Agriculture

Features of Indian Agriculture (are also problems of Indian Agriculture)

o Majority of the population is involved in agriculture and 49% of the households

derive their daily income from agriculture but the problem is that agriculture

contributes only 17% to GDP and the productivity is lower comparable to other

countries

o Majority of the land under agriculture is dependent on monsoon (monsoon is

erratic). Only around one third of the land under agriculture is irrigated and this

is one of the problems and lands covered under irrigation, practice traditional

methods of irrigation which are very inefficient methods

o Indian agriculture is suffering because of Lower mechanization disguised

unemployment

o Post the green revolution, agriculture has been oriented towards cereal

production which leads to problems such as over production of cereals, higher

storage costs, lower production of pulses, market distortions etc

o Per capita availability of land is low as a result fragmentation of land is very high

which is leads to higher input costs

o Per capita availability of water is low and with inefficient usage of water has led

to drop in the underground water levels

o Central problem of agriculture is productivity

o The fertilizer usage is very high and this has led to some unwanted outcomes

(dropping levels of water, crop rotation not happening, land loosing fertility,

productivity has not increased etc)

Subsidy- is the financial transfer or other support provided by the government to an

industry/an individual (the subsidies are transfer payments). The subsidy could be direct

(goods/services are purchased at a market price and the subsidy is transferred to the

consumer) and indirect (goods/services are provided at a subsidized prices). The

government provides subsidies in case many goods-food grains, kerosene, LPG etc

o Is subsidy necessary- especially for a country like India, which has

underdeveloped agriculture, higher disguised unemployment in agriculture,

lower availability of fertilizers etc, subsidies are necessary , having said so, it is

also important for the government to make sure that the subsidies are well

targeted and reaches the intended beneficiaries, thereby achieving the

objectives

o Drawbacks of subsidies

Are regressive in nature-benefits flow more to rich than poor

LPG-non-poor consume 91%

Electricity- poor get the subsidy of 49% and rich 49%. The poor

consume only 16% whereas non-poor consume 84%

Kerosene-Non poor consume 50%

lead to diversion and black marketing (fertilizers)

Market distortions such as price volatility, supply variation etc

Inefficient usage of resources-overuse of fertilizers, water, electricity etc

It violates one product one price principle

o Need for subsidy- subsidies are useful for providing inputs for the farmers at a

cheaper cost, reducing the cost of production, controlling the prices,

contributing to growth etc

Fertilizer

Fertilizer is artificial supply of nutrients. Three types of fertilizers are used N:P:K (Urea :

Diammonium Phosphate : Muriate of Potash)

o In India, Urea attracts the maximum parts of the subsidies provided for

fertilizers, of the three maximum produced, maximum controlled, maximum

imported etc

o Urea is produced by 30 manufacturers (these get subsidy based on the cost of

production)

o Urea is imported by 3 agencies (State Trading Corporation of India; Metals and

Minerals Trading corporation of India; India Potash Ltd)

o The other two fertilizers (DAP and MoP) get subsidy based on quantity of raw

materials used (Nutrient Based Subsidy)

o Since the pricing of fertilizers violates “one product, one price” principle,

fertilizers are black marketed, smuggled out of India etc

o Reforms taken in 2015

Gas pooling policy 2015-gas is one of the raw materials that is needed for

producing the fertilizer and government has introduced the policy

wherein the gas will be provided to the producers at a uniform price

Nutrient Based Subsidy (NBS)- 75% of urea produced must be neem

coated; Maximum retail price to be Rs 268/50 kg (additional 14 rupees if

coated with neem); Existing subsidy for P&K, DAP,MoP to remain the

same; Movement and sale of fertilizers has been freed; The units at

Talcher(odisha), Gorakhpur(UP), Ramagundam(Telangana), Baruni(Bihar)

to be revived(addition of 52 lakh tonnes)

(Advantages of Neem coated urea-increased yield, acts as insecticide,

reduces leaching etc)

o Steps to be taken

DBT could be introduced

Fertilizer could be provided to the households by the size of it

Imports must be decanalized

Urea should be brought under NBS

o Standing Committee report on Fertilizers-Chaired by Hukumdev Yadav (August

2016)

With the increase in agricultural production, the consumption of

fertilizers has also increased

1960s 2014-15

Agriculture Production 83 mn tn 252 mn tn

Fertilizer consumption 1 mn tn 25.6 mn tn

To meet the food security targets, there is a need to produce 300 mn tn

of food grains by 2025 for which there would be requirement of 45 mn tn

(of this only 6 to 7 mn tn would be organic). So there is a need to

undertake the studies regarding its impact

The consumption has increased but the domestic production is not

sufficient hence there is a need for imports

Huge disparity-56% of the districts account for 85% of the usage

Recommended usage is 4:2:1 respectively for N:P:K but in case of India it

is skewed 6.7:2.4:1

The present Fertilizer policy doesn’t include organic fertilizers, bio-

fertilizers etc which are much more effective than the chemical fertilizers.

Hence there is a need to formulate a new subsidy policy for fertilizers

There is a need of a policy to promote use of bio-fertilizers and organic

farming

The production of pesticides is monitored by Ministry of Chemicals and

Fertilizers whereas the usage is administered by Ministry of finance,

hence there is a need to set up a body to regulate manufacturing, import

and sale of pesticides

MSP-it is the price at which the government purchases the food grains from the

farmers. It was introduced during the green revolution so as to support our farmers and

prevent the distress sales by them but over the time, the MSP has been suffering from

some drawbacks-has led to price and production distortions, higher MSP announced in

some crops and ignored for some crops etc. MSP is recommended to the government by

CACP (Commission for Agricultural Costs and Prices) for 23 crops but is decided by the

government or CCEA

NITI Aayog Findings

Over 81% of the farmers have the knowledge of MSP

67% of the farmers sell the crops through their own means

Some of the reasons for this are

o The MSP in some states is paid late. Only 20% of the farmers receive the MSP

on the spot (in Karnataka it is paid on the same day and in Maharashtra more

than 90% of the farmers get the MSP after a month, which leads to most of

the farmers selling their produce to the middlemen)

o Long distance between the fields/farms and procurement centers

o FCI procures only rice and wheat in surplus states

o Too much of paper work

HLC headed by Shanta Kumar has pointed out that only about 6% of the farmers get

the benefits of MSP

Food Security-aim of the government is to provide food security i.e. provide food to

people. Food security refers to three terms-food availability (enough production of food

grains), food affordability (sold at a lower price) and food accessibility (the place of sales

is in the vicinity)

To achieve food security, the government has introduced NFSA in 2013 as per which

o 50% of urban and 75% of rural population (two-thirds of total population)

o 5 kgs of food grains/person/month

o Poorest of the poor will continue to be covered under AAY

o For issuing ration cards eldest woman of the house will be considered

o Redressal mechanism-DGRO and SGRO

o States have to identify eligible households

o Proposes using AADHAR, ICT for better implementation

Rural Credit- the farmers require access to credit at lower cost as they are heavily

dependent on such access. The farmers will need the loans for consumption or

investment purposes. The loans in agriculture sector can be explained under two

classifications

o Based on the source

Formal-loans are taken from institutions such as scheduled commercial

banks, rural banks etc (it is also referred to as Institutional credit)

Informal-loans are given by non-institutional actors such as money

lenders, friends, family, relatives etc.

o Based on the term

Short term-lesser than 15 months

Medium term-15 months to 5 years

Long term-more than 5 years

Problem with agriculture credit is that as per the 70th round of NSSO, 40% of credit is

from informal. This is a cause of worry as informal lending is done at a very high rate of

interest and usually illegal methods of recollections are used and the informal sector is

unregulated.

In 2015, RBI has removed the distinction between direct and indirect farm credit

(agriculture credit)

o Direct-the loans given by public sector bank to the farmers directly and the

farmer repaying the loans

o Indirect-the loans are usually routed through some other institutions such as

fertilizer dealers, FCI warehouses, NBFC (only to those involved in agriculture

sector) etc

Vyas committee was set up to give recommendations regarding the rural credit and the

committee submitted the recommendations in 2004. The recommendations are

o Review of mandatory lending by banks so as to enlarge direct lending

programmes

o Direct lending must be increased to 18%

o Reducing the cost of agricultural loans

o Banks to increase their disbursements to small and marginal farmers under

Special Agriculture Credit Plan (SACP)

Skewed Land Holding Pattern in India

o As per census of 2011

Marginal(1 hectare or less)-67%

small(1-2 hectares)-18%

Medium(2-10 hectares)-14.3%

Large(above 10 hectares)-0.7

Mechanization o Mechanization is lesser than 50% in India. In developed countries the

mechanization is high and the percentage population involved is very less but in

case of India, population involved in agriculture is high and mechanization is

comparatively less.

o With the labour in agriculture coming down (because urban migration, higher

MNREGA wages) there is a need for higher mechanization

o Higher mechanization will also increase production, increase productivity, lower

the costs

o Case of Higher Mechanization-Madhya Pradesh

The state government has introduced two schemes-Yantradoot scheme and

Custom Hiring Centers (CHCs).

Yantradoot Scheme

The state government will adopt 200 villages per annum are adopted during

which the farmers are given information as to how the mechanization will boost

productivity, save labour costs.

CHCs (Custom Hiring Centers)

The CHCs are the centers which will rent out machinery to small and

marginal farmers. They will employ the rural youth for managing these

centers.

The centers will be set up with a capital investment of Rs 25 lakh

The state government will provide a subsidy of Rs 10 lakh or 40% of the

costs, whichever is lower (it is mandatory to attend a week’s training

program to be eligible for subsidy)

The applicants will be chosen on lottery system

The CHCs are mandated to purchase some tools/machinery/equipments

These will be serving 200 to 300 farmers in a radius of 10 kms

The models are followed in Punjab and AP

Warehousing o Agriculture warehousing accounts for total of 15% warehousing market in India

o Around 40% of the total storage space is handled by state enterprises such as

FCI, CWC and SWC

o 30% of the total storage is held by unorganized and small godown players (lack

scale and quality)

o There is a shortage of storage space-as per the study conducted by Ministry of

Agriculture 7% of food grains, 30% of fruits and 10% of spices are lost due to

improper storage

o Uses

Price stabilization

Scientific storage reduces wastage

Continuous supply

o Types

Based on ownership-Private and Public

Based on storage- General and commodity

Some of the warehouses in India are National Co-operative Development

Warehousing Board (1956); Central Warehousing Corporation (1957); Food

Corporation of India (1965)

o Criticism

Not enough storage

Economically unviable

Storage by FCI does not include storage of pulses. oilseeds etc

Location disadvantages

Complicated and time consuming procedure of depositing and

withdrawing the produce

Lack of knowledge amongst the farmers

Lack of credit accessibility on the produce stored

In India the total storage potential is 727 lakh million ton which is not sufficient

for even half the rice and wheat produced.

o Buffer Stocks

Are food grains maintained by GoI for cushion against the fluctuations in

prices

Uses

Feed the TPDS

Ensure food security during the periods of lag phase

Stabilize food prices

Issues

High maintenance cost

Inadequate storage facility

After storing for long period they are disposed off

Procurement of pulses is limited

o Shanta Kumar Committee

FCI must transfer procurement operations to states which have made

considerable expenditure in infrastructure

There must be rationality and uniformity in procurement operations

centre not to accept additional/surplus food grains from states

announcing bonus over MSP

Stringent quality checks before accepting food grains

Encourages NWRS (Negotiable Warehouse Receipt System)

Prioritize pulses and oil seeds and their MSP

Reduce coverage under NFSA from 67% to 40%

6 months advance food grains to be issued so that the cost of storage

comes down

End to end computerization

Cash transfers in PDS to be operationalised in cities with population over

1 million

Agriculture Marketing

o Marketing must lead to

More returns to the producers

More coverage-small and marginal farmers

Efficient utilization of resources

Aim for market surplus

o The weaknesses of marketing system

remoteness and connectivity

Local storage capacity

Transportation costs

Mandi infrastructure-information, grading and standardization etc

o The farmers do not get correct prices because

Too many intermediaries

The long distance of market from the village forces villagers to sell to

intermediaries

This is compounded by infrastructural problems

o As agriculture is a state subject, the wholesale of agricultural produce comes

under the APMC acts of state governments

It empowers government to notify commodities to be sold

It empowers the sate to regulate the sale by establishing market into

APMCs

Once the area is declared as an market, no person/institution will be

allowed to conduct the trade freely (outside APMC)

Problems with APMC act of states

Only few of the states have amended their APMC acts on the lines of model act

Presence of very large vested interests which prohibit changes in the present mandi system

State APMCs have been unable to improve the infrastructure, provide access to information, modernization of market facilities etc

The modernization of market infrastructure requires huge investment which can be obtained with the assistance of private players

Model APMC Act

Direct sales of farm produce to contract farming sponsors

Provides for establishment of Farmers’ and consumers’ markets to

facilitate direct sales of agriculture produce

Setting up of special markets for specified agricultural produce

Permits private persons, farmers and consumers to establish new

markets for agricultural produce in any areas

Provides for a single levy of market fees on agriculture produce

market functionaries have to get registered

Creation of infrastructure from the revenues raised by APMC

o State of Bihar has repealed the APMC act and the state of Rajasthan and

Maharashtra have delisted fruits and vegetables to allow the farmers to sell the

produce to private parties without having to go through APMC. Apart from this

the state is also promoting growth of high value crops through PPP

o The central government in order to provide better returns to the farmers has

introduced eNAM (electronic National Agriculture Market)

This leads to creation of a national market

This is an electronic platform wherein the farmers can sell their produce

across India

This will lead to higher participation from both sides (farmers and

traders) leading o better price discovery and will also increase the

transparency

Initially 21 mandis from 8 states will be connected and 25 commodities

will be traded on this platform

Over the period of time 585 regulated markets will be connected through

eNAM by 2018

For the implementation the states will have to amend their APMC acts

Implementation by the Department of Agriculture & Cooperation through

Small Farmers Agribusiness Consortium (SFAC) by creation of a common

electronic platform deployable in selected regulated markets across the

country. A budgetary provision of Rs.200 cr has been made to be spent

over the next three years (2015-16 to 2017-18).

Hurdles in implementation

IT backbone

Information awareness

The unwillingness of the state government

Other concerns such as-who guarantees the price, what if there

are no buyers etc

Crop Insurance Agriculture faces various risks (such as deficit monsoon, drought, floods, earthquakes

etc). To protect the farmers the government provides insurance. In 2016, the

government has introduced PMFBY (Pradhan Mantri Fasal Bima Yojana). The features

are

o will be rolled out from the kharif season in June this year

o Under the new Crop Insurance Scheme premium-

2% for kharif food grains and oilseeds crops

1.5% for rabi food grains and oilseeds crops

Horticulture and cotton crops the premium has been fixed at up to 5% for

both kharif and rabi seasons

o There is no upper limit on Government subsidy. Even if balance premium is 90%,

it will be borne by the Government (earlier the claim was capped)

o The New Scheme aims to enhance insurance coverage of crops up to 50% of the

total crop areas from the existing level of about 23% over the next 2-3 years and

cover 50 million farmers (although the present coverage is 23% it was not

because the farmers opted for it but it was forced on them and the premium was

deducted from the loans that were given to them)

o The Government's liability on premium subsidy will be shared by the Central and

State Governments on 50-50 basis

o Problem with implementation

Financial burden on the state is very high (in some the states the financial

burden is more than 60% of the budget allocation for agriculture)

The states are using two methods

The notification is being delayed

The premium is being reduced thereby reducing the sum insured

(eg-Rajasthan has capped the insurance benefit-farmers owning

more than 7 hectares have to pay the full premium)

Pulses o The consumption of pulses has increased but the per capita consumption has

been on declining trend (from 60 grams to 38 grams in a span of two decades)

o The increase in the consumption is because there is change in the dietary

patterns and pulses are the primary sources of proteins

o The other reason for the increased production is that other food items are

costlier (twice in some cases and thrice in some cases)

o The pulses production has come down and consumption has increased as a

result of this, the imports of pulses have increased (in 2000-01 the imports were

0.06 MT and in 2015-16 it has increased to 5.53 MT) and in the first seven

months, the imports are 33.4%

o The high prices of pulses, has led to higher acreage planted expecting higher

returns but with expectations of higher production, the market prices have

started coming down. If the current trend continues, the mismatch between

demand and supply (of tur and urad) will increase to 1 million tons. Presently the

annual growth in the production was 3% and if India needs to take care of

imports then the production has to increase by over 8%

o India is one of the largest producers, consumer and also the importer of pulses.

(India produces 67% of the total tur in the world and still imports about 30% of

domestic demand for tur)

o To promote the cultivation of pulses the government has increased the MSP of

pulses (but this higher MSP is of little help as-the announcement was done late

and the MSP is lower by 40% to 50% compared to market prices). The MSP for

pulses should be decided based on social costs.

o Considering the current situation to achieve food security, it would be rational in

diverting more land for pulses production (as prices are high and imports will

hurt India, also the global production is not high), whereas the production of

cereals in India and globally is very high and are cheaper compared to pulses.

o Recommendations- Arvind Subramanian committee

1. The farmer has to be protected in two areas-MSP and procurement. The

government has to increase the MSP of tur, urad and moong. The

farmers are taking a risk by increasing the production of pulses and

incidentally the prices are falling hence the government has to protect

the farmers by increasing the MSP.

2. For the procurement activities, the government has to allocate an

additional Rs 10000 crore to the agencies FCI,SFAC, NAFED etc

3. The buffer stock of 2 million tones has to be maintained and should be

monitored in real time by a HLC including Finance Minister, Minister of

consumer affairs, Minister of Agriculture among others

4. The limits on stockholding and exports have to be lifted

5. Although procurement is of utmost importance now, there is also a need

for policies to ensure effective stocking, warehousing, processing and

disposal. Pulses deteriorate more quickly than cereals and hence need

more efficient management

6. New institution could be set up in PPP format which will also be into

procuring; it will not replace present agencies but will lead to

competition. This institution will work independent of the government

and to make it financially viable it could be allowed into procurement,

storage, warehousing of other agricultural commodities

7. As for as the MSP is concerned, it should be increased for the next kharif

season.

8. The diversification of the pulses must be promoted and the government

should transfer the benefits through DBT (Rs 10-15/kg in irrigated areas)

9. GM crops should be promoted, leading to higher productivity

10. Review the implementation of ECA 1955

(Recommendations from 1 to 6, they are to be implemented immediately

and from 7 to 10 to be implemented gradually)

E-technology in the aid of the farmers o Need of e-technology

Food security

Sustain the growth in agriculture

Poverty reduction

Assist farmers-majority of farmers are into small and marginal farming

Helps rural and under-developed markets to become efficient and

productive

ICT helps in dissemination of information-technology, market demand,

price information; weather, pest and best practices etc

National Policy for Farmers, 2007

National Commission on Farmers in 2004 under the chairmanship of Dr.

M.S. Swaminathan.

The “National Policy for Farmers, 2007” has been formulated and

approved by the Government of India

It has important provision for use of Technology:

New technologies which can help enhance productivity per unit of

land and water are needed.

Biotechnology, information and communication technology (ICT),

renewable energy technology, space applications and

nano technology

Technology to provide opportunities for launching an “Evergreen

Revolution” capable of improving productivity in perpetuity

without harming the ecology.

Kisan credit card

It was started by the Government of India, Reserve Bank of India (RBI),

and National Bank for Agriculture and Rural Development (NABARD) in

1998-99 to help farmers access timely and cheap credit.

The Kisan Credit Card allows farmers to have cash credit facilities without

going through time-consuming processes in the bank

The card is valid for three years and subject to annual renewals.

Withdrawals are made using slips, cards, and a passbook

Repayment can be rescheduled if there is a bad crop season, and

extension is offered up to four years.

Kisan Call Centers

Launched the scheme in January 2004.

Main aim of the project is to answer farmers’ queries over the phone in

their own language.

The queries are clarified in 22 local languages and the call in facility is

available from 6 am to 10 pm

These call Centers are working in 14 different locations covering all the

States and UTs.

A countrywide common eleven digit Toll Free number 1800-180-1551 has

been allotted for Kisan Call Centre.

KCC agents have access to Kisan Knowledge Management System (KKMS)

to facilitate correct, consistent and quick replies to the queries of farmers

and capture all the details of their calls

Kisan SMS Portal

Information/advisories/services are provided to the farmers through SMS

by the experts

Messages are customized based on farmer’s preferences in the language

chosen by them

Existing databases of the farmers available with central and state

government are being integrated with the portal.

Those who are not registered, they need to register themselves with the

system. They can register themselves by calling the Kisan call centre on

the toll free number or through web portal or even SMS based

registration is also available.

The services of the portal include crop production, including horticulture,

animal husbandry, dairying and fisheries. It sends messages relating not

only production aspect but also marketing of produce, weather forecast,

soil testing, etc.

Kisan Choupal

In collaboration with Krishi Vigyan Kendra

Is conducted in identified village on need basis (based on the assessment

of the farmers by the scientists)

Dialogue/discussions are held to solve problems with help of Information

technologies, showing technical videos to farmers, movies, etc.

It equips the farmers with the knowledge on copping patterns,

technology etc

Village resource centers (VRC)

Launched by ISRO to provide space based service in association with

NGOs/ Trusts and state/ central agencies.

At present, there are 461 VRCs set up in 22 States/Union Territories

The VRCs are connected to Knowledge/Expert Centers like Agricultural

Universities, Skill Development Institutes and Hospitals.

Programmes conducted by the VRCs are in the areas of,

Agriculture/horticulture, Fisheries, Live stock, Water resources, Tele

health care, Awareness programmes, Women empowerment,

Supplementary education, Computer literacy, Micro credit, Micro

finance, Skill development / vocational training for livelihood support etc.

So far, over five Lakh people have availed VRC services.

AGMARKNET Portal

AGriculture MARKeting information system NETwork

Launched by DMI-Directorate of Marketing in the 9th FYP

Linked to all important state APMCs, State Agriculture Market boards,

DMI Regional offices

AGMARKNET provides info on

Arrivals of agriculture commodities and their prices at various

mandis in 8 Indian languages

Trend analysis

Grading, packaging, standards, sanitary and phytosanitary

requirements and marketing charges

o Benefits of E-aid to farmers

The exposure to technology provides information to the farmers and

helps them to make informed decision making

The farmers can plan better and try to utilize the resources efficiently

Some of these lead to higher community involvement

Precision Agriculture (PA) - is also referred to as Site Specific Agriculture

(SSA), is a modern farming methodology wherein technological tools are

used in real time and the farmers. It involves collecting, analyzing the

data in real time and using it in the farming of large tracts of the land

o Problems

The reach of the technology is still very poor and large chunk of farmers

are still ignorant about such advancements.

Usage of regional languages

Abrupt power supply

Duplication of the efforts

Due to low literacy rate among farmers and digital divide

The rural infrastructure for the use of ICT is also not uniform and lot of

regional disparity persists.

Irrigation

Importance of Irrigation

o The monsoon phenomenon is not uniform in two ways-across geography and

time. It varies from one year to another and across all the states in India and

majority of the land under cultivation is dependent on agriculture. Since there is

a huge question mark over the predictability of monsoons there is a need to

promote irrigation

o There is a diversity in India with respect to types of crops cultivated, soils and

terrains on which they are cultivated

Present status of Irrigation

o More than 90% of the fresh water is consumed by agriculture sector

o Majority of the land under cultivation depends on monsoon

The Irrigation projects are classified into 3 types based on CCA(Culturable Command

Area)

o Minor-less than 2000 ha

o Medium-2000 to 10000 ha

o Major-greater than 10000 ha

Various Schemes to promote irrigation

o CADP (Command Area Development Programme)

Started in 1974-75

Today CADWMP (since 2004)

Outcomes-improve utilization of irrigation, increase production and

productivity, On Farm Development (construction of field channels, land

leveling etc)

o RIDP (Rural Infrastructure Development Programme)

Started in 1995-96

Focus on rural infrastructure (especially irrigation projects)

Provides funds to the state governments and state owned co-operations

Resources are from the PSBs who have not met the PSL targets

40% of the funds have been used for agriculture

o AIBP (Accelerated Irrigation Benefits Programme)

Loans are given to states for the completion of irrigation projects

Since 2004-05 grant component has been introduced

Amalgamation of CADP with AIBP

o NPRRRWB (Repair, Renovation & Restoration)

Launched in 2005

Expenditure of Rs 300 crore (C:S::3:1)

Focused on development of minor irrigation bodies

Launched in 26 districts

Micro-irrigation

o Types

Sprinkler

Drip

o Advantages

Will prevent loss of water due to evaporation, run off, protect the fertility

of soil etc

Fertigation- water soluble fertilizers are dissolved and directly applied at

the roots

Reduces the energy consumption

Increase in the agriculture productivity

Reduces the costs

o Dis-advantages

Initial higher cost of setting up

Regular maintenance will incur certain expenditure and requires

expertise

o Penetration

With more than half the land under cultivation dependent on the

monsoon, irrigation coverage is very low at 5% (approx) i.e.

approximately around 8 million hectares of land is under irrigation

whereas the potential is around 70 million hectares

In terms of percentage coverage Israel (absolute coverage is only 0.23

million hectares) tops the list

o Implementation

India has an arable land of around 160 mn ha and as per the task force

set up in 2004 on Micro-irrigation, the total area for potential micro-

irrigation is considered to be 69.5 mn ha, of which 27 mn ha is for drip

irrigation and 42.5 mn ha is for sprinkler irrigation.

Over the years, the allocation of funds have kept on decreasing

Even out of the allocated funds, the utilization also been on a declining

trend

The government has set a target of covering 0.5 mn ha per year under

irrigation. As per one of the survey, if it continues to target at that speed

then it would take the government at least 100 years to attain the

potential coverage, hence the government must increase the target to at

least 2 mn ha per year (with increase by 20% in each year so that it could

achieve the potential by the end of next decade)

In July 2015, the government has introduced PMKSY (Pradhan Mantri

Krishi Sinchayi Yojana)

o Problem areas

The focus on policy formulation and implementation has been reduced.

Micro-irrigation was implemented in a mission mode (MMP usually have

defined goals, objectives, targets, allocation of funds and evaluation

parameters) as NMMI (National Mission on Micro Irrigation) but has been

diluted to form a sub-component of various schemes of the government

since 2014-15

Real time monitoring and usage of IT systems absent or very limited

Unavailability and in some cases the delay in the disbursal of the funds

has become an impediment

Financing problems faced by the farmers

o Way out

Introduce DBT to transfer the subsidy

States such as Maharashtra, Gujarat, AP and Haryana have dedicated

teams which utilize IT form implementation of micro- irrigation programs

hence these models are to be followed by other states

Providing credit access, subsidy, interest intervention etc to promote

adoption of micro-irrigation

Make it mandatory to use micro-irrigation in case of sugar cultivation

(sugar is grown all throughout the year and requires twice as much water

as in case of paddy, wheat etc-states of Maharashtra and Karnataka have

already made it compulsory and have stated that the water consumption

on sugarcane came down by 60%)

PMKSY- was introduced by the central government in 2015. It aims at converging

investments on irrigation at the farm level, increasing the area under irrigation and

providing end-to-end solution for irrigation

The central government has allocated Rs 50000 cr for the period from 2015-16 to 2019-

20 for the implementation of the project and for 2015-16, Rs 5300 cr has been

allocated.

The PMKSY has got 4 components

o Accelerated Irrigation Benefits Programme-converging the investments at the

farm level

o Har Khet Ko Paani-increasing the area under irrigation, recharging liquefiers,

rejuvenating wells etc

o Per Drop More Crop-promotion of micro irrigation methods

o Watershed Development- effective management of run-off water and improved

soil conservation (moisture)

o Pros-merges various schemes under a single head, implementation at the district

level (plans to be implemented by District Magistrates leading to more

involvement)

o Cons-fund allocation holds the key and the allocation has been on the downside,

subsidy transfers delays not addressed, DBT model not introduced, DIPs (District

Irrigation Plans) will be stumbling blocks as there are 640 districts in India (as per

the agricultural census 2011),

Recent Initiatives

o In the budget 2016-17, the central government announced setting up of

Irrigation Fund of Rs 20000 cr under NABARD

o In September 2016, the government has kicked off work to complete 99 major

and medium irrigation projects that have been pending over a long time (the

target year for completion is 2018-19). These projects to be implemented mainly

in those areas which are besieged with farmer suicides such as Budelkhand

region in UP and MP; Marathwada (Maharashtra); Telangana. The estimated cost

for the implementation of the projects is Rs 77595 cr and will be covering 7.6 mn

ha

GM crops

GM stands for genetically modified. The gene of these plants are altered in order to

achieve any one or more of the following features

o Resistance to viral infection

o Resistance to insect damage

o Tolerance towards herbicides

o Tolerance to unfavorable climate conditions-high salinity, high temperatures etc

thereby increasing the production

The first commercially grown GM food crop was that of tomato (Flavr savr) and it was

developed by an American company Calgene.

The issues associated with GM crops are

Pros

o Higher resistance to diseases, pests and herbicides

o Improved tolerance to cold/heat/drought/salinity o Reduced maturation period thereby increasing the shelf life (with medicinal

benefits-edible vaccines) o The increased production will be advantageous to achieve food security o Increased nutrients, yields, quality and stress tolerance o The input costs will come down

Concerns

o The safety of GM crops has been doubted by various stakeholders

o The GM seeds are patented by MNCs and it will not be available at lower prices

to the farmers

o The MNCs will hold the patents and the concern is that these companies may

hold a sway/control over food security. Hence the developed countries will have

a certain control over developing countries

o Out Cross-the genes will flow into the traditional/natural types of crops because

of cross pollination

o The ethical concerns is raised because of loss of original species

GM crops and India

o The transgenic crops were introduced in India in the last decade (Bt Cotton in

2002)

o Bt Cotton is the only transgenic crop that has been allowed for

commercialization in India but this result has been positive as well as negative.

The cotton production has increased, the area under cultivation of cotton has

increased etc but these have been shadowed by certain negative outcomes such

as loss of traditional cotton varieties, sway of MNC companies in pricing the GM

seeds, government intervention and IPR issues

o Another GM food crop that gained lot of traction in the last couple of years was

Bt Brinjal. It was developed by Monsanto and received all regulatory clearances

in 2009 but because of the opposition the government had to put it on the

moratorium and since then there has been no change in the status

o Present Regulatory Mechanism

The GM crops are regulated under the Environment (Protection) Act, 1986.

Approval process for commercial release of GM crops

The company developing the GM crop undertakes several biosafety assessment tests (environmental and food safety assessments)

Next step is to conduct Bio-safety Research Trials which require prior approval of the regulators, the GEAC (Genetic Engineering Appraisal Committee) and the RCGM (Review Committee on Genetic Manipulation)

After considering the results, GEAC gives the mandatory approvals Finally, commercial release is permitted only for those GM crops found to

be safe for humans and the environment.

Recent updates

o The GEAC has recommended that

For the tests/trials which are conducted within the premises of the

company there is no need to get the nod/clearances.

The states must issue the clearances within 90 days

o GM mustard

DMH 11 (Dhara Mustard Hybrid 11) developed by centre for Genetic

Manipulation of Crop Plants at Delhi University. Two of the genes that

have been used here are barnase and barstar genes

Recently the government has placed in the public domain a safety

assessment report prepared by a subcommittee under the Genetic

Engineering Appraisal Committee (GEAC), which has found that the GM

mustard is “safe for food/feed and environment”

With the agriculture coming under a lot of stress (fragmentation of cultivable land, drop

in the water level, uncertain monsoon, increasing population etc) it becomes imperative

to use technology to increase the productivity in agriculture but the problem with

introduction of GM crops is that the public (stakeholders) do not have the facts such as

safety studies conducted by the government to make an informed decision. Hence

government of India must hold consultations with all the stakeholders, put the safety

studies in the public domain, clear all queries and take the public into confidence before

implementing or allowing any of these food crops for commercial production

AGRICULTURE

POINTS TO BE COVERED

Features of Indian Agriculture

Fertilizer subsidy

MSP

NFSA

Land Holding Pattern

Mechanization

Credit

Warehousing

FEATURES OF INDIAN AGRICULTURE

Majority of the population is involved in agriculture

49% of the households derive their daily income

Majority of the land under agriculture is dependent

on monsoon (monsoon is erratic)

Traditional methods of irrigation

Lower mechanization

Disguised unemployment

Too much oriented towards cereal production

Per capita availability of land and water is low

Central problem of agriculture is productivity

LAND AND WATER AVAILABILITY

PRODUCTIVITY OR CROP YIELD

SUBSIDIES

Transfer payments-are the one sided payments

without expecting any returns (taxes, subsidies)

Subsidy-Subsidy is a support (financial or

otherwise) extended by the government to an

economic sector. These are unconditional transfers

Direct/Indirect (cash/kind)

Universal/Targeted

Conditional/Unconditional

Implicit/Explicit

SUBSIDIES

Need for subsidy

Improved production/Promoting better inputs

Achievement of social objective

Price control

Increasing efficiency

Export promotion

Subsidy is provided by the government in

Food grains-PDS,NFSA

Fertilizers

LPG

Kerosene

SUBSIDIES

Criticism against subsidy

Ill-targeting

Has an impact on cropping patterns

Doesn’t allow for optimal utilization

Creates inefficiencies in the market

FERTILIZERS

Agricultural urea is most subsidized(74%), most produced (86%), most consumed(74%), most imported(52%), most physically controlled

The urea subsidy accounts for 0.8% of GDP

In case of DAP and MoP government pays the subsidy based on the quantity used (per kg) whereas in case of urea

Fixes maximum retail price

Provides subsidy to the 30 domestic producers

Provides subsidy to the importers

Imports are canalised-only three agencies are allowed(State Trading Corporation of India; Metals and Minerals Trading corporation of India; India Potash Ltd)

Half of the movement of fertilizer is directed

FERTILIZERS-LEAKAGES

Black marketing

Impact on the small farmers

Inefficient subsidy given to domestic manufacturers

Disparity in the usage

REFORMS

Imports must be decanalised so that the number of importers

increase leading to better demand estimation, competition, more

competitive pricing overcome shortages etc

Urea should be brought under NBS

DBT in urea

Identification of the small and marginal farmers

Identification of tenant farmers

Connecting beneficiaries wit the banking system

A preferred method would be to cap the number of bags of

subsidized fertilizer per household at the point of sales.

FERTILIZERS-REFORMS BY GOI

Gas Pooling Policy 2015

New Urea Policy

STANDING COMMITTEE REPORT

Production & Consumption

Production, Consumption and Imports

Huge Disparity 56% of the districts consume 85% of fertilizers

Consumption-N:P:K::6.7:2.4:1

1960s 2014-15

Agriculture Production 83 mn tn 252 mn tn

Fertilizer consumption 1 mn tn 25.6 mn tn

2001-02 2012-13

Fertilizer Consumption 17.4 mn tn 25.5 mn tn

Domestic Production 14.5 mn tn 16.1 mn tn

STANDING COMMITTEE REPORT

The present policy doesn’t cover bio-fertilizers,

organic farming etc. Hence there is a need for new

policy

There is a need to have a policy to promote organic

farming

There is a need to set up a new institution, to

regulate the sales, imports etc of pesticides

MSP (Minimum Support Price)-the price at which the government would purchase the food grains from the farmers. Announced by the GoI (recommended by CACP for 23 crops). Introduced in 1970s to help the farmers to protect the farmers from price fluctuations.

Crop diversion

Higher cost of storage

Imbalance in demand and supply

Procurement prices- is the price at which food grains are procured by the GoI in order to provide cheap food grains to people

Over the time both MSP and Procurement Prices have become synonymous

Food Subsidy = economic cost of food grains - issue price

Economic cost of food grains = MSP + all other costs

MSP-NITI AAYOG

More than 81% of the farmers have knowledge of MSP

67% of the farmers sell the crops through their own means

The MSP in some states is paid late

Long distance between the fields/farms and procurement

centers

FCI procures only rice and wheat in surplus states

Too much of paper work

HLC headed by Shanta Kumar has pointed out that only

about 6% of the farmers get the benefits of MSP

SUBSIDY ON FOOD GRAINS

Food Security

Availability

Accessibility

Affordability

Food grain distribution chain

VARIOUS FOOD PROGRAMMES

Name Year Coverage note

PDS Up to 1992 Universal

RPDS 1992 Backward

blocks

20 kg of food

grains

TPDS 1997 Poor and non-

poor (APL and

BPL)

35 kg of food

grains

AAY 2000 Poorest of the

poor

35 kg of food

grains

APS 2000 Indigent senior

citizens

10 kg of food

grains

NFSA 2013 Priority

households

5 kg of food

grains per

person per

month

LAND HOLDING PATTERN

Agriculture census is conducted after every 5 years

As per census of 2011

Marginal(1 hectare or less)-67%

small(1-2 hectares)-18%

Medium(2-10 hectares)-14.3%

Large(above 10 hectares)-0.7

LAND HOLDING PATTERN

AGRICULTURE MECHANIZATION

AGRICULTURE MECHANIZATION-CASE STUDY

Madhya Pradesh-Custom Hiring Centers (CHCs) and Yantradoot Scheme

CHCs

Centre to be set up at a cost of Rs 25 lakh (government to give a subsidy of Rs 10 lakh or 40% of the cost)

Each centre to serve 200 to 300 farmers within a radius of 10 kms

Yantradoot Scheme

Same model is followed in AP and Punjab

AGRICULTURE CREDIT

Types

Based on the term

Based on the source

Vyas Committee

Direct lending must be increased to 18%

Reducing the cost of agricultural loans

Banks to increase their disbursements to small and marginal

farmers under Special Agriculture Credit Plan (SACP)

NSSO-70th Round

Recent changes introduced

WAREHOUSING

Uses/need Price stabilization

Scientific storage reduces wastage

Continuous supply

Type

Criticism Not enough storage

Economically unviable

Storage by FCI does not include storage of pulses, oilseeds etc

Location disadvantages

Complicated and time consuming procedure of depositing and withdrawing the produce

Lack of knowledge amongst the farmers

Lack of credit accessibility on the produce stored

SHANTA KUMAR COMMITTEE REPORT

FCI must transfer procurement operations to states which

have made considerable expenditure in infrastructure

There must be rationality and uniformity in procurement

operations

centre not to accept additional/surplus food grains from

states announcing bonus over MSP

Stringent quality checks before accepting food grains

Encourages NWRS (Negotiable Warehouse Receipt System)

SHANTA KUMAR COMMITTEE REPORT

Prioritize pulses and oil seeds and their MSP

Reduce coverage under NFSA from 67% to 40%

6 months advance food grains to be issued so that the

cost of storage comes down

End to end computerization

Cash transfers in PDS to be operationalised in cities

with population over 1 million

IRRIGATION

Need/Importance

Classification of Irrigation Projects

Minor – up to 2000 hectares

Medium – 2000 to 10000 hectares

Major – more than 10000 hectares

Types of Irrigation-Traditional and Micro

Evaluation

EVALUATION-MICRO IRRIGATION

EVALUATION-MICRO IRRIGATION

PROMOTION OF MICRO-IRRIGATION

PROMOTION OF MICRO-IRRIGATION

APMC

As per the findings of Mr Ashok Gulati, the farmers get 25% of the

price that the consumers pay

PROBLEMS WITH APMC ACT OF STATES

Only few of the states have amended their APMC acts on the lines of model act

Presence of very large vested interests which prohibit changes in the present mandi system

State APMCs have been unable to improve the infrastructure, provide access to information, modernization of market facilities etc

The modernization of market infrastructure requires huge investment which can be obtained with the assistance of private players

The middlemen (or licensed traders) make a huge gain (As per the findings of Mr Ashok Gulati, the farmers get 25% of the price that the consumers pay)

MODEL APMC ACT

Direct sales of farm produce to contract farming sponsors

Provides for establishment of Farmers’ and consumers’ markets to facilitate direct sales of agriculture produce

Setting up of special markets for specified agricultural produce

Permits private persons, farmers and consumers to establish new markets for agricultural produce in any areas

Provides for a single levy of market fees on agriculture produce

Market functionaries have to get registered

Creation of infrastructure from the revenues raised by APMC

eNAM

eNAM

PRADHAN MANTRI FASAL BIMA YOJANA

NAIS MNAIS PMFBY

Premium rate Low High Lowest

(government to

contribute the

maximum)

One season one

premium

Yes No Yes

Coverage Full Capped Full

Localized risk

coverage

No Hailstorm, landslide Hailstorm,

Landslide,

Inundation

Post harvest loss

coverage

No Only coastal areas

(cyclonic rain)

Pan India (cyclonic

and unseasonal

rains)

Use of

technology

No Intended Mandatory

Awareness No No Yes (target to

double the

coverage to 50%)

PULSES

QUESTIONS

In India, which of the following have the

highest share in the disbursement of credit

to agriculture and allied activities?(2011)

(a) Commercial Banks

(b) Cooperative Banks

(c) Regional Rural Banks

(d) Microfinance Institutions

QUESTIONS

Priority Sector Lending by banks in India

constitutes the lending to: (2013)

(a) agriculture

(b) micro and small enterprises

(c) weaker sections

(d) All of the above

QUESTIONS

“The government has to make an investment in irrigation to prevent Indian Agriculture from dancing to the tunes of monsoons”-elaborate

What measures can be taken by then government to double the income of the farmers

The APMCs set up under state government acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine.

What are subsidies? Critically examine the importance of subsidies with the background of the fiscal discipline of GoI

The technology is essential to achieve food security in India. Discuss

QUESTIONS

Agriculture marketing is important for the

farmers to get better returns

Importance of new crop insurance scheme

Discuss the issue of GM crops in India. Is it an

imperative for India to adopt the GM crops to

achieve the food security and what would be the

pitfalls in the process of achieving it

Financial Markets

FINANCIALMARKETS

Surplus

sector

Financial

Markets

Deficit

sector

The financial market facilitates the movement (of

savings) of funds from surplus to deficit sectors

The surplus/deficit sectors could be households,

government and companies/firms

The participants could be banks, debt market, equity

market, money market etc

Financial market

Capital market

Debt Market

>Bonds-Convertible, non-convertible, Zero Coupon, Indexed

>Debentures

Equity Mkt

>Primary Mkt

>Secondary Mkt

Money market

>Repo and Reverse Repo

>Call Money Mkt

>Commercial Papers

>Certificates of Deposit

>Commercial Bills

EQUITY MARKET

Primary Market

The company issues the shares to the public for the first

time (going Public), till then it will be privately owned

IPO (Initial Public Offering) and FPO (Follow on Public

Offering)

Once IPO, is done, the shares of these companies will be

available for trading on the stock market

The company is Listed

IPO OR PRIVATE PLACEMENT

IPO Private Placement

Involves lot of costs Lower costs involved

Time consumption Less time consumption

More transparent Less transparency

Retail investors are involved Institutional investors are involved

Large number of shareholders Very less number of shareholders

Two methods of Private Placement

Qualified Institutional Placement- QIBs (Qualified

Institutional Buyers-commercial banks, MFs) are involved

Preference shares- is a quasi-debt instrument, dividend is

given regularly and these are less risky

EQUITY MARKET

Secondary Market

The shares which have been issued in the primary

market are traded in the secondary market

Stock exchanges-BSE and NSE

bulls and bears

SOME OTHER CONCEPTS

FSLRC

Alternative Investments

Bonds-Masala, Green, Corporate Bonds

Recent Reforms in the Corporate Bond Market

FSLRC-BACKGROUND

FSLRC

Existing Proposed Functions

RBI RBI Monetary policy; regulation of banks and

payment system

SEBI, FMC, IRDA

and PFRDA

Unified Financial

Agency (UFA)

Regulation and supervision of all non-bank

and payments related markets

Securities Appellate

Tribunal (SAT)

FSAT Hear appeals against RBI, UFA and FRA

Deposit Insurance

and Credit Guarantee

Corporation (DICGC)

Resolution

Corporation

Resolution work across the entire financial

system

Financial Stability

and Development

Council (FSDC)

FSDC Statutory agency for systemic risk and

development

New Entities Debt

Management

Agency

Independent debt management agency

Financial

Redressal Agency

Consumer complaints

ALTERNATIVE FINANCIAL INVESTMENTS

ALTERNATIVE FINANCIAL INVESTMENTS

GREEN BONDS

GREEN BONDS IN 2017

MASALA BOND

MASALA BOND

MASALA BOND

CORPORATE BONDS

CORPORATE BONDS

RBI-REFORMS IN CBM

QUESTIONS

With reference to ‘IFC Masala Bonds’, sometimes given below is/are correct?

1) The International Financed Corporation, with offers these bonds, is an arm of the World Bank

2) They are the rupee-denominated bonds and are a source of debt financing for the public and private sector

Select the correct answer using the code given below.

(a) 1 only

(b) 2 Only

(c) Both 1 and 2

(d) Neither 1 nor 2

QUESTIONS

What are green bonds and Masala Bonds? Explain their importance

What is a financial market? How helpful is it in mobilizing the funds in today’s scenario in India ?

Discuss novel/new tools which are being introduced in the financial market?

Discuss the recent reforms in the Corporate Bond Market.

Discuss the recommendations of FSLRC

Financial Markets

Financial markets facilitate the movement of funds from surplus sectors to the

sectors which are deficit of finance. The financial markets consist of primary

market, secondary market, debt market, banks, government, household etc

The structure of financial market

o Money Market - the funds are raised for a period of lesser than one year

Repo and Reverse Repo - repo is the RoI (Rate of Interest) that RBI

charges on the short term loans that it gives to the banks. Reverse

Repo is the RoI that the banks will charge on the short term loans

that they give to RBI

Call Money Market - is the market wherein, banks will lend to other

banks for a short period.

Commercial bills - when the trade is on credit, CBs are drawn by the

seller in the name of buyer (usually for a period of 3 to 6 months).

The CBs can be traded by the seller with the banks (the value of the

CB is discounted at bank rate)

Commercial Papers - are issued by corporates with a short maturity

period. These are more riskier and hence only the listed companies

satisfying certain guidelines are allowed to issue

Certificates of Deposit - similar to fixed deposits. The funds are

given for a prefixed period of time and at a prefixed interest rate.

These are tradable

Treasury Bills -are issued by RBI on behalf of the government. The

maturity period is lesser than 1 year

Role of money market - plays a key role in liquidity management of banks

and in implementation of monetary policy. It also provides liquidity in the

market, maturation or development of money market smoothens the

implementation of monetary policy and is in the best interests of all the

stakeholders.

o Capital Market-funds are raised for a period greater than 1 year. Capital

market plays an important role as it promotes savings and investments

from the retail investors, provides access to credit for the corporations in

turn promotes the industrial growth, access to foreign investments etc

Debt Market- here the company raises funds but comes under a

liability. The instruments that are usually used are bonds and

debentures. The bonds yield guaranteed returns and are less risky

whereas, the debentures yield higher returns compared to bonds

hence the risk is higher

Equity Market- companies raise funds by giving away,

ownership/stake in the company. In this market, the company issue

shares. The shares are issued for the first time in the primary

market, whereas, the issued shares are sold and bought in the

secondary market. The shares could be issued through IPO (Initial

Public Offering) and FPO (Follow on Public Offering). In the IPO, the

company would be issuing the shares for the first time (or the

ownership will shift from private to public, even a common man can

holds the shares of such company now) and gets listed on the stock

market. Any subsequent issues of the shares of the same company

are referred to as FPO.

The company can either go for IPO or the Private Placement,

wherein there will be fewer buyers of the stake that is being offered

by the company

BSE (Bombay Stock Exchange)

o Is the oldest Stock Exchange in Asia with a rich heritage.

o BSE was established in 1875 as “The Native Share & Stock Brokers”.

o First Stock Exchange in the country to obtain permanent recognition in

1956 from GOI.

o More than 5000 Indian companies listed with Stock Exchange.

o The BSE or Bombay stock exchange sensitive Index (Sensex) is a value

weighted index. Composed of 30 stocks with the base April 1979=100.

NSE (National Stock Exchange)

o In the year 1991 Pherwani Committee recommended to establish National

Stock Exchange (NSE) in India.

o The company operates a nation-wide, electronic market, which offers

trading in derivatives market, capital market and currency derivatives

segments including equities, equities based derivatives, equity based

exchange traded funds (ETF), gold ETF, currency futures and options and

retail government securities.

o The exchange has more than 1,600 listed members.

o The base year for calculation is 1995

SEBI(Securities Exchange Board of India)-

o Was set up in 1988 and was given a statutory status in 1992 (SEBI act

1992)

o The main objective of setting up of SEBI has been to protect the interests

of investors’ in securities and to promote the development of, and to

regulate the securities market and for matters connected therewith or

incidental thereto.

o Has been strengthened with each crisis in the capital market

o Functions of SEBI

Regulate stakeholders in the stock market

Registering and Regulating Collective investment schemes, mutual

funds, venture capital funds etc.

Prohibiting fraudulent and unfair trade practices such as insider

trading in securities

Promoting investors’ education and training of intermediaries of

securities markets.

Regulates FIIs

FSLRC (Financial Sector Legislative Reforms Committee)-

o Set up by the finance ministry in 2011 (submitted report in 2013), to

comprehensively review and redraw the Indian Financial System and

headed by Justice B N Srikrishna

o The report observed that current regulatory architecture is fragmented

and is fraught with regulatory gaps, overlaps and inconsistencies

o The committee observed that the framework must address

Consumer protection- the regulatory body (FRA) must be set up to

provide grievance redressal to the consumer. It also envisages that

promotion of competition is also in the best interest of the

customer hence there must be co-ordination between FRA and CCI

Regulation of firms- the regulator should regulate the firms under

entry, risk taking, management, loss absorption etc

In case of failure of an institution, the Resolution corporation must

oversee swift closure of the company

In case of capital controls there are various/multiple departments

involved-DIPP, FIPB, RBI, FM, ED etc. It should be the duty of

Finance Ministry to form policies for inbound capital and that of RBI

to take care of regulations of outbound capital

In case of systemic risks this has to be taken care of FSDC

Proposes a single Debt Management Agency

o Recommendations

Establish FRA (Financial Redressal Agency) to address consumer

complaints against the financial companies across

Establish five new regulating agencies namely UFA, FSAT, FRA, DMO

and Resolution Corporation

Set up DMO and FSAT to hear appeals against regulators

Greater separation of powers

Financial Market Reforms post 1991

Regulatory reforms- SEBI was given the statutory status in 1992 and since then

has been protecting investors and also developing the market. The government

has also set up IRDA as a statutory body (IRDA act 1999) to regulate insurance

sector and PFRDA-through executive order (2003), to regulate pension sector.

DIP (Disclosure and Investor Protection) guidelines- Under these guidelines all

the primary market security issuers are expected to disclose information on

aspects like factors used to arrive issue price, profitability, risk factors, board

changes etc

Free Pricing- The issuer along with underwriter is free to decide on the price of

primary issues without SEBIs intervention (rather it regulates)

Infrastructure- The SBTS (Screen Based Trading System) has been introduced to

replace the physical trading. This along with online trading has helped the

investors to get the same price in all the markets, increase the participation, get

access to information real time, higher liquidity in the market and a better price

discovery

Settlement Cycle- There are two parties in the trade-buyer and a seller. The

buyer makes the payment and the seller delivers the share/equity. It is the

clearing house which plays the role of the intermediary. Before 1991, the

settlement cycle took 2 weeks which was reduced to 7 days and now we follow

the T+2 settlement system under which the trade has to be settled within 2 days

from the day of executing the trade

Dematerialization- Under this system, the delivery of shares/equity will be done

in demat/electronic format. It has been introduced since 1996 and this helps in

quick settlement, reduction in the cost, no-need of clinging on to physical papers

etc

Integration- The FIIs have been allowed to invest in the stock market which will

lead to integration as well as more investments

Introduction of new instruments- Post 1991 the regulators have allowed various

types of instruments rather than just promoting vanilla instruments (such as

Green Bonds, AT1 bonds, Masala Bonds, FCNR etc).

Alternate Investment Funds (AIF)

AIFs refer to an investment vehicle which involves pooling in of the

resources/capital from HNIs and then utilizing it to make an investment. The AIFs

are nothing but the refined version of Venture Capitalists. This area is fairly new

and has come in the usage couple of years ago and the government has

introduced various reforms and guidelines so as to promote development in

various sectors through AIFs. Until 2015, the pooling of such resources was open

only for the domestic investors and these funds were used according to a

predetermined policy. Now the government (budget of FY2016) announced that

it will be open for even the foreign investors and the differentiation of FDI and

FPI will not be applicable.

To set up a AIF the following guidelines have to be satisfied

o The minimum investment from an individual is Rs.1 crore (the individuals

must have a minimum income of at least Rs 50 lakh)

o The overall corpus of the AIF should be at least Rs.20 crore

o There should not be more than 1,000 investors at any point in time.

o The fund manager or promoter should have contributed at least 2.5%

or Rs.5 crore, whichever is less, to the initial capital

AIFs are regulated by the Securities and Exchange Board of India (Alternative

Investment Funds) Regulations, 2012. Types of AIFs (based on the investment

profiles)

o Category I- these are the funds which usually have a positive and direct

impact on the economy, hence may be given certain concessions/support

by the government. These are the funds which usually invest in SME,

infrastructure, social infrastructure, start ups etc. These include venture

funds, social venture funds and infrastructure funds

o Category II- these are not given any concessions/support as these are

usually not involved in raising the funds for investing but raise for working

capital or for day-to-day operations (eg-private equity or debt funds)

o Category III- these are the AIFs which use complex trading strategies to

make short term gains. (eg-hedge funds)

To promote the investments through AIFs, the government has given a Pass

Through Status to category I and Category II investments in 2015. The status in

simple terms means that the income generated would be taxed in the hands of

the investor, and that the fund itself would not have to pay tax on the same.

The government also introduced Safe Harbour Rules under which offshore funds

will not be subject to business income taxation in India even if the investment

manager operates in India.

Narayanamurthy Panel set up by SEBI submitted the report by end of December

2015. Some of the recommendations are

Taxation reforms which will benefit the investors

Revamping norms for establishing AIFs

Taxation on AIFs should not be higher than that paid by Foreign

Portfolio Investors(FPIs) and Domestic Institutional Investors(DIIs)

10% tax rate on Long Term Capital Gains (LTCG) to be applicable on

transfers of shares of private limited companies (would help in

attracting foreign hedge funds, pension funds as currently the LTCG

is for a period of 3 years and tax rate of 20%, which should be

brought down to 1 year and 10%)

Introduce STT (Security Transaction Tax) at an appropriate rate on

private equity (PE) and venture capital (VC) funds invested through

the AIF route (presently there is a withholding tax of 10% which is

counterproductive)

Attracting the domestic angel investors

As of June 2016, SEBI has said that 235 AIFs have got registered

Importance

o These funds lead to higher investment in certain sectors (infrastructure).

By the end of March 2016, these funds were worth Rs 22,961 crore

(compared to Rs 9504 cr by March 2015)

o These will attract certain class of investors (global hedge funds and

pension funds)

o The global experience has shown that these investments will only keep on

increasing

Bond Market

Corporate bonds are debt instruments which are issued by corporations (either

private or public). These instruments do not provide any ownership interest to

the investors in the issuing company rather the interest on these is paid by

issuing company regularly (annually or semi-annually) irrespective of whether the

company makes a profit or a loss. These instruments are high on security and low

on returns.

Requirement for reforms

o Corporate bond penetration is very low

In 2014, ratio of bank deposits to GDP was 64% and corporate bond

to GDP was 14%

At the end of 2015, out of all the outstanding bonds, 72% were

government securities (G securities + State Development Loans)

and only 28% were corporate bonds

At the end of 2015, Corporate Bond penetration was 17% of GDP

whereas it was 45% in Malaysia and 75% in South Korea

As of March 2016, the value of corporate bonds issued was around

Rs 19 trillion. This may look very large in absolute terms but when

compared to GDP its value is just around 14%, whereas for bank

assets it is 89% of GDP and it is 80% of GDP in case of equity

markets.

o Majority of the resources raised were in the form of private placement. In

2015-16 of Rs 4.66 lakh cr raised, Rs 4.08 lakh cr (approx 88%) was in the

form of private placement. The private placement is only useful in case of

companies which are large and with credibility (credit rating of the bonds

of AAA or AA or A) whereas this will not be a feasible method in case of

the small corporates

o The country needs huge investments in various sectors-especially in

infrastructure

o Investor base is very narrow

o Infrastructure projects are having high gestation periods hence need

lenders for a longer period of time

o In the past the requirement of finances for infrastructure was provided

either by government (through budgetary allocations) or through RBI

(which provided concessional funds to Development Finance Institutions

RBI), but lately the government is finding it difficult to raise huge revenues

and divert it for investment on infrastructure. On the other hand the DFIs

have been formed into commercial banks and the commercial banks are

suffering because of twin balance sheet problem (add to this the BASEL III

requirements). Hence there will have to be accumulation of resources

either in the form of foreign investment or through developing the bond

market.

The GoI announced a set of reforms in budget of FY2017

o New platform for private bond issuances

o A platform for corporate bond repurchase agreement (repo)

o A consolidated reporting platform

o Requires the Life Insurance Corporation of India to set up a credit

enhancement fund for infrastructure projects (however LIC has backed out

from the proposal because of some regulatory issues. Instead a Rs 500 cr

worth of credit enhancement fund was announced by the FM in October

2016, which will be anchored by IIFCL and government is trying to rope in

SBI and PNB)

o Extend foreign investment to unlisted debt securities (In September 2016,

the SEBI has allowed the FPIs to purchase unlisted debt securities i.e. the

debentures which are issued by the public company)

Unlisted debt securities are the debt securities which are not traded in the

stock market. These are usually traded OTC (Over-The-Counter) by market

makers (are individuals/companies which provide liquidity in the market

by providing the buy and sell prices for a commodity/financial instrument

in the inventory)

o Reserve Bank of India (RBI) to encourage bond financing by large

borrowers

Reforms introduced by RBI (Recommendations of H R Khan Committee)

o RBI to start accepting corporate bonds as collateral to give loan to the banks under LAF (Liquidity Adjustment Facility)

o Banks will be permitted to issue other forms of bonds such as masala bonds and AT1 bonds.

o To improve participation in the bond market, brokers will be permitted to trade in bonds

o FPIs and Retail investors will also be allowed to invest directly (without any

middleman)

o PCE (Partial Credit Enhancement) scheme has been expanded

The aim/objectives of the reforms introduced are to expand the market and also

increase the volume of trading of bond markets. This will be achieved through

o Making it easier to acquire corporate bonds

The FPI can directly trade in these without any involvement of a

broker

The domestic retail investors can will be allowed to trade in them

directly

o Increased their liquidity

Allowing them to be used as collateral in RBI operations

Allowing brokers to participate in the corporate bond repo market

o Expanding the market by allowing the banks to issue bonds such as masala

bonds, AT1 bonds etc

o The aggregate exposure of the whole financial system under PCE scheme

will be increased to 50%

But the problem with such reforms are that they are driven by the government

rather than being a part of the evolution process. Which cannot be considered to

be all negative, as various earlier reforms have not yielded expected results

(Recommendation of Patil Committee, Percy Mistry Committee and Raghuram

Rajan Committee) but care has to be taken in driving the point that these reforms

are government driven and the effects of it on the other market and other

players in the financial system are made clear.

Expected outcome – the government by pushing these reforms in the market can

expect

o That the banks and other conservative institutions such as pension and

insurance funds will make more investment in the bond market and

become more bond savvy

o On the other hand the bond market will become a source of long term

investments for the infrastructure and other sectors in India

o The corporate bond market is not completely detached from the sovereign

bond market hence may get a fillip when the interest comes down

o The growth of corporate bond market will revitalize the growth in the

investment scenario

Some challenges

o The private sector companies are already overleveraged and they would

not prefer to take such a step when their balance sheets are under stress

o The government has always used the PSBs as avenues for borrowing

(through selling of SLRs) and this has led to lower lending of PSBs at a

higher cost, leading to crowding out of private corporations.

o Insolvency code?

o Some of the capital controls (such as the $50 billion investment limit

imposed on foreign investors in local currency denominated bonds) have

to withdrawn so as to promote the development of the bond market

PCE scheme – was introduced by RBI in September 2015, under which a bank will

guarantee a line of credit to the bond issuer if they cannot meet the interest

payments. But the conditions are that this exposure cannot be greater than 20%

of the bond issue size and the bond must have a credit rating of at least BBB-.

Under the new set of reforms the PCE has been extended to 50% (provided a

single bank will have a maximum exposure of 20%) which will increase the credit

rating of these instruments to AAA and make them more attractive for pension

funds and insurance funds to invest in

Green Bonds

o SEBI- “A green bond is like any other bond where a debt instrument is

issued by an entity for raising funds from investors. However what

differentiates a Green bond from other bonds is that the proceeds of a

Green Bond offering are 'ear-marked' for use towards financing ‘green’

projects.”

The GoI has set an ambitious target of 100 GW and 60 GW of solar and

wind energy. As of March 2016, the targets achieved were around 6 GW

of solar and around 26 GW of wind. As renewable energy is more capital

intensive the GoI has to invest around $160 bn in the coming days ($120

bn in debt and $40 bn in equity) but the banking system is under a lot of

stress as of now and hence there will be an impact on financing of these

projects (Currently most of these projects are being financed at a cost of

11-12% per annum)

o Green bonds are becoming very popular tools in the recent days for the

institutions to raise funds. Guidelines regarding green bonds are issued by

International Capital Market Association (ICMA)

o Currently the government provides support to the green infrastructure

Accelerated Depreciation- capital expenditure is to be depreciated

by 80% in the first year and remaining in the next 5 years

VGF (Viability Gap Funding)- the government provides a financial

support in the form of capital grant (20% of the expected project

cost)

Feed in Tariffs- are long term contracts wherein the discoms

purchase the electricity at higher prices

PSL- RBI has allowed loans to be given for green projects under PSL.

As per the notification of RBI, bank loans up to a limit of Rs 15 crore

to borrowers for purposes like solar based power generators,

biomass based power generators, wind mills, micro-hydel plants

and for non-conventional energy based public utilities eg-street

lighting systems, and remote village electrification. For individual

households, the loan limit will be Rs 10 lakh per borrower

o Challenges in promoting green infrastructure

Fossil fuels have always enjoyed a great subsidy regime

Lower credit rating of issuers

Higher cost of issue

Maturity period is usually short term

o So far in India 5 banks have issued green bonds (in may 2016, Axis bank

became the 5th bank to issue green bonds in India)

Masala Bonds

o Are the debt instruments which can be used by Indian companies to raise

funds in the overseas market

o The name masala represents that it is connected with India. It is not the

first time that such bonds are named after culinary-Dim sum bonds

(china), Samurai Bonds (Japan) etc

o Before this the companies in India tapped the foreign market by taking the

route of ECBs but were exposed to fluctuation exchange rates (hence the

exposure is very large and risky if it is a company whose majority earnings

are in rupees)

o The bonds are rupee denominated rather than dollar denominated

o These instruments are likely to be used by the PSEs to tap the global

market and get access to cheaper credit.

o Reforms introduced by RBI in April 2016

the maturity period has been brought down from 5 years to 3 years

the Masala bonds can be issued to investors originating from

countries that are listed in FATF (Financial Action Task Force)