GS-III: Governing India through fiscal math

Context

While it is important for a government to pursue a sound economic policy, including management of the public finances, it is yet another matter to make a fetish of any one aspect of it. The latter appears to govern this government’s approach to policy when the fiscal deficit is given pride of place in its self-assessment.

Thread of fiscal discipline

• Soon after the Budget for 2019-20 was presented, one of the Finance Minister’s predecessors remarked that “fiscal prudence rewards economies”.
• It figured in the most recent Economic Survey, and its anticipated magnitude for 2019-20 was the final statement in the Budget speech that followed.
• The Finance Minister commenced the speech by saying how the government was committed to fiscal discipline.

Fiscal discipline

• In this context, “fiscal discipline” is understood as taking the economy towards the 3% of the gross domestic product.

Actually, the point is two-fold:

• Whether the fiscal deficit should be the sole index of fiscal management.
• What a reduction in the deficit would achieve?

Overall imbalance in the Budget –

• The fiscal deficit reflects the overall imbalance in the Budget.
• Embedded in the accounts of the government is the revenue account which is a statement of current receipts and expenditures.
• A fiscal deficit may or may not contain within it a deficit on the revenue account, termed the “revenue deficit”.
• The possible embeddedness of a revenue deficit within a fiscal deficit muddies the waters somewhat.
• For movements in the overall, or fiscal, deficit by itself tell us nothing about what is happening to the revenue deficit.
• A revenue deficit implies that the government is dissaving.

Rewards yet to be seen

• A revenue deficit of the Central government is relatively recent, having been virtually non-existent till the 1980s.
• After that rampant populism has taken over all political parties, reflected in revenue deficits accounting for over two-thirds of the fiscal deficit such as the case today.

Implications of Revenue deficits

• Revenue deficits have become structural in India by now.

This has three implications:

• That the public debt is only bound to rise.
• We are permanently borrowing to consume.
• Leaving it to future generations to inherit the debt.

International borrowing

• In the last Budget, the government has signalled its intention to borrow in foreign currency from the international market.
• This is an innovation alright as the Government of India has so far never borrowed in the international markets, leaving it to public sector organisations and the private corporate sector to do so.

Justification of the move

• In the Budget speech of the 17th Lok Sabha, the Finance Minister justified the move in terms of the very low share of foreign debt to GDP.
• The proposal has received criticism, some of it focussing on the consequences of exchange rate volatility.

Concerns with it

• Benefits have been flagged too, such as that Indian sovereign bonds will attract a lower risk premium because the price of the foreign-currency-denominated sovereign bond will now be discoverable.
• This though ignores the biggest lesson from the global financial crisis of 2007, that the market cannot be relied upon to price risk correctly.
• Dollar-denominated debt has to be repaid in dollars.
• Right now our reserves are fairly high but this could change.
• Oil prices could go back to where they were, the trade war initiated by U.S. President Donald Trump holds little prospect for faster export growth, and portfolio investment may flow out.

Conclusion

• In the final analysis though, it is not the risk of exchange rate depreciation or stagnant exports or even capital flight that is the issue it is the rationale for borrowing.
• With revenue deficits the overwhelming part of the fiscal deficit, we would be borrowing to finance consumption.
• Dollar denominated sovereign debt is just a matter of shifting this borrowing overseas.

GS-III: Transforming livelihood through farm ponds

Context

Prime Minister Narendra Modi explicated the need to implement innovative water management measures, stressing particularly the importance of rainwater harvesting both at the household and community levels. One intervention that has been tried out in various States, and needs to be taken up on a bigger scale, is the construction of farm ponds.

Background

With an increased variability of monsoons and rapidly depleting groundwater tables, large parts of India are reeling under water stress.A number of peninsular regions like Bundelkhand, Vidarbha and Marathwada have been facing recurring drought-like situations.

Benefits of Farm Ponds

• Farm ponds can be cost-effective structures that transform rural livelihoods.
• They can help enhance water control, contribute to agriculture intensification and boost farm incomes. A recent study on farm ponds in Jharkhand and West Bengal found that they aided in superior water control through the harvesting not just of rainfall but also of surface run-off and subsurface flows. Some of them functioned exclusively as recharge points, contributing to groundwater replenishment.
• They also helped in providing supplemental irrigation in the kharif season and an enhanced irrigation coverage in rabi. The yield of paddy, the most important crop in kharif, stabilised, thus contributing to greater food security.
• Water retention: Farm ponds retained water for 8-10 months of the year; thus farmers could enhance cropping intensity and crop diversification within and across seasons. The area used to cultivate vegetables and other commercial crops also increased.
• Figures indicate that the ponds were also a financially viable proposition, with a fairly high Internal Rate of Return, of about 19%, over 15 years.

Challenges

• In parts of peninsular India, the idea of a farm pond as an in-situ rainwater harvesting structure has taken a complete U-turn. Some of them are benefiting farmers at an individual level, but not contribute to water conservation and recharge.
• They are being used as intermediate storage points, accelerating groundwater depletion and increasing evaporation losses as the groundwater is brought to the surface and stored in relatively shallow structures.
• Such farm ponds have an adverse impact on the water tables and accelerate water loss. The usual practice here is to lift water from a dug well and/or a borewell, store it in the pond and then draw it once again to irrigate the fields, often using micro-irrigation. This intensifies competition for extraction of groundwater from the aquifer, which is a common pool resource.
• In the command area of the irrigation project, farmers fill up their farm ponds first when the canal is in rotation and then take it from the pond to the field. This can impede the circulation of water.

Farm ponds can act as effective harvesting structures and also yield healthy financial returns. But if they are promoted merely for on-farm storage of groundwater and canal water, they could accelerate, rather than reduce, the water crisis in the countryside.

GS-III Paper: Going Electric: On plans To switch to Electric Vehicles.

Electric Vehicles:

• An electric vehicle uses one or more electric motors or traction motors for propulsion.
• An electric vehicle may be powered through the self-contained battery, solar panels or an electric generator to convert fuel to electricity.

Need For EVs in India :

Climate change

Problem of rapid global temperature increase has created the need for a reduction in the use of fossil fuels and the associated emissions.

India has committed to cutting its GHG emissions intensity by 33% to 35% percent below 2005 levels by 2030.

Rapid urbanization

Economic development leads to rapid urbanization in emerging nations as rural populations move non-agricultural sectors in cities creating environmental problems.According to a recent study by WHO, India is home to 14 out of 20 most polluted cities in the world. EVs will help in tackling this problem by reducing local concentrations of pollutants in cities.

Energy security

India imports oil to cover over 80 per cent of its transport fuel.

EVs can reduce dependence on imported crude oil promoting India’s energy security.

Innovation

It will encourage cutting-edge technology in India through adoption, adaptation, and research and development.

EVs manufacturing capacity will promote global scale and competitiveness.

Employment

The promotion of EVs will facilitate employment growth in a sun-rise sector.

Clean and Low carbon Energy

The shift towards renewable energy sources has led to cost reduction from better electricity-generating technologies. This has introduced the possibility of clean, low-carbon and inexpensive grids.

Challenges for EV Industry in India:

Lack of a stable policy for EV production: EV production is capital intensive sector requiring long term planning to break even and profit realization, uncertainty in government policies related to EV production discourages investment in the industry.

Technological challenges: India is technologically deficient in the production of electronics that form the backbone of the EV industry, such as batteries, semiconductors, controllers, etc.

Lack of associated infrastructural support: The lack of clarity over AC versus DC charging stations, grid stability and range anxiety (fear that battery will soon run out of power) are other factors that hinder the growth of the EV industry.

Government Initaitives:

• Government has set a target of electric vehicles making up 30 % of new sales of cars and two-wheelers by 2030 from less than 1% today.
• To build a sustainable EV ecosystem initiatives like – the National Electric Mobility Mission Plan (NEMMP) and Faster Adoption and Manufacturing of (Hybrid &) Electric vehicles in India (FAME India) have been launched by India.
• Organizations like the Bureau of Indian Standards (BIS), Department of Heavy Industry, and Automotive Research Association of India are devising design and manufacturing standards of EVs, Electric Vehicle Supply Equipment (EVSEs) & charging infrastructure to smoothen the advent of in-house production of EVs.