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CONTENTS

1. DEMONETISATION………………………………………………………………………… 2

2. AIR INDIA – DISINVESTMENT…………………………………………………………. 5

3. NATIONAL IPR POLICY, 2016………………………………………………………….. 6

4. UNIVERSAL BASIC INCOME (UBI)…………………………………………………….. 9

5. AGRICULTURAL INCOME - TO TAX OR NOT………………………………………… 11

6. FARM LOAN WAIVERS……………………………………………………………………. 13

7. UDAY………………………………………………………………………………………….. 15

8. DOUBLING FARMERS INCOME…………………………………………………………. 18

9. CATTLE TRADE RULES…………………………………………………………………….. 24

10. UDAN………………………………………………………………………………………….. 28

11. RAIL DEVELOPMENT AUTHORITY (RDA)………………………….……………………. 31

12. RAIL SAFETY………………………………………………………………………………… 33

13. GOODS AND SERVICES TAX (GST)…………………………………………………….. 36

14. INSOLVENCY AND BANKRUPTCY CODE, 2016……………………………………… 40

15. TWIN BALANCE SHEET PROBLEM……………………………………………………… 42

16. FOREIGN INVESTMENT PROMOTION BOARD (FIPB)…………………………….. 47

17. OUTCOME BUDGET………………………………………………………………………… 49

18. SHELL COMPANIES………………………………………………………………………… 51

19. E-NAM………………………….……………………………………………………………… 54

20. FRBM REVIEW COMMITTEE……………………………………………………………… 57

INDIAN ECONOMY MAINS 2017 IMPORTANT TOPICS

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1. DEMONETISATION Demonetization is an economic policy where a currency unit is stripped of its status as legal tender, while in its place a new currency unit comes into circulation. The demonetized currency unit is deposited with the banks or other authorized financial institutions and replaced with units that have legal tender status.

BACKGROUND On November 8, 2016, the Government announced that two of the largest denomination notes; Rs 500 and Rs 1000, were “demonetized” with immediate effect. In India’s own economic history there were 2 previous instances; in 1946 and 1978, the latter not having any significant effect on cash. Both were implemented through ordinances, unlike the current demonetization process. However, on all 3 counts the objective was to contain black money.

In 1946, currency notes of the value of ₹500, ₹1,000 and ₹10,000 were demonetized, while in 1978, those of ₹1,000, ₹5,000 and ₹10,000 were demonetized. From the two exercises, about 6% and 14% of the demonetized notes respectively did not return to the banking system. This could be possibly for fear of getting tracked or penalized.

FRAMEWORK Demonetisation rendered: 86% of the cash in circulation in terms of value, 11% in terms of money supply and 10% in terms of India’s annual GDP worth, invalid. It also involved the introduction of a new ₹2,000 note, while withdrawing ₹1,000 and replacing the ₹500 one. The demonetized notes were to be deposited in banks, while restrictions were placed on cash withdrawals.

AIM • To curb counterfeiting of notes. • To curb “black money”, generated by income that has not been declared to the tax

authorities. • To curb the use of high denomination notes for terrorist activities. • Cashless Economy.

CAUSES • Black Economy: According to a World Bank estimate the parallel economy in India makes up

about one-fourth of the total. • Cash Dependence: India is a heavily cash-dependent economy, with its Cash-to-GDP ratio

being around 12%. This is higher than its BRICS counterparts e.g. Brazil (3.93%) and South Africa (3.73%). Although the average use of cash declines with development, India’s is somewhat higher than other countries in its income group. This may suggest that some of the cash holdings are used to fund illegitimate activities.

• Cash Maintenance Costs: India pays a high price for the issuance and maintenance of its cash economy. One is the need to frequently reissue notes due to poor handling. Other reasons include the need to frequently upgrade security features and costs of pulling old notes out of circulation and replacing them. India also faces unique issues in logistics and in some places the currency notes have to be transported by helicopter. This creates a huge burden for the exchequer.

IMPLEMENTATION • Lack of Preparedness: The exercise was not managed well. It was marked by:

a) Frequent change of rules. These included increased withdrawal limits, dates and exceptions for usage of old notes among others.

b) Slow issuance of new notes. c) Delay in recalibrating ATMs.


• Usability of Rs 2,000 Note: The launch of the high value currency note has had little

practical use in day-to-day life and was possibly created to easily and economically fill up the cash vacuum in the economy. This along with the delayed launch of Rs 500 note caused much discontent for a short period.

• Cooperative Banks: RBI had excluded Cooperative Banks, which act as the lifeline of rural economy, from both currency swap and acceptance of deposits. This froze the financial system accessed by farmers among others, adding to economic and human costs.

IMPACT • Agriculture: Transactions in the Indian agriculture sector are heavily dependent on cash and

were adversely affected by demonetisation. Due to scarcity of the new banknotes, many farmers had insufficient cash to purchase seeds, fertilizers and pesticides. The cash crunch also resulted in a reduction in demand, thereby affecting the incomes of farmers.

• Informal Sector: Among businesses, it is the Informal sector that has been the worst affected by demonetisation. As the sector operates on a cash economy, restricted access to it caused businesses to shut down. It also witnessed loss of daily wages for casual labourers, low sales and limited access to new notes due to lack of identity papers among workers. This is worrying as the sector accounts for 90% of all employment in the country. Moreover, forced digitization in the sector is considered challenging and expensive due to its traceability, transaction costs (2%-3%) and input costs.

• Tourism: Especially medical tourism is another sector that has taken a huge hit. • Real Estate: Demonetization was expected to reduce black market transactions here with a

subsequent reduction in prices. However, after an initial fall in prices, the decline has been reversed lately, and prices are rising again.

• Rural Areas: People belonging to these areas were severely hit, mostly due to poor banking penetration.

• Digital Transactions: Although there was initial growth, recent statistics show a gradual decline in both value and volume terms of online transactions.

POSITIVES • Better Tax Compliance: Demonetisation has widened the tax base by adding 5.4 lakh

taxpayers or 1% of all individual taxpayers. This has increased tax collections from the public, ensuring better compliance and implementation in the future. It has also helped create room for undertaking quality expenditure and lifting the tax-to-GDP ratio above current level of 16% (Centre and States).

• Better Scrutiny: The whole process has brought in much needed data into the system, thereby enabling scrutiny of suspicious transactions, identification of shell firms and the accountability of money.

• Formalizing Economy: Along with GST, it would help in the speedy formalization of India’s economy and financialisation of savings.

• Digitization: It has reduced economy’s reliance on cash through increased adoption of digital payments.

• Reduced Cash Dependence: RBI has stated that currency demand has attained a new normal; currently around 87% of the pre-demonetisation peak. Or, the level of cash is currently 20% less, had pre-demonetization trends prevailed (Economic Survey- II).

NEGATIVES • Economic Slowdown: The GDP growth rate in the first quarter (April-June) of the current

financial year was 5.7%; a dip of over 2% points compared to the previous year. While the slowdown cannot fully be attributed to demonetisation, it has certainly impacted growth in sectors such as manufacturing. It has also hurt job creation and undermined agricultural trade in a year when rainfall was adequate.

• A Futile Exercise: In its annual report, RBI has revealed that about 99% (₹15.29 lakh crore out of ₹15.44 lakh crore) of the high value notes that were demonetized have been returned to the banking system.


• This has occurred inspite of expectations that 10-20% of the cash in circulation would be

‘black’, and would never return to formal channels. • Formalizing Black Money: Soon after demonetisation there was heavy money-laundering,

essentially through Jan Dhan accounts and most of the extinguished currency found its way back into the formal system. Innumerable ways were found to make black money white through the changing rules of exchange, cash limits, indelible ink and specified uses of old notes. Those who could not exchange money legally found money changers. The tax department has also found thousands of shell companies which were possibly engaged in depositing money into their accounts during the demonetisation period, claiming it to be cash from sales. This too provided a means for laundering money.

• Argument against Cash Dependence and Corruption: The “Corruption Perception Index” of Transparency International represents the perceived level of public sector corruption on a scale of 0 (highly corrupt) to 100 (very clean). In 2015, the index was higher for economies with high Cash- GDP ratios (e.g.: Japan (18.6%), Hong Kong (14.7%), Switzerland (11.1%)) and lower for many economies with low Cash- GDP ratios (South Africa (3.7%,), Brazil (3.9%,), Mexico (5.7%.)). This along with other studies on the matter makes it clear that cash is scarcely the reason for conducting shadow activities.

• Misplaced Assumption: A crucial assumption in the demonetisation exercise is that “black money” is hoarded as cash. Such a view is not just narrow, but defeats the larger purpose of preventing illegal creation and storage of unaccounted money. The prominent forms of holding black money are: (a) Real estate (b) Under-Valued Stocks (c) Benami Financial Investment (d) Gold, Diamonds and other precious metals (e) Undisclosed Foreign Assets. More recently, Free-Trade Arrangements and financial liberalisation policies have expanded the scope for holding black money in newer forms. Also, a big portion of this cash can be made legal through innovative ways. Thus, only a small section, who stored cash in large amounts, was affected by demonetisation.

• Expensive Exercise: Demonetisation has taken a heavy toll on resources. In terms of cost alone, the expenditure involved in printing new currency, distributing it, recalibrating ATMs and exchanging the old notes comes down to an astounding Rs 1.28 lakh crore.

• Counterfeit Currency: The share of such currency in comparison to those in circulation is negligible (around 0.002%). It is doubtful if its quantum is significant enough to warrant overarching measures like demonetisation.

• Reduced RBI dividend: The dividend paid by the Reserve Bank to the Government for the financial year 2016-17 was Rs. 30.7 lakh crore or less than half the dividend paid in 2015-16. This decrease was due to demonetisation costs, which will eventually lead to a fall in income for the Government and a possible increase in Fiscal Deficit.

SUGGESTIONS • Improve Cyber Security: The Indian banking system has been lax in insulating itself against

Cybercrime. This along with Privacy security must be ensured at the earliest. • Improve Digital Infrastructure: After the initial surge, there has been a dip in digital retail

transactions. This must be addressed by improving India’s network quality, acceptance infrastructure and internet connectivity. This digitization must also extend to land records and the Real Estate sector.

• Taxing Agricultural Income (above a certain threshold) • Check on Black Money Avenues: Checks must be placed on real estate, gold, holdings

abroad, and donations to political parties, along with improvements in tax, law enforcement and judicial systems.

• Electoral Reforms: It is believed that during elections, political parties spend 8-15 times more than that officially stated. The difference is primarily explained by black money. To tackle this, reforms in election funding is crucial. For e.g.: State funding of elections, placing it under the purview of RTI and income tax authorities etc.


2. AIR INDIA- DISINVESTMENT AIR INDIA: - Air India, formerly Tata Airlines, was founded by J R D Tata. - It is currently a wholly owned Government airline and is the flag carrier airline of India. - It is among the top 4 airline carriers in the country in terms of domestic market share. - Status:

• The company has been unable to make a net profit over the last decade. • It has been provided Rs.30000 crore bailout package by the previous Government in

2012 to help its turnaround, and debt relief by Public Sector Banks. Inspite of it, the airline has neither adequately improved its service nor become viable.

• Currently Air India has a total debt of around Rs. 50,000 crore which comprises of aircraft loan, working capital loan and other liabilities.

- Why Losses? • Reasons that are mainly structural; owing to a slew of operational inefficiencies,

including a bloated workforce. • Public ownership has left the carrier subservient to the interests of the political class for

personal gains. • Other reasons include- high interest burden, increased competition from low cost

carriers, and high fuel prices. - The National Transport Development Policy Committee (NTDPC), in its report in 2013 had

observed that with its excessive and unproductive manpower, failure to invest in the technology to keep it competitive, and poor operations, Air India’s future looks risky. It had also questioned the rationale for a National Airline. It had recommended that Air India’s liabilities be written off, and that the airline be run on complete operational and financial autonomy.

WHY DISINVESTMENT: - It will help enhance its operational and management efficiency. - There is no reason for the Government to run commercial operations in areas such as

aviation, where private companies do a satisfactory job. Currently, the private sector airlines cater to over 85% of the demand in the country.

- There is a Conflict of Interest when the Government makes policies, appoints the regulator and also has a commercial stake in Aviation. The NTDPC had observed that the National Carrier gets preferential treatment through access to government funding and flying rights. This hampers Competitive Neutrality.

- The Airline is surviving on taxpayers' money. This is a colossal waste of resources. Funds that keep Air India from becoming bankrupt could be better used to fund important social and infrastructure programme.

- Inspite of repeated packages, the current ownership structure has been unable to iron out its operational flaws.

- While Private carriers have added capacity in the domestic market, the capacity induction (adding more aircrafts) of Air India has not kept up. This has resulted in decrease in market share of Air India.

- Years of consecutive losses have pushed the airline into a debt trap; the cost of paying interest on the debt alone was putting huge pressure on earnings. It is estimated that even the asset sale may not fully cover its present liabilities.

AGAINST DISINVESTMENT: - Expressing concerns about the uncertain fate of 25,000 employees of the airline, Workers

Unions of Air India have requested to waive loans instead of disinvestment. - The National Carrier is one among other airlines that were struggling and is still undergoing

a 10-year rehabilitation package that started in 2012.


- Its performance has been steadily improving over the last five years. It has posted faster-

than-anticipated operating profits and lower net losses in 2015-16, much before its recovery package was to begin bearing fruit.

- Air India is not the only airline that was performing poorly earlier. Private airlines too have had difficulty navigating India’s civil aviation sector. Until the drop in global crude oil prices, the Aviation Sector faced difficulties due to relatively higher aviation turbine fuel costs in India, excess capacity, and a limited number of high-traffic routes.

- The Civil Aviation market in India, like in many parts of the world, is Oligopolistic, with a few firms controlling large market shares. Forcing the exit or merger of an established State-run Airline will only aid in the concentration of market power with a few large private airlines, and will prove anti-competitive.

GOVERNMENT PLAN: - Think tank NITI Aayog has recommended up to 100% stake sale (complete privatisation),

along with writing off its debt (to the tune of 30,000 crore). - But, the Civil Aviation Ministry aviation ministry is keen that the Government continues to

remain a stakeholder in the National Carrier after handing over its management to the Private Sector.

- The Union Cabinet has decided to go for Air India’s strategic disinvestment, which means the government is willing to shed a substantial portion of its stake and hand over the management of the ailing airline to the private sector. The Cabinet also approved strategic disinvestment in five of Air India’s subsidiaries (like Transport services, Hospitality services etc.)- some of which are profit making entities.

- The Ministerial group has considered forming a Special Purpose Vehicle (SPV) housing a substantial portion of its working capital loan and assets to meet its liabilities. Talks are still underway.

RECOMMENDATIONS: - The Government would do well to go for the sale of its entire stake, even if it is done in a

gradual manner. - Eventually, the aim of the sale should be to get the best price for the Airline. One good way to

achieve this would be to allow both domestic and foreign buyers to bid freely for stakes. For this, the government will have to re-tune its FDI policy to allow foreign investors to buy a stake in Air India.

3. NATIONAL IPR POLICY, 2016 Intellectual property (IP) refers to creations of the mind, such as inventions, literary and artistic works, designs and symbols and names and images used in commerce. Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time.

RECENT DEVELOPMENT In recent years, the US Trade Representative has kept India on its “Priority Watch List” for inadequate improvement in it’s IPR protection. Being placed in the list means that India continues to figure among countries that the USTR feels have ‘serious intellectual property rights deficiencies’ and do not give adequate protection to American companies. While the US does not threaten action against countries on this list, US laws say that retaliatory measures may be taken if a country slips further.

However, brushing aside concerns of the US on India’s IPR regime, the Government said its IPR laws are legal-equitable and WTO-compliant. Thus, the India has not yielded to pressure from the US to amend it’s patent laws. In response, the Government rolled out a National IPR Policy in 2016.


The National IPR Policy tries to balance yesterday’s protectionist political tendencies with the needs of tomorrow’s dynamic Indian economy.

NEED FOR AN IPR POLICY: To formulate incentives in the form of tax concessions to encourage research and

development (R&D). To maintain the sanctity of innovations so that litigations in this domain are minimal. To provide the required thrust to protect the traditional knowledge of India. To strengthen various government schemes like Make In India, Startup and Digital India. The IPR policy comes at a time when India and other emerging countries face fresh IPR

challenges from developed nations and mega regional trade agreements such as the RCEP. Also, Global drug brands led by US companies have been pushing for changes to India’s Intellectual Property rules. They have often complained about India’s price controls and marketing restrictions.

DESCRIPTION The Government released India’s National Intellectual Property Rights (IPR) Policy recently,

which is in compliance with WTO's (World Trade Organisation) agreement on TRIPS (Trade Related aspects of IPRs).

It is India’s first IPR Policy. The policy seeks to put in place a legal framework that will encourage an IPR regime that

fosters creativity and innovation and thereby, promoting entrepreneurship. It also aims to realise IPRs as a marketable financial asset, while protecting public interest.

OBJECTIVES There are seven major objectives; 1. IPR AWARENESS: To create public awareness about the economic, social and cultural benefits

of IPRs among all sections of society. 2. GENERATION OF IPRS: To stimulate the generation of IPRs. 3. LEGAL AND LEGISLATIVE FRAMEWORK: To have strong and effective IPR laws which balance

the interests of rights owners with larger public interest. 4. ADMINISTRATION AND MANAGEMENT: To modernize and strengthen service-oriented IPR

administration. 5. COMMERCIALIZATION OF IPRS: Get value for IPRs through commercialization. 6. ENFORCEMENT AND ADJUDICATION: To strengthen the enforcement and adjudicatory

mechanisms for combating IPR infringements. 7. HUMAN CAPITAL DEVELOPMENT: To strengthen and expand human resources, institutions

and capacities for teaching, training, research and skill building in IPRs.

HIGHLIGHTS OF THE POLICY It will be reviewed every five years in consultation with stakeholders to keep pace with further

developments in the sector. It also calls for updating various Intellectual Property laws, including the Indian

Cinematography Act, to remove anomalies and inconsistencies. The Policy suggests making the Department of Industrial Policy and Promotion (DIPP) the

nodal agency for all IPR issues. It calls for financial support to the less empowered groups of IP owners or creators, such as

farmers, weavers and artisans, through financial institutions like rural banks or co-operative banks offering IP-friendly loans.

For IP commercialization, it seeks for financial support to develop IP assets through links with financial institutions, including banks, VC funds, angel funds and crowd-funding mechanisms.

It proposes to create an effective loan guarantee scheme to encourage start-ups. The Policy allows the Government of India to leverage legislative flexibilities in the

international treaties and TRIPS agreement. These flexibilities include the sovereign right of


countries to use provisions, such as those concerning Compulsory Licensing (CL), for ensuring the availability of essential and life-saving drugs at affordable prices.

The Policy has essentially left the country’s patent laws intact.

BENEFITS • The National IPR Policy is a vision document that aims to create synergies between all forms

of Intellectual Property, concerned statutes and agencies. • It puts in place an institutional mechanism for implementation, monitoring and review. • It will likely bring India’s IP regime in line with global standards and help improve its ranking in

the World Bank’s Ease of Doing Business index. • It will help focus on enhancing access to healthcare, food security, environmental

protection and also preventing film and music piracy. For Ex, Indian Cinematography Act, 1952 may be amended to provide for penal provisions for illegal duplication of films.

• It will help substantially reduce the time taken on clearing the backlog of Intellectual Property Rights (IPR) applications from the current 5 to 7 years to few months.

• It seeks to promote R&D through tax benefits available under various laws and simplifies procedures for availing of direct and indirect tax benefits.

• The Policy correctly identifies IP as a strategic tool for furthering India’s economic goals. • It ensures credibility to potential investors and encourages them to invest in India and will

provide both domestic and foreign investors a stable IPR framework to work with in the country.

CHALLENGES • The Policy is silent on the issue of Traditional Knowledge and it’s protection. • Experts are also skeptical of how much the Policy is applicable to the informal economy

especially in rural areas. The reason is that, rural economy and creativity is not understood completely. Superimposing a formal IP regime here may do more harm than good.

• The measures suggested in the Policy envisage large Government funding for protecting and promoting foreign IP in India even though it stated that the primary obligation of protecting IP rights was on the IP owners.

• Reference to State legislations in the context of copyright protection show how the balance in the policy was tilted in favour of IP holders against society.

• Experts also feel that the National IPR policy lacks specifics and won’t be enough to foster innovation. It’s fundamental flaw is its assumption that more IP translates to more innovation. Due to this, the Policy advocates that all knowledge should be converted to IP. But, monopoly rights stifle radical innovation and do not promote sustainable innovation methods. Barriers to research collaboration may also develop. The diffusion of knowledge suffers and Industry and Science tend to innovate with difficulty. Thus, a strong IP system means a reduced access to innovation for Indians. Moreover, the Indian pharmaceutical industry became the pharmacy of the Third World due to the rejection of a strong Intellectual Property Rights (IPRs) system in the 1970s.

• The Policy could have announced a law favouring Open Source licensing. Even corporates today recognize that IP does not work well in certain technology sectors, for which a free flow of Open knowledge is more suitable. 25 countries including Australia, France and Germany have provided legislative support to Open Source.

• While the stated rationale of this policy is that a strong intellectual property rights system is necessary in order to promote creativity and innovation in India, there is plenty of evidence to the contrary.

• IP wrongs are essentially civil wrongs and should not be criminalised. For e.g.: Criminalising violation of the Indian Cinematographic Act is too severe and disproportionate.

• Intellectual Property must maximise disclosure, diffusion and dissemination, access to knowledge, and Public Interest. The Policy is vague about how such a balance can be achieved and how the rights of IP owners will be implemented in a manner conducive to social and economic welfare that prevents the misuse of IP rights.

http://www.springer.com/us/book/9783319215594


CONCLUSION In today’s knowledge era, it is imperative to create an Intellectual Property strategy. India’s National IPR Policy does so by taking a nuanced position whereby the interests of both the industry as well as the public have been considered. It states that policy formulation is not intended to have the force of law but merely serve as the guiding principles in the administration and enforcement of IP norms. The Policy has also safeguarded the interest of the generic biomedicine sector of India and has not yielded to the ever-mounting international pressure and lobbying by big MNC's.

India’s first IPR policy comes at a time when developed economies are trying to put in place even stronger IPR frameworks through mega-regional trade agreements.

4. UNIVERSAL BASIC INCOME (UBI) DESCRIPTION • Universal Basic Income (UBI) is an unconditional cash payment delivered to all individuals,

without any work requirement. • It was proposed in the Economic Survey of 2016‐17 as an alternative to State subsidies for

the poor. • A Universal Basic Income is, like many rights, Unconditional and Universal; it requires that

every person should have a right to a basic income to cover their needs, just by virtue of being citizens.

• It would take the individual and not household as the unit of beneficiary. This enhances their position, especially of women, within the households.

• Prerequisites: Financial Inclusion of all and Centre-State agreement on Funding.

BENEFITS a) POVERTY REDUCTION: Poverty and vulnerability will be reduced in one swoop. b) MINIMUM INCOME: Is ensured to all citizens, along with economic well‐being. c) FINANCIAL INCLUSION: Since all individuals will use their bank accounts to access money, it

would increase financial inclusion of the un‐banked people in the country.


d) WOMEN’S EMPOWERMENT: India’s BPL (Below Poverty Line) women suffer more than men.

An income in their bank accounts will ensure that they have a greater say in family affairs and get better nutrition for themselves and their children. (In a way, UBI also acknowledges non-wage work related contributions to society. For E.g.: Homemaking contributions of women are largely unacknowledged economically, since they do not take the form of wage or contract employment.)

e) PRO-CHOICE: A UBI entrusts citizens with the responsibility of using welfare spending as they see best; this may not be the case with in-kind transfers.

f) REDUCED EXCLUSION: As all individuals are targeted, exclusion error (poor being left out) is zero.

g) INSURANCE AGAINST SHOCKS: This income will provide a safety net against shocks such as health issues, job loss, disasters and others.

h) AGENTS OVER SUBJECTS: The poor in India have been treated as objects of Government policy. This inflicts an indignity upon the poor by assuming that they cannot take economic decisions relevant to their lives. Thus, an unconditional cash transfer treats them as agents, not subjects and liberates citizens from paternalistic relationships with the State.

i) EMPLOYMENT: UBI is even more urgent in an era of uncertain employment generation and increased automation. It would also open up new possibilities for labour markets. It creates flexibility by allowing for individuals to have partial or calibrated engagements with the market without fear of losing benefits. They allow for more non-exploitative bargaining since individuals will no longer be forced to accept any working conditions, just for survival.

j) ADMINISTRATIVE EFFICIENCY: Existing welfare schemes which are riddled with misallocation, leakages and exclusion of the poor. UBI would reduce the administrative burden on the State by replacing the plethora of government schemes by easy bank account transfers. Also computational challenges with regard to poverty definitions will no longer be a hindrance. (The Budget for 2016-17 indicates that there are about 950 Central Sector and Centrally Sponsored Sub-Schemes in India accounting for about 5% of the GDP by budget allocation.)

CHALLENGES a) COMPUTATIONAL CHALLENGE: Finding the optimum amount for UBI will be a major

challenge. b) INFLATION: With more flow of money in the economy, inflation could occur. Also, since the

purchasing power of rupee reduces with inflation, the government will have to adjust the UBI from time to time. This could lead to a financial disaster.

c) LABOUR SUPPLY MAY REDUCE: With an assured basic income, motivation to work may reduce thereby affecting labour supplies. This may also lead to rise in cost of labor, hurting India’s advantage as a country with cheap labor.

d) ACCESS TO BANKS: A large majority of Indians still do not use banking services regularly. Though Jan Dhan Yojana and Post Office banks have increased coverage, a large portion still remains unbanked.

e) STRESS ON BANKS: Given the current status of financial access among the poor, a UBI may put too much stress on the Banking System.

f) INCREASED GENDER DISPARITY: Gender norms may regulate the sharing of UBI within a household; men are likely to exercise control over spending of the UBI. This may not always be the case with other in-kind transfers.

g) INDULGENCE IN TEMPTATION GOODS/ WASTEFUL ACTIVITIES: There is a possibility of people, especially male members, spending this money on temptation goods like cigarettes and alcohol, instead of nutritious food and on basic necessities.

h) PROBLEM OF EXIT: Once introduced, it may become difficult for the Government to wind up a UBI in case of failure.

i) OPPOSITION OVER RICH: Opposition may arise from the provision of the transfer to rich individuals as it might seem to trump the idea of equity and State welfare for the poor.


APPROACHES Approaches can be considered that exclude the very rich i.e., approaching targeting from an exclusion of the non-deserving rather than the current inclusion of the deserving. This can be done by: • Defining the non-deserving based on ownership of key assets such as automobiles or air-

conditioners. • Adopting a ‘give it up’ scheme, wherein those non-deserving chose to opt out of the

programme. • Introducing a system where the list of UBI beneficiaries is publicly displayed; this would

“name and shame” the rich who choose to avail themselves of it. • Self-targeting; by developing a system where beneficiaries regularly verify themselves in

order to avail UBI – the assumption here is that the rich, whose opportunity cost of time is higher, would not find it worth while to go through this process.

• Universalize Across Groups: Another approach is to phase UBI for certain vulnerable groups; widows, pregnant mothers, the old and the infirm first. However, there could be exclusion errors and a lack of bank accounts among these groups.

• Gradualism: UBI must be embraced in a deliberate and phased manner. A key advantage of phasing would be that it allows reform to occur incrementally; weighing the costs and benefits at every step. Rather than provide a UBI in addition to current schemes, it may be useful to start by offering it as a choice to beneficiaries of existing programs.

• Exceptions: There is a need for some programs to be exempted from exclusion after implementing UBI. These include the MGNREGA and public services such as education and health.

Concerns: By following any or some of these approaches over current programs, it only reinforces all the existing problems related to targeting, exclusion errors, administrative burden and corruption. So care must be taken to address each of these issues carefully.

5. AGRICULTURAL INCOME - TO TAX OR NOT • In India, Agricultural Income is untaxed. • It falls under the State List of the Constitution. • Agricultural Income was taxed till 1886. • Six States currently have Agricultural Tax Legislation; Tamil Nadu, Kerala, Assam, Bihar,

Odisha and West Bengal, even if implementation varies substantially, from taxes not being levied at all to being levied only upon income from plantations (as they come under commercial crops). For e.g.: Assam Agricultural Income Tax Act (1939), the Bihar Agricultural Income Tax (1939), the Kerala Agricultural Income Tax Act (1991) etc.

• A number of other States such as Uttar Pradesh and Rajasthan have raised the issue over the decades, introducing and then rolling back Agricultural Tax.

Since British India there have been discussions for and against the move. Let’s see-

FOR TAXATION a) Widen Base: The agriculture sector has long acted as a tax shelter. Through taxation, the

low tax base would widen and it would improve the GDP to tax ratio of the country. b) Curb Tax Evasion: It will curb tax evasion because income from other sources is usually

shown as agricultural income and thus evasion becomes easy. For e.g.: In the year 2014-15, 9 of the top 10 claimants for tax exemption under agricultural income were corporations. Thus, apart from individuals, there are a large number of companies, including multinational ones, who benefit from this exemption.

c) Financial Inclusion: Taxation would increase the number of accounts held by farmers and thereby help in their financial inclusion.

d) Formal Lending: By bringing farmers into the formal banking sector, it would curb them from falling into the debt traps of informal moneylenders.


e) Better Documentation: Through the formal documentation of farmers, Government can

identify worthy farmers for targeted subsidy schemes and leave behind the well-off ones. Also the documentation based on correct land records can help them secure need based loans.

f) Check Vote-Bank Politics: One of the reasons States have been reluctant to tax agriculture incomes is that they do not wish to antagonize the vote bank of agriculturists.

g) Improved Productivity: Experts believe that taxing agricultural income could lead to higher agricultural productivity and lower default on credit.

h) Concurrence of Commissions: Almost all commissions and agencies appointed by the Government in the last 70 years have unanimously been of the view that Agricultural Income be taxed. This includes K.N. Raj committee (1972) and Vijay Kelkar committee (2002).

i) Statistics: As per the latest National Sample Survey (70th round), the landholding pattern of agricultural households reveal- Almost 70% have marginal holdings of below 1 hectare, Only 0.4% have holdings of over 10 hectares which account for 4% of Agricultural Income. Just 4% of households have holdings greater than 4 hectares, but with a share in excess of 20%. So, by taxing the incomes of the top 4.1% of households, at an average tax of say 30%, as much as Rs. 25,000 crore could be collected as Agriculture Income Tax.

AGAINST TAXATION a) Livelihood for Half the Population: During the post-reform period of 1991 to 2016, the

share of agriculture decreased from 32% to 15% of GDP. Inspite of this, half the population still depends on agriculture as a source of income (of which 40% are women). The main reason for this large dependency is small land holdings and less productive farming techniques.

b) Small Tax Base: The Kelkar task force report of 2002 estimated that 95% of the farmers were below the tax threshold. Thus, a key limitation to personal Income tax regime is the small tax base.

c) Low Credit to Small Farmers: Imposition of tax could lead to credit flowing only to big farmers as they have higher incomes to show. This could increase the vulnerability of small farmers to fall into debt traps, as banks would be likely to favour only big farmers.

d) Administrative Burden: It would be an onerous task to admit the illiterate and uninformed small farmers into the formal direct taxation structure as they may be prone to exploitation by tax planners and officials.

e) Complex Undertaking: Any agricultural tax system would have to evolve crop-specific return to the land, while accommodating external shocks like droughts, floods or pests. Lack of clarity on land titles and cropping patterns based on lease/share-cropping shall further introduce ambiguity to the system. Also, such a tax would fail to account for losses on sale. It would disincentivise farmers to sell through organised formal channels, thereby risking their incomes.

f) Price Fluctuations: As the market prices are variable, agricultural farmers are hostage to price fluctuations. Also, there is lack of a coherent policy to protect farmers from imports when international prices fall sharply. An agricultural tax would add to the stress faced by the farmer.

g) Taxing Sustainability: Many farmers save seeds from one harvest for the next and the practice remains critical to running Indian agriculture. But taxing them would end up taxing such sustainable practices as well.

h) Agrarian Distress: The agrarian distress has been deepening, and there has been a rise in farmer suicides. Education and health privatisation in rural areas has increased costs and the burden of agricultural households. Moreover, agricultural output fluctuates far more than in industrial and services sectors.

i) Informal Economy: In India, agriculture is even harder to tax as it is based largely on cash transactions which are tough to track and trace. Cash transactions not routed through the banking system are difficult to verify and be used for assessment of agricultural incomes.


j) Books of accounts are not maintained except in the plantation sector. Given the level of

informality prevalent in agriculture, implementing an agricultural tax will not be easy.

RECOMMENDATIONS • Build Consensus: The Government should build a consensus across the political spectrum,

given the issue is a politically sensitive one and its constitutional provisions fall under the State list.

• Tax Slabs: There could be a slab of taxes and let each pay according to their incomes from agriculture. The farmer with a small landholding of less than 2-3 hectares should be exempted from income tax.

6. FARM LOAN WAIVERS- RECENT DEVELOPMENT • STATES INVOLVED:

Recently, there have been announcements or promises of farm loan waivers made in Uttar Pradesh, Karnataka, Maharashtra, Punjab, and Tamil Nadu. This could possibly spread to other States too.

• WHY WAIVE? Farm loan waivers have a long history in India, and they have mostly been used as a tool by Governments to temporarily address the problem of farmer distress. Presently, farmers have been affected by a rapid fall in the prices of farm goods after a year of bumper production. Demonetisation and cheap imports have also affected the prices of produce. This has forced farmers to default on loans they borrowed from banks. State governments, given the high costs involved, have been unable to procure the produce of farmers at remunerative prices, as promised. So they have resorted instead to loan waivers that cost less money. Also, farmers are a powerful vote bank for political parties, so State governments budge to their demands. For instance, Maharashtra faced a shutdown that affected the supply of essential supplies like milk and vegetables, after which the State government gave in and announced the waiver of loans and other benefits.

• REACTIONS: There have been mixed reactions towards it. The Supreme Court of India has stayed the decision of the Madras High Court to provide loan waivers to all farmers instead of only small and marginal farmers. Also, the RBI governor has sounded the alarm on State governments waiving farm loans and has called for a consensus to do away with them to avoid damaging the National balance sheet. This was reiterated by the SBI chairperson, who said that the farm loan waivers lead to credit indiscipline.

PROS • Proponents see waivers as a means of helping farmers who have been subject to stress from

successive shocks to agriculture; 2 years of inadequate rainfall followed by a year of price declines. This often prompts States or the Centre to offer relief in the form of complete or partial waiver of loans.

• It must also be remembered that Credit Restructuring to Industry has entailed generous ‘haircuts’ on the outstanding amounts, often away from the public glare.

• Indebtedness is a key reason for the many farmer suicides in the country. Waiving loans can help reduce the stress they face and ultimately save their lives.

CONS Waivers will have long-term impact on the culture of loan repayments or credit culture and

can induce moral hazard. They favor: • those who have borrowed to those who have been more thrifty,


• those who have borrowed to those who have repaid their loans, • those who have borrowed from formal sources to those who have borrowed, often at more

usurious terms, from informal sources. It can lead to willful defaults by borrowers in the hope of such schemes. Due to this, banks

may become wary in providing loans to the poor farmers who actually need them, and can increase informal lending.

If more States follow suit, it could be a setback to the financial sector reforms. This, in turn, could result in a rise in default rates, impair bank balance-sheets and injure long-term growth.

Lately State finances have been deteriorating. According to a recent RBI report, the combined deficit of the States reached 3.6% of GDP in FY16, significantly higher than 2.6% in the previous year. This breaches the 3% fiscal deficit stipulated by the States in their FRBMs. This is partly explained by the State power distribution companies (DISCOM) debt, 75% of which will be accounted in States’ balance sheets. The quality of compliance by States has also deteriorated. Farm loan waivers aggravate the situation further.

Loan waivers will result in higher borrowing by the States with fiscal space. This could crowd out private spending and lead to funding constraint for investment projects.

It could also curtail Social Sector spending. Compensating banks, be it from the budget of the State or the Centre, means cutting spending from other sectors to maintain fiscal discipline.

The 2008-09 farm loan relief of Rs 60,000 crore offered by the Centre, announced a year before general election, is a useful benchmark to gauge the behavioral impact of a debt waiver.

A World Bank paper makes 2 interesting points; • First, after a waiver, defaults rise in a classic play of moral hazard. • Second, banks anticipate this default and channel less credit to the areas where the

impact of the waiver is felt most. The study finds that 1 standard deviation increase in the share of credit covered under the program lead to a 3.6% decrease in new loans made after the bailout and 2.4% increase in the share of non-performing credit.

A 2015 ICRIER paper said the massive write-off of loans in 2008 took its toll on the banks, increasing the Non-Performing Assets (NPAs) of commercial banks threefold between 2009-10 and 2012-13.

Surprisingly, farmer suicides increased in most States after the announcement of the loan waiver scheme. Data from the National Crime Records Bureau’s (NCRB) clearly indicate this. During 2008, 16,196 farm suicides were reported across the country, which is an increase of about 1.13% over 1998. Whereas, between 2013 and 2015, farm suicides have risen by about 7%. Further, the NCRB’s 49th Annual Report shows the number of farmers committing suicide rose more than 41% in 2015 over 2014.

Farm indebtedness did not recede since the introduction of the loan waiver scheme.

WAY FORWARD 1. OPTIMAL PRICING: In the present situation, farm loan waivers act only as a temporary

solution to the problems of farmers and it will not make them free from issues like decreasing farm income, debt trap or crop failures. The long-term solution to alleviate agrarian distress is to ensure higher prices for farm produce and letting farmers sell their produce outside mandis for better rates. A Market Intervention Scheme has to be implemented to protect the farmers from making distress sale in the event of bumper crop when the prices tend to fall below the cost of production.

2. RISING COSTS OF CULTIVATION It is a prime reason for poor gains from crop cultivation. Recent studies have found that cost of cultivation in most of crops has escalated almost four times during the first half of the current decade alone. They have also pointed out that while all key inputs costs have increased, the abnormal increase in the wage cost in recent years, especially after the implementation of MGNREGS, has been escalating the cost of cultivation. This must be


addressed at the earliest and MGNREGS must be restructured by linking it with farmer work to reduce the cost of cultivation.

3. MINIMUM SUPPORT PRICE (MSP) Farmers’ outcry is also directed towards the MSP that is neither announced in advance nor is in tune with the cost of cultivation. Farmers will continue to cultivate crops only if input costs are covered. As such, prices need to be fixed at least 50% above the cost of cultivation, as recommended by the M S Swaminathan Commission (2006). Besides, the MSP should be linked with the Wholesale Price Index (WPI) to offset inflation impacts. There is also a need to improve the procurement infrastructure on a massive scale for all major commodities, without which MSP will not be useful to farmers. Also, the practice of fixing Minimum Export Price (MEP) for different agricultural commodities should be abolished so that excess supply can be exported competitively.

4. CREDIT RESTRUCTURING An attempt can be made to restructure bad farm loans (particularly in regions where farmers’ suicides have taken place), as in the case of industry, before writing them off.

5. ACCESS TO CREDIT According to recent reports, the rate of growth for lending to agriculture has come down to 2.5%. In such a scenario, small and marginal farmers are forced to raise 40-60% of their debt from non-institutional lenders at usurious rates. Saving them from the clutches of the moneylender should be a high priority. Since most farmers have bank accounts now, such an objective is attainable.

6. RURAL COOPERATIVE BANKS Strengthening rural credit cooperatives, making them more publicly managed rather than Government-controlled, so that they emerge as alternatives to informal sources of credit.

7. CROP INSURANCE It should emerge as the main vehicle to cope with rural distress. The Pradhan Mantri Fasal Bima Yojana (crop insurance scheme) should extend insurance coverage to partially damaged crops too. It should target at the farm-household level, and extend the time coverage up to five years so as to cover both normal and bad years.

8. TECHNOLOGICAL UPGRADATION Agriculture needs better technologies to improve yields and combat the vagaries of rainfall and temperature. It requires massive investments in areas such as irrigation, water conservation, storage facilities, market connectivity and agricultural research.

9. LOWER DEPENDENCE The problems in Indian agriculture are structural. They need creative engagement through which the surplus workers in the sector can be sifted to more productive sectors through education and skilling, thereby making farming more profitable and sustainable for all stakeholders.

10. STATE FISCAL PRUDENCE A more stringent criteria must be developed to approve borrowings for States which deviate from stipulated fiscal norms. Whenever the Central government breaches fiscal norms, it secures parliamentary approval. Similarly, State governments must also be encouraged to secure the approval of the State Legislature.

7. UJWAL DISCOM ASSURANCE YOJANA (UDAY) DISCOMS (Distribution Company) have a key role in the power sector, acting as an interface between retail consumers and rest of the value chain. These companies act as intermediaries between generators and retail consumers, purchasing electricity from wholesale markets and

marketing it to retail consumers. As with any other market intermediary, they recover returns on their equity investments (ROI) by charging a mark-up over their cost of supply.

The weakest link in power sector value chain is distribution, wherein DISCOMs in the country have accumulated heavy losses and outstanding debts. Financially stressed DISCOMs are not


able to supply adequate power at affordable rates, which hampers quality of life and overall economic growth and development. Efforts towards 100% village electrification, 24X7 power supply and clean energy cannot be achieved without performing DISCOMs. Power outages also adversely affect national priorities like “Make in India” and “Digital India”. In addition, default on bank loans by financially stressed DISCOMs has the potential to seriously impact the banking sector and the economy at large. Given that these DISCOMs are central to connecting both sides of the electricity market, their debt overhang has traditionally been a bottleneck for the sector. States with the highest losses for DISCOMs are those where tariffs fail to cover costs on average.

For decades, State DISCOMs have been supplying electricity at tariffs that are far below cost. For obvious political reasons, States have been wary of revising power tariffs in line with rising costs. Inefficiencies in power distribution such as large transmission and distribution losses on power, have further strained the finances of the DISCOMs, who have been borrowing heavily from banks to keep themselves running. UDAY or Ujwal Discom Assurance Yojna was launched in November 2015 to help these loss-making DISCOMs turn around financially, with support from their State governments.

ISSUES IN THE SECTOR • State DISCOMs have been supplying electricity at tariffs that are far below cost - the tariff

hikes don’t reflect the cost of generation and distribution • There is considerable gap between the average cost of supply (ACS) and average revenue

realization (ARR) of DISCOMS. • The DISCOMS continued to fund their losses with debt, leading to rising interest burdens

and an eventual debt trap • High Aggregate Transmission and Commercial losses (AT&C loses) • Under-utilisation of the power generation capacity => DISCOMS not buying as much

power as they should because of weak finances

UDAY UDAY is a Central scheme for the financial revival of State electricity distribution utilities. The Memorandum of Understanding (MoU) of UDAY is a tri-partite agreement between union ministry of power, state government and their respective discom(s). Under the scheme, States will take over 75% of the debt of their respective DISCOMs. The governments will then issue ‘UDAY bonds’ to banks and other financial institutions to raise money to pay off the banks. The remaining 25 per cent of the discom debt will be dealt within one of the two ways — conversion into lower interest rate loans by the lending banks or be funded by money raised through discom bonds backed by State guarantee. Backing from the State will help bring down the interest rate for the DISCOMs. Also, once signed, the states will enjoy rationalised coal supply and central finance assistance.

In return for the bailout, the DISCOMs have been given target dates (2017 to 2019) by which they will have to meet efficiency parameters such as reduction in power lost through transmission, theft and faulty metering, installing smart meters and implementing GIS (geographic information system) mapping of loss making areas. States will also have to ensure that power tariffs are revised regularly.

States accepting UDAY and performing as per operational milestones will be given additional / priority funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF) or other such schemes of Ministry of Power and Ministry of New and Renewable Energy. Such States will also be supported with additional coal at notified prices and, in case of availability through higher capacity utilization, low cost power from National Thermal Power Corporation (NTPC) and other Central Public Sector Undertakings (CPSUs).

UDAY is an example of the utilization of the best principles of cooperative and competitive federalism. Adopting UDAY is optional for States, but provides the fastest, most efficient and financially most feasible way for providing 24X7 Power for All.


BENEFITS

UDAY will help to: - • Realise the vision of 24X7 Power for All. • Ensure energy security through coal and renewables. • Meet ambitious renewable energy commitments India made at Paris Climate Submit. • Reduce investment uncertainty and revive investments in power sector to create jobs. • Lower the risk for existing investments and loans in power, coal and renewables sector.

CONCERNS • By allowing the fiscal deficit number to be breached the entire FRBM (Fiscal Responsibility

and Budget Management Act) paradigm is being officially violated. • The bonds issued are essentially held by the same entities that had lent funds to the State

electricity boards (SEBs). But the interest received is lower by at least 4-6 per cent; this means that there is a loss of income.

• There is no guarantee that there will not be future losses as there is no retribution if the SEBs choose not to reform. In fact, this has been kept out of the purview of the scheme. By also mandating that State governments have to progressively take over the losses of their SEBs, the Centre has put the onus on the States to deal with the problem.

• The same money has to be repaid over time and if 75 per cent of the total of around ₹4.3 lakh crore is taken on by the States, the burden will come into effect after 10 years, when States have to generate money to repay this debt. If not, they will run into the usual problem of a debt trap.

• The impact on banks would be two-fold. To begin with, the UDAY bonds would give them a lower return. But there is also the lower return on the 25 per cent of debt that is restructured, as it earns just 10 bps above the base rate. As most of these institutions are public sector banks and FIs that are already under pressure from mounting NPAs, this would be a negative for them, even though State government’s guarantee is assured.

Hence, UDAY should be seen more as a scheme that forces SEBs to usher in reforms. States will have a tough time managing their budgets while lenders are clear losers though they have the comfort of dealing with the State government or their guarantees.

CONCLUSION Adequate and timely tariff revisions by State Electricity Regulatory Commissions (SERCs) as well as timely and adequate subsidy releases by state governments are extremely important for a sustainable turnaround in the financial position of state-owned distribution utilities. This is where the UDAY scheme runs the risk of being derailed. Political compulsions to provide subsidised power could likely cast a shadow on efforts to turn the DISCOMs around. Clearly, institutional safeguards for state electricity regulators are necessary so that they are less prone to being pressured by state governments. Also, DISCOMS must be allowed to charge prices that do not just reflect the cost of purchasing power, but also the cost of delivery and a reasonable return on capital. The inability to charge these prices to end-users has always been the precise reason why distribution companies have wound up needing bailouts.

India is facing the peculiar situation of having more than enough supply of electricity, more than enough unsatisfied demand, but no way of connecting demand to supply - the purpose, the distribution companies serve. The discoms’ poor finances are constraining their electricity purchases, which in turn is forcing generation companies to idle their plants. In this scenario, the UDAY scheme goes a step beyond previous restructuring schemes for Discoms, and its success will depend on the support it receives from the participating States in carrying out the spirit and intent of the scheme. Thus, UDAY aims at reforming the power sector, through reliable, reasonably priced and sustainable power supply, which are critical for economic growth.


8. DOUBLING FARMER’S INCOME WHY DOUBLE FARMERS' INCOME? • Past strategy for development of the agriculture sector in India has focused primarily on

raising agricultural output and improving food security. The net result has been a 45 per cent increase in per person food production, which has made India not only food self-sufficient at aggregate level, but also a net food exporting country.

• The strategy did not explicitly recognise the need to raise farmers' income and did not mention any direct measure to promote farmers welfare. The net result has been that farmers income remained low, which is evident from the incidence of poverty among farm households.

• Low level of absolute income as well as large and deteriorating disparity between income of a farmer and non-agricultural worker constitute an important reason for the emergence of agrarian distress in the country during 1990s, which turned quite serious in some years. The country also witnessed a sharp increase in the number of farmers suicides during 1995 to 2004 - losses from farming, shocks in farm income and low farm income are identified as the important factors for this. The low and highly fluctuating farm income is causing detrimental effect on the interest in farming and farm investments, and is also forcing more and more cultivators, particularly younger age group, to leave farming. This can cause serious adverse effect on the future of agriculture in the country.

• It is apparent that income earned by a farmer from agriculture is crucial to address agrarian distress and promote farmers welfare. In this background, the goal set to double farmers' income by 2022-23 is central to promote farmers welfare, reduce agrarian distress and bring parity between income of farmers and those working in non-agricultural professions.

THE CONCEPT AND TIMEFRAME Clarity on the following points is important to assess the possibility of doubling the income of the farmers. The substantive points are: 1. what is the period and targeted year for doubling the farm income; 2. what is to be doubled, is it output, value added or income earned by farmers from

agricultural activities; 3. whether nominal income is to be doubled or real income is to be doubled; and 4. whether the targeted income includes only income derived from agricultural activities or

would it also include income of farmers from other sources.


• It is obvious that the targeted year to double the current income of the farmers or income for

the agricultural year 2015-16 is by agricultural year 2022-23, which is seven years away from the base year 2015-16. And, if anything is to be doubled by the year 2022-23, it will require an annual growth rate of 10.4 per cent.

• Again, it is important to clarify what is sought to be doubled. Is it the income of farmers, or the output or the income of the sector or the value added or GDP of agriculture sector? If technology, input prices, wages and labour use could result in per unit cost savings then famers' income would rise at a much higher rate than the output. In nominal terms, the output became 2.65 times while farmers' income tripled in the seven years period. Therefore, doubling of farmers' income should not be viewed as same as doubling of farm output.

• It is obvious that if inflation in agricultural prices is high, farmers income in nominal terms will double in a much shorter period. In a situation where non-agricultural prices do not rise, or, rise at a very small rate, the growth in farmers' income at real prices tends to be almost the same as in nominal prices. The government's intention seems to be to double the income of farmers from farming in real terms.

• It is pertinent to mention that the latest data on number of cultivators is available only up to the year 2011-12. Therefore, while calculating per cultivator income, it is assumed that farm workers would continue their withdrawal from agriculture at the rate observed during 2004-05 to 2011-12. Presently, per cultivator income has been estimated as Rs 1,20,193 at current market prices.

SOURCES OF GROWTH IN FARMERS' INCOME • Doubling real income of farmers till 2022-23 over the base year of 2015-16, requires annual

growth of 10.41 per cent in farmers income. This implies that the on-going and previously achieved rate of growth in farm income has to be sharply accelerated. Therefore, strong measures will be needed to harness all possible sources of growth in farmers' income within as well as outside agriculture sector.

THE MAJOR SOURCES OF GROWTH OPERATING WITHIN AGRICULTURE SECTOR ARE: • improvement in productivity • resource use efficiency or saving in cost of production • increase in cropping intensity • diversification towards high value crops

THE SOURCES OUTSIDE AGRICULTURE INCLUDE: • shifting cultivators from farm to non-farm occupations, and • improvement in terms of trade for farmers or real prices received by farmers.

RECOMMENDATION OF M.S SWAMINATHAN’S REPORT 1. Irrigation:

• enable farmers to have sustained and equitable access to water • Increase water supply through rainwater harvesting and recharge of the aquifer. (“Million

Wells Recharge” programme) 2. Agricultural Productivity

• Substantial increase in public investment in agriculture related infrastructure particularly in irrigation, drainage, land development, water conservation, research development and road connectivity.

• A national network of advanced soil testing laboratories with facilities for detection of micronutrient deficiencies.

3. Credit and Insurance • Expand the outreach of the formal credit system to reach the really poor and needy. • Issue Kisan Credit Cards to women farmers, with joint pattas as collateral • Expand crop insurance cover to cover the entire country and all crops, with reduced

premiums


• Competitiveness of Farmers. • Improvement in implementation of Minimum Support Price (MSP). Arrangements for

MSP need to be put in place for crops other than paddy and wheat. Also, millets and other nutritious cereals should be permanently included in the PDS.

• MSP should be at least 50% more than the weighted average cost of production.

STRATEGY FOR IMPROVING FARMERS' INCOME The sources of growth in output and income can be put in four categories. • Development initiatives including infrastructure • Technology • Policies and • Institutional mechanisms

INCREASING INCOMES BY IMPROVING PRODUCTIVITY • Biotechnology is set to play critical role in crop and livestock production by enhancing yields,

nutritional profile, stress tolerance and crop protection. India must have a clear vision of the GM crops. The policy support accordingly be provided for the development of seed and biotech industry in the country. As per studies BT cotton alone has contributed more than Rs. 80,000 crores of additional output value to farmers. Similar potential many other crops may have for Indian agriculture and towards enhancing farmers profitability. Besides preparing Vision Document on Biotechnology, passing the BRAI bill in the Parliament, which can facilitate greater investments and faster rollout of biotech products, while ensuring compliance of bio-safety measures.

• Improving agricultural productivity in rain fed regions of India, which constitutes more than 50% of the country‘s arable land. Besides watershed management, constructing check dams and farm ponds should be taken up in a mission mode for providing life saving irrigation for the crops. Chandrababu Naidu Committee report (2003) need to be revalidated and implemented for bringing 69 million hectare area under Micro-Irrigation to save water and input costs, increase productivity and improve quality of output. The area expansion and subsidy to the States must be linked with the adoption of precision agriculture model.

• Bridging yield gaps among the States is important in improving national productivity i.e. the gap in rice yields almost 3 times between Punjab and Chhattisgarh. There is urgent need for developing a strategy document for assessing the present trends of crop productivity vis-a-vis the potential yield of major crop systems, so that specific action plans can be taken up for bridging the yield gaps, which in turn will contribute to enhanced productivity of farming systems. Increased Budget on Farmers Inter-State Exposure Visits and Training Scheme of MoA. This is a powerful scheme towards helping farmer bridge the yield gap.

WATER AND INPUTS • Fertilizer Subsidy and Rationalizing the NPK pricing for maintaining NPK ratio in the soil

and better application technologies to improve efficiency and reduce fertilizer subsidy by Rs. 25,000 – 30,000 crores annually. Policy on promoting crop specific speciality fertilisers and fertigation, besides setting standards and regulating bio-fertilisers under Soil Health Mission is needed. Since the year 2010, NP / NPK fertilisers have been reformed and put under Nutrient Based Subsidy (NBS) whereas Urea continues under direct control. Consequently, the gap in MRP of Urea and NP / NPK fertilisers has been widening. Therefore, unless corrections are made in the fertiliser policies, the benefit of soil health card will not be realised. And desired increase in yields in major crops will continue to delude the nation.

• Crop losses in India are huge and estimates range from Rs. 90,000 to Rs. 1.50 lac crores annually. Pesticides play an important role not only in protecting crops from pests and diseases but also in crop productivity, cost reduction and quality improvement. The cost benefit ratio in using pesticides is heavily in favour of farmers. The Government however needs to check flood of spurious pesticides in market by fly-by-night operators by regulating registrations, strengthening quality enforcement and tackling corruption through provisions of joint testing of samples.


• Farm Mechanisation in India has been a story of tractorisation. Time has come to promoting

efficient equipments and tools and small engine driven tractors to address small farm requirements adequately. Through a mix of specialised Custom Hiring Centres (CHCs) and with State Agros, Cooperatives and input dealers. Developing and Custom hiring facility in farm mechanization should be given high focus. Through MANAGE network of ACABCs, Custom Hiring Centres can be promoted effectively by enhanced incentivisation and by provisioning to hire agribusiness consulting companies by MANAGE / States for promoting CHCs among ACABCs.

• There is a need for integrated water use policy. India should critically examine several ongoing initiatives and develop its country-wide system for judicious and integrated use and management of water. A national commission on efficient water use in agriculture should be established to assess the various issues, regulatory concerns, water laws and legislations, research, technology development and community involvement. This will especially help resource-poor farmers in the rainfed ecosystems, who practice less-intensive agriculture.

• Farmers however need to be educated on water usage systems to drift them away from flood irrigation systems, which affects productivity and wastes water. The most important part is the crops planning, which needs to be done keeping water resources of a region and the water intake by various crops in mind. For example high water consuming crops like paddy and sugarcane should be grown in high rainfall areas.

ROADMAP AND ACTION PLAN The quantitative framework for doubling farmers income has identified seven sources of growth. These are: • The first step is to increase productivity. It means focusing on irrigation, and that is why we

have increased the irrigation budget. India has 142 million hectares agriculture land, out of which only 48% is under institutional irrigation. With the objective of providing water to every field, Pradhan Mantri Krishi Sinchai Yojana was launched on July 1, 2015, and, to provide an end-to-end solution in irrigation supply chains, water resources, network distribution as well as farm level application. We have adopted a comprehensive approach, one that combines irrigation with water preservation. The objective is More Crop Per Drop. In addition, the aim is to complete pending medium and large irrigation projects on a priority basis in the next four years. Water harvesting, management, and watershed development projects have been put on the fast-track.

• The second factor is effective use of inputs, which means increasing production through improved seeds, planting materials, organic farming, soil health card and other schemes. For the first time, a scheme has been launched for organic farming. Similarly, the government has curbed illegal use of urea and ensured its adequate supply through Neem-Coated Urea scheme. In addition, the Soil Health Card Scheme has helped reduce cultivation cost and increase production by curbing misuse of fertilisers. Farmers are also getting timely information and advisory services through new technologies such as space technology and online and telecom facilities via the Kisan Call Centre and Kisan Suvidha App.

• The next critical factor is reducing post-harvest losses. One of the biggest problems of farmers is storage after harvesting; as a result, they are forced to sell their products at a lower cost. Therefore, the government is encouraging farmers to use warehouses and avoid distress sales. Loans against negotiable warehouse receipts are being provided with interest subvention benefits. The focus is on storage facilities and integrated cold chains in rural areas.

• Value addition is being encouraged as a critical factor for augmenting income. The government has launched the Pradhan Mantri Kisan Sampada Yojana. Under this, food-processing capabilities will be developed by working on forward and backward linkages of agro-processing, benefitting 20 lakh farmers and creating employment opportunities for about 5 lakh.

• In agriculture marketing, the electronic-National Agriculture Market has been launched with three reforms and so far, 455 mandis have been linked to it. Online trading has begun on various mandis. In addition, a model APMC Act has been circulated, which includes private


market yards and direct marketing. Farmers are also being organised as Farmer Producer Organization. This helps them achieve economy of scale and increase bargaining power.

• The Pradhan Mantri Fasal Bima Yojana (PMFBY) helps reduce the possible risks. The scheme is a shield for farmers’ income. The lowest rate has been fixed for kharif and rabi crops. Maximum rate is 2% and 1.5%, respectively. The scheme covers standing crops as well as pre-sowing to post-harvesting losses, and 25% of the claim is settled immediately online. Under PMFBY, many states are using remote sensing technology and drones to estimate losses and settle claims. To reduce climate change impact, various tolerant species and animal species have been developed. Contingency plans for affected districts have also been prepared.

• Focus on agri-allied activities is critical. We are focusing on horticulture, dairy, poultry, beekeeping, fisheries, white revolution, blue revolution, agroforestry, integrated farming and rural backyard poultry development to increase the income of the farmers. We will increase the income of farmers through allied activities. Partially, it will be done through poultry, beekeeping, animal husbandry, dairy development, and fishery. We are encouraging farmers to utilise uncultivated areas for peripheral and boundary plantation to grow trees for wood and to produce solar cells. We are also emphasising on horticulture, agro-forestry, and integrated agriculture.

SPECIAL MEASURES • Structural reforms in agriculture pertaining to land leasing and market restrictions need to be

addressed. The market regulation on movement and procurements by private players is hampering market growth and prices realization by farmers. Similarly due to land leasing policies of State Governments the concept of contract farming is not successful. The experiments of contract farming are based on "win all", bringing value to all partners in operations. This needs to be encouraged on a large scale.

• Through a nationwide crops competitiveness study, States’ profiling of crops and animal resources should be done, indexing them against national and global benchmarks on cost, quality and productivity parameters, and their short, medium and long term strategic advantages. Based on this national indexing and estimation of market demands in short, medium and log terms national crop planning needs to be done. If India has to succeed in global market on a long term basis, this task is unavoidable.

• Agriculture to be brought to the Concurrent List: Bringing the entire gamut of post production activities in agriculture, such as PHM, marketing, processing, infrastructure, agribusiness etc. under the concurrent list of the Constitution for better central planning, as the business of food and agriculture is globalizing and role of central Government is increasing in making laws and policies, especially in post harvest, trade and agribusinesses, where MNCs and corporate sector is involved in big way.

• Review of current scenario of farm credit and subsidy disbursement system. All financial benefits, mainly the subsidies in different forms, should be provided and transferred directly to farmers account through e-governance through which tracking of farmers’ application, status and approval of all schemes is available online. Gradually phase out all subsidies including fertiliser and only transfer money to farmers, calculating aggregate measure of support. This improves efficiency of govt investments.

• Implementing ambitious Agribusiness Hubs Model, operating on a national platform and establishing 2.40 lac multi-functional Agribusiness hubs in all the Gram Panchayats of the country. This will revolutionize the farm economy and create jobs. The project outlines creating 10.0 million jobs, 50,000 crores of additional annual farm value, providing increased market opportunities of Rs. 50,000 crores and initiating various multifarious socio-economic activities, aimed at improving farm incomes.

• ICT-based agricultural extension brings incredible opportunities and has the potential of enabling the empowerment of farming communities. Information technology can support better crop, fertilizer and pesticide use planning as well as disease monitoring and prevention, both in crops and animal husbandry, besides improving farmers’ operational and financial management and to effectively connect them with the markets for better price realisation.


• Diversification of agriculture in the First Green Revolution areas such as Punjab, Haryana

and Western U.P. seems need of the hour. To promote diversification on ecological principles, will require making monetary equivalence (profit margin) between the replaced crop/commodity and enterprise with the ones planned to be introduced. Farmer is mainly concerned with the profit he gets from a particular crop or commodity. Crops like maize, soybean, pulses, oilseeds, fruits and vegetables have the potential to replace rice and wheat in this area. Upward push in MSP in favour of proposed diversification crops will be a practical option to achieve this objective.

• Integrating all central and state subsidies, instead of reducing costs of inputs, need to be targeted to empower farmers through infrastructure development in rural areas to promote agribusiness, food processing, water management, soil health enhancement, seed production and processing, custom hiring, plant protection, dairy, poultry, fisheries and enterprises etc. This will boost up agriculture sustainability and farms profitability.

• Strengthening Organic Food Program for India to make 10% of the global 60 billion USD market for each. Major parts of India such as NER, HP, J&K, Uttarakhand, MP, Chhatisgarh, Jharkhand, which are organic by default, must be made Organic by Process for the producers to get advantage of market value.

• Establishing Special Agriculture Zones (SAZ) by selecting export oriented and industrial use crops. Promoting Crop Stewardship Programs, GAP and Certification, formation of Global Commodity Boards, on the pattern of California Walnuts, Washington Apples etc., can help double in 5 years the current level of 1.70 lac crores of agri exports, which will benefit farmers significantly.

• Promoting scientific agriculture micro-irrigation on a very large scale. Micro irrigation along with the nutrient application can be highly efficient and priority should be given to empower farmers with micro irrigation. Advanced concept of Precision Agriculture need to be promoted on a large scale, emulating the success of TN Precision Farming Project. A National Project on Precision Agriculture on the pattern of TNPFP should be launched with integrated approach from advance production technologies to formation of FPOs and linking them with the markets. Studies done by LSE, Harvard, IIM-A and other premier global institutions show an increase of 80% to 600% extra yields in different crops under Tamil Nadu Precision farming Project.

• Provide affordable health insurance and revitalize primary healthcare centres. The National Rural Health Mission should be extended to suicide hotspot locations on priority basis.

• Set up State level Farmers’ Commission with representation of farmers for ensuring dynamic government response to farmers’ problems.

• Restructure microfinance policies to serve as Livelihood Finance, i.e. credit coupled with support services in the areas of technology, management and markets.

• Cover all crops by crop insurance with the village and not block as the unit for assessment. • Provide for a Social Security net with provision for old age support and health insurance. • Promote aquifer recharge and rain water conservation. Decentralise water use

planning and every village should aim at Jal Swaraj with Gram Sabhas serving as Pani Panchayats.

• Ensure availability of quality seed and other inputs at affordable costs and at the right time and place.

• Recommend low risk and low cost technologies which can help to provide maximum income. • Need for focused Market Intervention Schemes (MIS) in the case of life-saving crops such

as cumin in arid areas. Have a Price Stabilisation Fund in place to protect the farmers from price fluctuations.

• Need swift action on import duties to protect farmers from international price. • Set up Village Knowledge Centres (VKCs) or Gyan Chaupals in the farmers’ distress

hotspots. These can provide dynamic and demand driven information on all aspects of agricultural and non-farm livelihoods and also serve as guidance centres.


CONCLUSION The low level of farmers income and year to year fluctuations in it are a major source of agrarian distress. This distress is spreading and getting severe over time impacting almost half of the population of the country that is dependent on farming for livelihood. Persistent low level of farmers income can also cause serious adverse effect on the future of agriculture in the country. To secure future of agriculture and to improve livelihood of half of India's population, adequate attention needs to be given to improve the welfare of farmers and raise agricultural income. Achieving this goal will reduce persistent disparity between farm and non-farm income, alleviate agrarian distress, promote inclusive growth and infuse dynamism in the agriculture sector. Respectable income in farm sector will also attract youth towards farming profession and ease the pressure on non-farm jobs, which are not growing as per the expectations.

9. CATTLE TRADE RULES • The government on 23rd May 2017 notified new rules tightening trade in livestock and

transport of cattle to ensure their welfare at animal markets and also prevent smuggling. The rules prohibit the sale of cattle for slaughter at animal markets, effectively barring this nationwide, including in states such as Kerala which allow the slaughter of cows. The new rules include buffaloes in their definition of cattle and this will likely jeopardize the buffalo meat export business as it will disrupt the supply of spent buffaloes, according to a meat exporters’ association.

• Environment ministry notified Prevention of Cruelty to Animals (Regulation of Livestock Markets) Rules, 2017 on 23 May 2017.

THE NEW RULE NECESSITATES: • Rules list detailed measures for protection and welfare of cattle in animal markets. Cattle, as

per notification means, bulls, bullocks, cows, buffaloes, steers, heifers and calves and camels. It also brings very strict rules for cattle trade and bans trade of cattle for slaughter in animal markets, such as ploughing and dairy production.

• The rules mandated that animals intended to be slaughtered would be brought directly from farmers in farms, and those in animal markets would only be traded for agricultural purposes.

• Both purchaser and seller have to give an undertaking that the cattle sold in these markets are not for slaughter. Purchaser has to provide documentary proof that he is an agriculturist also give an undertaking that he will not sell the animal for at least six months from the date of purchase.

• The animal market committee will have to ensure that the purchaser will not sell the cattle for slaughter, not sacrifice the animal for religious purpose and not sell the cattle to a person outside the State without the permission as per the State cattle protection or preservation laws.

• As per the notification, animal markets are defined as “means a market place or sale-yard or any other premises or place to which animals are brought from other places and exposed for sale or auction and includes any lairage adjoining a market or a slaughterhouse and used in connection with it and any place adjoining a market used as a parking area by visitors to the market for parking vehicles and includes animal fair and cattle pound where animals are offered or displayed for sale or auction”. Traders say this definition of animal markets make it very difficult for them to procure animals.

FROM THE SIDE OF GOVERNMENT OR ANIMAL RIGHTS ACTIVISTS ABOUT THE RULE • The rules will ensure food safety and traceability of animals. It will also ensure cattle are

not smuggled or slaughtered illegally. • Now the cattle for slaughter can only be bought from farmers from their farms directly. The

slaughter house agents who used to buy such animals from the markets can now buy them from farmers directly from their farms - thus eliminating the middlemen.


NEGATIVE EFFECTS ON ECONOMY:

• India exported 1.33 million tonnes of buffalo meat from 2016-17, worth about $3.9 billion. It is among the largest beef-exporting countries, globally.

• India's meat and leather industries are worth more than $16 billion in annual sales. • It could create large scale unemployment as the beef and leather industry employ

millions of workers. • It would affect several industries; meat, leather, food, pharmaceuticals and transport. • While the rules do not make it illegal to sell cattle outside of the animal markets for

slaughter, it will become practically impossible to do so.

ON FARMERS: • Traders have to now procure from farmers directly and send them to slaughter houses

without taking the animals to markets. This means individual farmers will have fewer avenues to dispose spent buffaloes which now fetches them over Rs20,000 per animal.

• It would affect their financial security as a large percentage of a dairy farmer’s income comes from the sale of unproductive/spent animals.

• As dairy farmers will no longer be able to sell their non-productive animals at cattle markets, they will be expected to feed and maintain them, which will hurt their primary income.

ON WEAKER SECTIONS: • It would affect the employment, especially among Muslims and Dalits. • There have been several violent attacks and lynchings by cow vigilantes against

suspected of either storing meat or transporting cattle for slaughter. • The leather industry also employs several lower-caste Hindus, mostly in menial jobs like

in tanneries, whose livelihood may get affected after the notification.

ON DAIRY SECTOR • If farmers are unable to get the full economic value of their cattle after it stops giving milk,

especially for buffalo which is allowed to be slaughtered for meat, the lost income will have to be incorporated in milk prices, implying price of milk and milk products may increase in the near future.

• Also, dairy owners fear it will be difficult for them to purchase and transport animals due to the rigorous paperwork and undertakings required, as also explaining to vigilantes on the street that the animals they are transporting are not for slaughter.

• Farmers have been moving away from rearing cows to raising buffaloes as the later gives more milk and spent animals can be sold for slaughter. The new rules will lead to significant dip in price of buffaloes, and increase the risks while transporting animals, even for dairy purposes.

CRITICAL ANALYSIS • CATTLE TRADE RULES GO AGAINST 1960 LAW: Restrictions placed by the new rules

contravene the very law — Prevention of Cruelty to Animals Act (PCA) of 1960 — under which it has been notified. The Prevention of Cruelty to Animals (Regulation of Livestock Markets) Rules of 2017 permit the sale of cattle in markets only to verified “agriculturists”, who have to give an undertaking to the authorities that cattle will not be sold or slaughtered for meat. Nor shall the animal be used for sacrifices. The animal will be used only for farming. The rules take away the rights of the owner to even sell the carcass of an animal dying of “natural causes” in the market. The rules prescribe that the carcass will be incinerated and not be sold or flayed for leather. The Prevention of Cruelty to Animals Act, enacted on December 26, 1960, however, does not impose any such restriction. It does not ban a cattle owner to sell the carcass of his animals for leather. The legislative intent of the 1960 Act is to “prevent the infliction of unnecessary pain or suffering on animals”. Delegated legislation has to be in conformity with the objective of the parent Act as well (Kerala


Samsthana Chethu Thozhilali Union vs State of Kerala (2006)). To prevent slaughter of cattle is not the objective of the Prevention of Cruelty Act.

• SLAUGHTER FOR FOOD: The Act further recognises slaughter for food. Section 11 of the Act does not categorise slaughter of animals for food as cruelty. It makes a specific exemption for “destruction of any animal as food for mankind unless such destruction or preparation was accompanied by the infliction of unnecessary pain or suffering. “When a public interest litigation (PIL) petition came up for hearing before the Supreme Court to ban animal sacrifices for religious purposes, the court had specifically noted how Section 28 of the Act mandates that “nothing contained in this Act (1960 Act) shall render it an offence to kill any animal in a manner required by the religion of any community.”

• FUNDAMENTAL RIGHTS VIOLATION: The restriction on trade of cattle or carcasses in livestock markets will have to be tested on the touchstone of the fundamental right to occupation, trade or business under Article 19 (1) (g) to see whether it is “reasonable.” The Rule also threatens Article 14 that provides equality before law and prohibits discrimination, Article 21 that protects life and personal liberty and Article 29 that protects the interests of minorities.

• REAL OBJECTIVE BEHIND THE RULE: If the main subject of the notification was the regulation of livestock markets, why was it issued by the Ministry of Environment and not the Animal Husbandry Department of the Ministry of Agriculture, which deals directly with this issue? Moreover, on what ground can the slaughter of any animal for food be prevented under the PCA, when it explicitly recognises that animals may constitute “food for mankind”? What the Act prohibits is only the “infliction of unnecessary pain and suffering” when animals are consumed as food. Such legal infirmities are bound to be challenged in court, but meanwhile the economic costs of this decision will merit a close watch. If estimates that 90% of slaughtered buffaloes are bought and sold in animal markets are correct, then the trade will be crippled. The Centre must address the concerns of the trade as well as of those who suspect the notification is a part of a Machiavellian plot to influence and curb food choices. If the government’s real interest was indeed the prevention of cruelty to animals due to slaughter, there cannot be any constitutionally acceptable reason for leaving out chickens, pigs, sheep, goats, fish, rabbits, etc.

• RULES WERE NOT PLACED BEFORE THE PARLIAMENT:

• MISLEAD THE GENERAL PUBLIC: This practice involves camouflaging a controversial

provision with seemingly progressive and innocuous provisions in order to deceive and mislead the general public. It was done in the case of Motor Vehicles Amendment Bill, wherein the provisions introducing limit on third party insurance were sugarcoated with provisions increasing penalty for traffic violations, thereby making people believe that it was a

http://www.thehindu.com/news/national/tamil-nadu/new-rules-for-cattle-sale-irk-farmers/article18587048.ece


‘Road Safety Bill.” Likewise in the Aadhaar Act, which was introduced as a money Bill touted to be having the objective of plugging subsidy leaks, provisions permitting private entities to use Aadhaar data for their private purposes were sneaked in. Following the same mischievous tactic, the said Rules have been framed.

• RESTRICTION ON INTER-STATE SALE: The Rules contain restrictions on inter-state sale. As per Rule 22(e)(iv), the purchaser of cattle cannot sell cattle outside state without permission, as per state cattle preservation and protection laws. So a trader is restricted from effecting sale of cattle to another state, where cattle slaughter is not prohibited. If cattle slaughter is permissible in one state, why should there be a restriction in exporting cattle to such state? Also, Article 301 of the Constitution declares that trade, commerce and intercourse throughout the territory of India shall be free. It has been held in in Hinsa Virodhak Sangh vs Mirzapur Moti Kuresh Jamat (2008), and In Re Ramlila Incident (2012) that what one eats is one’s personal affair and forms part of right to privacy under Article 21.

• FARMER IS THE VICTIM: If markets for spent buffaloes and cattle cease to exist — which is what the Environment Ministry’s rules effectively do — the ultimate victim would be the farmer. The ordinary dairy farmer who may need to dispose of one or two unproductive animals a year has no means to supply these directly to a slaughterhouse. The latter, in turn, cannot economically source from hundreds of scattered individual producers, each selling one or two animals a year (unlike the 5-10 litres of milk they would sell daily that also makes direct procurement a viable proposition). The institution that makes trade in unproductive bovines possible is the market, which brings together the sellers (whether farmers or primary aggregators) and buyers (butchers or agents of slaughterhouses) for these animals on a single platform.

Cattle markets are typically weekly affairs where, say, 500 farmers come and sell their animals to 50 suppliers to slaughterhouses. This is a more efficient system than the same buyers going to each individual seller’s home; the farmer also benefits from multiple bidders, who are absent in a direct sourcing arrangement. Unlike in the West, there aren’t separate categories of “beef cattle” and “dairy cattle” farmers in India. The farmer who rears buffaloes for milk sells the same animals for slaughter when they become unproductive. By killing the market for slaughter livestock, the government may end up destroying the market for dairy animals as well.

• ABSENCE OF ANY STAKEHOLDER CONSULTATIONS: Whether it is the meat, dairy and leather industries, farmer organisations or state governments responsible for regulating “markets and fairs” under Entry 28 of List-II of the Constitution — none apparently had the faintest idea about the rules while in the process of drafting.

• EXPANSIVE DEFINITION OF “ANIMAL MARKETS” One may feel that the ban is only with respect to sale of cattle for slaughter in animal markets and that one is still free to sell cattle elsewhere. But, the definition of “animal market” given is quite wide and expansive. The phrase “lairage” adjoining a market or a slaughterhouse is doing the mischief. ‘Lairage’ refers to a place where animals are kept before slaughter. Most slaughterhouses keep the animals to be slaughtered near. Even if one animal is kept near the slaughterhouse, the place occupied by the animal would be a ‘lairage’, and consequently it would become an ‘animal market’ as per the definition of the Rules. This is actually a ploy to efface the difference between ‘animal markets’ and ‘slaughterhouses’, thereby making most ‘slaughterhouses’ ‘animal markets’ as defined in the Rules. As a result of this, one can’t even seek to sell cattle directly to a slaughterhouse. This will have a far-reaching impact on small-scale operators of slaughterhouses and abattoirs. Small-scale operators are in effect precluded from procuring cattle for slaughter, driving them out of their trade.

SUPREME COURT RULING AND THE PRESENT STATUS The Supreme Court suspended the Government ban on the trade of cattle for slaughter. Since the ruling, the Central government is planning to address all the contentious issues and

reframe the rules once again.


SUGGESTION If the intention is to stop the infliction of unnecessary pain and suffering on animals, then one solution is to encourage modernisation of abattoirs (slaughter houses), with regulators enforcing rigorous standards for how livestock must be treated.

10. REGIONAL CONNECTIVITY SCHEME (UDAN – UDE DESH KA AAM NAGARIK)

BACKGROUND India has the potential to be among the global top three nations in terms of domestic and international passenger traffic. It has an ideal geographical location between the eastern and western hemisphere, a strong middle class of about 30 crore Indians and a rapidly growing economy. Despite these advantages, the Indian aviation sector has not achieved the position it should have and at present it is ranked 10th in the world in terms of number of Passengers.

India is now one of the largest domestic aviation market. Over the next half-a-decade, the sector is expected to clock a growth rate of 10 per cent a year, well over the GDP growth rate. But this remarkable surge masks a highly skewed development. Only 75 of the 476 airstrips in the country have scheduled operations while the principal hubs of Delhi and Mumbai are already stretched to capacity. Per capita availability of seats is a quarter that of Thailand or Indonesia. Despite rising fleet strength, key activities such as maintenance, repair and overhaul (MRO) take place largely overseas. And worryingly, India’s overall aviation safety rating was lowered due to a critical shortage of flight control personnel and safety inspectors, and rising number of near misses.

• Potential of aviation sector in India – Ideal Geographical location and strong middle-class population

• Only 75 of the 476 airstrips in the country have scheduled operations • The principal hubs of Delhi and Mumbai are already stretched to capacity • Low Per capita availability of seats • Maintenance, Repair and Overhaul (MRO) takes place largely overseas • Low overall aviation safety rating

REGIONAL CONNECTIVITY SCHEME (UDAN – Ude Desh ka Aam Nagarik) Regional Air Connectivity Scheme (RCS), presented by the Ministry of Civil Aviation, refers to operation of an air transport service between any two airports, of which at least one has been declared by the central government as unserved or under- served. An un-served airport is one to which there is no daily service, while an under-served airport is one which has not seen a flight for two consecutive flight schedules. It is considered as a vital component of the National Civil Aviation Policy (NCAP) which was released on June 2016.

Once the scheme is implemented, passengers will be able to fly an hour’s journey (of about 500 km) for an all-inclusive fare of Rs 2,500. The passenger service fee and user development fee will not be applicable on this fare. Only routes covering a distance of 200-800 km connecting an ‘unserved or under- served’ airport will qualify for the regional connectivity scheme and the airfare cap will be proportional to the air distance travelled. Subsidy will be provided to airlines to fund their losses to enable them to offer airfares at Rs. 2,500. These airlines, which can bid for routes of their choice, will be given exclusive rights of a particular route for a period of three years.

OBJECTIVE OF REGIONAL CONNECTIVITY SCHEME • To make flying affordable for the masses, • To promote tourism, increase employment and promote balanced regional growth. • It intends to revive un-served and under-served airports.


IMPLEMENTATION OF UDAN

Revival of un-served or under-served airports/ routes. i) Concessions by different stakeholders - Concessions by Central & State Governments and

airport operators to reduce the cost of airline operations on regional routes. ii) Viability Gap Funding (VGF) for operators under RCS - Financial support to meet the gap, if

any, between the cost of airline operations and expected revenues on such routes.

SUBSIDY While the Centre will provide 80 per cent subsidy to airlines for three years to fund the losses they incur, to enable them to charge lower airfares to passengers, the remaining 20 per cent will come from the states.

The Central Government will support the RCS Scheme by levying an excise duty of only 2% on Aviation Turbine Fuel (ATF) purchased at RCS Airports for a period of three years. The service tax will be levied at only 10% of the taxable value of tickets for RCS seats for a period of one year. The operating Airline will be free to enter into code sharing arrangement with domestic and international airlines. Further, Centre will set up a Regional Connectivity Fund (RCF) for viability gap funding, to be financed by a cess charged to airlines flying on metro or trunk routes for each departure. The cess may marginally increase airfares on such routes. The government may provide higher subsidy to the airlines if the cost of Aviation Turbine Fuel (ATF) goes up in future. The airlines will be mandated to fly at least three flights every week on such regional routes and the subsidy will be provided for maximum seven flights per week.

RCS will be made operational only in those States which reduce VAT on Aviation Turbine Fuel (ATF) at these airports to 1% or less for a period of 10 years. State Government will provide land free of cost and free from all encumbrances and also provide multi-modal hinterland connectivity (road, rail, metro, waterways, etc) as required. Further, State Government will provide police and fire services free of cost. Power, water and other utilities will be provided at substantially concessional rates. Moreover, there will be no airport charges levied for operations under RCS.

CONCERNS • The success of the scheme requires Centre-State cooperation. • The issue of providing air traffic control services • Complexities in calculating VGF • With volatile jet fuel prices, it can create additional subsidy burden • Politicization of identifying destinations with populist gestures to the hinterland voter. • Infrastructural deficits

The only way to get airlines to fly these thin routes (RCS routes) would be by reducing operational costs. Thus, at the heart of RCS lies the importance of Centre-State cooperation, in the form of viability gap funding, subsidised aviation fuel and a fare cap, pivotal to enabling the scheme’s success. The States would have to be prepared to take some toll by providing free land and operational infrastructure, and that the Centre would have to agree to forego excise on aviation fuel and service tax on tickets signals that the scheme may end up testing the actual commitment of governments both at the Union and State levels.

With private airlines having evinced interest but not having expressly committed themselves so far to the RCS, there is also the issue, going by experience, of whether the burden of operating such routes could end up ultimately falling on Air India.

Given the scale of the scheme, there is also the issue of providing air traffic control services. With mounting worries over air safety and the alarming rise in ‘near-miss’ incidents, there can be no room for compromise on this vital component of the aviation industry.

The policy on regional air connectivity is a complex web of price controls, cross-subsidy and viability gap funding (VGF) by the government: the kind of things a regime that believes in


"minimum government and maximum governance" should have nothing to do with. The scheme talks of a tariff cap, which will be linked to the distance covered. If the airline loses money on these flights, it will be compensated from RCF (cess levied from trunk routes), which can increase airfares and affect aviation market in India.

Further, calculating VGF is not going to be easy, especially when jet fuel prices turn volatile. Also, different aircraft have different costs of operation, which means that the subsidy will have to be calculated afresh for each flight. There are bound to spur up further controversies over inclusion of certain costs and revenues while calculating VGF.

Besides, if jet fuel prices shoot up, and the demand for this subsidy comes from all quarters, it will lead to unnecessary bureaucratic interference in the business, which is avoidable if the country wants to become business-friendly. It would also result in an additional subsidy burden that the Centre as well as the states will have to bear at a time when there is need for reducing subsidies by targeting them for the needy.

There is shortage of parking area at major airports which has come in the way of exploring newer routes under the RCS scheme. The success of the RCS scheme depended more on the government fixing the infrastructure issues at large airports.

Amidst these concerns, RCS is a welcome move as regional air connectivity can provide required impetus to the economic growth. It has a right mix of fiscal and monetary incentive and also gives flexibility to the operator. Further, it is market-driven and will simulate demand. Moreover, a critical reform is the de-politicisation of identifying destinations. Indeed, resources ought to be deployed based on economics rather than as populist gestures to the hinterland voter.

SUGGESTIONS • National Civil Aviation Policy (NCAP) should form an independent civil aviation authority. • At present, the Directorate General of Civil Aviation (DGCA) takes care of both safety and

economic regulation - and fails miserably at the latter as they don’t have the technical expertise or the staff to do it. Economic regulation should be separated from safety regulations through NCAP.

• Airports Authority of India (AAI) is another entity that needs complete transformation, yet NCAP falls short of addressing that. India’s massive airport infrastructure development plans require a strong entity to see the execution through. In this aspect there is little clarity on the way forward for the AAI or about its listing in the stock exchanges.

• Airlines have for long been seeking reduction of high State taxes on ATF (Aviation Turbine Fuel) which make the fuel 50-60 per cent costlier in India than in many other countries. The NCAP gives no direction on removing the negative fiscal regime on Indian airlines which includes sales tax on ATF and other taxation measures. These have not been effectively addressed.

• Air travel in the country is expanding at a fast clip. Meanwhile, data between 2011 and 2016 reveal that the number of near collisions between aircraft has sharply increased. At the heart of the increasing number of near collisions is an increasing crunch in qualified Air Traffic Control (ATC) staff. In fact, ATC is working without a quarter of its sanctioned strength currently. This in turn is due to poor pay and the stressful job profile of an air controller. NCAP fails to address this concern and bring effective reform to ATC, which functions under Airports Authority of India.

CONCLUSION As the Indian economy grows, consumption-led growth in populated metros is expected to spill over to hinterland areas. This is also expected to be on account of factors of production (land, labour, etc.) becoming costlier in the densely populated metro cities. In this scenario, air connectivity can provide required impetus to the economic growth of such regional centres.


11. RAIL DEVELOPMENT AUTHORITY (RDA)

Indian Railways (IR) is more than 150 years old and has played a vital role in the socio-economic development of the country. Today, the Railways is one of the largest rail networks in the world, transporting around 23 million passengers every day and employing 1.4 million people, thus playing an important role in national integration.

The Railway Board single-handedly manages the railway network consisting of 17 zones and 68 divisions. Since Independence, the growth of the railway system has been hindered by the Board’s muddled performance. Some of the critical challenges faced by railways include:

BACKGROUND OR CHALLENGES IN THE SECTOR The largest contributor to losses for IR is passenger traffic, where IR recovers only about 50

per cent of the actual cost of moving passenger traffic. An increasing quantum of cross-subsidisation of passenger services by freight have resulted in freight fares being about 63 per cent more than the cost incurred by IR. With higher tariff and slower movement, the share of rail in freight traffic has declined.

A declining trend of the rail market share vis-à-vis the road mode from a level of 80 per cent in the fifties to around 30 per cent today. This happened despite distinctly superior characteristics in respect of energy and land-use efficiencies and environment-friendly and safety parameters of rail in relation to road.

An insubstantial growth in basic infrastructure over the past six decades due to under-investment. The network length of 52,000 km at the time of Independence has increased by a paltry 14,000 km. This meagre 22 per cent growth is despite a more than 15-fold increase in freight tonnage as well as passenger throughput.

Despite severe resource constraints investment policies have been skewed in favour of projects that are socially relevant but are financially unremunerative, and at the cost of commercially relevant and financially viable projects.

Announcing new trains for political gains IR needs a more proactive approach in the vital area of safety. Derailments, accounting for

almost 45% of all accidents, continue to plague the 65,000-km-long network. Perhaps it is time for an external agency to carry out an in-depth audit of the existing practices.

Needs to reduce travel time.


Reforms in Indian Railways like increase in train tariffs and reduction in the number of

railway employees have been withheld due to political reasons. The Bibek Debroy Committee found the private sector is discouraged from participating

more effectively due to a monopolistic framework.

INTRODUCTION TO RDA The railways connect the country’s far corners and act as a driver of the economy. High rates of economic growth have raised the demand for travel, but this remains largely unmet. The popular aspiration is for a modern system that offers high-quality travel with low risk of accidents, while industry wants smooth freight transfer. An independent, empowered regulator could be the paradigm shift that is needed.

The need of having a rail regulator has been emphasised by various committees for past many years since 2001. This includes Expert Group under the Chairmanship of Rakesh Mohan in 2001, the National Transport Development Policy Committee (NTDPC) in 2014 and Bibek Debroy's Committee in 2015.

The RDA is formed through an executive order of the government. It will act within the parameters of the Railway Act, 1989. It will only make recommendations to the Railway Ministry which will take a final call on passenger and freight fares. It will be an independent body with a separate budget. The independence is ensured through provision of a separate budget, and the appointment and removal process.

OBJECTIVES Key functions of RDA are: • Tariff determination • Ensuring level playing field for investors in the carrier • Setting efficiency and performance standards • Information dissemination.

Other objectives include: 1. Pricing of services commensurate with costs. 2. Suggest measures for enhancement of Non-Fare Revenue. 3. Protection of consumer interests, by ensuring quality of service and cost optimization. 4. Promoting competition, efficiency and economy. 5. Encouraging market development and participation of stakeholders in the rail sector and for

ensuring a fair deal to the stakeholders and customers. 6. Creating positive environment for investment. 7. Promoting efficient allocation of resources in the Sector. 8. Benchmarking of service standards against international norms and specify and enforce

standards with respect to the quality, continuity and reliability of services provided by them. 9. Providing framework for non-discriminatory open access to the Dedicated Freight Corridor

(DFC) infrastructure and others in future. 10. Suggesting measures to absorb new technologies for achieving desired efficiency and

performance standards. 11. Suggesting measures for human resource development to achieve any of its stated objectives.

NEED FOR RAIL DEVELOPMENT AUTHORITY Rail Development Authority will fix cost-based tariffs, delink populist decisions and ensure adherence to contract norms, while developing the market share of the rail sector. The move will help reduce the cross-subsidy within the railway users — in passenger and freight segments — and improve the market share in freight.

The regulatory authority will change the landscape of Indian Railways as it will help the national carrier take decisions on pricing of services commensurate with costs, protect consumer interests, suggest measures for enhancement of non-fare revenue, promote competition and encourage market development, create positive environment for investment, promote efficient resource


allocation and benchmarking of service standards, and suggest measures for absorption of new technologies and human resource development.

CONCERNS The RDA’s role in fixing tariffs will be advisory in nature => lack statutory powers => need to set it up through a legislation as advised by the Niti Aayog in order to keep the body independent.

Lack of regulatory power may result in less investment by private players.

SUGGESTIONS Need accounting reforms: The current accounting system does not provide details of the cost of various activities and services, such as introduction of new trains and scheduling of stops. It neither tracks assets nor assesses liabilities. Consequently, it becomes difficult to compute the costs and benefits of any project or activity. In this regard, the Committee recommends switching to a commercial accrual-based double entry accounting system.

IR should focus more on core activities: Non-core activities (eg. running schools) can be outsourced to private entities. Need non-budgetary finances

12. RAIL SAFETY BACKGROUND - Indian Railways is the largest employer in the country, employing over 1.3 million people. - It is among the top 10 employers in the world. - It is the third largest rail network by size globally. - It handles the largest number of passengers in the world; 8,300 million annually.

WHAT HAPPENED? - According to latest data, over the past 5 years (2012-17), a total of 586 accidents took place

on the Indian railways network. These accidents led to 1,011 casualties and left 1,634 people injured

- Total serious train accidents declined from 135 in 2014-15 to 104 in 2016-17. But the number of derailments went up from 63 to 78 during the same period. The share of derailments in total accidents has soared from 47% in 2014-15 to 75% in 2016-17.

- In 2016-17, railways witnessed 78 derailments which left 196 passengers dead and 327 injured.

- Till August, 2017, 85% of the total rail accidents occurred due to derailments. - The Kakodkar Committee (2012) on Railway Safety found that out of 441 derailments it

analysed, only about 15% were the result of sabotage, while the majority were caused by factors completely under the control of the Railway Administration.

- According to Niti Aayog, • Accidents due to derailments and level crossings accounted for 90% of total accidents,

85% casualties and 82% injuries on railway networks. • Human failures accounted for about 87% of all accidents, of which 46% of these are a

result of railway staff failure and 41% failure of road users. The remaining was due to failure of equipment (2%), sabotage (2%), incidental factors (6%) and unknown errors (3%).

• Since 2012, 6 out of every 10 rail accidents have occurred due to mistakes or negligence of railway staff.

- Other than human loss and infrastructure damage, it creates fiscal strain to the already financially-stressed Organisation in terms of compensation provided to victims.

CAUSES - CONSEQUENTIAL TRAIN ACCIDENTS: These include collisions, derailments, accidents at

level crossings, train fires and similar accidents that have serious repercussions in terms of

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casualties and damage to property. These exclude cases of trespassing at unmanned railway crossings

- DERAILMENTS: Accounted for more than 50% of the total consequential accidents. Derailments occur due to wear and tear of track, failure of components like wheels, rolling stock and human error. Track defects had the highest share of around 44% in train derailments between 2012-13 and 2016-17.

- LEVEL CROSSING (LC) ACCIDENTS (manned and unmanned): Accounted for about 40% of the total consequential accidents. Currently there are about 15,000 Unmanned Level Crossings (UMLCs) in the railway network.

- LACK OF MAINTENANCE: The IR has a total track length of 1,14,907 km of. Of this, 4,500 km should be renewed annually. However, due to financial constraints, no more than half of that is generally carried out.

- UNFILLED VACANCIES: There is a persistent shortage of loco-pilots; about 20% of posts lie vacant. As a result, loco-pilots are overworked and prone to error in signals. There is also a 16% shortage in safety staff, which means others have to work longer and harder.

- FINANCIAL MISMANAGEMENT: Track upkeep and renewal are carried out from the Depreciation Reserve Fund. Significantly, instead of increasing this fund, Governments seem to decrease allocation to it. For instance, appropriation to the fund in 2016-17 Budget was 3,200 crore rupees which is nearly 60% less than the 2015-16 Budget figures.

- PROCEDURAL LAPSE: Non observance of mandatory operating procedure has led to several accidents recently, for e.g.: Utkal Express. Sometimes no speed restriction warnings are put at the maintenance spot. This is so that delays don’t reflect poorly on the performance report of the division and zone. This is far more dangerous than infrastructural failures, as it represents a breakdown of basic processes. According to the 15th report of the Parliamentary Standing Committee on Railways, more than half the accidents are on account of lapses on the part of the railway staff, of which the chief is loco-pilots missing signals.

- SLOW EXPANSION: The Standing Committee on Railways noted that the slow expansion of rail networks has put undue burden on the existing infrastructure, leading to severe congestion and safety compromises. Most accidents occur on the over-capacity routes. Since independence, while the railways’ route kilometers have increased by 23%, passenger and freight traffic has increased by 1,344% and 1,642% respectively. This suggests that the railway lines are severely congested. Over-utilisation is leaving little time for safety inspections and essential maintenance of track and other infrastructure as well as the rolling stock.

- NATURAL CAUSES: Like floods, fogs, landslides etc. - OTHERS: Although a small fraction, accidents occur also due to vandalism sabotage and

terrorism.

WAY FORWARD - OPTIMIZE TIMETABLES: The Railway timetable should be reworked to ensure that workmen

get enough time for daily safety checks of rail tracks. - TIMELY INSPECTION: Field inspections and accountability at appropriate levels are crucial. If

track repairs need time and resources, it must be stated upfront. - IMPROVE INFRASTRUCTURE: Replacing ageing and unsafe carriages with modern coaches

has been slow and its supply has not kept pace with requirement. Travel demand has, meanwhile, continued to leap as economic growth both needs and encourages greater mobility. Therefore, avoiding accidents would also require significant investments towards capital and maintenance of railways infrastructure.

- ELIMINATE UNMANNED LEVEL CROSSINGS: The Standing Committee on Railways has recommended implementing audio-visual warnings at level crossings to warn road users about approaching trains. Also, road speed-breakers should be constructed before level crossing gates to reduce the speed of approaching traffic.

- FILL VACANCIES: IR has a shortage of over 2 lakh employees, of which more than half belong to the safety category. Also there have been recommendations for regular refresher courses for each category of railway staff covering case studies of accidents, technology upgradation and other related topics.


- SAFETY MEMBER/ DEPARTMENT: A separate post for Member (Safety) in the Railway Board

or/and a department must be created for the same. - INDEPENDENT SAFETY AUTHORITY: Due to a 97.5% increase in the number of causalities

due to railway accidents (from 122 in 2015-16 to 241 in 2016-17), a NITI Aayog report has suggested the setting up of a statutory independent outfit; ‘Railway Safety Authority’, to improve the safety situation of Indian railways. The administrative structure of the railways prevents proper safety oversight. The railway board is rule maker, operator and regulator at the same time. This prevents accountability from being fixed. The need of the hour is an independent and empowered regulator, outside the ambit of the railway ministry, to audit rail safety. It was also suggested by the Kakodkar Committee. This would be in line with global best practices where railway systems prepare an analysis of the risks faced and set measures to mitigate them.

- IMPLEMENT TECHNOLOGICAL INNOVATIONS: Initiatives that reduce the potential of human errors such as automated inspection and asset monitoring techniques, mechanisation of maintenance, detection systems for derailment and replacement of over-aged assets (tracks, signaling) needs priority emphasis. Also technologies such as ultrasonic flaw detection to keep tracks safe, crash-proofing coaches among others must be looked at to carry passengers safely. Similarly, the production of conventional coaches that topple over one another in case of derailments must be discontinued. Instead, a shift to Linke Hofmann Busch (LHB) coaches, that do not pile, should be expedited.

- SHIFT TO LHB COACHES. Stop the production of conventional Integral Coach Factory coaches that topple over one another in case of derailments. Shift to LHB coaches that do not pile up on top of each other in the event of derailment should be expedited.

- OPTIMAL UTILISATION- According to the latest data, utilisation exceeds the capacity on 65 per cent of busy routes. It is 120 per cent to 150 per cent on 32 per cent of the routes, and utilisation exceeds 150 per cent on 9 per cent of the routes. For optimal performance, utilisation should be 80 to 90 per cent of the capacity.

RECENT GOVERNMENT INITIATIVES • MISSION ZERO ACCIDENT: It was proposed in the Railway Budget of 2016-17 and comprises of

2 sub-missions; a. Elimination of Unmanned Level Crossings b. TCAS (Train Collision Avoidance System): This safety system is aimed at avoiding

head-on collisions by preventing train accidents caused due to driver’s error of Signal Passing at Danger (SPAD) or over-speeding. It is planned to equip 100% of the high density networks with the indigenous technology in the next 3 years.

• RASHTRIYA RAIL SANRAKSHA KOSH (National Rail Safety Fund): For passenger safety, budget 2017-18 announced the creation of a ‘Rashtriya Rail Sanraksha Kosh’ with a corpus of 1 lakh crores over a period of 5 years. This fund will be utilized for track improvement, bridge rehabilitation, rolling stock replacement, human resource development, improved inspection system and safety work at level crossing, among other objectives.

• GIS AND REMOTE SENSING: Ministry of Railways has signed a memorandum of understanding (MoU) with ISRO for developing Remote Sensing and Geographic Information System (GIS) for Remote Sensing at unmanned railway crossings and other uses. This is a step in the right direction. (This could also be extended for natural disasters like landslides, heavy rains, fogs etc.)

• ELIMINATION OF UNMANNED LEVEL CROSSINGS: In the Union Budget 2017-18, elimination of all unmanned level crossings on broad gauge lines by 2020 has been proposed.

• LHB COACHES: The Government has taken a decision that henceforth only LHB coaches will be manufactured.

ANIL KAKODKAR COMMITTEE • There should be an independent body like Railway Safety Authority under the government

with chairman and experts from outside.

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• A robust and powerful Safety Architecture should be there have a safety oversight on the

operational mode of Railways. • Elimination of both manned and unmanned level crossings within the next five years

• To avoid accidents and deaths at level crossings which account for 65 per cent of total deaths.

• To improve the line capacity as trains get held up at busy level crossing gates. • Save operation and maintenance costs incurred in the gates. • Doing away with level crossings needs Rs.50,000 crore. the investment could be

recouped in about 8 years as the monetary saving from a phase-out of level crossings would be in the region of Rs.7,000 crore per annum.

• Advanced signalling system based on continuous track circuiting and cab signalling similar to European train control system Level-II on the entire trunk route of about 19,000 route kilometres within five years.

• Public Premises Eviction Act should be amended so that eviction of encroachment is easily possible with the help of local railway police forces.

• Better coordination between Indian railways and the policing authorities. • Railways Act should be suitably amended to impose stringent punishment on persons found

guilty of sabotage. • Railways had classified at least 3,000 bridges to be 100 years old or more and 32 bridges as

distressed structures, wanted vulnerable bridges fitted with water level gauges and turbine flow meters to measure flow which should be interlocked in a way to warn the driver of the approaching train.

13. GOODS AND SERVICES TAX (GST)

AIM To have one indirect tax for the entire nation, that will make India a Unified Common Market.

DESCRIPTION GST is essentially a single tax on value addition at each stage of the supply of goods and services. According to the 101st Amendment Act, 2016, GST is a consumption based tax i.e. the tax is received by the State in which the goods or services are consumed and not by the State in which such goods are manufactured.

SUBSUMED TAXES At the Central level- Central Excise Duty, Additional Excise Duty, Service Tax, Countervailing Duty, Special Additional Duty of Customs, Surcharges and Cesses are subsumed.

At the State level- State Value Added Tax/Sales Tax, Entertainment Tax (unless levied by local bodies), Central Sales Tax, Octroi and Entry tax, Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling, State Surcharges and Cesses (related to goods and services) are subsumed.

EXEMPTED TAXES Basic Customs Duty, Vehicle Tax, Road Tax, Toll Tax, Stamp Duty, Excise on Liquor, Tax on Sale and Consumption of Electricity, Entertainment Tax (levied by local bodies)

SCHEME The previous Indirect Tax structure will give way to a dual GST model, with the Centre and

States simultaneously levying GST on a common tax base, as follows: • Central GST (CGST): For intra-state transactions of goods and services, levied by the

Centre. • State/ Union Territory GST (SGST/ UTGST): For the supply of goods and/or services

within the States/ Union Territories, levied by the States/Union Territories.


• Integrated GST (IGST): For inter-state transactions and imports of goods and services,

levied by the Centre. GST will have 4 broad slabs of indirect taxation; 5%, 12%, 18% and 28%, depending on

various factors such as being a luxury good/ service. GST on gold would be 3%. On consumption of ultra-luxury goods like luxury cars and demerit goods like tobacco

products, pan masala and environmentally harmful products, it imposes a cess over and above the 28% rate. This will bring in 50,000 crore as revenue and will be used to compensate the States for any revenue loss.

From the cesses, only the Clean Environment Cess will be retained, with the GST subsuming all the others, including the Swachh Bharat Cess, Krishi Kalyan Cess and Education Cess.

Goods and Services excluded from GST but are taxed by the Centre and/or States include- Alcohol, few Petroleum products, Land and Real Estate, Electricity, Food, Health and Education services.

The likely revenue of each State in the first five years (transitory period) of implementation of GST will be calculated using growth rate of 14%. The Centre would compensate States whose revenue collections fall below these levels.

Turnover Threshold: GST will apply when turnover of the enterprise exceeds Rs 20 lakhs (Limit is Rs 10 lakhs in hilly and North Eastern States).

Cross Empowerment Model: This model in GST aims to create a single interface for taxpayers. According to it, States were to have jurisdiction over assessees with turnover of up to 1.5 crore, while both States and the Centre were to assess those above that (50-50%). But to tackle the Centre's concerns, the GST Council agreed that service tax payers with turnover of 10 lakh to 1.5 crore would be handled by the Centre. This could, however, mean dual control for companies that supplies both services and goods.

STRUCTURE GST COUNCIL: It comprises of the Union finance minister as its chair and State finance ministers as its members. The Centre will have one-third weight in the council while States together will have the remaining two-third weight. Decisions will have to be passed by three-fourth vote, implying the need for consensus. The council will take decisions regarding the rate, laws, rules, procedures and administrative framework of the GST. The Council will also recommend those taxes to be subsumed and exempted from GST, the rates of taxation etc.

GOODS AND SERVICES TAX NETWORK (GSTN): To provide a common platform for registration, return filing and e-payment.

BENEFITS FOR,

• CENTRAL AND STATE GOVERNMENTS: Simpler and easier administration of taxes, increased revenue by decreasing cost collections and plugging leakages, increased tax buoyancy and widened tax base.

• BUSINESSES: Easy compliance, enhanced ease-of-doing business with uniformity of taxes, minimal cascading of taxes which would reduce hidden costs of business, boost investments by a transparent and predictable tax regime, create job opportunities that will, in turn, increase demands and bolster overall growth.

• MSMEs: Increased Formalization of the Sector. Previously, some parts of the value chain, like fabrics, were outside the tax net, leading to informalisation and evasion. This would be reduced. Small businesses can also now build up a real time track record of tax payments digitally, and this can be used by lending institutions for credit rating and lending purposes. Currently, small businesses are credit-constrained as they cannot credibly demonstrate their financial capability.


• CONSUMERS:

Increased transparency in indirect taxes paid and removal of any hidden taxes. • SERVICES:

Previously the Centre only imposed Service Tax, wherein agents had to register with and file to only one authority. But, now agents will have to register in all States that they operate in and file in each of them. This was done to ensure that States receive their due share of revenues. The increased compliance requirements could become cumbersome for agents (although a small %) with a pan-India presence.

EXPAND TAX BASE Previously, some parts of the value chain like fabrics (textile and clothing sector) and real estate were outside the tax net, leading to informalisation and evasion. Its inclusion now has overall expanded the tax base and increased formalization of the economy.

REDUCE COMPLEXITY It would help ease the complexity of the tax structure in India, by replacing Central and State indirect taxes, the latter being different across States, by reducing it to a structure of 6 rates.

LOWER COSTS Lower overall tax burden, by eliminating cascading, would help reduce the cost of raw materials and ultimately commodity prices.

REDUCE CORRUPTION It will foster compliance and reduce leakages. Previously invoice matching existed only for intra-state VAT transactions and not for excise and service tax nor for imports

LOGISTICAL BENEFITS Logistical costs within India are high. The previous tax regime raised direct costs (esp. in terms of time to delivery), indirect costs (firms keeping large inventories) and influenced location choices (locating closer to suppliers/ customers instead of the best place to produce). By implementing GST and eliminating inter-State check-posts, there would be a reduction in transportation costs, fuel costs and corruption. It would also give a boost to inter-State trade within the country.

AGRICULTURAL BENEFITS It would curtail the wastage of agricultural commodities (languishing at check-posts) and reduce warehousing costs (done to save from taxes).

DATA COLLECTION There would be seamless flow and availability of data to both the Centre and States, which would make direct tax collections more effective and widen tax base.

BOOST CO-OPERATIVE FEDERALISM Nearly all domestic indirect tax decisions to be taken jointly by Centre and States.

ISSUES: SEVERAL TAX SLABS:

As many as 4 main ones, and a total of 7 categories, ranging from zero to an undefined level beyond 28%. What is a flat tax in other economies has morphed into a progressive tax system in India.

MULTIPLE REGISTRATIONS: GST law requires all suppliers to register in each State where taxable supply of goods or services are made. Effectively, this means that suppliers in multiple States would have to obtain separate registrations. This would be difficult for companies with operations across India such as banking, telecom or airline companies.


HIKED ELECTRICITY COSTS:

GST is expected to inflate electricity costs as the Government has decided to keep electricity out of GST. Power producing companies would however have to pay GST for their inputs such as fuel and machinery but will not be able to get these taxes refunded, as their output; electricity is exempt. These higher costs would then be passed on to consumers.

IMPROVE TAX RATES: Currently, tobacco tax is levied only on cigarettes which constitute just about 11% of the market. The Centre could seriously consider bringing other forms such as chewable tobacco, gutka and bidis into the net. There is also the challenge to maintain revenue neutral rates.

GSTN ISSUES: As GSTN is building the IT infrastructure for GST, it will have access to sensitive tax data. But, its ownership pattern has a majority private stake in it. This has raised concerns of fraud and abuse of data within the Network.

MSME CONCERNS: With the shift to GST, compliance costs are a major concern for MSMEs. Its cost competitiveness may be threatened due to this.

EXCLUSION CHALLENGES: A large the number of goods and services have been excluded from GST. These must be reduced and rationalized at the earliest. For e.g.: Bringing diesel under GST would have brought down diesel prices and would have an all-pervasive impact, especially on the poor, by flattening the overall price-levels.

CONFUSION OVER ANTI-PROFITEERING RULE: GST's anti-profiteering clause requires companies to pass on the benefit of lower taxes to consumers. But little clarity over it has led to confusion over setting selling prices. Many countries that adopted GST have witnessed a spurt in inflation after implementation. A National Anti-profiteering Authority (NAA) is to be set up to ensure that the benefits that accrue to entities due to reduction in costs is passed on to the consumers. However, there was a delay in its formation and the rules to be framed.

RAISED PRICES: Ideally, the Government should have started with low rates, achieved compliance, and pushed rates up gradually. Also, multiple rates make administration complicated. For instance, as most States did not levy any Value-Added Tax (VAT) on micronutrients, organic manure and bio-fertilisers, the 12% GST rate would mean a rise in retail prices of these minor fertilisers. This will go to the extent of modifying the Nitrogen-Phosphorus-Potassium (NPK) ratio in fertiliser use. This would impact land productivity in the future. Also, the tax on gold and jewellery products- items that are disproportionately consumed by the rich- at 3% is low. Thus, commodity tax rates must be rationalized further keeping in mind long term benefits.

ON ENVIRONMENT: The Carbon Tax (or Coal Cess), which was a source of funding for clean energy projects through the National Clean Energy Fund, will now feed the GST Compensation Fund- a fund meant to compensate State Governments for any loss in revenue arising out of GST. This can affect environmental and sustainability goals of the country.

RECOMMENDATIONS: AWARENESS:

There is a need to educate the common man on GST and its repercussions. So many industrialists and individuals are still grappling with it’s provisions. More awareness is required for companies, especially Medium and Small companies, to understand compliance requirements.


ROBUST IT INFRASTRUCTURE:

The success of GST would hinge on the robustness of it’s IT infrastructure. GST Network (GSTN)-readiness is a fundamental aspect of the rollout. Only through a robust, state-of-the-art, secured and trusted IT system is it possible to provide a seamless, user-friendly experience cutting across geographical and functional boundaries.

WELL-INFORMED ADMINISTRATION: The Central and the State tax administration staff must be familiarised with the IT infrastructure. They should be up-to-date with the GST Act and the way to register, file returns and make payments. All this requires intensive training. The success of any GST regime depends on the ability of the tax authorities to track goods and services across the value chain till the retail stage. This should not lead to harassment. Typically, the end of the value chain involves small and mid-sized businesses that don't have the ability to follow complex compliance processes. Failure to understand this would not only snap the value chain but also have tax authorities deal with multiple taxpayers with low tax payments, increasing the administrative costs of tax compliance.

GST SECRETARIAT: A GST secretariat is required in every State. This body will deal with day-to-day issues relating to the implementation of Goods and Services Tax. This will help plug the institutional void at the State level.

SERVICES: There is scope for more centralized procedures to minimize the compliance burden under services.

REDUCE EXEMPTIONS: Exemptions break the GST chain, raise the chances of evasion and create systemic inefficiencies. The GST rate can be lowered only when the Government keeps exemptions to the minimum and subsumes all taxes. In due course, all sectors should be brought under GST. For instance, bringing electricity into the GST framework would improve the competitiveness of Indian industry because taxes on power get embedded in manufacturers' costs, and can be claimed back as input tax credit. Also, inclusion of land and real estate and alcohol in GST would improve transparency and reduce corruption. Keeping health and education completely out is inconsistent with equity because these are also services consumed disproportionately by the rich.

14. INSOLVENCY AND BANKRUPTCY CODE, 2016

PURPOSE: - In India, there has been a lack of global standards in dealing with default of debt. - The bankruptcy proceedings and recovery by creditors is plagued by a plethora of Acts.

E.g.: Sick Industrial Companies (Special Provisions) Act, 1985, Recovery of Debts Due to Banks and Financial Institutions Act, 1993 etc.

- Some of these laws are almost a century old, and have not kept up with the times. E.g.: Presidential Towns insolvency Act, 1909 and Provincial Insolvency Act, 1920.

- Due to the overlapping jurisdictions of these laws and lack of clarity in their provisions, there have been delays in the Insolvency Resolution.

- The existing laws have failed to aid recovery for lenders or restructuring of firms. - This has hindered the confidence of lenders, which has in turn diminished debt access for

borrowers. - It hampers ease-of-doing business. The World Bank has stated that it takes 4 years to

resolve a bankruptcy case in India.


FEATURES: - To speedily identify financially distressed companies and its resolution, if the underlying

business is viable. The Code will also ensure time-bound settlement of insolvency and create a database of serial defaulters—all critical in resolving India’s bad debt problem which has crippled bank lending. This will make it easier for financial institutions to deal with Non-Performing Assets (NPAs) arising out of failed ventures.

- To consolidate existing laws relating to insolvency and reorganization of companies. - To facilitate the easy exit of companies, an issue which has been plaguing the industry

for long. - To addresses cross-border insolvency. - To promote entrepreneurship and availability of credit to all stakeholders in a time-

bound manner. - To maximize the value of assets concerned.

PROCESS: • The Code creates time-bound processes for insolvency resolution of companies and

individuals. These processes will be completed within 180 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.

• The essential idea is that when a firm defaults on its debt, control shifts to a Committee of Creditors, who has a fixed time period to evaluate proposals from interested parties about resuscitating the company or to enable liquidation.

• It may be initiated by the debtor or creditor. The Code essentially contains 4 pillars of Institutional Infrastructure;

I. First is a class of regulated persons; the ‘Insolvency Professionals’. They play a key role in the working of the insolvency resolution process by initiating it or managing and liquidating distressed assets. They would in turn be regulated by ‘Insolvency Professional Agencies’.

II. Second is the electronic database; the `Information Utilities'. They would collect and disseminate information about lenders and terms of lending, so as to facilitate the Insolvency Resolution.

III. Third is adjudication. The NCLT (National Company Law Tribunal) will be the forum where firm insolvency will be heard and DRT (Debt Recovery Tribunal) will be the forum where individual insolvencies will be heard. These institutions, along with their Appellate Bodies; NCLAT and DRATs will be adequately strengthened so as to achieve world class functioning of the bankruptcy process.

IV. Fourth pillar is a regulator; ‘The Insolvency and Bankruptcy Board of India’. This body will have regulatory over-sight over the whole process.

ISSUES: - Market Slump: Several Non-Performing Assets (NPAs) are in sectors where market conditions

are in a slump, such as steel, power and textiles. In this environment, it is difficult for banks to find suitable buyers of distressed assets at desired valuations.

- Ambiguous Provision: Although there is a provision in the Code that no legal proceedings can be permitted against insolvency professionals or concerned officials for anything done in good faith, they find it difficult to prove if a particular act was done in good faith or not.

- Flexibility and Autonomy: The tight resolution timelines envisaged under the code cannot be achieved if bankers do not have the flexibility and the autonomy to sell distressed assets.

- Promoters Ignored: Role Promoters play in delaying NPA resolutions has been ignored. Majority of businesses in India remain under the control of their Promoters. In order to resolve the issue of NPAs, the involvement of Promoters is paramount for bankers to make significant management changes.


- No Scope for Settlement: It is alarming that the Code prohibits withdrawal of the

application once the same has been admitted. This means that there is no scope whatsoever for settlement.

- Creditors Over Debtors: The debtor is not given any opportunity to put forth his/her case or representation in the entire process. In this manner, the Code ignores rights enshrined in the Constitution.

- Capacity Concerns: The severe capacity constraints of the NCLT and DRT in handling the present and past backlog of cases are yet to be resolved. Insufficient technical expertise and infrastructure could also hinder the smooth functioning of the process.

- Selection of IPs: Regarding IPs (Insolvency Professionals), it is critical to develop a robust way to select the most qualified, and to ensure that they are independent and do not allow Promoters or other stakeholders to manipulate the resolution process in any unfair manner. This is crucial for the successful implementation of the IBC.

- Secure MSMEs: It is necessary to ensure that the Code has no adverse impact on the MSME sector, which is constantly grappling with problems of delayed payment of their dues, which may result in the filing of insolvency petition

- Purpose of Insolvency and Bankruptcy Fund: The Code creates an Insolvency and Bankruptcy Fund for those concerned under the Code. However, it does not specify the manner in which the Fund will be used.

- Initiate International Agreements: Regarding Cross-Border Insolvency, it is necessary for the central government to enter into reciprocal arrangements with other countries which could benefit sectors such as aviation, shipping, and infrastructure, amongst others. These reciprocal arrangements would also be useful in all those cases where the creditors are pursuing remedies abroad or the company has overseas assets.

15. TWIN BALANCE SHEET PROBLEM

WHAT IS TWIN BALANCE SHEET PROBLEM? • Overleveraged and distressed companies and the rising NPAs in Public Sector Bank

balance sheets.

WHY IS IT AN IMPORTANT ISSUE? • Because it is holding up private investment in the country and therefore, growth in all sorts

of sectors. • More than four-fifth of the non-performing assets were in the public sector banks, where the

NPA ratio had reached almost 12 percent. • At its current level, India’s NPA ratio is higher than any other major emerging market (with

the exception of Russia), higher even than the peak levels seen in Korea during the East Asian crisis.

HOW IS INDIA’S TBS PROBLEM DIFFERENT? • Typically, countries with a twin balance sheet (TBS) problem follow a standard path. Their

corporations over-expand during a boom, leaving them with obligations that they can’t repay. So, they default on their debts, leaving bank balance sheets impaired, as well.

• This model, however, doesn’t seem to fit India’s case. True, India had boomed during the mid-2000s along with the global economy. But it sailed through the Global Financial Crisis largely unscathed. This happened because prudential restrictions kept bank credit from expanding excessively during the boom, while capital controls prevented an undue recourse to foreign loans.

• In other TBS cases, growth was derailed because high NPA levels had triggered banking crises. But this has not happened in India. In fact, there has not even been a hint of pressure on the banking system.

• Because the bulk of the problem has been concentrated in the public sector banks, which not only hold their own capital but are ultimately backed by the government, whose resources


are more than sufficient to deal with the NPA problem. As a result, creditors have retained complete confidence in the banking system.

WHAT WENT WRONG? • The origins of the NPA problem lie in decisions taken during the mid-2000s. During that

period, economies all over the world were booming. Indian GDP growth had surged to 9-10 percent per annum. Corporate profitability was amongst the highest in the world.

• Firms launched new projects worth lakhs of crores, particularly in infrastructure-related areas. Within the span of four short years, the investment-GDP ratio reached over 38 percent by 2007-08.

• This investment was financed by an astonishing credit boom. Between 2004-05 and 2008-09, the amount of non-food bank credit doubled. There were also large inflows of funding from overseas. All of this added up to an extraordinary increase in the debt of non-financial corporations.

• But just as companies were taking on more risk, things started to go wrong. Costs soared far above budgeted levels, as securing land and environmental clearances proved much more difficult and time consuming than expected. At the same time, forecast revenues collapsed after the GFC.

• Financing costs increased sharply. Firms that borrowed domestically suffered when the RBI increased interest rates to quell double digit inflation. And firms that had borrowed abroad when the rupee was trading around Rs 40/dollar were hit hard when the rupee depreciated, forcing them to repay their debts at exchange rates closer to Rs 60-70/dollar.

• Higher costs, lower revenues, greater financing costs — all squeezed corporate cash flow, quickly leading to debt servicing problems.

CHARACTERISTICS OF INDIAN TWIN BALANCE SHEET SYNDROME • What distinguished India from other countries was the consequence of TBS. TBS did not

lead to economic stagnation, as occurred in the U.S. and Europe after the Global Financial Crisis and Japan after its bubble burst in the 1990s. To the contrary, it co-existed with strong levels of aggregate domestic demand, as reflected in high levels of growth despite very weak exports and moderate, at times high, levels of inflation.

• Perhaps the most important difference between India and other countries, however, was the way in which the financial system responded to the intense stress on corporations. In other countries, creditors would have triggered bankruptcies, forcing a sharp adjustment that would have brought down growth in the short run. But in India the strategy was to allow time for the corporate. That is, companies sought financial accommodation from their creditors, asking for principal payments to be postponed, on the grounds that if the projects were given sufficient time they would eventually prove viable.

• Accordingly, banks decided to give stressed enterprises more time by postponing loan repayments. They also extended fresh funding to the stressed firms to tide them over until demand recovered.

• As a result, total stressed assets have far exceeded the headline figure of NPAs.

PROBLEMS OF PRESENT LOAN RESOLUTION MECHANISMS • Low performance of ARCs: The RBI has been encouraging the establishment of private

Asset Reconstruction Companies (ARCs), in the hope that they would buy up the bad loans of the commercial banks. In that way, there could be an efficient division of labour, as banks could resume focusing on their traditional deposit-and-loan operations, while the ARCs could deploy the specialist skills needed to restructure corporate debts. This strategy, however, has had only limited success. Many ARCs have been created, but they have solved only a small portion of the problem, buying up only about 5 percent of total NPAs at book value over 2014-15 and 2015-16. The problem is that ARCs have found it difficult to recover much from the debtors. Thus they have only been able to offer low prices to banks, prices which banks have found it difficult to accept.


• SDR AND S4A: So the RBI has focussed more recently on two other, bank-based workout

mechanisms. In June 2015, the Strategic Debt Restructuring (SDR) scheme was introduced, under which creditors could take over firms that were unable to pay and sell them to new owners. The following year, the Sustainable Structuring of Stressed Assets (S4A) was announced, under which creditors could provide firms with debt reductions up to 50 percent in order to restore their financial viability.

• In principle, these schemes taken together might have provided a comprehensive framework for dealing with solvency problems. Their success, however, has been limited; while two dozen firms have entered into negotiations under SDR, only two cases have actually been concluded as of end-December 2016. And only one small case has been resolved so far under S4A.

• There are several reasons why progress has been so limited. In part, the problem is simply that the schemes are new, and financial restructuring negotiations inevitably take some time. But the bigger problem is that the key elements needed for resolution are still not firmly in place: Loss recognition. The Asset Quality Review (AQR) was meant to force banks to recognise

the true state of their balance sheets. But banks nonetheless continue to evergreen loans, as the substantial estimates of unrecognised stressed assets make clear.

Coordination. The RBI has encouraged creditors to come together in Joint Lenders Forums, where decisions can be taken by 75 percent of creditors by value and 60 percent by number. But reaching agreement in these Forums has proved difficult, because different banks have different degrees of credit exposure, capital cushions, and incentives. For example, banks with relatively large exposures may be much more reluctant to accept losses. In some cases the firm’s losses aren’t even known, for they depend on the extent of government compensation for its own implementation shortfalls, such as delays in acquiring land or adjusting electricity tariffs. And deciding compensation is a difficult and time-consuming task; many cases are now with the judiciary.

Proper incentives. The S4A scheme recognises that large debt reductions will be needed to restore viability in many cases. But public sector bankers are reluctant to grant write-downs, because there are no rewards for doing so. To the contrary, there is an inherent threat of punishment, since major write-downs can attract the attention of investigative agencies. Accordingly, bankers have every incentive to simply reschedule loans, in order to defer the problems until a later date. To address this problem, the Bank Board Bureau (BBB) has created an Oversight Committee which can vet and certify write-down proposals. But it remains open whether it can change bankers’ incentives.

Capital. The government has promised under the Indradhanush scheme to infuse Rs 70,000 crores of capital into the public sector banks by 2018-19. But this is far from sufficient, and inherently so, because there is a principal-agent problem, arising from the separation of the institution with financial responsibility (the government) from its decision-making agent (the state banks).If the government promises unduly large funds in advance, the banks may grant excessive debt reductions. But banks do not receive sufficient assurance of funding, they will not be able to grant companies enough debt relief.

• In short, the road to resolution remains littered with obstacles, even for the most ordinary of bad debt cases. Stressed assets are concentrated in a remarkably few borrowers, with a mere 50 companies accounting for 71 percent of the debt owed by IC1 debtors (Company who’s interest coverage ratio is less than 1 which means they don’t earn enough to even honour their interest obligation). The large, over-indebted borrowers are particularly difficult to resolve, for several deep-seated reasons: Severe viability issues. At this point, large write-offs will be required to restore viability to

the large IC1 companies. About 33 of the top 100 stressed debtors would need debt reductions of less than 50 percent, 10 would need reductions of 51-75 percent, and no less than 57 would need reductions of 75 percent or more.

Acute coordination failures. Large debtors have many creditors, who need to agree on a strategy. This is often difficult when major sums are involved.


Serious incentive problems. Public sector bankers are even more cautious in granting

debt reductions in major cases, as this may attract the attention of not only the investigative agencies, but also the wider public. At the same time, state banks are often not in a position to take the alternative route of converting their claims to equity, taking over large firms, and then reselling them, even when this is clearly the value-maximising solution – and even though it is encouraged under SDR.

Insufficient capital. Debt write-downs in the case of the large debtors could quickly deplete banks’ capital cushions.

PUBLIC SECTOR ASSET REHABILITATION AGENCY (PARA) • One possible strategy would be to create a ‘Public Sector Asset Rehabilitation Agency’

(PARA), charged with working out the largest and most complex cases. Such an approach could eliminate most of the obstacles currently plaguing loan resolution.

• It could solve the coordination problem, since debts would be centralised in one agency; • It could be set up with proper incentives by giving it an explicit mandate to maximize

recoveries within a defined time period; • It would separate the loan resolution process from concerns about bank capital.

For all these reasons, asset rehabilitation agencies have been adopted by many of the countries facing TBS problems, notably the East Asian crisis cases.

HOW WOULD A PARA WORK? • There are many possible variants, but the broad outlines are clear. It would purchase

specified loans from banks and then work them out, either by converting debt to equity and selling the stakes in auctions or by granting debt reduction, depending on professional assessments of the value-maximizing strategy.

• Once the loans are off the books of the public sector banks, the government would recapitalise them, thereby restoring them to financial health and allowing them to shift their resources – financial and human – back toward the critical task of making new loans. Similarly, once the financial viability of the over indebted enterprises is restored, they will be able to focus on their operations, rather than their finances. And they will finally be able to consider new investments.

• Of course, all of this will come at a price, namely accepting and paying for the losses. But this cost is inevitable. Loans have already been made, losses have already occurred, and because public sector banks are the major creditors, the bulk of the burden will necessarily fall on the government (though the shareholders in the stressed enterprises may need to lose their equity as well). In other words, the issue for any resolution strategy –PARA or decentralised -- is not whether the government should assume any new liability. Rather, it is how to minimize the existing liability by resolving the bad loan problem as quickly and effectively as possible. And that is precisely what creation of the PARA would aim to do.

WHY IS A PUBLIC SECTOR ASSET REHABILITATION AGENCY(PARA) NEEDED? • It’s not just about banks, it’s a lot about companies. So far, public discussion of the bad

loan problem has focused on bank capital, as if the main obstacle to resolving TBS was finding the funds needed by the public sector banks. But securing funding is actually the easiest part, as the cost is small relative to the resources the government commands. Far more problematic is finding a way to resolve the bad debts in the first place.

• It is an economic problem, not a morality play. Without doubt, there are cases where debt repayment problems have been caused by diversion of funds. But the vast bulk of the problem has been caused by unexpected changes in the economic environment: timetables, exchange rates, and growth rate assumptions going wrong.

• The stressed debt is heavily concentrated in large companies. Concentration creates an opportunity, because TBS could be overcome by solving a relatively small number of cases. But it presents an even bigger challenge, because large cases are inherently difficult to resolve.


• Many of these companies are unviable at current levels of debt requiring debt write-

downs in many cases. Cash flows in the large stressed companies have been deteriorating over the past few years, to the point where debt reductions of more than 50 percent will often be needed to restore viability. The only alternative would be to convert debt to equity, take over the companies, and then sell them at a loss.

• Banks are finding it difficult to resolve these cases, despite a proliferation of schemes to help them. Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests. If PSU banks grant large debt reductions, this could attract the attention of the investigative agencies. But taking over large companies will be politically difficult, as well.

• Delay is costly. Since banks can’t resolve the big cases, they have simply refinanced the debtors, effectively “kicking the problems down the road”. But this is costly for the government, because it means the bad debts keep rising, increasing the ultimate recapitalization bill for the government and the associated political difficulties. Delay is also costly for the economy, because impaired banks are scaling back their credit, while stressed companies are cutting their investments.

• Progress may require a PARA. Private Asset Reconstruction Companies (ARCs) haven’t proved any more successful than banks in resolving bad debts. But international experience shows that a professionally run central agency with government backing – while not without its own difficulties -- can overcome the difficulties that have impeded progress.

FUNDING OF PARA • Part would need to come from government issues of securities. This would increase the

debt stock, but could actually strengthen the government’s financial position if establishing PARA hastens the resolution of the stressed asset problem, since doing so would reduce the amount that would ultimately be needed to compensate banks for the losses on the bad loans.

• A second source of funding could be the capital markets, if the PARA were to be structured in a way that would encourage the private sector to take up an equity share. In addition, capital markets could help replenish the capital of the public sector banks, if the government were willing to sell down its holdings.

• A third source of capital could be the RBI. The RBI would (in effect) transfer some of the government securities it is currently holding to public sector banks and PARA. As a result, the RBI’s capital would decrease, while that of the banks and PARA would increase. There would be no implications for monetary policy, since no new money would be created.


HOW TO ENSURE EFFECTIVENESS OF PARA? • First, there needs to be a readiness to confront the losses that have already occurred in the

banking system, and accept the political consequences of dealing with the problem. If loans are written off, there could be accusations of favouritism; if defaulting companies are taken over and sold, this could be seen as excessively strong government. The only defence against such charges would be to ensure the PARA is thoroughly professional, with plans that maximize recovery value.

• Second, the PARA needs to follow commercial rather than political principles. To achieve this, it would need to be an independent agency, staffed by banking professionals. It would also need a clear mandate of maximizing recoveries within a specified, reasonably short time period. The best, perhaps the only way to achieve this is to set up a structure like the one done for the GST Network, which is broadly within the aegis of the public sector but with government owning 49 per cent.

• The third issue is pricing. If loans are transferred at inflated prices, banks would be transferring losses to the Rehabilitation Agency. As a result, private sector banks could not be allowed to participate – and then co-ordination issues would remain – while private capital would not want to invest in the Agency, since PARA would make losses. To get around this problem, market prices could be used, but establishing the market price of distressed loans is difficult and would prove time consuming.

• All three problems are formidable ones, which is precisely why other schemes have been tried first. But these other schemes have not worked, years have flown by, and meanwhile the costs are continuing to mount. To paraphrase the learned economist Mr. Holmes, “Once you have eliminated the impossible, whatever remains, no matter how difficult, must be the solution.”

16. FOREIGN INVESTMENT PROMOTION BOARD (FIPB)

DESCRIPTION Since the early 1990s, India allowed FDI in most sectors through the automatic route. But, in certain segments considered sensitive for the economy and security, the proposals were to be first cleared by FIPB.

Thus, the Foreign Investment Promotion Board (FIPB) is an inter-ministerial body that offers a single window clearance for applications on Foreign Direct Investment (FDI) belonging to the approval route.

COMPOSITION It comprises of the Secretaries of main Ministries of GOI. Chairperson: Secretary of Department of Economic Affairs. Members: Secretaries of DIPP, Department of Commerce, Ministry of External Affairs, Ministry of Overseas Indian Affairs, Department of Revenue and Ministry of Small and Medium & Micro Enterprises. However, the Board can co-opt those persons (secretaries, officials or experts) as may be required. It is housed in the Department of Economic Affairs, Union Ministry of Finance.

FUNCTION • To quickly approve Foreign Investment proposals. • To review FDI polices and to set up guidelines that are transparent and which encourage

FDI into various sectors. • To look over the implementation of the various proposals those have been approved by it. • To take up activities that encourage FDI into the country. • To identify those sectors which require FDI. Presently, FDI proposals up to 5,000 crore rupees are cleared by the FIPB. However, proposals involving more than 5,000 crore rupees are given final clearance by the Cabinet Committee on Economic Affairs (CCEA).


While the Government now allows FDI in most sectors through the automatic route, there are some such as broadcast content, print media, multi brand retail and banking where foreign investment is restricted (in most cases less than 50%) and allowed only through the Government approval route.

RECENT DEVELOPMENTS FIPB will be abolished in 2017-18 as declared by the Finance Minister in his Budget speech.

WHY ABOLISH? The concept of the approval route is against the rule of “minimum government”. While the FIPB had the final say in approving Foreign Direct Investment (FDI) proposals in the country for long, its power has been systematically reduced under the current government. In 2016, the Government had announced relaxed FDI norms in single-brand retail, civil aviation, airports, pharmaceuticals, animal husbandry and food products. This ensured that more than 90% of total FDI inflows are now through the automatic route. Thus, FDI approvals over the years have been brought down and are currently required only for 11 sectors.

WHO WILL PERFORM FIPB’S DUTIES? All FDI applications, their processing and approval will be handled by the concerned Ministries/Departments in consultation with the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce.

Proposals over sensitive sectors will be looked upon by the Home Ministry.

DIPP will also issue the Standard Operating Procedure (SOP) for processing of applications and decision of the Government under the extant FDI policy. It is noted that the concurrence of DIPP would be mandatory with reference to FDI applications which are rejected by the concerned Ministry/Department.

DISADVANTAGES • Even after dismantling FIPB, the approval regime would continue with sectoral departments

being in charge of granting approvals to FDI inflows. If this is true, then dismantling the FIPB without simultaneously abolishing the approval route will be counter-productive.

• It will end up increasing costs associated with the approval process, as it will require investors and the firms to deal with multiple departments in administration.

• India’s capacity to ensure affordable medicines or vaccines may be compromised. FDI in brownfield or existing pharmaceutical companies are marked by profitability rather than welfare. The new arrangement eliminates the ability of the Health Ministry to impose changes/ conditions in their case, which falls under the Department of Pharmaceuticals, Chemicals and Fertilizers Ministry.

• Although there are doubts about the FIPB’s effectiveness, this inter-ministerial body provided a forum to assess the implications of FDI in a holistic manner.

ADVANTAGES • The approval mechanism makes the system vulnerable to regulatory discretion regarding

capital controls and induces unpredictability in the process. • Retaining this route mechanism indicates that despite our liberalisation of capital inflows, we

rely on Central Planning for the economy. • It creates artificial entry barriers. • Dismantling FIPB will help rationalize our FDI regime and improve ease-of-doing business

within India.

RECOMMENDATIONS Abolishing FIPB without addressing the underlying flaws of India’s investment approval process is nothing short of an exercise in futility. For further rationalising and liberalising of the FDI policy,


the move must be complemented with a single comprehensive law governing capital inflows in India.

This law must resolve the fundamental issues plaguing the process and bring about reforms such as- • Binding timelines for concerned ministries/ departments for various actions. • Clear guidelines on the purpose of Government approval itself. • Requirement of Government approval only for foreign investment in sectors that are

strategic from the viewpoint of National Security or to address Emergency situations such as war or balance of payments crisis.

• The law should also focus on accountability of the Government. It should provide clear, time-bound legal processes and require the Government to give reasons for rejecting an investment proposal.

• Redesigning of the primary law; the Foreign Exchange Management Act (FEMA).

17. OUTCOME BUDGET • One of the leading budgeting technique followed in India at present is the outcome budgeting

or outcome based budgeting. It is practiced by most of the Ministries while preparing their budget details and submitting it to the Ministry of Finance for the preparation of the annual budget towards the end of February.

• Outcome based budgeting is a practice of suggesting and listing of estimated outcomes of each programmes or schemes designed.

• Outcomes are the end products and results of various Government initiatives and interventions, including those involving partnership with the State Governments, Public Sector Undertakings, autonomous bodies and the community.

• An interesting feature of outcome based budgeting is that the outcomes of programmes are measured not just in terms of Rupees but also in terms of physical units like Kilowatt of energy produced or tonnes of steel produced. Also outcomes are expressed in terms of qualitative targets and achievements to make the technique more comprehensive.

PROCEDURE OF OUTCOME BASED BUDGETING • Under outcome budgeting, each Ministry presents a preliminary Outcome Budget to the

Finance Ministry, which is responsible for compiling them. The Outcome Budget becomes a progress card on what various Ministries and Departments have done with the outlays in the previous annual budget.It measures the development outcomes of all government programmes and whether the money has been spent for the purpose it was sanctioned including the outcome of the fund usage. Outcome budget is a performance measurement tool that helps in: Better service delivery Decision-making Evaluating programme performance and results Communicating programme goals Improving programme effectiveness Make budgets cost effective Fix accountability Aid better scheme management Outcome budgeting makes government programmes more result oriented, instead of outlay

oriented. Under outcome budgeting, the document shows physical dimensions of the financial budget indicating the actual physical performance in the previous year, current year and targeted performance during the projected (next) year.

From 2007-08 onwards, the previous Performance Budget was merged with Outcome Budget. There was only one document i.e. the Outcome Budget. All Ministries have to prepare outcome budgets to make the budgeting target oriented.


IMPORTANCE • Better perspective to the short and long-term outcomes of governance. • A robust public administration that would focus on results and outcomes. • Rather than simply asking did the institutions build enough toilets or did they open schools and

hospitals, the questions will be like whether the toilets built are clean and functional and did open defecation reduce.

• Education sector: Construction of an x number of primary school buildings could be the desired output, the outcomes could be to educate an x number of children up to the primary level or augmentation of existing school and associated infrastructure etc.This will help in inclusiveness and quality of service delivery.

• Handling corruption: chances of leakages, fraud and embezzlement of funds get reduced as there is proper outcome already decided.

• Time bound results: Periodic inspections and review reduce the time lag and utilization of public funds productivity is increased.

• Online grievance redressal mechanism becomes easy as outcome budgeting focusses on technology and fast delivery.

• Linking budgetary outlays to specific outputs (tangible services or infrastructure provided) and outcomes (short or long-term benefits to the people).

• Citizens now can have data to hold governments accountable, and in turn empowers the governments to better orient the bureaucracy towards results.

• Building on this, the Delhi government’s Outcome Budget for 2017-18 shifts the bar for transparency and accountability in public spending to a new level.

• Participation of stakeholders: All the stakeholders in the society in decision making are included. It will lead to pooling of funds with investor confidence and reiterates the tenets of democracy.

DELHI’S OUTCOME BUDGET • There are at least three distinct ways in which the Delhi government’s effort is unique for any

government in India. • A substantial chunk of the annual budget has been linked to quantifiable indicators

measuring both outputs and outcomes. In all, 1,938 unique indicators were developed to capture the performance of 34 departments and agencies of the Delhi government.

• The report also captures the baseline performance against these indicators for 2016-17 and targets for 2017-18, a bold act of suo moto disclosure for any government in India.

• Realising the difficulty of capturing certain outcomes through administrative data, the Delhi government plans to rely on independent surveys and citizen feedback to assess the outcomes of important programmes. For example, independent surveys will now measure the percentage of community toilet seats that are functional and their average cleanliness score, and average satisfaction levels among citizens using Mohalla Clinics and hospitals of the Delhi government.

• Since programmes and schemes have been linked to a comprehensive set of indicators with targets, the Delhi government plans to use the Outcome Budget as a government-wide quarterly monitoring framework facilitated through an IT application, and not as a one-off annual report. This has major implications for creating a common bottom line for government functionaries to focus on, similar to the quarterly profit and performance targets (KRAs) driving private sector managers.

• Delhi’s outcome budgeting initiative puts it in the league of global cities that rigorously measure the performance of their agencies. For example, since 1977, the New York City government releases a half-yearly Mayor’s Management Report which tracks the city’s 44 agencies against 1,649 performance indicators. The publication of the report is mandated by the city’s charter and has become a well-accepted standard for civic openness.

• Delhi’s Outcome Budget is a remarkable achievement also for the fact that it was not just a technocratic project. Backed strongly by the elected leadership, it was a collaborative exercise between the Planning department and hundreds of officials from various departments.


Much more work will be required to improve upon the choice of indicators and to build robust systems to generate reliable data. Nevertheless, this initiative underscores an important point. The promise of good governance won’t be realised by crafting catchy slogans and launching well-meaning welfare schemes alone. It will be realised by a relentless focus on the right outcomes and motivating the government machinery to deliver on those outcomes.

18. SHELL COMPANIES DESCRIPTION DEFINITION: A shell company or corporation is one without any active business operations

or significant assets. They are paper companies incorporated around the world without any tangible business.

These types of corporations are not all necessarily illegal. LEGITIMATE: Legitimate reasons for a shell company include setting it up as a startup, using

the business entity as a vehicle to raise funds, conduct a hostile takeover or to go public. ILLEGITIMATE: Many wealthy individuals abuse shell companies for personal gain. They can

be used to disguise business ownership from law enforcement or the public. Also, in order to escape taxation, several people seek personal tax havens. They set up

shell companies in one or many such locations to funnel earnings in such a way that it isn't counted towards personal income.

Moreover, they can be used to obscure the ultimate beneficiaries, conceal political investment, route money to evade tax, commit fraud or manipulate tenders.

METHODS: • Suspicious transactions are often conducted below the threshold of automatic banking

software triggers. • In some cases, ‘seed’ money is introduced as capital in one shell which is then passed on

to other shells in a single day in a single branch. Thus, each company gets identical sums as capital, which is instantly lent or invested in another company. The exercise is repeated five to ten times to create the illusion of real transactions and multiplying money.

• In cases involving forex, large remittances are sent out as payment for fictional imports, advances or commissions, later moved into other shells and then brought back as receipts (called round-tripping).

• Lax tax regulations have allowed many errant promoters to list companies with no operations as conduits for money laundering.

• Often many such shells have a common registered address with ‘dummy’ directors who may be real persons but are untraceable or unrelated to the business.

INDIA AND SHELL COMPANIES In India, shell companies have traditionally been used for rotating and siphoning off funds through fictitious sales, inflated purchases, unjust commissions or for creating equity for individuals operating behind the scenes. INSTANCES:

• In Kolkata, Delhi and other cities, over 300 companies can be found registered at one single address, all for facilitating illicit transactions.

• In May 2016, investigations revealed that 24 ghost companies operating from a single branch of a leading Public Sector Bank in Delhi were used to cheat the Government of several crore rupees.

• The leaked Panama Papers (2016) exposed a global network of shell companies operating from tax havens used for moving assets and cash from one country to another illegally.

• The Special Investigation Team (SIT) on black money says such manipulation of stocks and creation of non-taxable capital are gaining popularity. According to it, investments from Cayman Islands, a tax haven, to India amount to Rs. 85,000 crore. This reflects the increasing use of shells companies in money-laundering.

http://www.investopedia.com/terms/s/startup.asp

http://www.investopedia.com/terms/h/hostiletakeover.asp

http://www.investopedia.com/terms/p/personalincome.asp


• Following demonetisation, Investigative agencies have found that about Rs. 4,000 crore

of cash was deposited in shell companies. • The IT department has found that almost 90% of shell companies are located in Kolkata

and has planned a major crackdown against them. Kolkata is a preferred choice on account of its easy availability of professionals and an established network needed to set up a shell company.

LAWS Some laws that help curb illegal activities to target shell companies are- 1. Benami Transaction (Prohibition) Amendment Act, 2016 2. The Prevention of Money Laundering Act, 2002 3. The Companies Act, 2013.

GOVERNMENT INITIATIVES The scrutiny against shell companies was stepped up in the wake of demonetisation and as part of the action against black money. 1) OPERATION CLEAN MONEY:

• Initiated by Income Tax Department (ITD). • First phase of the operation involved-verification of large cash deposits made after

demonetization. • Second phase involves identification of high risk persons for detailed investigations by

the ITD. 2) MINISTRY OF CORPORATE AFFAIRS (MCA) INITIATIVES:

• A ‘Taskforce on Shell Companies’ co-chaired by secretaries in the Revenue Department and Corporate Affairs Ministry has been established.

• Companies can be removed from the rolls of the Ministry of Corporate Affairs (MCA) by 2 means; either by the Registrar of Companies (RoC) or voluntarily. The strike off happens in case companies have failed to commence business within a year of incorporation or were not carrying any business for 2 preceding financial years or if they did not apply for dormant status.

• In April, 2017, the Registrar of Companies (RoC) issued show cause notices to over 2 lakh companies for striking off their names. The Enforcement Directorate (ED) will be roped in to probe if companies deregistered have been involved in money laundering.

• Criticism: Actions are initiated under the Companies Act, although, in the absence of a definition for shell companies, the basis of selection of these companies is unclear.

3) SEBI’S INITIATIVES: • The Securities and Exchange Board of India (SEBI) had curbed trading activities of over

300 firms, identified as shell companies. Subsequently these were eased, following appeals against the ruling.

• Several firms have been ordered to conduct forensic audits to verify credentials and finances.

• Criticism: SEBI (a quasi-judicial body) had banned trading in the shares of many companies without giving the entities in question a chance to respond to the allegations. This became detrimental as it caused a mini-crash in the market, affecting the prices of multiple shares and the destruction of wealth of several financial institutions and investors. It also risked the credibility the securities market regulator. SEBI subsequently rescinded the trading ban on many of those companies.

4) PLACE OF EFFECTIVE MANAGEMENT (PoEM) GUIDELINES: • PoEM means a place where key management and commercial decisions that are

necessary for the conduct of the business of an entity, as a whole, are made. To avoid taxes and retain incomes outside, companies sometimes seek to artificially escape residential status in India. This is done by shifting insignificant or isolated events related with control and management outside India, when in reality actual control lies within the nation.


• Recently, the Central Board of Direct Taxes (CBDT) released guidelines to help

determine the Place of Effective Management (PoEM) of companies, applicable from April 1 of the current financial year. The objective of introducing PoEM was to ensure that companies incorporated outside India but controlled from India do not escape taxation here. It also brings in the concept of residency of corporates with internationally accepted principles.

• Criticism: - The CBDT guidelines come barely two months before the end of fiscal year 2016-17,

giving little time for Indian multinationals to prepare for the new regime. - According to some experts, the guidelines are subjective on substance and can be

challenged for interpretation in many places.

WAY FORWARD A database of such companies and their directors should be built by pulling in information

from various agencies. A unique legal identifier can be instituted for all corporate entities. Instead of limiting the number of holding companies, the Government can mandate

companies to declare their beneficial owners, following the practice in UK. Cash deposits should be limited to Rs. 3 lakh to make large deposits or layering of cash

difficult, if not impossible. Real-time monitoring and detection of unusual transactions should be done. MCA 21, the portal in which all corporate filings reside, is a good starting point. It can be

mined for common directors, common registered addresses, little businesses and suspicious transactions, to create alerts.

A central KYC registry of transactions will also be useful. Swift and exemplary punishment is equally essential. Apart from those directly involved,

others in the chain of activities should also be held culpable. The current levels of conviction for white-collared crimes, estimated at 0.006% by some experts, needs to improve significantly.

Technology will play a significant part in surveillance and oversight. Robust business rules embedded in the Artificial Intelligence (AI) of machines will help both pre-emptive and preventive actions.

A strong deterrent mechanism brought about by diligent investigations and quick judicial decisions will produce the desired result.

However, the Government should guard against taking unilateral actions against corporate entities and individuals on mere suspicion, as this could end up hurting the innocent; • Provisions of the Companies Act, 2013, pertaining to disqualification of directors,

should not be selectively used to harass political opponents of the current dispensation.

• Innocents should not suffer in the case of precipitate actions and blanket bans. There could be some individuals amidst the list of debarred directors who had nothing to do with the activities of these firms and, there may be firms that are subsequently exonerated of their charges. Such persons or entities will suffer an unnecessary loss of reputation.

• The Companies Act or SEBI’s Act has not defined what a “shell company” is and what kind of activities would lead to a company being termed a “shell”. This gives rise to a lot of loose interpretations regarding it’s definition. This must be rectified at the earliest.

Thus the authorities should ensure that while banning institutions and individuals, the fundamental principle of natural justice is not given the short shrift. This is a prerequisite for a healthy corporate environment.


19. E-NATIONAL AGRICULTURAL MARKET (E-NAM) • National Agriculture Market (NAM) is a pan-India electronic trading portal which networks the

existing Agricultural Produce Market Committees (APMC) mandis (markets) to create a unified national market for agricultural commodities.

• Following the Budget announcements in 2014 - 2015, the scheme for setting up of a National Agriculture Market (NAM) was approved with a budget of Rs.200 crores, to be implemented during 2015-16 to 2017-18.

• It envisages implementation of NAM by setting up of an appropriate common e-market platform that would be deployable in selected regulated wholesale markets in States/Union Territories (UT) desirous of joining the e-platform.

• Integration of state Agricultural Produce Market Committees (APMC) with NAM requires certain pre-requisites in the State AMPC Acts, namely-

(i) a single license to be valid across the State, (ii) single point levy of market fee and (iii) provision for electronic auction as a mode for price discovery.

Only those States/UTs that have completed these three pre-requisites will be eligible for assistance under the scheme.

• The Department of Agriculture, Cooperation & Farmers Welfare (DAC&FW) will meet expenses on software and its customization for the States and provide it free of cost to the States and UTs. It will also give grant as one-time fixed cost subject to a ceiling of Rs.30 lakhs per mandi for related equipment/ infrastructure in 585 regulated mandis, for installation of the e-market platform.

• The NAM currently in pilot phase which would be expanded to 585 mandis by 2018. 455 Mandi's across 13 States are live on e-NAM as on 31 July 2017.

• The passage of Goods and Service Tax Bill after a long delay and several debates, the government would be able to create a uniform market for all goods and services in the country and the agriculture sector – where multiple distortions exist – would gain despite it being a State subject. It would act as a catalyst for the better implementation of NAM.

NEED FOR NATIONAL AGRICULTURAL MARKET (NAM) • State laws such as the Agricultural Produce Marketing (APMC) Act add to farmes’ woes.

Originally enacted to protect farmers from exploitation by middlemen, APMC Acts have essentially cut down the bargaining power of farmers by forcing them to make the first sale of their produce only through local mandis, requiring them to use only licensed commission agents, and levying high taxes and charges on the sale proceeds.

• Market segmentation in India for agri commodities and structural constraints such as state of storage and logistics infrastructure has urged for a new solution giving way to the concept of e-NAM.

• NAM addresses these challenges by creating a unified market through online trading platform, both, at State and National level and promotes uniformity, streamlining of procedures across the integrated markets, removes information asymmetry between buyers and sellers and promotes real time price discovery, based on actual demand and supply, promotes transparency in auction process, and access to a nationwide market for the farmer, with prices commensurate with quality of his produce and online payment and availability of better quality produce and at more reasonable prices to the consumer.

OBJECTIVES OF NAM • A national e-market platform for transparent sale transactions and price discovery initially

in regulated markets. Willing States to accordingly enact suitable provisions in their APMC Act for promotion of e-trading by their State Agricultural Marketing Board/APMC.

• Liberal licensing of traders / buyers and commission agents by State authorities without any pre-condition of physical presence or possession of shop /premises in the market yard.

• One license for a trader valid across all markets in the State.


• Harmonisation of quality standards of agricultural produce and provision for assaying

(quality testing) infrastructure in every market to enable informed bidding by buyers. Common tradable parameters have so far been developed for 25 commodities.

• Single point levy of market fees, i.e on the first wholesale purchase from the farmer. • Provision of Soil Testing Laboratories in/ or near the selected mandi to facilitate visiting

farmers to access this facility in the mandi itself.

BENEFITS • The present system forces farmers to sell their produce only at nearby mandis through

commission agents. The result is farmers don’t get more than 20-30 per cent of the prices paid by retail consumers. With NAM in place, farmers will have access to many more buyers, including from outside a State. Thus, a farmer can choose from where and to whom he wants to sell his produce.

• Similarly, buyers will have more freedom to choose from where they want to buy. With middlemen mostly out of the scene, NAM is expected to create a Pan-India common market with freer inter-State movement of agri commodities.

• Real-time monitoring of prices and transparency in operations, such as weighing, pricing, billing and presence of a competitive marketing platform, will lead to better price discovery.

• That, along with the application of uniform quality standards, will bring price parity across different markets in the country. That will address the problem of very high prices of specific commodities in some places and very low prices at others.

• It will reduce the gap between farm to fork prices (the prices farmers get and prices paid by retail consumers).

• It reduces the number of intermediaries and improves the scope for more income for farmers.

• Bulk buyers of agri commodities such as the Food Corporation of India may be able to conduct e-procurement operations across regions, at transparent prices.

POSSIBILITIES AND CHALLENGES TO MAKE THE NAM WORK The electronic-National Agriculture Market is a sound idea but implementation is at a nascent stage. This model looks very neat. But the reality is complex. • BASIC SERVICES AND INFRASTUCTURE: The small farmer often is located several miles

away from the mandi. He does not have access to credit channels and depends on the intermediate adathiya (commission agent). The adathiya, contrary to the impression created, has an important function. He advises the farmer, provides credit, sells seeds, and most importantly has a buyback facility from him so that the farmer is assured of sale at a predetermined price which could be lower than the market price. But the adathiya takes the onus of price risk and has to transport the same to the mandi for sale and take control of the other related expenses of packing, carriage, carrying cost etc. Unless it is able to provide roads and transport facilities from the interiors to the mandi, the farmer will always have problem of access and stick to the regular channels. Alternatively, all villages should have connectivity and electricity.

• GRADING AND UNIFORM STANDARDS: To facilitate assaying of commodities for trading on NAM, common tradable parameters

have been developed for 69 commodities. But in reality, the grading is mostly done through physical inspection where the experts literally put their hand inside and judge the quality as earlier in many online-mandis. Still there is no uniform standards to classify commodities as several grades are available for different commodities. There are about 50-70 grades of rice and wheat which come in different forms. The products here cannot be standardised, which poses challenges. Also, a uniform system of weighing is required, which though now prevalent has to be regulated well as any incorrect delivery could lead to litigation.

The idea of a national market is alluring as it resembles seamless trading just like retail e-commerce. But agriculture is complex and unorganised and, hence, while one can be


sure of what, say, a Big Basket delivers the same may not be the case if we buy rice from a distant location. This is due to the absence of standardisation.

• AN EFFECTIVE DISPUTE RESOLUTION MECHANISM: In physical market, the deal takes place in the mandi and hence both the buyer and seller see each other and the quantity that is weighed. The moment it becomes anonymous when the trading is electronic, disputes would arise that have to be resolved. Therefore, an effective dispute resolution mechanism has to exist.

• WAREHOUSING AND ROBUST DELIVERY SYSTEMS: Another most important factor that will determine the success of this system is

warehousing. When the farmer sells to a party outside the mandi locality there would be a time lag between the sale and the pick-up.

This requires robust delivery systems which are certified and have all the requisites required for storage. The issue of co-mingling has to be addressed or else the buyer may not get what he thought he would get when the deal was struck. Presently there is not these many warehouses in place. Further, the warehouses must have adequate safeguards against rodent attacks as well as pilferage. Unless this system is perfect there will be several disputes.

Except Karnataka, no State has notified the warehouse as a component of market. In the case of e-NAM, if the commodities sold through APMCs are routed through

warehouses, or if the APMCs make arrangements for warehousing/cold storage facilities through tie-ups locally, it will be easy for buyers to trade at any APMC without hurrying the delivery.

As followed in the case of commodity exchanges, the seller can deposit assayed (quality tested) and graded produce at notified warehouses and based on the warehouse receipt, trading occurs.

In order to make such an arrangement available, quality storage will be needed across the nation. This will require the active role of an agency such as the Warehousing Development and Regulatory Authority to increase awareness about accreditation of quality warehouses and to also speed up the process of accreditation.

Apart from engaging with the States on this issue, the Centre can expedite the adoption of NAM by helping out the affiliated mandis with additional transportation, warehousing and grading infrastructure that can draw in more farmers. The present promises of software support and Rs. 30 lakh per mandi may not be incentive enough. Surely, the Centre can spare far more than the Rs. 200 crore it has so far earmarked for this game-changing initiative.

• FINANCIAL INFRASTRUCTURE: Then the farmer who sells goods has to be paid on time. Therefore, the settlement process

is important. The payment system (margining) used in the case of futures trading can run into rough weather, in case there are defaults. At the same time taking full payment upfront can lead to buyer dissatisfaction in case the product falls short of expectations.

Alternatively, the NAM needs to have systems that provide refunds across the country in case the deal is rejected.

Currently in ordinary markets, the farmer gets the money once the deal is struck. In the electronic form the money will come with a lag into a bank account which means that unless such an account exists, the seller is out of the system.

Therefore, having a Jan Dhan account is necessary. The level of awareness is still low and ground level reports indicate that while accounts have been opened the deposit holders often do not have a clue as to what they are. The spread of payments banks and small finance banks should help.

• MORE MARKETS TO MAKE A NATIONAL MARKET: Despite being termed as a national market; it covers only 585 markets out of over 7,000 wholesale markets. All major markets need to be brought under NAM to realise its full potential. Necessary amendment in APMC


laws by remaining States should also be made. Most States ban the movement of commodities when local prices surge. As a part of NAM, States should refrain from restricting the inter-State movement of agri produce.

• AVAILABILTY OF INSTITUTIONAL CREDIT: Most farmers sell their crops to local commission agents as they are their main sources of credit supply. NSSO surveys say that even for MSP-led procurement supported crops, such as paddy and wheat, not more than one-tenth of farmers sell to state/cooperative institutions. If this reality doesn’t change, NAM’s benefits may remain limited to big farmers rather than helping small and marginal farmers. Institutional credit will have to replace credit from local traders/money lenders for encouraging small farmers to access NAM for selling their produce.

• ROLE OF STATE: Since agricultural marketing is a state subject under the Constitution, the states' role is critical in this venture's success. This is especially so because the Agricultural Produce Marketing Committees (APMCs), which operate regulated mandis, have considerable political clout and do not want to forego their hold on marketing of farm produce. The unified e-market has been conceptualised in a way that may not attract much hostility from APMCs. Their interests have not been entirely disregarded. According to the SFAC, a transaction on the e-platform would be deemed to have taken place through the mandi where the seller would normally have brought his produce. Thus, the APMC concerned would continue to earn the mandi fee even if the transaction does not happen in its market yard. With this critical issue having been addressed by the government, it can be hoped that states would have no hesitation to join the NAM for the benefit of both farmers and consumers.

National Commodity & Derivatives Exchange Limited (NCDEX) today runs a very vibrant spot exchange and future evolution of NAM should be borrowed from this model, which corporate buyers find useful. However, when it comes to individual wholesalers, it would still be an enigma which will be tested over time. This initiative is commendable and we have to give it time to work. Awareness is important; if we look at the futures market, which is electronic, farmers are not into trading on account of absence of knowledge. They operate within traditional system of the ‘adathiya’, which is hard to dislodge. Therefore, the development of the NAM will be a gradual process, though the effort should be continuous and enthusiasm should not slacken or relax.

20. FRBM REVIEW COMMITTEE

FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT (FRBM) ACT, 2003 Within a decade of the BoP (Balance of Payments) crisis and subsequent economic liberalisation, India’s Fiscal Deficit reached unsustainable levels again. At the time, the need to institutionalize a new Fiscal Discipline outline arose, and the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 was formed. Its framework is as follows; GOAL

To introduce transparent fiscal management, strengthen fiscal prudence, manage debt, move to a balanced budget and aim for fiscal stability of India in the long run.

TARGETS • Reduction of Revenue Deficit by 0.5% or more of the GDP at the end of each financial

year. This would begin from 2004–05, and brought to zero by 2008-09, after which there would be a build-up of Revenue Surplus.

• Reduction of Fiscal Deficit by 0.3% or more of the GDP at the end of each financial year. It would begin from 2004-05, so that deficit is contained within 3% by 2008–09.

• Total Liabilities of the Union Government should not rise by more than 9% a year.

BUDGETARY TRANSPARENCY In order to ensure greater transparency in its fiscal operations, the Central government has to release 3 statements with the Budget. They are:

http://www.business-standard.com/search?type=news&q=Agricultural+Produce+Marketing+Committees

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A) Macroeconomic Framework: It contains assessment regarding the expected GDP growth

rate, fiscal balance of the Central Government and the external sector balance of the economy.

B) Fiscal Policy Strategy Statement: It explains how the current policies are in conformity with sound fiscal management principles and provides the rationale for any deviation in key fiscal measures.

C) Mid-Term Fiscal Policy Statement: It sets out three-year rolling targets for 4 fiscal indicators, namely, 1. Revenue Deficit 2. Fiscal Deficit 3. Tax to GDP ratio 4. Total out-standing liabilities

RBI BORROWING: The Central Government shall not borrow from the RBI except by Ways and Means Advances (WMA) to meet temporary excesses of cash disbursements over receipts.

EXCEPTIONS: The Revenue Deficit and Fiscal Deficit may exceed target specified in the rules only on grounds of National Security, National Calamity or such other exceptional grounds as the Central government specifies.

CRITICISM The bill took three years to become an Act and during this process, it lost much of its teeth. Lack of an autonomous Fiscal Management Review Committee (as proposed originally, but

removed later), to conduct annual, independent and public reviews of FRBM compliance, diluted the Act.

In 2010-11, Government gave further blow to this Act by introducing the concept of Effective Revenue Deficit (ERD) in Budget documents. ERD has been criticized as a jugglery to rewrite Revenue Expenditure as Capital Expenditure.

Subsequently, in 2012-13, the FRBM Act was changed. It deserted the Centre’s commitment to eliminate Revenue Deficit. Instead, it brought in a new commitment of eliminating the ERD.

The FRBM rules can be simply amended by gazette notification. For e.g.: The FRBM Act, 2003 originally required eliminating Revenue Deficit by 2008. After several postponements, the govt. has decided to eliminate it by 2018.

Revenue Deficit denotes how much more the Centre spends on administrative and welfare expenditure than what it earns. A Zero Revenue Deficit is a situation where the government spends all that it earns on this expenditure and borrows from markets only for Capital Expenditure. Experts say the ‘utopia’ of Zero Revenue Deficit is unachievable and may even be detrimental in a way.

The words ‘such other exceptional grounds’ is vague and liable to interpretations that suit the needs of the Government in office.

CURRENT STATUS • Due to the 2007 Global Financial Crisis, a Fiscal Stimulus package was provided by the

Government to revive the economy. Also, in 2008-09, there were unanticipated changes in oil and fertilizer prices which shot up the subsidy bill. This led to the Government issuing fertilizer and oil bonds to raise money from market. All this led to huge Fiscal Deficits and the subsequent relaxation of FRBM targets. In the last few years, the Act has been largely neglected.

• Although it failed at the Center, it has succeeded in disciplining the States upto some extent. This is mainly because the States cannot borrow without the Centre’s permission.

• The Economic Survey 2013-14 had recommended for a new FRBM Act with teeth.


N K SINGH REVIEW COMMITTEE FOR FRBM ACT, 2003 The N K Singh committee was set up to review the Fiscal Responsibility and Budget Management (FRBM) Act of 2003. Its report was published in early 2017. Important recommendations were as follows;

TARGETS: • To achieve a Fiscal Deficit of 2.5% of GDP by 2023. (Glide path from 2017 to 2023) • To achieve a Fiscal Deficit target of 3% from 2017-18 to 2019-20. • To achieve a Revenue Deficit of 0.8% of GDP by 2023, by reducing 0.25% each year. • To achieve a Fiscal Deficit glide path, from 3% in 2017 to 1.7% by 2025.

States • To achieve a Debt-GDP Ratio of 60% of GDP by 2023 for the General government; 38.7%

for Central government and 20% for State governments.

NEW ACT: To repeal of the existing FRBM Act, 2003 and the FRBM Rules, 2004, and enact a new Debt Management and Fiscal Responsibility (DMFR) Act and Rules.

FISCAL COUNCIL: Composition: A Chairperson and 2 members appointed by the Centre. To maintain its

independence, it proposed a non-renewable 4-year term for them. Further, they should not be employees in the Central or State governments at the time of appointment.

Role: (i) Preparing multi-year fiscal forecasts. (ii) Recommending changes to the fiscal strategy. (iii) Improving quality of fiscal data. (iv) Advising the Government if conditions exist to deviate from the fiscal target. (v) Advising the Government to take corrective action for non-compliance with the Act.

Advantages: The decision to set the Fiscal Council follows international best practices. While the CAG and Finance Commission help the legislature, at the State and

Central levels, to tackle fiscal issues, the Executive of both is unsupported. Thus the Fiscal Council can help plug this gap.

It is purely an analytical and advisory council, having no regulatory, policy making or auditing function. This is because fiscal affairs are the core functions of the elected Government, reporting to the Legislature.

ESCAPE CLAUSE: It has provided ‘escape clauses’, for deviations of up to 0.5% of GDP, from the stipulated Fiscal Deficit target, after which the normal glide path will resume. It can be triggered in 3 scenarios; Situations concerning National Security, Acts of War, National Calamities and

Agricultural Collapse. Situations of far-reaching Structural Reforms in the economy with unanticipated Fiscal

implications. During decline in Real Output Growth of at least 3% below the average of the previous

year.

This clause can be invoked only after consultations and advice of the Fiscal Council, so as to prevent its misuse.

TARGETS FOR INDIVIDUAL STATES: The Committee recommended that the 15th Finance Commission be asked to recommend the debt trajectory for individual States. This shall be based on their track record of fiscal prudence and health.


CRITICISM • Lack of Accountability: Its most obvious shortcoming is that its recommendations have no

teeth, and rely on good sense and fiscal rules that can easily be broken, as has happened in the past.

• Overlooks In-built Escape Clause: The Constitution under Article 110 defines what is permissible in a money bill. It empowers the Lok Sabha to unilaterally enact a law on ‘borrowing of money’ by the Government as a ‘money bill’. Unfortunately, amendments to fiscal responsibility laws are permissible in money bills, which include finance bills. As a consequence, any Parliamentary law which requires fiscal responsibility is no impediment to the ruling party. In other words, if the statutory escape clause is too restrictive, the Central government can use the ‘constitutional escape clause’ to suitably amend the statute to deviate from the path of fiscal consolidation at its own discretion. The Indian government has in the past consistently used this money bill route to relax restrictions under the FRBM Act. The Review Committee is silent on this.

• Dissent Note: Chief Economic Advisor Arvind Subramanian submitted a dissent note. He stated that: In the Escape Clause, allowing for deviations if the output is 3% lower than the 4 quarter

average, may not leave flexibility to tackle economic downturns or growth booms. Having multiple targets (Debt, Fiscal Deficit and Revenue Deficit) with precise limits may

make it difficult to achieve them all. He argued against specifying a Revenue Deficit target. Further, he stresses that policymakers should be keen on reducing Primary Deficit (the

difference between Revenue and Expenditure excluding Interest Repayments) rather than Fiscal Deficit, since it implies whether the Government is collecting enough revenue to meet its running costs. Primary Deficit is universally regarded as the real measure of fiscal discipline because it focuses on those items of expenditure which the Government controls. Interest payments can go up if interest rates rise, but this does not imply fiscal profligacy. The Government’s dependence on growth and favourable interest rates to contain the debt ratio is an admission of vulnerability to shocks.

• Rigid Revenue Deficit Targets: Revenue Deficit has little to do with debt and macro stability. It figures in the Committee’s recommendations only because of the belief that it will help improve the quality of expenditure. However, the implicit assumption that Capital Expenditure is always good is an oversimplification, and equally, Revenue Expenditure incurred in providing health and education services cannot be viewed as bad. Concerns about improving the quality of expenditure are best handled through detailed sectoral evaluations and not by an aggregate indicator.

CURRENT TRENDS Fiscal Deficit for 2016-17 was 3.5% of GDP. Centre pegs it for 2017-18 at 3.2% of GDP. Revenue Deficit for 2016-17 was 2.3% of GDP. The Central government’s Debt-to-GDP ratio for 2016-17 was 49.4%. The State government’s Debt-to-GDP ratio for 2016-17 was 21%. Currently India’s total Debt-to-GDP ratio is around 70%, and is higher than its emerging

market peers. The aggregate State’s Fiscal Deficit has increased from 2% of GSDP (Gross State Domestic

Product) in FY11-12 to 3.4% in FY16-17. It can be attributed to reasons like seventh pay commission recommendations, UDAY scheme, farm loan waivers, low funding support for Centrally Sponsored Schemes (CSS), among others. This keeps overall deficits high and delays consolidation plans.

The 14th Finance Commission had recommended that the Fiscal Deficit of all States be anchored to an annual limit of 3% of GSDP for the award period: 2015-16 to 2019-20.


Note: Debt indicates the Total Outstanding Liabilities of the Government, while Fiscal Deficit indicates New Borrowings made in the year, and Revenue Deficit indicates what part of these New Borrowings have been used to cover Revenue Expenses.

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