Archives: Publication

Excessive centralisation of skilling programmes may hinder the ability of training institutions to effectively respond to Indian market requirements.

About a month ago the Government of India launched the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) 3.0 the third phase of the short duration national skilling programme. Unlike some other public policy campaigns of recent times there are many concerns about the skilling programmes of the government. There is a need to think about the most useful ways forward.

In any field the first question to ask when discussing state intervention is: What is the market failure? In the case of skills the market failure arises out of positive externalities. When one individual increases her skills some of the benefits accrue to her and to her employer but some of the benefits accrue to others in society.

Firms worry that the employees would leave so some of the gains of her increased skills would go to future employers. Individuals are often hobbled by the difficulties of Indian finance and face high interest rates or absence of credit access.

Individuals face asymmetric information and lack confidence that spending money on skilling will generate a useful impact on their labour market prospects. These difficulties of finance and of information lead to under-investment in skills. State intervention can help address the market failure. This is the intellectual genesis of government involvement in skills.

State intervention can be organised as state production (the government runs skilling programmes for individuals) state financing (private persons run skilling programmes but the government contributes some part of the fees paid by individuals) or state regulation (the state uses its power to intervene in the way private persons build skilling businesses). The bulk of skills take place through the process of work. There is learning by doing rather than learning in a classroom. Hence everything that is done in this field should have a strong connection with employers.

The backbone of the present system is the network of Industrial Training Institutes (ITIs). There are about 14000 ITIs across the country and over 80 per cent of these are private. On completion of training most students are certified through a national or a state council which are executive bodies and not statutory regulators like the University Grants Commission or the All India Council of Technical Education.

This skilling system has suffered from the usual difficulties of state capacity and the landscape is similar to that seen in parts of health and education. The offerings of the institutions tend to lag behind the changing needs of the economy. Government ITIs tend to have decent land and buildings but have average quality labs and equipment and high vacancies in teaching positions.

The staff have formal qualifications high wages but low accountability and low motivation to serve their customers. At the same time private sector production is not a ready panacea. While there are a few high quality private skills institutions the average private ITI has less resources and delivers inferior results to the average government ITI.

Over the last 15 years a new approach came together in parallel to the main mechanism of the ITIs. This involved short duration programmes that emphasised prospective employment in new areas of the services industry which did not require training on using expensive machines and originated in initiatives of GOI ministries. A novel state intervention was born in 2007-09 when the GoI created the National Skill Development Corporation (NSDC) as a public-private partnership to support early-stage skill training institutions with soft loans and grants. Courses were certified by industry led Sector Skills Councils. These initiatives helped catalyse a new skilling industry.

The key challenge in this new mechanism as with the ITI mechanism is quality assurance and the trust of employers and workers. There are a large number of private providers the quality of training is varied assessments are not entirely standardised and reported employment outcomes are typically low. The challenge for policy lies in addressing these gaps. For this we need to assess the difficulties of the Indian labour market and the place of skills in it.

The bulk of the Indian workforce is in firms with below 10 workers. If a person gains skills and becomes self-employed i.e. if there is no employer that is a perfectly good outcome from the viewpoint of society. Skilling programmes should not be defined around the formal and large-scale employers only.

In order to recognise and support migration flows skilling solutions have to take place with an eye to the national market for labour. There are considerable labour migration flows taking place within the country and across the border. There is a need to address foundational skills including soft skills recognising the limitations of elementary education. A great deal of the actual learning takes place in apprenticeship with employers and this needs state support but we need to think about apprenticeship as it takes place in the Indian informal sector and not a formal machinery that works only for formal sector firms.

Excessive centralisation of design of policy or of skills programmes hinders the ability of skilling organisations to respond to the felt needs of the community. This calls for a flexible approach where decision-makers at the ground level look at the reality around them and adapt themselves to fit in it.

Looking forward state intervention can be usefully separated out into production financing and regulation each of which requires a different organisation design and skillset. For an analogy production of telecom services and regulation of private telecom firms was once fused into the Department of Telecommunications but in modern times a clean architecture has emerged with a separation between the pillars of intervention. In a similar fashion the old design of government in skilling and of the NSDC did not clearly separate these things out. In recent years there has been a move towards rationalisation. One key element of the landscape is the new National Council for Vocational Education and Training which will be a regulator for this field. The unfinished agenda is decentralisation of design and implementation of programmes in line with the constitutional mandate for a concurrent list subject.

The writer a retired secretary to GoI is now a professor at the National Council of Applied Economic Research and non-executive chairman of Shriram Capital.

The allocations show that the focus is more on income support than improving crop and livestock yields

That agricultural sector is critical for the overall socio-economic development of the country needs no re-stating. On average the agriculture and allied sector accounted for 20 per cent of GDP between 2012-13 and 2019-20 and is estimated to be 27 per cent in 2020-21. The Ministry of Statistics and Programme Implementation in its First Advance Estimates has estimated that the sector will register 3.4 per cent growth in 2020-21. This is close to the average medium-run growth of 3.5 per cent between 2012-13 and 2019-20.

Agriculture is characterised by low labour productivity employing 45 per cent of the workforce (MoSPI; 2018-19). India’s farmers are overly dependent on the South-West monsoon as only 49 per cent of the gross cropped area is irrigated thereby creating huge uncertainties. Further both yield and percentage of irrigated gross cropped area vary widely across States (see chart). The two are strongly correlated.

Investment in agriculture has stagnated over the last five years. Gross capital formation to output ratio in the sector declined from the average of 13 per cent during 2011-12 to 2014-15 to 10.5 per cent during 2015-16 to 2019-20 (MoSPI February 21). It is not surprising that while crop yields in India have gone up over time the country continues to lag in international comparisons (Lok Sabha Question No. 82 November 2016). According to the NITI Aayog Doubling Farmers’ Income Report even livestock productivity is low which forms a significant share of farmers’ income.

In Union Budget 2021-22 on average the total combined expenditures of the Ministry of Agriculture & Farmers’ Welfare and Ministry of Fisheries Animal Husbandry & Dairying formed 5 per cent of the total Central expenditure. The 2021-22 Budget Estimate (BE) has declined compared to 2020-21 BE by (-)7.5 per cent.

Let’s examine the key allocations in the Budget as a percentage of total expenditure of the two Ministries put together under different heads:

Improving crop and livestock productivity: Green Revolution (9.9 per cent) to improve yield and productivity in the sector.

Pradhan Mantri Kisan Sichai Yojana (2.9 per cent): The impact of this scheme is doubtful due to the under-utilisation of funds in 2020-21 and its ambiguous impact on increasing irrigation intensity.

The corpus fund for Micro Irrigation Funder under NABARD has increased from ₹5000 crore to ₹10000 crore

Improving agricultural support activities: Interest subsidy to short-term credit to farmers (14.3 per cent); and Pradhan Mantri Fasal Bima Yojana (11.8 per cent).

The reduced allocations across schemes makes it doubtful whether farmers will get MSPs.

Market intervention Scheme and Price Support Scheme (1.1 per cent): It was underspent in 2020-21 and allocation under this has been reduced from ₹0.02 trillion in 2020-21 (BE) to ₹0.015 trillion in 2021-22 (BE).

A related point is that Food Corporation of India (FCI) under the National Food Security Act procures cereals mostly rice and wheat and thus helps farmers get MSPs for their produce. Allocation under this has increased from ₹0.8 trillion in 2020-21 (BE) to ₹2 trillion in 2021-22 (BE). However if the financial support of ₹1.4 trillion extended through loans from National Small Savings Fund to FCI in 2020-21 (BE) is added (it was brought under the Budget in 2021-22) there was a decline in allocation between the two periods.

Agriculture Infrastructure Fund (0.7 per cent): This is a new scheme introduced last year designed to provide medium-long term debt financing facility to a variety of stakeholders .

Income support: The allocation for PM-KISAN (47.8 per cent) is ₹0.7 trillion in 2021-22 (BE) ₹0.1 trillion less than 2020-21 (BE). The scheme is not reaching all farmer households and is not necessarily pro-poor. Consequently the scheme is underachieving its target of 14 crore farmers.

Capital expenditure in this sector forms only 1.5 per cent of total expenditure but Budget allocation in 2021-22 has gone up by 147.4 per cent. And 97.2 per cent of the capital expenditure in this sector is for food storage and warehousing and investments in agricultural financial institutions. Animal husbandry is the only sub-item under this sector which has experienced a decline in allocation.

In sum the focus of the Budget is towards income support and improving agricultural support activities. However early evidence indicates that PM-KISAN is mis-targeting and allocations for MSP supporting schemes are being reduced.

Also barring micro-irrigation schemes limited attention is being paid to improving actual crop or livestock yields. The systemic stagnancy in the core of the agricultural sector may hold back future growth.

Ajaya Sahu is a Senior Research Analyst and Bornali Bhandari is a Senior Fellow at NCAER. Views are personal

India’s finance minister also announced a set of financial sector reforms be it in insurance banking or development finance. Success would depend on how well these are carried out.

• The budget has announced some laudable reform initiatives but their success will depend on how well they get implemented
• The budget has surprisingly opted for fiscal compression at a time when our economy needed higher spending. Thankfully capital expenditure has risen which can offer multiplier gains.
  

A game-changing 2021-22 budget was required to reboot the economy and revive growth apart from one with greater transparency especially with regard to extra-budgetary resources. Three key requirements included: (i) high expenditure growth to pump-prime demand (ii) a shift in expenditure allocation in favour of income support and public investment combining their high demand multiplier effects with urgent relief to contain immiserization from livelihoods lost in the pandemic and (iii) wide-ranging structural reforms especially in the financial and banking sector to position the economy for high growth in the medium- to long-term (See ‘A Proposed Fiscal Strategy for Sustainable Economic Recovery’ Mint 18 December 2020). While the budget of 1 February was widely appreciated for its transparency how does it measure up to these requirements?

The first requirement was of high expenditure growth. However the budget has adopted a surprisingly restrictive stance. In 2020-21 the central government has ramped up expenditure to₹30.4 trillion (revised estimate) a 28% increase compared to the actual expenditure in 2019-20. It has accomplished this despite an estimated 7.7% decline in revenues through a massive increase in borrowing to ₹18.4 trillion a 132% increase over the budgeted level of ₹8 trillion. But for this gross domestic product (GDP) would have contracted significantly more than the estimated 7.7%. The strong expenditure push should have been sustained in 2021-22 to help revive growth especially since the budget has assumed fairly high revenue growth at 15% and a huge increase of over 300% in non-debt capital receipts.

But expenditure has been budgeted to grow by only 1% in nominal terms implying a decrease in real terms even if inflation remains subdued at 4% to 5%. The fiscal deficit has been projected to decline from an exceptional 9.5% of GDP in 2020-21 to 6.8% in 2021-22 an 18% decline in absolute terms. Such strong fiscal compression at a time when it is so urgent to revive growth seems illogical. Perhaps the budget team (i) expects a large shortfall in budgeted receipts especially non-debt capital receipts and (ii) assumes correctly that the base effect of a sharp contraction in 2020-21 will lead to high growth in 2021-22 despite the strong fiscal compression.

The second requirement is an expenditure allocation shift in favour of capital expenditure income support and social services. The allocation for capital expenditure at over 14% of total expenditure is not only much higher than the 10% allocated in 2020-21 an abnormal year but also higher than the 13% actual share in 2019-20. However allocations have been slashed from₹4.2 trillion in 2020-21 to ₹2.4 trillion in 2021-22 for food subsidy and from ₹1.1 trillion to ₹0.7 trillion for the Mahatma Gandhi National Rural Employment Guarantee scheme. The PM-Kisan allocation has remained the same at ₹0.65 trillion implying a reduction in real terms. The allocation for education and related activities is only 5.6% more than in the last normal year 2019-20 again implying a reduction in real terms. The allocation for health at ₹70 trillion is much higher than ₹29 trillion in 2019-20 but virtually all of it is on account of the covid vaccination programme ( ₹35000 crore). The significant increases in other health-related expenditures such as water supply and sanitation are mainly on account of grant awards of the 15th Finance Commission. This parsimonious treatment of income support and social spending is the weakest aspect of this budget.

The third requirement is a big push on reforms especially in the financial sector. The budget has done rather well on this count barring the continued protectionist tampering with tariff rates mostly raising them. Several reforms have been announced such as the ambitious programmes of privatization asset monetization and infrastructure investment. Given the space constraints however I limit my remarks here to reforms in banking and finance. The creation of an asset reconstruction company and an asset management company to take over and manage the stressed assets of public sector banks (PSBs) will leave them with cleaned up balance sheets enabling them to resume normal lending and help revive the flow of credit and economic activity. Another key reform is the decision to privatize two PSBs in addition to IDBI Bank. However raising fresh equity in excess of government holdings would have been a more effective way of privatizing and recapitalizing them at the same time (See ‘Recapitalization of State-Owned Banks: Privatization Should Do It’ Mint 14 January 2021).

Allowing foreign direct investment up to 74% in insurance companies and the proposed public offering of Life Insurance Corporation of India’s shares are also important moves towards a progressive privatization of the financial sector. Finally the proposal to set up a new development financial institution (DFI) recognizes the gap in long-term investment financing.

However institutions like ICICI and IDBI started out as DFIs and several public sector DFIs are still operational though they are also burdened with stressed assets. Hence this proposal needs to be more clearly thought through.

In summary the reform proposals are important initiatives to reset the economy for high growth. But as usual much will depend on how these reforms are actually implemented.

Sudipto Mundle is a distinguished fellow at the National Council of Applied Economic Research. These are the author’s personal views.

After the agitation on the Farm Bills one expected that the Budget would not include any more reform agenda. But this has happened and the allocation within the line item do not exhibit major changes.

However if one looks at the size of the pie for small and marginal farmers in the Budget it emerges that they have received a raw deal. Here’s why.

Farmers or agricultural households have four sources of income — from crop agriculture livestock non-farm business and wages and salaries. The Budget deals with the first two sources of income. The relative contribution of the first two sources of incomes — crop and livestock — varies according to the size of the landholdings and across States.

According to Report of the Committee on Doubling Farmers’ Income Volume II at the lower end of the spectrum of land size which constitute the small/marginal farmers livestock is an important source of farmers’ income. As land size increases its importance decreases. Since bulk of our farmers are small/marginal ones their interest should be of some importance to the policymakers.

At all-India level out of the ₹100 income of a small/marginal farmer ₹70 comes from crop agriculture and ₹30 comes from livestock. However in some of the States like Gujarat Haryana Goa and Jharkhand the income from livestock for small/marginal famers could be in the range of ₹50-60 out of the total income of ₹100. This shows that there is need for separate policy support for this sector.

Big challenge

The biggest challenge that the livestock sector is facing now is the government’s recent policies on protection of cattle and restrictions on its trade combined with vigilantism by self-appointed cow-protection groups. The cow owners now have little choice. Either they need to maintain the animals or find ways to surreptitiously get rid of them by abandoning them in forests or pushing them into city roads under the cover of darkness.

Both of these options imply that the small and marginal farmers are worse off as they would not be able to earn from selling off their old cattle to invest in new productive stock which may reduce their family’s nutritional intake in the form of milk. This problem is also faced by the dairies which need to be provided a solution to dispose of cattle that have reached the end of their productive life.

The net outcome would be that cow population in India would decline in the coming years. The latest Livestock Census data (2019) indicates that the cow population in Madhya Pradesh Uttar Pradesh and Maharashtra declined by six per cent between 2012 and 2019 with farmers preferring to keep buffaloes. There is a view in some circle that by-products (gobar cow-urine) from unproductive stocks have economic value to take care of the well-being of same. However this is possible only in an organised centre but not in isolation by farmers at their households.

The easy solution to this problem could have been a buyback policy for unproductive cow stock by the government. If the Finance Minister can make a provision for scrappage policy for polluted vehicles why not a policy along similar lines for buying back unproductive cow stock from small/marginal farmers? Sure it would benefit all farmers.

Presently the crop insurance benefits the farmers from income loss in the event of crop failure. However there is none like same for livestock sector. It is also important since we find that small/marginal farmers suffer significant income loss when mass culling of their stocks (poultry) become necessary due to disease like bird flu. Incidentally the recurrence of this type of disease has become quite frequent these days. Thus there is more so a need to have a similar policy for livestock insurance.

Of course a silver lining is that the Finance Minister has indicated that there will be increased focus on credit flows to animal husbandry dairy and fisheries. Hope the small/marginal farmer may benefit from this initiative.

The writer Sanjib Pohit is Professor at NCAER. Views are personal