9 PM Daily Brief – May 20th ,2020

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9 PM for Main examination

GS-2

  1. Challenges in ensuring national Energy Security

GS-3

  1. What are the weaknesses of revival plan announced by central government?
  2. Agri-Marketing Reforms
  3. Financing the stimulus
  4. intervention analysis

9 PM for Preliminary examination

FACTLy


1.Challenges in ensuring national Energy Security

Source –  The Hindu

Syllabus – GS 2 – Government policies and interventions for development in various sectors and issues arising out of their design and implementation

Context – As part of relief package under Atmanirbhar mission there is proposal to amend the Electricity Act, 2003

Present challenges of Discom segment – Power purchase agreement (PPA)

  1. Idle fixed cost -Discoms must purchase electricity from generating companies under long term PPA’s. This makes them pay a fixed cost to the power generator, irrespective of whether Discoms draws the power or not, and a variable charge for fuel when it draws power.
  2. Over-estimation of energy requirement– These PPAs signed by DISCOMs were based on over-optimistic projection of power demand  estimated by the Central Electricity Authority (CEA).
  3. Falling demand due to lockdown– Now due to overestimation and fall in demand amid lockdown (industries and commercial sector consumed 50% of total power) DISCOMs are locked into long-term contracts paying idle cost for power not drawn.

Implication – All this increases their dues and thus the Discom debt rises which in turn affects the availability of working capital, its investment, quality of services to households as well as NPA in banks.

Proposed Amendments

  1. Entry of private sub-franchisee in Distribution (Discom) segment– This is a challenge to existing discoms which are already bleeding due to multiple issues as sub-franchisee can tap on existing discoms profitable market and erode profit made by Discoms.
  2. More Concessions to renewable power developers– Discoms are already obliged to absorb all renewable power generated by renewable power developers and pay idle charges to thermal power even when not utilizing its production. With more concessions, renewable energy ‘s production will shoot up which will lead to more burden on discoms.
  3. Elimination of cross-subsidies– The elimination of cross-subsidies will raise service charge for each consumer category (agriculture, household, industry and commercial sector). Since, rural households require long lines and numerous step-down transformers, thus their service cost will be higher than any other category.
  4. Against principle of cooperative federalism– There are two proposed amendments which violate the spirit of cooperative federalism:
  5. Central selection committee to appoint state regulators– This committee has distorted composition:
  6. majority of members from Centre and
  7. only 2 representatives of state government

This committee and its selection,hence, jeopardize the concurrent status of the electricity sector.

  1. Establishment of a centralized Electricity Contract Enforcement Authority– The members and chairman of this authority will again be selected by the same selection committee referred to above. The power to adjudicate upon disputes relating to contracts will be taken away from State Electricity Regulatory Commissions and vested in this new authority. This will leave no space for state and its discoms to challenge the rising centralization in electricity sector.

Way Forward – States need Centre’s support to settle dues of discoms and strengthen electricity sector which will also bear the brunt of pandemic. Electricity bill 2020 instead of supporting states puts more burdens on State discoms. Thus there is a need to revisit the bill to ensure energy security with resilient sector.

2.What are the weaknesses of revival plan announced by central government?

Source: Live Mint

Syllabus: GS 3-Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context: The government announced the economic package which had five tranches on five successive days to deal with COVID-19.

What government has announced? Atmanirbhar Bharat Abhiyan totaling Rs 20 lakh crore.

Announcement Day

 

Focus area
Day 1 Focused on small and medium enterprises, non-bank financial institutions, real estate and liquidity.

 

Day 2 Migrants, affordable housing, street vendors and micro credit.

 

Day 3 Agriculture, animal husbandry and fisheries

 

Day 4 Private-sector entry, the opening up of India’s coal sector, and the privatization of power distribution, airports and Union public sector enterprises (PSEs) as well as on raising FDI limits.

 

Day 5 Rural employment guarantee, postponement of insolvency and other compliances and incentivizing reforms in states by making their enhanced borrowings contingent on these.

The reforms which were long overdue which could have provided support to economy during COVID-19:

  • Slow reforms in Agriculture: The agricultural and rural sectors have hardly been touched by post-1991 reforms. The Essential Commodities Act (ECA) and Agricultural Produce Marketing Committee (APMC) Acts should have reformed long ago.
  • Participation of private sector: The issue privatization (of PSEs) and greater private sector participation in the economy.
  • For Urban Poors: There should be portability of identity through a unified ration card long ago.
  • For Workers: The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act of 1979 issues.

The Weaknesses of economic package:

  1. Distort Resource allocation: Sector-specific sops distort resource allocation and make the task of tax simplification difficult.
  2. Emphasis on supply side: It focuses on structural reforms and not demand.
  3. Passing of tax cuts to consumers: The multiplier effects of tax sops are doubtful and inferior to those of government expenditure.
  4. Expansionary Fiscal policy: There is a clear correlation between a continued lockdown and urban production shortfalls, suggesting inelastic supply curves in urban India now. The government should have focused more on fiscal expenditure on rural India.
  5. Too slow structural reforms: Before India imported the virus, there was a dysfunctional debate between demand declines versus structural constraints. Many of those critics argued that the government wasn’t paying sufficient attention to structural reforms.
  6. Credit rating issue: It is interpreted not as actions by external rating agencies but an internal assessment of the credits (revenue) and debits (expenditure) of government accounts. By around October or November, there will be pressure on Union and state government revenues. There will be enhanced expenditure because of emergency health-related measures, health infrastructure and demand-driven (MGNREGA, housing) expenses.
  7. No sops for troubled sectors: There haven’t been sector-specific tax sops for troubled sectors like hospitality, travel, tourism, telecom and aviation.
  8. Debt Management issue: If nominal GDP growth in 2021-22 is also low and the government rates of borrowing are what they are today, there will be a serious debt management issue.

Way Forward

There is near unanimity that real and nominal growth in 2020-21 will be negative. A growth revival in 2021-22 would depend on factor-market reforms and productivity increases.

3.Agri-Marketing Reforms

Source – Livemint

Syllabus – GS 3 – Transport and marketing of agricultural produce and issues and related constraints

Context – Due to distress sale by farmers in the lockdown, State governments are reforming APMC

Agriculture Produce Market Committee

APMC Act, 1955 was enacted to ensure that farmers mandatorily sell their produce in market yard (mandi) through auction and they do not depend on informal channels to sell their produce.

APMC Act, 1955 Model APMC Act,2003 Model APLM Act,2017
1. Mandatory for farmers to sell produce in mandi established under the act.

Exporters, retailers not allowed to trade directly with farmers.

 

This led to monopoly of traders in mandi who formed cartels and bought produce from farmers at throwaway price.

 

They also engaged in hoarding of produce and profited during lean season by exploiting consumers.

 

1. Farmer can sell produce to anyone including retailers and exporters.

 

 

 

This is to destroy the monopoly of traders and give freedom to farmers for selling their produce at better rates.

 

1. Farmer can sell produce to anyone including retailers and exporters.

 

 

 

This is to destroy the monopoly of traders and give freedom to farmers for selling their produce at better rates.

 

2. Mandi traders delayed payment to farmers and in case payment is made, receipts were denied to them.

Difficult for farmers to prove their income and get working capital from banks.

2. Mandatory for traders to make payment same day otherwise seizure of the produce from trader.

 

It provides for transparency in pricing and transactions. Also farmer gets the receipt and can avail loans from banks.

2. Mandatory for traders to make payment same day otherwise seizure of the produce from trader.

 

It provides for transparency in pricing and transactions. Also farmer gets the receipt and can avail loans from banks.

3. No Public- Private Partnership allowed in management and development of mandi.

 

Thus no infrastructure for grading and sorting was developed. This lead to post-harvest losses of several commodities, especially perishables.

3. Allowed PPP allowed in management and development of mandi.

 

Promotes value-addition and prevent post-harvest losses.

3. Allowed PPP allowed in management and development of mandi.
4. Contractual agreements for Contract farming are recorded with the APMCs which can also resolve disputes arising out of these contracts.  Further, market fees and levies are paid to the APMC to undertake contract farming.

Other features of Model Agricultural Produce and Livestock Marketing (Promotion & Facilitation) Act, 2017

  1. Creation of a national market with provision for interstate trading license.
  2. Cap on market fee – 2% for fruits and vegetables and 1% for grains.
  3. Promotion of e-trading through e- National Agriculture Market.

Recently many states have adopted the model APLM Act,2018 as lockdown forced farmers into distressed sale of their produce:

  1. Rajasthan has allowed farmers to sell their produce directly to traders;
  2. Chhattisgarh is rolling out a direct cash transfer of a maximum of Rs. 10,000 per acre subject

Issues with Model APLM act

  1. Protection to farmers not ensured– There would be no record of the price at which a farmer has managed to sell the produce thus there is no clarity on know how the farmers will be protected.
  2. State’s overregulation of mandis– Agriculture is on the State List and so as to achieve efficiency in agricultural markets, state governments have enacted their own legislation. They have built a monopoly in mandis and earn significant cess from transactions taking place in these markets.

Way Forward – Agriculture sector is in urgent need of structural reforms including in marketing of produce which will ensure positive growth rate in FY21, provide better income to farmers and strengthen food security for billion of Indians.

4.Financing the stimulus

Source – Indian Express

Syllabus – GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context – To fill budgetary gaps and to provide Relief package of Rs. 20 lac crore, government is resorting to privatization

Means of financing the stimulus and associated challenges:

1.Privatization – It refers to transfer of shareholding, management, and control of public sector enterprises to the private sector.

Pros of Privatization

  1. Facilitates business friendly environment– The government owned enterprises distorts the market forces for its own benefits, and this is solved by privatization which facilitates business friendly environment for entrepreneurs.
  2. Makes PSU’s more competitive– It is generally done to make failing public sector enterprises more competitive with effective utilization of resources by profit-oriented private sector.
  3. Boost to FDI– Privatization increases the flow of Foreign Direct Investment in country which injects liquidity and give stimulus to economy.

Cons of privatization

  1. Government losing its silver spoon– Government is selling its own assets which forms essential component of non-tax revenue – as PSU’s provide dividends and profit to government.
  2. Valuation of assets is poor– Since valuation of assets is not done properly, the actual cost may always not be recovered which leads to loss for the government.
  3. Proper utilization not done– The proceeds are used to bridge fiscal deficit and no focus on spending the sum on capital expenditure component of budget which increase assets for the nation.
  4. Discourages structural reforms in taxation and revenue expenditure– Government’s revenue receipts needs to be more than its capital receipt (increases liabilities) which demands structural reforms in taxation. Also rationalizing revenue expenditure saves more for capital expenditure. Getting treasury filled with proceeds of privatization discourages both objective steps.
  5. Distress sale– Due to current pandemic industries need policy support in form of cheap credit, which in turn discourages them to buy these PSU’s and expand their inventories. So, government may resort to distress sale of PSU’s to finance the stimulus.
  6. Crony Capitalism– In such market conditions where private investment are already falling due to lockdown, only few big companies will buy them which will foster Crony Capitalism.
  7.  External commercial borrowings – Borrowings taken by an eligible entity in India for commercial purpose, externally i.e. from any recognized entity outside India.

ECB has its own disadvantages:

  1. Falling revenue and recession– Due to covid and lockdown, slow growth will decrease the revenue of government and worldwide recession will dampen this more. Borrowing need to be paid back with better returns and this happens when government’s capital expenditure is more than revenue expenditure. The borrowing, however, will be spent on revenue expenditure (doesn’t ensure returns) to inject liquidity thus paying debt will be tougher in coming years.
  2. Depreciating Rupee– The rupee is at its lowest level compared to the US dollar and any more depreciation will only make it harder for the government to pay back its debt.
  3. Export is not the solution– Since external borrowings must be paid back in borrowed currency, exports thus is an option (to pay government debt). However, India should account for the inevitable global slump in international demand and a consequent drop in its exports.
  4. Poor rating by rating agencies– High NPA’s, debt-ridden industry and more borrowing by government will only lead to downgrading of rating by rating agencies.

Way Forward – India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs. The rest may have to come from a mixed bag of privatization, taxation, loans and more international aid to inject liquidity in system.

5.Govt. intervention analysis

Source: The Hindu

Syllabus: GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context: The COVID-19 pandemic and the prolonged national lockdown have brought the Indian economy to a standstill. States are struggling to cope with the unprecedented existential challenges they face. The government should ensure that matters of lives and livelihoods are not pitted against each other.

Government announcements to tackle COVID-19:

  • Early package: At the end of March, the Centre had announced a stimulus package of ₹1.7-lakh crore, out of which about ₹1.2-lakh crore was the existing entitlement.
  • Atmanirbhar package: The PM announced a package of ₹20-lakh crore without mentioning anything specific for stranded migrant workers and for re-structuring micro, small and medium enterprises (MSMEs).

Flaws in economic Package:

  • For MSMEs:
    • No major concessions: The announcements offer no major concessions; soft loan, PF and tax provisions are acute.
    • Redefinition of MSMEs: It has been long-pending and cannot be called a reform.
    • Main employer: It is small businesses that give traction to entrepreneurial activities in the unorganized sector where migrants from rural India mostly work. They need some urgent solutions for liquidity problems.
  • Lack of consultation: As per the situation, the government should have begun consultations with parliamentarians, Opposition parties and industry representatives very early to prepare a well-thought out relief package to restart the economy.
  • Lack of Funds for states: States have been at the forefront of the war against COVID-19 but have not given the required funds to help them cope with the public health emergency and support the high influx of returning migrant labourers.
  • For the middle class: It’s not likely that they will get anything substantial from this package.
  • Workers: A large number of workers in the organised sector are facing heavy pay cuts, job losses and a sharp fall in income.
  • Farmers: Farmers are finding it difficult to get the MSP for their produce; a majority of them are in debt and face many obstacles.

Difficulty of the migrant workers:

  • No income security: The first national lockdown created panic among migrants who were suddenly left without any income security.
  • Home returning of workers: A vast majority of them lost their livelihoods. They have walked thousands of kilometres to go back home to States such as Bihar, Uttar Pradesh and Madhya Pradesh because, for them, a homecoming was the last resort to stay alive.
  • Government-Opposition tussle: The helping hands also comes from the Opposition, charitable individuals and social organisations but there were issues regarding their working with government.
  • Trains for migrants: On May 1, some Shramik Express trains were flagged off from certain destinations to take back migrant workers to their home States, but there started a tussle regarding the payment of fares.

Need of the hour to tackle COVID-19:

  • Cutting out expenditure by government: It is expected that the government would accord priority to cutting out expenditure on projects such as the bullet train project.
  • Managing available resources: The government should manage the available resources of the RBI, the Employees’ State Insurance Corporation, the EPFO and the PM CARES Fund to help the poor.
  • Role of central Bank: The central bank should be busy in restoring the health of the financial sector and also concerned itself with considering the suggestions of former RBI Governors Raghuram Rajan and C. Rangarajan on adopting an selfless approach in place of the one driven merely by fiscal and inflationary concerns.
  • Single policy: The government should follow a single policy, namely people first. The matters of lives and livelihoods should not be pitted against each other.

Way Forward

In tackling the crisis, the Centre should collaborate with states to take the much-touted benefits of “cooperative federalism”. The matters of lives and livelihoods have to be taken care of simultaneously.


9 PM for Preliminary examination

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