Current Affairs 30th January & Highlights of Economic Survey


Economic Survey predicts 11% growth next fiscal #GS3 #Economy

India’s economy is firmly in the middle of a V-shaped recovery and will bounce back to record 11% growth in 2021-22 after an estimated 7.7% contraction this year, as per a “conservative” estimate in the Economic Survey for 2020-21, which termed this a “lockdown dividend” from the country’s stringent response to the COVID-19 pandemic.

Making a strong pitch for the government to loosen its purse strings to spur the economy with a “counter-cyclical fiscal push” till the country returns to its pre-COVID-19 growth path, defended the conservative fiscal stimulus during the initial phase of the pandemic, stating that pushing down on the accelerator while the brakes are clamped “only wastes fuel”.

The V-shaped economic recovery while avoiding a second wave of infections make India a sui generis case in this unique, synchronised global recession,” the Survey said. It added that a rapid vaccination roll-out this year could boost recovery in the services sectors as well as stir up private consumption and investment.

While absolute growth numbers may be remarkable in 2021-22 due to the low base effect, returning to pre-pandemic growth and output levels would take longer.

Benefit of the News- V shaped growth model.

‘Withdraw forbearance once economy recovers’ #Gs3 #Economy

The Economic Survey 2020-21 has prescribed an early withdrawal of the regulatory forbearance that was adopted in the wake of the pandemic to ward off the threat of financial sector failures impacting the real economy.

Forbearance represents emergency medicine that should be discontinued at the first opportunity when the economy exhibits recovery, not a staple diet that gets continued for years, citing the lesson learnt from the prolonged continuance of the loosened regulations over the seven years following the Global Financial Crisis (GFC) of 2008.

During the GFC, the forbearance, which should have been discontinued in 2011 when GDP, exports, IIP and credit growth had all recovered significantly, continued for seven years resulting in unintended and detrimental consequences for banks, firms, and the economy.

Given relaxed provisioning requirements, banks exploited the forbearance window to restructure loans even for unviable entities, thereby window dressing their books.

The lesson for policymakers was “to treat emergency measures as such and not to extend them even after recovery: when an emergency medicine becomes a staple diet, it can be counterproductive.”

It recommends policymakers set thresholds of economic recovery at which such measures would be withdrawn. These thresholds ought to then be communicated to the banks in advance so that they could prepare for the same.

Prolonged forbearance is likely to sow the seeds of a much deeper crisis… forbearance should be accompanied by restrictions on zombie lending to ensure a healthy borrowing culture.”

It said a clean-up of bank balance sheets was necessary when the forbearance was discontinued. “Note that while the 2016 AQR [Asset Quality Review] exacerbated the problems in the banking sector, the lesson from the same is not that an AQR should not be conducted,” the survey added.

It said given the problem of asymmetric information between the regulator and the banks, which gets accentuated during the forbearance regime, an AQR exercise must be conducted immediately after the forbearance is withdrawn.

“The asset quality review must account for all the creative ways in which banks can evergreen their loans. The banking regulator needs to be more equipped in the early detection of fault lines and must expand the tool kit of ex-ante remedial measures.”

The Survey said a clean-up unaccompanied by mandatory capital infusion exacerbates bad lending practices. “Expecting banks to get recapitalised on their own on account of economic recovery may not be prudent.”

Therefore, a clean-up exercise should be accompanied by mandatory recapitalisation based on a thorough evaluation of the capital requirements post an asset quality review,

Apart from recapitalising banks, it is important to enhance the quality of their governance. Ever-greening of loans by banks as well as zombie lending is symptomatic of poor governance, suggesting that bank boards are “asleep at the wheel” and auditors are not performing their required role as the first line of defence.

India’s ratings don’t reflect economy’s fundamentals: CEA #GS3 #Economy

India’s sovereign credit ratings do not reflect the economy’s fundamentals, Chief Economic Adviser Krishnamurthy Subramanian said, while pitching for sovereign credit ratings methodology to be made more transparent and less subjective.

“Never in the history of sovereign credit ratings has the fifth-largest economy in the world been rated as the lowest rung of the investment grade (BBB-/Baa3). Reflecting the economic size and thereby the ability to repay debt, the fifth-largest economy has been predominantly rated AAA. China and India are the only exceptions to this rule,” the CEA said.

The Economic Survey, tabled in Parliament, added that while sovereign credit ratings do not reflect the Indian economy’s fundamentals, “noisy, opaque and biased credit ratings” damage FPI flows.

“Sovereign credit ratings methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations by becoming more transparent and less subjective.

Developing economies must come together to address this bias and subjectivity inherent in sovereign credit ratings methodology to prevent exacerbation of crises in future. The CEA also pointed out that the problems of India’s administrative processes derive less from lack of compliance to processes or regulatory standards, but from over-regulation.

‘India overregulates’

“It is not possible to have complete regulations in a world which has uncertainty as it is not possible to account for all possible outcomes. The evidence, however, shows that India over-regulates the economy. This results in regulations being ineffective even with relatively good compliance with process.

The Chief Economic Adviser also pitched for simplification of regulatory processes by avoiding substitution of supervision with more complex regulation, along with transparent decision-making processes.

The CEA also highlighted that given the problem of asymmetric information between the regulator and the banks, which gets accentuated during the forbearance regime, an Asset Quality Review exercise must be conducted immediately after the forbearance is withdrawn.

Increase ration shop prices of rice, wheat #GS3 #Economy

The Centre must increase the prices which 80 crore poor people pay for subsidised rice and wheat at ration shops to trim the ‘bulging’ food subsidy bill, the Economic Survey recommended on Friday.

Under the National Food Security Act, ration cardholders are allowed to buy 5 kg of foodgrains per person each month at a subsidised rate of Rs. 2 per kg of wheat and Rs. 3 per kg of rice. This rate, known as the Central Issue Price (CI), has not been increased since the NFSA was enacted in 2013. However, the Food Corporation of India’s economic cost of buying and distributing foodgrains had surged since then.

For wheat, the economic cost had risen from Rs. 19 per kg in 2013-14 to almost Rs. 27 per kg in 2020-21. For rice, the increase is from Rs. 26 per kg to Rs. 37 per kg.

“While it is difficult to reduce the economic cost of food management in view of rising commitment towards food security, there is a need to consider the revision of CIP to reduce the bulging food subsidy bill,” said the Survey.

Agility key to countering pandemics #GS3 #Economy

The ongoing pandemic has showcased how a healthcare crisis can get transformed into an economic and social crisis, noted the Economic Survey 2020-21. It said the healthcare policy must not become beholden to ‘saliency bias’, where policy overweighs a recent phenomenon. “To enable India to respond to pandemics, the health infrastructure must be agile..

Stating that COVID-19 had spread worldwide because it is a communicable disease, the survey notes that the next health crisis may not possibly involve a communicable disease and that India’s healthcare policy must continue focusing on its long-term healthcare priorities.

“Following the COVID-19 pandemic, a key portfolio decision that healthcare policy must make is about the relative importance placed on communicable versus non-communicable diseases. To enable India to respond to pandemics, the health infrastructure must be agile. 

For instance, every hospital may be equipped so that at least one ward in the hospital can be quickly modified to respond to a national health emergency while caring for the normal diseases in usual times. Research in building such health infrastructure can guide how to build such flexible wards.”

Telemedicine potential

It added that the pandemic had revealed the potential of telemedicine to provide healthcare access in remote areas. “This needs to be harnessed to the fullest by especially investing in Internet connectivity and health infrastructure.” The National Health mission had played a critical role in mitigating inequity as the access of the poorest to pre-natal and post-natal care as well as institutional deliveries had increased significantly, it said.

Bare necessities gap between States has narrowed since 2012, survey shows #GS3 #Economy

Poorer States have reduced the gap with rich States in providing citizens with access to the basics of daily life — housing, water, power, sanitation, cooking gas — according to a new ‘Bare Necessities Index’ (BNI) in the Economic Survey 2020-21.

The index, which draws its name from Baloo the Bear’s song in the movie adaptation of Rudyard Kipling’s Jungle Book, uses existing National Statistical Office survey data to show that between 2012 and 2018, serious gains were made in the area of sanitation although equity in housing access still lagged.

States such as Kerala, Punjab, Haryana and Gujarat top the index, while eastern Indian States of Odisha, Jharkhand, West Bengal and Tripura occupy the lowest rungs. States which showed significant improvement include Uttarakhand, Rajasthan, Uttar Pradesh, Bihar, Madhya Pradesh and Chhattisgarh.

“Inter-State disparities in the access to ‘the bare necessities’ have declined in 2018 when compared to 2012 across rural and urban areas,” said the survey.

“Access to ‘the bare necessities’ has improved disproportionately more for the poorest households when compared to the richest households across rural and urban areas. The improvement in equity is particularly noteworthy because while the rich can seek private alternatives, lobby for better services, or if need be, move to areas where public goods are better provided for, the poor rarely have such choices.”

However, the survey noted there was still a gap between urban and rural India, as well as among income groups, and recommended “effective targeting of the needier population” in government schemes.

Better Centre-State coordination with local governments is needed, as they were responsible for civic amenities in urban areas, added the survey. It also suggested the BNI could be constructed at district level using large annual household survey data, to show progress.

High out-of-pocket expenses for health can lead to poverty’ #GS3 #Economy

India has one-of-the highest level of Out-Of-Pocket Expenditures (OOPE) contributing directly to the high incidence of catastrophic expenditures and poverty, notes the Economic Survey.

It suggested an increase in public spending from 1% to 2.5-3% of GDP — as envisaged in the National Health Policy 2017 — can decrease the OOPE from 65% to 30% of overall healthcare spend.

The Survey states about 65% of deaths in India are now caused by non-communicable diseases (NCDs) with ischemic heart diseases, chronic obstructive pulmonary disease (COPD) and stroke being the leading causes.

The Survey observes that the health of a nation depends critically on its citizens having access to an equitable, affordable and accountable healthcare system. The OOPE, as a share of total health expenditure, drops precipitously when public health expenditure increases.

The Survey also underlines that OOPE for health increases the risk of vulnerable groups slipping into poverty because of catastrophic health expenditures. The life expectancy in a country correlates positively with per capita public health expenditure, it notes.

Private healthcare

The Economic Survey observed that bulk of the healthcare in India is provided by the private sector. “Private hospitals charge much higher than government hospitals for treatment of same ailment and higher charges do not assure better quality.

The Survey added that for enabling India to respond to pandemics, the health infrastructure must incorporate flexibility as events requiring healthcare attention may not repeat in identical fashion in future.

‘Focus on growth than on alleviating inequality #GS3 #Economy

India must keep its focus on economic growth, rather than trying to alleviate inequality, says the Economic Survey, arguing given India’s current stage of development, redistribution of wealth is not feasible without growing the overall pie.

Unlike the developed world, in India, economic growth and inequality both have similar correlations with socio-economic indicators such as health, education, fertility rates, crime and drug usage.

The Survey also draws on the Chinese experience to suggest in countries with high growth rates and high levels of absolute poverty, there is no trade-off between growth and inequality. It said questions regarding conflict between growth and inequality become more pertinent “especially because of the inevitable focus on inequality following the COVID-19 pandemic.”

An Oxfam report had showed Indian billionaires increased their wealth by 35% during the lockdown at a time when a quarter of the country was earning less than Rs. 3,000 per month.

Capital budget allocated for defence completely utilised since 2016-17 #GS3 #Economy

The allocated capital budget for defence has been fully utilised since 2016-17, reversing the previous trends of surrender of funds, as per the Economic Survey.

“The trend of underutilisation of defence budget has also been reversed from financial year 2016-17,” the Survey stated. The allocation for defence budget, including civil estimates and pensions for 2020-21, was Rs. 4,71,378 crore or Rs. 40,367.71 crore more than the budget estimates of 2019-20.

On account of the lengthy procurement process and delays in finalising deals, in the past, unused funds had been returned at the end of the financial year.

Last year, the armed forces went for a series of emergency procurements since the stand-off with China in May along the Line of Actual Control (LAC) in Eastern Ladakh. At the Army Day address on January 15, Army Chief General Manoj Naravane said that last year, 38 deals were executed through ‘emergency and fast track’ route and these were worth about Rs. 5,000 crore. In addition, capital procurements worth Rs. 13,000 crore were concluded.

On efforts to boost indigenisation of weapons systems, the Economic Survey said Defence Public Sector Undertakings (DPSU) and Ordnance Factories (OFs) were striving to increase the indigenous content of the equipment and products manufactured by them.

“The indigenous content as on March 31, 2020 was 74.56%,” it noted.

On efforts to boost private sector participation in domestic manufacturing, it said that as a policy, the DPSUs and OFs have been outsourcing many of their requirements and ‘the value of outsourcing, in terms of value of production, for the FY 2019-20 stands at 41.70%.”

Wide vendor base

Further, over the years, a wide vendor base had been developed. Exports from the Ordnance Factory Board (OFB), the DPSUs and the private sector had increased from Rs. 4,682 crore in 2017-18 to Rs. 9,116 crore in 2019-20.

Since the opening of defence sector to private participation in 2001, 44 Foreign Direct Investment (FDI) proposals and joint ventures have been approved for manufacture of various equipment, both in the public and the private sectors.


Govt. tightens oversight on funds received by NGOs #GS2 #Governance

The Union Home Ministry has laid down a charter for banks which says that “donations received in Indian rupees” by non-governmental organisations (NGOs) and associations from “any foreign source even if that source is located in India at the time of such donation” should be treated as “foreign contribution”.

As per the existing rules, all banks have to report to the Central government within 48 hours the “receipt or utilisation of any foreign contribution” by any NGO, association or person whether or not they are registered or granted prior permission under the FCRA.

Last September, the Foreign Contribution (Regulation) Act, 2010, was amended by Parliament and a new provision that makes it mandatory for all NGOs to receive foreign funds in a designated bank account at the State Bank of India’s (SBI) New Delhi branch was inserted.

FCRA regulates foreign donations and ensures that such contributions do not adversely affect the internal security of the country. All NGOs seeking foreign donations have to open a designated FCRA account at the SBI branch by March 31. The NGOs can retain their existing FCRA account in any other bank but it will have to be mandatorily linked to the SBI branch in New Delhi.

Penal provisions

The Ministry has laid out a series of guidelines and charter to make the NGOs and the banks comply with the new provisions.

It may be noted that foreign contribution has to be received only through banking channels and it has to be accounted for in the manner prescribed. Any violation by the NGO or by the bank may invite penal provisions of the FCRA, 2010.

It added that “donations given in Indian rupees (INR) by any foreigner/foreign source including foreigners of Indian origin like OCI or PIO cardholders” should also be treated as foreign contribution.

Benefit of the News- FCRA changes along with recent government tightens.

Delink boundary dispute from ties #GS2 #IR

China said it “appreciates” External Affairs Minister S. Jaishankar emphasising the importance of India-China relations, but reiterated its calls for the boundary dispute to “not be linked with the overall bilateral relations”.

Mr. Jaishankar said the relationship needed to be built on “mutual respect, mutual sensitivity and mutual interests”. The Minister outlined eight propositions to take the ties forward after what he called a year of “exceptional stress”.

‘Prerequisite for ties

India’s view that peace on the border was a prerequisite for the rest of the relationship to develop. China’s actions last year had “not only signalled a disregard for commitments about minimising troop levels”, but also “showed a willingness to breach the peace and tranquillity” on the border that had been the foundation of the relationship.

Meanwhile, we stress that the boundary issue shall not be linked with the overall bilateral relations. That is important experience we have gathered through the countries many years efforts to keep the ties moving forward. We hope the Indian side will work with us to properly manage difference, promote practical cooperation and bring bilateral relations back on track.

China has in recent months hit out at India’s economic measures, such as the banning of apps and tightening the curbs on investment, saying events on the border should not be linked to other aspects of relations.

India has reiterated its view that such a proposition is untenable, and normal relations can’t be restored until there is peace on the border and a full restoration of the status quo, prior to last summer’s transgressions.

Mr. Jaishankar underlined that view in his speech, saying that any expectation that the events on the border “can be brushed aside and that life can carry on undisturbed despite the situation in the border is simply not realistic”.

Benefit of the News- India- China relations.

Core sector output shrank 1.3% in Dec. #GS3 #Economy

Output from India’s eight core sectors contracted 1.3% in December 2020, with electricity and coal the only two sectors recording positive growth.

This is the third month in a row that core sectors’ output declined, with revised estimates for September 2020 suggesting that output had grown by 0.6% in the month compared to provisional estimates of a 0.8% contraction in the month. September’s marginal uptick was preceded by six successive months of contraction in the core sectors.

Upward revision

The Office of the Economic Adviser in the Department of Promotion of Internal Trade and Investment also revised upwards the indices for October and November 2020, based on updated data. Now, the core sectors’ output is estimated to have shrunk by just 0.9% in October, compared to a 2.5% decline estimated earlier.

Similarly, core sector output in November had contracted by 1.4% compared to the 2.6% dip projected earlier. Coal output recorded positive growth for the fifth month in a row, albeit at a moderate 2.2% in December 2020. Electricity production grew for the fourth successive month, at 4.2%.

Cement contracts 9.7%

Cement production which had grown only once this financial year, at 3.2% in October, recorded a sharp 9.7% decline in the month of December.

Overall, core sectors have contracted by 10.1% in the April to December period, with fertilisers the only sector to record positive growth over the year, of a modest 3%.

Cement output over this period fell by 18.3%, followed by steel production which has declined 16.7%. Economists said the core sector numbers ‘temper the exuberance’ generated by upticks in several other leading economic indicators in December.

‘Setbacks expected’

We continue to expect intermittent setbacks at a sectoral level, as the economy attempts to regain pre-Covid normalcy in a sustained manner.

“Based on the plateau in the core sector data, juxtaposed with the uptick in auto production trends and recovery in non-oil merchandise exports, we expect the Index of Industrial Production (IIP) to rebound to a modest growth of 0.5-1.5% in December 2020, trailing the level seen in October 2020.