Economy | Daily Current Affairs, UPSC, PCS

Bengaluru-based food products company involved in preparation and supply of ready-to-cook items had approached the AAR regarding whether preparation of whole wheat parotta and Malabar parotta attracting 5 per cent GST.
The products khakhra, plain chapatti and roti are completely cooked preparations, do not require any processing for human consumption and hence are ready to eat food preparations.
The impugned product (whole wheat Parottas and Malabar Parottas) are not only different from the said khakhras, plain chapatti or roti but also are not like products in common parlance as well as in the respect of essential nature of the product.

Classification of food items for GST:

Most food items, especially those of essential and unprocessed nature, are charged nil GST.
But processed foods attract higher rates of 5%, 12%, or 18% depending on the food product.
For instance, pappad, Bread (branded or otherwise), are charged zero GST, but pizza bread is charged 5% GST.
Heading 1905 under the Harmonised Commodity Description and Coding System classifies pizza bread, khakhra, plain chapati or roti, rusks, toasted bread in one category, for which a 5% GST rate is levied.
Similarly, in the ready for consumption category, unbranded namkeens, bhujia, mixture and similar edible preparation attract 5% GST, while such branded namkeen, bhujia, mixture attract 12% GST.

What is IGX?

The IGX is a digital trading platform that will allow buyers and sellers of natural gas to trade both in the spot market and in the forward market for imported natural gas.
It will allow trading across three hubs —Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh.
Imported Liquefied Natural Gas (LNG) will be regassified and sold to buyers through the exchange, removing the requirement for buyers and sellers to find each other.
The exchange also allows much shorter contracts – for delivery on the next day, and up to a month – while ordinarily contracts for natural gas supply are as long as six months to a year.
This will mean that buyers do not have to contact multiple dealers to ensure they find a fair price.

Will domestically produced natural gas also be bought and sold on the exchange?

The price of domestically produced natural gas is decided by the government. It will not be sold on the gas exchange.
However, following appeals by domestic producers that the prices set by the government are not viable given the cost of exploration and production in India.
A new gas policy will include reforms in domestic gas pricing and will move towards more market-oriented pricing.

Will this make India more import-dependent?

Domestic production of gas has been falling over the past two fiscals as current sources of natural gas have become less productive.
Domestically produced natural gas currently accounts for less than half the country’s natural gas consumption; imported LNG accounts for the other half.
LNG imports are set to become a larger proportion of domestic gas consumption as India moves to increase the proportion of natural gas in the energy basket from 6.2% in 2018 to 15% by 2030.

What regulatory change is required?

Currently, the pipeline infrastructure necessary for the transportation of natural gas is controlled by the companies that own the network.
State-owned GAIL owns and operates India’s largest gas pipeline network, spanning over 12,000 km.
An independent system operator for natural gas pipelines would help ensure transparent allocation of pipeline usage, and build confidence in the minds of buyers and sellers about neutrality in the allocation of pipeline capacity.
Experts have also called for natural gas to be included in the Goods and Services Tax (GST) regime to avoid buyers having to deal with different levies such as VAT across states when purchasing natural gas from the exchange.

JUNE – 22nd to 30th 2020

What is the response to the Economic Crisis?

Different response to a different economic crisis

Pattern followed by economic crises:

There is a well-established pattern to economic crises in emerging markets (EMs).

First, because of loose fiscal and monetary policies, the economy goes into a demand overdrive.

Demand overdrive spikes inflation and widens the current account deficit (CAD).

Then, CAD is financed by foreign capital chasing the promise of even higher growth and asset prices.

At some point, the overdrive is perceived as unsustainable, which triggers a reassessment of growth, inflation, and financial stability.

Domestic and foreign investors stop new investments, large capital outflows ensue.

Banks stop giving new loans and rolling over old ones on fears of worsening credit quality.

Growth collapses and a full-blown economic crisis follows.

The 1995 Mexican, the 1997 Asian, the 1999 Russian, the 2008 sub-prime, and the 2013 Taper Tantrum are all examples of such crises.

In the case of India, the 1981-82, the 1991-92, and the 2013 crises all had the same characteristics.

Pattern in response to such crises:

The first response is to restore confidence in policymaking.

It means large increases in interest rates, massive withdrawal of liquidity, and deep cuts in fiscal deficit.

Just before the crisis assets [which reflects in bank’s balance sheets] are severely overvalued on inflated views of growth, profits, and income prior to the crisis.

So, the second step is to restart the economy by restructuring the tattered balance sheets of banks, firms, and households.

This means debt restructuring and bank recapitalisation aided by privatisation, closures, and mergers.

These measures often need to be bolstered by structural reforms.

The economic crisis makes it easier to forge the political consensus for the reforms.

But the economic crisis caused by pandemic is different

Why is it different?

Because, before the COVID-19 outbreak far from overheating, Indian economy was slowing down.

The financial system had virtually shut off the flow of credit as it wrestled with its bad debt burden.

This is not an instance of a financial crisis turning into an economic shock weighed down by damaged balance sheets.

Instead, this is an instance of an economic shock that could turn into a financial crisis if the damaged balance sheets are not repaired.

So, should the response also be different?

Yes.

Do the opposite of what is done in a typical EM crisis: Cut interest rates, increase liquidity support, and allow the fiscal deficit to widen.

The RBI has done the first two generously, although with the coming disinflation, it needs to cut interest rates much more.

But, what about the fiscal policy of the government?

Fiscal policy of the government: Doing not enough:

The government’s approach to fiscal policy, however, seems ambivalent.

The overall fiscal support from the government will be limited to 2 per cent of the GDP.

So all the revenue shortfall and the pandemic-related budgetary support must add up to 2 per cent of the GDP.

If the revenue shortfall is more than 2 per cent of GDP, then total spending will need to be cut.

Why fiscal policy matters for balance sheets:

In this crisis, the causality of damage to balance sheets runs opposite.

Balance sheets will be damaged not because of prior excesses but because of the collapse in incomes during the lockdown.

Consequently, debt doesn’t need to be restructured to resume the flow of credit and get the recovery going.

Instead, what is needed is adequate income support to households and firms.

Such support will provide the needed time and space for the recovery to take hold.

Which, in turn, would repair much of the damage to the balance sheets.

But the fiscal response so far has been inexplicably restrained.

What should the government focus on:

What matters today is the assurance of medium-term growth and not a few higher or lower points in this year’s fiscal deficit.

To do that, the government needs to allow the deficit to rise.

This extra deficit should help accommodate the decline in revenue and also provide adequate income support.

Some have argued that the government, instead, needs to offset the decline on private demand by increasing public spending.

This is an odd argument.

It would mean letting demand collapse and then compensating it with higher government spending.

Instead, using the same resources to ensure that private demand did not decline was the more natural and efficient response.

What should be the RBI’s response:

The RBI, too, has a very large role to play.

As elsewhere, it is now the only entity that has a strong enough balance sheet to provide any meaningful support.

The RBI is keeping markets flush with liquidity and low interest rates.

However, the RBI also needs to undertake extensive quantitative easing to keep bond yields from spiking given the likely large increase in deficit.

Because of the depth of the growth shock, bad debt will rise.

The natural instinct of banks is to cut back credit because of worsening credit quality.

To prevent this from happening, the RBI will need to extend substantial regulatory forbearance on accounting norms, provisioning rules, and, if needed, even capital requirements.

In addition, like the US Fed and the ECB, the RBI might also need to provide liquidity directly to corporates.

As of now, banks are providing liquidity to corporates supported by government guarantees as proposed now.

Amendment of the Essential Commodities Act

Excessive Grain Stock

There is one area which the government can tap to raise more than Rs 1,00,000 crore.

As on June 1, FCI had unprecedented grain stocks of 97 million metric tonnes (MMT) in the Central Pool (see Figure).

Even on July 1, when the procurement of rabi ends, FCI is likely to have grain stocks of about 91-92 MMT.

This will be against a buffer stock norm of 41.12 MMT that are required for the Public Distribution system (PDS), and some strategic reserves.

So, compared to this norm, on July 1, FCI will have “excess stocks” of at least 50 MMT.

Even if one takes a conservative and lower ballpark figure of Rs 30,000/tonne as the combined economic cost of rice and wheat, the value of this “excessive stock”, beyond the buffer norm, is Rs 1,50,000 crore.

This is unproductive capital locked-up in the Central pool of FCI.

Unlock this by liquidating “excess stocks” through open market operations.

It will not recover its full economic cost, as they are much higher than the prevailing market prices, but by not liquidating it.

But FCI will keep incurring unnecessary interest costs of about Rs 8,000-10,000 crore per annum.

This is simply not a good food policy.

How will amendment to ECA 1955 will help?

Amendment of the Essential Commodities Act, via the ordinance route, can instil confidence in the private sector for building large scale storage.

Now, stocking limits will not be imposed on the private sector, except under exceptional circumstances.