DAILY CURRENT AFFAIRS ANALYSIS
03 AUGUST 2022
|Minimum Support Price
|Prelims & Mains
|Cryptocurrency in India
|Prelims & Mains
|Non Performing Assets
|Prelims & Mains
|Defence Exports in India
|Prelims Specific Topic
1 – Minimum Support Price:
Topic – Agriculture related issues
- The MSP, which is based on a computation of at least 1.5 times the farmers’ production costs, is the rate at which the government purchases crops from farmers.
- A “minimum price” (MSP) is set for any crop the government deems to be profitable for farmers and so deserving of “support.”
- MSP-recommended crops include sugarcane and 22 other mandatory crops, according to the Commission for Agricultural Costs & Prices (CACP).
- A department within the Ministry of Agriculture and Farmers Welfare is known as CACP.
- 14 kharif season crops, 6 rabi season crops, and 2 more commercial crops make up the list of required crops.
- Additionally, toria and de-husked coconut MSPs are set based on the MSPs of rapeseed/mustard and copra, respectively.
- Criteria for Suggesting the MSP: The CACP takes into account a number of factors, including the cost of cultivation, when recommending the MSP for a commodity.
- It considers the commodity’s supply and demand dynamics, domestic and international market price trends, parity with respect to other crops, repercussions for consumers (inflation), the environment (soil and water consumption), and trade agreements between the agricultural and non-agricultural sectors.
- Three Different Types of Production Cost:
- The CACP estimates three different types of production costs for each crop, both at state- and India-wide average levels.
- ‘A2’: Pays for all direct expenditures made by the farmer for things like seeds, fertiliser, pesticides, hired labour, leased land, fuel, irrigation, and so forth.
- A2 plus an imputed value for unpaid family labour is included in the phrase “A2+FL.”
- “C2”: It is a more comprehensive cost that, in addition to A2+FL, takes into account rentals, interest forgone on owned land, and fixed capital assets.
- When advising MSP, CACP takes into account both A2+FL and C2 expenses.
- CACP estimates simply A2+FL as the return cost.
- C2 costs, however, are largely utilised by CACP as benchmark reference expenses (opportunity costs) to determine whether the MSPs they suggest at least cover these costs in some of the key producing States.
- The Union government’s Cabinet Committee on Economic Affairs (CCEA) makes a final determination regarding the MSP level and other suggestions given by CACP.
- Why is MSP Required?
- Since 2014, farmers have been forced to endure falling commodity prices due to the twin droughts of 2014 and 2015.
- Demonetization and the introduction of the GST, two simultaneous shocks, damaged the rural economy, particularly the non-farm sector but also agriculture.
- The majority of farmers continue to be in a precarious condition as a result of the epidemic, the slowdown in the economy following 2016–17, and other factors.
- Increased costs for diesel, energy, and fertilisers have only made the situation worse.
- What Problems Are Related to India’s MSP Regime?
- Confined extent only to two commodities—rice and wheat—are purchased despite the official announcement of MSPs for 23 different crops because they are allocated through NFSA (National Food Security Act). The remainder is mainly incidental and irrelevant.
- Ineffectively Implemented: Only 6% of the MSP could be obtained by farmers, according to the Shanta Kumar Committee’s assessment from 2015. This immediately translates to 94 percent of farmers in the nation not receiving the benefit of the MSP.
- Prices in the domestic market have no relationship to the existing MSP regime. Its main purpose is to satisfy NFSA criteria, therefore rather than being an MSP, it functions as a procurement price.
- The overproduction of rice and wheat caused by the skewed MSP system inhibits farmers from growing other crops and horticultural products, which have higher demand and may, therefore, boost farmers’ income.
- Middlemen-Dependent: The MSP-based procurement system also relies on intermediaries, commission agents, and APMC representatives, all of whom are difficult for smaller farmers to access.
- Way ahead:
- True MSPs call for government intervention anytime market prices drop below a certain threshold, primarily in situations of excess production and oversupply or a price collapse brought on by external sources.
- For many of the crops that are desirable for nutritional security, such as coarse cereals, as well as for pulses and edible oils for which India is reliant on imports, MSP can also be a motivating price.
- The path to wisdom is to spend more money on more nutrient-dense produce like fruits and vegetables as well as fisheries and animal husbandry.
- The ideal method to invest is to provide financial incentives for businesses to create effective value chains based on a cluster strategy.
- Government must develop a transitional plan for agricultural pricing, whereby some agricultural pricing should be supported by the government and some should be determined by the market.
- A shortfall payment plan modelled after Madhya Pradesh’s Bhavantar Bhugtan Yojana (BBY) could be one approach to do this.
Source – The Indian Express
2 – Cryptocurrency in India:
Topic – Economy related issues
- Cryptocurrency: What is it?
- Any kind of money that exists digitally or virtually and uses cryptography to safeguard transactions is known as cryptocurrency, also referred to as crypto-currency or crypto.
- Cryptocurrencies employ a decentralised mechanism to track transactions and create new units rather than a central body to issue or regulate them.
- The blockchain, a decentralised peer-to-peer network, underpins it.
- What are the Rewards of Using Cryptocurrency?
- Quick and affordable transactions: Due to the fact that there are fewer intermediaries involved, using cryptocurrencies to carry out international transactions is significantly more cost-effective.
- Investing Location: Cryptocurrencies have a finite quantity, somewhat like gold. Additionally, during the past several years, the price of cryptocurrencies has increased more quickly than the price of traditional financial assets.
- As a result, investing in cryptocurrencies may become popular.
- Anti-inflationary Currency: Because there is so tremendous demand for cryptocurrencies, their prices have mostly continued to rise. In this situation, people are more likely to hold cryptocurrencies than to use it.
- The currency will experience deflation as a result of this.
- Why are nations like the CAR adopting cryptocurrencies as a legal form of payment?
- Strong and Inclusive Growth: If implemented, the proposal will allow for “strong and inclusive growth” and put the African nation on the “map of the most brave and forward-thinking nations in the world.”
- CAR, which has a population of 5 million, is one of the world’s poorest and most economically precarious nations.
- According to projections from the World Bank made in July 2021, 71% of its people were living below the federal poverty threshold of $1.90 per day.
- Positive Growth: Inflation and nations that allow the usage of cryptocurrencies may be directly correlated.
- Cryptocurrencies have the ability to turn the decrease of legal tender due to inflation into growth.
- This perhaps direct connection would be important to CRA. The IMF predicts that the country’s inflation rate would increase to 4% in 2022 as a result of rising food and fuel costs.
- The relevance of this to geopolitics:
- Continuity with the Other Country:
- The two nations that accepted Bitcoin as legal tender do not have their own currencies.
- 14 African countries share the CAR franc as their common currency, while El Salvador uses the US dollar.
- The “Franc Zone” is made up of these nations, the majority of which were historically French colonies.
- Avoid the Embargo and Sanctions Imposition: As a result of the blockade imposed by the U.S., nations like Cuba are cut off from international financial systems and are unable to get financial instruments like debit or credit cards. As a result, they struggle to travel abroad and purchase goods and services from other countries.
- What Cons are there?
- Extremely Volatile: Cryptocurrencies are highly volatile assets that have gained appeal due to their lack of regulation. The risk of volatility has raised questions about the possible influence on a nation’s macroeconomic stability, particularly those with weak socio-economic fundamentals.
- Recently, numerous nations—especially those with poorly designed monetary systems and protracted inflation—have pondered passing laws that would control the usage of cryptocurrencies.
- Uncontrolled Nature: Additionally, the International Monetary Fund (IMF) had recommended El Salvador to restrict the use of unregulated assets due to the significant dangers that Bitcoin use poses to consumer protection, financial stability, and integrity, as well as the accompanying fiscal contingent liabilities.
- Paying Taxes in Cryptocurrencies: For nations like CRA, the hazards of paying taxes in cryptocurrencies would be exposed if tax payments were made using crypto assets but that local currency was still used for expenditures.
- For instance, if the government uses cryptocurrency to collect $100 in taxes, a decline in the value of the asset releases $40 for spending.
- Not a Clearly Defined Mechanism: Since cryptocurrencies are speculative assets and not tied to any specific mechanism like stocks or currencies are, central banks would have no way to determine the appropriate interest rates for their domestic needs.
- Blockchains may be used counterproductively to track transactions but not the persons involved. As a result, it might be applied to money laundering, financing of terrorism, or other illicit acts.
Source – The Indian Express
3 – Non Performing Assets:
Topic – Economy related issues
- A non-performing asset (NPA) is explained as:
- You may have noticed that a bank’s loans are regarded as one of its assets. Therefore, if a loan’s principal, interest, or both components are not being repaid to the lender (bank), the asset would be classified as a non-performing asset (NPA).
- A non-performing asset is any asset that, for a predetermined length of time, stops providing returns to its investors (NPA).
- In most nations and among the many lending institutions, that time frame is typically 90 days. It is not, however, a set norm, and it may change depending on the terms and conditions that the borrower and the financial institution agree upon.
- An illustration of NPA:
- Let’s say a corporation receives a loan from the State Bank of India (SBI) for Rs. 10 crores (Eg: Kingfisher Airlines). Consider the interest rate of, say, 10% per year that they agreed upon. Let’s say that originally everything went smoothly and that the market forces were favouring the airline business; as a result, Kingfisher was able to pay the interest. Let’s say that later on the corporation is unable to pay the interest rates for 90 days due to administrative, technological, or corporate issues. In that circumstances, a loan issued to Kingfisher Airlines is a strong candidate for classification as a non-performing asset (NPA).
- What might the potential causes of NPAs be?
- Investing money in fraudulent or unrelated ventures.
- Failures despite attentiveness
- Business losses brought on by modifications to the regulatory environment.
- Morale is low, especially following government loan forgiveness programmes.
- Financial crises on a global, regional, or national scale cause companies’ profit margins to shrink, which strains their balance sheets and, ultimately, prevents them from making loan and interest payments. (For instance, the world financial crisis of 2008).
- the general slowing of the entire economy, like in the case of India after 2011, which caused NPAs to increase more quickly.
- Because of the downturn in a particular industrial sector, businesses there suffer, and some could even go bankrupt.
- NPAs are the outcome of unintended corporate house expansion during the boom period and loans that were first accepted at low rates but later serviced at high rates.
- due to business mismanagement, such as willful defaulters and willful incompetence.
- Loans become non-performing assets (NPAs) as a result of poor governance and policy gridlock, which slow down the timetable and pace of projects. the Infrastructure Sector, as an example.
- severe rivalry in any given commercial sector. Take the Indian telecom industry as an example.
- Land acquisition is being delayed because of social, political, cultural, and environmental factors.
- a dishonest lending technique that involves making loans in an opaque manner.
- because of natural occurrences like floods, droughts, disease outbreaks, earthquakes, and tsunamis, among others.
- Dumping causes cheap imports, which hurts domestic businesses. Take the Indian steel industry, for instance.
- What effect do NPAs have?
- Lenders’ profit margins are reduced.
- Stress in the banking industry results in less money being available to finance other initiatives, which has an adverse effect on the whole national economy.
- Banks’ increased interest rates to keep their profit margin.
- transferring money from beneficial projects to detrimental ones.
- As investments become stalled, unemployment may have resulted.
- In the case of public sector banks, poor performance by the banks results in poor shareholder returns, which reduces the amount of dividends paid to the Indian government. As a result, it might affect the quick distribution of funds for infrastructure and social development, which would have social and political costs.
- Investors do not receive the proper returns.
- The balance sheet syndrome with Indian characteristics, which is characterised by strained balance sheets in both the banking and corporate sectors, stops investment-led development.
- NPAs-related cases increase the pressure on the judiciary’s already backlog of litigation.
- What efforts are being taken to combat NPAs?
- The story of NPAs in India is not new, and the GOI has made a number of efforts toward reforming the legal, financial, and policy framework. The Narsimham Committee made numerous reform recommendations in 1991 to deal with NPAs. Some of them were put into practise.
- The 1993’s DRTs (Debt Recovery Tribunals):
- to speed up the process of case resolution. The Recovery of Debt Due to Banks and Financial Institutions Act of 1993 applies to them. However, because there aren’t enough of them, cases often drag on for more than two to three years in many places.
- 2000’s Credit Information Bureau:
- In order to prevent loans from getting into the wrong hands and, consequently, NPAs, a good information system is necessary. By maintaining and distributing data on specific defaulters and wilful defaulters, it benefits banks.
- 2001’s Lok Adalats:
- They are beneficial in dealing with and recovering small loans, but according to RBI guidelines established in 2001, they are only permitted for loans up to 5 lakh rupees. They are advantageous since fewer matters are brought before the courts as a result.
- 2002’s SARFAESI Act:
- The SARFAESI Act of 2002 – Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest By acquiring and selling the secured assets in NPA accounts with an outstanding value of Rs. 1 lakh or more, banks and other financial institutions are allowed by the Act to recover their non-performing assets (NPAs) without the assistance of a court. Banks must first publish a notification. Then, if the borrower doesn’t pay back, they can:
- Take control of the management of the borrowing firm or assume ownership of the security.
- Appoint someone to handle the issue.
- Additionally, this law was modified last year to speed up enforcement.
- Asset reconstruction Companies (ARCs):
- Following the revision to the SARFAESI Act of 2002, the RBI has granted licences to 14 additional ARCs. These businesses were established to recover value from distressed loans. Before this regulation, lenders had to go through a lengthy legal process to enforce their security interests.
- Restructuring of Corporate Debt in 2005:
- By lowering the rates paid and lengthening the period the company has to repay the obligation, it aims to lessen the weight of debts on the business.
- 5:25 rule – 2014:
- Affectionately referred to as Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries. The need for loans every 5-7 years and refinancing for long-term projects was advocated in order to preserve the cash flow of such businesses because the project schedule is lengthy and they do not receive the money back into their books for a considerable amount of time.
- 2014 Joint Lenders Forum:
- The inclusion of all PSBs with stressed loans gave rise to it. It exists to prevent loans from various banks being made to the same person or business. It was created to stop situations where someone would borrow money from one bank and then lend it to someone else.
- 2015’s Mission Indradhanush:
- Since banking was nationalised in 1970, the Indradhanush framework for changing PSBs has been the most extensive reform initiative implemented by ABCDEFG to modernise PSBs and enhance their overall performance.
- Restructuring of the strategic debt (SDR) in 2015:
- In accordance with this plan, banks that have provided loans to corporate borrowers have the option to convert all or a portion of those loans into equity shares in the business that received the loans. Its main goal is to make sure that promoters have a larger share in restoring stressed accounts and giving banks better capabilities for starting a change of ownership when necessary.
- 2015 Asset Quality Review:
- Classify stressed assets and make provisions for them to safeguard the banks’ future. In addition, identify assets early to take the necessary steps to stop them from becoming stressed.
- Structuring stressed assets sustainably in 2016 (S4A):
- It has been designed as a flexible framework for handling severely pressured accounts. By dividing the outstanding debt into sustainable debt and equity/quasi-equity instruments that are anticipated to deliver upside to the lenders when the borrower turns around, the sustainable debt level for a stressed borrower can be determined.
- The 2016 Insolvency and Bankruptcy Code:
- The Chakravyuaha Challenge (Economic Survey) of the exit dilemma in India is the reason behind its formulation. By consolidating and amending the laws relating to the reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals in a timely manner and for the maximisation of value of such persons’ assets and matters connected therewith or incidental thereto, this law seeks to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders.
- Private ARC vs. Public ARC in 2017:
- This year’s Economic Survey proposed the notion of a Public Asset Reconstruction Companies (ARC) that would be entirely funded and managed by the government. Mr. Viral Acharya, the deputy governor of the Reserve Bank of India, has argued in favour of a private ARC. Economic surveys refer to it as PARA (Public Asset Rehabilitation Organization), and their proposal is based on the successful usage of a comparable agency during the East Asian financial crisis in 1997.
- 2017’s Bad Banks:
- The creation of a bad bank that will take on all stressed loans and manage them in accordance with flexible rules and mechanisms is another topic covered in Economic Survey 16-17. It will make PSBs’ balance sheets easier to manage, allowing them to fund more development initiatives and start new ones.
Source – The Indian Express
4 – Defence Exports of India:
Topic – Agriculture related issues
- What are the key points?
- Seventy percent of the exports came from the private sector, with the remaining twenty percent coming from public sector businesses.
- 90 percent of the economy used to be in the private sector, but today more public sector units are involved in defence.
- Indian enterprises are progressively becoming a part of the supply chains of American defence companies, despite the fact that India’s defence imports from the US have increased dramatically in recent years.
- What recent initiatives have been made to increase defence exports?
- India’s single largest defence export order, for the sale of three batteries of the shore-based anti-ship BrahMos supersonic cruise missile, was signed in January 2022 with the Philippines for USD 374.96 million.
- Over the past two years, India has placed a gradual import ban on 310 various weapons and systems, which has boosted export.
- Over the course of the next five to six years, these weapons and platforms will be locally produced in stages.
- Defense exports have significantly expanded as a result of increased collaboration with the commercial sector.
- How are India’s defence exports doing?
- A key component of the government’s effort to achieve self-sufficiency in the manufacture of defence is defence exports.
- Italia, the Maldives, Sri Lanka, Russia, France, Nepal, Mauritius, Sri Lanka, Israel, Egypt, the United Arab Emirates, Bhutan, Ethiopia, Saudi Arabia, the Philippines, Poland, Spain, and Chile are just a few of the nations to which more than 30 Indian defence companies have exported weapons and equipment.
- Personal protective equipment, defence electronics, engineering machinery, offshore patrol boats, advanced light helicopters, avionics suites, radio systems, and radar systems are among the exports.
- However, India still falls short of expectations in terms of its defence exports.
- India was classified as the 23rd largest exporter of weaponry from 2015 to 2019 by the Stockholm International Peace Research Institute (SIPRI).
- Still, only 0.17 percent of the world’s weaponry exports come from India.
- India’s Ministry of Defense currently lacks a specific agency to promote exports, which is the cause of its terrible record in defence exports.
- India has set a goal of reaching $5 billion in defence exports by 2024.
- What defense-related initiatives are there?
- DPEPP 2020, the Defense Production and Export Promotion Policy:
- The DPEPP 2020 is envisioned as a comprehensive road map to give the nation’s defence production capabilities a focused, organised, and major push for exports and self-reliance.
- Progressive improvements have been made with the aim of empowering the private sector.
- Introducing Indian IDDM (Indigenously Designed, Developed, and Manufactured), a new category for the DPP 2016:
- Indian IDDM was given advantage over all other categories if any Indian companies chose it.
- Strategic Collaboration:
- A strategic partnership approach enables Indian businesses to work with foreign original equipment manufacturers (OEMs) and obtain technology transfer, the capacity to build and produce in India, and the ability to sustain those projects in India.
- The first conventional submarine RFP is currently operational.
- Positive indigenous development:
- The government is forbidding itself from importing anything for the first time in order to support local business.
- There are two positive indigenization lists with 101 and 108 items each, covering a wide range of products from platforms to weaponry to sensors to the full spectrum.
Source – The Indian Express