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1 | Economy Note

1. Shanta Kumar Committee of FCI Restructuring:
Economic Survey Summary: Shanta Kumar Committee Report
This is summary of Shanta Kumar Committee Report on FCI , The high Level Committee
(HCL) on restructuring of Food Corporation of India (FCI),major issue before the Committee
was how to make the entire food grain management system more efficient by reorienting the
role of FCI in MSP operations, procurement, storage and distribution of grains under
Targeted Public Distribution System (TPDS).
This post contains summary from Economic Survery Vol 2 .
Procurement related issues:
 The FCI should hand over all procurement operations of wheat, paddy, and rice to
states that have gained sufficient experience in this regard and have created
reasonable infrastructure for procurement. The FCI will accept only the surplus (after
deducting the needs of the states under the NFSA) from these state governments (not
millers) to be moved to deficit states. The FCI should move on helping those states
where farmers suffer from distress sales at prices much below MSP, and which are
dominated by small holdings.
 Centre should make it clear to states that in case of any bonus being given by them on
top of MSP, it will not accept grains under the central pool beyond the quantity
needed by the state for its own PDS and OWS.
 The statutory levies including commissions need to be brought down uniformly to 3
per cent, or at most 4 per cent of MSP, and this should be included in the MSP itself
(states losing revenue due to this rationalization of levies can be compensated
through a diversification package for the next three-five years);
 The Government of India must provide better price support operations for pulses and
oilseeds and dovetail their MSP policy with trade policy so that their landed costs are
not below their MSP.
 Cash transfers in PDS should be gradually introduced, starting with large cities with
more than 1 million population; extending it to grain surplus states; and then giving
deficit states for the option of cash or physical grain distribution.
On PDS- and NFSA-related issues:
 Given that leakages in the PDS range from 40 to 50 per cent, the GoI should defer
implementation of the NFSA in states that have not done end to end computerization; have
not put the list of beneficiaries online for anyone to verify; and have not set up vigilance
committees to check pilferage from PDS.
 Coverage of population should be brought down to around 40 percent.
 BPL families and some even above that they be given 7kg/person.
 On central issue prices, while Antyodya households can be given grains at ` 3/2/1/kg for
the time being, but pricing for priority households must be linked to MSP.
On stocking and movement related issues:
 FCI should outsource its stocking operations to various agencies.
 Covered and plinth (CAP) storage should be gradually phased out with no grain stocks
remaining in CAP for more than 3 months.
 Silo bag technology and conventional storages wherever possible should replace CAP.
On Buffer Stocking Operations and Liquidation Policy:
 DFPD/FCI have to work in tandem to liquidate stocks in OMSS or in export markets,
whenever stocks go beyond the buffer stock norms. A transparent liquidation policy is the
need of hour, which should automatically kick-in when FCI is faced with surplus stocks than
buffer norms.
 Greater flexibility to FCI with business orientation to operate in OMSS and export
markets is needed.

Nayak Committee Report The P. Nayak Committee report was constituted by the RBI for making recommendations regarding corporate governance in PSU banks Recommendations of the Nayak Committee The committee has submitted its report on 12th May 2014 and made the following main recommendations:  Scrapping and removal of Bank Nationalisation Acts. movement. Inside Directors and top Executives of PSBs would be the responsibility of the Bank Boards Bureau constituting three serving or retired bank chairmans and the government would not be involved in this decision in any way  Nayak committee also recommends proportionate voting rights to all shareholders and reduction of governmental shareholding to 40% Points Against the Committee: • Bankers in disagreement with the report said that in many banks. starting from procurement from farmers. Nayak panel suggested government and RBI should not be part of the . PJ Nayak Committee on Bank Governance: Autonomy for public sector banks has remained a perpetual goal for banks as well as policymakers. SBI Act and SBI(Subsidiary Banks) Act  Conversion of PSBs into Companies as per the Companies Act  Formation of a Bank Investment Company/BIC under the Companies Act. autonomy in the current context is in terms of freedom for PSBs independent of their government ownership • A crucial issue has been the dependence of PSBs on government owners for more capital • Top management of PSBs has not been able to resist political will. government holding was above 51% which could be diluted to bring more equity • Also. there is no need for reducing the government stake below 51% when markets are conducive for equity raising • Proper examination is needed for director appointments and board should spend more time on policy issues. P. On the new face of the FCI: The new face of the FCI will be akin to an agency for innovations in the food management system with the primary focus of creating competition in every segment of the foodgrain supply chain. On end to end computerization: The HLC recommends total end-to-end computerization of the entire food management system. to stocking. J. according to many estimates. transfer of shares by the central government in PSBs to the BIC  BIC in turn would have over the controlling power to boards of PSBs  Government will only control earning return on investment  Fair return on investment to the Central government would be the responsibility of BIC. 2. from procurement to stocking to movement and finally distribution under the TPDS. • Reform agenda has attracted its fair share of supporters and critics.2 | Economy Note On direct subsidy to farmers:  Farmers be given direct cash subsidy (of about Rs 7000/ha) and fertilizer sector can then be deregulated.  Appointments of CEOs. and finally distribution through the TPDS. so that overall costs of the system are substantially reduced and leakages plugged and it serves a larger number of farmers and consumers.J.

3. 2002 ) will be a big boost to the sector. this can be eliminated if the Nayak committee report is accepted • Panel’s recommendations will enhance the quality of directors in the bank and improve the governance and accountability of independent directors in decision making Facts and Stats • Nayak panel estimates that by 2018. as per the 14th Finance Commission • Budget 2015 has set aside INR 7940crore for capitalisation of banks which is lower than what the budget had sanctioned in the previous year • This is higher than INR 6990 crore allocated this fiscal to group of 9 PSBs measuring efficiency of parameters laid down by the government • Autonomy for PSBs will remain tough till they gain financial independence.87 lakh crore • PSBs are committed to retain stake of government at 52% or above • Innovative means will be used to acquire additional capital to meet Basel III capital adequacy norms and meet higher provisioning requirements • Budget 2015 has also conferred autonomy on PSBs. SARFAESI Act to cover NBFC: The Budget proposal to treat non-banking financial companies (NBFCs) as financial institutions under the SARFAESI Act (The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act.500 crore and above will be considered for notifications as ‘financial institution’ in terms of the SARFAESI Act. Present Scenario: . the government suffers from various constraints when it comes to providing capital for the PSBs. 2002. this will allow NBFCs to enjoy the benefits that presently apply only to banks.3 | Economy Note appointment process and both should withdraw their director nominees from the boards of PSBs • All board level appointments are the responsibility of RBI and taking away this responsibility could have negative repercussions if PSB boards are not well governed Points in Favour of Committee: • Bankers in support of the committee recommendations indicated its provisions would ensure more professionalism in decision making at a point where bad assets are on the rise and the need for capital is essential • Banks will also be able to become more efficient and raise funds rather than depending upon budgetary support • Moreover. It is proposed that NBFCs registered with RBI and having asset size of Rs. holding company will be able to leverage its holding of quality shares thereby raising money for even those PSBs which are at a disadvantage • Government has also run out of options for funds for the recapitalisation of PSBs and the fiscal responsibilities of the government will persist even after the shares are transferred to NOFHC. PSBs will need an infusion of INR 5. A long-standing demand of the industry.

 Upon loan default. Hence. had recommended that the Act be extended to cover the NBFCs also. NBFCs are not covered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. The Act provides three alternative methods for recovery of non-performing assets. RBI has issued guidelines to banks on the process to be followed for sales of financial assets to ARCs. calling upon them to discharge their dues in full within 60 days from the date of the notice.4 | Economy Note    Currently. namely: 1. Most of the NBFCs are unable to recover bad debts. There have been lakhs of cases that are dragged to court every year by NBFCs. The Act empowers the Bank:  To issue demand notice to the defaulting borrower and guarantor.  To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank. It enables banks to reduce their nonperforming assets (NPAs) by adopting measures for recovery or reconstruction. the working group of RBI. it has not laid out clear guidelines either on the recovery mechanism or the provisions for NBFCs to take action against defaulters under SARFAESI Act. Enforcement of Security without the intervention of the Court The provisions of this Act are applicable only for NPA loans with outstanding above Rs. SARFAESI Act: This act allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. banks can seize the securities (except agricultural land) without intervention of the court.  The Act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies (ARCs). Securitisation 2. the bank would have to move the court to file civil case against the defaulters. if the asset in question is an unsecured asset.  The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions. 1lac. If the borrower fails to comply with the notice. Asset Reconstruction 3. However.  SARFAESI is effective only for secured loans where bank can enforce the underlying security. In such cases. Any Security Interest created over Agricultural Land cannot be proceeded with.  To ask any debtor of the borrower to pay any sum due or becoming due to the borrower. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act. court intervention is not necessary. Though the Reserve Bank of India has tightened the NPA recognition norms. headed by Usha Thorat. unless the security is invalid or fraudulent. the Bank may take recourse to one or more of the following measures:  Take possession of the security  Sale or lease or assign the right over the security  Manage the same or appoint any person to manage the same .

Arun Jaitley. No exemption. and provides for criminal liability for attempting to evade tax in relation to foreign income. located outside India.  Scope of income to be taxed: The total undisclosed foreign income and asset of an individual would include: (i) income.  One .time compliance opportunity: A one-time compliance opportunity to persons who have any undisclosed foreign assets (for all previous assessment years) will be provided for a limited period. in addition to tax payable at 30%.  Tax rate: A flat rate of 30 per cent tax would apply to undisclosed foreign income or assets of the previous assessment year. with a value of five lakh rupees or less. 2015 was introduced in Lok Sabha on March 20. or submits inaccurate details of the same. .  Penalty for offences: o Undisclosed foreign income/assets: The penalty for nondisclosure of foreign income or assets would be equal to three times the amount of tax payable. This would apply from April 1. This would not apply to an asset. would be liable to pay an amount equal to the amount of tax arrears. (ii) income.5 | Economy Note 4. and (iii) value of an undisclosed asset. They would have powers of inspection of documents. The proceedings are to be judicial. o Second time defaulter: Any person. 2015 by the Minister of Finance. with a value of five lakh rupees or less. and pay a penalty at the rate of 100%. Such persons would be permitted to file a declaration before a tax authority. who continues to default in paying tax that is due. o Failure to furnish returns: The penalty for not furnishing income tax returns in relation to foreign income or assets is a fine of Rs 10 lakh. This would not apply to an asset. which has not been disclosed in the tax returns filed. 1961 for the taxation of foreign income.  The Bill will apply to Indian residents and seeks to replace the Income Tax (IT) Act. o Undisclosed or inaccurate details of foreign assets: If a person who has filed tax returns does not disclose his foreign income. It penalizes the concealment of foreign income. and evidence. he has to pay a fine of Rs 10 lakh. 2016 onwards. The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill. from a source located outside India.  Tax Authorities: The relevant tax authorities and their jurisdiction would be as specified under the IT Act. deduction or set off of any carried forward losses (as provided under the IT Act) would apply. Mr. from a source outside India. for which no tax returns have been filed. 2015:  The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill.

His liability is absolved if he proves that the offence was committed without his knowledge.  Trade repository: A person who is engaged in the business of collecting. collating. 5.  Legal entity identifier: A unique identity code assigned to a person by an issuer to identify that person in such derivatives or financial transactions. and a fine.6 | Economy Note o  Other defaults: If a person fails to abide by the tax authority in (i) answering questions. ATMs. The Act designates the Reserve Bank of India (RBI) as the authority to regulate such systems. These systems include inter-bank transfers such as the National Electronics Funds Transfer (NEFT) system. o Failure to furnish returns: or non disclosure of foreign assets in returns: The punishment is rigorous imprisonment of six months to seven years. Arun Jaitley. . etc. o Punishment for abetment: The punishment is rigorous imprisonment of six months to seven years. and a fine. Mr. as specified by the RBI. processing or disseminating electronic records or data relating to such derivatives or financial transactions. The Payment and Settlement Systems (Amendment) Bill. and fine. as specified by the RBI. It was passed by Lok Sabha on December 9. (iii) attending or producing relevant documents. in relation to payment systems. or issuer. he is to pay a fine between Rs 50. credit cards. 2014  The Payment and Settlement Systems (Amendment) Bill. 2014 by the Minister of Finance. it introduces three definitions:  Issuer: A person who issues a legal entity identifier or similar unique identification. 2014. 2014 was introduced in Lok Sabha on December 8. which was enacted to regulate and supervise payment systems in India. the Real Time Gross Settlement (RTGS) System. Prosecution for certain offences: o Wilful attempt to evade tax: The punishment would be rigorous imprisonment from three to 10 years. and fine. as specified by the RBI from time to time.  The Bill amends the Payment and Settlement Systems Act.  The Bill seeks to extend the application of the Act to a designated trade repository. o Liability of company: For any offence under this Act. o Wilful attempt to evade payment of tax: The punishment would be rigorous imprisonment from three months to three years. 2007. In this regard. (ii) signing off on a statement.000 to two lakh rupees. storing. every person responsible to the company is to be liable for punishment.

 The Bill introduces a new provision for settlement and netting in relation to central counter parties (who is a system provider who by way of novation interposes between system participants). Companies Act.7 | Economy Note  The Act stipulates that payment obligations and settlement instructions among system participants is to be determined in accordance with gross or netting procedure. system providers must: (i) deposit in a separate bank account. This provision would override that of the Companies Act. It states that upon an order of declaration of insolvency. 1949. as approved by the RBI while issuing authorisation to a payment system. Further. or is dissolved or wound up. after appropriating the collaterals provided by the system participants towards their settlement etc.  The Bill introduces a new provision which empowers the RBI to direct system providers of a payment system to ensure protection of funds collected from customers. To this end. or (ii) maintain liquid assets of an amount equal to such percentage of the amounts collected by the system provider from its customers and remaining outstanding. How to reduce NPA: all steps: NPAs can be classified in three categories: Sub_standard Assets: With effect from March 31. would also not be affected.  This must be approved by the RBI while issuing authorization and such determination would be final and irrevocable. 1956. 2013 and the Banking Regulation Act. 1956. Companies Act. This provision would override that of the Companies Act. It further clarifies that this would apply to any settlement made prior to such order or immediately thereafter. the right of the system provider to appropriate any collaterals contributed by the system participant towards its settlement etc. dissolution or winding up in relation to a central counter party. (b) return the collaterals held in excess. which has remained NPA for a period less than or equal to 12 months. 1949.  The Bill amends this provision to specify that such payment system would be either that under the provision which deals with the issue or refusal of authentication or under any other provision of the Act. a substandard asset would be one. the settlement which is final and irrevocable would not be affected. 2005.  The Act states that where a court has declared a system participant as insolvent.  The Bill clarifies that the liquidator of the central counter party must: (a) not reopen any determination that has become final and irrevocable. 2013 and the Banking Regulation Act.  The Bill modifies this provision to add that the final settlement would not be affected even in cases where the court or tribunal has appointed a liquidator. the payment obligations and settlement instructions between the central counter party and the system participants is to be determined by the central counter party in accordance with the gross or netting procedure or any other provision of this Act. as specified by the RBI. . 6.

. These loans can occur due to the following reasons: (i) Normal banking operations (ii) Bad lending practices (iii) Incremental component (due to internal bank management. like credit policy. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses 2. etc. 2. Hence. Decrease profitability. they adversely impact the national economy. . Following are some of the impacts of NPAs: 1. It is the failure to meet financial obligations. the economy suffers due to loss of good projects and failure of bad investments 4. Loss Assets . Reduce capital assets and lending limits.A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some rescue or recovery value. Reasons for Occurrence of NPAs NPAs can be termed as "Bad Loans" or defaults. liquidity problems may ensue. Increase loan loss reserves. non-payment of a loan installment. In other words.8 | Economy Note Doubtful Assets: With effect from March 31. 2005.) (iv) Competition banks are enormously selling unsecured loans The Problems caused by NPAs: NPAs do not just reflect badly in a bank's account books. When bank do not get loan repayment or interest payments. terms of credit. Bad loans imply redirecting of funds from good projects to bad ones. Bank shareholders are adversely affected 3. Result of NPAs on an organization 1. an asset would be classified as doubtful if it has remained in the sub_standard category for a period of 12 months. Depositors do not get rightful returns and many times may lose uninsured deposits. 3..

The Act provides three alternative methods for recovery of non-performing assets. SARFAESI ACT 2002 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. Security Interest by way of Lien. pledge. but not with any civil court. A borrower / guarantor aggrieved by the action of the Bank can file an appeal with DRT and then with DRAT. The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. Some steps are as follows by which bank can reduce NPA 1. calling upon them to discharge their dues in full within 60 days from the date of the notice. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.60 of CPC. The borrower / guarantor has to deposit 50% of the dues before an appeal with DRAT. (iv. (iii. are not covered under this Act The Act empowers the Bank: (i. Securitisation ii. (ii. Non-performing assets should be backed by securities charged to the Bank by way of hypothecation or mortgage or assignment.) To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank.9 | Economy Note How to reduce NPA? . 1. the borrower makes any representation or raises any objection. hire purchase and lease not liable for attachment under sec.Non Performing Assets can be reduced by taking some major steps by the banks. . Asset Reconstruction iii. he shall communicate the reasons for non acceptance WITHIN ONE WEEK of receipt of such representation or objection. authorised officer shall consider such representation or objection carefully and if he comes to the conclusion that such representation or objection is not acceptable or tenable.) To ask any debtor of the borrower to pay any sum due or becoming due to the borrower.) Any Security Interest created over Agricultural Land cannot be proceeded with.) To issue demand notice to the defaulting borrower and guarantor.00 lac. namely: i. If on receipt of demand notice. Enforcement of Security without the intervention of the Court.

management. complying with all the laws of the land. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. the Bank may take recourse to one or more of the following measures: (i) Take possession of the security (ii) Sale or lease or assign the right over the security (iii) Manage the same or appoint any person to manage the same 2. Credit Information Bureau: A Credit Information Bureau help banks by maintaining a data of an individual defaulter and provides this information to all banks so that they may avoid lending to him/her. The management of the company hence assumes the role of a trustee for all the others. What are the principles underlying corporate governance? Corporate governance is based on principles such as conducting the business with all integrity and fairness. they cover NPA up to Rs. 5. making all the necessary disclosures and decisions. According to RBI guidelines issued in 2001. The presence of an active group of independent directors . 5 lakhs. employees and society. Lok Adalats: Lok Adalat is for the recovery of small loans. principles and processes by which a company is governed. DEBT RECOVERY TRIBUNALS: The debt recovery tribunal act was passed by Indian Parliament in 1993 with the objective of facilitating the banks and financial institutions for speedy recovery of dues in cases where the loan amount is Rs. Why is it important? Fundamentally. 10 lakhs and above. both suit filed and non-suit filed are covered. 4. Another point which is highlighted in the SEBI report on corporate governance is the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company. accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner. being transparent with regard to all transactions. It is applied to advances below Rs. 3. there is a level of confidence that is associated with a company that is known to have good corporate governance.10 | Economy Note If the borrower fails to comply with the notice. 7. shareholders to customers. What is corporate governance? Corporate governance refers to the set of systems. Stakeholders in this case would include everyone ranging from the board of directors. Compromise Settlement: It is a scheme which provides a simple mechanism for recovery of NPA. 10 Crores.

though not a desirable one. in long-run. renewable energy. Particularly. it is the implementation part. overall money supply. as these schemes generally suffer from poor implementation and massive corruptions and loopholes. through VRS and reducing new jobs in public sector or vice versa. Loan payments: This again is a component. despite being meritorious expenditure in nature. however. this expenditure can be altered. public transport shall be encouraged to ensure good health and sustainable growth. Ideally only meritorious subsidies shall be in operation and all the wasteful subsidies must be phased out. Borrowing: Borrowing is a necessary source of funds. have been abused in India. full page government advertisements in newspaper to generate favorable public opinion. subsidies as policy instrument. Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. which can’t be touched in short-run. These are used by politicians as poll promise and political instruments to gain more popular support. but unfortunately. Having a clean image on the corporate governance front could also make it easier for companies to source capital at more reasonable costs.single: Single most important source on government revenue is also a very important policy measure as elaborated in the policy combinations above. how subsidies should not be used. however. In place of these. Similarly. Components of Earning Tax.11 | Economy Note on the board contributes a great deal towards ensuring confidence in the market. However. though there are efforts to reduce them from time to time under public pressure. subsides for health programs. fertilizer subsidy and power subsidy benefits the large farm holder and capitalist farmers instead of the needy ones. it becomes an important part of monetary policy as well due to its impact on interest rates and credit creation and thus. however. the recent example of Aam Aadmi Party manifesto is a good example. It is also known to have a positive influence on the share price of the company. Wasteful expenses: Needless to say these are the expenditures that must be curbed with immediate effect. which is key. However. . Fiscal Policy: Tools of fiscal policy Components of Spending: Maintenance (including staff salaries): This component can’t be altered in short-run and hence is hardly a part of policy making. Similarly. in most of the cases these are necessary too and important instrument of social welfare and economic growth. as tax/GDP ratio is low due to less per capita income. governments in long-run can reduce these payments or eliminate them by running the budget surplus. Unfortunately. no government in world has neither shown the intention to curb them. for example. Thus. corporate governance often becomes the centre of discussion only after the exposure of a large scam. Welfare schemes: These are one of the policy options that once introduced can’t be removed due to their populist nature. in developing countries. For example. these at time appears as waste. Subsidies: This component is a major part of policy as it can be altered in short-run. 8.

then this policy can be adopted. BSNL was deliberately pushed into loss. in previous NDA government. It simply means government is managing less money and hence less impact on markets and business. since most of PSUs are generating losses. Similarly. At times PSUs are deliberately kept in losses to keep prices low and ensure wider outreach for social welfare. first the government decreases taxes and leaves more income with people to spend and invest. is not the foremost objective. should be used when situation is alarming. PSU banks in pre-reform era and post-offices. lending government buildings for private use. Indian Airlines was deliberately kept in losses by avoiding flights on profitable routes to benefit private airlines during UPA government’s rule. These however. however. is a balanced budget approach. whereas sale of PSUs is a onetime income. are good sources of revenue. by increasing tariffs to provide competitive edge to a newly launched company by one of the biggest business conglomerate in India. . then it also spends more to give further boost to demand through additional income generated through government work. even above the economic growth in the short run. example. Profits from PSU: Profits from PSUs can also be a potential source of revenue. when curbing inflation is the foremost objective. or other assets such as telecom spectrum or lease of a mine block for certain years. This is only possible in short-run as this policy leads to massive deficits and thus. Increase in government spending and tax rates (Balanced fiscal policy): This would be opposite to the previous policy as it would increase the size of government. is a regular source of income. This would affect the growth little and sometimes even boost growth due to cut in inflation. Increase in government spending and decrease in tax rates (Expansionary fiscal policy): This would be adopted to give economy a stimulus though injection of funds. CAG report says that. they are in losses due to inefficiency and wasteful expenditure. Rigid Government Spending and Increasing Tax Rates (Contractionary fiscal policy): This is used when economy is overheated (When a prolonged period of good economic growth and activity causes high levels of inflation as producers overproduce and create excess production capacity in an attempt to capitalize on the high levels of wealth) due to too much excitement on the part of investors. Reduction in Government Spending and an Equivalent Reduction in Taxes (Balanced Fiscal Policy): This. Indian government usually ends up subsidizing them. at other times. Increase in taxes and interest rates (through monetary policy) would curb the investments in short-run and prevent economy from going into recession after overheating. Most striking case in India. is of ministerial corruption to keep PSUs in loss deliberately to benefit private sector. which though is part of government’s priority. when a government decides to reduce its size and level of its intervention in economy. Various combinations of fiscal policies Reduction in Government Spending and no Change in Tax Rates (Contractionary fiscal policy): This policy is useful in moderate inflation. Reduction in Government Spending and Increase in Tax Rates (Contractionary fiscal policy): This policy is useful in high inflation.12 | Economy Note Proceeds from sale/lease of assets: This is a both a one-time and regular source of income. Similarly. For example. A government on the path of socialization would adopt such policy. for example. as they provide government more room to spend without increasing taxes.

Again. the scheme provides a legal guarantee for at least one hundred days of employment in every financial year to adult members of any rural household willing to do public work-related unskilled manual work at the statutory minimum wage. SCs/STs account for 51% of the total person-days generated and women account for 47% of the total person-days generated. MGNREGA: Sustainable Development v/s Populism: The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is a social security measure that guarantees of ‘Right to Work’ to Indian citizen. • Funding: Funding is shared between the centre and the states MGNREGA was implemented in phases. and at present it covers all districts of the country with the exception of those that have 100% urban population. Scheduled Castes and Scheduled Tribes (SCs/STs) and other traditionally marginalized sections of society. and flood control and protection works. Enacted by legislation on 25 August 2005. which can be used for a bit longer compared to previous. the Act provides a legal right to employment for adult members of rural households. Finally. a short-run stimulus policy like previous two. • Increasing the wage rate in rural areas and strengthening the rural economy through the . Wages must be paid according to the wages specified for agricultural labourers in the state under the ‘Minimum Wages Act’. 1948. At least one third beneficiaries have to be women. citizen information boards. drought proofing. Key features: • Legal right to work: Unlike earlier employment guarantee schemes. • Decentralized planning: Gram-Sabhas must recommend the works that are to be undertaken and at least 50% of the works must be executed by them. Achievements of MGNREGA: • Ensuring livelihood for people in rural areas. 9. starting from February 2006. Social audits are conducted by gram sabhas to enable the community to monitor the implementation of the scheme. • Time bound guarantee of work and unemployment allowance: Employment must be provided with 15 days of being demanded failing which an ‘unemployment allowance’ must be given. land development. there is an emphasis on strengthening the process of decentralization through giving a significant role to Panchayati Raj Institutions (PRIs) in planning and implementing these works. but a more moderate one. Rigid Government spending and decrease in tax rates (Expansionary fiscal policy): This policy is usually adopted to give incentive to private sector to invest and boost growth. implementation and monitoring of the works that are undertaken • Work site facilities: All work sites should have facilities such as crèches.13 | Economy Note Increase in government spending and no change in tax rates (Expansionary fiscal policy): This is also a stimulus policy (through public sector). Management Information Systems and social audits. • Transparency and accountability: There are provisions for proactive disclosure through wall writings. drinking water and first aid. Aim: It aims at addressing causes of chronic poverty through the ‘works’ (projects) that are undertaken and thus ensuring sustainable development. • Large scale participation of women. PRIs are primarily responsible for planning. The Act provides a list of works that can be undertaken to generate employment related to water conservation.

Odisha. Further. Shortfall and Delays in Execution of Works: The effectiveness of the planning has to be measured against the actual execution. Inefficient Planning: According to the MGNREGA guidelines. F. C. funds for training personnel were highly under-utilized in many states. Specific problems related to wages and MGNREGA works: Job cards were not issued to households in various states. The CAG also noted significant delays at every level in the submission of the annual plans. annual plans at the GP level were either not prepared or prepared in an incomplete manner. Madhya Pradesh. Photographs on job cards (an important identifier against fraud and misrepresentation) were missing. It has proposed to limit .14 | Economy Note creation of infrastructure assets. Recommendations of the Standing Committee on Rural Development: • Regulation of job cards • Participation of women • Participation of people with disabilities: • Utilization of funds • Context specific projects and convergence • Payment of unemployment allowance • Regular monitoring • Training of functionaries The future of MGNREGA is uncertain as the new Government at Center has shown its inclination towards complete restructuring of the scheme. the responsibility for the implementation of the scheme and the primary unit of planning is the Gram Panchayat (GP). Human Resource Shortfall and Capacity: The MGNREGA guidelines envisage Gram Rozgar Sahayaks (GRS) appointed at the village level to assist the GP in the implementation of the scheme. Around 70% of respondents were aware of the timeliness within which wages are to be paid. Record Keeping and Monitoring: The audit found poor record maintenance at not just the GP level but also at the block and district levels. and • Strengthening PRIs by involving them in the planning and monitoring of the scheme. allocation of works. The CAG audit however found a number of inefficiencies with this planning process. B. Jammu and Kashmir and Mizoram. distribution of job cards. Only half of the interviewed beneficiaries were aware of the prescribed quantum of work which entitled them to full wage payment. West Bengal. this ratio was less than 1/5th in Gujarat. • Facilitating sustainable development. overseeing the process of registration. These GRS are responsible for maintaining all documents. D. Non-payment or under payment. delayed payment of wages was noticed E. payment of wages and ensuring monitoring of the scheme through social audits. Uttar Pradesh. Beneficiary Analysis: While at an all India level the total women beneficiaries is 33% (as per the norm). Several states. The audit report found widespread shortages in GRS posts. The audit report observed large variations in some states between planned employment generations (as per the labour budget) and actual employment generated. CAG report on MGNREGA Some of the findings of the CAG are highlighted below: A.

the body needs more than 2. sex. Thus the poor are hungry and their hunger traps them in poverty. A large body of research shows that the NREGA has wide-ranging social benefits. • Politics of Distribution: Amartya Sen Won a Nobel Prize in part for demonstrating that hunger in modern times is not typically the product of a lack of food. subsidies. How much food do you need: The energy and protein that any person needs varies according to age. the MGNREGA has achieved significant results. packaging. While MGNREGA is not exactly a dole program. Extra energy is needed during pregnancy and lactation. among others. assembling. This would enable the poor and needy to become self-dependent and become a contributor. What causes hunger? In purely quantitative terms. painting. and doles. polishing. to cite a few. its victims must live on significantly less than the recommended nutritional levels that the average person needs to lead a healthy life. And yet. A majority of NREGA workers are women. ‘Despite numerous hurdles.e. However when we talk about people suffering from hunger we usually refer to those who. They central point of their argument was.100 kilocalories per day per person to allow a normal. Rather. physical activity and to some extent climate.. instead of rural infrastructure. e. At a relatively small cost (currently 0. hunger usually arises from food distribution problems. Hunger: Hunger is the physical sensation of desiring food. even months. Fund disbursement has been reduced by 45%. since the new government has taken charge.g. the poor planning by village level authorities and dysfunctional Gram Sabha have made it so as the asset creation is very poor and the money is just spent on social welfare.3% of India's GDP). The reasons are: • Poverty Trap: The poverty hunger nexus is considered the most important factor in causing hunger among people.15 | Economy Note MGNREGA programmes within tribal and poor areas. Instead the money can be used for skill development. MGNREGA belittles the long-term development of the worker by paying out cash for unproductive labour and discourages skill development which alone can lead to long-term and sustainable employment of the rural poor. It has since been broadly accepted that world hunger results from issues with the distribution as well as the production of food. The poverty-stricken do not have enough money to buy or produce enough food for themselves and their families. 10. healthy life. for weeks. one out of every eight people is going hungry (about 850 million people worldwide). as from the recent election results. people have voted out government that promised social change through grants. rather than a burden on exchequer. about 50 million households are getting some employment at NREGA worksites every year. or from governmental policies in the developing world. and close to half are Dalits or Adivasis. The current debate is also important from the point of view of the political viewpoint. there is enough food available to feed the entire global population of 7 billion people.’ On the other hand some analysts argue. including the creation of productive assets. they tend to be weaker and cannot produce enough to buy more food. are unable to eat sufficient food to meet basic nutritional needs. On average. and equipment handling. body size. i. with Sen's 1981 essay Poverty and Famines: An Essay on Entitlement and Deprivation having played a prominent part if forging the new consensus . In turn. for sustained periods.

which is now almost universal in all the states. Also lack of awareness among people about proper dietary requirements and nutritional value of various food items causes malnourishment. It was only after green revolution India attained self-reliance and also surplus in food grain production. There are also considerable efforts to usher in a 2nd green revolution in our country. However it is not a lasting solution to the problem. microbial growth. Indian effort to combat Hunger: With frequent famines and stagnant agricultural growth feeding the huge population of India was a major concern after independence.16 | Economy Note • Food wastage is very high – In developed countries a lot of food items are wasted due to improper eating habits. compared to men. • Rashtriya Krishi Vikas Yojna and National Food Security Mission. The apparent explanation for this imbalance is that. which is the largest supplementation program of its kind in the world (and probably the largest ever in human history) plays a huge role in reducing hunger and malnutrition among children. Whereas high losses in developing nations are mainly due to a lack of technology and infrastructure as well as insect infestations. So the 1st 5year plan focused mainly on agriculture to increase the food production. the largest of which is the Mahatma Gandhi National Rural Employment Generation Scheme (MNREGA) aims to increase income levels to provide access to food and nutrition. damage and high temperatures and humidity. the two of the major schemes for the agriculture sector to increase the agricultural productivity to feed the hungry millions of our country. Action plan against hunger : Food donations (food aid) sent to the worst affected countries by those who have plenty is a first and essential step in emergencies. Some of which are: • The Targeted public Distribution system of India along with Antodaya anna Yojana aims to provide access to food grains to the most vulnerable sections of our society • There are a number of food-for-work programmes and employment guarantee schemes. and the Integrated Child Development Services (ICDS). and nearly 10 million tonnes of cereals are provided each year to poorer countries as food aid. The other steps to be adopted are: • Promoting greater self-reliance in countries suffering from hunger . However India still had to depend on food aid like PL480 of USA. • Food fortification programs and schemes like Nutri Farms and Livestock development programs are striving towards reducing malnutrition among the people. • Socio Cultural Factors: World Bank studies consistently find that about 60% of those who are hungry are female. women more often forgo meals to feed their children.hence reducing dependency on imports. With scare land resource in our country these schemes to increase productivity attain a very important role in achieving food security in future • Among the direct nutrition supplementation programs are the Midday Meal Scheme. • The proposed National Food Security Act when implemented would make the access of food a matter of right with a governmental commitment to provide cheap food grains to its people. To overcome this situation and combat the chronic hunger and malnutrition the government has undertaken several initiatives. Currently India is facing a paradoxical situation where at one side it has a record production of food grains with overflowing godowns and on the other hand having the largest number of hungry people in the world. • Re-examining farm policies in developing countries to make sure that they encourage - .

17 | Economy Note rather than discourage . • To ensure that countries are prepared to adapt to climate change and mitigate negative effects. • Re-examining food aid to make sure it reaches the hungry but does not disrupt national production. • Improving transportation. Policies should aim to ensure fair prices for farm produce. • Avoiding over consumption and the waste of food in all countries. • Reorienting national policies to encourage both public and private investments in food and agricultural sector. marketing and storage systems to ensure that available food reaches areas where and when it is needed most. • Greater co-operation among developed and developing nations to remove trade barriers and help stabilize international prices for agricultural commodities. .farmers to produce food on a dependable basis. • To make sure developing countries have a fair chance of competing in world commodity markets and that agricultural support policies do not unfairly distort international trade. access to the means of production. and wise land and water use.