- [Block-1] Planning commission (PC) why replace?
- [Block-2] Budgeting reforms
- [Block-3] Banking sector
- Misc.Short term reforms
- [Block-4] Farm subsidies, buffer-stock, PDS
Revision of selected topics for GS3 syllabus:
- Issues relating to planning, mobilization of resources
- Government Budgeting.
- Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System
Planning, budgeting and resource mobilization should be seen from three stage economic reforms. (as suggested by Economic survey)
|Short term||Stroke of a pen @individual ministries||MoEF reforms in 100 days.|
Structure functions = read from M.Laxmikanth. Planning commission sucks because:
- Achieved >9% GDP growth-rate during 2005-07, thanks to American boom prior to sub-prime crisis, pretty much all nations of world experienced high growth. So 9% GDP did not come from Montek’s magic wand.
- Post sub-prime crisis, failed to evoke the “animal spirit” in Indian economy. GDP going down, inflation going up for 2008 to 2013.
- Reduced poverty by doctoring the BPL-line. Tendulkar line says 27 crore BPL, if we use Ranga line then 37 crore BPL. Planning commission brags reducing poverty line on Tendu’s parameters.
- Toothless body, can’t hold State/union/ministries/departments accountable for failing to achieve targets.
- Hopes that CAG =>Public accounts Committee will take care accountability part. But PAC too is pretty much toothless.
- Failed to implement land reforms. Faulty policies for MSME, industrialization, Factory-labour law problems we saw in GS2 MFG revision note.
- Office manned by Generalist IAS/IES with short tenure; panel members filled with academicians and jholachhap NGOs. Need subject specialists with international exposure like Rajanbhai.
- Designed CSS with One size fits all approach and a few extra crores to NE/J&K/Hill-states and LWE.
- But for long, it did not use pilot projects / sample testing / interaction with states.
- Hence, IAY, ICDS etc. programs failed to show tangible result despite pumping crores.
- Tried to bypass state Governments via NGO-funding, DRDA. Hence States unenthusiastic about implementing Central-schemes named after you know who.
- Only in 2013- reforms done like reducing # of CSS, 10% flexifund to states, direct transfer of money to state consolidated fun etc. But it’s too late.
- Shortcomings in planning commission => new bodies sprung up like PM’s economic advisory council, PM’s project monitering group and so on=> more brains=> more lack of coordination.
- Modi says planning commission (PC) is beyond fixing- just like Gotham city and Delhi city. Wants to replace it with a body similar to China’s National Development reform commission. (NDRC)
- Moily says NDRC good for China but not suitable for federal nation like India. Better restructure PC again by addressing above 13 bullets.
Modi wants to replace PC with a body like China’s NDRC. (or atlest experts say so). Let’s
|Chinese NDRC doing following||India present system|
|Makes macro-economic policy||FM+RBI|
|Approves investment & construction projects||CCI, FIPB and many other bodies @union and state level.|
|Energy & oil policy||Oil ministry, DG Hydrocarbon|
|Looks after Poorer Western Provinces||Separate ministry for NE Development|
|Parent: State council headed by President of China||Headed by PM. Disinvestment in ONGC, CIL etc .|
In short, Chinese NDRC controls pretty much everything, just like a communist unitary Government would want. Hence Moily’s criticism- NDRC unsuitable for Federal India.
- Problem in Environment laws so TSR Subramanium Committee, Problem in railway so Bibek Debroy Committee, problem in IPR so Prabah Sridevan Committee…..such piecemeal approach and firefighting must stop.
- Economic survey says create a separate Statutory body called Productivity commission”.
- To Review laws, regulations, processes continuously.
- Publish report cards of each ministry and department.
- Advanced economies have such bodies.
|NSEL scam||FMC shifted to FM|
|Saradha chitfund scam||Plan to amend Chit fund act|
- Such piecemeal / firefighting approach => scamsters shift base from one sector to another, use technicalities and loopholes to get stay orders & escape.
- Hence we need comprehensive reform in financial rector regulators.
- 2011: Government setups Financial legislative reform commission under Justice BN Srikrishna.
- Gave two type of reforms (1) non-legislative (2) legislative
- Present: dozens of acts for banking, insurance, provided fund, forward market, NBFC etc.
- Srikrishna says repeal them all, and enact a new law “Indian financial code”. (IFC)
- IFC will be a single, unified financial law with precise objectives; clear-cut jurisdictions for fin.sector regulators with adequate checks and balances.
|Present body||Replacement in Srikrishna’s IFC|
|SEBI, FMC, IRDA, PFRDA||All to be merged into a single UFA: Unified financial agency|
|SAT (SEBI kaa Baap)||FSAT: Financial sector appellate authority = UFA kaa baap.|
|Ombudsmans, consumer courts||FRA- Financial redressal agency to hear all complaints.|
Misc. bodies: data centre, resolution corp.
- Present, RBI is the debt manager of the Government. = Conflict of interest.
- Government releases Government securities (G-Sec) to borrow money from market. RBI uses the same G-sec to control money supply = conflict of interest.
- Srikrisha (FSLRC) proposed setting up separate public debt Management office. (PDMA)
|Yes because||No because|
|13th FC (Kelkar) and FSLRC (Srikrishna) recommend this path.Advanced economies like Sweden, NZ, German, Denmark etc. use this path. Central bank and debt Management office are separate.||Only RBI got necessary staff, infra and expertise to manage debt of both union and state. No time for trial-error with new body|
|No conflict of interest=Better Management of public debt and better monetary policy||
- Repeal bank nationalization and SBI act
- Sell the shares of Public sector banks to newly setup “Bank investment company”. (BIC)
- BIC to look after appointments, business strategies.
- Until BIC done, setup Bank board bureau (BBB) to look after board-CMD appointments.
- Age tenure reforms for upper Management.
- Result: less Government control = more efficiency in banks.
- Both rail and general budget 2014 covered under Mrunal.org/economy
- But syllabus says “budgeting”. So, let’s check three reforms in “budgeting” process.
Until now, Department got funding decided by two brains
- Non-plan Expenditure = FM
- Plan Expenditure = PC Planning commission.
Result: Sub optimal allocation, Diffused accountability, poor return on the money invested.
Solution: Budget making unified @FM, he’ll decide both plan and non-plan Expenditure.
Economic Survey observed:
- Government doubled the money spent on each child, in last 7 years.
- Yet as per NGO Pratham’s ASEAR report, >50% of class5 kids can’t read class2 book; >50% of class8 kids can’t do division.
- Every year, ministries given higher funds than last year, irrespective of achievement.
Survey solution: “Feedback loop” mechanism in budgeting.
- After financial year is over, get an independent body to analyze ministry/Department’s performance.
- Next year’s budget depending on performance card: increase fund/ decrease fund/ change scheme features/ give bonus to babus / cut salaries of babus
|Reduce this||To this||By this||But present level is this|
|Effective revenue deficit||0%||2015, 31st March||1.6% of GDP|
|Fiscal deficit||3% of GDP||2017, 31st March||4.1% of GDP (>5 lakh cr)|
So, what has Modi done to reduce fiscal deficit?
- FD1: Disinvestment
- FD2: Fuel subsidies cut down
- FD3: 10% non-plan Expenditure cutdown
- Pro: less Government control over board= more efficiency. Overstaffing, lossmaking gone.
- Anti: private sector can’t cater poor, Government earning declines, selling assets to fillup fiscal deficit is unhealthy.
Disinvestment in India
- Permitted with 91’s Industrial policy.
- Then Rangarajan, GV Ramkrishan panels and various chillar Prime ministers
- When petrol, diesel, kerosene sold at below international price=> OMC losses (under-recovery)=>Government gives them oil bonds as “subsidy payment”.
- 2010 Kirit Parekh Committee says stop.
- But LPG, Kerosene…administered prices continued.
- Petrol deregulate: OMC+Petro Ministry to decide price
- Diesel deregulation: Jan’13. 50 paisa increased per month. Finally at deregulated @Oct 2014.
- Jan 2013: diesel price increased by 50 paisa each month.
- Oct 2014: market linked. If international price go down, diesel to be cheaper.
- Became Rs.3 cheaper than Sep.2014 => inflation goes down=> RBI may cut repo rates=>cheaper loans=>more demand of goods and services=>GDP, jobs improve
- Less subsidy burden=>less fiscal deficit=> Soverign credit rating improves=>more FDI, FII to India.
- Under recovery gone=>OMCs can do Biz.expansion, give better service.
- Reliance-Essar can sell diesel. (till now relied on state-OMC bcoz they did not get subsidy)
- Junta to buy Fuel efficient car, no more blind purchase of diesel vehicles because it was cheap.
- More Usage of Public transport
- 2013: Aadhar Linked DBT (12 cylinders)
- 2014: Selected districts: Modified DBT. Don’t need Aadhar. Even bank account no. / LPG customer id sufficient. Rs.568 will be transferred.
- 1/1/15: all India implementation.
- Will reduce subsidy burden by 15%. (LPG subsidy costs ~48k crore)
- Additional reform underway: Government to give LPG subsidy on per kg basis rather than per cylinder basis. Will help even migrants and slum-folks who buy small sized cylinders. At present small cylinders don’t get subsidy.
- At present Total Non plan: ~12 lakh crore | Plan: ~6 lakh crore
- FM ordered following, for 2014-15
- No 5-star hotels for conferences
- Only cheapest fare air-travel
- Freeze on new vehicles & appointments
- Result: 10% reduction in non-plan => ~1.2 lakh crores saved.
In India, RBI’s monetary policy fails to curb inflation because
- People don’t have many investment alternatives. Commercial banks have high deposits. Repo rate change doesn’t affect their money supply immediatly.
- Monsoon uncertainty, cyclone, flood, draughts => Supply side constrains
- Crude oil, gold prices outside RBI control
- fiscal deficit, public borrowing, subsidy leakage=RBI’s money supply calculations disrupted
- Unorganized money market; Shroff; lack of financial inclusion. RBI can’t control their interest rates.
- Then how reform monetary policy? Ans. implement Urjit Patel Committee report.
Point#1: inflation targeting
- Target=4% CPI, +/-2% Band [=control inflation in 2-6% range.]
- Tool=Repo as policy rate, +/-1% spread in RR-Repo-MSF,
- Time limit: 0/12/24 (months)=10/8/6% (CPI)
- Strategy=keep repo higher than CPI.
Point#2: fixing accountability
- Setup monetary policy Committee (MPC) headed by RBI governor, 3 insider (RBI official) and 2 outsider members.
- Decide policy by majority voting.
- Issue public statement in case of failure.
Point#3: Government to help RBI
- Stop administered prices (MSP), wages (MNREGA), interest rate (farm loans
- Implement Vijay Kelkar fiscal consolidation report.
- Religiously follow FRBM.
- Bi-monthly policy from April 2014 onwards(earlier every 45days)
- Kept Repo unchanged to 8%. Although reduce SLR from 23% to 22% => banks left with spare money to lend to private sector=>GDP growth.
- Agreed to target CPI: 8% by Jan’15; 6% by Jan 2016.
- Oct 2014: CPI down to 6.45; meaning its working.
- External challenges: 60% chances of El-Nino, Geopolitical problems in Ukraine, Syria, Iraq & their possible impact on crude oil prices.
- why fin.inclusion important for poverty removal=> check GS1 revision note.
- Fin.inclusion attempts in past: Nationalization, RRB, Coop banks, BCA, Swabhiman, Swavlamban, MFI (24%), No-frills account, 25% rural branch rule, BMB, Bandhan, IDFC.
- Still 49% families- no account; 55% rural dalits borrow from money lenders @34% rate.
What is Jan dhan?
Dept of Fin services. 15/08/14; 7.5 cr families in 1 year; 6 pillars strategy
- 1.Sub-service area to cover 1000-1500 families within 5 kms distance
- 2.Each family 1 account, rupay debit card, 1 lakh accident cover, 5k overdraft if good credit history.
- 3.fin.literacy campaign; 4.credit guarantee fund to cover losses 5.sell micro insurance product 6. DBT.
Criticism of Jandhan
- Insurance cover only if rupay card used every 45 days. (NPCL pays your premium, NPCL runs Rupay)
- Banking Correspondence Agent model: 2% commission, misconducts by RBI report. 47% BCA untraceable.
- Hawala via smurfing (sending money overseas in small units) and money mules, fears Rajanbhai.
- Universal banking account for all residents by 2016
- White label BCA (to tie up with multiple banks).
- Affordable Investment and insurance products for poors.
- Consumer protection in financial services. (Fin. Redressal agency)
- Bank access within 15 minutes; Payment banks, Small banks, wholesale banks.
Rajanbhai wishes to launch these banks for greater financial inclusion under Nachiket’s report.
|Small banks||Payment banks|
|Take deposit, give loan but small area of operation.||
|Customer money circulated as loan to MSME, unorganized workers, small/margi. farmers.||Only invest in G-sec. can’t give loans|
so far, we saw long term reform, med. term reform, now one last point:
Slow environment clearance, cited as one of the main reason GDP decline. Environment ministry did these reforms:
- No environment clearance needed for following:
- Border: LAC 100kms, BRO permitted
- Naxal: forest land 5ht. Convert for public buildings
- Ganga basin-5 states: industries to install emission monitoring systems.
- Web portal for file clearance
- GIS system forest clearance
- TSR Subramium panel to review green laws=> long term reforms when report comes.
More points can be added by throwing statistics and schemes from 100 day reports by various ministries. but revision cost-benefit not that good.
|GDP||New GDP calculation with base year with as 2011-12. Will include unorganized sector=> higher GDP, because earlier they were not included|
- MNREGA+Rising income= more demand fruits, veggies, edible oil, milk, egg, protein food.
- But Government keeps cereal MSP high for farmer vote bank, cheaper electricity and fertilizers=> more farmers grow cereals.
- This Supply demand mismatch=food inflation from non-cereals.
- FCI open ended procurement but lack of shortage capacity=Rotten grain.
- Leakages in PDS=blackmoney + inflation.
- @Farmer: Remove MSP, give direct cash transfer to farmers, include urea in NBS; more R&D to raise productivity, farm mechanization (=more employment in rent+repairs),
- Decentralized procurement: instead of FCI, states themselves procure and distribute PDS. Started in 90s but only few states adopted.
- Existing: Private.entrp. guarantee scheme+ Grameen Bhandaran + 100% FDI in warehouse, warehousing receipts to get bank loans; offload excess wheat/rice in open market to curb prices.
- @PDS: Food stamps/DBT to poor= no more leakage or hidden hunger; allows PDS shows to sell other items to keep profit & reduce hoarding, online monitoring of stocks etc.
- @Retail: Reform APMC act. Allow- private years, farmer-SHG to direct sell, create national market for agriculture (law), online info on pricing, no more market fees; stable export policies.
lot More bolbachchan can be done but everything boils down to points given above.
- Nutrient based subsidy- on weight of macro/micro nutrients. Farmer gets tailormade fertilizer as per soil requirements (using his soil-health card from budget 2014).
- EPICFail because: Urea not covered, NBS subsidy not given quickly to companies.=> excessive urea use=> soil NPK ratio disturbed; subsidy bill increased to 70k+cr.; higher import=CAD; smuggling.
- State Government administered price (SAP) higher than union’s MSP/FRP (fair remunerative price)
- Mill owners need to pay SAP to farmers=>losses because retail sugar price declining.
- Mill owners in arrears: union giving interest free loans to them. (SEFESU scheme).
- Ranga. Committee says stop SAP & adopt FRP.
Easy and clichéd topic but its bullets can be used as ‘fallback line’ when “out of content” for a generic question on poverty-hunger-issues.
- 97: TPDS, 2000: Antyodaya Anna; 2013: NFSA (under consumer affairs ministry)
- Union: supply foodgrains; else give allowance to states
- States: identify beneficiaries; give food else allowance
- 67% population covered.
- Quota: AAY: 35kg for whole family, Priority 5kg per person
- Rice 3; Wheat 2; coarse 1 Rs./kg
- Preg: Free meals, 6k installment; Kids: free meals, take home rations.
- Grievances redressal @distrct & state level; TPDS: ICT, doorstep delivery
- Deadline: Oct14=>extended to April 2015, because very few states implemented, because beneficiary identification problem. SECC survey yet to complete.
- Full implementation: Haryana, Raj, Punjab total 5 states.
Criticism against NFSA
- Hidden Hunger: only carbohydrates given but no vitamins and micronutrients. Global hunger report says >50% Indian women and children have anemia. Solution?
- iodized salt, fortified flour, bio-fortification of crops (nutrifarms)
- National nutrition mission 2014 to reduce anemia
- EcoSurvey says give food stamps, let’em buy whatever nutritious food they want. Jene dreze counters- they’ll buy Desi liquor.
- Fiscal deficit: 1.15lakh crore burden=> 88k given to food security Act.
- FCI storage capacity insufficient=>rotten grain=>inflation
- GPS truck-tracking, CCTV…no. Parliament Committee recommended this but not implemented in NFSA.
- Identifying beneficiaries biggest problem. SECC incomplete.
Donot confuse food act with Food security Mission: Under Agro ministry. Increase production of 5: rice, wheat, pulses, millets and commercial crops.
Next revision article: GS3 Economy- Infrastructure and Black money.