Topic 1 : RBI at 90
Introduction: While central banks in developed countries can be traced as far back as the 17th century, among developing countries, the Reserve Bank of India, established on April 1, 1935, is one of the oldest such institutions.
How did RBI come into existence?
- The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
- The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
- Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
RBI in pre- and post-independence period
- Since it came into existence, it has navigated and managed the several transitions the country has undergone - from a time when the planning process held sway to a more market-oriented economy, and now an increasingly digital economy.
- As it looks towards the next 10 years, the RBI must learn from its past, adjust and adapt, and plan for the challenges it could encounter on its journey towards its centenary.
Record of RBI in the face of challenges
- In the past nine decades, the Indian economy and the RBI have faced many difficult moments.
- In the more recent past, these include the global financial crisis of 2008, the taper tantrum of 2013, demonetization, and the pandemic-induced disruptions to economic activities.
- There was also the issue of bad loans plaguing the banking sector.
- This problem, as the prime minister noted, was tackled by authorities at multiple levels - recognition, resolution, and recapitalization.
- Prodded by the RBI, banks began to recognize the true extent of the problem.
- The IBC framework ushered in by the government provided a more effective mechanism for resolving bad loans.
- Alongside this, the government infused capital into public sector banks.
- As a consequence, bad loans fell from 11.25 percent in 2018 to below 3 percent by September 2023, and credit growth has been healthy.
- The twin balance sheet problem that held back investment activity has been resolved, the PM said.
The new age challenges for RBI
- There have been other significant changes in recent times.
- For one, the central bank has formally adopted inflation targeting.
- This has helped keep inflation in line with the target and anchor expectations, barring some periods marked by the pandemic-induced disruptions.
- The introduction of UPI has revolutionized the payments ecosystem across the country.
- Over the coming years, as the pace of change accelerates further, the central bank must prepare for the many challenges that may come before it - from dealing with changes in payment mechanisms, and the central bank's digital currency, to new sources of risk and ensuring effective regulation and supervision.
Conclusion: It must also be mindful of the risks of unforeseen events. An independent central bank plays a critical role in the macroeconomic management of the country. Coordination between monetary and fiscal policies is critical for the economy, and for creating a "Viksit Bharat".
Topic 2 : An imperfect farm solution
Introduction: Earlier this month, farmers were on the streets again to demand a legally guaranteed minimum support price (MSP). The agitation, centred around politics in Punjab, fizzled out as the unions were riddled with factionalism. However, debates about legally-guaranteed MSP or its impracticality continue to linger.
What is MSP?
- MSP is a price calculated by the government for different crops, some of which it procures for its food security buffer stocks, redistributing to the poor, mitigating inflation and stabilising prices.
- In the process, farmers get financial support.
- Therefore, no government is likely to stop announcing MSP and procuring crops at this support price.
- Legally guaranteed MSP has largely come to signify the right of the farmer to receive this value.
Views on legalising the MSP in India
- There is no unanimity amongst those seeking legally-guaranteed MSP on several issues.
- Though the number of farmers benefiting from MSP has increased by more than 50 per cent in the last 10 years, such farmers remain a small minority.
- Farmers who grow cereals will be happy to settle for legal provisions for the 23 crops for which MSP is currently available.
- These comprise only about 28 per cent of the country's total agricultural output.
- Other producers want all agricultural products covered.
- Academics too are divided. Many espousing the farmers' demand believe that the provisions cannot be extended to perishable commodities like fresh fruit and vegetables as they would be impossible to implement.
The myth about the potential benefits of legalisation of MSP
- Farmers believe that after legal MSP comes into force, the government will have to physically procure everything.
- This idea is unsound and has been rejected outright by almost all who understand that MSP has to be ensured through different means, such as procurement or the government paying the difference between the market price and MSP.
- Many believe the law would mean that traders who purchase the produce below the MSP risk prosecution.
- Similarly, such a provision would negate the option of paying farmers the difference between the market price and the MSP, as it would obliterate the most vital market price discovery mechanism.
Challenges after the legalisation of MSP
1. Confrontation among farmers from different regions
- If legally guaranteed MSP were to be implemented, it would be operationalised according to the area crop production plan - in a particular area, a farmer would be incentivised to grow the crops best suited to the block's agro-climatic conditions.
- Farmers growing paddy will not want to shift to other crops as the alternatives can never be as profitable.
- On the other hand, a legal enactment would result in support for and procurement of different crops expanding exponentially across India.
- Therefore, it is only logical, given the increased cost and scale of interventions, that interventions would be for limited produce (five acres worth) per farmer family.
- This is the norm in all states for all crops (apart from wheat and paddy).
- Due to these two fundamentals, paddy and wheat procurement in Punjab could be reduced by at least a third.
- This would sow the seeds of a fiercer and uglier confrontation
2. Calculation of cost of production
- More complications could result from the ambiguity in the calculation of legally- guaranteed MSP.
- Currently, the CACP, which sets the MSP, calculates it by averaging the countrywide costs.
- For example, for wheat, the MSP is Rs 2,275.
- For Punjab, the C2 cost of production is Rs 1,503 while in Chhattisgarh it is Rs 1,939.
- Therefore, farmers in Punjab receive 51.36 per cent and their counterparts in Chhattisgarh receive 17.33 per cent over their respective C2 costs of production.
- In a legally guaranteed MSP regime, it would only be natural for states - like Bihar and UP, which have a combined total of 120 parliamentary seats - to insist on state-specific MSP to gain maximum benefit for their farmers.
3. Cost sharing between the centre and states will come under strain
- It is presumed that the central government will foot the bill for legally-guaranteed MSP.
- However, many who are better informed maintain that states like Tamil Nadu and Karnataka will vehemently object and insist that costs are shared according to Finance Commission norms on the ratio for devolution of funds 41 per cent from states and 59 per cent from the Centre.
- This is nothing new: Already, all centrally sponsored schemes like Pradhan Mantri Krishi Sinchai Yojana, Paramparapagat Krishi Vikas Yojna, RKVY- RAFTAAR have a 60:40 ratio where a state has to pitch in with a 40 per cent share.
- Once MSP becomes law, states would have to pitch in with their share.
- If that is not acceptable to them, their share in the Finance Commission's central pool would have to be reduced by over four per cent.
4. legalising MSP will not give enough surplus to small and marginal farmers and agriculture labourers
- Finally, the most important point that's missing in every discussion on the issue is that about 42 per cent of India's population is directly dependent on agricultural activities.
- Ninety per cent of this population, the landless labour, marginal and small farmers, either have no produce to sell or a very small surplus.
- Therefore, even if they were to receive C2+50 per cent MSP price, it would not give them sufficient income to lead a life of dignity.
Conclusion: Along with MSP, the right combination of intervention needs to be determined before a few more generations are lost. Legalising MSP will do more harm than good. Farmer unions and the government must look for other alternatives to this.