Economic Survey

(2015-16)

Volume - I

Economy Survey (Volume - 1)

INDEX
1.

Economic Outlook, Prospects and Policy challenges

2.

The Chakravyuha Challenge of the Indian Economy

3.

Spreading Jam across India's Economy

4.

Agriculture: More from Less

5.

Mother and Child

6.

Bounties for the Well-off

7.

Fiscal Capacity for the 21st Century

8.

Preferential Trade Agreements

9.

Reforming the Fertilizer Sector

10.

Structural Changes in India's Labour Markets

11.

Powering "One India"

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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.

As India is integrating with world economy so its growth is also tracking the global economic path since
1991.

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 proentrepreneurship 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.

India's optimism despite challenges:

Competitive federalism is the key for this optimism. Performing states become "models and magnets."
Other states are emulating the models of successful states.

Optimism is reinforced by events of the last decade that have re-affirmed the dictum that good economics
is good politics. Not always and not everywhere but increasingly, Central and State governments, that have
delivered rapid growth and better governance tend to get re-elected and vice versa.

Furthermore, optimism is also fuelled by the Indian decision-making process which allows-hopefully even
creates the pressures- for disappointments to be retrieved. The GST is within reach; new bankruptcy

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procedures, as well as the revival of some big stalled projects such as Dabhol, illustrate that the exit
problem can be solved; the infrastructure being created for the game-changing JAM agenda to be translated
into reality.
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.

More flexible exchange rates, however, could moderate

full-blown eruptions
into less disruptive
but more prolonged
volatility. One tail
risk scenario that
India must plan for
is a major currency
re-adjustment in Asia
in the wake of a
similar adjustment in
China, as such an
event would spread
deflation around the
world. Another tail
risk scenario could
unfold as a consequence of policy
actions-say, capital
controls taken to
respond to curb outflows from large
emerging market countries, which would further moderate the growth impulses emanating from them.

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.

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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--vis 5.5% in 2014-15).
Meanwhile, services continue to expand rapidly.

Nominal GDP (GVA) is likely to increase by just 8.6 (6.8)% in 2015-16. In nominal terms, construction
is expected to stagnate, while even the dynamic sectors of trade and finance are projected to grow by only
7 to 73/4%.

Inflation remains under control. The CPI-New Series inflation has fluctuated around 51/2%, while measures
of underlying trends-core inflation, rural wage growth and minimum support price increases-have similarly
remained muted. Meanwhile, the Wholesale Price Index (WPI) has been in negative territory since November
2014 because of large falls in international commodity prices, especially oil.

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, India was consequently well-positioned to absorb the volatility
from the U.S. Federal Reserve actions to normalize monetary policy that occurred in December 2015

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 201516 vis--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).

The budget envisaged an improvement in quality by shifting expenditures away from current to capital
expenditures.The main findings are that a welcome shift in the quality of spending has occurred from
revenue to investment, and towards social sectors. Aggregate public investment has increased by about 0.6
% of GDP in the first 8 months of this fiscal year, with contributions from both the Centre (54%) and
states (46%).

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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
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. Reflecting India's growing globalization, the correlation
between India's growth rate and that of the world has risen sharply to reasonably high levels. Correlation
coefficient has doubled to 0.42.

In other words, in the current global environment, there needs to be a recalibration of growth expectations
and consequently of the standards of assessment

There is a need to examine each of the components of aggregate demand: exports, consumption, private
investment and government.

Current projections by the IMF for marginal improvement in demand this year to about 2.8. On the
domestic side, increased spending from higher wages and allowances of government workers if 7th pay
commission recommendations are accepted, agricultural incomes will improve if the monsoon returns to
normal, with attendant gains for rural consumption, the disappearance of much of last year's oil windfall,
reduced Corporate sector profitability and Finally, the path for fiscal consolidation will determine the
demand for domestic output from government. The magnitude of the drag on demand and output will
be largely equal to the size of consolidation, assuming a multiplier of about 1.

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.

Further relief should come from abroad. Oil prices have plunged in the 1st 2 months of 2016, as have some
commodity prices, suggesting that input prices are likely to be lower next fiscal year. Beyond this factor
lie other deflationary forces. As growth in China continues to slow, excess capacity there could continue

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to increase, which will put further downward pressure on the prices of tradable goods all around the world.
Part of this might be offset by upward pressure coming from a depreciation of the rupee, especially if the
Federal Reserve Bank continues to raise interest rates, prompting capital to reflow to the U.S, although the
prospects of aggressive Fedral Reserve action are receding. On balance the risk to imported pressures, as
with domestic pressures, remains firmly to the downside.

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.

Medium-Term Fiscal Framework:

The 2016-17 fiscal stance needs to be assessed in a medium-term context along with short term outlook
to preserve fiscal sustainability and the government needs to be in a strong position tomorrow to repay
the debts it is incurring today.

Governments adopt various targets to achieve and signal fiscal sustainability. These include the overall
deficit, the primary deficit, the revenue deficit, and the debt-to-GDP ratio.

The indicator of the sustainable path is the direction of its debt-to-GDP ratio. If this ratio is declining,
then the government's fundamental fiscal strength is improving. Annual deficits were eventually curtailed,
but macro imbalances nonetheless continued to grow, leading by 2013-14 to the 2nd impediment: a sharp
exchange rate depreciation that inflated the rupee value of foreign debts.

As a result, overall government debt continued to grow as fast as GDP, keeping the debt ratio of the
consolidated government (Centre plus states) near 67% of GDP. This ratio is high compared to some
countries in Emerging Asia, India's credit rating peers. Accordingly, the government is determined to break
the post-GFC trend, and finally put the debt ratio on a downward path toward more comfortable levels.

For this reason, there are strong arguments to stick to a path of aggressive fiscal consolidation as envisaged
at the time of the last budget. Such a low deficit would not only curtail the debt accumulation, but would
also offer some wider advantages. To begin with, it would mean that the government would be delivering
on a commitment, thereby reinforcing its credibility, which is one of the most precious assets that any
authority can command. Credibility and optimality seem to argue for adhering to the 3.5%t of GDP
target.

However, there are also arguments on the other side. With respect to feasibility, 2 factors complicate the fiscal
task in 2016-17 and beyond:
The 7th Pay Commission has recommended that government wages and allowances be increased significantly.
Full implementation of this pay award--which the government will decide on would add about percent
of GDP to the Centre's wage bill.

Public investment may need to be increased further to address a pressing backlog of infrastructure needs.
Such an increase would merely return spending to its 2010-11 level of around 2% of GDP, well below
the level in other emerging markets.

Taking these factors into account, the Centre's deficit could swell substantially. As a result, achieving the
original could prove difficult unless there are tax increases or cuts in expenditures. There is some scope
to increase receipts from disinvestment and spectrum auctions to realize which will require effort.

Second, even the desirability of a strategy of aggressive fiscal consolidation could be questioned. This is
because the current environment is fraught with risks, which threaten all the engines of India's growth, as
explained earlier. It would consequently seem important for the government to "purchase insurance"
against these downside risks rather than reduce fiscal demand significantly and take the chance of
precipitating their realization. Data uncertainty reinforces the need for purchasing insurance.

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But if the deficit target were to be relaxed, 2 questions would need to be answered. 1st, what would happen
to interest rates? The lower the fiscal deficit, the lower the borrowing requirement, and possibly the lower
the interest rate on government securities, which would be very helpful to companies facing debt servicing
difficulties.

What about short-term interest rates? Isn't there a risk that large pay awards could push up inflation,
forcing the RBI to increase their policy rate? the risk seems small, as there's little evidence that public
sector pay increases are transmitted to prices, or even to wages in the private sector.

In fact, the more significant risks to inflation would seem to be to the downside: from lower oil prices,
a slowing Chinese economy, and the impact of fiscal deficit reduction of any size on aggregate demand.

Summing up the cyclical considerations, small differences in the degree of fiscal adjustment may not have
much impact on interest rates. Which means that any positive effects from a large adjustment ("austerity")
coming from lower interest rates could be offset by the direct negative impact on aggregate demand.

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.

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 810% 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.

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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.

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.

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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.

Broader issues: The "Big-but-Poor" Dilemma

India also needs to address 2 broader issues. The 1st is what might be called the, big-but-poor, dilemma

On the one hand, India's self-perception as a poor country translates into a reluctance to recognize and
practice reciprocity (give-and-take) in trade negotiations. On the other hand, India's policies have a significant
impact on global markets and it has become a large economy in which partner countries have a legitimate
stake in seeking market access just as India should in relation to its partners' markets.

In the 1970s and 1980s, India's engagement in the WTO was broadly non-reciprocal. This was possible
because was small enough for trading partners to overlook this non-reciprocity. Today they do care because
of India's market size, and India must respond, balancing the "big-but-poor" dilemma.

Partner countries must show a serious interest in reviving multilateralism. Equally India and other emerging
market economies must make it attractive for trading partners to engage in the WTO. An important part
of this will require India playing more of the reciprocity game and using its growing markets as leverage
to attain its own market interests abroad, including the mobility of labor.

The costs of reluctant engagement need careful review.

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.

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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 1980s 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.

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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
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 costof 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.

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SPREADING JAM ACROSS INDIA'S ECONOMY

975 million individuals have an Aadhaar card - over 75% of the population and nearly 95% of the adult
population. Nearly 1/3rd of all states have coverage rates greater than 90%.

Only in 4 states- Nagaland (48.9), Mizoram (38.0), Meghalaya (2.9) and Assam (2.4) penetration is less
than 50%.

India's BC: population ratio is 1:6630 which is less than 3% of the Kenyan level of 1:172. The spatial
density of BC's in India is 17% the Kenyan level.

The mobile penetration across India is strong. Only in Bihar (54%) and Assam (56%) is penetration lower
than 60%. Moreover, there are approximately 1.4 million agents or service posts to serve the approximately
1010 million mobile customers in India, a ratio of about 1:720.

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

For transferring money and subsidies the government must be able to identify and transfer money to beneficiaries
and the beneficiaries must be able to easily access their money.
Failure in identification leads to inclusion errors and leakage - Benefits intended for the poor flow to rich and
"ghost" households, resulting in fiscal loss. Failure in transferring and having access to money leads to exclusion
errors - Genuine beneficiaries being unable to avail benefits.
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.

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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.

The chief middle-mile issues are the administrative challenge of coordinating government actors and the
political economy challenge of sharing rents with supply chain interest groups.

Within-government coordination: It is essential to have coordination between Ministries and State

government departments and share authority in administering subsidies and transfers.

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.

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.

Last-mile issues relate to the risks of excluding genuine beneficiaries, especially the poor which depend
on vulnerability and financial inclusion of the beneficiaries. The exclusion errors can be substantial if few
beneficiaries have bank accounts and can easily access them.

C.

Case study of 1st type of JAM -

DBT in LPG
The government has achieved significant progress through Pahal Scheme which directly transfers LPG
subsidies into customers' bank accounts. Currently over 151 million beneficiaries receive LPG subsidies
via DBT, and Rs. 29,000 crore have been transferred to beneficiaries till the date.

The ghost and duplicate beneficiaries have been reduced. The use of Aadhaar has made black marketing
harder, LPG leakages have reduced by about 24% with limited exclusion of genuine beneficiaries. However,
diversion of LPG from domestic to commercial sources continues, because of the differential tax treatment
of "commercial" and "domestic" LPG. In other words, the One Product One Price principle is still being
violated. Diversion could be further reduced by equalising taxes across end-uses.

Seeing the size of the leakages and the central government control the scheme can be replicated in
fertilisers and with-in government fund transfers. This can be done by (DBT) Direct Benefit Transfer and
(BAPU)- Biometrically Authenticated Physical Uptake.

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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.

Indicators in the JAM preparedness index

Way forward
Seeing the trends from DBT in LPG it can be seen that there is a March problem where unconsumed
subsidised cylinders are sold in the black market. Reducing the cap could significantly reduce this leakage.

While banking correspondent networks develop and mobile banking spreads BAPU-Biometrically
Authenticated Physical Uptake could be a meanwhile step. This could be replicated in states where state
preparedness is high and with some policy push they can be well prepared for BAPU.

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.

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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.

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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 selfsufficiency 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:
There is sharp decline in cultivable land per person in India much sharper than in other countries. Over the
next 20 years, India's fast population growth will make the cross country comparison even less favorable for
India.
B.

Water efficiency

Although water is one of India's most scarce natural resources, India uses 2 to 4 times more water to produce
a unit of major food crop than does China and Brazil. This constraint is exacerbated because, while Brazil and
China use approximately 60% of their renewable fresh water resources for agriculture, India uses a little over
90%.

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.

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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.
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.

Results from an impact evaluation of National Mission on Micro Irrigation (of the Ministry of Agriculture,
Government of India) conducted in 64 districts of 13 states - Andhra Pradesh, Bihar, Chhattisgarh, Gujarat,
Haryana, Karnataka, Maharashtra, Odisha, Rajasthan, Tamil Nadu, Sikkim, Uttar Pradesh and Uttarakhand
- Are revealing on the benefits of drip irrigation.

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 Krishi Sinchayi 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.

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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.
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.

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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.

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.

Notes

b)

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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.

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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
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.

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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.

Notes

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, respectivelygetting "more from less" of these inputs

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MOTHER AND CHILD

Despite recent progress seen in the economic growth, India generally under-performs on maternal and child
health indicators: Pre-pregnancy weights and weight-gain during pregnancy are both low. The Infant Mortality
Rate (IMR) and Maternal Mortality Rate (MMR) are high when compared to other developing countries and
we are far ahead in achieving the goals of Mellennium Development Goals (MDG).
Why should India invest in mother and child health?

India is currently in the middle of her demographic dividend- A period of time when population changes
gives economic growth a boost by expanding the working age share of the population. For this, it is
important to invest in maternal and child health as some of the highest economic returns to public
investment in human capital lies in these sectors.

It has been reported that, countries with better maternal and infant health "at takeoff" grew faster over
the subsequent 20 years.

Investment in human capital- physical health, education, skills and broader capabilities is a key to determinant
of a country's growth potential and is seen as investments in the productivity of tomorrow's worker.

Tomorrow's worker is today's child or foetus, events which occur while a child is in uterus (in the womb)
or very young (below the age of 2) cast a long shadow over cognitive development and health status even
in adulthood.

There are evidences that the most rapid period of physical and cognitive development in a person's life
occurs in the womb, a mother's health and nutritional status significantly affect the biological development
of the foetus. Besides, diseases during in utero period may be particularly difficult to recover from.

Early life conditions affect cognitive development. A healthy mother is more likely to give birth to a
healthy baby who learns better and stays on in school longer.

Programmes targeting younger children appear relatively cheap in comparison to investments made in
older children. Iodine supplementation is relatively cheaper compared to improving teacher quality or redesigning institutions to raise school accountability, and also requires less service delivery capacity from
the state. As such, on both the benefit and the cost side, early-life investments represent a real opportunity.

State of child's play in India

Height and cognitive development are partly determined by early life of environment and level of net
nutrition. However, there has been improvement over time in both urban and rural India but there is a

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persistent rural-urban height gap which has not closed over the past decade. Despite the progress made,
India remains a negative outlier our children are on average to standard deviations shorter than the healthy
average.

The indications of poor early life health have later-life human capital consequences. India's records show
no significant improvement in the health status.

State of maternal health

A child's 1st 1000 days on earth are thought to be a "critical period" of physical and cognitive development
with long-run consequences. However, due to poor results India has a high neonatal mortality rate. Low
birth weight babies are one of the causes for high rate which occurs due to low weight gain during
pregnancy.

42.2% of Indian women are underweight at the beginning of pregnancy. Not only the Indian women too
thin when they begin pregnancy, they also do not gain enough weight during pregnancy to compensate for
low pre-pregnancy body mass. Figures suggest that women in India gain only about 7 kilograms during
pregnancy, which is substantially less than the 12.5- 18 kg gain that the WHO recommends for underweight
women.

Causes

Availability of resources not concerns much as even women from richer households who start pregnancy
heavier do not gain enough weight.

Social norms which provide low status to young women in joint households and to younger daughter-inlaws in families.

Improving maternal Health in India

Government initiatives like the National Food Security Act of 2013 that legislated a universal cash
entitlement for pregnant women of at least 6,000 rupees to help improve their nutrition during pregnancy.

The cash payments from the government, need to be converted into more, higher-quality food and more
rest for pregnant women, so as to improve infants' birth weight.

The cash transfers can be linked with conditional requirements and should be given in a single, lump-sum
payment early in pregnancy to avoid delays, reduce administrative costs, ensure that it is spent on better
food during pregnancy.

Awareness should be created so as to see behavioural patterns like breast-feeding and corrective treatment.

Problem of open defecation

The open defecation in India (61.3%) is much more common than in even much poorer countries as
compared to Nepal (37.5%), Pakistan(21.4%), Bangladesh (1.8%) and Sri Lanka (0).

61% of rural Indians defecate in the open in 2015, compared with only 32% of rural people in sub-Saharan
Africa.

Income constraints are not the main determinant of open defecation. The rural households reject the pits
of latrines as they need to be emptied regularly. It is further complicated by India's history of untouchability.

It leads to many diseases like diarrhoea and environmental enteropathy via spread of germs and also leads
to child stunting.

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Addressing open defecation

Government initiatives: Building of more than 80 lakh toilets under Prime Minister's Swachh Bharat
Mission.

UN's Sustainable Development Goals commit to end open defecation worldwide by 2030. However, for
this the main focus needs to be on the rural areas.

The major challenge is behavioural challenge. Though people have latrines but still they defecate in open.
So, it is necessary to overcome barriers to toilet adoption in rural India and promote latrine use.

Way forward

Early life interventions can be an important policy tool for improving the health and human capital.

It is necessary to bring a behavioural change as without it the use of physical capital will not be possible
in an effective way. The goverment interventions should be supported by behavioural change.

There is a need to influence social norms in a wide variety of sectors persuading the rich to give up
subsidies they do not need, reducing social prejudices against girls, educating people about the health
externalities of defecating in the open, encouraging citizens to keep public spaces clean.

The government can play a progressive role in changing norms by creating Nudge units.

Key terms
Net nutrition: It is defined as the sum total of (i) The nutrition available from the mother in the womb
and during breastfeeding, (ii) The quantity and quality of the food that complements breast milk from 624 months, (iii) Energy losses due to disease and infection and poor absorption of nutrients.

Neonatal mortality: It is the number of infants that die in the first 30 days of life after birth.

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BOUNTIES FOR THE WELL-OFF

What is the article all about?

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.

What are subsidies?

A subsidy is a grant or other financial assistance given by one party for the support or development of
another.

Subsidy has been used by economists with different meanings and connotations in different contexts.

According to one (OECD) Organisation For Economic Co-operation And Development definition, "A
subsidy is a measure that keeps prices for consumers below market levels, or keeps prices for producers
above market levels or that reduces costs for both producers and consumers by giving direct or indirect
support."

Subsidies, as inverse of an indirect tax, constitute an important fiscal instrument for modifying market
determined outcomes.

Subsidies affect the economy through the commodity market by lowering the relative price of the subsidised
commodity, thereby generating an increase in its demand.

With an indirect tax, the price of the taxed commodity increases, and the quantity at which the market
for that commodity is cleared, falls, other things remaining the same.

Taxes appear on the revenue side of government budgets, and subsidies, on the expenditure side. Subsidies
can have a major impact in augmenting welfare of the society provided these are designed and administered
efficiently to serve a clearly stated set of objectives.

However, subsidies can also be very costly, if they are poorly designed and inefficiently administered.
Subsidies in areas such as education, health and environment are advocated on grounds that their benefits
are spread well beyond the immediate recipients, and are shared by the population at large, present and
future.

Subsidies are also used with redistributive objectives, particularly for ensuring minimum consumption
levels of food and other basic needs.

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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Small savings

"Small" savings schemes were initially created to

mobilise saving by encouraging "small earners" to
save, and offered above market deposit rates in
accessible locations like post offices for this
purpose.

This 1st set of "actually small" schemes ranges

from postal deposits to schemes for the elderly
and women. The second set is of "not so-small"
schemes, which includes the most important of
all - the Public Provident Fund (PPF). The 3rd
category is "not-small-atall" schemes, which
includes tax-free bonds issued by designated public
sector companies like IRCL, IIFCL, PFC,
HUDCO, NHB, REC, NTPC, NHPC, IREDA,
NHAI and others, supposedly to finance
infrastructure projects.

The interest rates (6.7) on most of these schemes

are fixed (for year), but they vary in magnitude
and periodicity. Whatever the terms, the key
determinant of their real return is their tax
treatment. Ideally, savings schemes should be
taxed according to the "EET principle". The first
("E") stands for tax Exemption of the contribution,
the second (E) for Exemption of interest income,
while (T) stands for Taxation of the principal (and
interest) when it is withdrawn.

Most schemes in the "actually small" category are TTT - Neither the interest nor the contribution to the
scheme are exempt from tax under Section 80C(4) of the Income Tax Act. By contrast, the PPF, which
is a "not-so-small" scheme is EEE: The interest is tax exempt, contributions are tax exempt, but up to
a limit of Rs. 1.5 lakhs, and tax exempt at the time of withdrawal.

We can indirectly infer how well-off beneficiaries of the PPF scheme are. In sum, the effective returns
to PPF deposits are very high, creating a large implicit subsidy which accrues mostly to taxpayers in the
top income brackets. The magnitude of this implicit subsidy is about 6% points - Approximately Rs.
12,000 crore in fiscal cost terms.

2.

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.

Notes

1.

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3.

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).

It turns out that 91% of these subsidies are accounted for by the better-off as their share of consumption
of LPG in the total consumption is about 91%; while the poor account for only 9% of LPG consumption
and hence only 9% of subsidies go to them.

So, this subsidy, aimed at benefitting the poor, is hardly being used by them.

Another important point to note is that LPG is subsidized heavily, as compared to other energy related
commodities like petrol, diesel etc which are taxed at very high rates, hence the effective subsidy to the
better-off on account of LPG is much more than the actual direct subsidy of 36% (more details in next
section).

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.

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.

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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.

Notes

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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 indicatorsoverall 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--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
relatively identified. Higher rates (with values updated periodically) can be the foundation of local

Notes

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Notes

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.

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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

Notes

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 PTAs as the way forward to enable the stable growth of our exports.

Notes

(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.

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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%).

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).

Notes

Thus in many ways urea dominated the sector.

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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.
Canalisation further aggravates the situation. Canalisers are a instructed when to import, what quantities to
import, and in which districts to sell their goods. Every season the Fertiliser Department estimates how much
imports are required by forecasting domestic supply and demand. Forecasting fertiliser demand is a difficult
business, and misestimates- Especially shortages are difficult to correct because the system to procure imports
is time consuming.

The entire process-from the time the Fertiliser Department decides to import to the time urea reaches
consumer centres takes about 60-70 days.

These delays can exacerbate shortages, and are particularly costly during the peak demand period when
timely availability of urea is essential for proper plant growth. Farmers are thus pushed to purchase in the
black market.

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.

Notes

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.

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Since 2014, important reforms have been implemented in the fertiliser sector. These include:

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

Notes

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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STRUCTURAL CHANGES IN INDIA'S LABOUR

MARKETS
India is Midway through its demographic dividend when demography gives a push to economic growth. To
exploit this dividend, India need good jobs which are safe and pay well. Which encourage workers and firms
to improve productivity. With these characteristics good jobs can mean creating more jobs in formal sector.
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:

Notes

a) Subcontracting the work of following regulations and managing inspectors to the contracting firm.

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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%.
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 labour do 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 labour laws :

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.
In Futuristic views, how would an export plays an important dimention?

Knowledge of an advance technologies utilisation by Developed countries matters a lot.

Becoming the part and parcel of the global supply chain & integrate with the wide range of Market
(For e.g Automobile Industry but rubber/Tyre Industry cant be a part of it because of its monopoly.

Brings it closer to the global frontier for the exported goods.

These skills are transferable across industries.

Like, China entered in electronics manufacturing through mobile phone assembly space by producing
electrical cables and connectors and is now producing sophisticated, high end smart phones.

Relocation: A case study of apparel industry.

Relocation means shifting the industries to 2nd and 3rd tier industries to avoid spatial mismatch in labour
availability, high cost real estate sector etc.

Notes

Apparel industry is labour intensive and India must be performing well because of abundant supply of cheap
labour. But in this also India is ceding space to countries like Bangladesh and Vietnam.

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A)

Why Indian apparel industry is suffering ?

Indian apparel industry is dominated by informal firms.

2 million informal firms employ 3.3 mill workers whereas 2800 formal firms employ 330,000 workers.

Informal firms are 15 times less productive than formal firms.

This mushrooming for 1 person apparel establishments is because of spatial mismatch.

Living costs are high in cities, leaving cost sensitive, labour intensive manufacturing uncompetitive.

High transportation cost and week connectivity between metros and sub-urban areas preclude any possibility
of living outside the city and daily commuting.

B)

How to improve productivity in apparel industry?

Through reallocation of capital from less productive to more productive units.

Adopting relocating to 2nd and 3rd tier cities.

This will also offer other advantages like:

Spreading economic development to underdeveloped areas

Reducing mismatch in the labour market (low skilled labour is available in these towns).

Will raise competitiveness by raising firms access to low cost labour.

Will offer jobs to women who forms 70% of workforce in apparel industry.
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.

A study by McKinsey has found that, improving Gender Parity in employment India's GDP can improve by
1.4%.
This will provide other benefits too.
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.
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

A)

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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 service charge of 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

Notes

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.

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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 201415.

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:
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

A)

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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 (Deendayal Upadhyaya 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.

Notes

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