IASbaba's Daily Current Affairs Analysis

IASbaba’s Daily Current Affairs (Prelims + Mains Focus)- 4th May 2018

(PRELIMS+MAINS FOCUS)

India doing “extremely well” on electrification: WB

Part of: Mains GS Paper III- Infrastructure, Inclusive growth

Key pointers:

India is doing “extremely well” on electrification with nearly 85 per cent of the country’s population having access to electricity, the World Bank has said.
Between 2010 and 2016, India providing electricity to 30 million people each year, more than any other country as per the latest report of the World Bank.
While challenges still remain to provide electricity to the rest of the 15 per cent of the 1.25 billion population, India is all set to achieve the target of universal access to electricity before the 2030 target date.
The report comes less than a week after Prime Minister Narendra Modi announced that all the villages in the country have been electrified.
The report said that nearly 85 per cent of the country’s population has access to electricity.
In absolute terms, India is doing more on electrification than any other countries.
However, India is not the fastest country in electrification. Bangladesh and Kenya, for example are faster in electrification than India, she noted.
However, reliability of service is an area of concern for India. In some parts of India or having the connection doesn’t necessarily guarantee the energy’s reliable supply.

Article link: Click here

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

Minimum Support Price: How effective it has been?

Background:

Under Indian conditions, agriculture faces several risks — weather, production, quality and market, to name a few. While crop production is often seasonal and regional, consumption is round the year and across the country. Because of this, market prices usually tend to be volatile. For instance, prices tend to collapse during the harvest season glut and heavy arrivals.

The rationale behind minimum support price (MSP):

It provides the assurance of a minimum price that ensures the farmer recovers his cost of production and receives a decent return on investment.
MSP is a kind of sovereign guarantee that farmers will not be allowed to suffer losses if crop prices fall below the specified minimum price.
MSP works as an options contract. If price were to fall below the specified MSP, the government has the obligation to purchase from farmers at the MSP. At the same time, the farmer is under no obligation to sell to the government if the price stays above MSP. In the event, the farmer is free to sell in the open market at price higher than MSP.

Calculating MSP:

For arriving at the MSP, the Commission for Agricultural Costs and Prices (CACP) (formerly, Agricultural Prices Commission set up in 1965) undertakes an exercise every year examining the cost of production of select crops (numbering about 23), overall demand-supply, domestic and international prices, inter-crop price parity, terms of trade between agri and non-agri sectors, and so on.
According to the government, the CACP also ensures rational utilisation of production resources like land and water.
However, the CACP’s recommendations on MSP are not binding on the government. Although often accepted, the government occasionally tinkers with the recommended prices.

Ineffective instrument:

Over the years, MSP has ceased to be an instrument to influence crop diversification or area allocation.
Often, growers do not get to know the MSP as there are challenges relating to information dissemination; and when growers get to know, they do not care because it didn’t mean much to them.

What has the MSP regime achieved so far?
Little.

A majority of growers in the country do not receive the specified MSP (barring, of course, for wheat and rice that too in some States). They are upset and disillusioned and the farm crisis is worsening.
There is a mistaken belief that higher MSP will translate to higher production.
MSP not backed by a robust procurement policy and associated logistics is doomed not to succeed, especially in the context of our production-centric approach.
In the case of rice and wheat, grain mono-cropping and open-ended procurement at support price in agriculturally important States of Punjab, Haryana and Uttar Pradesh are leading to disastrous environmental impacts.
Soil health has deteriorated and the water table has gone down to alarmingly low levels.

So, the lesson is:

MSP alone will achieve little. We need a holistic approach. Along with MSP we need a robust procurement system. We need an appropriate foreign trade (export/import) policy and tariff (Customs duty) policy in a way that will protect domestic growers without compromising the interests of consumers.

OECD experience:

For our policy-makers, there is a lot to learn from the OECD experience.
The OECD countries (30 of the wealthy industrialised nations) support agriculture with a humongous $500 billion a year. Of this, about $80-90 billion is invested in what is described as general services — agri infrastructure and innovation systems, inspection and control systems, market development, and so on.
These are crop-neutral initiatives that seek to build lasting assets as well as scientific post-harvest systems.

Conclusion:

In sum, we need an integrated approach to agriculture and food policies; and a lack of it will continue to result in uncertain output, suspect quality, price volatility and distorted markets.

Connecting the dots:

What is the rationale behind MSP? How is it calculated and how effective it has been for Indian farmers? Discuss.

NATIONAL

TOPIC: General Studies 2:

Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests

Effect of policies and politics of developed and developing countries on India’s interests

Free Trade Agreements: An analysis

Introduction:

Eminent economist Jagdish Bhagwati in his 2008 book, Termites in the Trading System: How Preferential Agreements Undermine Free Trade, lamented how an ever-increasing number of free trade agreements (FTAs) are a threat to the world trading system.

But why does Bhagwati consider FTAs to be bad?

In an FTA, two or more countries agree to lower import tariffs and other trade barriers on each other’s products.
Good for them at one level but bad for the overall trade, because of the two effects that take place as a result.
Economists term these trade diversion and trade creation.
Trade diversion favours less efficient producers while trade creation stresses local producers.

Example: Diversion and creation

To understand, let us take the example of a shirt.

Trade diversion:

Let’s presume that all shirts are identical and have the same quality and a consumer will buy from the cheapest source. Cost of one shirt sold by the US is Rs. 1,000 and the EU, Rs. 1,100. If the import duty in India on the shirt is 20 per cent, cost of one shirt imported from the US will be Rs. 1,200 and that from the EU, Rs. 1,320. Now, since the price of shirts from the US is lower, Indian consumers will prefer to buy them.
The game changes if India signs an FTA with the EU and eliminates import duty on shirts from the EU. So, shirts from the EU can now enter India at Rs. 1100, while shirts from the US will continue to come at Rs. 1,200.
So, India will stop buying from the US and start buying from the EU. As the shirts from the EU cost more, but duty elimination through the FTA makes them less expensive.
Since the India-EU FTA diverted trade from the more efficient US to less efficient EU producer, the effect is termed trade diversion. It is considered bad as the FTA rewards a less efficient producer.

Trade creation:

Let us now understand the impact of an FTA on the local industry. Consider the shirt example again. A shirt produced in India sells at Rs. 1,150. Pre-FTA, no imports will take place as this price is lower than the duty paid price of shirts from the US ( Rs. 1,200) and EU ( Rs. 1,320).
But position changes after the FTA. Now the shirts from the EU (at Rs. 1,100 per piece) will cost less than the shirts produced in India ( at Rs. 1,150 per piece).
The phenomenon is called trade creation as the FTA created new trade in the form of imports from the EU.
Soon imports from the EU will replace locally produced shirts. After some time, Indian shirt makers would shut shop.

To what extent these effects distort world trade:

Since FTAs allow trade at zero import duty on most products and world over 280-plus FTAs are operational, it is widely believed that most world trade happens through the FTA route.
A data check shows that the share of most countries’ trade with their FTA partners is 20-40 per cent of their total global trade. But even most of this trade takes place outside of the FTA.
Global and bilateral export-import data show that much of world trade takes place outside the FTAs.

Conclusion:

Above analysis shows that the FTAs had the potential to damage the multilateral trading system and world trade, they could not.
Reason: Most (about 83-85 per cent) world trade takes place outside the FTAs. Only 15-17 per cent of trade is on preferential terms.
But as the US action of increasing the tariffs and China’s response shows tariffs are still the central means of regulating imports. And these should be reduced through the FTAs only when economic benefits can be clearly demonstrated.

Connecting the dots: