[Economy] 9% GDP and 4% Agriculture growth: Fodder material for Essay and Interviews

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  1. What is the theme of 12th Five Year plan?
  2. What are the main targets of 12th FYP?
  3. Government’s role in Development
  4. Time Factor
  5. Inflation
  6. Exports
  7. Policy environment
  8. Labour
  9. Reducing the fiscal deficit
    1. Strategy #1: Increase revenues
    2. Strategy#2: Reduce non-Plan expenditure.
  10. Railways: Cross subsidization
  11. How to get 4% Agriculture growth?
    1. Cold storage
    2. Supply lines
    3. Land Leasing
    4. Non-farm Employment
    5. Change the focus
  12. MSME
  13. Regional imbalance
  14. Infrastructure Development
    1. Where is the money?
    2. Quick Project implementation
    3. Reforms in the Financial Sector
  15. Crowding out corporate borrowing
  16. Energy Economy
    1. Reducing Energy Intensity
    2. Electricity
    3. Increasing Domestic Energy Supply
    4. Coal production
    5. Solar and Nuke Energy
    6. Nuke
    7. Solar
    8. Hydro
  17. Managing Water Resources
    1. Water price
    2. Tubewells
    3. Urbanization
  18. Environment Protection
  19. Corruption
  20. Government schemes
  21. Conclusion

This is not really an “article”, just compilation of some important fodder material for GS, essay, group discussion and interview.

Often we hear the newspaper columnists and TV-debatewallas talking

“if India wants 9% growth then it should xyz”

“if India wants 4% growth in agriculture then it should do xyz”

So, let us make a list on what should be done.

What is the theme of 12th Five Year plan?

  • Theme=Faster, sustainable and more inclusive growth.
  • Let’s deconstruct the theme.
  • Faster growth= GDP should grow at 9% per year.
  • Sustainble growth = you know what that means. If not, go through Kyoto and RIO+20 article
  • More inclusive growth= Women, SC,ST,BPL, Physically challenged and minorities should also benefit from 9% GDP growth. + The fruits of Growth should be spread all over India and should not get concentrated in a few big states only.

What are the main targets of 12th FYP?

(list is not exhaustive)

  • Every year GDP should grow the 9%. (this was the original target but in Oct 2012, Government concluded that it is beyond our aukaat to grow at 9%, so the new target is 8.2% per year).
  • Every year Agriculture sector should grow at 4%, because
    • Higher agricultural growth would provide income benefits to the rural population and
    • It’ll also reduce food inflation.
  • Every year, manufacturing sector should grow at 10%
  • At present, 30 per cent of the population is below poverty line. 12th FYP wants to bring down the poverty ratio by 10 per cent.
  • major flagship programmes in the Eleventh Plan, would continue in the Twelfth Plan. most notably the
  1. National Health Mission (NHM),
  2. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA),
  3. Pradhan Mantri Gramin Sadak Yojana (PMGSY)
  4. Integrated Child Development Scheme (ICDS)
  5. National Rural Livelihoods Mission (NRLM).
  • Focus Areas: Health, education, infrastructure and skill development
  • Allocation in the health sector is all set to double.

Government’s role in Development

  • Nowadays much of the growth process is now driven by actors outside the direct control of government.
  • These actors are : farmers, entrepreneurs, corporate houses and market forces.
  • This, however, does not mean that government has no role to play in the development process.
  • Government has important role to play in India’s Growth.
  • There are four areas, where Government’s role is essential:
  1. providing a policy environment (FDI, environment clearnaces, land acquisition etc)
  2. Developing infrastructure (roads, dams, powerhouses, ports, railways etc)
  3. Supporting poor and vulnerable groups. (through various schemes)
  4. Providing essential public services (police, fire, health education, drinking water, sanitation etc)

Time Factor

  • Development requires time and patience. For example,  if Government  takes step to improve education for the poor kids.
  • but the impact will only be reflected in actual income earning much later (When they grow up and start earning).
  • So, even when policies are moving in the right direction, the results may only be evident much later.

Inflation

  • A moderate level of inflation, is unavoidable for a growing economy.
  • but when inflation beyond this tolerable level – usually put at 5 percent to 6 percent, then it’ll start damaging the overall growth and inclusiveness (of poor people.)
  • Inflation has been well above this level in the past two years and while India is not the only emerging market country experiencing this problem.
  • But inflation in India has been higher than in most other countries
  • High rates of inflation in food prices, especially vegetables, fruits, milk, eggs, reflected in double digit rates of inflation as measured by the Consumer Price Index (CPI) in the past two years
  • Main reasons for inflation in India
  1. Rise in global prices of crude oil, foodgrains and metals.
  2. domestic supply constraints in the food economy other than foodgrains.
  3. High Fiscal deficit

Fixing inflation

  • Monetary policy is the traditional instrument for dealing with overall inflation,
  • Last two years, RBI gradually tightened the monetary  policy, but it can be effective only if it is supported by appropriate fiscal policy.(i.e. steps by Government)

Exports

  • India has become a more open economy in the post-LPG Era. But It is still less dependent on export demand than other emerging market countries
  • Problem: How India can actually expect to grow faster in an environment in which export demand will be weaker. (because of slowdown in US and EU).
  • Answer: even if export demand from industrialised countries is weaker, many emerging market countries are projected to grow more rapidly. (Brazil, South East Asia etc.)
  • So, if we target these fast growing markets our export performance could be improved.
  • Traditionally, we have viewed current account deficits of around 2 percent of GDP as comfortable.
  • current account deficit in 2010-11 was already around 2.5 percent of GDP

Policy environment

  • India has only recently begun to attract global capital and given the size of the economy, and its perceived high growth potential,
  • If Indian Government’s policy towards FDI is seen to be supportive, then India will remain an attractive investment destination for coming years.
  • But there is also a situation when but investment does not take place even after allowing FDI, relaxing environment laws etc. simply because entrepreneurs do not find investment opportunities attractive, i e, “animal spirits” are missing.
  • Therefore, Government  needs to create an overall policy environment conductive for investment (not just FDI but also infrastructure, labor laws etc.)

Labour

  • In the coming years, working age population in India will increase.
  • At the same in the industrialised countries, and also in China, it will be going down.
  • This situation can work as a “demographic dividend” only if
  1. sufficient investment is taking place to generate the GDP growth (and thus employment) to absorb this youth.
  2. right education and vocation skills are given to the youth.
  • Right now, over 90 percent of our labour force has received no formal training prior to employment and skills are typically acquired only on the job.
  • This is simply not consistent with target of 9 percent growth.
  • India’s position today is roughly comparable to China’s in the 1985, and starting from that position, China achieved an average growth of GDP over 10 percent per annum for 30 years. There is no reason why India cannot do the same.

How to upgrade skills of labour force?

  • Eleventh Plan had set a target of having 500 million individuals in the labour force with some formal training by 2020.
  • There is National Skill Development Council under the chairmanship of the prime minister.
  • But Government  must Involve the private sector in skill development, because it increases the likelihood that the skills imparted are marketable.

Reducing the fiscal deficit

  • (we already discussed this in length, in the two kelkar articles) but still…
  • Fiscal deficit can be reduced through two pronged strategy

Strategy #1: Increase revenues

  • most important initiative in this context is the Goods and Services Tax (GST)
  • Because implementation of the GST involves a constitutional amendment, a successful outcome may take time
  • but once achieved, it will be a major achievement.

Strategy#2: Reduce non-Plan expenditure.

  • Some reduction in non-Plan expenditure will happen automatically because
    1. Government employment is not expected to increase significantly.
    2. Government  is not going to form any No new pay commission for some years.
  • Government  provides lots of subsidies on food, fertilisers and on petroleum products, which together account for around 2 percent of GDP.
  • Food subsidies, alone  amount to about 0.7 percent of GDP.
  • But Food subsidies cannot be reduced much, because of upcoming National Food Security Act.

Railways: Cross subsidization

  • Cross subsidy in crude term means that Railways doesn’t increase passange train ticket price and makes losses. So to cover these losses, it increases the freight (goods, coal etc.) transport prices. And thus indirectly increases the inflation.
  • Solution: freight tariffs should be lowered and passenger fares raised.

How to get 4% Agriculture growth?

  • Need to increase R&D in seeds Development.
  • improve soil health: increase micro-nutrients and carbon content in the soil.
  • Provide soil health cards issued to farmers, with periodic soil testing. Then the farmer will be given tailormade advice on how type of crops, seeds, fertilizer, irrigation method is suitable for his farm, according to his soil-health card.
  • Carbon content can be increased by shifting from the traditional practice of burning crop residue to leaving it in the field.

Reduce water consumption in agriculture

  • Use  new practices such as land levelling, use of drip irrigation, zero till cultivation, raised seedbed planting
  • in the case of rice, adoption of the System of Rice Intensification (SRI).

Cold storage

  • Most of the Agriculture growth in future will come not from foodgrains
  • but from sectors such as horticulture, dairying and fisheries, where the produce is perishable (Food that will decay rapidly if not refrigerated)
  • So Government  must pay greater attention transporting produce from the farm to the consumer, with minimum spoilage.
  • This requires active involvement of the private sector, cold storages, better quality roads etc.

Supply lines

  • The present Agricultural Produce Marketing Committee (APMC) Acts prevent the private sector buyers from dealing directly with producers.
  • State Governments must amend these acts.

Land Leasing

  • state governments is the reform of laws relating to leasing of land.
  • When rural population increase, the farm holdings are subdivided and become uneconomic.
  • The very small and marginal farmers should lease out their tiny land to more viable farmers, and move into other sectors for better employment.
  • But small farmers will do it only if they felt that they could lease out their land and get it back when they want.
  • Yet, leasing is not legal in some states. Where it is allowed, the law is biased towards the tenant (Someone who pays rent to use land).
  • So state Governments should also amend the laws accordingly.

Non-farm Employment

  • In manufacturing sector, the corporates make huge profit even after giving salaries to the employees. And much of this profit is reinvested for research and Development of new products. (e.g. Apple’s iphone 5)  and in expansion (e.g. Tata making new automobile plant in some state)
  • Therefore, manufacture and service sector continues to grow, because new products are created, new demand is generated, new employment is generated.
  • But Productivity in agriculture is low and too many people are employed in it. So after paying for seeds, farm-labourers, even a big farmer doesn’t have enough ‘extra-money/profit’ left, which he can use to drastically change his farming practice (like buying big farming equipments from US, importing best hybrid quality seeds from top company etc.)
  • Therefore Government should focus on two things:
  1. land consolidation : small farmers should lease their land to big farmers/ cooperative farming.
  2. move people out of the agro-sector.
  • This is actually necessary to reduce the present underemployment/ ‘disguised unemployment’ in agriculture and increase real wages in this sector.
  • Agriculture growth will itself give rise to new demands for non-agricultural services and generate employment in agriculture-related sectors such as modernised marketing and agro-processing activity.

Change the focus

  • At present, Government’s policy/ attitude is that if give the farmers huge subsidies in electricity, seeds, and loans, then agro-productivity will automatically increase.
  • But Government should focus more on changing  in farming practices, introducing new technology. So that farmers become less dependent on subsidies in the long run.

MSME

  • If Government wants to move people out of agriculture, then Micro, small and medium enterprises (MSME), are generally more labour absorbing,
  • MSME are also potential seedbeds for innovation and entrepreneurship.
  • So Government must provide policy environment to encourage the growth of these industries and this does not mean sops and subsidies. But instead, give them
  • first class infrastructure which includes both reliable electricity supply at reasonable cost.

Regional imbalance

  • Northern states are industrially backward at present, but have high labour supply.
  • Hence there is lot of inter-state migration.
  • So the respective Governments must improve the employment opportunites right within their states.
  • How? By attracting both national and international companies in their states.
  • But those companies will come only if there is right atmosphere and environment in the state. That means
  1. No naxalite problem
  2. No kidnapping and extortions.
  3. Sufficient electricity and water supply
  4. Quick land acquisition and environment clearnaces.
  5. Rationalise our labour laws to give employers more flexibility to shed labour when faced with a downturn.

Infrastructure Development

  • infrastructure sectors = power, roads, ports, airports, and railways
  • some sectors, e g, telecommunications, achieving higher levels of investment than projected, while others achieved significantly less.
  • For 9% growth, we need total investment of $1 trillion over the Twelfth Plan period.
  • But how to finance infrastructure projects? Two problems

Where is the money?

  • Government  doesn’t have enough money.
  • And Government’ the first priority must be to spend money in education and health. Because those two sectors are crucial for inclusiveness and are currently underfunded.
  • Both the central and state governments must therefore follow an infrastructure strategy which consists of a combination of public investment and public-private partnership (PPP).
  • Public investment would have to be directed to areas where the private sector is unlikely to come. (e.g. backward regions, rural areas).

Quick Project implementation

  • This is second major challenge in infrastructure.
  • Infrastructure projects are often delayed due to difficulties in land acquisition and environmental clearance.
  • the current processes are often not sufficiently transparent and predictable.
  • We need to move to a system with much greater transparency, predictability.

Reforms in the Financial Sector

  • This sector involves: banks, non-bank finance companies, microfinance institutions, capital markets, mutual funds, insurance companies, pension funds and venture capital fund etc.

reform are already in the pipeline

  • road map for new private sector banks and foreign investment in banks,
  • deregulation of the savings rate offered by banks
  • increasing FDI in pension, insurance etc.
  • passage of the Pension Fund Regulatory and Development Bill,
  • passage of the Company Laws Amendment which will modernise bankruptcy proceedings.
  • creation of the Public Debt Management Office outside the RBI

Crowding out corporate borrowing

  • In the earlier articles, we already saw that
    1. there are two ways to finance a company: Debt / Equity.
    2. very high fiscal deficit, crowds out corporate borrowing. (recall first Kelkar article)
  • LIC, EPFO, etc, are very conservative at present when it comes to investment.  Whatever money they get from clients, they prefer to invest it in G-sec instead of higher yielding corporate bonds.
  • Reason: if the private company defaults or goes bankrupt then it is very hard and time-consuming to recover the bond-money.
  • While banks, can easily recover loan money via SARFAESI, bond holders can only have recourse to liquidation and bankruptcy procedures which are hopelessly time consuming.
  • Therefore Government  must amend the Company laws etc. to fix this problem.

Energy Economy

  • global supply of crude oil = will remain tighter in the years ahead, and therefore crude oil price will also remain high
  • Therefore we must increase domestic supply of energy from both conventional and non-onventional resources.

Reducing Energy Intensity

LPG and Kerosene

  • Petrol price is deregulated.
  • LPG and kerosene prices remain under administrative control and are currently set well below global levels
  • Government doesn’t  want to raise kerosene and LPG prices because of the impact on vulnerable groups,
  • but it must be recognised that the subsidy implicit in the present low prices of kerosene and LPG is completely untargeted.
  • In the case of kerosene, it also leads to large-scale black marketing, adulteration and criminalisation.
  • Solution: Implementation of a unique identification number.

Electricity

  • Electricity prices are set by supposedly independent state regulators, but there is strong political pressure on regulators in many states and it prevents them from increasing electricity price.
  • The system must be allowed to function properly so that electricity prices are not artificially depressed, especially as coal prices are expected to rise. (otherwise subsidy burden= more fiscal deficit= inflation.)

Increasing Domestic Energy Supply

  • expand domestic production of petroleum, natural gas and also coal to avoid excessive import dependence

Coal production

  • Coal industry is nationalised, although private investment is allowed in captive coal mines (i e, coal mines linked to power plants or steel and cement plants).
  • the policy for the coal industry should be liberalised – allowing private investment.

Solar and Nuke Energy

  • We must also take steps to exploit the full potential of other energy sources notably nuclear, solar and wind power.
  • Both nuclear and solar power are more expensive than coal / gas power plants and
  • While increased reliance on solar/nuke sources will contribute to energy security, reduce climate change, but it does imply higher energy costs.
  • But Costs can be expected to come down as technology develops further. (e.g. compare price of Desktop PC in 1998 vs 2012)

Nuke

  • Expansion of nuclear power is an important element of India’s long-term energy strategy and this has been facilitated by the recent agreement with the Nuclear Suppliers Group which gives India access to imported uranium, and also opens windows for other cooperation in this area.
  • Problem: Bogus NGOs and semi-naxalite intellectuals protesting against Nuke plants after receiving bribes from abroad.

Solar

  • India has target to install 20,000 MW of solar power by 2020.
  • India has  the potential to be a significant supplier of solar-equipment to other countries.

Hydro

  • Can make huge dams in Arunchal Pradesh and generate thosands of MW electricy.
  • Problem: border disputes with China.

Managing Water Resources

  • India’s available supply of fresh water is the same as it was 5,000 years ago, and the population has grown.
  • excessive withdrawal of = water table gets low =land salinity increases = agriculture output decreases.
  • If things are left to business as usual, the situation will worsen steadily.
  • Solutions:
    1. building storage dams,
    2. investing in watershed management to improve surface water retention a
    3. groundwater recharge
    4. forcing industry to treat waste water for reuse.
    5. About 80 percent of India’s water use is for agriculture and it is technically feasible with better agricultural practices, to reduce water use in agriculture by 40 percent to 50 percent
    6. land levelling drip irrigation

Water price

  • Government keeps the price of irrigational water very low.
  • This leads to poor maintenance of the canal system due to low funds.

Tubewells

  • The present laws only provide for banning new tubewells in areas where the water table has fallen too far.
  • This only confers a monopoly on existing tubewell owners to pump as much water as they wish and sell it to other farmers.
  • Free electricity  for agriculture provides a wholly unjustified incentive for such activity (of selling tubewell water).
  • So, state governments should consider imposing a cess (tax on tax), on electricity for agricultural use in all areas where the water level has sunk too low.
  • Right now only 30% of the sewage generated in urban areas, is treated before getting discarged into rivers. Government should increase this to 100%.

Urbanization

  • The urban percentage of the population is currently around 30 percent, and is expected to reach 40 percent by 2030.
  • Most of the revenue generated from economic activity in the country occurs in urban areas.
  • But most of this tax Revenue goes to Union and State Government and not to the city municipalities.
  • So, municipalities in India also have limited money to improve the water, sewerage and urban transport system.
  • Jawaharlal Nehru National Urban Renewal Mission (JNNURM) introduced in the Eleventh Plan fixing this problem. But much needs to be done yet.

Environment Protection

  • We want high growth (9%) without inflicting much damage to the environment.
  • But these two objectives (9% growth vs protect environment) cannot be achieved simultaneously in many situations for example,
  • 9% growth = need lots of power/electricity =need coal and hydropower= forest clearance.
  • 9% growth = require industrialisation = leads to water +air pollution.
  • Therfore some compromise is necessary.
  • But there are certain areas where we must not make any compromise, for example tiger reserves and very select biospheres.

Corruption

  • Corruption in land-acquisition and land allotment
  • Corruption in Spectrum and minerals allocation.
  • These things indirectly increase the ‘input cost’ for the entrepreneurs and hence inflation also increases.
  • As a general rule, competitive bidding among qualified bidders provides the most transparent way of allocating scarce resources such as mining rights or spectrum.
  • Many countries have a public procurement law whereas in India government procurement is governed by rules.

Government schemes

In following schemes, the Complaints of leakages, inefficiency and corruption are widespread

  1. subsidised foodgrains through the PDS
  2. National Social Assistance Programme (NSAP) which provides an old age pension
  3. MNREGA
  4. National Rural Drinking Water Programme: at covering villages which do not have an assured supply of potable water
  5. Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) : electricity to all uncovered villages and provides free connection to all BPL families
  6. Indira Awas Yojana (IAY) which provides assistance to the rural poor to build pucca homes

Why problem?

  • central government only finances these programmes, and actual implementation is carried out by state government agencies
  • Many schemes involve cooperation between different departments of government, e g, of agriculture, irrigation and rural development or the departments of health, education and women and child development.
  • Unfortunately, Government  departments typically work in silos = interdepartmental cooperation very difficult = lot of leakage and wastage.
  • Secondly many schemes have separate id-cards and registers = cross verification difficult = corruption. So need to fully implement UID as soon as possible.
  • The panchayati raj institutions (PRIs) donot have enough funds to carry out the Development activities.

Conclusion

  • No power on earth can stop an idea whose time has come.
  • We live in a world of rising and faltering economies. So, The future is what we make of it. Nothing is ordained or pre-determined. India can rise, if the right steps at taken at right time.
  • Much of what needs to be done to accelerate GDP growth to 9% (or 8.2%) will be done by the private sector, but the governments too have a crucial role to play in providing a policy environment that is seen as investor friendly and is supportive of inclusive growth.

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