01 April, 2021 - Daily Current Affairs Analysis & MCQs - The Daily News Simplified from The Hindu

  • Weekly Mains Assignment Question
  • 15th Finance Commission Recommendations -2nd Report (2021-26) (Polity & Governance)
  • Govt. sharply cuts rates on small savings instruments (Indian Economy)
  • Government of NCT of Delhi (Amendment) Act, 2021 (Polity & Governance)
  • Panel submits report on farm laws to SC (Indian Economy)
  • World Bank's Forecasts on India's GDP growth (Indian Economy)
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    UPSC Current Affairs: 15th Finance Commission Recommendations- 2nd Report (2021-26)| Page – 06

    UPSC Syllabus: GS Paper III – Economic development

    Sub Theme: 15th Finance Commission| Fiscal federalism| UPSC     

    15th Finance Commission Recommendations- 2nd Report (2021-26)

    The 15th Finance Commission headed by Mr. N.K. Singh has recently submitted its recommendations. Usually, the Finance Commission recommendations are valid for a period of 5 years. However, this time, the 15th Finance Commission recommendations would be valid for a period of 6 years.

    Earlier, the 15th Finance Commission had submitted its first set of recommendations which were applicable for the financial year 2020-21. Now, the commission has submitted its second report, whose recommendations will be applicable for the next 5 years i.e. 2021-2026.

    In this regard, let us understand the need for setting up of Finance Commission in India and the important recommendations of 15th Finance Commission.

    Important recommendations of 15th Finance Commission

    Vertical Devolution of Taxes: The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.  This is less than the 42% share recommended by the 14th Finance Commission for 2015-20 period.  The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the Centre. 

    Criteria for the Horizontal distribution of taxes among the States:

    The criteria for distribution of central taxes among states for 2021-26 period is same as that for 2020-21.

    Criteria

    14th Finance Commission

    15th Finance Commission

    Income Distance

    50

    45

    Population (1971 Census)

    17.5

    Not Considered

    Population (2011 census)

    10

    15

    Demographic Performance

    Not Considered

    12.5

    Forest Cover

    7.5

    Not Considered

    Forest and Ecology

    Not Considered

    10

    Area

    15

    15

    Tax Effort

    Not considered

    2.5

    Total

    100

    100

    Analysis of the Criteria used by the 15th Finance Commission:

    Income Distance: The Income distance criteria is the difference between per-capita income of a particular state and state with the highest per-capita income. If the income distance is larger, it would mean that a particular state is poorer and hence it would get higher share of taxes. If the income distance is smaller, it would mean that a particular state is richer and hence it would it would get lesser share of taxes.

    Population: Earlier, the 15th Finance Commission has asked to explore the possibility of using the Population of 2011 census instead of 1971 census for the devolution of taxes. However, this was opposed by the Southern states. These states have taken substantial efforts to reduce the Population growth rates by undertaking the Family planning programmes since 1970s. So, naturally, if the criteria of 2011 census were to be used, this would lead to loss in the share of their taxes.

    Here, the Finance Commission has done a fine balancing between the directions issued by the centre and concerns raised by the Southern states.

    It has used the Population of 2011 census and done away with the Population of 1971 census. However, keeping in mind, the concerns raised by the Southern states, it has introduced the new criteria of Demographic performance. The Demographic performance indicator looks at the Fertility rate in a state. If the fertility rate in a particular state is lower, it would mean that such a state has taken substantial efforts to reduce its population growth rate and accordingly it would get a higher share. Since, the fertility rate in the southern states is much lower, the introduction of such an indicator is likely to reduce the impact caused by using the criteria of 2011 census instead of 1971 census.

    Forest and ecology: This criteria has been arrived at by calculating the share of dense forest of each state in the aggregate dense forest of all the states.

    Tax effort: This criterion has been used to reward states with higher tax collection efficiency.   It has been computed as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three-year period between 2014-15 and 2016-17.

    Grants-in-aid

    The Terms of Reference of the Finance Commission require it to recommend grants-in-aid to the States.  These grants include: (i) revenue deficit grants, (ii) grants to local bodies, and (iii) disaster management grants.

    Revenue Deficit Grants: In spite of the devolution of taxes from Centre, some of the states may not able to fund their revenue expenditure requirements on their own through their Revenue receipts. Hence, in order to meet requirements of such states, the Finance Commission provides for Revenue deficit grants. These grants are usually assigned in order to cover the gap between the Revenue expenditure and Revenue Receipts of the states. The 15th Finance Commission has estimated that 17 states would face revenue deficit post-devolution. To make up for this deficit, the Commission has recommended revenue deficit grants worth Rs 2.9 lakh crores to these 17 states.

    Sector Specific Grants: Sector-specific grants of Rs 1.3 lakh crores will be given to states for Health, Education, Agriculture etc.

    Grants to local bodies: The total grants to local bodies for 2021-26 has been fixed at Rs 4.36 lakh crore. The grants will be divided between states based on population and area in the ratio 90:10. The grants will be made available to all three tiers of Panchayat- village, block, and district. No grants will be released to local bodies of a state after March 2024 if the state does not constitute State Finance Commission and act upon its recommendations by then.

    Fiscal Roadmap

    Fiscal deficit and debt levels: The Centre should bring down fiscal deficit to 4% of GDP by 2025-26.  For states, fiscal deficit should be reduced to 3% of GSDP.

    The Commission observed that the recommended path for fiscal deficit for the centre and states will result in a reduction of total liabilities of: (i) the centre from 63% of GDP in 2020-21 to 56.% in 2025-26, and (ii) the states on aggregate from 33% of GDP in 2020-21 to 32.5% by 2025-26. 

    It also recommended forming a high-powered inter-governmental group to: (i) review the Fiscal Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM framework for centre as well as states, and oversee its implementation.

    Goods and Service Tax

    The 15th Finance Commission has highlighted some challenges with the implementation of the Goods and Services Tax (GST).  These include: (i) large shortfall in collections as compared to original forecast, (ii) high volatility in collections, (iii) accumulation of large integrated GST credit, (iv) glitches in invoice and input tax matching, and (v) delay in refunds.  The Commission observed that the continuing dependence of states on compensation from the central government (21 states out of 29 states in 2018-19) for making up for the shortfall in revenue is a concern.

    Recommendations:

    Address the Inverted Duty Structure: The term ‘Inverted duty Structure’ refers to a situation where the rate of tax on inputs purchased (i.e. GST Rate paid on inputs) is more than the GST rate on finished goods. The inverted duty structure leads to higher input tax credits and hence lower tax collection for the Government.

    Revenue Neutrality: A change in tax regime can be said to be revenue neutral if the modified tax is able to realise revenue comparable to the original tax regime. As far as GST is concerned, earlier, general government revenues from the taxes subsumed under GST was around 6.3 per cent in 2016-17. However, collections under GST was around 5.1 per cent of GDP in 2019-20. This clearly shows that post the implementation of GST, the overall indirect tax collections have failed to reach up to the earlier levels.

    Correcting the inverted duty structure and problems related to invoice matching in the next two years should progressively help India's GST to re-establish its revenue neutrality.

    Rationalisation of GST rates: The GST was introduced in order to simplify the tax structure and improve the tax compliance. However, the existing GST regime has multiple rates: 0, 0.25, 1, 3, 5, 12,

    18 and 28%; Rate structure should be rationalised by merging the rates of 12% and 18%.

    Centrally Sponsored Schemes (CSS)

    Present Status:  The Union Budget 2020- 21 shows that fifteen of the thirty umbrella CSS account for about 90 per cent of the total allocation under CSS. Many umbrella schemes have, within them, a number of small schemes, some of them with negligible allocations

    Recommendations: It is important to gradually stop the funding for those CSS and their subcomponents which have either outlived their utility or have insignificant budgetary outlays not commensurate to a national programme. There should also be a minimum threshold funding size for the approval of a CSS. Below the stipulated threshold, the administrating department should justify the need for the continuity of the scheme. Third-party evaluation of all CSS should be completed within a stipulated timeframe. 

    Funding of defence and internal security: 

    Present Status: Defence expenditure has, over time, been characterised by a higher share of revenue expenditure, huge pension bills and lower capital expenditure with high dependence on import of defence equipment.

    Recommendations: A dedicated non-lapsable fund called the Modernisation Fund for Defence and Internal Security (MFDIS) should be constituted under the Public Account for capital expenditure in defence and internal security. The fund will be funded through (a) Transfers from the Consolidated Fund of India (b)  Disinvestment of defence PSUs (c) Monetisation of defence lands.

    Public Health

    States should increase spending on health to more than 8% of their budget by 2022.  Primary healthcare expenditure should be two-thirds of the total health expenditure by 2022.  Centrally sponsored schemes (CSS) in health should be flexible enough to allow states to adapt and innovate.  Focus of CSS in health should be shifted from inputs to outcome.  All India Medical and Health Service should be established.

     

    UPSC Current Affairs: Govt. sharply cuts rates on small savings instruments | Page – 01

    UPSC Syllabus: GS Paper III – Indian Economy |

    Sub Theme: Small Savings Instruments| UPSC    

    The Government has recently decided to cut interest rates on various small savings schemes sharply by 40-110 basis points. The revised rates will come into effect from April 1 and remain in effect till June 30.

    The Small savings instruments are the major source of household savings in India. Broadly, the small savings schemes basket comprises 12 instruments and can be classified under three heads. These are:

    • Postal deposits
    • Savings certificates [(National Small Savings Certificate VIII (NSC) and Kisan Vikas Patra (KVP)]; and
    • Social security schemes [(public provident fund (PPF) and Senior Citizens ‘Savings Scheme (SCSS)].

    All small savings collections are credited to this National Small Savings Fund (NSSF) in the Public Account of India. The interest rates are reset every quarter based on the G-Sec yields of the previous three months.

    A certain amount of NSSF is invested in the Central and State Government securities. The fund is administered by Department of Economic Affairs, Ministry of Affairs.

    Reasons for the cut in the interest rates:

    Higher borrowings of the Government through the Small Savings schemes ( 2020-21: Rs 4.8 lakh crores; 2021-22: Rs 3.9 Lakh crores). Higher interest rates would make Government's borrowings costly and hence the plan to reduce the interest rates.

    Fall in the yield rates on the G-Secs. ( Yield on 10 year G-Sec reduced from 6.8% in April 2020 to 6.1% now)

    Implications:

    Government's borrowing cost reduces and hence lower interest burden.

    Enable the Banks to reduce rate of interest on the Deposits

    Lower avenues for the Investors to invest money either in Bank Deposits or Small Savings--> Increase consumption expenditure.

     

    UPSC Current Affairs: Government of NCT of Delhi (Amendment) Act, 2021 | Pg 06

    UPSC Syllabus: GS Paper II – Polity & Governance   

    Sub Theme: NCT of Delhi | UPSC       

    THE GOVERNMENT OF NATIONAL CAPITAL TERRITORY OF DELHI (AMENDMENT) BILL, 2021

    è  It amends the powers and responsibilities of the Legislative Assembly and the Lieutenant Governor provided under the Government of National Capital Territory of Delhi (GNCT) Act, 1991. 

    è  The amendment provides that the term “government” referred to in any law made by the Legislative Assembly will imply Lieutenant Governor (LG). 

    è  1991 Act allows the Legislative Assembly to make Rules to regulate the procedure and conduct of business in the Assembly.  The Amendment provides that such Rules must be consistent with the Rules of Procedure and Conduct of Business in the Lok Sabha.

    è  The Amendment prohibits the Legislative Assembly from making any rule to enable itself or its Committees to: (i) consider the matters of day-to-day administration of the NCT of Delhi and (ii) conduct any inquiry in relation to administrative decisions. The Amendment also ensures that all such rules made before its enactment will be void.

    è  The Amendment requires the LG to reserve those Bills for the President which incidentally cover any of the matters outside the purview of the powers of the Legislative Assembly. 

    è  The 1991 Act specifies that all executive action by the government, whether taken on the advice of the Ministers or otherwise, must be taken in the name of the LG. The Amendment adds that on certain matters, as specified by the LG, his opinion must be obtained before taking any executive action on the decisions of the Minister/ Council of Ministers.        

     

    UPSC Current Affairs: Panel submits report on farm laws to SC | Page - 10

    UPSC Syllabus: Mains – GS Paper II – Polity & Governance | GS Paper III - Economy

    Sub Theme:  Farm Laws | UPSC      

    Essentially, the Indian agriculture can be considered as an enterprise with two distinct components- Production and Post-Production activities. With respect to agricultural production, India has not only become self-sufficient in terms of food production, but it has also emerged as a net exporter of agricultural products. However, the post-production activities of Indian agriculture have not kept pace with the production related activities. The quantities of marketable surplus have multiplied by almost 10 times during the last 50 years. However, the agriculture marketing infrastructure continues to remain out-dated.  

    Government has converted the COVID-19 crisis into a reform opportunity by undertaking long pending reforms in agriculture marketing. Out of 11 measures, 3 measures seek to liberalize agricultural marketing and hence hailed as 1991 moment for agriculture. The 3 farms acts are - Act to promote Inter-state and Intra-State Trading, Act to promote Contract farming and Amendments to Essential Commodities Act. However, these 3 farm Acts have been opposed by various stakeholders- Farmers, Traders and State Governments on account of various reasons:

    • Discontinuation of MSP via open-ended procurement
    • Gradual dismantling of the Public Distribution System (PDS),
    • Loss of price discovery mechanism established by the APMC mandis
    • Exploitation by the corporates,
    • Fear of a reduction in the scope and size of PDS

    Let's understand as to what extent these fears are justified and whether the new marketing reforms would indeed benefit the Indian agriculture.

    Problems with Agricultural Marketing in India

    Most of the State governments enacted the Agricultural Produce Market Regulation Act (APMC Act) which authorizes the States to set up and regulate marketing. Apart from that, there are more than 22,000 Rural Markets or Grameen Haats under the control of local bodies, panchayats, APMCs, etc.

    Problems with the APMC Regime:

    Restrictive Regime: Under the present APMC Act, farm produce should be sold only at regulated markets through registered intermediaries. Further, the Essential Commodities Act allows central and state governments to place restrictions on the storage and movement of commodities deemed essential by governments.

    Fragmented Agricultural Marketing with about 2500 regulated APMCs, 5000 sub-market yards and thousands of Rural Markets or Grameen Haats. Hence, due to this fragmented marketing  the agricultural commodities pass through multiple middlemen and traders leading to escalation in  prices and also prevents the farmers from getting remunerative prices.

    Lack of Freedom to farmers to sell their produce to whomsoever and wherever they want.

    Lack of Access to APMCs:  An average APMC in India serves an area of around 450 sq.km as against the recommendation of 80 sq.km given by M.S. Swaminathan Committee. On account of this, the farmers are forced to sell their produce at lower prices outside the APMCs.

    Against Interests of Small and Marginal farmers who are forced to sell at lower prices due to their low marketable surplus and poor bargaining power.

    Poor Infrastructure of the APMCs leading to improper storage and consequently higher post-harvest losses; No electronic auction platform

    Imposition of Multiple Fees in APMCs which is estimated to be around 15% of the value of the agricultural produce; Increased prices and affect food processing Industries 

    Higher Post-harvest Losses in the range of 20-25% of produce accounting for Rs 92,000 crores loss.

    Critical Analysis of various Government Initiatives

    1. Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020

    Mandate:

    Freedom to the farmers to sell their produce whomsoever and wherever they want; Options to sell produce outside APMCs.

    Critical Analysis:

    Around  17 State governments having amended the APMC Act to make it more liberal and bring it on line with Model Agriculture produce and livestock marketing act, 2017. For example,  Kerala does not have an APMC Act and Bihar repealed it in 2006. Other states  such as Karnataka, Maharashtra etc. deregulated fruits and vegetables trade, allowed private markets, introduced a unified trading licence and have introduced a single-point levy of market fee. So, have these Reforms benefitted the farmers??

    Expectation of Government

    Ground Realities

    Farmers allowed to Sell their produce anywhere within India

    Markets located away from the villages--> 90% of the Crops sold within the villages to the traders-->

    Compelled to sell at lower prices.

    Poor Participation of Government agencies in procurement--> farmers forced to sell to traders at lower prices-->Low price realization for farmers

    More Private Sector Investment in agriculture marketing.

    Lack of enthusiasm among the Private sector in setting up of Market yards.

    Collection of APMC levy done away with to deregulate Agriculture Marketing

    Loss of revenue which otherwise could have been used for improving the infrastructure of existing APMCs.

    Proliferation of small unregulated private market yards which charge fee from both farmers and traders but yet do not provide basic infrastructure.

    Increase in prices received by the Farmers leading to improvement in their income levels

    Study conducted by National Council for applied Economic Research (NCAER)--> No significant improvement in the last 13 years after the repeal of APMC Act.

    This clearly shows that reforming the APMC Acts alone would not benefit the farmer. What should be done then?

    • Insertion of a provision in Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 to state that the price paid to the farmer shall not be less than the MSP for such crops where MSP has been notified
    • Increase the Market Density in line with recommendations of M.S. Swaminathan Committee
    • Link all the markets with the E-NAM
    • Organize Small and Marginal Farmers into FPOs
    • Improve Infrastructure in existing APMCs such as Godowns, Cold chain infrastructure etc.

     

    1. Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020

    Mandate:

    Promote Contract Farming and ensure fair and remunerative prices

    Benefits of Contract Farming:

    • Streamlines the supply chain by connecting the farmers directly with the buyers and reduce post-harvest losses.
    • Enhancement of Incomes by integrating farmers with bulk purchasers such as exporters and food processing industries
    • Access to Inputs such as Seeds, Capital, Fertilisers, technology etc.
    • Promote higher Investment by providing price certainty
    • Address Rural Indebtedness by reducing dependence of the farmers on moneylenders for meeting their credit needs
    • Boost to Food Processing by providing access to good quality raw materials and hence provide greater fillip to the sector.

     

    Potential Problems related to Contract Farming

    • Exclusionary in Nature due to fragmented land holdings and lower marketable surplus of small and marginal farmers; Exclude women farmers.
    • Exploitation of Farmers due to lower bargaining power; Could lead to development of Monopsony market (one buyer dealing with multiple sellers and thus benefitting buyer).
    • Adverse Impact on Environment: Promote Monoculture farming; Promote harmful agricultural practices such as excessive water usage, fertilizer consumption; Destruction of forests and wildlife etc.

     

    How to address this problem?

    • Insertion of a provision in Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 to state that the price paid to the farmer shall not be less than the MSP for such crops where MSP has been notified
    • Legalizing Tenancy; Organize farmers into FPOs;

     

    3.Amendments to Essential Commodities Act (ECA), 1955

    Essential Commodities Act and its rationale:

    Used by the Government to regulate the production, supply and distribution of commodities which are declared as essential under the act. The list of items under the Act includes drugs, fertilizers, pulses and edible oils, and petroleum and petroleum products. The Central Government may add or remove a commodity from the schedule in consultation with the State Governments.

    How does it work?:

    If the Centre finds that a certain commodity is in short supply and its price is increasing, it can notify stock-holding limits on it for a specified period. Anybody trading or dealing in a such a commodity, be it wholesalers, retailers or even importers are prevented from stockpiling it beyond a certain quantity. This improves supplies and brings down prices.

    How Essential Commodities Act hinders the agricultural marketing?

    Fails to realize stocking is essential: The fear of bringing the agricultural commodities under the act has prevented the traders and processors from undertaking bulk procurement of agricultural commodities during bumper harvest season. Further, since almost all crops are seasonal, ensuring round-the-clock supply requires adequate build-up of stocks during the season.

    Poor investment in Storage infrastructure: With frequent stock limits, traders have not invested in better storage infrastructure.

    Adverse impact on Food Processing Industry since Stock limits curtail their Operations.

    Impact on agriculture exports: Whenever the Government declares an agricultural commodity as essential, it imposes a number of restrictions on it including ban of export of such commodities.

    Outdated Act:  This act was enacted in 1955 when we used to frequently faced shortage of agricultural commodities and hence it required Government to crackdown on black marketing and hoarding and bring down the prices. However, now situation has changed completely. Now, we have surplus production of agricultural production. Hence, accordingly, we must give the necessary freedom to the traders, aggregators and food processing industries to undertake bulk procurement of the agricultural commodities.

    New Announcement:

    Agricultural commodities to be outside the purview of ECA; Stockholding restrictions to be imposed only under exceptional circumstances.

    Critical analysis of the Amendment to ECA

    • Government's prerogative to impose stockholding limits during exceptional circumstances may deter private sector investment in supply chain infrastructure
    • May give a free hand to the large traders to involve in black marketing; need to ensure this does not happen.

    Way forward

    Need to abolish ECA completely as recommended by Economic Survey 2019-20

     

    UPSC Current Affairs: World Bank's Forecasts on India's GDP growth | Page - 14

    UPSC Syllabus: Mains – | GS Paper III - Economy

    Sub Theme:  GDP Growth Forecast | UPSC     

     

     

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