TODAY’S TALK ON EDITORIALS CIVILS360
AUGUST 16, 2017
Caution from a sobering Survey
The update – PART II ECONOMIC SURVEY
- Economic growth for fiscal year 2016-17 was 7.1%. This was the year when oil prices and inflation were moderate, monsoon rains were abundant, inbound foreign direct investment was at record peak, the currency was stable and the fiscal deficit was under control. With such macroeconomic context, the year should have recorded at least one percentage point higher growth than the previous year. But that was not to be, and demonetisation could be the biggest reason. Indeed the second half of the last fiscal saw the growth rate plummet by 1.2 percentage points compared to the first half.
- The Survey says that signs of slowdown were evident even before the surprise November announcement of demonetisation. Next year too, the Survey forecasts a growth closer to its lower bound, possibly lower than 7%. In three years if the economy has missed one percentage point every year, cumulatively that’s a permanent loss of national income of close to Rs. 5 lakh crore in nominal terms. The continuing deflationary trends arise from lower investment ratio, low farm prices especially for non-cereals foods, the cutting back on development spending by State governments owing to the burden of loan waivers, and of course the twin balance sheet problem. The Survey cites the example of Uttar Pradesh which had to slash its development spending by 13% in order to accommodate the farm loan waiver.
- The latest June data on the index of industrial production (IIP) shows negative growth, i.e. contraction of the index, which is the first in the last four years. It may very well be due to de-stocking of warehouses before the July 1 launch of the Goods and Services Tax (GST), but it does not seem so.
- The contraction is particularly widespread across manufacturing sectors, with 15 out of 23 industries showing negative growth. This is where the twin balance sheet problem hits hardest. Bank balance sheets are stretched with a non-performing assets (loans) ratio close to 10% of their total loan. This is higher than the capital base available to most public sector banks. So technically their net worth is negative.
- On the other hand, corporates too are reeling under stretched balance sheets, burdened by excessive borrowing at high interest rates (from the past), excess capacity and not-so robust demand for their products. Their situation is made worse with the flood of imports, which take away their domestic market share. The strong rupee makes imports more attractive.
- Under the GST regime, the countervailing duty paid in lieu of excise (now GST) is now tax deductible. Earlier it was not for many products. This makes imports that much more attractive in comparison with domestically produced goods. The strong rupee has also been flagged by the Survey as potentially harming the domestic economy.
- Is the weakness in industrial growth a structural problem or a cyclical one? If the latter, then we should see an upswing. But it also has long-term structural dimensions. The investment-to-GDP ratio has been steadily falling for five years in a row. Of this the private sector component growth is abysmally low. The bank credit growth to industry has been consistently negative since September 2016.
- The third area highlighted by the Survey is the financial sector, including money and banking. It implicitly blames the high interest policy of the Reserve Bank of India (RBI) for thwarting industrial growth. Even when the monetary policy framework has now become focussed on inflation targeting, the RBI’s forecasts have overshot six out of 14 times in as many quarters.
- The inflation expectations surveys of the RBI consistently show people’s anxiety about future price rise. And it is not as if the investment train will zoom in as soon as interest rates are cut. Many other factors weigh on the minds of investors.
- The key problem is of course the continuing burden of non-performing assets (NPA). Repeated and innovative proposals from the RBI (under various acronyms such as CDR, SDR, S4A, or corporate debt restructuring, strategic debt restructuring and scheme for sustainable structuring of stressed assets) have not borne fruit.
The silver lining
- Finally as with all things Indian, one must end with optimism. The fiscal situation at the Centre is improving. Exports are finally in positive territory. The basic building blocks of longer term growth are being put in place.
- The four major reforms are: GST, a new insolvency and bankruptcy code to deal with NPAs, a new monetary policy framework, and Aadhaar linkage to government services.
- While the near term may not cross 7%, the medium term has the potential to see a sustained 8% growth path. The caution of the Survey is tinged with this optimism!
No case for an all India judicial service
- The proposal to create an All-India Judicial Service (AIJS) along the lines of the All India Services (AIS) is one that has been endlessly debated since the idea was first mooted by the Law Commission in the 1950s. It has never really moved forward as the same arguments both for and against it have been made over and over again.
- The debate has once again come to the fore with a fresh move to implement it and nine High Courts expressing their disapproval.
Why it is a bad idea
- The brief outline of the AIJS is generally this: district judges will be recruited centrally through an all-India examination and allocated to each State along the lines of the AIS. This, it is argued, will ensure a transparent and efficient method of recruitment to attract the best talent in India’s legal profession.
- A milder version of this, with judges recruited by High Courts on the basis of a common examination is currently being debated in the Supreme Court. This is also a proposal with serious drawbacks.
- The first objection to this idea is that it does not adequately diagnose the problem. What exactly is holding back the smartest and the best from the judiciary? The answer lies in the fact that the Bar Council of India has mismanaged legal education. Barring a few islands of excellence, almost no effort has gone into improving the standard of legal education across the country. The best law schools in India are the few set up and funded by the State governments, barring a few exceptions.Within this incredibly small talent pool, the judiciary competes by offering very unremunerative pay and limited avenues for career advancement.
- While a lot of effort has been undertaken by the Supreme Court to ensure uniformity in pay scales across States through its orders in the All India Judges’ Association case, it is still abysmally low when compared to that in the private sector, notably law firms, litigation and the corporate sector. A civil judge (junior division), and the lowest entry level post, can expect a basic pay of Rs. 27,700 per month. Top graduates can expect to earn at least three times as much in Indian law firms in equivalent entry level positions.
- Lower pay would also be acceptable, as with the civil services, if the position was accompanied by sufficiently good terms and conditions of service, and a defined career progression. While trial court judges face much the same problem in the case of transfers and such issues as civil services officers, they have fewer avenues for growth and promotion. A study published in the Economic and Political Weekly in 2016 showed that less than a third of seats in the High Courts are filled by judges from the district cadre. They are also appointed later in their careers and tend to have shorter tenures than judges appointed directly from the Bar. Even if a lawyer is eager to serve as a judge, she would rather wait to be eligible for direct elevation to the High Court than have to go through the grind in the district judiciary.
- An AIJS addresses neither the problem of disproportionately low pay nor the lack of career advancement. While the former is in the hands of the State governments concerned, the latter is in the hands of the judiciary itself, but no changes have been made to ensure better district judge representation in the High Courts.
Causes new problems
- On the other hand, an AIJS creates new problems.
- A “national exam” risks shutting out those from less privileged backgrounds from being able to enter the judicial services. It may also end up not taking into account local laws, practices and customs which vary widely across States, vastly increasing the costs of training for judges selected through the mechanism.
- If the answer is to fill up vacancies faster, compare the vacancy position in the AIS and the subordinate judiciary. The decentralised approach of each High Court conducting its own appointment and a centralised one seem to have roughly the same efficacy in filling up the vacancy.
- The problems of the Indian judiciary at all levels have reached catastrophic levels. The public is losing confidence in the judiciary despite the latter’s assertions. Data show that they are acting on this belief by filing fewer cases year on year. It is likely to be a combination of delays, cost, uncertainty, inefficiency and corruption.
‘Why can’t the government provide a higher income for farmers?’
The greatest challenge facing Indian agriculture 50 years back was achieving self-sufficiency in foodgrain production. What is the greatest challenge today?
- There are two major challenges before Indian agriculture today: ecological and economical. The conservation of our basic agricultural assets such as land, water, and biodiversity is a major challenge. How to make agriculture sustainable is the challenge. Increasing productivity in perpetuity without ecological harm is the need of the hour. In Punjab, and in other Green Revolution States, the water table has gone down and become saline. Further, during the Green Revolution the population was about 400-500 million; now it is 1,300 million and it is predicted to be 1.5 billion by 2030. The growing population pressure has made it pertinent to increase crop yield.
- Also, the economics of farming will have to be made profitable to address the current situation. We have to devise ways to lower the cost of production and reduce the risks involved in agriculture such as pests, pathogens, and weeds. Today, the expected return in agriculture is adverse to farmers. That’s why they are unable to repay loans. Addressing the ecological challenge requires more technology while the economics requires more public policy interventions. In my 2006 report, I had recommended a formula for calculating Minimum Support Price, C2+50% (50% more than the weighted average cost of production, classified as C2 by the Commission for Agricultural Costs and Prices). This would raise the current MSP and has now become the clamour of farmers and the nightmare of policymakers.
The NDA government has said it wants to double farmers’ incomes by 2022. But they haven’t implemented the recommendations of the Swaminathan Commission Report that you submitted to the UPA government in 2006.
- Farm loan waivers are posing a bigger burden on the government exchequer compared to what higher pay for farm produce will incur. But the government is not prepared to give the Rs. 20,000 crore or so for farmers by way of higher MSP. In 2009, the UPA government gave Rs. 72,000 crore as farm loan waiver, but no government is prepared to take long-term steps to ensure the economic viability of farming.
- There are three ways to improve the incomes of farmers. MSP and procurement is one. We also need to improve productivity. The marketable surplus from agriculture has to be enhanced. We should also look at making a value addition to biomass. For example, paddy straw is a biomass product that could be used to make edible mushrooms.
The incidence of farmers committing suicides has shown no signs of abating. What needs to be done to address the crisis?
- We are not really analysing the causes of farmer suicides. Instead, we are simply attributing it to the inability to pay off debts. Some serious thought needs to be given to how we could reduce the cost of farm production, minimise risks and maximise returns. The solution for ending farmer suicides is not only paying compensation. I’ve seen in Vidarbha — so many men have committed suicide and their families are left in the lurch. One of the first projects we initiated in Vidarbha at that time was to rescue children and give them education. Farming is the most important enterprise in this country and farmers are an integral part of our country. In China, farms are owned by the government, and farmers are mere contractors. In our case, land is owned by the people. How do you treat this largest group of entrepreneurs? Unfortunately, all policies today are related to corporate powers. What about food security and 50 crore farmers?
The Green Revolution of 1967-68 may have resolved the food crisis in the short run, but the heavy use of pesticides and high-yielding varieties of paddy have resulted in environmental degradation and loss of biodiversity. How do we cope with these adverse effects?
- After the Green Revolution, I came up with the concept of the Evergreen Revolution. In this we will see increase in farm productivity but without ecological harm. This will include integrated pest management, integrated nutrient supply, and scientific water management to avoid the kind of environmental damage witnessed during the Green Revolution. I’ve addressed these issues in my 2016 paper on Evergreen Revolution. I recommended mandatory rainwater harvesting and introduction of fodder and grain legumes as rotation crops to be adopted by wheat farmers in States like Punjab to ensure sustainability of farming. We can also declare fertile zones capable of sustaining two to three crops as Special Agricultural Zones, and provide unique facilities to farmers here to ensure food security. Soil health managers should be appointed to monitor and ameliorate the soil conditions in degraded zones and rectify defects like salinity, alkalinity, water logging, etc.
- The Prime Minister recently went to Israel. We have several practices to emulate from there. They have a clear sense of where water is needed and where it’s not. The idea of more crops per drop has been implemented well in Israel. We should adopt those practices here. You should see how a water controller works in an Israeli farm. Everything is remote-controlled. They know exactly which portion of the field requires how much water and release only the exact amount. We cannot sacrifice on productivity now, because land under crop cover is shrinking. Post-harvest technologies like threshing, storage, etc. will have to be given greater attention now.
Opinion is divided on the benefits of genetic modification technology to improve yields of food crops. Can GM technology help address food security challenges?
- There are many methods of plant breeding, of which molecular breeding is one.
- Genetic modification has both advantages and disadvantages. One has to measure the risks and benefits before arriving at a conclusion.
- First, we need an efficient regulatory mechanism for GM in India. We need an all-India coordinated research project on GMOs with a bio-safety coordinator. We need to devise a way to get the technology’s benefit without its associated risks.
- Barring the U.S., most countries have reservations about adopting GM technology. Europe has banned it on grounds of health and environmental safety.
- I’d say GM in most cases is not necessary. Normal Mendelian breeding itself is sufficient in most cases — 99% of what is being done under GM initiatives is not justifiable. Parliament has already suggested a law based on the Norwegian model where there are considerable restrictions on GMOs.
What is the scope for organic farming when it comes to addressing food security?
- Organic farming can have a good scope only under three conditions.
- One, farmers must possess animals for organic manure.
- Two, they must have the capacity to control pests and diseases.
- Three, they should adopt agronomical methods of sowing such as rotation of crops. Even genetic resistance to pests and diseases can help organic farmers.
- If you look at the organic farms in Pillaiyarkuppam near Puducherry that were started by the Sri Aurobindo Ashram, it is a good model to follow for organic farming. They have adopted the requisite crop-livestock integration.
Climate change has upset rainfall patterns and we have this cycle of droughts and floods, which has rendered farming risky. How do we address these challenges?
- Both less rainfall and a higher mean temperature affect farming adversely. Currently we are witnessing drought, excess rainfall, sea-level rise… There are both adaptation and mitigation measures to follow in this regard. I’ve evolved a drought code and a flood code… some of the recommendations I’ve made in recent times include setting up a multi-disciplinary monsoon management centre in each drought-affected district, to provide timely information to rural families on the methods of mitigating the effects of drought, and maximising the benefits of good growing conditions whenever the season is normal. Animal husbandry camps could be set up to make arrangements for saving cattle and other farm animals because usually animals tend to be neglected during such crises. Special provisions could also be made to enable women to manage household food security under conditions of agrarian distress.
- In the case of temperature rise, wheat yield could become a gamble. We should start breeding varieties characterised by high per day productivity than just per crop productivity. These will be able to provide higher yields in a shorter duration.
India’s ranking on the Global Hunger Index has become worse over the years and we missed out on the Millennium Development Goal of halving hunger. What are the steps we should take to address the matter?
India has done well in production, but not in consumption. What we are witnessing today is grain mountains on the one side and hungry millions on the other. The Food Security Act must be implemented properly to address the situation. We should also enlarge the food basket to include nutri-millets.