrition.
Rashtriya Krishi Vikas Yojna and National Food Security Mission, the two of the major
schemes for the agriculture sector to increase the agricultural productivity to feed the hungry
millions of our country. There are also considerable efforts to usher in a 2nd green revolution
in our country. With scare land resource in our country these schemes to increase
productivity attain a very important role in achieving food security in future
Among the direct nutrition supplementation programs are the Midday Meal Scheme, which
is now almost universal in all the states, and the Integrated Child Development Services
(ICDS), which is the largest supplementation program of its kind in the world (and probably
the largest ever in human history) plays a huge role in reducing hunger and malnutrition
among children.
Food fortification programs and schemes like Nutri Farms and Livestock development
programs are striving towards reducing malnutrition among the people.
The proposed National Food Security Act when implemented would make the access of
food a matter of right with a governmental commitment to provide cheap food grains to its
people.

Action plan against hunger :

Food donations (food aid) sent to the worst affected countries by those who have plenty is a
first and essential step in emergencies, and nearly 10 million tonnes of cereals are provided
each year to poorer countries as food aid. However it is not a lasting solution to the problem.
The other steps to be adopted are:
Promoting greater self-reliance in countries suffering from hunger - hence reducing
dependency on imports.
Re-examining farm policies in developing countries to make sure that they encourage -

17 | Economy Note
rather than discourage - farmers to produce food on a dependable basis. Policies should aim
to ensure fair prices for farm produce, access to the means of production, and wise land and
water use.
Reorienting national policies to encourage both public and private investments in food and
agricultural sector.
Improving transportation, marketing and storage systems to ensure that available food
reaches areas where and when it is needed most.
Re-examining food aid to make sure it reaches the hungry but does not disrupt national
production.
Greater co-operation among developed and developing nations to remove trade barriers
and help stabilize international prices for agricultural commodities.
To make sure developing countries have a fair chance of competing in world commodity
markets and that agricultural support policies do not unfairly distort international trade.
Avoiding over consumption and the waste of food in all countries.
To ensure that countries are prepared to adapt to climate change and mitigate negative
effects.