IASbaba's Daily Current Affairs Analysis

IASbaba’s Daily Current Affairs (Prelims + Mains Focus)- 14th February 2018

(PRELIMS+MAINS FOCUS)

Defence Acquisition Council (DAC)

Part of: Mains GS Paper 3 – Defence

Key pointers:

Defence Acquisition Council – is often in news.

DAC recently gave approval for a series of proposals to shore up the Army’s infantry firepower and other deals, together estimated at ₹15,935 crore.
INSAS (Indian Small Arms System rifles rifles) to be replaced by new light machine guns, assault rifles and sniper rifles.
To enhance the anti-submarine warfare capabilities of Naval Ships, the DAC approved the procurement of the “Mareech” advanced torpedo decoy systems.
The system has been developed by the Defence Research and Development Organisation and has successfully completed extensive trial evaluations.

Do you know?

About Defence Acquisition Council

DAC – is the government’s highest decision-making body on procurement.
DAC is chaired by Union Defence Minister.
To counter corruption and speed up decision-making in military procurements.
The decision flowing from the Defence Acquisition Council are to be implemented by the following 3 Boards –

Defence Procurement Board headed by the Defence Secretary
Defence Production Board headed by the Secretary (Defence Production)
Defence Research & Development Board headed by the Secretary (Defence Research & Development)

Article Link: Click here

(MAINS FOCUS)

ECONOMY

TOPIC: General Studies 3:

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Reforms to transform informal economy and boost formal economy

Introduction:

Medium, Small and Micro Enterprises (MSMEs) are a major engine of growth and employment in the country.

Formalisation and mainstreaming of MSMEs have been taking place at a rapid pace since demonetisation and the introduction of the Goods and Services Tax.

Union Budget 2018 will look to accelerate this process by incentivising formalisation in such a way that it sets off a cycle of easing access to finance, lowering tax incidence, and encouraging job creation.

Big Reforms:

Budget pronouncements seek to change the landscape by triggering three effects:

Increase access to formal finance:

Large corporates are now being mandated to go to the corporate bond market for a quarter of their borrowings. Competition from mutual and pension funds is set to increase in the corporate bond market, therefore making funds available to large companies.
After recapitalisation, public sector banks will have more money to lend.

How will it help MSMEs?

Since, large corporates borrow from the corporate bond market, there will be enough money left in the banks and with recapitalization – it is expected that banks will start increasing their exposure to the MSME sector.

There is also a proposal to link the Trade Receivables Discounting System (TReDS) platform with the GST Network, and to revamp the online loan sanctioning facility – this would also improve the MSME sector’s access to formal finance.

How will this help MSMEs?

Access to relevant financial data on MSMEs has been a challenge for banks, particularly when funding their working capital requirements. Therefore, with the TReDS -GSTN linkage and by onboarding Public Sector Banks and corporates on to the TReDS platform – the above issue will be solved.

So, gradual adoption of TReDs has the potential to significantly ease the liquidity woes of MSMEs.

Role of digital revolution: New advances in technology will allow lenders to use digital transaction trails and rule-based decision-making to underwrite and offer large number of small-ticket loans.

How?

Technology allows aggregation and analysis of bank statements of MSMEs and helps in analysing cash flows.

Tax cuts and incentives

Incentivising sound legal constitution through tax cut:

Union Budget 2018 has reduced the income tax slab of 25 per cent to companies with a turnover of up to Rs. 250 crore (from Rs. 50 crore announced in the last year’s budget).
Government also aims to boost the investible surplus of MSMEs.

The reduction will benefit macro, small and medium enterprises which account for 99% of companies filing their tax returns.

It is expected that it will incentivise informal firms (partnerships and proprietorships) to adopt a more sound legal constitution — and that’s positive for formalisation.

Job creations among MSMEs

Incentivising formal enterprises would create new jobs:

Incentives to formal enterprises extend beyond lower corporate tax rates.
The Government has increased its contribution to the employees provident fund to 12 percent of wages from 8.33 percent earlier in the case of new employees for the next three years.
Similarly, the benefits under Section 80-JJA of the Income Tax Act have been extended by relaxing the minimum period of employment for new employees to 150 days from 240 days for the footwear and leather sectors as well, besides continuing it for the apparel sector.

All the above three segments have high labour intensity and therefore, these steps will be beneficial to promoting new jobs.

Conclusion:

In sum, using digital trails to improve access to funds, lowering tax rates to increase the investible surplus in the hands of MSMEs, and incentives to employ are just what are needed to ensure faster growth of the formal economy.

Connecting the dots:

Easing access to finance and lowering tax incidence in MSME sector will accelerate the formalisation process and generate jobs. Do you agree? Comment.

NATIONAL

TOPIC:

General Studies 3:

Issues related to direct and indirect farm subsidies and minimum support prices
Inclusive growth and issues arising from it.

General Studies 2:

Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes; mechanisms, laws, institutions and bodies constituted for the protection and betterment of these vulnerable sections

Hike in the MSPs: Making it effective

Background:

The issue of minimum support price has been mired in controversy. Recently the government has announced a hike in the MSPs. In the latest budget the government has announced to increase the minimum support price of crops to 50% over the cost of production.

What is MSP?

Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the market price for the crops.

It is set by the CACP (Commission for Agricultural Costs and Prices) and is normally active for rice and wheat at all times. The Food Corporation of India is the procuring agency.

For other crops, while MSP is announced, it becomes active when there are cooperatives or state agencies procuring the product based on circumstances.

This is because market prices would normally be higher than MSP and the machinery for procurement, storage and disposal is weak.

What necessitates price intervention?

Ideally, the market should be setting the price with all checks at manipulation being in place.

Farmers are suppliers of basic inputs for the rest of the economy.
It is not just the share in GDP that matters but also the purchasing power provided for other industries being linked directly with other sectors.
The mandi system is opaque and farmers are at a disadvantage when they enter these markets.

Therefore, price intervention is required.

A2+FL and C2 concept:

The Government’s announcement to increase the MSP to 1.5 times the cost is laudable as it ensures that the farmers get a higher price and income.

It has, however, not been clarified whether the cost being referred to is the A2+FL concept which is actual cost plus farm labour or the C2 concept which is comprehensive and includes interest paid, rent, etc.

The Government needs to make clear what is being referred to when we speak of 1.5 times the cost — A2+RL or C2?

Making the hike meaningful:

Pricing is one part of the story but delivery is more important. Higher prices would mean a radical change in the way in which farm products are marketed.

It is necessary to create structures where the Government — Central or State — gets involved with procurement of crops.

Volumes would be large as almost all the kharif crops now rule below the MSP since production has been very good.

Organisations for procurement have to be identified; these will have collection centres across all the markets. Ideally, they should be located at all mandis where the crops are sold.

Procurement is always for an average fair quality. Thus, grading and assaying must be required.
For rice and wheat the manual inspection system has been established; the same has to be developed for other crops.
The Government should be able to have warehouses ready to store the produce. Today even the handling of rice and wheat stocks faces several challenges.
Once procured, focus should be on disposal.

In the case of rice and wheat, there is direct linkage with PDS and buffer stock, and hence a system has been established. The same has to be done for other crops.

Issue:

Rural distress continues to exists despite many crops and many states already having provided for MSP, which is 50% above the cost of production.

Merely announcing MSPs may not make a material difference unless all the accompanying factors are addressed. At present, for many of the crops the market price is lower than the MSP, yet farmers are not able to get the MSP as there are no channels existing for them.

Price Deficiency Payment System:

A way out of the issues related to MSPs is to not procure but to compensate the farmer with the difference between the price received at the mandi and the MSP. Thus, the option of price deficiency payment system should be explored.

Challenge:

Given that there are intermediaries along the way, the farmer may get bypassed in such a transaction.
Besides, mandis are opaque and records are not maintained.

Conclusion:

Hike in MSP without plans of implementation won’t help farmers. To make the higher MSPs meaningful it has to be ensured that all the systems are in place to procure and then dispose of the same.
Pricing is one part of the story; delivery is more important. A radical change is needed in farm products marketing.

Connecting the dots:

The government recently has in its latest budget has announced hiking of MSPs for multiple crops. Discuss how this may not help farmers, until all the systems to procure and then dispose of the same is put in place.
Rural distress continues to exists despite many crops and many states having provided for MSP, which is 50% above the cost of production. Discuss the issues related with MSPs. Also analyze how price deficiency payment system may help.