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Mains Special

ECONOMIC SURVEY
2015-2016
With Practice Questions

For Civil Services Examination


Objective
Excerpts from Economic Survey
with Practice Questions

The following chapters contain some of the most important facts


and analysis from the economic survey. Reading this, we are
sure that, students would be able to cover maximum topics in
minimum time. While reading survey is always a better option
to understand the issues involved, however, given the time
constraint from now onwards, that option won’t be accessible for
a vast majority and thus, this study material can come to rescue
of all such students.
We have also provided questions at the end of each chapter for
your revision. Some answers you may be able to find in the
chapter itself. Whereas some questions would have a theme
from survey, but may also ask about additional facts and
concepts. This will help you to prepare for overall Indian
economy portion from paper 3. We hope you would find this
useful and practise hard to utilize it in proper manner. The
examination today is not just about how much you know, but it
is also about, how much you can recall, reconnect, and reorient
in the limited time and high pressure of examination hall and
thus, the key to success lies in brainstorming and practising
more and more questions only.

All the best !!!

PREFACE
Economic Survey (2015-2016)

INDEX
1. Economic Outlook, Prospects and Policy challenges

2. The Chakravyuha Challenge of the Indian Economy

3. Agriculture: More from Less

4. Fiscal Capacity for the 21st Century

5. Subsidies

6. Preferential Trade Agreements

7. Structural Changes in India's Labour Markets

8. Powering "One India"

9. State of the Economy: An overview

10. Public Finance

11. Monetary Management and Financial Intermediation

12. External Sector

13. Prices, Agriculture and Food Management

14. Industrial, Corporate and Infrastructure Performance

15. Social Infrastructure, Employment and Human Development


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ECONOMIC OUTLOOK, PROSPECTS AND


POLICY CHALLENGES
• 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 fiscal
consolidation 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 good
economics 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 activity
and non-trivial risks of extreme events so to protect Indian Economy & a recalibration of expectations
is a necessity.

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 competitiveness
rankings.
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• Restoring stability and predictability in tax decisions;


• Implementing a major public investment program to strengthen the country's infrastructure and make up
for 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 up
subsidies.
• Undertaking comprehensive reforms of the power sector (especially the UDAY Scheme) &Avoiding policy
reversals
Challenges which still Persists:
• Launching and better implementing schemes were privileged over policy changes and that policies to
unlock 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 private
investment, 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, eliminating
exemption Raj & corporate subsidies.
• Second, major investments in people- Their health and education-will be necessary to exploit India's
demographic dividend, better delivery of essential services by expand the capacity and improve the
efficiency 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.
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 in table.

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• More flexible ex-change rates, how-ever, could moderate full-blown eruptions into less disruptive but more
prolonged volatility.
• 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.
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 projected
to increase to 7.6% in 2015-16 from 7.2% in 2014-15, mainly because private final consumption expenditure
has accelerated.
• Although agriculture is likely to register low growth for the 2nd year in a row on account of weak
monsoons, it has performed better than last year. Industry has shown significant improvement primarily
on account of the surprising acceleration in manufacturing (9.5% vis-à-vis 5.5% in 2014-15). Meanwhile,
services continue to expand rapidly.
• Inflation remains under control. The CPI-New Series inflation has fluctuated around 5.5%.
• The current account deficit has declined and is at comfortable levels; foreign exchange reserves have risen
to US$351.5 billion in early February 2016.
• The fiscal sector registered three striking successes: ongoing fiscal consolidation, improved indirect tax
collection 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 revenue
deficit 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% in
the first 9 months (9M) of 2015-16. Indirect taxes were also buoyant. In part, this reflected excise taxes
on diesel and petrol and an increase in the Swachh Bharat cess. Tax performance also reflected an
improvement in tax administration because revenues increased even after stripping out the additional
Revenue Measures (ARMs). Indirect tax revenues grew by 10.7% (without ARMs) and 34.2 per cent
(with ARMs).
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 global
Notes

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growth and demand. As India's exports of manufactured goods and services now constitute about 18%
of GDP, up from about 11% a decade ago.
• 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-related
factors 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 will
the increase in wages and benefits (as recommended by 7th Pay Commission) destabilize prices and
inflation expectations? Most likely, it will not, as was the case of 6th Pay Commission. Significant hike
in 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
commitment to 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 the domestic 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 the
monsoon returns to normal, food prices will ease, especially since the government remains committed to
disciplined increases in Minimum Support Prices (MSPs) for cereals, and rural wage growth remains
muted.
• 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.
External Outlook
• A weak external environment was identified as a major medium- term risk. It turned out to be a short run
risk as well, and the prospects are that it might continue to be one in the period ahead. One of the puzzles
this year has been how remittances have held up despite a dramatic decline in oil prices and hence in the
health of countries that host overseas Indian workers.
The Indian economy and foreign exchange earnings were 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 countries will 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, growth
this year was held back-by about 1-1.2% points relative to last year. for assessing prospects going forward
question 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.

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• One can answer this question by examining how India's exports relative to world GDP have fared compared
with world exports. It is noteworthy that in the 2000s, India's exports of manufactured goods and services
were above the line of best fit but note that services outperformed manufacturing (services data points
are more above the line than manufacturing data points). For the world, there is a similar but less
pronounced pattern, especially for services. In the last 2 years, however, Indian services exports have been
more 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 no
less 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 composition
of Indian exports of services is more favourable than that of Indian exports of manufactured goods. More
of the former goes to the United States, and more of the latter to Asia. Since Asia has slowed down more
rapidly, India's exports of manufactures should have been more affected. Furthermore, in the last year, the
rupee 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's
export performance in services with China's performance in manufacturing at a comparable stage of the
growth surge.
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 agriculture
and 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.
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• 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.
• 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.
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 train
reactions 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 could
undermine the competitiveness of downstream firms and industries.
• India could respond in 3 ways. 1st, the most effective instrument to respond to threats to overall
competitiveness 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 against
dumping (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 manufacturing
and 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

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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.
Questions
1. The Indian economy has shown resilience despite the global turmoil, identify the major factors
behind this and assess the long term stability of Indian economy?
2. The next economic crisis would a crisis generated by the fall in repayment capacity and debt
trap. Critically analyze in context of predictions by Economic Survey 2015-16?
3. Analyze the major reasons behind the recent slowdown of Chinese economy? Discuss its major
impact on global economy with a particular focus on India?
Notes

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THE CHAKRAVYUHA CHALLENGE OF THE


INDIAN ECONOMY
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 interest costs 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.
• 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

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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.

Questions
1. It is commented that India needs a Bankruptcy code to fight the double cancer of NPA and lack
of ease of doing Business. In the light of above statements, explain how the proposed Bankruptcy
code can tackle the above mentioned problems. Also mention the key feature of the Insolvency
and Bankruptcy Code bill 2015.
2. India will always face industrial sickness, till it will continue to intervene in the entry and exit of
firms. Critically analyze with a case study.
Notes

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AGRICULTURE: MORE FROM LESS


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 1/3rd 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:
B. Water efficiency
• 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 content
is 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.
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 that need
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.

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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.
The key bottlenecks in the adoption of this technology are the high initial cost of purchase and the skill
required for maintenance. However, the increase in yields and reduction in costs of power and fertiliser use can
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 public
spending 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) - Into
the Prime Minister's KrishiSinchayi Yojana (PMKSY) offers the possibility of convergence of investments in
irrigation, 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 in
pulses.
• 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 have
yields 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 6709
kg/ha.
• 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 into large 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.
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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 price
uncertainty 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.
• 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.

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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.
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 potential
for 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
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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.

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 in
agriculture.

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.

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Questions
1. The declining growth in agriculture owing to two consecutive drought years indicating a building
up rural distress, discuss a roadmap to ensure complete agrarian transformation of sort to
ensure sustainable livelihoods for the farmers and food security for the population?
2. The past two years have observed a general fall in food inflation? Critically analyze the major
reasons behind this decline; also discuss why the pulses and edible oil have registered a reverse
trend with a significant price rise? Describe its impact on nutritional availability in India?
3. What is net water trade of India and examine the reasons for its present state? Discuss how the
issue can be resolved?
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FISCAL CAPACITY FOR THE 21ST CENTURY


Considering the dramatic changes that, the Indian tax system is likely to witness in the coming time ahead such
as 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 unit
to improve tax administration, the fundamental question that arises is that how can India move from its current
situation 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 Indian
democracy. The state's role is to create the conditions for prosperity for all by providing essential services and
protecting the less well-off via redistribution. For this, it must be levied tax on its citizens to maintain
accountability 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 state
to increase its legitimacy.
Cross-Country Taxation and Expenditure Patterns:
• India taxes and spends less than (OECD) Organisation for Economic Co-operation & Development
countries and its emerging market peers. Infact the spending and tax ratios are the lowest even among
countries with comparable per-capita GDP e.g. Vietnam (28% and 22.2%), Bolivia (43.3% and 25.5%) and
Uzbekistan (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 lowest
among BRICS and lower than both the OECD and EME (Emerging Market Economy averages. India's
tax to GDP ratio at 16.6 per cent also is well below the EME and OECD averages of about 21% and
34%, respectively.
• Over time too, India's tax to GDP ratio has increased by about 10% points over the past 6 decades from
about 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, the
question 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 indicators
of 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, and
human capital expenditure to GDP. Analysing these parameters, it can be concluded that India does not
have a low fiscal capacity. It seems to do better than average.

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• 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 large
gap 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 personal
income 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 into
commensurately strong fiscal capacity. In the long run, if India is to stay "on the line" as its per capita income
grows, it will need to build fiscal capacity. For this, it must refrain from raising exemption thresholds and allow
natural 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: Public
infrastructure, 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 role
efficiently. In this sense, the government's efforts to improve transparency through transparent and efficient
auctioning 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 tax
exemptions Raj which often amount to redistribution towards the richer private sector also need to be
reviewed 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
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relatively identified. Higher rates (with values updated periodically) can be the foundation of local
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.

Questions
1. Taxation is not just about financing expenditure; it is economic glue that binds citizens to the state
in a two-way accountability relationship. Analyze in the context of India's Fiscal capacity and fiscal
discipline.
2. It is a well-known and established fact that India needs to increase its tax to GDP ratio, but how
would that be achieved, given the fact that people already feel too burdened due to taxes as they
hit the middle class dis-proportionately?

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SUBSIDIES
Spreading Jam Across India’s Economy
• Mobile network penetration in India is very deep and most of people except certain regions, are within
rech of telephone network.

• Similarly, Aadhar registration is almost complete and most of Indians are on its roll.

• time has arrived to utilize them both and connect through the Jan Dhan banking network to distribute the
subsidy benefits, salaries and accruals to citizen through this network and hereby cutting the interface of
citizen with lower bureaucracy =, where incidentally the corruption is most rampant.

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

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.

• 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.

• 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.
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• 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 mobile payments technology to not only transfer money quickly and securely, but also improve
the quality and convenience of service delivery.
• 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.
Way forward
• 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.
• 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.

Bounties for the Well-Off (Poorly Targeted Subsidies)


• 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.
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'.
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1. 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 expenditure
on 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 normal
commodities.)

• 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.

4. 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 and
69% 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). (also read)Ujjawala Yojana

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 by
air, 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.
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• 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.
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 foregone to
help the truly deserving.

Reforming the Fertilizer Sector


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 that
determines 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%).
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• 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.

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 to
divert 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.

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.

Since 2014, important reforms have been implemented in the fertiliser sector. These include:
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• 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 provide
good 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.
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Questions
1. Discuss the market distortion created by the subsidies and analyze its impact of farm diversity
and food security?
2. Elaborate the difference between merit and non-merit subsidies and analyze the factors which
lead to subsidy leakages?
3. JAM trinity is based on the premise of e-governance and thus, is bound to do well for areas
having better IT and mobile telephony infrastructure and not in areas, where it is needed most
urgently. Critically analyze.
4. Fertilizer subsidy is ill-designed, badly executed, and poorly implemented and no wonders, it
has affected the entire food production in India. Elaborate.
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PREFERENTIAL TRADE AGREEMENTS


(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%.
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(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 trade
ASEAN 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.

Questions
1. Since the mid-2000s, India's FTAs have doubled to about 42 today. Critically analyze their evolution
and importance in contemporary global reality? Also discuss if have they really benefitted India
or they are a mere outcome of geopolitical relations?
2. Given the new mega pacts like TPP and RCEP are coming up, it seems, the world has left WTO
for a slow death and is already working on alternate arrangement. Critically analyze.
Notes

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STRUCTURAL CHANGES IN INDIA'S LABOUR


MARKETS
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.
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%.
Notes

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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 labourdo 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 labourlaws:
• Labour reforms mostly fall in the states domain. With private investment lagging states are taking steps
to 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 they
manufacture.
• 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.
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 those villages
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.
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 and
reducing 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, the
difference between the gross salary and net in hand salary is 45% in case lower paid worker and only 5%
in case of higher paid.
Notes

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• 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 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.

Questions
1. Job creation has been the one of most important electoral promises of present government;
however, the net job creation has not been significant, discuss some of the key initiatives taken
by the government to boost job creation in the economy?
2. The informalization of labor market is a direct result of tough labor market laws? Examine the
current labor laws in the context of above statement and discuss how the laws which are meant
for labor welfare are ultimately hurting them?
Notes

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POWERING "ONE INDIA"


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 distribution
level. 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).
Notes

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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 in creating
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 to
maintain 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.
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• 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 (DeendayalUpadhyaya 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.

Questions
1. Rural electrification has always seems to have fallen from radar, despite the fact that in the
modern economy roads and electricity are must for development. Discuss if there has been any
change in that focus and also elaborate on the current developments regarding this?
2. Power shortage is one of the major issues for the small scale industry, particularly those, who
’ t install large power generators. Discuss the major effects of power shoratage in MSME
can
and the steps taken by government to address the issue.
Notes

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STATE OF ECONOMY : AN OVERVIEW


• In 2015, Global Macro economic Outlook was marked by uncertainty and slowdown which is exacerbated
by declining prices of number of commodities, turbulent financial markets, and volatile exchange rates.
Despite This India continued to grow at 7.6% in 2015-16 despite global slowdown and erratic monsoons.

• However, though India grew at 7.6% and both the twin deficits and inflation are under control, Indian
economy is facing number of challenges which include decline in exports, low Agriculture growth due to
erratic monsoon, Low Industrial growth, Saving and investment are showing hardly any signs of revival
and appreciation of rupees against currencies of other emerging economies. Since these conditions are
hardly expected to change in 2016-17 it would be unreasonable to expect growth to increase in 2016-17.

Aggregate Demand

• The recent growth revival in India is predominately consumption driven which can be seen from the fact
that in non-food credit section only personal loan segment witnessed rapid growth last year.

• From expenditure side GDP at MP can be seen as sum of (a) Consumption both private and public (b)
Investment (c) Net exports

• According to survey 3 visible changes are taking place in aggegreate demand:


(1) Private consumption has strengthened in current year as share of private consumption expenditure
in GDP increased from 56.2% to 59.8%.

(2) Aided by capital goods the growth of fixed capital formation has picked up.
(3) Substantial erosion of global demand for Indian outputs, manifest in loss of Indian exports acts as
a drag on domestic growth.
What are the indicators of consumption lead growth in India?

• In non-food credit section only personal loan segment witnessed rapid growth last year.

• Share of private consumption expenditure in GDP increased from 56.2% to 59.8%.


• A decline of household investment in construction activities,

• More pronounced reduction in household acquisition of machinery and equipment indicates a realignment
of household expenditures in favour of consumption.

Thus, the above arguments prove the point that recent Indian growth is consumption led.
Growth of gross value added across sectors

(a) Agriculture
• Agriculture growth improved in 2015-16, However the improvement was dismal as growth improved from
-0.2% to 1.1%. Main Reasons for dismal performance of Agriculture is 2 consecutive years of deficient
South-west rainfall.
Notes

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• Within Agriculture and allied sectors Food grain production declined this year, However the negative
growth in food grain sector is compensated by positive growth in fruits and vegetables.
• Allied services are only silver lining in Agriculture sector as it grew at 5% in 2015-16.
(b) Industry
Why revival of industrial sector is important?
The importance of sustaining the revival can be seen from the fact that manufacturing activity contributed only
17.4% (at 2011-12 prices) to the total value addition in the economy but accounted for more than a 3rd of
the production of output. The difference between the output and Gross Value Added (GVA) contributions has
not been so stark in any other sector. This indicates that manufacturing provides the demand base for the
products of many other growing sectors of the economy, thereby creating substantial backward linkages
• Growth in Industry accelerated in 2015-16 which could be seen from the fact that manufacturing growth
between April to December grew at 3.1% instead of 1.8% previous year and private corporate sector is
to grow by 9.9% at current price between April and December.
• The ongoing Manufacturing recovery in the current year is aided by robust growth in petroleum refining,
automobile, chemicals and electrical machinery, However one area of concern is that other 3 segments of
Industry i.e. electricity, water supply and mining and construction activities are witnessing a deceleration
in growth.
(c) Service sector
• Service sector contributes more than half to GDP and is the main driver of the economy which could be seen
from the fact that this sector contributed to about 69% of the total growth during 2011 to 2015-16.
• The main drivers of the growth among Service sector are Hospitality sector, Finance services and Business
services.
• One area of concern is that growth rate of Public administration has decelerated however it has still
remained high.
The Saving-Investment Balance
• One of the major reasons why India grew rapidly between 2003-2008? was, that savings and investment
increased rapidly between this period. Savings and investment increased from 22-23% to 36% and 38%.
However, Savings and investment have been declining since last 5 years which is 1 of the major causes
behind the slowdown in economic growth in India
Key Findings by Economic Survey
(1) Savings
• There are 3 institutional sectors that save and invest (a) Households (b) Private corporate sector which
include both financial and non-financial sector (c) The public sector consisting of Government.
• In recent years, Gross domestic saving rate in the economy declined by 1.6% from 34.6% (2011) to 33%
(2014-15) despite the fact that Private corporate saving increased by 3.2% between these 4 years. Even
the public saving decline only slightly in these 4 years i.e. from 1.5% to 1.2%.
• The real reason behind the decrease in gross domestic saving is fall in Household saving which fell
drastically from 23.6% to 19.1%.
Notes

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• Household saving consists of 2 components (a) Physical saving-Which consists of funnel its savings into
physical assets like gold and real estate. (b) Financial saving-which consists of funnel saving into banks,
stock exchange etc.
• It is physical saving which decreased significantly from 16.3% to 11.4% between 2011-2015, on the other
hand Household Financial saving increased from 7.4% to 7.7%.
• The main factor why household physical saving decreased was that household investment, which consists
of household construction, their possession of machinery and equipment and valuables declined significantly
between 2011 and 2015. Household construction, which constitutes the bulk of household investment,
stood almost at the same level in 2014-15 as it did in 2011-12, resulting in a decline in the ratio of
household physical savings by 4.9% points of the GDP.
• Thus Total financial saving (consisting of all public, private and Household saving) increased significantly
between 2011 and 2015, which indicates that the GDP share of the county has Rises.
• Domestically generated financial resources that can be available to potential investors has increased,
mainly on account of the retained profits of the private corporate sector.
(2) Investment
• Gross Fixed capital formation which includes land improvements (fences, ditches, drains, and so on);
Plant, machinery, and equipment purchases; The construction of roads, railways and the like, including
schools, offices, hospitals, private residential dwellings, and commercial decreased significantly between
2011 to 2015. It fell from 34.3% to 29.4%.
• Here also it is Household investment which is responsible for Fall in Gross Fixed Capital Formation
(GFCF) as both Private corporate investment and Public investment increased between 2011-15. While
Private corporate investment increased from 11.2% in 2011 to 12.3% in 2015, Public investment increased
from 7.4% to 7.7%
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• While private corporate saving increased by 3.2% between 2011 and 2015, Private corporate investment
increased by just 1.1% which means that even while the retained profit of corporate have increased in
recent years they have not investment adequately that saving perhaps in view of the shrinkage in demand
due to global slowdown and also due to lack of optimism among them. This is a cause of concern
• However one silver lining is that, if we exclude from the picture household sector from investment
measurement we will find that non-household fixed investment as proportion of GDP increased from
18.5% to 19.8% between 2011 to 2014-15.
• The current account balance of the Balance of Payments (BoP) mirrors the difference between domestic
savings and domestic investment and conveys the extent of this gap that needs to be bridged by foreign
savings. the gap between investment and savings has been declining over time. However, it is due to the
greater decline in the investment rate measured as ratio Gross Capital Formation of (GCF) to Gross
Domestic Product (GDP) vis-à-vis (the savings rate.)

Questions
1. The savings rate in India has fallen down consistently over the years in last decade. Discuss the
major reasonsbehind such a shift in people ’ ssaving and consumption pattern?

2. Whenever the private investment falls, the onus is on government to run a expansionary fiscal
policy. Elaborate.
Notes

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PUBLIC FINANCE
Public finance is the study of the role of the government in the economy. It is the branch of economics which
assesses the government revenue and government expenditure of the public authorities and the adjustment of
one or the other to achieve desirable effects and avoid undesirable ones.
Introduction
The budget 2015-16 signaled three major objectives: Ist to increase growth through increase in public investment,
secondly to institutionalize the changing structure of cooperative federalism and 3rd to continue the commitment
to fiscal consolidation.
(1) Trend in receipts in 2015-16
Central government receipt could be divided into debt and non-debt receipt. The non debt receipts comprise
of tax revenue, non-tax revenue, recovery of loans and disinvestment receipts. While debt receipt mostly
consist of market borrowings and other liabilities.
(a) Tax revenue
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Tax Revenue includes both revenue earned from direct taxes and indirect taxes. The budget 2015-16 envisaged
a growth of 15.8% in gross tax revenue over the revised estimates (RE) of 2014-15.
Direct taxes rose by 10.67% to Rs 6.12 lakh crore in the first 11 months of the current financial year in line
with the revised budget projections.
The performance of indirect taxes in first 9 months indicates towards that the target will be achieved and
possibly exceeded.
Why indirect taxes collection has increased at a rapid pace?
• Excise duty on petroleum products have increased
• Service tax increased from 12 to 14%
• Exemptions of service taxes on many areas have been revoked.more areas are brought under service tax
ambit.
• Penalty provision in service tax was rationalized to encourage compliance and early dispute resolution.
• Swatch Bharat cess imposed on service tax
• Basic custom duty on specified steel goods was increased from 10-12.5%
• Anti-dumping duty and safeguard duties were imposed on specified goods.
• Basic custom duty was imposed on sugar from 14 to 40%.
• Basic custom duty was imposed on crude edible oils from 7.5% to 12.5%
(b) Tax expenditure
• Tax expenditures are revenue losses attributable to tax provisions that often result from the use of the tax
system to promote social goals without incurring direct expenditures. How tax expenditures are structured
affects both who will benefit from them and how much they will reduce government revenues. It should
be interpreted as targeted incentives for the promotion of certain sectors that may not in the absence of
such incentives have come up.
• Tax expenditure has been brought down significantly as a result of simplification of the tax system and
improvements in tax administration.
(c) Non tax revenue
Non tax revenue consists of interest and dividend receipts, external grants and receipts from services provided
by the central government which include fiscal services like currency and mint, general services like UPSC,
police, social service and economic service. The budget 2015-16 envisaged generation of Rs. 2.2 lakh crore
from non-tax revenue, which is 1.6% of GDP.
(d) Non-debt capital receipt
It comprises of recovery of loans and disinvestment receipts. Recovery of loans receipt is decreasing because
of 12th finance commission recommendation against loan intermediation from the centre to states, allowing
the states to directly borrow from state.
(2) Trends in expenditure
• Public Expenditure could be divided into either plan or non plan or revenue and capital expenditure.
Notes

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• Non plan expenditure-While Non-plan revenue expenditure is accounted for by interest payments, subsidies
(mainly on food and fertilizers), wage and salary payments to government employees, grants to States and
Union Territories governments, pensions, police, economic services in various sectors, other general services
such as tax collection, Non-plan capital expenditure mainly includes defense, loans to public enterprises,
loans to States, Union Territories and foreign governments.
• Any expenditure that is incurred on programmes which are detailed under the current (Five Year) Plan of
the centre or centre's advances to state for their plans is called plan expenditure. Provision of such
expenditure in the budget is called Plan Expenditure. Items of plan expenditure are:
(i) Expenditure on electricity generation,
(ii) Irrigation and rural developments,
(iii) Construction of roads, bridges, canals
(iv) Science, technology, environment, etc. It includes both revenue expenditure and capital expenditure.
Again, the assistance given by the Central Government for the plans of States and Union Territories
(UTs) is also a part of plan expenditure. Plan expenditure is further sub-classified into Revenue
Expenditure and Capital Expenditure which along with their components
• The 2015 budget allocated greater amount on capital expenditure as it understood that investment could
only be revived with greater public investment. As a proportion of GDP, Total capital expenditure was
raised by 0.2% points of gdp which is highest in last 6 years. Most of the 33.5% increase in capital
expenditure was on the plan side
• Revenue expenditure in April to December 2015 was only modestly higher by 9% due to 18.3% decline
in plan revenue expenditure largely reflecting the change in pattern of devolution to the states./UT.
(a) Plan expenditure
• There is decrease in the share of plan expenditure in 2015-16 (BE) vis-a-vis. The average of shares during
2010-11 to 2014-15.
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(b) Non plan expenditure

• Non plan expenditure constituted 73.8% of the total expenditure in BE 2015, which is 3% higher than
average of the last 5 years ending 2014-15. Out of the total non-plan expenditure of RS 13.12 lakh in
BE 2015-16 revenue expenditure accounted for around 92%, remaining 8% was mainly defense capital
expenditure.

• While rationalization of planned expenditure is easy, it is not easy to rationalize non-plan expenditure
since most of the non-plan expenditure is committed expenditure. Committed expenditure involves: Ist
Interest liability on debt incurred in the past, and 2nd, pension payment to superannuated/retiring workforce
from government services.

• On the issue of the subsidies, the Economic Survey states that, the rationalization and reprioritization of
subsidies through better targeting would play a vital role in fiscal consolidation and in targeting expenditure
more towards inclusive development. The total subsidy bill as a proportion of GDP is expected to be
below 2% of GDP as per budget estimates for 2015-16. The 1.7% decline in majors subsidies was due
to a near 44.7% decline in petroleum subsidy during April-December 2015 while other major subsidies-
Food and Fertilizer-increased by 10.4% and 13.7% respectably during the period.

(3) Fiscal deficit

• The Fiscal deficit of the Union Government at end December 2015, as percentage of Budget Estimate
is lower than in the corresponding period of the last year. The benign fiscal outcome so far in the year
has been due to improved tax buoyancy and prudent expenditure management with assistance from the
decline in oil price. However fiscal deficit even if it is higher is not a major threat to India as unlike
European countries domestic sources constitute roughly 98% of the deficit financing.

Internal debt

• On internal debt the robust GDP growth has kept the increasing debt of the Central Government at
sustainable levels, relative to the size of the economy. It says that, the outstanding external debt which
is 1.5% of GDP is only small fraction of the total liability of the centre and is a declining proportion of
GDP.

Conclusion

• On the issue of fiscal performance of the general government (Center plus States), performance has been
of fiscal consolidation and fiscal discipline. Based on the first 8 months data of the current year, it is
observed that the both the centre and the states have stuck to the plan of ensuring quality of expenditure
and boosting public investment.

• The coming year is expected to be a challenging one from the fiscal point of view. The chances of Indias
growth rate in 2016-17 increasing significantly beyond 2015-16 levels are not very high, due to likelihood
of persistence of Global slowdown. Further the implementation of the Pay Commission recommendations
and the One Rank One Pay (OROP) scheme will put additional burden on expenditure. Improving tax
compliance through better tax administration, tapping new resources etc. could help raise more revenue
and keep the fiscal deficit at levels projected in the revised fiscal roadmap. Improving the quality of
expenditure has been indicated as important for achieving sustained fiscal consolidation.
Notes

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Questions
1. Discuss how the fiscal consolidation objectives would be completed given the new challenges
that are emerging for the government in form of 7th Pay Commission and OROP, etc?
2. The recent improvement in fiscal deficit is not sustainable as government has no control over
those variables. Critically analyze.
3. Discuss why the government efforts towards establishing a successful crop insurance system
have failed so far? Can the newly Launched PradhanMantriFasal Bima Yojana reverse the existing
dismal state of affairs; analyze the scheme on parameters of stability, inclusiveness and fiscal
burden?
Notes

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MONETARY MANAGEMENT AND FINANCIAL


INTERMEDIATION
(a) Monetary Development in 2015-16
• Agreement on Monetary policy framework was signed between the government and RBI, according to the
framework the target for retail inflation which is the nominal anchor, is set at 6% by January 2016. The
target for 2016-17 and all the subsequent years will be 4% with a band of plus/minus 2%. If RBI misses
the target it will have to explain to the government factors why it missed its target. This framework would
increase accountability for RBI on the other hand it would provide autonomy to the RBI as The agreement
signed between the RBI and the Finance Ministry clearly says, once inflation reaches beyond the comfort
zone, both at high and low levels, RBI should use whatever in its command to bring it to the comfort zone.
That way, it gives autonomy to RBI,"
• The RBI eased its monetary policy stance in 2015-16 which could be seen from the fact that it decreased
SLR by 0.5% to 21.50% and Repo rate by 125 basis points between January 2015 to October 2015. This
easy monetary policy was pursued by RBI because the headline inflation fell to below 6% much ahead
of January 2016 target.
• Easing of policy rate is accompanied by a pickup in growth rates of Reserve Money (M0) and Narrow
money. While reserve money grew because of growth of currency in circulation and bankers deposit with
the RBI, While M1 grew because of higher rate of growth in demand deposit of banks.
• Year on year growth on Time deposits fell by 10.6% in 2015-16 even though real rate of return on it was
positive due to fall in inflation. The reason for its because household savings were channelized to other
avaenues like gold and real estate. Fall in growth of time deposits also had adverse effect on Bank credit
since time deposits remain the most important source of bank funding as time deposits are cheaper
relative to other sources and also it is held in banks for longer duration by the customers which makes
it eaiserfor bank to lend it.
(b) Bank credit
• Bank credit is an important indicator of economic growth. Bank credit which remained at around 15% till
February 2014 fell to 10% in the current financial year. There are Many reasons for its fall.
(1) Incomplete transmission of the monetary policy as banks have not passed on the entire benefit to
borrowers
(2) Unwillingness of banks to lend credit on account of rising NPA.
(3) Worsening of corporate balance sheets, forcing them to put their investment decisions on hold
(4) More attractive interest rates for borrowers in the bond market.
• Non-food credit is slowing down and grew just at 5.3% and even gross bank credit to bservice sector grew
at below 7% between May and November 2015. The agriculture loan also witnessed downturn from 2014,
only the personal loan segment grew at rapid pace.
Why did non-food credit continue to grow at tepid pace?
• Even though RBI decreased repo rate by 125 points why did non-food credit specially the credit to
Industry did not witnessed turnaround? There are various reasons for it.
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(1) Muted market sentiments leading to slowdown in private investment demand and industrial growth
leading to less demand of credit.
(2) Poor earnings growth of the corporate sector
(3) Risk aversion on the part of banks in the background of rising gross NPA'S.
Why did interest rate of SCB not fall?
• While Repo rate fell by 125 bps, however SCB reduced their median term deposit rate by only 72 bps
and median base rate by just 60BPS. There are various reasons behind it
(1) Mobilization of deposits at fixed rates with only about 20% of term deposits getting re-priced during
a year.
(2) Competition from small saving schemes where the interest rates are much higher compared to bank
deposit rates.
(3) Base rate of the banks are mostly determined on the basis of average cost rather than marginal cost.
Performance of SCB'S
• The performance of SCB'S remained subdued like previous years. There credit growth decline due to the
factors mentioned above and also with the availability of alternative sources, corporate sector companies
also switched part of their financing needs to other sources such as ECB ,corporate bonds and commercial
papers.
• CRAR of SCB decline to 12.7% from 13%, however it remained above the minimum required level of 9%.
• Asset quality of SCB also came under stress with Gross NPA of SCB as apropotion of gross advances
increased to 5.1% from 4.6% between March and September 2015.While total stressed advances (which
includes both NPA and restructured loans) increased to 11.3% from 11.1%.
• Public sector bank has highest level of stressed assets at 14%,followed by private sector banks at 4.6%
and foreign banks at 3.4%
• The contribution of 5 sub sectors namely mining, iron and steel, textiles, infrastructure and aviation to the
total stressed advances was 53%.Since the biggest lender to these sector are PSB, No wonder they have
the highest stressed assets.
Financial inclusion
• The number of new Basic Savings Bank Deposit Accounts (BSBDAs) rose considerably during the year
on account of the government's initiative under the PradhanMantri Jan Dhan Yojana (PMJDY). BSBDAs
reached 441 million for the period ended September 2015 as against 398 million for the year ended March
2015. The total number of banking outlets went up from 553,713 as at end -March 2015 to 567,530
(517,328 branchless modes and 50,202 branches)as at end -September 2015.
• Brick-and-mortar branches are an integral component of financial inclusion and for increasing banking
penetration. Hence State Level Bankers Committee convenor banks have been advised in December 2015
to identify villages with population more than 5000 without an SCB branch. The opening of bank
branches under a roadmap is scheduled, to be completed by 31 March 2017.
Developments in the capital Market
• During 2015-16 Indian security market remained subdued as sensex declined by 8.5% between March
2015 and January 2016) due to number of factors
Notes

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(1) Due to turmoil in global equity markets in August 2015 and January 2016 following slowdown in
China and its currency devaluation and slump in stocks.
(2) The downward trend in the Indian stock market was also guided by mixed corporate earnings for Q1
and Q2 of 2015- 16, FPIs' concern over Minimum Alternative Tax (MAT), weakening of the rupee
against the US dollar, investor concern over delay in passage of the Goods and Services Tax GST)
Bill, uncertainty over interest rate hike by US Fedral Reserve and selling by FPIs.
However, the Indian equity market has been relatively resilient during this period compared to the other major
EMEs. The Indian stock market withstood the US Fedral Reserve increase in interest rates in december 2015.
Institutional investments
• Net FII in India market in 2015 is Rs. 63,663 crore in 2015 compared to Rs. 256213 crore in 2014.
Decisions taken by government in 2015 in FII sector
• The limits for FPI investment in debt securities will henceforth be announced/fixed in rupee terms. The
limits for FPI investment in central government securities will be increased in phases to 5% of the
outstanding stock by March 2018.
• In order to facilitate rupee-denominated borrowing from overseas, the government decided to put in place
a framework for issuance of rupee-denominated bonds overseas within the overarching The minimum
maturity period of these ECB policy bonds will be 5 years and the all-in-cost of such borrowings should
be commensurate with prevailing market conditions.
Reforms undertaken by the government in the financial sector
• Merger of FMC with SEBI to achieve convergence of the regulation of the securities and commodity
derivatives markets and increase the economies of scope and scale for exchanges, financial firms and other
stakeholder
• Signing of Monetary policy agreement between RBI and Government
• Going forward, the government intends to deepen such reforms including amendment of the RBI Act for
providing a statutory Monetary Policy Framework and Monetary Policy Committee, strengthening and
upgrading the Securities Appellate Tribunal to the Financial Sector Appellate Tribunal and creation of a
Resolution Corporation to enable faster dispersal of deposit insurance as well as orderly resolution of
financial service providing companies
• Introduction of Bankruptcy code bill in Parliament
Insurance and pension sector
• Number of schemes were launched by government in insurance sector. These include PradhanMantri
Suraksha Bima Yojana, Atal Pension Yojana and PradhanMnatriJeevanJyoti Bima Yojana (refer to gs score
current affair notes for information on above schemes).
• In 2015 LIC premium registered a growth of 4.4% whereas General insurance business grew by 9%.
• Insurance penetration which is premium volume as a ratio of GDP was 2.71% in 2001 and 3.3% in 2014.
Globally it is 3.4%
• In pension sector till 31st December 2015 a total of 11.2 crore people have been enrolled under the NPS.
Notes

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Questions
1. Financial inclusion is not merely about opening more and more bank accounts, but is rather
about developing a habit among people to deposits their small savings into banks. Discuss the
importance of financial inclusion in context of resource mobilization efforts of government? Also
evaluate the PM Jan Dhan Yojana in the in context of the first statement?
2. The worsening condition of banks ’ balance sheet has forced the focus of government on
consolidation, instead of credit expansion, which can be detrimental for the industry. Critically
analyze.
3. The Capital markets in India suffer from crony capitalism and lack of information access; discuss
some of the recent reforms by SEBI to address this issue. Also elaborate on the insider information
reforms?
Notes

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EXTERNAL SECTOR
1. Global Economic Environment:

• After the 2008 Global Financial Crisis, though the economic growth has continues to be tepid but still it
has shown positive outcomes in most of the economies. The spillover effects of the crisis have made the
task of projecting Global Economic Outlook arduous. The growth rate has been projected to go up from
3.1% in 2015 to 3.4% in 2016 and further to 3.6% in 2017.

• The growth rate has been revised for most of the economies. But overall global economic activity
remained subdued in 2015 due to the changing composition of the global economy and relative point
contributions to global growth.

• The World Economic Outlook (WEO) update has indicated that India and the rest of emerging Asia are
bright spots, albeit with some countries facing strong headwinds from China's economic rebalancing and
global manufacturing weakness. The IMF's growth forecast for India is 7.5% in 2016 and 2017 this
surpasses the projection of 6.3% and 6.0% respectively for China.
It has also estimated that India will grow by a robust 7. 8% in 2016 and 7.9% in the following 2 years.

2. Trends in India's external sector


(a) Fall in exports and imports

• Both exports and imports have been declining over the period. India's exports declined year-on-year by
17.6% between April 2015 and January 2016 and stand at US$217.7 billion. The imports have declined
by 15.5% in the current financial year (April-January) to US$324.5 billion.

• The decline owed to sluggish global demand, strong Rupees and low global commodity prices and particularly
of petroleum. Since India is a major exporter of refined petroleum products the subdued oil prices have
adversely impacted our export figures. Strong Rupees is making our exports expensive in comparison to
other competitors from emerging countries.

• Lower levels of Petroleum imports figures is the main reason for the decline in total import. Lack of
internal demand due to lack of economic activities at home is another reason for fall in imports.

(b) No broad-based decline in exports and imports


• There is no universal fall in exports or imports across the sectors in 2014-15, While there is a decline in
the exports of petroleum products, gems and jewellery and agriculture and allied products all these sectors
together combined 41.3% of India's exports in 2014. On the other hand there is rapid growth in exports
in sectors like textiles and chemicals and related products, leather,transport equipments, base metal and
machinery. However the data of first 9 months in 2015-16 i.e. between April 2015 to January 2016 shows
broad based fall in exports.
• Similarly while there is fall in petroleum imports on account of fall in prices of crude oil, there is growth
in imports of items like chemicals and related products,electronic goods and gold registered growth rates.
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(c) Change in Direction of trade


• The slowdown in terms of global economic growth and trade volumes has affected the direction of trade
statistics. The share of advance economies in Indian exports has fallen significantly.
• The shares of Europe (consisting of the EU, the European Free Trade Association [EFTA] and other
European countries) and America (consisting of North America and Latin America) declined from 23.6%
and 20.1% respectively in 2004-05 to 18.1% and 19.0% respectively in 2014-15.
• There has been increase in share of Asia (from 47.9% to 49.6%) and Africa (from 6.7 % in 2004-05 to
10.6% in 2014-15).
• Indian exports have increased to USA, UAE and Hongkong and fallen for China, Saudi Arabia and UK.
All major trade partners have witnessed negative growth.
• India's import sources have also undergone change. Imports from Europe have declined while import
shares of Africa, America and Asia have increased. Among major trade partners, China, Switzerland,
Indonesia and Korea have registered positive growth rates. Imports from all major regions declined in
2015-16, with imports from America registering the highest decline.
(d) Fall in Trade deficit
• As a result of measures taken by the government to contain trade and current account deificits, it has been
moderated to some extent. In 2014-15 trade deficit was US$ 137.7 billion. Trade deficit has continued to
be at a lower level due to the decline in the value of POL imports by 16.0%, caused by a fall in
international oil prices by 20.2%.
• Eventhough exports have been falling since last few years ,however imports have fallen even more rapidly
which has resulted in fall in trade deficits.
• The moderation in the levels of trade deficit is likely to have a salutary effect on sustaining the moderation
in the overall Balance-Of-Payments (BOP) outcome in the current fiscal.
(e) Fall in Current account deficit
• The external sector outcome in 2014- 15 and the first half (H1) of 2015-16 indicates continued moderation
in levels of trade and current account deficits with broadly adequate financing largely due to the fall in
global crude oil and commodity prices. The low global growth besides affecting the merchandise exports
has caused the invisible surplus to grow only marginally.
Despite decline in the exports India has witnessed:
(i) Lower trade deficit and modest growth in invisibles resulted in lower CAD;
(ii) The increase in FDI inflows and NRI deposits;
(iii) Net outflow of portfolio investment.
(f) Rupee depreciated less in comparison to other emerging economies
• In 2014-15, though the rupee has depreciated against the dollar by 1.0%, but it became stronger against
other currencies, for example, against the Japanese yen and the euro by 8.2% and 4.7% respectively.
• The fall of rupee to Rs. 65.04 per US dollar in 2015-16 can be attributed to stronger growth in the USA
and deterioration of China's growth and currency development, impacting the outlook on other Emerging
Market and Developing Economies (EMDE) owing to risk aversion perceptions of global investors.
Notes

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(iv) So far the rupee has performed better than the currencies of most of the other emerging market
economies. Strong Rupees is making our exports expensive in comparison to other competitors from
emerging countries which is one of the reason for fall in exports.
(g) Increase in the Foreign Exchange Reserves
• The level of foreign exchange reserves can change due to change in reserves on BoP basis as well as
valuation changes in the assets held by the RBI. Indian forex reserves have mainly been in accumulation
mode, reflecting excess of financial flows over the requirements of current account.
• In HI of 2015-16,India's foreign exchange reserves increased by us$ 10.6 billion on BOP basis.
• Among the major economies with CAD, India is the 2nd largest Foreign Exchange Reserve holder after
Brazil with its foreign exchange reserves at US$351.5 billion.
• The composition varies with -
Foreign currency assets > Gold > Special drawing rights > Reserve tranche position in IMF
(h) Sustainable external debt
• India's Prudent external debt policies and management with emphasis on sustainability, liquidity and
solvency have successfully limited the rise in magnitude of external debt to a modest level.
• India's external debt stock at end march 2015 stood at US$475 billion showing a rise of US $ 29.2 Billion
over March 2014. The reason for the increase is higher External commercial borrowing, particularly
commercial bank loan and securitized borrowings and NRI deposits.
Reasons for higher External Commercial Borrowings (ECB)
(1) Increase in access to rupee denominated borrowings
(2) Liberalization of the process of allocation of limits
(3) RBI's issuance of guidelines on capital and provisioning requirements for exposure to entities with unhedged
foreign currency exposure and simplification of the procedure for ECB.
• India's external debt is however sustainable which could be seen from the following facts. Firstly India's
short term external debt which is an indicator of unsustainability decreased by 6.7% between march 2014
and march 2015. Secondly The proportion of short term debt to total external debt decreased from 18%
at end march 2015 to 17.8% at end September 2015.
• If we closely analyse India's external debt profile we find that most of the external debt is of long term
nature which is therefore not alarming.
3. Trade policy measures undertaken by India in 2015-16
• In the wake of declining exports, the government took various measures to boost exports in the Union
Budget 2015-16 and a new Foreign Trade Policy (FTP). A new FTP for the period 2015-20 was announced
on 1st April 2015, with a focus on supporting both manufacturing and services exports and improving the
'Ease of Doing Business'.
• The new FTP aims to increase India's exports to US$900 billion by 2019-20. It also provides the road
map adopted by the government to align it with the 'Make in India' and 'Digital India' programmes and
to ease trade.
Notes

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Recent Measures For Trade Facilitation


• The government has reduced the number of mandatory documents required for exports and imports to
3 each, which is comparable with international benchmarks. The trade community can file applications
online for various trade-related schemes.
• Customs single window initiative: The Union Budget 2014-15 announced an Indian Customs Single
Window Project to facilitate trade. This project envisages that importers and exporters will electronically
submit their customs clearance documents at a single point with customs.
• 24x7 customs clearance: The facility of 24x7 customs clearance for specified imports have been made
available at seaports and at air cargo complexes. This will help in faster clearance of such import and
export goods, reduce dwell time and lower the transaction cost.
• Moving towards a paperless 24x7 working environment.
• simplifying various 'Aayat Niryat' forms, bringing in clarity in different provisions, removing ambiguities
and enhancing electronic governance.
• The Directorate General of Foreign Trade (DGFT) has launched a new-look website and a mobile application
whereby the trade community can file applications online for Importer Exporter Code (IEC) and exporters
can also see the status of their electronic bank realization certificates almost in real time.
• Training/outreach programmes for exporters: The Niryat Bandhu Scheme has been galvanized to achieve
the objectives of Skill India. Outreach activities are being organized at MSME (Micro, Small and Medium
Enterprises) clusters with the help of Export Promotion Councils (EPCs) and other willing 'industry
partners' and 'knowledge partners'.
• An ambitious outreach programme has been launched by the Department of Commerce (DoC) for
exporters located in the major export clusters/cities. The programme focuses on:
• Training exporters to utilize Free Trade Agreements (FTA).
• Taking inputs from exporters on FTAs under negotiation, for example the Regional Comprehensive
Economic Policy (RCEP).
• Promoting awareness about the contents of the www:indiantradeportal.in launched by the DoC.
Other important measures
• A Council for Trade Development and Promotion has been constituted in July 2015 to ensure continuous
dialogue with the governments of states/ Union Territories (UT) on measures for providing an international
trade-enabling environment and for making the states active partners in boosting India's exports.
• The state/UT governments have been requested to develop their export strategy, appoint export
commissioners, address infrastructure constraints restricting movement of goods, facilitate refund of Value-
Added Tax (VAT)/octroi/state-level cess, address other issues relating to various clearances and build
capacity of new exporters in order to promote exports.
4. Salient features of Fund Transfer Pricing (FTP) 2015-2020
• Merchandise Export from India Scheme: The 6 different schemes of the earlier FTP (Focus Product
Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agriculture Infrastructure Incentive
Scrip, Vishesh Krishi and Gram Udyog Yojana and Incremental Export Incentive Scheme) which had
varying sector-specific or actual user only conditions attached to their use have been merged into a single
scheme, namely the Merchandise Export from India Scheme (MEIS). Notified goods exported to notified
markets will be incentivized on realized Free On Board (FOB) value of exports.
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• Service Export from India Scheme: The Served from India Scheme (SFIS) has been replaced with the
Service Export from India Scheme (SEIS). The SEIS applies to 'service providers located in India' instead
of 'Indian service providers'. Thus, it provides for incentives to all service providers of notified services
who are providing services from India.
• Incentives (MEIS & SEIS) to be available for SEZs: FTP 2015-20 extends the benefits of the MEIS and
SEIS to special economic zones (SEZ) as well, which will give a new impetus to the development and
growth of SEZs.
• Duty credit scrips are freely transferable and usable for payment of custom duty, excise duty and service
tax: All scrips issued under the MEIS and SEIS and the goods imported against these scrips are fully
transferable and can be used for payments. This will promote trade in the country.
Other Measures:
(a) Under the Export Promotion Capital Goods (EPCG) scheme, in case capital goods are procured from
indigenous manufacturers, specific export obligation has been reduced to 75%. This is designed to help the
indigenous capital goods manufacturing industry.
(b) Under the MEIS, export items with high domestic content and value addition have generally been provided
higher levels of incentives.
(c) Hard copies of applications and specified documents which were required to be submitted earlier for
incentive schemes and duty exemption schemes have now been dispensed with.
(d) Landing documents of export consignments as proof for notified market can now be digitally uploaded
as specified.
(e) There will be no need to submit copies of permanent records/documents repeatedly with each application,
once the same are uploaded in the exporter/importer profile.
(f) Dedicated e-mail addresses have been provided for faster and paperless communication with various
committees of the Directorate General of Foreign Trade (DGFT), e.g. Norms Committee and Exim
Facilitation Committee.
5. TPP and its Implications for India
Positives
• India could experience huge export gains of more than US$500 billion per year-a 60% increase--from
joining an expanded TPP or participating in a comprehensive Free Trade Area of the Asia Pacific (FTAAP).
• It would increase both India's exports and imports. It is also likely to boost India's services exports through
less trade barriers.
Negatives
• Possibility of trade diversion and raised concerns about erosion of India's share in exports to the US and Europe.
• Loss of competitiveness of Indian exports in European markets
• Lower India's export share to the US and the EU,
• Some of the export sectors such as textiles and clothing industry are likely to face stiff competition from
Vietnam, and it may lead to trade diversion.
• Concern of investment diversion, particularly as countries like Vietnam would offer more robust investor
protection.
Notes

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Concerns
India has to give due consideration to the costs if it is desirous of joining the TPP, as it will be required to
comply with provisions relating to tariffs, SoEs, agriculture and Intellectual Property Right (IPR) protection.
Some of the major concerns are as follows:
• Openness of market: India needs to work significantly in terms of openness of market as its tariff rates
are significantly higher than those in the Trans-Pacific-Partnership Agreement (TPP) countries.
• Import competition: Domestic industries will face severe import competition due to tariff elimination on
some of the products.
• SoEs: Membership of the TPP would prevent the government from using SoEs and government
procurement as vehicles for achieving social and economic objectives, including employment generation.
• IPRs: The prices of pharmaceutical products can be expected to rise due to implementation of IPR
agreements which will give more protection to patented medicine and may lead substantially to elimination
of generic drugs from the market.
• Government procurement: Apart from stressing non-discriminatory, fair and transparent procurement
procedures, the TPP specifies timely publication of complete information on the procuring entity, the
specific procurement, the time frame for submission of bids, and a description of conditions for participation
of suppliers. As the agreement curtails the flexibility available to signatory countries to impose export
restrictions on food, it will jeopardize India's endeavour to ensure food security.
• Labour standards: TPP bind the members to adopt and maintain laws and practices governing acceptable
conditions of work relating to minimum wages, hours of work, and occupational health and safety. These
labour standards may increase the labour cost.
• Environment standard in TPP agreement: The TPP agreement goes beyond the provisions in other FTAs
to include wildlife trafficking, illegal logging and illegal fishing practices. The TPP members acknowledge
that inadequate fisheries management, fisheries subsidies that contribute to overfishing and overcapacity,
and Illegal, Unreported and Unregulated (IUU) fishing can have significant negative impacts on trade,
development and the environment and 'thus recognize the need for individual and collective action to
address the problems of overfishing and unsustainable utilization of fisheries resources'. This is in
contradiction to India's current policy of subsidizing the fishery industry. It may severely affect special
governmental assistance programmes for around 15 million poor fishermen in India. Hence these TPP
rules are likely to affect the multilateral process and impact India.

Questions
1. Analyze the New Foreign Trade Policy of 2015-2020, amidst the rising challenge of decreased
demand for exports due to impeding global slowdowns? Also discuss some adjustments that
can be made in advance to face the upcoming slowdown in least impacting way?
2. The growth of MSME sector alone can address the issue of competitiveness with Indian exports.
Elaborate the statement and discuss some of the recent steps taken by the government to boost
export orientation of MSME?
3. The growth of the major multilateral economic and financial institutions has been much less then
desirable. Discuss its major impact on global economy with a particular focus on developing
countries? Suggest a roadmap to strengthen these institutions, so that they are not only capable to
address major global issues, but also address small issues of poor countries in Africa and Asia?
Notes

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PRICES, AGRICULTURE AND FOOD


MANAGEMENT
Overall Trends in Inflation
Persistent and elevated levels of inflation, in particular food inflation, during the period 2010-11 to 2013-14,
reversed from 2014-15 onwards and the economy has been experiencing sustained moderation in general
inflation ever since.
• The new monthly CPI (combined), with base 2012=100, is now taken as the measure of headline inflation
and is tracked by the Reserve Bank of India (RBI) to anchor its monetary policy.
• The CPI Headline inflation which declined in April-December 2015-16, has, however, been ticking upwards
lately owing tobuild up in food group inflation and adversebase effect.
• The decline in CPI core inflation (non-food non-fuel) was largely on account of decline in the inflation.
• The WPI inflation for the fuel and power subgroup declined owing to decline in crude prices whereas, the
decline in global commodity prices has resulted in a drop in the WPI-based core inflation
Impact of fall in Crude Price on Inflation
Global fluctuation in crude oil prices has significant impact on domestic inflation as India imports 80% of its
crude requirement.
• The decline in crude oil prices had helped India deregulate diesel prices. Deregulation has reduced the
subsidy burden, thereby helping reduce fiscal deficit. Post deregulation, decline in diesel prices has resulted
in reduction in overall inflation.
• The fall in crude prices has more impact on WPI fuel and power inflation than CPI fuel & light inflation
because petroleum products have negligible weight (6.8%) in CPI fuel & light group.
Trends in Food Inflation
Food inflation remained high during 2010-11 to 2013-14. Supply-side constraints have been causing inflationary
spurts from time to time, in particular in pulses, edible oils and vegetables. With deft and astute food management
by the government, there has been significant moderation in wholesale and retail food inflation since 2014-15.
The decline in food articles inflation during 2015-16 so far was mainly on account of a fall in the prices of
cereals, vegetables, fruits, milk, egg, fish and meat. However, a spike in the prices of pulses on account of low
domestic production kept food-grain prices high.
Urban and Rural Sector Inflation
The urban CPI basket has been experiencing lower inflation as compared to the rural consumer expenditure-
based basket because global commodity prices meltdown has more benefited urban consumers. The gap is
partly due to variation in the weights of items in the 2 baskets.
The rural basket of the CPI assigns significantly larger weights to cereals, vegetables, meat and fish and pulses.
Prices of these commodities have been experiencing volatility due to supply- side constraints and lack of a
seamless common market for agri-products in the country.
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State-Wise Inflationary Trend


States such as Karnataka, Andhra Pradesh, Telangana and Jammu and Kashmir experienced higher inflation
during April-December 2015 as compared to the corresponding period of the previous year. The reason
is higher food inflation.
Wedge between CPI and WPI
The WPI series mainly tracks the movement of producer and bulk transaction prices and its weights are based
on the value of output in different sectors of the economy. The series is similar to producer price indices
compiled in other countries.
The CPI basket is based on consumer expenditure estimates and tracks inflation at retail level or the prices
consumers pay. The base years of the 2 series are 8 years apart as WPI base revision is long overdue. The
weighting of items of the 2 series varies significantly.
Overview of Agriculture
The share of agriculture in employment was 48.9% of the workforce [NSSO, 2011-12] while its share in the
Gross Domestic Product (GDP) was 17.4% in 2014-15 (First Revised Estimates) at constant (2011-12) prices.
Against the growth target of 4% for agriculture and allied sectors in the 12th Five Year Plan, the growth rates
in agriculture have been fluctuating at 1.5% in 2012-13, 4.2% in 2013-14, and (-) 0.2% in 2014-15.
The reason for shortfall in growth is due to:-
• Two consecutive drought years in 2013-14 and 2014-15
• Issues of expansion in irrigation and its efficiency.
• Declining growth of capital formation in the sector.
• Volatility in the markets, especially of prices, altering and distorting cropping patterns of some crops.
Area, Production and Yield
As per the 2nd Advance Estimates, food-grains production during 2015-16 is estimated at 253.16 million
tonnes. The acreage under several crops declined substantially in 2014-15 compared to 2013-14. The largest
decline in the areas of gram and groundnut of around 20 and 15% respectively, resulted in a decline in
production of gram and groundnut by 27% and 32% in 2014-15 compared to 2013-14. Only two crops, jowar
and bajra shows an increase in the yield of crops in2014-15 over the previous year.
From 2010-11, the percentage changes in average yields of rice, wheat, pulses, oilseeds and cotton are also
showing declining trends, which is a cause for concern. China has an average cereal yield of above 5800
kg. per ha while India has less than 3000 kg. per ha.
Pathways to Productivity in Agriculture
I. Irrigation
Focus should be 'more crop per drop'with adoption of appropriate technologies such as micro irrigation through
suitable pricing. There is a need for expansion of irrigated area, arrest the declining trend in efficient utilization
of irrigation potential and enhance on-farm Water-Use-Efficiency (WUE) spatially and temporally to increase
the productivity in agriculture.
In this context, the Government has recently launched the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY)
aiming at providing water to every field of agriculture.
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II. Mechanisation
The overall level of mechanization in farming is below 50% in the case of majority of the farming operations
in India.With shortage of labour for agricultural operations owing to rural urban migration, shift from agriculture
to services and rise in demand for labour in non-farm activities, there is need to use labour for agricultural
operations judiciously, which makes a strong case for mechanization of farming.
The promotion of appropriate farm equipment which are durable, light weight and low cost, region, crop and
operation specific using indigenous/adapted technologies need to be made available for small and marginal
farmers to improve productivity. The tools and equipment should be designed ergonomically to suit the needs
of women workers so that there would be better adoption of technologies in agriculture.
III. Seed Development
It is estimated that the quality of seed accounts for 20 to 25% of productivity. The challenges in development
and adoption of quality seeds are development of new seeds especially early ripening and resistant (to pest,
moisture variations, etc.) varieties, high cost of seeds for small and marginal farmers, shortage of supply of
quality seeds, non-resolution of issues related to adoption of Genetically Modified (GM) crops and inadequate
number of players restricting competition.
The issues that require immediate attention are affordability, availability, research and technology for seed
development, GM crops and seed. The adoption of hybrid and HYV seeds is one definitepathway to raising
productivity in Indian agriculture.
IV. Fertilizers
The indiscriminate use of fertilizers has not proportionally improved the yield of crops, but has resulted in the
depletion of soil fertility and salination of soil in many areas. There is need to rationalize fertilizer subsidy in
an input, crop and region neutral format and minimize diversions. The disbursal of subsidy on fertilizers should
shift to DBT, the benefits of which will be maximized, if all controls (including imports) on the fertilizer
industry/outputs are lifted simultaneously
Linking the Soil Health Card to provide profile of the soil and fertilizer on the basis of the same profile
utilizing fertilizer, even if not subsidized can improve the yield of crops. The deficiency of micronutrients like
boron, zinc, copper and iron in Indian soils can be overcome if there is expansion of the use of organic
fertilizer.
V. Pesticides
In India, the farmer's crop yield losses range from 15 to 25% owing to the presence of weeds, pests, diseases
and rodents. India uses a low amount of 0.5 kg per ha pesticide. However, the use of pesticides without
following proper guidelines, use of sub-standard pesticides and lack of awareness about pesticide use are key
concerns in India.
Besides information dissemination among farmers to encourage appropriate application of pesticides there is
also a need for greater focus on Integrated Pest Management (IPM). Being environment friendly, non- toxic and
cost effective, bio-pesticides need to be promoted among small farmers to improve productivity in agriculture.
VI. Credit
According to NSSO, 70th round data, as much as 40% of the funds of farmers still come from informal
sources. Local money lenders account for almost 26% share of total agricultural credit. In respect of high
interest rates, DBT may be considered to replace subvention of interest rates.
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The ratio of agricultural credit to agricultural GDP has increased from 10% in 1999-2000 to around 38% by
2012-13. However, the share of long-term credit in agriculture or investment credit has declined from 55% in
2006-07 to 39% in 2011-12. The decline in the share of long-term credit in agriculture needs to be arrested
and reversed. Accordingly, the Government of India has allocated Rs. 15,000 crore to the Long Term Rural
Credit Fund (LTRCF) set up in the National Bank for Agriculture and Rural Development (NABARD) for
2015-16.
VII. Agriculture Extension Services
Agriculture extension services can improve productivity in agriculture by providing timely advisory services to
farmers to adopt best practices, technology, meet with contingencies, market information etc.
There needs to be a shift to demand driven agricultural advisory services that will cater to farmer, region and
crop-specific needs. This can be done through a virtual connect, using IT (mobile and internet),integration of
agricultural extension services with all stakeholders
Investment in Agriculture and Allied Sectors
As per the revised estimates, the percentage share of Gross Capital Formation (GCF) in agriculture and allied
sector in the GVA (GDP) from agriculture has also shown a decline from 18.3% in 2011-12 to 15.8% in 2014-
15. This declining trend needs to be arrested and reversed. The increase in investment rate in agriculture has
to come from both the public and private sectors.
Horticulture in India
The percentage share of horticulture output in agriculture is more than 33%. Over the last decade, the area
under horticulture grew by about 2.7% per annum and annual production increased by 7.0%. India witnessed
sharper increase in acreage in horticulture crops compared to food grains over the last 5 years.
The Mission for Integrated Development of Horticulture (MIDH), was launched during the 12th Five Year
Plan with effect from 2014-15, for the holistic development of the horticulture sector covering fruits, vegetables,
mushrooms, spices, flowers, aromatic plants, coconut, cashew, cocoa and bamboo.
The key concerns that the horticulture sector faces in India are post-harvest wastages and losses. The wastage
occurs at all levels of the value chain-at the levels of farmer, transporter, wholesaler and retailer. The answer
lies in minimizing the wastage at all stages, to enable farmers to get remunerative prices, and can be done by
improving practices and facilities at each stage including the transportation stage.
Allied Sectors
India ranks first in milk production, accounting for 18.5% of world production, achieving an annual output of
146.3 million tonnes during 2014-15. The per capita availability of milk in India has increased from 176 grams
per day in 1990-91 to 322 grams per day by 2014-15.
Both egg and fish production has also registered an increasing trend over the years. Fisheries constitute about
1% of the GDP of the country and 5.08% of agriculture GDP.
There is increasing significance of poultry and livestock products in the context of diversifying farm and non-
farm activities in the agriculture sector to increase livelihood security. The Government's focus, besides framing
suitable policies for enhancing commercial poultryproduction, is for strengthening the family poultry system,
which addresses livelihood issues.
The National Livestock Mission has been launched in2014-15 with an approved outlay of Rs. 2,800 crore
during the 12th Plan. This Mission is formulated with the objective of sustainable development of the
livestock sector, focusing on improving availability of quality feed and fodder, risk coverage, effective extension,
improved flow of credit, and organization of livestock farmers/rearers.
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Food Management
Though India's agricultural production has also increased over the past few decades, hunger and starvation still
persist among the poorer sections of the population. With 27% of the population below the poverty line, along
with provision of food subsidy, stability in agricultural commodity prices is essential for making the poorer
sections food secure. There has been moderation ofinflation including food inflation during thelast 2 years, but
more needs to be achievedby freeing up markets, augmenting supply of food and leveraging the use of IT.
Public Distribution System and Food Subsidy
The PDS strives to ensure food securitythrough timely and affordable distributionof foodgrains to sections of
population that live below the poverty line. However, the system of PDS has many weaknesses leading to
leakagesand targeted beneficiaries being left out of the system. There is a case for introducing DBT for
consumers of food and kerosene as is under way in Andhra Pradesh.
National Agriculture Market
The scheme for setting up of a National Agriculture Market (NAM) through an Agri-Tech Infrastructure Fund
(ATIF) was approved by the Cabinet Committee on Economic Affairs (CCEA) on 1st July 2015 with a budget
of Rs. 200 crore, to be implemented during 2015-16 to 2017-18.
Integration of state Agricultural Produce Market Committees (APMC) with NAM requires certain pre-requisites
inthe State AMPC Acts, namely- (i) A single license to be valid across the State, (ii) Single point levy of
market fee and (iii) Provision for electronic auction as a mode for price discovery. Only those States/UTs that
have completed these 3 pre-requisites will be eligible for assistance under the scheme.
Trade Policy
India has adopted a tradepolicy vis-à-vis agricultural commodities,which is responsive to the changing domestic
situation of crop production, demand, supply and most importantly retail prices.
Frequent changes in the policy parameters/goal posts of trade in agricultural products in the form of changes
in import duties and minimum export prices, etc., create instability of policy for any investment in the agro-
processing industry. The entire activity of changes in the policy parameters vitiates the concept of a market
and needs to be discontinued.

Questions
1. Even though the Government has provided adequate attention to neglected Food Processing
sector in recent years, still the recent statistics suggest that many of Mega food parks, which
were announced in the scheme have either not been established or they are on the verge of
shutdown. Analyze the factors behind this trend; also suggest what should be done to reverse
the trend?
2. Critically analyze the suggestions made by Shanta Kumar Committee regarding buffer norms?
Also discuss the recent steps taken by the government regarding the same?
3. Discuss the major bottlenecks to agricultural productivity in India? Discuss how many of these
can be addressed without increasing budget for the sector?
4. White revolution in Gujarat has been remarkable and has provided a steady base of extra
income to farmers and it is this sector which has laid the roots of development 2-3 decades
ago? Elaborate.
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INDUSTRIAL, CORPORATE AND


INFRASTRUCTURE PERFORMANCE
Industrial sector riding on the performance of manufacturing sector has registered higher growth during 2015-
16. Policy measures to create an enabling environment and major initiative taken by government include Make
in India, Ease of Doing Business, Start Up India, Digital India, and Smart Cities will boost the performance
of industrial sector & infrastructure sector.
Trends of Growth in Industrial Sector:
Year Growth Rate(%)
2013-14 5
2014-15 5.9
2015-16 7.3
• The growth of Industrial sector broadly comprising mining, manufacturing, electricity and construction
during 2014-15 and during 2015-16 growth of industrial sector is mainly because of manufacturing sector
which is growing at 9.5%. The trends in the Index of Industrial Production (IIP) data at 2004-05 base
shows that during April-December, 2015-16, growth rate was 3.1% as compared to a growth of 2.6% in
the same period of 2014-15.
• The contribution of the manufacturing sector to Gross Value Added (GVA) has been hovering around 17%
for the last 4 years.
• The government efforts, reforms &progammes to strengthen and sustain the momentum of economic
growth:
1. Simplification and rationalization of procedures and processes for boosting investment,
2. Adopting a more open Foreign Direct Investment (FDI) policy
3. Measures for creating a conducive business
4. Reducing the list of industries that can be considered defence industries requiring industrial licence;
5. Amendments in FDI policy which include allowing FDI in defence up to 49%, in railway
6. Infrastructure up to 100% and in the insurance and pension sector up to 49%.
7. The investment limit requiring prior permission from the Foreign Investment Promotion Board (FIPB)/
Cabinet Committee on Economic Affairs has been increased from Rs. 1200 crore to Rs. 3000 crore.
8. The definition of investment by Non Resident Indians (NRI), Persons of Indian Origin (PIO) and
Overseas Citizens of India (OCI) in the FDI policy has been revised.
9. Programmes/initiatives include such as ease of doing business, Make in India, Invest India, and e-biz
Mission Mode Project under the National e-Governance Plan.
10. Government of India is also building a pentagon of corridors across the country to boost manufacturing
and to project India as a global manufacturing destination.
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11. The National Investment and Infrastructure Fund (NIIF) has been approved to extend equity support
to infrastructure Non-Bank Financial Companies (NBFC). Issue of tax free infrastructure bonds has
been allowed for rail, roads and irrigation programmes.
12. The Ministry of Environment, Forest and Climate Change has completed the process for online
submission and clearance of applications for environment, coastal regulation zone and forest clearances.
13. The system for coal block auctions has been streamlined so that these are now granted in a transparent
framework.
14. In order to improve the financial viability of the State Electricity Distribution companies, a
comprehensive financial restructuring of these bodies has been taken up through the Ujwal DISCOM
Assurance Yojana (UDAY) programme.
15. The process of labour market reforms, as initiated in some states, has been taken up by the central
government also.
16. Enhanced public investment in infrastructure has been emphasized to ‘crowd-in’ private investments
• These initiatives helped India to improve its position from 142 in 2015 to 130 in 2016 in the World Bank’s
Ease of Doing Business report 2016.
Comparative Position of India and World Manufacturing:
• Owing to weak global demand and a decline in commodity prices along with an uncertain investment
climate, global manufacturing output rose by 2.7% in the 2nd quarter (Q2) of 2015, following a growth
of 2.5% (Q1) in the 1st quarter of 2015.
• US & Europe has shown recovery, while developing and emerging industrial economies registered
manufacturing growth of 5.0% in Q2 of 2015, compared to the same period of the previous year however
China is a worrying factor due to its excess capacity & lower demand.
• As against this, India’s manufacturing sector grew by 12.6% in Q3 of 2015-16 as compared to a growth
of 1.7% in Q3 of 2014-15.
Corporate Sector Performance:
• Growth of sales especially Petroleum products and iron and steel, growth in interest expenses has been
contracting. Net profit grew by 19.8% in Q2 2015-16 on the back of contraction in 3 successive quarters.
• Net profit to sales ratio improved during the last three quarters and stood at 6.3 per cent, the highest in
10 quarters. Capacity utilization recorded fractional decline in Q2 2015-16 over the previous quarter and
stood at 70.6%, lower than the level during the same quarter of the previous year.
Gross Capital Formation in the Industrial Sector:
• The rate of growth of GCF in industry has registered a sharp rise from (-) 3.7% in 2013-14 to 3.6% in
2014-15, showing upward momentum of investment in industry. However, the rate of GCF to GDP
declined from 34.7% during 2013-14 to 34.2% in the year 2014-15
Credit Flow to the Industrial Sector:
• Growth in credit flow to the industrial sector, including mining and manufacturing, has slowed down in 2015-
16 as compared to 2014-15. Credit flow to industries like basic metal and metal products, chemical and
chemical products and engineering industries increased while a sharp decline was noticed in industries like
petroleum and nuclear fuel, cement and cement products, transport equipment and food processing industries.
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• In 2015-16, credit to micro & small industries, and large industries grew at 2.5% and 6.6% respectively.
But credit flow to medium scale industries declined by 7.6% during the same period.
Micro, Small and Medium Enterprises Sector:
• MSME include 3.6 crore units that employ 8.05 crore people and have a contribution of 37.5% to the
country’s GDP. The sector has huge potential for helping address structural problems like unemployment,
regional imbalances, unequal distribution of national income and wealth across the country.
• Due to comparatively low capital costs and their forward-backward linkages with other sectors, MSMEs
will play a crucial role in the success of the Make in India initiative.
Government’s Schemes, Programmes& New Initiatives to Promote & Develop MSMEs:
• It includes Prime Minister’s Employment Generation Programme (PMEGP), Credit Guarantee Trust Fund
for Micro and Small Enterprises (CGTMSE), Credit Linked Capital Subsidy Scheme (CLCSS) for Technology
Upgradation, Scheme of Fund for Regeneration of Traditional Industries (SFURTI), and Micro and Small
Enterprises- Cluster Development Programme (MSECDP).
• New initiatives include Udyog Aadhar Memorandum (UAM). It is a pathbreaking step to promote ease
of doing business for MSMEs. Under the scheme,MSME entrepreneurs just need to file an online
entrepreneurs’ memorandum to instantly get a unique UdyogAadhaar Number (UAN). The information
sought is on self-certification basis and no supporting documents are required.
• Employment Exchange for Industries: To facilitate match making between prospective job seekers and
employers in line with Digital India.
• Framework for Revival and Rehabilitation of MSMEs: Under this framework, banks have to constitute
a Committee for Distressed MSME enterprises at zonal or district level to prepare a Corrective Action
Plan (CAP) for these units.
• A scheme for Promoting Innovation and Rural Entrepreneurs (ASPIRE): Was launched with the objective
of setting up a network of technology centers and incubation centers to accelerate entrepreneurship and
promote start-ups for innovation and entrepreneurship in rural and agriculture based industry.
Central Public Sector Enterprises:
• Out of 298 CPSEs under the administrative control of various Ministries/Departments, 235 were in
operation and 63 under construction up to December 2015.
• ONGC Ltd, Coal India Ltd, NTPC Ltd, the National Mineral Development Corporation (NMDC) Ltd.
and Power Finance Corporation Ltd. were the top 5 profit-making CPSEs during 2014-15, whereas, Bharat
Sanchar Nigam Ltd, Air India Ltd. Mahanagar Telephone Nigam Ltd. Hindustan Photo Films Manufacturing
Company Ltd and Mangalore Refinery and Petrochemicals Ltd. were the top five lossmaking CPSEs.
• CPSEs contribute to the central exchequer by way of dividend payment, interest on government loans and
payment of taxes and duties, however there is a decrease in the contribution to the central exchequer on
account of a decrease in their contribution to dividend, corporate tax and custom duty in 2014-15. There
was, however, an increase in their contribution to excise duty, dividend tax, sales tax and service tax.
Foreign Direct Investment:
• Foreign direct investment (FDI) is an important driver of economic growth as it leads to productivity
enhancement and is a major source of non-debt financial resources and employment generation. FDI
inflows are critical for sustaining a high growth rate.
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Government’s Efforts to increase FDI:


1. Government is promoting a favourable policy regime and sound business environment have facilitated
increase in FDI flows into the country.
2. A number of sectors have been liberalized, including defence, construction, broadcasting, civil aviation,
plantation, trading, private sector banking, satellite establishment and operation and credit information
companies.
3. During 2015-16, FDI policy in the pension sector has been revised to permit foreign investment up to 49%,
with 26 percent under automatic route. Manufacturing of medical devices and white label ATM operations
have been opened up to 100% FDI under automatic route.
4. There is a growth of near 26% in FDI inflow in 2015 over 2014 mainly in sectors like computer software
and hardware, services, trading, automobile industry, construction (infrastructure) activities, chemicals
(other than fertilizers) and telecommunications.
• Sectors contributing to FDI ( in last 15 years) in descending order are Service sector (17.6%),
construction development (8.8%), computer hardware and software (7.2%), telecommunications (6.6%)
and the automobile industry (5.2%).
• Singapore, Mauritius, Netherlands, the USA and Japan account for the major share in FDI. Out of
FDI equity inflows of US$24.8 billion during 2015-16 (April-November), more than 60% have come
from Singapore and Mauritius.
• There is a huge regional disparity in FDI inflow with Delhi, Haryana, Maharashtra, Karnataka, Tamil
Nadu, Gujarat and Andhra Pradesh have together attracted more than 70 per cent of total FDI
inflows to India during the last 15 years. However, states with vast natural resources like Jharkhand,
Bihar, Madhya Pradesh, Chhattisgarh and Odisha have not been able to attract foreign funds directly
for investment in different sectors.
• After the launch of the Make in India initiative in September 2014, there is a nearly 40% increase
in FDI inflows during October 2014 to June 2015 over the corresponding period of the previous year.
MAKE IN INDIA
With the objective of promoting investment in the country, a full-fledged Investment Facilitation Cell has been
set-up under the Make in India initiative, primarily to support all investment queries as well as to handhold
and liaise with various agencies on behalf of potential investors.
As envisaged by the National Manufacturing Policy 2011, Make in India seeks to create 100 million additional
jobs in manufacturing by 2022. In order to improve their employability. In order to tap the creative potential
and boost entrepreneurship in India, the Start-up India, Stand-up India campaign has been announced. An
innovation promotion platform called Atal Innovation Mission (AIM) and a techno-financial, incubation and
facilitation programme called Self-Employment and Talent Utilization (SETU) are being implemented to
encourage innovation and start-ups in India.
For supporting the financial needs of the small and medium enterprise sector and promote start-ups and
entrepreneurship, the government has taken various steps through Make in India. The India Aspiration Fund
has also been set up under the Small Industries Development Bank of India (SIDBI) for venture capital
financing of newly set-up or expanding units in the MSME sector. SIDBI Make in India Loan for Small
Enterprises (SMILE) has been launched to offer quasi-equity and term-based short-term loans to Indian SMEs
with less stringent rules and regulations and a special focus on 25 thrust sectors of Make in India. Further, a
Micro Units Development Refinance Agency (MUDRA) Bank has been set up to provide development and
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refinance to commercial banks/NBFCs/cooperative banks for loans given to micro-units. MUDRA Bank
would follow a credit-plus approach by also providing financial literacy and addressing skill gaps, information
gaps, etc.
To improve ‘Ease of Doing Business’ in the country. Existing rules have been simplified and information
technology introduced to make governance more efficient and effective.
Measures Taken under ‘Ease of Doing Business’
• The process of applying for Industrial License (IL) and Industrial Entrepreneur Memorandum (IEM) has
been made online and this service is now available to entrepreneurs on a 24x7 basis at the e-Biz website.
• 20 services are integrated with the e-Biz portal which will function as a single window portal for obtaining
clearances from various governments and government agencies.
• Notification has been issued by Directorate General of Foreign Trade (DGFT) to limit number of documents
required for export and import to 3.
• The Ministry of Corporate Affairs has introduced an integrated process of incorporation of a company,
wherein applicants can apply for Director’s Identification Number (DIN) and company name availability
simultaneous to incorporation application [Form INC-29].
• The Companies (Amendment) Act 2015 has been passed to remove requirements of minimum paid-up
capital and common seal for companies application forms for Industrial Licence (IL) and Industrial
Entrepreneur Memorandum (IEM) have been simplified.
• Defence products’ list for industrial licensing has been issued, wherein a large number of parts/components,
castings/forgings, etc. have been excluded from the purview of industrial licensing.
• Similarly, dual-use items, having military as well as civilian application (unless classified as defence item),
will also not require ILs from the defence angle.
• The Ministry of Home Affairs has stipulated that it will grant security clearance on IL applications within
12 weeks.
• An Investor Facilitation Cell has been created under Invest India to guide, assist and handhold investors
during the entire life-cycle of the business.
• The process of applying for environment and forest clearances has been made online through the Ministry
of Environment and Forests and Climate Change portals.
• Registration with the Employees Provident Fund Organization (EPFO) and Employees State Insurance
Corporation (ESIC) has been automated and ESIC registration number is being provided on a real-time
basis.
• A unified portal for registration of units for Labour Identification Number (LIN), reporting of inspection,
submission of returns and grievance redressal has been launched by the Ministry of Labour and Employment.
• A report titled ‘Assessment of State Implementation of Business Reforms’ was released on 14th September
2015. It reports the findings of an assessment of reform implementation by states by the DIPP, Ministry
of Commerce and Industry, Government of India, with support from World Bank group and KPMG.
The global perception about India’s competitiveness has improved as per the Global Competitiveness Index
of the World Economic Forum. Significantly, at position 55, India went up 16 rungs in 2015-16.
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Infrastructure Performance- Specific Sectors


POWER:
• To provide uninterrupted continuous access to power supply in the country, several steps have been taken
for increasing power generation, strengthening of transmission and distribution, separation of feeder and
metering of power to consumers. In order to restructure the sector, various amendments are being brought
in the Electricity Act, and tariff policy in collaboration with states.
Electricity Generation and Capacity
• During 2014-15, the achievement in electricity generation registered growth of 8.4%. Annual generation
crossed 1 trillion units last year. In the current year (April–December 2015), generation registered a growth
of 4.4%.
• Growth in the generation of thermal power (5.6%), which is the primary source of power in India, was
achieved due to enhanced availability of coal and statutory clearances provided for a number of projects.
Distribution
• Integrated Power Development Scheme (IPDS) was launched for strengthening sub-transmission and
distribution system.
• The new scheme, the ‘DeendayalUpadhyaya Gram Jyoti Yojana’ (DDUGJY) was launched with more
budgetry allocation which is a continuation of the Rajiv Gandhi GrameenVidyutikaran Yojana (RGGVY).
The government also intends electrifying all the remaining 18,452 villages (as on April 1, 2015) by May
1, 2018.
UDAY (Ujwal DISCOM Assurance Yojana)
• The UDAY scheme was launched for financial and operational turnaround of DISCOMs and to ensure
a sustainable permanent solution to the problem.
• The scheme envisages reducing interest burden, cost of power and AT&C losses. DISCOMs and participating
states would enter into a tripartite agreement with the Government of India to achieve operational and
financial targets as per the agreed trajectory.
National LED Programme
• It was, launched the 100 cities National LED Programmes with the aim of promoting use of the most
efficient lighting technology at affordable rates.
• This programme has 2 components: (i) The Domestic Efficient Lighting Programme (DELP) aiming to
replace 77 crore incandescent bulbs with LED bulbs by providing LED bulbs to domestic consumers and
(ii) The Street Lighting National Programme (SLNP) to replace 3.5 crore conventional streetlights with
smart and energy-efficient LED streetlights by March 2019.
• It is estimated that the National LED programme will result in annual electricity saving of about 109
billion units and a 21,500 MW reduction in demand along with monetary savings of Rs. 45,500 crore
accruing to domestic consumers and urban local bodies. Additionally, it will play a major role in mitigating
climate change by effecting greenhouse gas emission reductions of 85 million tonnes of CO2 annually.
This will facilitate the nation’s commitment towards reducing its emission intensity per unit GDP by 33-
35% below 2005 levels by 2030
• Apart from this, the programme is expected to encourage and support domestic manufacturing of LED
bulbs, making it consistent with the ‘Make in India’ policy of the government.
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National Smart Grid Mission


• Government has approved the establishment of a National Smart Grid Mission (NSGM) in the power
sector to plan and monitor implementation of policies and programmes related to smart grid activities in
India.
COAL
Coal production registered a growth of 4.7% during 2015-16. Gap in demand & supply is met through imports.
However, due to higher domestic production, imports have been coming down since last year.
Initiatives and Achievements
• The Coal Mines (Special Provisions) Act 2015 has been enacted to enable the government to reallocate
204 coal blocks whose allocations were cancelled by the Supreme Court. The primary objective of the
act is to ensure continuity in coal mining operations and production of coal and to promote optimum
utilization of coal resources consistent with the requirement of the country. The auction of coal blocks
is being carried out in e-auction mode in order to keep the process transparent.
• As per the recommendations of an Inter-Ministerial Task Force (IMTF) constituted in June 2014 by the
Ministry of Coal to review rationalization of linkages.
• An Inter-Ministerial Committee (IMC) has been constituted to examine the feasibility of allocation of
coal linkages/LoAs through a market-based mechanism with a view to providing a level playing field for
supply of coal to different stakeholders. The proposed mechanism on auction of linkages is expected to
bring objectivity and transparency in allocation of linkages.
• To ensure timely implementation of ongoing projects, major coal projects costing more than Rs. 500 crore
of 3 million tonnes per year (MTY) capacity are being closely monitored. In order to deal with various
pending issues relating to clearance of coal sector projects, the government has set up a web portal to fast-
track project implementation. The government has also assigned high priority to the early completion of
critical railway projects for movement of coal. Joint Venture (JV) companies have been formed by coal
companies along with respective state governments and IRCON for the speedy implementation of future
rail projects
• To address the issues of dispute between coal companies and power utilities/ developers and to bring
about improvement in the quality of coal supply, the system of third-party sampling was further improved.
MINERALS
• As per IIP mineral production increased by 3.1% owing to increase in the production of bauxite, chromite,
iron ore, limestone and phosphorite.
• The mining sector had been hit hard for 2 consecutive years, i.e. 2011-12 and 2012-13, due to legal issues
in courts and environmental, regulatory and land acquisition issues.
Government’s Initiative to Improve the Mining Sector:
• The Government has recently amended the Mines and Minerals (Development and Regulation) Act 1957
with effect from 12th Janauary 2015 for promoting the mining sector.
• The sailent features of the MMDR Act 2015 are:
1) The grant of mineral concessions through auction by competitive bidding, which is a transparent and
non-discriminatory method and which will also obtain for the state government its fair share of value
of the mineral resources;
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2) Transition provisions for extension of existing leases to obviate disruptions in supply of ore and to
ensure regular supply of raw material to industry (transition period of minimum 15 years for captive
mines and 5 years for other mines);
3) Assured tenure and easy transferability of mineral concessions granted through auction to attract
private investments and FDI;
4) Stricter penalty provision to deter illegal mining; special court may be constituted if necessary;
5) District Mineral Foundation to be established in each mining affected district with the objective of
working for the interest and benefit of persons as well as affected areas where mining activity is taking
place; National Mineral Exploration Trust to be set up for impetus to exploration.
• PradhanMantriKhanijKshetraKalyanYojna (PMKKKY) under it an amount of Rs. 6000 crore per annum
is to be spent on welfare schemes related to people and districts adversely affected by mining activities.
Fund will be used to minimize/mitigate the adverse impacts during and after mining on environment,
improvement in health, education and socio-economic condition of people in mining districts; and to
ensure long-term sustainable livelihood for the affected people in mining areas.
Petroleum and Natural Gas:
• Domestic production is supplemented by oil and gas assets acquired abroad. In global context, There has
not only been a narrowing of the shortage of supply over demand of crude oil during a little more than
a year, but in fact there is excess availability with contraction of global demand, primarily in the USA
(with shale gas supply) and China (with fall in economic growth). At the same time, there is increased
availability from the USA and the Organization of the Petroleum Exporting Countries (OPEC), despite
falling prices.
Major Initiatives
• The Government approved the Marginal Fields Policy (MFP) for the development of hydrocarbon discoveries
made by national oil companies, i.e. ONGC and OIL. With this policy, it is expected that these fields can
be brought into production, helping augment India’s energy security.
• The government has approved a policy on Testing Requirement in with/without Drill Stem Test in NELP
blocks.The policy has paved the way forward for 10 discoveries in the east coast offshore areas by
resolving long-pending disputes associated with testing requirements.
• Government has approved the policy framework to ease rigidities in PSCs and remove bottlenecks for
early monetization of hydrocarbon discoveries.
• A Uniform Licensing and Open Acreage Policy with new contractual and fiscal regime is being formulated.
The policy envisages three fundamental changes in the Exploration and Production (E&P) regime, i.e.
single E&P licence for all forms of hydrocarbon, open acreage licensing system and simple and easy to
administer revenue-sharing model.
• Exploration of Unconventional Resources like Coal Bed Methane, Shale Oil and Gas.
Issues Relating to the Petroleum Sector
(i) In view of the absence of a global gas market for benchmarking domestic gas prices in India, various
formulae have been suggested and since October 2014 a formula based on producer and consumer
markets is being used to arrive at domestic gas prices in India. It was expected that the formula would
balance the interest of producers and consumers in the country. However, market-determined arm’s
length pricing for domestic gas, with an effective regulator, to provide adequate incentive for investment
and also ensure competiveness and transparency remains the first-best solution that merits consideration.
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It would reflect the appropriate gas price in relation to alternative fuels. In the medium term, being a large
consumer, India may be able to be a price setter for gas prices in the region.
(ii) Petroleum products and natural gas should be included under the Goods and Services Tax (GST), or at
least its exclusion should not be indicated in the Constitution Amendment Bill.
(iii) The cess collections could be used to support construction of a network of gas pipelines, which is of
crucial importance for providing clean energy to deprived regions of the country. The progress is somewhat
constrained at present by having been linked to revival of fertilizer units and development of small
industries in areas along the gas highway projects. Alternatively, in order to promote the gas pipeline
network, Viability Gap Funding (VGF) may be provided for promoting pipeline assets creation and
development of efficient markets.
(iv) Impetus is required for construction of not only cross-country pipelines but also city gas distribution. The
present system of bidding by the Petroleum and Natural Gas Regulatory Board (PNGRB) is lopsided and
long-drawn-out and needs to be reformed since it has constrained development of the gas network.
Expansion of the PNG/CNG (Compressed Natural Gas) network could help provide gas connections to
rural areas.
(v) Rationalization of LPG subsidy is essential, while aligning taxes and duties on domestic and commercial
LPG users.
(vi) Import of liquefied Natural Gas (LNG) for use in the power industry is exempt from customs duty while
LNG for all other uses attracts 5% customs duties. There should be no exemptions for any sector.
(vii). In order to develop a cost-effective and revenue-neutral mechanism for swapping of gas across producing
and consuming states for the national gas grid, it is important to make special tax provision for sale of
natural gas under the Central Sales Tax Act 1956. Natural gas and LNG may be treated as declared goods
to bring about tax parity with crude oil and make prices uniform across states.
New and Renewable Energy:
• The renewable energy potential in the country has been assessed in the medium term at 8, 96,602 MW,
which includes the potential from solar (7, 48,990 MW), wind (1, 00,000 MW), small hydro (20,000
MW) and biomass (26,800 MW) power.
• Apart from grid power requirement, renewable energy sources are also being used for distributed generation,
lighting, pumping and motive power requirement in remote and inaccessible areas.
• The target from various renewable energy sources has been increased to 175 GW by the year 2022. The
major contributions are expected to be 100 GW from solar energy and 60 GW from wind energy.
• Grid connected & off grid power generation capacity of the country is over 38,820 MW and 74.68 MW
equivalents respectively.
Major Initiatives
• Under the National Solar Mission (NSM), the government has increased its support for implementation
of grid-connected rooftops systems over a period of 5 years up to 2019-2025.
• Setting up of solar parks and ultra mega solar power projects with an aggregate capacity of 20,000 MW
in the next 5 years in various states, 34 solar parks with capacity of about 22,000 MW have been
sanctioned in 22 states.
• A scheme for setting up of 15,000 MW of grid-connected solar PV power projects under the NSM through
NTPC Limited/NVVN (NTPC VidyutVyapar Nigam) in 3 tranches by the year 2018-19 has been approved.
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• Against a target of installation of one lakh solar pumps for irrigation and drinking water, 1,21,524 solar
pumps have been sanctioned as on 31 December 2015.
• Approval has been granted for 56 solar city projects against a target of 60 under the Development of Solar
Cities Programme; The Surya Mitra scheme has been launched in May 2015 for creating 50,000 trained
personnel within a period of 5 years.
• Other initiative include (i) The National Offshore Wind Energy Policy 2015 to exploit the vast 7600 km.
coastline for development of offshore wind energy in the Indian Exclusive Economic Zone (EEZ), (ii)
Inclusion of renewable energy in the priority sector and bank loans up to Rs. 15 crore limit to borrowers
categories for purposes like solar-based power generators, biomass-based power generators, windmills, micro-
hydel plants and for non-conventional energy-based public utilities like street lighting systems, and remote
village electrification and for individual households, up to Rs.10 lakh per borrower to be covered under
priority sector lending norms, (iii) Investments in renewable energy are on automatic route, i.e. automatic
approval for up to 74% foreign equity participation in a Joint Venture and 100% foreign investment as
equity is permissible with the approval of the Foreign Investment Promotion Board (FIPB), (iv) Approval
to the amendments in the National Tariff Policy 2005, inter alia adding promotion of renewable power as
a key objective of the policy and enhancing Renewable Purchase Obligation (RPO) targets.
Railways:
• Given the limitation of public resources, efforts are on by Indian Railways to generate sufficient internal
surplus, and tap innovative methods of financing, to meet these needs. Indian Railways (IR) is prioritizing
investments in important areas like dedicated freight corridors, high speed rail, high-capacity rolling stock,
last mile rail linkages and port connectivity, and attracting private and FDI investments to supplement
available resources.
Initiatives Taken
• Various measures to improve passenger amenities, infrastructure and service, and initiatives under Make
in India, freight initiative, resource mobilization initiative and green initiatives, etc. have been taken by IR
Optical Fibre Cable (OFC) over 1098 route kilometres (RKM) has been laid.
• Coach Factory, Chennai, has developed a 1st of its kind stainless steel 3-phase energy efficient AC
transmission 1600 HP DEMU train set. Mobile application for freight operations Parichaalan has been
introduced. IR has also installed solar panels on rooftops of coaches for the train lighting system on trial
basis. Tenders and policy guidelines for 50 MW solar plants on rooftops of IR buildings have been issued.
• Besides the Mumbai-Ahmedabad corridor, a Diamond Quadrilateral network of High Speed Rail connecting
major metros and growth centres of the country was announced in the Railway Budget 2014-15.
High Speed Train Project
The Japan International Cooperation Agency (JICA) which undertook the study on the feasibility of this
prestigious project, submitted its report in July 2015. The project was approved by the Cabinet Committee
on Economic Affairs, in December 2015, to be implemented with Japanese technical and financial assistance.
A new special purpose vehicle with 50% equity participation from the Ministry of Railways and 50% from
the state governments of Maharashtra and Gujarat was to be set up to implement the project.
Salient features of the project
• Average per km cost of construction works out to be Rs.140 crore.
• Project implementation time will be approximately 7 years from the commencement of construction.
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• Japanese official development assistance will be 81% of project costfor 50 years with 0.1% interest and
a 15 year moratorium.
• Total length of the proposed corridor will be 508 km between the Bandra-Kurla complex in Mumbai and
Sabarmati/ Ahmedabad in Gujarat.
• The maximum design speed will be 350 kmph with an operating speed of 320 kmph.
• 35 trains per day each way will operate by 2023, which will go up to 105 trains per day each way in 2053.
It will have approximately 36,000 daily users per day (both ways) in 2023.
Roads:
• India has the 2nd largest road network in the world with about 52.32 lakh km of road network comprising
National Highways, State Highways and other roads. The National Highways (NH) in the country cover
a total length of 1,00,475 km and carry about 40% of the road traffic.
Major Initiatives
• The government has approved a scheme for the development of about 1177 km. of NHs and 4276 km.
of state roads in Left Wing Extremism (LWE)-affected areas as a Special Project.
• Special Accelerated Road Development Programme for North-Eastern region (SARDP-NE).
• Bharatmala is a proposed umbrella scheme for (i) Development of State Roads along Coastal areas /
Border areas, including connectivity of non-major ports, about 7000 km. (ii) Backward Areas, Religious,
Tourist Places Connectivity programme, about 7000 km. iii) SetubhratamPariyojana which is for the
construction of about 1500 major bridges and 200 ROBs / RUBs. (iv) District Head Quarter Connectivity
Scheme for development of about 9000 km newly declared NHs. The programme is targeted for completion
by 2022.
Civil Aviation
• This industry in India is experiencing a new era of expansion, driven by factors such as increasing private
participation under Public Private Partnership (PPP), development of greenfield airports, restructuring and
modernization of airports, FDI in domestic airlines, increase in number of Low Cost Carriers (LCCs) and
emphasis on regional connectivity, coupled with cutting-edge information technology interventions.
• Domestic traffic increased by 20.4% and international passengers by 7.8% during April-November 2015
over the same period of the previous year.
Major initiatives have been taken to augment airport infrastructure:
• Major thrust on Greenfield airports in various states.
• Signing of MoU for engaging Changi airport, Singapore, for executing Operations and Maintenance(O&M)
contracts at Ahmedabad and Jaipur airports;
• Development of small airports in tier-II and tier-III cities.
Shipping Sector:
• A vision document for Coastal Shipping, Tourism and Regional Development has been prepared with a
view to increasing the share of coastal/inland waterways transport mode from 7% to 10% by 2019-20.An
ambitious programme has been drawn up to develop 78 lighthouses in the country as centres of tourism
in the 1ST phase under PPP.
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• The cargo traffic of Indian ports increased by 8.2% to 1052.2 million tonnes in 2014-15, with traffic at
non-major ports increasing at a faster rate than at major ports.
Inland Waterways Transport Sector
• Development of this sector will facilitate fuel savings, environment friendliness and cost effectiveness for
transportation of bulk goods, dangerous goods, etc.
• A significant step in creation of IWT infrastructure is implementation of the JalMargVikas Project with
World Bank assistance of Rs.4200 crore.
• To provide a thrust to the IWT sector, on the legislative front, it has been decided that in addition to the
existing 5 national waterways, 106 more waterways across 24 states would be declared as National
Waterways and a bill was passed to this effect by the Lok Sabha in the winter session of Parliament.
Telecommunications
• It is a key driver for socio-economic growth & it’s performance during 2015-16 has been encouraging,
Overall telephone density in the country has increased from 79.4% at the beginning of the financial year
to 81.5% at the end of October 2015, while total broadband connections have touched 120.9 million (at
end-September 2015).
• The Department of Telecommunications (DoT) conducted auction of spectrum in March 2015
simultaneously in 2100 MHz, 1800 MHz, 900 MHz and 800 MHz bands.
Machine to Machine Communications (M2M)
• It will facilitate the role of new technologies in furthering public welfare and enhanced customer choices
through affordable access and efficient service delivery. A ‘National Telecom M2M Roadmap’ has been
prepared putting together various standards, policy and regulatory requirements and approach for the
industry on how to look ahead to M2M.
Major New Initiatives
• BharatNet / National Optical Fibre Network (NOFN) project is planned to connect all gram panchayats
(approximately 2.5 lakh) in the country through optical fibre, utilizing existing fibre of PSUs, namely
BSNL, RailTel and Power Grid, and laying incremental fibre wherever necessary.
• This will bridge the connectivity gap between gram panchayats and blocks and provide broadband
connectivity. Access providers/service providers like mobile operators, Internet Service Providers (ISP),
cable TV operators, content providers can launch various services in rural areas. Various applications for
e-health, e-education, e-governance etc. will be provided.
• The Rural Wireline Broadband Scheme provides wireline broadband connectivity to rural and remote
areas.
Urban Infrastructure
• A number of initiatives have been taken to improve urban infrastructure encourage like in public transport,
for example Bus Rapid Transit Systems (BRTS), Intelligent Transport System (ITS) in buses and Metro
Rail Projects.
New Initiatives
• Swachh Bharat Mission (SBM) aims at making India free from open defecation and at achieving 100%
scientific management of municipal solid waste in 4041 statutory towns/ cities in the country. The targets
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set for the mission which have to be achieved by 2 October 2019 are: construction of 1.04 crore Individual
Household Latrines (IHHL), 2.52 lakh Community Toilet (CT) seats and 2.56 lakh Public Toilet (PT)
seats; and achieving 100% door-to-door collection and scientific management of Municipal Solid Waste
(MSW).
• National Heritage City Development and Augmentation Yojana (HRIDAY) scheme aims at preserving
and revitalizing the soul and unique character of heritage cities in India.
• Atal Mission for Rejuvenation and Urban Transformation (AMRUT) was launched with the objective of
improving basic urban infrastructure in 500 cities/towns which will be known as mission cities/towns.
Cities with a population of 10 lakh or above are entitled to central assistance of 1/3rd of the project cost
and all other cities, one half of the project cost. Balance funding is to be arranged by state governments/
Urban Local Bodies (ULB), including through private investment.
Startup India: Wings to Fly above the Sky
• It is a flagship initiative to build a strong ecosystem for nurturing innovation, driving sustainable economic
growth and generating large-scale employment opportunities. Apart from the technology sector the start-
up movement will extend to a wide array of other sectors including agriculture, manufacturing, healthcare
and education. From existing tier-1 cities it will extend to tier-2 and tier-3 cities including semi-urban and
rural areas.
Proposed Action Plans under Startup Initiative:
• Creating a compliance regime based on self-certification to reduce the regulatory burden on start-ups,
thereby allowing them to focus on their core business and keep compliance cost low.
• Setting up Startup India hub to create single point of contact for the entire Startup ecosystem and enable
knowledge exchange and access to funding.
• Rolling out of mobile app and portal to serve as the single platform for start-ups to interact with government
and regulatory institutions for all business needs and information exchange among various stakeholders.
• Relaxed norms of public procurement for start-ups to provide an equal platform to start-ups (in the
manufacturing sector) vis-à-vis entrepreneurs/companies experienced in public procurement.
• Legal support and fast-tracking of patent examination at lower costs to promote awareness and adoption
of Intellectual Property Rights (IPR) by start-ups and facilitation for them in protecting and commercializing
the IPRs.
• Faster exit for start-ups, Providing funding support through a fund of funds with a corpus of Rs. 10,000
crore.
• Credit Guarantee Fund for start-ups to catalyse entrepreneurship by providing credit to innovators across
all sections of society, Tax exemption on capital gains, Tax exemption for 3 years.
• Launch of Atal Innovation Mission with (SETU) programme to serve as a platform for promotion of
world-class innovation hubs, start-up businesses and other self-employment activities, particularly in
technology-driven areas.
• Building innovation centres at national institutes to propel successful innovation through augmentation of
incubation and R&D efforts.
• Setting up of 7 new research parks modelled on the research park at IIT Madras.
• Promoting start-ups in the biotechnology sector to foster and facilitate bio-entrepreneurship.
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• Launching of innovation-focused programmes for students to foster a culture of innovation in the field
of science and technology.
• Startup India will turn Indian youths from job seekers into job creators.

Questions
1. India has made great strides in removing the barriers to the entry of firms, talent,
and technology into the Indian economy. Less progress has been made in relation to exit.
Substantiate your answer by analyzing a specific sector?
2. Indian Railway is the classic example that, unless public deliveries are based upon user charges,
it will affect the very service to people only and thus, it is necessary to charge people for
services. Critically analyze.
3. What do you understand by a start-up, why are these start-ups more common in technology in
case of India. Also explain what start-up eco-system is and what are its constituents?
4. In order to attract more investment in the Hydrocarbon sector the government has replaced
Production sharing models. Will Revenue sharing model be able to solve the issues related to
earlier method? Discuss.
5. Renewable energy has the potential to create a large industrial base in India apart from reducing
the huge energy import bill? Critically analyse the current developments in the sector?
6. The risk borne by a single party is extreme in case of both the PPP models (BoT and EPC). In the
light of above statement explain how Hybrid Annuity model will resolve this problem also
highlight its key features? Also analyze how the adoption of this model can help in completion
of stalled projects?
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SOCIAL INFRASTRUCTURE, EMPLOYMENT


AND HUMAN DEVELOPMENT
• In India, the proportion of economically active population (15-59 years) has increased from 57.7% to
63.3% during 1991 to 2013, as per Sample Registration System (SRS) data for 2013.
• As a proportion of the Gross Domestic Product (GDP), expenditure on education has hovered around 3%
during 2008-09 to 2014-15.
• There has not been any significant change in the expenditure on health as a proportion of GDP and it has
remained stagnant at less than 2% during the 2008-09 to 2014-15.
Educational Challenges
1. Decline in enrolment in government schools in rural areas, from 72.9% in 2007 to 63.1% in 2014 - Decline
in enrolment in Government schools and some shift to private schools might be largely related to the poor
quality of education offered in government schools, since it is free or offered for a nominal fee.
2. Only 79% of teachers are professionally qualified overall.- There is need to increase the percentage of
qualified teachers and also the training of both qualified and under-qualified teachers.
3. In the case of Scheduled Tribe (ST) students, parity between girls and boys has not been achieved across
all levels of school and higher education and higher education in the case of Scheduled Caste (SC)
students.
Employment
LFPR : Labour Force Participation Rate, WPR : Worker-Population Ratio, UR is Unemployment Rate, UPS
: Usual Principal Status
The LFPR for rural areas at 54.7 is greater than that for urban areas at 47.2. The LFPR for women is
significantly lower than that for males in both rural and urban areas. The Worker Population Ratio (WPR)
reflects a similar pattern, with women having lower participation rate in comparison to men in both rural and
urban areas.

• The Unemployment Rate (UR) for persons aged 15 years and above according to Usual Principal Status
(UPS) is 4.7% in rural areas and 5.5% in urban areas. The total UR reported is 4.9%.
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Government is keen to address the issue of low female LFPR and WPR and has launched various legislation
based schemes
• Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), guaranteeing at one-third
participation by women. The participation by women under the MGNREGA has been more than the
stipulated 33% since its inception.
• National Rural Livelihoods Mission (NRLM), a restructured version of the Swarnajayanti Gram Swarozgar
Yojana (SGSY), has been in operation since 3 June 2011. It aims at Organizing all rural poor households
and nurturing and supporting them till they come out of abject poverty, by organizing one woman member
from each household into affinity-based women Self-Help Groups (SHG).
The low labour force participation in India is largely because the female LFPR, which is amongst the lowest
in the world and the second lowest in South Asia after Pakistan.
Labour Reforms
• The Payment of Bonus (Amendment) Act 2015: The eligibility for bonus payment as defined under
section 2 (13) of the Payment of Bonus Act 1965 has been increased from Rs. 10,000 to Rs. 21,000 per
month. Section 12 of the principal Act states that, the calculation of bonus with respect to certain
employees where the salary or wage of an employee exceeds Rs.7000 (or the minimum wage for the
scheduled employment as fixed by the appropriate government, whichever is higher) shall be paid per
month, the bonus payable to such employee under section (10) or, as the case may be, under section (11),
shall be calculated as if his/her salary or wage were Rs.7000 per month
• National Career Services Portal: The NCS is envisaged as a digital portal that will provide a nationwide
online platform for job seekers and employers for job matching in a dynamic, efficient and responsive manner.
• ShramSuvidha Portal: The features includes unique Labour Identification Number (LIN) to units/
establishments registered on it and transparent labour inspection scheme; unified annual returns under 9
central acts and unified electronic challan-cum-return for filling of monthly contribution with Employees
Provident Fund Organization (EPFO).
• Universal Account Number: Pandit Deen Dayal UpadhyayShramevJayate Karyakram introduced
portability feature through the Universal Account Number (UAN) by EPFO.
Hidden contribution of women
• The declining female participation rates in conventional surveys are largely explained by the high share of
women in unpaid work.
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Child Labour
• National Child Labour Project (NCLP) Scheme :- A project-based intervention under which children
rescued/withdrawn from work in the age group of 9-14 years are enrolled in NCLP special training centers,
where they are provided bridge education, vocational training, mid-day meal, stipend, health care, etc.,
before being mainstreamed into formal education system.
• Children in the age group of 5-8 years are directly linked to the formal education system through close
coordination with the SarvaShikshaAbhiyaan (SSA).
• Stricter punishment for employers contravening the provisions have been proposed as amendment to the
Child Labour (Prohibition & Regulation) Act, 1986.
Imparting vocational education and training is an effective way of developing skills at various levels and sub-
sectors of industries for improving the employability of the population.
Standard Training and Assessment Reward (STAR) scheme are likely to create a widespread positive impact
on the skill ecosystem in India.
Healthy India
Challenges to the delivery of efficient health services in India: Paucity of resources and the plethora of
requirements in the health sector.
Consumption of contaminated, drinking water, improper disposal of human excreta, lack of personal and food
hygiene and improper disposal of solid and liquid waste have been causes of many diseases in developing
countries like India.
The share of children (0-6 years) accounts for 13.6% (26 million children) of the total population in the
country. Mortality has declined from 126 in 1990 to 49 in 2013.
National Iron Plus Initiative has been rolled out to address anaemia among children (6 months to 19 years)
and women in reproductive age including pregnant and lactating women in both rural and urban areas throughout
the country.
UHC Index :- Developed by the World Bank to measure the progress made in health sectors in select countries
of the World. India ranks 143 among 190 countries in terms of per capita expenditure on health
Poverty
• According to ‘Tendulkar Committee’ methodology using household consumption expenditure survey ,
incidence of poverty declined from 37.2% in 2004-05 to 21.9% in 2011-12.
• The high rural poverty can be attributed to lower farm incomes due to subsistence agriculture, lack of
sustainable livelihoods in rural areas, impact of rise in prices of food products on rural incomes, lack of
skills, underemployment and unemployment.
• 70% of India's population (650 million) lives in rural and slum areas.
Human Development
• As per the Human Development Report (HDR) 2015, India ranks 130 out of 188 countries.
• In comparison to other nations in the BRICS grouping, India has the lowest rank with Russia at 50, Brazil
at 75, China at 90 and South Africa at 116.
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• Apart from the cultural and social factors which prevent women from engaging in economically productive
activities outside the household, the lack of education and skills restricts them from participating in
economic activity, which leads to their further impoverishment and subjugation of women in India.
Gender Issues
• Gender discrimination in India, which is embedded in the social fabric, continues in most spheres such
as 1) Access to education 2) Social and economic opportunities. 3) Sex determination test in womb 4)
Abortion of the female foetuses, 5) Discrimination in terms of nutrition offered to the girl child 6) The
length and type of schooling the girl child avails of vis-à-vis her male siblings 7) Inadequate or lack of
access to higher education 8) Discrimination in opportunities of employment and wages paid 8) Unequal
share in inheritance.
• The reliance on a legal system to offer gender equality and justice, has not built in a time dimension in
the dispensation of justice.
• Further, dependence on schemes and programmes with inadequate coverage, outlays, inefficiencies and
leakages in the delivery mechanism, the social, economic and legal condition of women shows inadequate
improvement in terms of several indicators.
• For achieving double-digit growth, it is critical that India particularly overcome the development challenges
through innovative models of delivery of services.
• Technology will play a crucial role as an enabler for inclusiveness and provider of efficient services by
preventing leakages
Conclusion
There is a need to improve the quality of education provided in schools to arrest and reverse the decline in
enrolment in government schools and improve the educational outcomes in both public and private schools.
An important contributor to improvement in the quality of education would be an increase in the percentage
of qualified teachers.

Questions
1. Healthcare expenditure in India is one of the lowest in world in proportional terms; suggest
measures how it can be boosted in India? Also discuss some steps taken by government in this
regard?
2. Education extension has so far been focused on universal enrolment and quantity instead of
quality, however, now its time that quality also should be given its due and it receive some focus.
Critically analyze.
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