GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”
Understanding India’s export collapse
- There was an optimism in the Commerce Ministry, following the rise in export value in June 2016 in comparison to June 2015.
- But soon, the optimism dissipated with decline in export value during July 2016 and August 2016 in comparison to July 2015 and August 2015.
- If we take the period April to October 2016, the growth in the dollar value of exports stagnated (0.02 per cent growth) relative to the corresponding period of the previous year.
- The problem is by no means recent. Over a relatively long period starting 2011-12 the dollar value of India’s merchandise exports has been stagnant or declining.
- Clearly, the persistence of the Great Recession in the world economy has affected India quite adversely.
- But the period since March 2015 seems to have been worse than before.
- Thus, the growth in the dollar value of merchandise exports over 2015-16 was a negative 15.6 per cent, as compared with minus 1.3 per cent in 2014-15 and a positive 4.7 per cent in 2013-14.
- But what stands out, is the extreme volatility of export growth in recent years, with growth rates varying from a positive 21.8 per cent to a negative 15.6 per cent.
Factors behind this trend:
- Limited diversification of India’s export basket: The top 10 principal exports in terms of commodity groups, account for as much as 78 per cent of total merchandise exports.What happens in the market for these commodities has a major impact on overall export performance.
- The second is that in recent times the export performance of some of these goods has either deteriorated or been characterised by a lack of dynamism.For example, four of India’s lead exports (Engineering goods, Gems and jewellery, chemicals and readymade garments) registered negative or near zero growth rates during 2015-16.
- Their growth performance, as well as that of a commodity group like drugs and pharmaceuticals that was earlier showing export dynamism, has been indifferent or poor during recent months as well.
- While this was undoubtedly largely the result of the global recession, the importance of these commodity groups in the export basket affected aggregate export growth adversely.
- Thirdly, in the recent years, changed global dynamism have allowed few traditionally not so important goods to find a slot among India’s principal exports for a brief period.Typical examples are iron ore and rice.
- Iron ore exports that were large because of demand from China and policy measures permitting such low value-added exports from India, have fallen because of the slowdown in China. ‘
- Rice exports boomed, because the policy adopted by the previous government to offer subsidies to farmers raised prices in Thailand and helped India to displace it as the world’s leading rice exporter. But that advantage is now waning with the Thai government choosing to aggressively dispose of accumulated stocks in an environment of improved production.
- For long India has been importing crude and petroleum products because its requirements have far exceeded domestic production.
- Crude is imported and refined domestically and to the extent that some petroleum products thus obtained are more than the domestic demand for such products after accounting for imports, the balance is exported.
- However, with India’s demand for petroleum products increasing, the volume of export has fallen.
- This has resulted in a collapse in the value of petroleum product exports from $60.7 billion in 2013-14 to $47.3 billion in 2014-15 and $27.1 billion in 2015-16. That too has contributed to the fall in the dollar value of merchandise exports.
Thus, an unusual combination of factors has intensified the adverse impact that the global recession has had on India’s export performance. All of them point to weaknesses reflected most starkly in India’s poorly diversified export basket.[Ref: Business Line]
GS (M) Paper-1 Topic: “Social empowerment”
GS (M) Paper-2 Topics: “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”
GS (M) Paper-3 Topics: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”
Universal Basic Income
What is Universal Basic Income?
- It is a form of social security in which all citizens or residents of a country regularly receive an unconditional sum of money, either from a government or some other public institution, in addition to any income received from elsewhere.
Currency Liabilities and Possibilities:
- It is anticipated that there will be a decrease in the currency liabilities of the RBI between Rs 2,000 and Rs 2,500 billion as an impact of demonetisation.
- The actions of the RBI to offset this reduction in liabilities present a wide array of possibilities. They range from giving a windfall to the government in terms of increasing dividends to a possible capitalisation of banks that are reeling under the impact of non-performing assets.
- Another way to compensate the reduction in liabilities in the RBI’s balance sheet is to reduce its assets by offloading government debt.
Lower money supply and GDP growth:
- Offloading government debt would mean a proportionate increase in the fiscal legroom of the central government.
- Lower money supply can impact GDP growth by reduced consumption expenditure in the near term as there is a temporary liquidity crunch because of the government strictures.
- In the medium to long term negative wealth effects leading to lower GDP growth from the erstwhile hoarders of Rs 500 and Rs 1,000 currencies may set in.
How to neutralise the negative effect?
- One way to neutralise the negative impacts on spending (either through the wealth effect in the medium term or through the liquidity crunch effect in the near term) is to transfer the windfall gain (A windfall gain or windfall profit is any type of usually high or abundant income that is sudden and/or unexpected) to the needy with a high marginal propensity to consume.
- This is, in other words, the right time to try out the idea of universal basic income (UBI).
- The government can use the fiscal space created by the demonetisation exercise to introduce a UBI in a stage-wise manner.
UBI and subsidies:
- The estimated budgetary requirement for providing UBI to all adults (roughly 69 per cent of the population) is in the range of 11 per cent of the GDP amounting to Rs 11,000 billion.
- One of the main stumbling blocks was the need to rationalise subsidies which accounted for 14.4 per cent of the total expenditure of the central government and use the savings thus generated to provide a UBI.
- The additional fiscal space that demonetisation has presented itself should therefore be utilised for putting in place a version of the UBI that is implementable.
How it can be done?
- Transfer money equivalent to the increased fiscal availability to the Jan Dhan. As on November 9, 2016, there were a total of 255 million account holders of which roughly 60 million (23.5 per cent) were zero-balance accounts.
- As a first step in the provisioning exercise, a fourth of the anticipated liquidity gain should be transferred to these zero-balance accounts by the end of Q1 2017.
- Non-Plan subsidies (including those on food, fuel and fertilisers, was Rs 2,578 billion in 2015-16 (RE) of which 54 per cent was contributed by the food subsidy bill (Rs 1,394 billion).
- For starters the government could target the phased removal of the food subsidy bill.
- A plan to phase out the food subsidy over four years would mean that the government can aim to save at least Rs 350 billion in 2017-18 Budget.
- In addition, a phased reduction of other subsidies can also be envisaged to accommodate the actual amount of government debt that the RBI decides to retire.
UBI and Cashless economy:
- This above suggestion also ties in well with the government’s avowed policy of moving towards a cashless economy.
- If the present demonetisation exercise is the first step in the long road to a cashless economy, then transferring amounts for the UBI will be an assured progression in the journey.
- To actualise the move towards cashless transactions, the government has to encourage making transactions through their accounts using facilities such as RuPay, which are add-ons to the Jan Dhan accounts.