6. Economics Notes 41

Elaborate Notes

Banking in India

• Early Banking History: The genesis of modern banking in India can be traced to the late 18th century. The Bank of Hindustan, established in 1770 in Calcutta by the agency house of Alexander and Co., was the first bank established in India. It was liquidated in 1832.
• Presidency Banks: The British East India Company established three major banks, known as the Presidency Banks, to manage its finances and trade.
  • Bank of Calcutta (1806): Renamed the Bank of Bengal in 1809, it was the first of the three.
  • Bank of Bombay (1840): Established to serve the commercial needs of the western region.
  • Bank of Madras (1843): Catered to the southern region’s trade and finance.
  • In 1921, on the recommendation of economist John Maynard Keynes, these three banks were amalgamated to form the Imperial Bank of India, which acted as a quasi-central bank before the establishment of the RBI.
• Establishment of the Reserve Bank of India (RBI): The need for a central bank was formally recommended by the Royal Commission on Indian Currency and Finance, also known as the Hilton Young Commission, in 1926. Based on these recommendations, the RBI Act was passed in 1934, and the RBI commenced operations on April 1, 1935. It was initially a private shareholders’ bank but was nationalized in 1949.
• Emergence of the State Bank of India (SBI): Post-independence, the government sought to expand banking services to rural India. The All India Rural Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank. Consequently, as per the State Bank of India Act of 1955, the RBI acquired a controlling interest in the Imperial Bank of India. On July 1, 1955, the Imperial Bank of India was renamed the State Bank of India. Subsequently, the Central Government has acquired all shares of SBI from the RBI to avoid any conflict of interest between the RBI’s role as a banking regulator and owner of a bank.
• SBI Subsidiaries: The State Bank of India (Subsidiary Banks) Act of 1959 brought eight banks that belonged to former Princely States under the control of SBI as subsidiaries (e.g., State Bank of Bikaner, State Bank of Mysore). Over time, these subsidiaries were merged into SBI, with the final merger completed in 2017.
• Bank Nationalization: To achieve broader economic objectives like financial inclusion, directed credit, and control over the economy’s “commanding heights,” the government nationalized major commercial banks in two phases.
  • 1969: Under Prime Minister Indira Gandhi, 14 major commercial banks with deposits over ₹50 crore were nationalized.
  • 1980: Six more private banks with deposits over ₹200 crore were nationalized.

Functions of RBI

• Banker to Banks: The RBI acts as the custodian of the cash reserves of commercial banks. Banks are required to maintain a certain percentage of their deposits as the Cash Reserve Ratio (CRR) with the RBI. It also facilitates the clearing and settlement of inter-bank transactions.
• Regulator and Supervisor of the Banking System: As per the Banking Regulation Act, 1949, the RBI has extensive powers to regulate and supervise the banking sector. This includes issuing licenses for new banks, branch expansion, regulation of capital adequacy (as per Basel norms), and ensuring sound banking practices. However, its disciplinary control over Public Sector Banks (PSBs) is considered limited compared to private banks, as major decisions like appointments of directors or mergers often involve the Government of India.
• Lender of Last Resort: Following the principle articulated by Walter Bagehot in his work “Lombard Street” (1873), the RBI provides liquidity to banks when they are unable to get it from any other source. This function is crucial for preventing bank failures and maintaining financial stability. This is done through facilities like the Marginal Standing Facility (MSF).
• Banker to the Government: The RBI acts as the banker for the Central and State Governments. It carries out banking transactions for the government, manages public debt (issues government securities like T-bills and bonds), and acts as an advisor on monetary and financial matters.
• Custodian of Foreign Exchange Reserves: The RBI manages India’s foreign exchange reserves as per the Foreign Exchange Management Act (FEMA), 1999. This is crucial for maintaining confidence in the economy, managing the balance of payments, and providing a buffer against external shocks.
• Maintaining Rupee Stability: The RBI manages the exchange rate of the rupee in a system often described as a ‘managed float’. It does not fix the exchange rate but intervenes in the foreign exchange market by buying or selling foreign currencies (primarily the US dollar) to curb excessive volatility and maintain orderly conditions.

Priority Sector Lending (PSL)

• PSL is a policy mandate by the RBI requiring banks to lend a specified portion of their funds to sectors that may not otherwise receive adequate and timely credit. The objective is to ensure that credit is channeled to economically important but potentially neglected sectors.
• The total lending of a bank is referred to as Adjusted Net Bank Credit (ANBC).
• The current requirement for domestic commercial banks is to extend 40% of their ANBC to the priority sector. This includes sub-targets for agriculture, micro-enterprises, and weaker sections. Priority sectors include Agriculture, MSMEs, Export Credit, Education, Housing, Social Infrastructure, and Renewable Energy.

Non-Performing Assets (NPA)

• An NPA is an asset (loan or advance) for which the principal or interest payment remained overdue for a continuous period of 90 days. This classification is in line with international best practices.
• Gross NPA: This is the total value of all loan assets that are classified as NPA as per RBI guidelines. It reflects the overall quality of the loan book. Gross NPA = Net NPA + Provisioning against NPA.
• Net NPA: This represents the actual amount of default. It is calculated by subtracting the provisions set aside by the bank from the Gross NPA. Net NPA = Gross NPA - Provisions.
• Provisioning: This is a crucial practice where banks set aside a portion of their profits as a buffer to cover potential losses from bad loans. The amount of provisioning required depends on the asset’s classification (Sub-standard, Doubtful, Loss). A high Provisioning Coverage Ratio (PCR) indicates that the bank is well-cushioned to absorb losses from NPAs.

Non-banking Financial Companies (NBFCs)

• NBFCs are financial institutions registered under the Companies Act, 1956, and engaged in the business of loans and advances, acquisition of shares/stocks/bonds, leasing, hire-purchase, etc.
• They are often called Shadow Banks because they perform bank-like functions (like credit creation) but operate outside the traditional banking regulatory framework. Key differences include their inability to accept demand deposits and their non-participation in the payment and settlement system.
• They can be classified based on their ability to accept public deposits:
  • NBFC-D: Deposit-taking NBFCs.
  • NBFC-ND: Non-Deposit taking NBFCs.

Slippage Ratio

• The slippage ratio is a key indicator of the deterioration in the asset quality of a bank. It measures the rate at which good loans (standard assets) are turning into bad loans (NPAs) during a specific period.
• Formula: Slippage Ratio = (Fresh NPAs added during the period / Total Standard Assets at the beginning of the period) * 100.
• Example: If a bank’s Gross NPA was 12% in 2021-22 and it increased to 15% in 2022-23, the 3% increase represents the newly accrued NPAs or ‘slippages’ for that year relative to the total asset base.
• Credit Cost: This is the loss a bank anticipates from its credit portfolio, expressed as a percentage of total loans. It is primarily driven by the amount of provisioning the bank has to make against NPAs.

Agriculture

• Labor Dualism in Agriculture: This concept, drawing from the Lewis model of economic development proposed by W. Arthur Lewis (1954), describes a situation where a large part of the labor force remains trapped in the low-productivity, subsistence agricultural sector, while the modern industrial sector is unable to absorb this surplus labor. In India, despite a sharp decline in agriculture’s GDP share, its share in employment has fallen much more slowly, leading to low per-capita productivity and disguised unemployment.
• Trends in Agriculture:
  • Contribution to GDP: The sector’s contribution to India’s Gross Value Added (GVA) was 18.8% in 2021-22 (at current prices).
  • Resilience: During the COVID-19 pandemic, agriculture demonstrated remarkable resilience, registering a positive growth rate of 3.6% in 2020-21 when the industrial and service sectors contracted.
  • Allied Sectors: Growth has been significantly driven by allied sectors like livestock, dairy, and fisheries. The livestock sector grew at a CAGR of 8.15% over the five years ending 2019-20.
  • Policy Focus: This shift aligns with the recommendations of the Committee on Doubling Farmers’ Income (2018), chaired by Ashok Dalwai, which emphasized income diversification through allied activities and food processing. The government’s focus on the food processing sector is aimed at creating a market for agricultural produce and absorbing surplus rural labor.
  • Focus Areas: Growth strategies are centered on four key areas: Crops, Livestock, Fishing, and Aquaculture.

Problems with Indian Agriculture

1. Labor Dualism: Explained above; leads to disguised unemployment and low wages.
2. Outdated Technologies: Slow adoption of modern farming techniques, machinery, and high-yielding variety seeds in many parts of the country.
3. Fragmented Landholdings: The average size of operational land holdings in India is very small (1.08 hectares as per Agriculture Census 2015-16), which makes mechanization and economies of scale unviable.
4. Low Agricultural Productivity: India’s crop yields for most commodities are lower than the global average.
5. Dependence on Monsoon: A significant portion of Indian agriculture is rain-fed, making it highly vulnerable to the vagaries of the monsoon.
6. “One-Size-Fits-All” Policy Approach: Policies often fail to account for the diverse agro-climatic zones and socio-economic conditions across India.
7. Subsidy Issues: Both direct and indirect subsidies face challenges. The MSP regime has skewed cropping patterns towards wheat and paddy. The MSP calculation debate revolves around farmers’ demand for it to be based on the C2 cost (comprehensive cost including imputed rent and interest on owned land and capital), while the government provides it based on A2+FL (actual paid-out cost plus imputed value of family labor), as recommended by the M.S. Swaminathan Commission (2006).
8. Lack of Irrigation: Less than 50% of the net sown area is under irrigation, highlighting a critical infrastructure deficit.
9. Low R&D: Public investment in agricultural research and development as a percentage of agricultural GDP remains low.
10. High Input Costs: Rising costs of seeds, fertilizers, pesticides, and labor squeeze farm profitability.
11. Inadequate Institutional Credit: Small and marginal farmers still rely heavily on informal sources of credit due to issues like lack of collateral and the NPA burden on banks, which makes them risk-averse despite PSL targets.
12. Agricultural Marketing Issues: The APMC (Agricultural Produce Market Committee) mandis have often been criticized for cartelization, high fees, and lack of transparency. Issues with contract farming laws also persist.
13. High Pressure on Land: This leads to disguised employment, where more people are employed than necessary, and under-employment.
14. Soil Degradation: Poor soil health management and lack of widespread soil testing result in declining fertility.
15. Failure of Cooperative Farming: Despite its potential, cooperative farming has largely been unsuccessful in India, except in states like Maharashtra (sugar cooperatives) and Gujarat (dairy cooperatives like Amul).
16. Cereal-Centric Production: The MSP and procurement system has incentivized the production of wheat and rice, discouraging crop diversification and creating huge buffer stocks with the Food Corporation of India (FCI).

Importance of Agriculture in India

• Historical Context: Before British colonization, India had a balanced economy where agriculture and flourishing cottage industries co-existed. Historians like R.C. Dutt in “The Economic History of India” (1902) have detailed how British policies deliberately de-industrialized India, destroyed its handicrafts, and pushed the workforce into agriculture, disrupting this balance.
• British Era Exploitation: The British introduced intermediary land tenure systems like the Zamindari system, where a parasitic class extracted a large surplus from the actual cultivator, leaving them with bare subsistence. This transformed Indian agriculture into a subsistence occupation.
• Post-Independence: The adoption of commercial agriculture began earnestly only after the land reforms and the Green Revolution in the mid-1960s.

Share of Agriculture in the Economy

• Declining Share in GDP: At the time of World War I, agriculture’s contribution to national income was nearly two-thirds. Post-independence planning led to industrial and service sector growth, causing agriculture’s share to decline from around 54% in 1950-51 to 15.4% in 2015-16 (and around 18-19% in recent years). This decline is a classic indicator of economic development and structural transformation.
• Slow Decline in Employment: In contrast, the workforce’s dependence on agriculture has reduced much more slowly. From about 60% in the 1990s, it stood at 48.9% as per the 2011 Census. The absolute number of people in agriculture remains very large, leading to disguised employment and under-employment due to the inability of other sectors to absorb the surplus labor.

Agriculture’s Role in Poverty Reduction

• The World Development Report has consistently highlighted agriculture’s superior role in poverty reduction in developing nations. It states that 1% growth in agriculture is 2-3 times more effective in reducing poverty than the same growth in non-agricultural sectors. This is because agricultural growth directly boosts the incomes of the rural poor and can lower food prices, benefiting both urban and rural poor.

Provision of Food Surplus

• With a rising population and increasing per capita income, the demand for food grows rapidly. A productive agricultural sector is essential to generate a marketed surplus of food grains to feed the population and prevent food-price inflation, which can destabilize the economy.

Importance of Agriculture in International Trade

• Historically, agro-based commodities like cotton, silk, jute, tea, and spices have been mainstays of India’s exports, accounting for over 50% of export earnings for many years. Even today, India is a significant exporter of rice, sugar, spices, and marine products.
• A vibrant agricultural sector is a precondition for overall economic development. It provides food and raw materials for industry, widens the domestic market for industrial goods by increasing rural purchasing power, and facilitates the transfer of capital for infrastructure development.

E-Technology for Farmers

• Electronic National Agricultural Market (e-NAM): Launched in 2016, e-NAM is a pan-India electronic trading portal that networks existing APMC mandis to create a unified national market for agricultural commodities.
  • Objective: To overcome challenges posed by physical mandis, such as information asymmetry, cartelization, and fragmented markets.
  • Features: It facilitates transparent price discovery through contactless remote bidding and offers e-payment options. The Small Farmers’ Agribusiness Consortium (SFAC) is the lead implementing agency.
• Agricultural Produce Market Committees (APMCs): Established under state-level APMC Acts (first introduced in 1963), these are physical markets meant to regulate the sale of agricultural produce.
  • Issues: They made it mandatory for farmers to sell their produce only in designated mandis, leading to a monopsony-like situation. High mandi fees, commissions for agents (arthiyas), and lack of interoperability between mandis (a license for one APMC is not valid in another) inflate consumer prices without benefiting farmers.
• Benefits of e-NAM:
  • It expands the farmer’s choice. A farmer can sell to local traders in the physical mandi or to online bidders from other states.
  • This competition leads to better price realization for the farmer.
  • The transaction is recorded in the local mandi’s books, so the mandi continues to earn its fee, potentially on a higher volume of trade.
  • The government also provides support for logistics and quality assaying to facilitate inter-state trade.

Farm Subsidies

• Direct Subsidies: These involve direct cash transfers to farmers, with no price distortion for the product. The farmer buys the input at the market price, and the subsidy is paid directly into their bank account.
  • Example: PM-KISAN (Pradhan Mantri Kisan Samman Nidhi), which provides an income support of ₹6,000 per year to eligible farmer families.
• Indirect Subsidies: These are provided in the form of subsidized prices for inputs or higher prices for output, which distorts market prices.
  • Example: Fertilizer subsidy (selling fertilizers below market price), power subsidy, irrigation subsidy, and Minimum Support Price (MSP) for crops.

Animal Husbandry

• This branch of agriculture is concerned with the breeding, rearing, and management of livestock (cows, buffaloes, goats, pigs, etc.) and poultry for human benefit. It also includes allied activities like fisheries (pisciculture) and beekeeping (apiculture).
• Benefits:
  1. Contribution to GVA: The livestock sector contributed 5.2% to the total agricultural GVA (in 2019-20).
  2. Additional Income: It provides a stable, supplementary income to farmers, acting as a cushion against crop failure.
  3. Employment: It provides livelihood to about 8.8% of the population, especially women, and over 20 million people depend on it.
  4. Food & Nutrition Security: It is a key source of high-protein food like milk, meat, and eggs. India is the world’s largest milk producer.
  5. Transport: Draught animals remain crucial for transport and farm operations in hilly and remote areas.
  6. Cultural & Social Security: Livestock ownership is often linked to social status and serves as a liquid asset for farmers during emergencies.

Benefits of Allied Activities

• They help diversify farm income, reducing dependence on crop cultivation alone.
• They provide a safety net during crop failure due to drought or flood.
• They are particularly suitable for dryland and rain-fed areas where crop cultivation is risky.
• They allow small and marginal farmers with fragmented landholdings to augment their income.
• They promote downstream food processing industries, creating non-farm employment in rural areas.

Revision Concepts

• Tier I Capital: This is the core capital of a bank that is used to absorb losses without the bank being required to cease operating. As per Basel III norms, it consists of Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital.
• Liquidity Coverage Ratio (LCR): This is a Basel III requirement that mandates banks to hold a sufficient stock of high-quality liquid assets (HQLA) to cover their total net cash outflows over a 30-day stress period, thus ensuring short-term resilience.
• Asset Reconstruction Company (ARC): A specialized financial institution that buys Non-Performing Assets (NPAs) or bad loans from banks and financial institutions at a discount. This helps clean up the banks’ balance sheets. ARCs are regulated by the RBI and derive their legal basis from the SARFAESI Act, 2002.
• Pent-Up Demand: A situation where demand for a good or service increases sharply after a period of suppressed spending. This was widely observed globally after the COVID-19 lockdowns were lifted.
• Foreign Tourist Spending: Spending by foreign tourists in India is treated as an export of services and is recorded as a credit entry in the ‘Travel’ sub-account of the Invisibles section of India’s Balance of Payments (BoP).
• Mixed Recall Period (MRP): A method used for collecting consumption expenditure data for poverty estimation in India, recommended by the Suresh Tendulkar Committee. Under MRP, data on consumption of five low-frequency non-food items (clothing, footwear, durables, education, and institutional medical expenses) is collected for a 365-day recall period, while data for all other items is collected for a 30-day period.
• Dutch Disease: An economic phenomenon where the discovery or sharp increase in the price of a natural resource leads to a large inflow of foreign currency, causing the national currency to appreciate significantly. This appreciation makes other sectors, especially manufacturing, less competitive in export markets, leading to their decline. The term originated from the Netherlands after the discovery of North Sea gas fields in the 1960s.
• Inflation and Bond Yields: There is an inverse relationship between bond prices and bond yields. Higher inflation erodes the real return on a bond’s fixed interest payments. To compensate for this loss of purchasing power, investors demand higher yields, which causes existing bond prices to fall.
• Operation Twist: A monetary policy tool where the central bank simultaneously sells short-term government securities and buys long-term government securities from the open market. The primary goal is to reduce long-term interest rates (by increasing demand for long-term bonds, thus raising their price and lowering their yield) and flatten the yield curve. This can lower borrowing costs for corporations and consumers, thereby driving consumption and investment. It also tends to lower interest rates on long-term deposits like FDs.
• Foreign Currency Convertible Bonds (FCCBs): A type of bond issued in a currency different from the issuer’s domestic currency by a private company to raise money from international markets. It is a hybrid instrument that is part-debt and part-equity. It is treated as External Commercial Borrowing (ECB) until the holder chooses to convert it into equity. Upon conversion, it is treated as Foreign Direct Investment (FDI).
• Tax Elasticity vs. Tax Buoyancy:
  • Tax Buoyancy: Measures the responsiveness of tax revenue growth to the growth in GDP. It is calculated as the percentage change in tax revenue for a one percent change in GDP. It includes the impact of both economic growth and discretionary changes in tax policy (e.g., changes in tax rates).
  • Tax Elasticity: Measures the same responsiveness but isolates the effect of economic growth by removing the impact of discretionary policy changes. It reflects the inherent efficiency of the tax system.
• Laffer Curve: A theoretical representation of the relationship between tax rates and the amount of tax revenue collected by governments. The curve, popularized by economist Arthur Laffer, suggests that as tax rates increase from 0%, tax revenue will increase up to a certain point (the revenue-maximizing point), after which further increases in tax rates will cause tax revenue to fall as high rates disincentivize work and investment.
• Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow overnight from the RBI at a penal rate, which is higher than the repo rate. Banks can pledge government securities from their Statutory Liquidity Ratio (SLR) quota to avail this facility, which is not allowed under the regular repo operations (LAF). It acts as a safety valve against unexpected liquidity shocks.
• Surcharge: An additional charge or tax levied on an existing tax. It is calculated on the amount of tax payable, not on the total income. In India, it is used as a tool for progressive taxation to ensure that high-income earners contribute a larger proportion of their income as tax, thereby reducing income disparity.
• Composition Scheme (GST): A simple, hassle-free compliance scheme for small taxpayers under GST. Businesses with a specified annual turnover can opt for this scheme and pay tax at a fixed percentage of their turnover, instead of dealing with complex GST formalities and paying tax at normal rates. They cannot, however, claim an input tax credit.
• Minimum Alternate Tax (MAT): A provision in direct tax laws to limit the tax exemptions and deductions available to companies, ensuring they pay a “minimum” amount of tax to the government. It is levied on the “book profit” of companies that show high profits in their books but pay little or no corporate income tax due to various exemptions. The MAT paid can be carried forward and set off (credited) against regular tax liability in future years.

---

Prelims Pointers

• Bank of Hindustan: First bank in India, established in 1770.
• Presidency Banks: Bank of Calcutta (1806), Bank of Bombay (1840), and Bank of Madras (1843).
• Imperial Bank of India: Formed in 1921 by merging the three Presidency Banks.
• Hilton Young Commission: The Royal Commission on Indian Currency & Finance whose recommendations led to the establishment of the RBI.
• RBI Establishment: Commenced operations on April 1, 1935, under the RBI Act, 1934.
• State Bank of India (SBI): Formed on July 1, 1955, by nationalizing the Imperial Bank of India, as per the SBI Act, 1955.
• Bank Nationalization: 14 banks were nationalized in 1969; 6 more were nationalized in 1980.
• Banking Regulation Act, 1949: Provides the framework for RBI’s regulation of the banking sector.
• Priority Sector Lending (PSL): Mandated target for commercial banks is 40% of their Adjusted Net Bank Credit (ANBC).
• Non-Performing Asset (NPA): A loan is classified as NPA if the principal or interest is overdue for more than 90 days.
• Net NPA Formula: Gross NPA - Provisions.
• Shadow Banks: A common term for Non-banking Financial Companies (NBFCs).
• Slippage Ratio: Measures the rate at which standard assets turn into NPAs.
• Agriculture GDP Share: Accounted for 18.8% of Gross Value Added in 2021-2022.
• Ashok Dalwai Committee: Formed to recommend a strategy for doubling farmers’ income.
• MSP Calculation: Government uses the A2+FL formula, while farmers demand the C2 formula.
• e-NAM: Launched in 2016 as a pan-India electronic trading portal for agricultural commodities.
• PM-KISAN: An example of a direct farm subsidy.
• MSP & Fertilizer Subsidy: Examples of indirect farm subsidies.
• Tier I Capital: Core capital of a bank for absorbing losses.
• LCR (Liquidity Coverage Ratio): A Basel III norm to ensure short-term liquidity.
• SARFAESI Act, 2002: Provides the legal framework for Asset Reconstruction Companies (ARCs).
• Dutch Disease: Currency appreciation due to a natural resource boom harms other export sectors.
• Operation Twist: Simultaneous sale of short-term G-secs and purchase of long-term G-secs by the RBI.
• FCCB (Foreign Currency Convertible Bond): Treated as External Commercial Borrowing (ECB) before conversion and as FDI after conversion.
• Tax Buoyancy: Responsiveness of tax revenue to GDP growth, including policy changes.
• MAT (Minimum Alternate Tax): A direct tax levied on the book profits of companies that pay zero or low corporate tax.
• MSF (Marginal Standing Facility): An overnight borrowing facility for banks from the RBI at a penal rate.

---

Mains Insights

Banking Sector Analysis

• Bank Nationalization - A Double-Edged Sword: While the nationalization in 1969 and 1980 was crucial for promoting financial inclusion and directing credit to priority sectors, it has been criticized for fostering inefficiency, political interference in lending (leading to NPAs), and a lack of competitiveness in Public Sector Banks (PSBs). This forms a classic debate on state intervention versus market efficiency.
• The Twin Balance Sheet Problem: This refers to the stress on the balance sheets of both Indian corporations (over-leveraged and unable to pay debts) and banks (burdened with NPAs). This vicious cycle, as highlighted by former Chief Economic Adviser Arvind Subramanian, chokes new investment and credit growth, slowing down the entire economy. Reforms like the Insolvency and Bankruptcy Code (IBC), 2016, are direct policy responses to this structural issue.
• RBI’s Trilemma: The RBI often faces the policy trilemma of simultaneously managing its objectives of price stability (controlling inflation), promoting economic growth, and maintaining financial stability. Aggressive interest rate hikes to control inflation can stifle growth, while a loose monetary policy to boost growth can fuel inflation. This balancing act is a constant challenge for the central bank.

Agricultural Sector: Structural Issues and Debates

• The Paradox of Indian Agriculture: India is a leading producer of many agricultural commodities, yet it faces immense agrarian distress, low farmer incomes, and high levels of malnutrition. This paradox stems from structural issues like fragmented landholdings, supply chain inefficiencies, price volatility, and a lack of non-farm employment opportunities in rural areas.
• MSP - Price Support or Market Distortion?: The debate over MSP is central to agricultural policy.
  • Proponents argue: It is a vital safety net for farmers against price volatility and ensures food security for the nation.
  • Critics argue: The current MSP regime (focused on wheat and rice) distorts cropping patterns, depletes groundwater, creates a huge fiscal burden, and benefits mainly large farmers in a few states. The demand for a legally guaranteed MSP based on the C2 formula raises questions of fiscal feasibility and potential for massive market distortion.
• Direct vs. Indirect Subsidies: The shift towards Direct Benefit Transfers (DBT) like PM-KISAN, instead of indirect input subsidies (fertilizer, power), is a significant policy debate. Direct subsidies are considered less distortionary, more transparent, and empower farmers with choice. However, challenges remain in terms of accurate beneficiary identification and the adequacy of the transfer amount to cover rising input costs.
• From Production-Centric to Income-Centric Approach: The recommendations of the Ashok Dalwai Committee mark a crucial shift in policy perspective from merely increasing agricultural production (a goal of the Green Revolution) to ensuring income security for farmers. This requires a holistic approach focusing on cost reduction, yield improvement, better price realization, and income diversification through allied sectors and food processing.
• Marketing Reforms - e-NAM and Beyond: While e-NAM is a positive step towards creating a ‘One Nation, One Market’, its success is contingent on addressing ground-level challenges like the lack of quality assaying infrastructure, logistics, and resistance from entrenched interests in APMC mandis. Its effectiveness highlights the need for deeper reforms in agricultural marketing to provide farmers with genuine market access and choice.