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The Centre should uphold its end of the deal with states as it would not only be more efficient but also help foster federalism

The last thing India needed at this time when it is already facing crises on multiple fronts is friction in Centre-state relations. Yet relations between the Centre and states especially those ruled by non-National Democratic Alliance political parties are under severe stress. An impression has formed that the Centre is trying to wriggle out of its responsibility to compensate states for the shortfall in their goods and services tax (GST) revenues as per legally specified norms. A serious trust deficit has emerged.

The GST compensation scheme that India’s then finance minister Arun Jaitley had negotiated gave an assurance to states—enshrined in the GST Compensation Act—that for a transition period of five years the Centre would compensate states for GST revenues that fell short of the collections they would have got had the state taxes that GST subsumed grown at an annual 14% starting with the base year. This offer was overly generous since revenues from the taxes subsumed had not been growing at 14%. Jaitley nevertheless made that offer to bring states on board and roll out the GST. Arguably it would be the most significant economic reform since the liberalization reforms of 1991. No less important it would lay the foundation for an altogether new paradigm of Centre-state relations based on trust and cooperation.

The GST Compensation Act specified that the shortfall if any would be paid out of a GST compensation cess which the Centre was authorized to levy. During the 7th and 8th meetings of the GST Council it was decided that in the event of the cess proving inadequate to cover the shortfall the council would decide on ways to raise additional resources including borrowing from the market to make up for the difference. It was also decided that such debt would be paid back from the proceeds of the compensation cess. The cess could be extended beyond the five-year transition period under clause 8(1) of the Act.

Following the lockdown in late March states were hit by a double whammy. As frontline state governments battled the pandemic while also having to provide humanitarian relief to cushion the impact of an economic contraction their expenditure requirements went up significantly. At the same time their resources shrank dramatically on three counts: a decline in central tax receipts that reduced transfers to states from this divisible pool; a fall in the states’ own tax revenues; and most importantly a slide in their state GST receipts.The shortfall to be compensated have shot up to an estimated ₹3 trillion. Meanwhile receipts from the compensation cess have fallen to a mere ₹65000 crore leaving a large gap of ₹2.35 trillion

Such an eventuality had been anticipated as a possibility. The Centre has now proposed two options. Splitting the shortfall into two parts; it claims that only ₹97000 crore is attributable to GST implementation problems and the balance ₹1.38 trillion is attributable to the economic contraction. Hence under Option I the Centre proposes a special Reserve Bank of India window to provide concessional loans to states of up to ₹97000 crore for which the principal and interest will be paid out of the compensation cess. The borrowing limits of states will also be relaxed by an additional 0.5% of gross state domestic product for this purpose. Under option II the Centre will facilitate market borrowings by individual states to immediately cover their entire share out of the ₹2.35 trillion. However apart from the higher cost of market loans under this option the compensation cess will only be usable to repay the principal not the interest.

The partition of the shortfall into two parts and the unequal treatment of the financing of the two may not be legally sustainable since the Compensation Act only refers to the total shortfall. Further it is inexplicable why the central government is nudging states towards option I by making it more attractive. Option I would minimize present borrowing and spending by the states though it is now that they need to urgently raise spending to fight the pandemic and provide humanitarian relief. Such spending will also help stimulate demand and thus an economic recovery.

It is equally inexplicable why the Union government is pushing states to borrow rather than doing so itself since ultimately it will be taxpayers who will foot the bill through an extended compensation cess. As Vijay Kelkar and Ajit Ranade have argued there are compelling reasons for the Centre to do the borrowing (Indian Express 1 September 2020). Unlike states the Centre has multiple options to raise domestic or foreign loans including multilateral loans. Second it can borrow at a lower cost than states can. Third it was the central government which had imposed the lockdown that triggered the severe contraction of India’s economy. The Centre therefore must bear the moral responsibility of dealing with its consequences especially since it is constitutionally responsible for maintaining macroeconomic stability. Fourth and most importantly reneging on a legally-mandated commitment will have the effect of destroying the grand bargain forged by Jaitley that enabled the GST roll-out to begin with. It could also destroy the foundation of trust between the Centre and states that underlies the new paradigm of cooperative federalism he sought to institute.

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

The bank-led model of infrastructure financing is fraught with difficulties. But DFIs are not a quick fix.

It is reported that the government is working towards reviving Development Finance Institutions (DFIs) for funding infrastructure projects in order to address the rising challenges of infrastructure financing. In the past DFIs have not worked well; it is hence useful to place and assess this move in historical context. 

IT is important to diagnose why previous attempts worked out poorly and bring that institutional memory into the next take on the problem. Some argue that solving deeper problems and making the Indian financial system work is a long-term project while the benefit of building a DFI right now will be obtained rapidly. However a little “aarthikam chintanam” shows that for a new DFI to build up a meaningful balance sheet size will also require time. So if a DFI is being created alongside careful steps in building it the government should in parallel address the long-standing policy difficulties of Indian finance. 

Let us briefly look at how we got here. In the 1950s finance in India was primarily debt financing as the bulk of the risk-taking was done by government and public sector units (PSUs). The intellectual framework involved banks that would deliver working capital and short-term finance and a new class of financial firms termed as the Development Financial Institutions to produce long-term finance. 

The first DFI was the Industrial Finance Corporation of India (IFCI) established in 1948. This was followed by the setting up of State Finance Corporations (SFCs) at the state level after the enactment of the SFCs Act 1951. Some other DFIs set up during the early phase of planned economic development were ICICI Ltd in 1955 and UTI and IDBI in 1964. A second generation of DFIs were set up as sector specific FIs or financial institutions in the 1970s and 1980s including NABARD EXIM Bank NHB and IRFC. Among the third generation DFIs are IDFC and IIFCL that were established in the liberalisation phase of the 1990s.

At many points in this journey when policymakers saw an infirmity in the working of the financial system their response was not to solve the underlying deeper failures of financial policy but to start one more DFI. 

But we must ask: Why can a DFI do useful things that a private financial firm cannot? A little examination shows that DFIs have been subsidised by the exchequer. There was concessional financing from the Reserve Bank of India or RBI (which thereby drifted into a fiscal function). They also had access to cheap funds from multilateral and bilateral agencies intermediated by the Government of India which absorbed the foreign exchange risk of these loans. The bonds issued by DFIs qualified as statutory liquidity ratio investments by banks so channelling bank resources to DFIs was one part of the Indian system of financial repression.

When financial reforms began these elements of special treatment of DFIs were partly wound down and the viability of many of these organisations came under threat. There is a risk management problem when a balance sheet is constructed using short-dated borrowings and long-dated risky assets. The difficulties of a weak business model poor incentives moral hazard associated with government involvement and weak regulation translated into business failure. Multiple committees of the RBI have concluded there are structural problems in the concept of a DFI and have recommended conversion into banks (e.g. IDBI and ICICI) or non-banking financial companies (NBFCs).

Attempts at building a DFI today need to draw on this institutional memory of the challenges experienced from the 1990s onwards where organisations like IFCI IDBI and ICICI experienced difficulties. That knowledge will be useful in evolving better structures.

In the 1990s with an increasing role for the private sector in the economy it came to be understood that Indian finance required capabilities in both equity and debt. With the establishment of the securities market regulator Sebi and other institutions like non-conflicted stock exchanges depositories and clearing corporations revolutionary gains were achieved in equity market development and market regulation. However on the debt side paradoxically the progress was much less; the foundations of the debt market have yet to be laid. This constrains infrastructure financing and also constraints the possibilities of what DFI-like organisations can do.

The dissatisfaction in the minds of policymakers about the state of infrastructure financing is well placed. The bank-led model of infrastructure financing which played a leading role in the economic boom of 2002-2011 was fraught with difficulties. The uncertainty and maturity profile of cash flows from infrastructure projects are not well suited for bank balance sheets. A solution to this problem is essential given that over Rs 100 trillion of infrastructure financing is estimated as the requirement in the coming decade.

The attraction of building a DFI today lies in the sense that it can help in the short run. While setting up a new organisation with a balance sheet of Rs 0.1 trillion is not hard there are considerable challenges in scaling up. The new DFI will not make a material impact upon the economy until its balance sheet is a couple of trillion rupees. But building up to a balance sheet of a couple of trillion rupees safely is a slow process.

While setting up a DFI seems like a quick fix it is actually a slow fix. Deeper reforms are slow but have the highest influence because changing laws and regulation harnesses the energy and balance sheets of private persons.

When faced with the opportunities in Indian software/ITES in the late 1980s policymakers could have started an “Indian High Technology Finance Corporation”. But instead the path towards deeper reforms was established through the G S Patel Committee report of 1984 which set the stage for the reforms of the early 1990s that led to trillions of rupees of capital that have gone into software/ITES companies in the recent decades.

The complete understanding of the problems of financial policy debt markets and infrastructure financing is in hand with committee reports and draft laws. Alongside the long range project of building a DFI it is worth also undertaking the long range project of financial reform. 

The writer retired as a secretary to GoI and is now a professor at the National Council of Applied Economic Research. Views are personal.

Increased focus on horticulture crops will be a win-win formula: it will help increase farm income and support nutritional security

A remarkable but lesser-known fact about the National Horticulture Mission (NHM) is the crop diversification it has brought in. 

The NHM a centrally-sponsored scheme was launched in 2005-06 with one of its major objectives being to increase horticulture production and doubling farmers’ income.

Horticulture production in India has more than doubled approximately from 146 million tonnes in 2001-02 to 314 million tonnes in 2018-19 whereas the production of foodgrain increased from 213 million tonnes to 285 million tonnes during the same period.

India is now self-sufficient in foodgrain production and is the largest global producer of farm products like pulses jute buffalo meat milk and poultry. It is also is the second-largest producer of several horticulture products especially fruit and vegetables.

Just before the launch of the NHM the production of horticulture crop was approximately 167 million tonnes using only 9.7% of the cropped area (18.5 million hectare); the total foodgrain production was 198 million tones covering 63%(120 million hectare) of total crop area of the country.

In 2012-13 total horticulture production at 269 million tonnes surpassed total foodgrain production at 257 million tonnes.

The area under horticulture crops increased to 25.5 million hectare in 2018-19 which is 20% of the total area under foodgrain and produced 314 million tonnes. However the area under total foodgrain declined from 129 million hectare in 2016-17 to 124 million hectare in 2018-19.

The most notable factor behind this is that the productivity of horticulture has increased from 8.8 tonnes per hectare in 2001-02 to 12.3 tonnes per hectare in 2018-19. The productivity of total foodgrain increased from 1.7 tonnes per hectare to 2.3 tonnes during the same period.

Horticulture crops are characterised by high-value crops higher productivity per unit of area and lower requirement of irrigation and input cost.

According to National Accounts Statistics 2019 the value of horticulture crops was Rs 4.7 lakh crore in 2011-12 at constant prices which increased to Rs 5.5 lakh crore in 2017-18. The total value of all crops was Rs 11.9 lakh crore in 2011-12 and increased to Rs 13.2 lakh crore in 2017-18.

The share of horticulture crops in relation to the value of all agricultural crops increased from 39% in 2011-12 to 42% during the same period.

Another important point of note is that share of value of export earnings from horticultural crops has been higher than the export value of total foodgrain. The total export value of horticultural crops includes crops such as spices cashew cashew nut shell liquid fruits-vegetable seeds fresh fruits vegetable oil fresh vegetable processed vegetable processed fruits and juice floriculture products tea coffee Ayush and herbal products and cocoa products.

The export of foodgrain crops consists of Basmati rice non-basmati rice other cereals pulses and wheat. The total value of agricultural export was approximately Rs 29700 crore in 2001-02 which increased to Rs 2.75 lakh crore in 2018-19.

Similarly the value of horticultural export too increased from approximately Rs 8000 crore to Rs 63700 crore and the value of foodgrain export increased from Rs 5000 crore to Rs 58600 crore during the same period. The value of export of horticultural products is much higher than the value of exports of foodgrain in the total agricultural export value except for the year 2007-08.

In a nutshell horticulture production contributes more to crop production despite much lower land use and lower input cost.

However these crops require better infrastructure to prevent post-harvest crop losseslike cold storage and better warehousing which will go a long way toward enhancing farmers’ income.

Recently the government announced Rs 1 lakh crore support for agriculture infrastructure development especiallyfor cold storage warehousing and markets for farmers. This will certainly benefit farmers to increase their income directly or indirectly.

Increased focus on horticulture crops could be a win-win formula both at the top level as well as the bottom level for the government to accomplish its endeavour in nutritional security as well as increasing farmers’ income.

The author Tarujyoti Buragohain is Associate Fellow NCAER Views are personal

It is expected for COVID-19 vaccines to be classified as ‘global public goods’ given their development is being substantially funded by people’s taxes

Unrelenting efforts to find a vaccine or vaccines to combat the novel coronavirus disease (COVID-19) are currently underway across the world. There has earlier never been a race against time to produce a vaccine within record time.

Institutions companies and developers across the world have begun to use cutting-edge technologies combined with scientific know-how to find a vaccine. 

In this rush regulators sped up administrative processes fast-tracked procedures and reduced paperwork to allow shortcuts and hasten research and clinical studies. Professionals — including data analysts and physicians — have begun working on clinical trials and are giving this their top priority.

Thirty-four vaccine candidates have reached clinical evaluation with another 142 candidates in pre-clinical evaluations according to the draft landscape of COVID-19 vaccine candidates published by the World Health Organization (WHO) as of September 3 2020.

These events occurred amid pessimistic and somewhat cautious warnings from a few sections of experts and scientists. They said potential COVID-19 vaccines now in the pipeline in various stages may be more likely to fail because of the rush through research and clinical testing phases.

Allocation of potential vaccine(s) 

Global health think-tank Policy Cures Research estimated that more than $5.39 billion was already committed to finding vaccines for COVID-19. This was possible because of large-scale efforts through various partnerships. 

The levels of upfront public investment being allocated for the development of COVID-19 vaccines were higher than any other vaccines. We can see this influencing price determination and country-dose allocations. 

The WHO broadly developed a strategic advisory for the appropriate and fair use to allocate vaccines. In the first phase of allocation doses will be allocated proportionally to all participating countries simultaneously to reduce overall risk while in the second phase consideration will be given to countries in relation to threat and vulnerability.

It is obvious that frontline workers / responders in the health sector who were in close contact with high-mortality risk groups — including the elderly the poor and under-nourished with low immunity and those with certain comorbidities — will be the first beneficiaries of potential vaccines.  

It was also reported that due to the absence of international laws that prevent pre-purchase agreements several rich countries have already entered into such agreements with vaccine manufacturers. This development has come to be known as ‘vaccine nationalism’ or the ‘my nation first’ approach. 

Global alliances

Countering this move about 172 economies — as of August 24 — were engaged in discussions to potentially participate in COVAX a global initiative co-led by the Coalition for Epidemic Preparedness Innovations (CEPI) Global Alliance for Vaccines and Immunization (GAVI the Vaccine Alliance) and the WHO. COVAX is working with vaccine manufacturers to provide countries equitable access to safe and effective vaccines.

We can also expect COVID-19 vaccines being classified as ‘global public goods’ and ‘the people’s vaccine’ given their development is being substantially funded by people’s taxes.

But it will be closely watched as to how these initiatives get converted into something concrete and then implemented in ensuring affordable adequate procurement and equity in distribution of COVID-19 vaccines. Passing through trials and getting regulatory approvals are just the first few steps. The last leg will be determined by the vaccines’ accessibility and most importantly by efficacy and affordability. 

It was observed in the past that many vaccines were supplied by one or two suppliers in view of the fact that vaccine development has high costs (investments) and carried the risks of high failure rates. 

Vaccines were also often viewed as less profitable for pharmaceutical companies leading to some pulling out of production altogether resulting in smaller investments being allocated.

Patents and procurement mechanisms

In addition new vaccines tend to be more expensive when they are under patent protection. At present there have been no specific announcements that COVID-19 vaccines being developed will forgo patent protection an indication of why stock prices of such developers have seen an upward trend. Successful COVID-19 vaccine(s) will invariably face production bottlenecks driving prices higher.

The fact that only some manufacturers will have the necessary equipment and capacity to produce large quantities of the vaccine(s) loomed large. This can adversely impact availability and have the resultant effect on pricing.

Along with this implementing universal immunisation programmes in view of resource and capacity constraints would be a herculean — if not an impossible — task. A staggered approach in which the most exposed and / or vulnerable population groups are prioritised will perhaps be the norm. The WHO also rightly pointed out that different procurement mechanisms can also affect the prices and timely access.

According to some experts vaccine technology and approach would be yet another consideration in determining pricing. Live-attenuated vaccines for example take a longer time to develop and are more expensive to produce compared to other approaches.

There are also doubts about the duration of protection that COVID-19 vaccine(s) will have having a logistical impact on both the implementation of vaccination programmes and the prices of vaccine(s). 

It is hoped that one or more vaccine candidates will see the light of day keeping in mind the number of candidates and the evolving pandemic situation. Mutually beneficial procurement mechanisms and pricing trends will emerge. Some experts pointed out multiple vaccines can also address large-scale production challenges and prevent monopolies.

None of the potential developers however have completed all the required clinical tests at this stage with necessary approvals to follow. Some clues or indications about pricing have started emerging.

This was despite GAVI publicly saying that as of now they have no specific target prices and will also seek to negotiate tiered pricing for richer and poorer countries. 

Adoption of pricing models

It is obvious that pricing will not only depend on the type of vaccines being developed and capacity constraints but also on the number of doses and the kind of negotiations or agreements with respective national governments. 

Speculations are rife that manufacturers of potential vaccine candidates are likely to adopt some kind of ‘differentiated pricing model’. Manufacturers may pursue their launches on a ‘not-for-profit’ basis or adopt ‘ethical margins’ on price. 

Public procurement by governments is another option but contracts through procurements invariably include elements such as assured volumes or quantities upfront payment (partial or full) multi-year contracts bundling of products discounts and rebates etc.

Will governments override any patents or other intellectual property barriers on production import and export of these vaccines?

In emergencies governments can issue ‘compulsory licenses’ to allow companies that do not own intellectual property of a medicine or vaccine to manufacture and sell versions for domestic distribution at lower prices 

If such steps are adopted then private or non-government developers will have to be compensated. There is also a need on clarity over licensing agreements and transfers of technology from the developer to manufacturer. 

Another angle that needed to be looked into at the time of launch is the so called ‘in-pandemic’ pricing and ‘out-of-pandemic’ pricing where manufacturers may face a situation where infection rates plummet to negligible levels prior to the vaccine launch. This situation can reinforce the production and commercial risk taken by developers or manufacturers.

We are being confronted with an unprecedented situation warranting unprecedented solutions. Researchers have made the COVID-19 genome freely available resulting in speeding up of the hunt for vaccine(s).

It is only to be expected that we should not allow intellectual property patent rights or any form of exclusive licenses or restrictions to threaten countries’ access to safe effective and affordable COVID-19 vaccines. Scientific challenges to find effective and safe vaccine(s) will be followed by an equally tough moral test to make it adequately available at affordable pricing

Views expressed are the authors’ own and don’t necessarily reflect those of  Down To Earth.

Although India does not have an explicit carbon tax till date it has an implicit or de facto carbon tax in the form of a coal cess since 2010.

Low-carbon inclusive growth (LCIG) as a strategy has been the hallmark of India’s vision on clean environment. This strategy is a multi-pronged one which broadly includes the following policy instruments: regulations and standards such as building codes bio-fuel standards and vehicle-efficiency standards; public funding for R&D; awareness and capacity building activities; and market-based instruments which in turn include quantity instruments (emission trading schemes such as Perform Achieve and Trade or PAT and renewable energy certificates) and price instruments (removal of subsidies and imposition of a carbon tax on fossil fuels). Among these it is the price instrument of carbon tax that remains the most potent market-based policy tool for inducing fuel-switching towards cleaner sources of energy. Yet it has not found favour with policymakers in India because of its supposed detrimental effects on economic growth and income distribution.

Although India does not have an explicit carbon tax till date it has an implicit or de facto carbon tax in the form of a coal cess since 2010. The reason for preferring a coal cess over a direct carbon tax is not explicitly stated in the policy documents of Government of India (GoI). It is not likely that the implicit carbon tax through cesses and excise duties on fossil fuels will produce better results in terms of reduction in carbon emissions and changes in GDP than an explicit carbon tax. Indeed the reverse is likely to be true. The greater efficacy of explicit carbon tax vis-à-vis implicit carbon taxes has been shown to hold by many researchers on the subject. The real reason for the adoption of an indirect carbon tax in the form of cesses and excise duties seems to be the ease in their collection.

If coal cess is a de facto carbon tax then quantitatively speaking coal cess should be translatable into an equivalent carbon tax. Economic Survey 2014 converts the specific coal cess into equivalent carbon tax (using standard carbon emission factors and net calorific values of coal). In 2015 GoI revised its coal cess from Rs 50 per ton to `100 per ton. Presently it is Rs 400 per tonne.

Coal cess penalises the carbon emitted from coal but spares that from other fossil fuels—e.g. oil and natural gas. Thus an indirect carbon tax cannot induce efficient fuel-switching away from fossil fuels towards cleaner sources of energy. In our view the transition to a direct carbon tax linked to declared carbon emission targets is the next step in the evolution of a emission control policy in India.

Turning to options on usage of revenues generated through carbon taxation it may be noted that theoretically the range here is rather wide. Carbon-tax action in our view must focus on distributing revenues uniformly to all household groups across-the-board or preferentially to the low income/consumption-expenditure household groups to compensate for the burden borne by them due to the imposition of the carbon tax in the first place investing additionally in various sectors of the economy for capacity expansion investing exclusively in clean (renewable) energy sectors and investing in R&D for enhancing energy efficiency. Needless to say these options are not mutually exclusive. They may all be exercised simultaneously with varying degrees of emphasis. Using a computable general equilibrium (CGE) model we developed multiple plausible policy-scenarios based on combinations of the first three options outlined above and found that a combination of the first two options is the best as it is capable of yielding the triple dividend of marginal GDP gains (not losses) a small improvement in income distribution and significant carbon emissions abatement. This shows the way for employing a direct carbon tax in place of the existing coal cess in our low carbon inclusive growth strategy.

Ojha is professor of economics Christ Deemed University & Pohit is professor NCAER Views are personal