Insolvency and Bankruptcy Code

Last Update: May 2023 (Insolvency and Bankruptcy Code)

Insolvency and Bankruptcy Code

This article deals with ‘Insolvency and Bankruptcy Code.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


What is Bankruptcy?

Bankruptcy is a legal status usually imposed by a Court on a firm or individual unable to meet their debt obligations. 


Drawbacks of Earlier System of Bankruptcy

  1. It takes 4.3 years to resolve insolvencies in India (compared to 0.7 years in Japan ). 
  2. Creditors recover just 25% in India compared to 93% in Japan.
  3. It was difficult to wind up an unviable company in India, and this acted as a considerable barrier for entrepreneurs (as StartUps are prone to failure).  
  4. It has inhibited the development of a vibrant corporate bond market in India.  
  5. It has led to the ‘Evergreening of loans’, which has resulted in a large NPA of Banks.  
  6. The multiplicity of Acts to deal with Insolvency like the Sick Companies Act, 1985; SARFAESI Act, etc., led to delays and corruption because of overlapping provisions.

Provisions of the Act

  • Who can Initiate Insolvency Resolution Process? – It can be initiated by 
    • Business or debtor who has defaulted on dues (but he shouldn’t be Wilful Defaulter), OR
    • Lenders and creditors to the firm. 
  • Speed will be the main essence of insolvency proceedings 
    • The 180-day limit for the Committee of Creditors’, which will have representation of all lenders in proportion to their advances, to decide one of three alternatives — liquidation of the company, sale of the company as a going concern, or restructuring of debt.  
    • They can demand 90 extra days from Adjudicating Authority in exceptional cases. 
    • If three-fourths in value of creditors cannot agree on one of the three options within the 180/270 -day period, then the liquidation process will automatically commence.
  • Such speedy winding up is achieved by creating a host of new institutions. These include:
    • During the time insolvency proceedings are going on, Insolvency Professionals will take over the management of a company, assist creditors in the collection of relevant information, and later manage the liquidation process,
    • Insolvency Professional Agencies who will examine and certify these professionals,
    • Information Utilities collect, collate, and disseminate financial information related to debtors to facilitate insolvency, liquidation & bankruptcy (NeSL (National E-Governance Services Limited) is the first Info Utility).
    • Insolvency Regulator: The Insolvency and Bankruptcy Board of India (IBBI) exercises regulatory oversight over the whole process. 
  • Insolvency Adjudicating Authority: The final decision to accept or reject the insolvency resolution plan rests with the adjudicating authority. Adjudicating Authority in these cases are 
    • Debt Recovery Tribunal (“DRT”) in individuals and unlimited liability partnership firms.  
    • National Company Law Tribunal (“NCLT”) in companies & limited liability entities.
  • The act has provisions to tackle issues of cross-border insolvency. India must enter into bilateral agreements with these countries to settle cross-country insolvency. Budget 2022 announced that IBC would be amended to deal with cross-border insolvency efficiently. 
  • The bill has the provision of personal insolvency in case the promoter of the company has given a personal guarantee against the loans taken by the company. (For Example: A personal insolvency procedure was initiated by SBI against Anil Ambani, who had given a personal guarantee for a loan of ₹1200 crore taken by his companies RCom & Reliance Infratel Limited (RITL).
  • 2018 Amendment: Earlier, Promoters and defaulters bided for their companies and repurchased them. 2018 amendment stopped promoters and defaulters from bidding for companies undergoing resolution. 
Insolvency and Bankruptcy Code

Side Topic: Pre-Packing

Insolvency and Bankruptcy Code is amended to allow the procedure of pre-packing in India. Pre-packing is a process under which a resolution is agreed upon between corporate debtor and lender before approaching the courts for bankruptcy proceedings. 


What is Pre-Packing?

  • If the matter goes to NCLT for the formal insolvency proceedings, it negatively impacts the company’s image. It affects the future clients and customers of the company. 
  • To avoid such incidents, advanced economies (like the UK and the USA use the system of PRE-PACKING, i.e. borrower company informally (discretely) negotiates a resolution plan with its lenders or buyer parties before approaching the NCLT process. 

Benefit

  • It has the benefit of quick resolution and a discreet way of completing the insolvency process without negatively impacting its brand image.

Positive effects of Insolvency and Bankruptcy Code

  1. Easy exit policies will be a significant boost for StartUp India.
  2. It will improve the rank of India on the ease of doing business index.
  3. It can help in reducing the menace of NPA.
  4. Cases in High Courts will decrease because the adjudicating authority is DRT & NCLT.


Shortcomings of Insolvency and Bankruptcy Code

  • It lacks provisions equivalent to Chapter 11 of the US bankruptcy law, which allow a voluntary appeal by a debtor to be given a chance for a turnaround that the bankruptcy court can grant, if the court finds it feasible, regardless of the creditors’ verdict.
  • IBC interacts with numerous laws. E.g. labour laws and the Industrial Disputes Act, 1947.  
  • The proposed resolution plan requires 75% in value of creditors to sign for it. It creates the risk of the minority creditors being disenfranchised.
  • Code provides a hard deadline of 180/270 days to complete the corporate insolvency process, failing which liquidation starts. Negotiating under the shadow of liquidation may lead parties not to conduct a broad enough market search for the ailing corporate debtor and will likely result in fire sales (translating into creditor under-recoveries). 
  • There is a need to increase the number of NCLT benches, IP professionals, and ICT technology for faster case proceedings.
  • Issue of Group insolvency needs to be fixed. Group insolvency means insolvency of one company of a group of companies. E.g., Tata Sons have many companies like Tata Motors, Tata Capital, TCS etc. More clarity on the issue when one or more than one company of group undergoes insolvency process. 


Working Appraisal of Insolvency and Bankruptcy Code

Achievements

  • IBC Regime is working better than any other previous regime. Since the inception of the IBC in December 2016, 5,893 Corporate Insolvency Resolution Processes (CIRPs) have commenced by end-September 2022, of which 67 per cent have been closed. 
  • The time to settle insolvencies decreased to 1.6 years in 2020 (from 4.3 years). It is an improvement, but it should also be noted that in 64% of the cases where the Insolvency Process was started under the Act, the threshold of 270 days was breached (as of Feb 2023)
  • Corporate behaviour change wrt outstanding unpaid loans: Earlier, the Insolvency process used to take 4.3 years. Hence, Corporate houses used to be non-serious about paying these unpaid loans. Now, the time to solve insolvency has decreased to less than a year, and as a result, they have started repaying loans in fear of losing control over the company. 
  • Amount recovered – Shows mix trend
    • In the case of big loans like that of Bhushan Steel, banks have recovered 85%.
    • But in the case of MSME loans, the recovery rate is below 50% (but still higher than the previous recovery) 
  • Uniform and universal application: RBI has withdrawn other resolution schemes such as Strategic Debt Restructuring (SDR) Scheme, Scheme for Sustainable Structuring of Stressed Assets (S4A) etc.  
  • In Ease of Doing Business, the Rank of India wrt resolving insolvency has decreased due to these changes. 

Challenges

  • Low recovery rates: The recovery rate is meagre, with some of the insolvency processes giving haircuts of up to 90-95%.
  • Delays: The timeline for settling the cases under the act is not followed as more than 71% of the cases remains pending for more than 180 days. 
  • Staffing and infrastructure issues: NCLT is not equipped to handle the load as it operates with just half of the sanctioned strength.  
  • Need for strengthening homebuyer rights: According to a 2018 amendment to the IBC, a minimum of 100 homebuyers, or 10% of the total flat purchasers, are needed for initiating the process. However, homebuyers face practical difficulties in gathering the required number to initiate insolvency proceedings against the real estate owner.
  • Cross-Border Insolvency: IBC lacks standardized cross-border insolvency, as observed in Videocon and Jet Airways cases. 

MSME Industry

Last Updated: May 2023 (MSME Industry)

MSME Industry

This article deals with ‘MSME Industry.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


MSME Definition

Amendment to MSME Act, 2018 

Under the Amendment to MSME Act 2006, changes have been made in the criteria of classifying Micro, Small and Medium enterprises from ‘investment in plant & machinery/equipment to ‘annual turnover’. Accordingly, Act will be amended.

Micro Enterprise Annual turnover does not exceed 5 crore rupees
Small Enterprise Annual turnover is more than 5 crore rupees to Rs 50 crore
Medium Enterprise Annual turnover is more than 50 crore rupees to Rs 250 crore.

Central Government may, by notification, vary turnover limits.

The change has been made because there was a drawback in the earlier classification system. Earlier, if the businessman wanted to expand the productivity of his enterprise and invest in machinery, the MSME tag would have been lost. Hence, Businessmen resisted investing in machinery, impacting the economy’s overall efficiency.


Previous System of MSME Classification

Previously, MSMEs were defined on the basis of investment in plant and machinery.

  Manufacturing Sector Services Sector
Micro Upto 50 lakh Upto 10 lakh
Small Between 50 lakh and 10 crore Between 10 lakh and 2 crore
Medium Between 10 crore and 30 crore Between 2 crore and 5 crore

Importance of MSME Industry

Importance of MSME Industry
  • MSMEs employ 11 crore people (after agriculture, the largest sector in India).
  • MSME sector contributes 30% to the country’s GDP. 
  • 45% of manufacturing in India is done in MSME industries. 
  • MSME constitutes 40% of Indian exports.  
  • More than 55% of MSMEs are located in rural areas. Hence, they are essential for rural development. 
  • SC/ST/OBC owns the majority of MSMEs.
  • The sector has enormous potential to address structural problems like unemployment, regional imbalances, unequal distribution of national income and wealth across the country. 

Issues faced by them

  1. Lack of access to Institutional Credit: Banks prefer to give a few large loans to big corporations instead of providing a large number of small loans to MSMEs because the administrative cost of managing small loans is high.
  2. NPAs: More than ₹80,000 crore worth of loans given to the MSME sector has turned NPA. Many MUDRA loans given to the MSME Sector without checking the credit history have also turned NPA.  
  3. Implementation of GST: GST Reforms has disrupted MSME Sector due to the following reasons 
    • Input Tax Credit: Credit is paid after a long delay. MSME sector can’t bear it and face a credit crunch due to this
    • Increased Compliance Cost.
  4. Insolvency and Bankruptcy Code Issue: Most of the MSME entities are Operational Creditors of big companies, but while the Insolvency process is going on, voting power is given only to Formal Creditors and not Operational Creditors. Hence, MSMEs don’t get back the right amount of recoveries.
  5. MSMEs can’t achieve an Economy of Scale & hence can’t compete with big industries. 
  6. MSMEs can’t invest in branding their products. 
  7. MSMEs lack access to improved technology
  8. MSME sector faces deficiencies in basic infrastructural facilities like power supply, road/rail connectivity, etc.  
  9. MSME sector has not been able to get back their markets after the disruption caused by the Covid pandemic. 

German Model of MSME – Mittelstand

  • German MSMEs Model is known as Mittelstand Model.
  • German MSMEs invest in R&D and produce high-quality products. As a result, German MSMEs export their products to western markets. This has played an important in making Germany a trade surplus economy. 
  • India can follow this model to encourage MSMEs to produce high-quality products which can be exported to foreign markets. 
German Model of MSME - Mittelstand

Scheme: Zero Defect – Zero Effect Scheme

  • Prime Minister launched it on Independence day of 2016.
  • Scheme emphasize that Indian MSMEs should manufacture goods in the country with 
    • “Zero defects”: Zero non-conformance/non-compliance.
    • “Zero effect” on the environment: Zero air pollution/liquid discharge /solid waste. 
  • It would enable the advancement of Indian industry to a position of eminence in the global marketplace through the ‘Made in India’ mark.

Schemes for MSMEs

1. Support & Outreach Initiative (SOI) for MSME Sector

  • It was started in 2018.
  • Various initiatives announced under the scheme are
    • 59 minutes Loan portal launched: MSMEs can get an easy loan ranging from ₹10 lakh to 1 crore 
    • 2 % Interest Subvention for all GST registered MSMEs.
    • Companies with turnover up to ₹500 crores must compulsorily be brought on the Trade Receivables e-Discounting System (TReDS).
    • Labour Inspector will inspect the MSME unit via computerized random allotment to prevent corruption.
    • Self Declaration of air and water pollution laws.
Support & Outreach Initiative (SOI) for MSME Sector

Side Topic: TReDS Platform

  • TReDS platform aims to solve the issue of delayed payment to the MSME sector.
  • When MSMEs sell their goods to any corporate buyer, they mostly get Trade Receivable, i.e. invoice saying that buyer will pay back after, say 4 months. But this creates an issue for MSME, which is short on funds. They need immediate cash to get their operations going. Hence, they can sell that invoices to a third party like a bank or NBFC at a discount and get immediate cash. 
TReDS
  • TReDS platform is a sort of intermediary that will check the invoice’s authenticity and upload it on its system so that Banks and NBFCs can look at the available trade receivable and place their bids to buy those trade receivables (not going into many technicalities). 
  • Presently, RBI has approved three TReDS platforms i.e.
    1. Receivables Exchange of India (RXIL):  Joint venture of SIDBI and NSE 
    2. Invoicemart
    3. Mind Online National Exchange
  • Parliament has also passed Factoring Regulation (Amendment) Act giving legal sanctity to MSMEs to use this platform.

2 . MUDRA

What MUDRA bank will do?

  • MUDRA is a Non-Banking Financial Corporation (NBFC).
  • Objective: Refinance lending to Micro-Enterprises via Scheduled Commercial Banks, Regional Rural Banks, Cooperatives, Microfinance Institutions & other NBFCs.  
  • Ownership: It is wholly owned by SIDBI.  
  • It is not the first of its kind & such institutions are already operating in many countries, with the first such institution opened in Bangladesh in 1990.

Works

  • Refinance Micro Enterprise Loans, i.e. give money to Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs) etc., so that they can give money to Micro Enterprises. These institutions distribute money received from Mudra Bank to Micro-Enterprises under Mudra Yojana. 
  • 3 types of loans are given under Mudra Yojana 
    1. Shishu: loans up to 50,000      
    2. Kishor : >50,000/- up to 5 lakh 
    3. Tarun : > 5 lakh and up to 10 lakh
  • Mudra loans are collateral-free
Working of MUDRA Bank

3. Ubharte Sitare Program

  • It is an Alternate Investment Fund (AIF) created by EXIM Bank and SIDBI (in 2021). 
  • Objective: To finance the export-oriented MSMEs using debt or equity finance.

4. One District One Product

  • The scheme was started Commerce Ministry. 
  • Under the scheme, one unique product will be recognized from every district of India, and the Commerce Ministry will support that to increase its export. 
  • For example, Blue Pottery has been recognized from Jaipur and Pickle from Amritsar. 

5. RAMP (Raising and Accelerating MSME Performance) Scheme

It is a World Bank-supported scheme that aims to 

  1. Improve access of MSMEs to market & credit
  2. Helps in technology upgradation of MSMEs
  3. Addressing issues of delayed payments to MSMEs
  4. Greening (i.e. reducing carbon footprint) of MSMEs

6. Prime Minister Employment Generation Program  (PMEGP)

  • Under PMEGP, financial support of Rs 25 lakh is provided to the beneficiaries for the setting up of new  MSMEs.

7. Other Government Initiatives for MSME industries

7.1 No GST

  • If turnover is up to 20 lakh (10 lakh for Special Category State), then no need to REGISTER for GST

7.2 Priority Sector Lending

  • 7.5% of the bank loans should be given to MSMEs. 

7.3 Public Procurement Order

  • Every central ministry, department and PSU should procure 25% of their total purchase from the MSME sector.

7.4 Easier Registration

  • The process to simplify the registration of MSMEs. Now MSMEs can be registered using only PAN Card and Aadhaar.

7.5 SME Exchanges

  • SME exchange is dedicated to trading the shares of small and medium scale enterprises (SMEs) who, otherwise, find it difficult to get listed in the main exchanges.
  • BSE has named its SME platform BSESME, while NSE has named it Emerge.

7.6 SIDF

  • Small Industries Development fund (SIDF) is operated by SIDBI for the development of MSMEs.

7.7 SFURTI

  • Scheme of Fund for Regeneration of Traditional Industries aims to set up clusters of Khadi, Coir, Handicraft; & help the entrepreneurs inside them.

7.8 MSME Samadhaan

  • If a buyer (Govt organisation at Union/State) is not paying money to MSME supplier within the specified time limit. In that case, Organisation can be ordered to pay money with interest rate.


Economic Survey Topic: Nourishing Dwarfs to become Giants- Reorienting policies for MSME Growth

Companies in the Model

OURISHING DWARFS TO BECOME GIANTS

Ideally, an Infant firm (i.e. formed less than 10 years ago and employing less than 100 workers) should gradually become Large (employing more than 100 workers). But over the last seven decades, the government’s policies have stifled the growth of MSMEs in the economy, and there is a domination of Dwarfs (employing less than 100 employees, despite being in existence for more than 10 years) in the Indian economy. 

OURISHING DWARFS TO BECOME GIANTS


Issues with Dwarfs

  • Firms that can grow over time to become large are the biggest contributors to employment and productivity in the economy. In contrast, dwarfs that remain small despite becoming older remain the lowest contributors to employment and productivity in the economy.

How do government policies promote Dwarfism?

  • Labour Regulations: For example,  
    • Industrial Disputes Act (IDA), 1947 mandates firms with more than 100 employees to get permission from the government before retrenchment of employees. 
    • Employees’ Provident Fund & Miscellaneous Provisions Act, 1952 mandates that firms with more than 20 employees are required to co-contribute in insurance/pension accounts of low-salaried workers.
  • MSMEs are eligible for Priority Sector Lending, Public Procurement Quota and many other government schemes designed especially for MSMEs.

Indian policies have created a “perverse” incentive for firms to remain small. If the firms grow beyond the thresholds that these policies employ, they will not obtain the said benefits. Therefore, entrepreneurs find it optimal to start a new firm to continue availing these benefits rather than grow the firm beyond the said threshold. But then, the firm cannot benefit from economies of scale. 


Ways to promote Dwarf MSMEs to become Giants

  • Under Priority Sector Lending (PSL), banks are required to lend 7.5% of their annual loans to Micro enterprises. These norms should be tweaked to give first preference to loan applications by ‘start ups’ and ‘infants’ firms.
  • Sunset Clause for Incentives: MSME benefits should have a ‘sunset’ clause, say, after 5-7 years, the firm will no longer be able to claim it. 
  • Focus on High Employment Elastic Sectors like the manufacture of rubber and plastic products, electronic and optical products, transport equipment, machinery, basic metals and fabricated metal products, chemicals and chemical products, textiles and leather & leather products.

Ease of Doing Business

Last Update: May 2023 (Ease of Doing Business)

Ease of Doing Business

This article deals with ‘Ease of Doing Business.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


What is Ease of Doing Business Report?

  • Ease of Doing Business is an index released by World Bank to measure how easy or difficult it is to run a business in a given country. 
  • It ranks country based on 10 parameters like 
    1. Construction permits required.
    2. Documents required to start a firm.
    3. Provisions for enforcement of contracts.
    4. Trading across the country.
    5. Getting credit.
    6. Getting electricity connection.
    7. Ease in paying taxes. 
    8. The process to resolve insolvency.
    9. Registering new property. 
    10. Provisions for protection of minority investors.

Ranking

Ease of Doing Business

What is the government doing in this regard?

  • Labour Laws have been rationalized from 44 Union Labour laws to 4 codes to make compliance easy. 
  • The government is promoting the Self Certification Regime Promotion through steps such as Shram Suvidha Portal.
  • Insolvency and Bankruptcy Code passed for efficiently resolving insolvency.
  • FDI limits have been liberalized, and more sectors have been opened.
  • GST Reform has rationalized the indirect taxation system.
  • The government has made incorporating new companies easy.
  • Investor Facilitation Cell has been created under Invest India Program to guide, assist & handhold investors.
  • Judiciary: Commercial Courts have been set up to deal specifically with cases of commercial nature.
  • Protecting Minority Investors: India has strengthened minority investor protections by increasing the remedies available in cases of prejudicial transactions between interested parties.
  • Simplifying the process to pay statutory dues such as provident fund contributions and corporate taxes.
  • Introduction of paperless court procedures and systems including e-fling, e-payment, e-summons etc. 
  • Record of rights of lands has been digitalized. 

What more can be done?

  • Enforcement of contracts now takes longer than it did 15 years ago. (Wayout: Fast Judiciary)
  • Registering property is still difficult. (Wayout: Computerization of land records)
  • Paying taxes is still difficult in India.
  • Trading across borders is still difficult. (Wayout: Infrastructure building like ports + Computerization at Customs)
  • There is still no legislation for Land Acquisition.


Side Topic: Indian State’s Ease of Doing Business

  • Department of Industrial Promotion and Internal Trade (DIPIT) publishes this report with the help of the World Bank.
  • Latest such report was published in July 2022, and top-ranked states wrt Ease of Doing Business were 
    1. Haryana
    2. Andhra Pradesh
    3. Gujarat
    4. Karnataka
    5. Punjab

Economic Survey (2020) Topic: Overregulation and Uncertainty in India

According to Economic Survey (2021), India suffers from over-regulation. For example, the time to settle a commercial dispute in India is 1445 days compared to just 120 days in Singapore.

civilspedia.com 
120 Days 
1445 Days

Moreover, there is policy uncertainty in India. In such a situation, Government officials like CAG, CBI etc., create a number of rules to save themselves as these rules can be interpreted in several ways. It gives an opportunity for corruption and nepotism to the officials.


Solutions

1. Doctrine of Business Judgement Rule

  • This doctrine assumes that the company’s board of director and higher officials has taken all the decisions in good faith. Hence, officials willn’t be presumed guilty unless the contrary is proved.

2. Doctrine of Minimum Government and Maximum Governance

  • Government should reduce the number of regulatory bodies and rationalize the obsolete statutes.

3. Rationalize the Tribunals

  • Government should rationalize the number of Tribunals. In this regard, the government is already working on explaining the number of tribunals. The government has abolished tribunals such as the Film Certification Appellate Tribunal and various tribunals under the Customs Act, Patents Act, Airport Authority of India Act etc. 

4. TORA 

  • Government should implement the Transparency of Rules Act (i.e. TORA), under which all the organizations will have to publish the rules and regulations on their websites. Any rule not published on the website will not be applicable. 

Startups

Last Update: May 2023 (Startups in India)

Startups

This article deals with ‘Start ups.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


What is Start Up?

A start up should satisfy the following conditions

  • Enterprise should be registered under the Companies Act or Partnership Act or Limited Liability Partnership Act.
  • From the date of registration, 10 years must not have been passed.
  • The total annual turnover should not be more than Rs 100 crores in any year. 
Startups

Why do we need Start ups?

  • To reap the demographic dividend, India needs new companies.
  • Instead of training and educating people to seek jobs, the government wants to create an environment where people can create jobs.  
  • In the era of LPG, the government can’t create enough jobs. The private sector has to come forward. Startups can help in creating those jobs.
  • India has to correct its proportion of persons involved in different sectors by increasing percentage of people engaged in manufacturing & service sector and decreasing persons in Agricultural sector. This objective can’t be achieved by relying just on the traditional companies of big business houses.

Side Topic: Unicorn Club

  • Unicorn Start ups are those StartUps whose valuation is more than $1 billion. 
  • There are 80 Unicorn Startups in India as of 2022, including Swiggy, Paytm, Byjus, Unadadamy, CRED, etc.


Startup Trends in India

According to Economic Survey (2023) 

  1. States with the largest number of Startups are – 1. Maharashtra, 2. Karnataka, 3. Delhi, 4. UP and 5. Haryana 
  2. Sectors in which Startups are coming up are – 1. IT Services, 2. Healthcare, 3. Education, 4. Professional Services and 5. Food Beverages. 

Factors affecting new firm registration/startup in a given area are 

  1. Physical infrastructure: It includes basic physical infrastructure such as roads, electricity, water, etc., and proximity to large population centres.
  2. Social Infrastructure: It includes education level identified through the proportion of the literate population and number of colleges.
  3. Government policies: It includes labour and taxation laws, subsidies provided in the form of cheap electricity, easier acquisition of land etc. 

What government is doing in this regard?

1 . StartUp India

  • Startup profits to be tax-free for 3 years.  
  • Compliance regime based on self-certification for labour and environmental laws. 
  • Setting up StartUp India hub to create a single point of contact for the entire Startup ecosystem.
  • Easy exit policy for StartUps within 90 days. 
  • The government will try to link Industry & Academia so that both can work in synergy. 
  • Rs. 10,000 crores ‘Fund of Funds’ to promote Startups.  
  • Liberalised Fast-track mechanism for startup patent applications with 80% cost rebate.
  • Encouraging Startups to participate in public procurement by easing norms of minimum turnover. 
  • Mobile apps and portals to register StartUps in a day.
  • Public-private partnership (PPP) model for new incubators.
  • Government to promote core innovation programmes in 5 lakh schools across the country.

Overall, Start-up India will turn Indian youths from job seekers into job creators. The initiative aspires to give India wings to fly above the sky.


2. Stand Up India

  • The StandUp India scheme has been started to promote entrepreneurship among the Scheduled Caste/Scheduled Tribes (SC/ST) and Women entrepreneurs.
  • Under the provisions of the scheme, approximately 1.25 lakh branches of Indian banks have been mandated to provide a loan worth Rs. 10 lakh to Rs. 1 crore without collateral to one Dalit or Adivasi member and one woman each for setting up greenfield enterprise in the non-farm sector.


3. Governance Reforms

  • The government has reduced the plethora of regulatory procedures involved in creating StartUps. 
  • Bankruptcy laws have been amended according to world best practices to provide easy & safe exit. StartUp business is precarious, and even in Silicon Valley, 1 out of 10 StartUp is successful.

4. Groom Entrepreneurship via Schemes

  • More “Incubation centres” have been set up.  
  • Scheme for Promoting Innovation and Rural Entrepreneurs (ASPIRE): To promote StartUps in rural and agriculture-based industries.

5. Encouraging innovation

  • Under Niti Ayog: Atal Innovation Mission (AIM), Self Employment & Talent Utilisation (SETU) etc., have been started.
  • Start-Ups Intellectual Property Protection (SIPP) scheme: Creates awareness about intellectual property and encourages Startups to go towards creativity and innovation. 
  • Uchhattar Avishkar Yojana: The government of India spends ₹ 250 crore/annum for fostering high-quality research among IIT students. 
  • Smart India Hackathon: Event organized by the Ministry of Education. College students are asked to solve the challenge faced by the public sector, industries or NGOs. 

6. Help to make Capital  available

  • The government encourages more Venture Capitalists & Angel Investors to invest in India by making the regulatory environment conducive.

7. Faster Judiciary

  • The government has created separate commercial courts have been established.

Critical Analysis –  Potential of Startups in Extensive Job Growth

Favour Points are many as discussed above

  • After finishing studies, many entrepreneurs who would have been looking towards the government to get jobs are now creating jobs and opening their own companies due to Startup India. 
  • It also helps to stop the Brain Drain.
  • Examples of Startups giving Jobs 
    1. Startups like OLA have provided jobs to thousands of youth as Taxi Operators apart from Tech Experts managing Logistics. 
    2. Flipkart has created many jobs in Logistics, even in Tier 2 & 3 cities. 

Critical Part

  • Most of the Startups are in IT Sector. Hence, Startups are technology and skill intensive. These Startups value skill rather than mass employment. So one particular Startup can’t lead to the creation of many jobs.  
  • Government should encourage Startups in diverse sectors like 
    1. Low Skill Manufacturing Sector: Apparel and shoes are employment-intensive and employ women.
    2. Agro Business Startups: Food processing by making contracts with farmers 
  • Startups are located in limited areas geographically like Bangalore, Delhi, Mumbai etc. Government should incentivize Startups in Remote regions like North East leveraging ICT and cheap labour. North East can be used to create Server Farms of Technology Companies due to cold climate (Tech Companies locate their Server Farms in cooler areas).
  • It has led to the rise of the Gig Economy with no job security.

Challenges with StartUps

Issues with StartUps
  • Failure Prone: Even in Silicon Valley, just 1 out of 10 Startups succeed. 
  • Access to Funding: If Startups take funding from Venture Capitalists or Angel investors, the stake of the original entrepreneur is diluted, and Investors start to interfere in decision-making processes. 
  • Foreign ownership: Almost all prominent Indian StartUps like Ola, Flipkart, PayTM etc., are now presently owned by foreign companies and financial institutions like Softbank, Tencent, Alibaba, Walmart etc. 
  • Flipping: Indian startups are involved in flipping ownership. Flipping refers to the complete transfer of ownership, IPR etc., of an Indian company to a foreign entity. This process is predominantly undertaken to relocate to countries with more lenient tax and legal regulations, such as UAE or Singapore, and to access more affordable financing options.
  • Fake Start ups: Established companies are promoting sister entities as Startups to avail benefits of the Startup Scheme. 
  • Overvaluation: Most Startups are overvalued. 
  • Startups concentrated in e-Commerce Aggregation: Most StartUps are concentrated in the e-commerce aggregation sector (Zomato, Flipkart etc.), whereas India needs more Startups in Agriculture, Manufacturing, Healthcare and Education.
  • Bubble Creation: According to analysts, India is witnessing a bubble similar to the heady dot-com rush of 1999-2000 in Silicon Valley with too much money chasing too few ideas.  
  • Issue of Corporate Governance in Startups: There are issues wrt Corporate Governance in the StartUps exemplified case where Flipkart Co-founder Binny Bansal was accused of sexual harassment with the company’s women employees. 
  • Criticism of Startups by Raghuram Rajan: Raghuram Rajan believes that ‘there is no FREE LUNCH in the economy. When companies give free products or cashback to the consumer, it is ultimately paid by the government through tax holidays & subsidies given to that company. 

Industrial Corridors

Last Update: May 2023 (Industrial Corridors)

Industrial Corridors

This article deals with ‘Industrial Corridors.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Introduction

To give impetus to the industrial sector in India, the Government of India is building a large number of Industrial Corridors.

Industrial Corridors

1. DMIC – Delhi Mumbai Industrial Corridor

  • In 2006, an MoU was signed between India & Japan regarding this.
  • The project is funded by Japan and is worth more than $90 billion.
  • The aim is to spur economic growth in the surrounding areas, create jobs, and remove infra bottlenecks. 
  • Indian Railways is also constructing  Western Rail Freight Corridor to extract maximum leverage out of DMIC. 
  • It covers 7 states and UTs i.e. 
    1. Delhi 
    2. Haryana 
    3. UP
    4. Rajasthan 
    5. Gujarat 
    6. MP
    7. Maharashtra

Delhi Mumbai Industrial Corridor

2. Amritsar-Kolkata Industrial Corridor (AKIC)

  • AKIC project involves developing the 150-200 km band on either side of the Eastern Dedicated Freight Corridor (EDFC) to Industrial Corridor in a phased manner. 
  • It is funded by the Government of India.
  • The aim is to spur economic growth in the surrounding areas, create jobs, and remove infra bottlenecks. 
  • It covers 7 states, i.e. 
    1. Punjab
    2. Haryana
    3. Uttarakhand
    4. Uttar Pradesh
    5. Bihar
    6. Jharkhand
    7. West Bengal

Amritsar-Kolkata Industrial Corridor

3. Bengaluru-Mumbai Economic Corridor (BMEC)

  • The United Kingdom funds BMEC.
  • It covers the states of Maharashtra and Karnataka.


4. Chennai – Bengaluru Economic Corridor

  • It is funded by Japan.
  • It covers  Karnataka, Andhra Pradesh & Tamil Nadu.


5. Eastern Coast Economic Corridor

  • Eastern Coast Economic Corridor links Kolkata-Chennai-Tuticorin.
  • This project is funded by Asian Development Bank.

Contract Farming

Last Updated: Feb 2023 (Contract Farming)

Contract Farming

This article deals with ‘Contract Farming.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Introduction

It is a forward agreement between farmers & buyers  in which 

Contract Farming
Buyer Agrees to buy produce from the farmer at a predetermined price.
Usually, the buyer also provides inputs like seeds to ensure that the final product meets desired quality.
Farmer Agrees to supply the produce of predetermined quality to the buyer. 

But the problem is, this is prevalent in only a few states where APMC laws allow contract farming.   


Examples of Contract Farming in India

Punjab

  1. PepsiCo is doing contract farming with Potato farmers of the Hoshiarpur district.
  2. ITC is doing contract farming for Soyabean.
  3. Mahindra Shubhlabh is doing contract farming for Basmati rice 

Karnataka

  • Himalaya is doing contract farming with Ashwagandha producers.

Madhya Pradesh

  • Hindustan Unilever is doing contract farming with wheat farmers.

Benefits of Contract Farming

  • Improving Farmer’s Productivity: It provides access to better inputs, scientific practices and credit facilities. 
  • Insurance to post-harvest price fluctuations: Farmers are saved from price fluctuations since the price is fixed.
  • Crop Diversification: In the absence of contract farming, farmers grow only wheat and rice, which the government procures.
  • Crop Diversification: Contract farming helps in promoting Food Processing Industry.
  • The company can get desired quality of agro products.
  • Consumers Benefit: It leads to the elimination of intermediaries that can reduce food price inflation.


Challenges with Contract Farming

  • Stockholdings limits on the contracted produce under the Essential Commodities Act, 1955 act as a hindrance in contract farming.
  • Not benefiting Small Farmers: Buyers have no incentive for contract farming with a large number of small and marginal farmers due to high transactions and marketing costs, creating socio-economic distortions and preference for large farmers.  
  • It is a capital-intensive and less sustainable cultivation pattern as it promotes increased use of fertilizers and pesticides, which have detrimental impacts on natural resources, the environment, humans and animals. 
  • Encourages Monoculture Farming: It impacts soil health negatively and poses a risk to food security. 
  • Monopsony: Product is generally a particular crop and is the only buyer for that company. Hence, the farmer can be price takers only because the company is the sole buyer. 
  • Predetermined prices deny farmers the benefits of higher prices prevailing in the market.


Key Features of the Contract Farming Act

  • Mainly to address the breach of contract by the company (because the company can breach the contract if they are getting goods at a low price and then afford a lawyer to fight the case).
  • It sets up Contract Farming Authority and Recording Committees to register the contracts and implement them effectively.
  • It provides to keep contract farming outside the ambit of the APMC act.
  • The produce will be insured under the existing agriculture insurance schemes.
  • It makes provisions for making Farmer Producer Companies (FPCs). 

Food Inflation

Last Updated: May 2023 (Food Inflation)

Food Inflation

This article deals with ‘Food Inflation.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Introduction

Following the green revolution, India has achieved a surplus in cereal production, especially in wheat and rice. However, producing fruits and vegetables remains a challenge for the country. The seasonal fluctuations in onions, tomatoes, and pulses continue to be a primary concern for Indians.


Recent trends in food inflation are as follows

Food Inflation

Causes of Food Inflation

1. Supply side bottlenecks

  • Shortage of commodities due to poor monsoon or excessive monsoon as Indian agriculture is excessively dependent on monsoon.  
  • Post-harvest losses due to unavailability of cold storage and warehouse
  • The Food Processing Industry is not well developed in India, leading to inflation of particular vegetables or fruits in the offseason.
  • Hoarding by the merchants leads to artificial scarcity.

2. Demand-side factors

  • Due to the growth of the middle class in India, their disposable income has increased. As a result, the demand for green veggies and fruits has also increased. It pushes the prices upward.

3. Faulty government policies

  • Successive governments have increased the MSP of wheat and rice due to vote bank politics. On the other hand, the MSP of fruits and green vegetables is not announced. Although the MSP of pulses is announced, it is very low compared to wheat and rice. Hence, farmers prefer to grow wheat and rice instead of pulses or vegetables, leading to inflation.

4. Climate change and global warming

  • Due to global warming, the weather has become erratic. Frequent heat waves lead to the destruction of nascent flower buds of vegetables. 
  • Rains have become erratic as well. For example, onion prices touched the Rs 100/kg mark in 2020 due to excessive rainfall in Nagpur and the surrounding area, destroying onions.
  • The frequency and severity of pest attacks have increased as well. E.g., the locust attack of 2020 in Rajasthan, Madhya Pradesh etc. which destroyed crops at a large scale, was the result of global warming.

5. Inefficient supply-chain with many mediators

  • The end product reaches the consumer in India after passing through various intermediaries. Each mediator tries to profit by increasing the original cost without adding value. As a result, the end price becomes higher than the actual price.  


Case of Inflation in Pulses

Prices of pulses are prone to inflation which can be corroborated by the following graph showing trends in the price of Tur dal.

Inflation in Pulses

Reasons for the price rise of pulses

  1. Wheat and rice cultivation was promoted after the green revolution. Due to the introduction of a new HYV of wheat & rice, their productivity increased. Such HYVs were not introduced for pulses. As a result, their productivity is low.  
  2. The economic survey reveals that most of the irrigated & fertile land is dedicated to wheat, rice & sugarcane, and pulses are grown on unirrigated lands. It decreases the productivity of pulses further.
  3. Despite the increase in the MSP of pulses, the farming community has a lack of interest to produce them as there are no proper infrastructural facilities for their procurement at MSP compared to Wheat and Rice. 
  4. Rise of Middle Class in India: There is a well-known economic law that when the income of people rises, they move towards a high-protein diet. Due to this, the demand for Pulses has increased, resulting in higher prices.
  5. The peculiarity of Indian Society: With the increase in income, people go towards a protein-rich diet & this phenomenon is seen in all societies. But other societies, unlike India, diversify their diet to a large number of livestock products, as seen in China. Empirical evidence shows that dietary diversification towards livestock products, particularly meat products, in India has been slow due to cultural factors. Most of the population depends on Pulses for protein, causing a Supply-Demand gap. 

Case of Inflation of Edible Oil

Inflation of Edible Oil

Reasons for the inflation in Edible Oil

  1. La-Nina conditions affect edible soybean oil production in Argentina and Brazil.
  2. Fluctuation in international prices: India imports 60% of its edible oil consumption, making it vulnerable to international movements in prices. The fluctuations in international prices and volatility in the rupee conversion rate impact the prices of edible oil.
  3. Sunflower oil, which makes up 15 per cent of our total edible oil imports, is procured mainly from Ukraine and Russia. It suffered due to the Russia-Ukraine war.
  4. Due to a shortfall in production and to secure their supplies, producer countries levied high export taxes, increasing the price for oil importers (like India).
  5. Edible oil is diverted for the generation of biofuels.
  6. Supply chain disruptions due to Covid.
  7. Edible oil is grown on unirrigated land in India, thus making it susceptible to the vagaries of climate.

Trends of inflation in Edible Oil

Steps taken by the government

  • National Mission on Edible Oil- Oil Palm (NMEO-OP)
    • Aim: To make India self-sufficient in edible oil.
    • The scheme will focus on North East and Andaman, and Nicobar Islands.
    • The main components of the scheme include
      1. Price Assurance to the producers.  
      2. Training farmers for cultivation and seed management.
      3. Support industries to set up oil palm processing units.
    • The Indian government is concentrating on Oil Palm because it gives 10 to 46 times more oil per hectare than other oil crops.
  • National Food Security Mission (Oilseeds)
    • Government intervenes to produce foundation and certified oil seeds.
    • The government distributes mini-kits of High Yielding Varieties (HYV) of oil seeds.
  • Increasing MSP: Government has increased the MSP of oilseeds to encourage farmers to grow oilseeds. For example, in 2021 Government increased the MSP of Rice and Wheat by 2%, whereas that of rapeseed-mustard by 8.6%.
  • Import duty of crude soya bean, sunflower oil and soya bean oil has been reduced.  
  • Essential Commodities Act 1955 aimed at ensuring adequate availability of the scheduled essential commodities at fair prices to ordinary people. 
  • Targeting Rice Fallow Areas (TRFA) for the cultivation of Pulses and Oilseeds: The pulses and oilseeds can be harvested on the land where rice was harvested previously by using the residual moisture left in the soil.  
  • Promotion of alternates: The government of India is promoting the production of secondary oils, especially rice bran oil, to decrease India’s import dependence on edible oil.
Reduction of Food Inflation in India

Steps taken by the government to control Food Inflation

1. Creating Buffer

  • The government has created a buffer of food items susceptible to inflation, especially Pulses and onions. E.g., the buffer of 23 LMT of pulses and 2.08 LMT of onions was created in 2021-22 and released in a calibrated manner to contain the price rise.

2. Minimum Export Price

  • It is the minimum price below which agricultural products can’t be exported to other countries. To fight inflation in a particular product, the government raises the Minimum Export Price so that farmers are forced to sell their product in India, and its supply is increased in the local market.

3. Fiscal Policy Measures

  • The government has imposed higher export duties on items such as wheat, rice and pulses (to make exports expensive). On the other hand, it has reduced import duties on items such as palm oil, sunflower oil

4. MoUs with countries

  • India has signed MoUs with top exporters of pulses like Mozambique and Myanmar to deal with the future shortage in the supply of pulses. 
  • Similar MoUs have been signed with Egypt and Turkey for the supply of onions.

5. Price Stabilisation Fund

  • Under this scheme, the government has given interest-free loans to FCI, NAFED and other central agencies to procure pulses and green vegetables and sell them to the common public at a reasonable price in case of inflation.

6. Operation Greens for Tomato, Onion & Potato (TOP)

  • Operation Greens was started for vegetables, similar to Operation White for milk. It aims to end the issue of inflation in vegetables as Operation White did for milk.
  • Operation Greens targets Tomato, Onion & Potato in the first phase.

7. Open Market Sale Scheme

  • FCI sells the grain in the open market to increase supply and curb price rise in food inflation.

8. Essential Commodities Act (ECA)

  • Under the provisions of ECA, the Union government can declare any commodity as an Essential Commodity and notify the stock limit on that for a specific period. The government uses this to fight against hoarders who create artificial scarcity.

9. Free distribution of seeds

  • The government has started the free distribution of seeds to attain self-sufficiency in pulses.

10. New Monetary Policy Framework

  • Under the new Monetary Policy Framework, RBI has been mandated to keep inflation at 2-6%. 

11. Kisan Rails

  • The government of India has started the Kisan Rail service for the speedy transportation of perishable food items from areas of production to areas of consumption. 

Agricultural Exports

Last Updated: Feb 2023

Agricultural Exports

This article deals with ‘Agricultural Exports.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Introduction

India’s agriculture exports were worth $ 50.2 billion in 2021, constituting between 2.5-3% of the world agriculture trade

Agricultural Exports

Analysis

Main exports Basmati Rice, Marine Products, Spices, Wheat, Sugar and Tea
Main export destinations USA, China, Saudi Arabia, Iran, Nepal and Bangladesh.

Importance of Agri-Exports

Importance of Agri-Exports
  • Addressing crash of prices due to glut/surplus: Farmers suffer during bumper crops. Exporting the surplus produce will help to maintain the prices.
  • Increase Farmer’s Income: It can help achieve the ambitious target of ‘Doubling farmer’s income till 2022’. 
  • Earn Foreign Exchange: Agricultural exports will help India to earn Foreign exchange.
  • Create Jobs: By integrating Indian agriculture with global value chains via agricultural exports, more jobs can be created.    


Issues with Indian Agro Exports

  • Lack of Stable Agricultural Trade Policy Regime: Indian Agricultural Policy is not stable. The government frequently change the policy to tame inflation, thus impacting exports. For example, the government increases the Minimum Export Price (MEP), due to which certain Indian Agricultural Exports become uncompetitive in the world market.
  • Frequent rejections: Indian agro-products frequently fail to meet the phytosanitary and quality standards set by different countries, especially European Union and the USA.
  • Lack of value addition: India exports raw agriculture due to the underdeveloped Food Processing Industry. Hence, the rate of return is low. 
  • Lack of uniformity: Foreign importers hesitate to buy such products.
  • Infrastructure and Logistics: Poor connectivity of the landlocked production areas (E.g. Bihar, Jharkhand, North-Eastern states and hilly regions, etc.) to the ports is a stiff challenge.  
  • Constitutional Issue: “Agriculture” is a state subject, whereas “trade and commerce” is a Union subject under Schedule 7 of the Indian constitution. The two fail to collaborate to increase agricultural export.


Agriculture Export Policy, 2018

Objectives

  • Double agricultural exports from $ 30+ Billion to $ 60+ Billion by 2022.
  • Double Indian share in world agro-trade from 2% to 4%.
  • Ensure that farmers benefit from the exports. 

Terms

  • Focus on ‘Bake in India’ on the lines of ‘Made in India’.
  • Diversify our export basket. E.g., Wild Herbs, Aromatic Oils, Medicinal plants etc.
  • Diversify the destinations and don’t just focus on Europe and US. 
  • Stable Trade Policy Regime and don’t change policies like Minimum Export Price on an ad-hoc and reactionary basis.
  • Reforms APMC Act like removal of perishables from APMC Act. 
  • Provide Infrastructure and logistic support by building Mega food parks, State of Art testing facilities etc.
  • Develop Farm to Port projects (like farm-to-fork).
  • A separate fund for promoting and marketing ‘Brand India in Agricultural products will be created.
  • Attract private investments in agro-export-oriented activities.
  • The Agro-start-up fund will be created.
  • The government will help exporters with Sanitary and Phytosanitary (SPS) issues via FSSAI, APEDA etc., so that the EU / USA doesn’t ban their products.  

Sugarcane Pricing Issue

Last Updated: Feb 2023 (Sugarcane Pricing Issue)

Sugarcane Pricing Issue

This article deals with the ‘ Sugarcane Pricing Issue.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Importance of the Sugar Industry

The sugar industry is vital as 

  • It is India’s second largest agro-based industry, next only to cotton.
  • 5 crore farmers are directly or indirectly involved in this.
  • India’s annual sugarcane production is around 35 crore tons, which is used to produce 2.6 crore tons of sugar.
  • India’s domestic sugar production is more than domestic consumption.

Regulated Nature of Sugar Industry

The sugar industry is highly regulated.  

Regulations at Farmer Level

  • Farmers are obliged to sell produce at the nearest mill only. Mills are obliged to purchase from all farmers. 
  • Wrt sugarcane pricing, the Union government announces the Fair and Remunerative Price (FRP) suggested by the Department of Food and Public Distribution and approved by Cabinet Committee on Economic Affairs. 
  • State governments announce State Administered Prices (SAP), which are usually higher than Union’s FRP due to vote bank politics.

Regulations at Mill Level

  • Mills must purchase from all farmers at FRP or SAP (whichever is higher).
  • Sugar mills can buy sugarcane only from farmers within a specified radius, known as Cane Reservation Area.
  • The government also fixes the Minimum Selling Price of sugar (which as of 2021 is Rs 3,100 per quintal).
  • The Centre also fixes the mill-wise sales quota of sugar.
  • Centre’s Sugarcane (Control) Order mandates mills to pay the FRP within 14 days of cane purchase from farmers, failing which 15% annual interest is charged on the due amount for the delay period.
  • Government levy: Earlier, mill owners had to give 10% of their production to the central government at the government-determined price (which was much lower than the market price). This provision has been abolished now.

Main Problem of the Sugar Industry  (price related )

Sugarcane Pricing Issue
  • The cost of Production of Sugar (of Mills) is greater than the Market Price of Sugar.
  • Significant arrears of sugar farmers towards Sugar Mills to the tune of ₹22,000 crores are still lying.
  • Union and State governments announce high FRP & SAP due to vote bank politics.  
  • The sugar industry has a seasonal character – mill, and the workers remain idle for almost half a year. 
  • The sugar recovery rate in India is less than 10% compared to Java and Hawaii, where it is up to 14%.
  • Low Sugar Prices in World Market: The world is sugar surplus. Mill owners can’t increase the price of sugar due to the import of foreign sugar. 
  • WTO ruling against Sugar Pricing Regime: Australia, Brazil, and Guatemala filed a complaint against India in 2019 that the Indian government supports its sugarcane farmers that go against the WTO principles and breach the de-minimus limit. In 2021, WTO Dispute Settlement Body ruled against India. 

Suggestions to address woes of the Sugar Sector

  • C Rangarajan Panel on Sugar Pricing recommended that States should stop announcing SAP and go with FRP suggested by Union. 
  • The Union government should devise a proper mechanism to arrive at FRP. Presently, Union Government doesn’t reduce FRP even if sugar prices are low.
  • Proper utilization of the by-products of Sugarcane like Ethanol, Bagasse etc.  
  • The industry association opines that if states announce SAP higher than FRP, the state governments should bear such price differential.
  • Power generation using cogeneration technology & generating revenues by selling extra electricity. 


Steps taken already

  • Union Government has given soft loans with low interest to sugar mill owners to pay the arrears of farmers.
  • Import duty on the import of sugar was increased from 50% to 100%.
  • Export duty on exporting sugar has been scrapped.
  • National Policy on Biofuels, 2018: It has set the target of 20% ethanol blending of petrol by 2030 to provide a market for the by-products of the sugar industry.
  • State-Specific Steps: In 2020, the Maharashtra government gave a state guarantee for loans to Sugar Cooperatives to buy sugarcane from farmers on time.


Side Topic: Ethanol

  • Ethanol is a by-product of the sugar industry
  • Use: It can be used as fuel by mixing with petrol.
  • To offset their losses, Sugar Mills can go towards Ethanol manufacturing. 

Farm Loan Waivers

Last Updated: Feb 2023

Farm Loan Waivers

This article deals with ‘Farm Loan Waivers.’ This is part of our series on ‘Economics’, which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Earlier Farmer Loan Waivers

1990 VP Singh Government waived loans of farmers up to ₹10,000.
2008 Manmohan Singh Government waived loans of farmers costing 52,000 crores to exchequer. Due to loan waivers, the Congress government was re-elected, setting a bad precedent for various state governments.
2016 to 2020 State governments like Punjab, UP, Karnataka etc., have announced various loan waivers for state farmers due to tremendous pressure from farmer lobbies.

Arguments in Favor

  • Economic Survey 2020 opined that peasant borrowers suffer from a problem of “debt overhang”. It refers to a situation where the borrower’s current income is used up in repaying the accumulated debt, leaving little incentive to invest either in physical or human capital. Debt waiver can clean up the borrowers’ balance sheet and is likely to lead to new investments and an increase in demand as disposable income in the hands of farmers will increase. 
  • Industrialists are given significant cuts in case the Industrial sector faces stress. Hence, farmers should also be given a cut on loans when the agriculture sector faces stress. The agriculture sector has been facing tremendous pressure since demonetization due to a decrease in demand and a rapid fall in the prices of agricultural commodities.  
  • Farm Waiver can help to solve the issue of farmer suicides due to their inability to pay loans.

Problems with Loan Waivers

Farm Loan Waivers
  1. Loan Waivers create a moral hazard for borrowers, who have no incentive to stick to credit discipline. Economic Survey (2020) noted that the 2008 waiver by the Government of India led to increased loan defaults on future loans. Economic Survey (2020) was of the view that waiver helps only when the beneficiaries are genuinely distressed but fuels even greater default when relief is not made conditional to genuine distress.
  2. It adversely impacts the banking sector’s health, especially when they are suffering their huge NPA problem.
  3. Schemes are prone to serious exclusion and inclusion errors. Loans from non-institutional sources ( 44%) are not covered. 
  4. It could lead states to violate their FRBM targets. E.g., the UP waiver cost the government ₹ 36,000 crores. In Punjab, Loan Waiver constitute 0.83% of GSDP (Punjab Budget 2018).
  5. Crowding out impact: Farm waivers could squeeze out private spending by firms.  
  6. Domino Effect: Farm waiver by one state forces other states to imitate this, opening the Pandora Box. 
  7. Due to farm waivers, the government fails to develop the agricultural infrastructure. For example, in 2016-17 alone, a cumulative sum of Rs 3.1 lakh crore was given as loan waivers in India, an amount that could have increased India’s irrigation potential by 55%.
  8. The farmer who will get a farm waiver will become non-creditworthy in the eyes of the bank. 


Way forward

By giving loan waivers, Governments are just trying to correct the symptoms of the crisis without paying serious attention to the root cause of the underlying crisis. The best way out can be 

  1. Implementation of Swaminathan Report.
  2. Encourage livestock to supplement their income.   
  3. Promote Pradhan Mantri Fasal Bima Yojana to create a safety net in crop loss.
  4. Increase the resilience of Indian agriculture by building irrigation infrastructure.