[Revision] GS3: Economy-Planning, Budgeting, Resource mobilization & Farm subsidies

1. Prologue
2. [Block-1] Planning commission (PC) why replace?
   1. Modi’s NDRC
   2. Productivity commission
   3. SriKrishna’s FSLRC
   4. New Financial sector regulators
   5. PDMA Debt Management
   6. PJ Nayak Committee
3. [Block-2] Budgeting reforms
   1. Bud1: FM 4 kharchaa-Paani
   2. Bud2: Feedback Loop
   3. Bud3: Curbing fiscal deficit
      1. FD1: Disinvestment Keypoints
      2. FD2: Fuel subsidies curbed
      3. FD2A: Diesel deregulation: benefits of
      4. FD2B: Modified DBT
      5. FD3: 10% cutdown in Non-plan Expenditure
4. [Block-3] Banking sector
   1. B1: Why Monetary policy ineffective?
   2. B2: Urjit Patel’s reforms 4Monetary Policy
   3. B3: RajanBhai’s monetary policy
   4. B4:Jan-Dhan
   5. Nachiket Mor: financial inclusion
   6. Small Banks and Payment banks
5. Misc.Short term reforms
6. [Block-4] Farm subsidies, buffer-stock, PDS
   1. MSP, FCI, procurement
   2. Fertilizer Subsidy reforms
   3. Sugar pricing (Government intervention)
   4. National Food security Act (NFSA)

Prologue

Revision of selected topics for GS3 syllabus:

1. Issues relating to planning, mobilization of resources
2. Government Budgeting.
3. 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)

Duration	Focus	Action
Long term	Administrative legislative regulatory reforms	Replacing Planning commission setting up performance commission Srikrishana’s FSLRC
Mid-term	Budgeting	Feedback loop, performance based budgeting Reducing fiscal deficit Separate body for public debt  Management
	Banking	Urjit monetary policy reform Jan Dhan Nachiket Small / payment banks
Short term	Stroke of a pen @individual ministries	MoEF reforms in 100 days.

[Block-1] Planning commission (PC) why replace?

Structure functions = read from M.Laxmikanth. Planning commission sucks because:

1. 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.
2. Post sub-prime crisis, failed to evoke the “animal spirit” in Indian economy. GDP going down, inflation going up for 2008 to 2013.
3. 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.
4. Toothless body, can’t hold State/union/ministries/departments accountable for failing to achieve targets.
5. Hopes that CAG =>Public accounts Committee will take care accountability part. But PAC too is pretty much toothless.
6. Failed to implement land reforms. Faulty policies for MSME, industrialization, Factory-labour law problems we saw in GS2 MFG revision note.
7. 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.
8. Designed CSS with One size fits all approach and a few extra crores to NE/J&K/Hill-states and LWE.
9. But for long, it did not use pilot projects / sample testing / interaction with states.
10. Hence, IAY, ICDS etc. programs failed to show tangible result despite pumping crores.
11. Tried to bypass state Governments via NGO-funding, DRDA. Hence States unenthusiastic about implementing Central-schemes named after you know who.
12. 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.
13. 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.
14. 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)
15. Moily says NDRC good for China but not suitable for federal nation like India. Better restructure PC again by addressing above 13 bullets.

Modi’s NDRC

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.

Productivity commission

• 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.

SriKrishna’s FSLRC

Recent scams and solutions taken

Sahara-scam	SEBI ordinance
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

Legislative reforms:

• 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.

New Financial sector regulators

Present body	Replacement in Srikrishna’s IFC
RBI	RBI for banking regulation and monetary policy Separate public debt Management authority PDMA
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.
FSDC	Same. But Oversee all of above. Financial stability and Development council is under Department  of Economic affairs FM + bosses of (RBI, SEBI, IRDA, PFRDA and FMC) Work for Coordination, consultation and fin.literacy

Misc. bodies: data centre, resolution corp.

PDMA Debt Management

• 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)

Should India setup separate 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	Separate PDMA can’t stop conflict of interest. Government can still force PSU and sarkaari banks to buy G-sec, because Government =largest shareholder=its chamchaa-log in board of directors. Economic survey calls this “financial repression”

PJ Nayak Committee

• 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.

[Block-2] Budgeting reforms

• Both rail and general budget 2014 covered under Mrunal.org/economy
• But syllabus says “budgeting”. So, let’s check three reforms in “budgeting” process.

Bud1: FM 4 kharchaa-Paani

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.

Bud2: Feedback Loop

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

Bud3: Curbing fiscal deficit

High Fiscal deficit bad because

Angle1	Government issuing more G-sec=> PSU and banks forced to buy them=> less loans/capital for private businessman. =>Government has to relax FDI=> Kiranawallaa unemployment, desi-artisan unemployment. Government spends too much on Populist scheme=> infra sector finance left to PPP=> higher tolls, higher light bills=> purchasing power down=> unemployment / pink slips in private sector.
Angle2	Government begins monetizing deficit i.e. RBI ordered to print new currency notes to fulfill Government’s debt=>rupee’s real value eroded=>inflation =>RBI has to increase repo rate to curb inflation =>expensive home/business/vehicle loans=> less purchase=>unemployment/pink slips in private sector.
Angle3	Monetizing deficit=>inflation=>Real interest becomes negative if you invest in bank/sharemarket- your savings will be eroded. Junta invests in real estate=>black money Junta invests in gold=>higher CAD=>expensive crude oil => expensive petrol/diesel=>high inflation=>real interest become more negative =>vicious cycle.

 

Therefore, FRBM act wants Government to do following

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

FD1: Disinvestment Keypoints

• 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

Government	Disinvestment Policy
Vajpayee	Strategic PSU: no disinvestment Non-strategic: phased
UPA-1	Profit making PSU: No disinvestment Sick units to be revived PSUs to be given more autonomy to make them profitable Overall, not much Disinvestment given left allies’ opposition
UPA-2	All PSUs can be disinvested upto 49%. Meaning Government to keep 51% ownership Money earned from disinvestment=>NIF =>given to bank recapitalization, metrorail, nuke energy, EXIM-NABARD-RRB Target 40k cr but hardly 16k made because file-pendency and luckwarm response in stock-exchange. Later took “CPSE-ETF” solution. i.e. 10 CPSE’s shares given to Portfolio manager Golmand Sach. He issues New fund offer of Rs.10 each. You can buy and re-sell it @stock-exchange, hence called “Exchange traded funds”.
Modi	6 bogus shutdown: HTM watches, Hindustan Photo films etc. Rs.1000 crore given for their VRS 5 loss making to be revived e.g. HMT Tools NHPC, CIL, ONGC: 5-10% disinvestment via direct selling @Stock exchange

FD2: Fuel subsidies curbed

• 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.

FD2A: Diesel deregulation: benefits of

• 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

FD2B: Modified DBT

• 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.

FD3: 10% cutdown in Non-plan Expenditure

• 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.

[Block-3] Banking sector

B1: Why Monetary policy ineffective?

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.

B2: Urjit Patel’s reforms 4Monetary Policy

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.

B3: RajanBhai’s monetary policy

• 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.

B4:Jan-Dhan

• 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.

Nachiket Mor: financial inclusion

• 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.

Small Banks and Payment 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.	Take deposit only current account, saving account No fixed deposit, no loans.
Customer money circulated as loan to MSME, unorganized workers, small/margi. farmers.	Only invest in G-sec. can’t give loans
MFI, NBFC can convert to small banks Even individual with 10 years xp. In bank/cooperative sector can apply Requirements: 25%rural branching, 50% loans to MSME	Focus: Payment/remittances for poors, migrants, unorgnized sector. Max. balance per customer=Rs.1 lakh

so far, we saw long term reform, med. term reform, now one last point:

Short term reforms

Slow environment clearance, cited as one of the main reason GDP decline. Environment ministry did these reforms:

1. No environment clearance needed for following:
   1. Border: LAC 100kms, BRO permitted
   2. Naxal: forest land 5ht. Convert for public buildings
2. Ganga basin-5 states: industries to install emission monitoring systems.
3. Web portal for file clearance
4. GIS system forest clearance
5. 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.

Misc. topics

GDP	New GDP calculation with base year with as 2011-12. Will include unorganized sector=> higher GDP, because earlier they were not included
PPI	Producer’s price index to replace WPI. To replace WPI. Will include service sector= broader coverage Experimentation began in banking, postal, telecom and railways Agro. Prices will be difficult to track though.

[Block-4] Farm subsidies, buffer-stock, PDS

MSP, FCI, procurement

Problems?

• 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.

Solutions?

• @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),
• @FCI:
  • 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.

Fertilizer Subsidy reforms

• 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.

Sugar pricing (Government intervention)

• 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.

National Food security Act (NFSA)

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

Entitlements

• 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

1. 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.
2. Fiscal deficit: 1.15lakh crore burden=> 88k given to food security Act.
3. FCI storage capacity insufficient=>rotten grain=>inflation
4. GPS truck-tracking, CCTV…no. Parliament Committee recommended this but not implemented in NFSA.
5. 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.