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Ports Infrastructure of India

Context: The recently released World Bank’s Logistic Performance Index (LPI) Report 2023 has brought encouraging news for Indian ports as well as for the country’s logistics sector. India has moved up to 22nd rank in the global rankings on the “International Shipments” category from the 44th position in 2014. Moreover, the country has also secured the 38th rank on the LPI score.

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About India’s Port

  • Ports are an essential part of the maritime environment and are like hubs that link sea routes with trade routes on land.
  • There are 12 major ports and 200 non-major ports (minor ports) in the country. While the Major Ports are under the administrative control of the Ministry of Shipping, the non-major ports are under the jurisdiction of respective State Maritime Boards/ State Governments.
  • All the 12 Major ports are functional. Out of the 200 non-major ports, around 65 ports are handling cargo and the others are “Port Limits” where no cargo is handled, these are used by fishing vessels and by small ferries to carry passengers across the creeks, etc.
  • All the 12 Major Ports are governed under the Major Port Authorities Act, 2021.
  • All the Non-Major Ports (minor ports) are governed under the Indian Ports Act of 1908 and regulates the berths, stations, anchoring, fastening, mooring, and unmooring of vessels.
  • Major ports are included in the Indian Constitution's Union list.
  • The Government of India appoints a Board of Trustees to oversee each major port. Their responsibilities include port development, management, and operations.
  • India’s key ports had a capacity of 1,598 million tonnes per annum (MTPA) in FY22. 
  • In FY22, major ports in India handled 720.29 million tonnes of cargo traffic, implying a Compounded annual growth rate  of 2.89% in FY16-22. 
  • Non-major ports accounted for 45% of the total cargo traffic at Indian ports in FY22, due to a significant shift of traffic from the major ports to the non-major ports.

Significance of ports infrastructure

  • Facilitating International Trade: Ports serve as vital gateways for international trade, enabling the movement of goods and commodities between countries. India’s major and minor ports handle about 95% of India’s international trade.
  • Economic Impact: Ports create numerous economic opportunities, generating employment and attracting investments. The Government of India has allowed Foreign Direct Investment (FDI) of up to 100% under the automatic route for projects related to the construction and maintenance of ports and harbours
  • Supply Chain Efficiency: It acts as critical node in global supply chains. They connect different modes of transportation and facilitate the smooth flow of goods from production centers to consumers.
  • Trade Competitiveness: Well-developed ports enhance a country's competitiveness in global markets.
  • Revenue Generation: It is a significant source of revenue for governments through tariffs, customs duties, and other fees levied on cargo handling and related services.
  • Connectivity and Regional Integration: They facilitate trade between neighbouring countries, promote cross-border cooperation, and support the development of economic zones and industrial clusters.
  • Environmental Considerations: Ports are increasingly focusing on sustainable practices and reducing their environmental impact. The focus on decarbonisation in the maritime sector along with the Panchamrit commitments of the government has been reflected in the port sector: There has been a 14-fold increase in the use of renewable energy in major ports over the last eight years. Four of the major ports now generate more renewable energy than their total energy needs.

Challenges in India’s port connectivity

  • Prolonged ship turnaround times: India's ports experience lengthy ship turnaround times. For instance, the normal ship turnaround time at Singapore is under a day. However, it takes more than two days in India.
  • Port Congestion: The number of containers, the lack of equipment for managing them, and ineffective operations all contribute to port congestion, which is a major problem. Consider the port of Nhava Sheva as an illustration.
  • Sub-optimal Transport Modal Mix: This is due to a lack of the infrastructure required for evacuation from both large and minor ports.
  • Protracted inspections and scrutiny: Despite India’s customs processes rapidly moving towards paperlessness and digitisation, cargo and other maritime activities are nevertheless the subject of protracted inspections and scrutiny.
  • Issues with technology and inadequate infrastructure are present in non-major ports, where there aren't enough berths or ones that are long enough for vessels to berth properly.
  • Different administrations are in charge of major and minor ports. The regulatory framework is also rigid.
  • Spills or leaks from cargo loading and unloading and pollution from oil spills are widespread during port operations due to a lack of respect for environmental rules and standards.
  • The majority of port development and initiatives result in the displacement of people for example Mundra in Gujarat and Gangavaram Port in Andhra.
  • Dredging: Some Indian ports particularly those on the east coast and near the Gulf of Mannar are prone to excessive siltation which reduces their capacity.

Government Initiatives

  • The Harit Sagar Green Port guidelines: It aims to bring about a paradigm shift towards safe, efficient, and sustainable ports while implementing sound environmental practices among all stakeholders.
  • National Logistics Portal (Marine): It is a single-window digital platform for all stakeholders including those engaged in cargo services, carrier services, banking and financial services, and government and regulatory agencies. 
  • Sagar Setu app: It facilitates seamless movement of goods and services in ports while substantially enhancing the ease of doing business.
  • Major Port Authorities Act, 2021 which grants greater autonomy to major ports. 
  • Marine Aids to Navigation Act, 2021 that provides for increased safety and efficiency in vessel traffic services and training and certification at par with international standards.
  • The Indian Vessels Act, 2021 which brings uniformity in law and standardised provisions across all inland waterways in the country. 
  • Maritime India Vision, 2030: It has identified initiatives such as developing world-class Mega Ports, transhipment hubs and infrastructure modernization of ports
  • Sagarmala Project: To promote port-led development in the country through harnessing India’s 7,500 km long coastline, 14,500 km of potentially navigable waterways and strategic location on key international maritime trade routes. The main vision of the is to reduce logistics cost

Way Forward

  • With the increasing participation of the private sector in the port sector,the share of minor ports has been increasing for example Mundra port is highest in terms of number of containers in handled annually. In this respect suitable policy changes is needed to Indian Ports Act of 1908 with present-day requirements.
  • Providers of services such as operation and maintenance, pilotage and harboring and marine assets such as barges and dredgers are benefiting from these investments.
  • Expansion and Modernisation by increasing the capacity of ports to handle larger volumes of cargo, improving berthing facilities, and upgrading storage and handling capabilities. The use of advanced technologies such as automated cranes, robotic systems, and smart port management systems should be explored to optimize operations and improve efficiency.
  • Careful planning should be undertaken to ensure adequate connectivity with road and rail networks to facilitate seamless movement of goods.
  • Coastal Economic Zones (CEZs) provide a conducive business environment, streamlined regulatory processes, and infrastructure support, which can attract manufacturing units, logistics companies, and other industries to set up operations near ports.
  • Efforts should be made to improve connectivity between ports and the hinterland through efficient road and rail networks.
  • India should continue its digital transformation efforts in the port sector. Implementing technologies such as blockchain, Internet of Things (IoT), and data analytics can enhance transparency, efficiency, and security in port operations. Automation of processes, such as electronic documentation, container tracking, and cargo clearance, can help reduce paperwork, delays, and human errors.

Simplifying and streamlining regulatory processes, permits, and clearances related to port infrastructure development can attract investments and expedite project implementation. An efficient regulatory framework can provide certainty to investors and promote ease of doing business in the port sector.

About Logistics Performance Index

  • It is an index compiled by World Bank to help countries identify challenges and opportunities they face in their performance on trade logistics and what they can do to improve their performance. 
  • 139 countries are ranked in the 2023 edition of LPI.
  • 2023 edition of LPI only conducted survey on international component of LPI. Earlier editions of LPI, focused on both domestic & international surveys.

Rankings in Logistics Performance Index 2023: 

  • India's ranking improved by 6 places to reach 38th place on the Logistics Performance Index 2023 as compared to the last edition in 2018. 

India's Improvement in Logistics Performance Index

  • The substantial reduction in the dwell time (the amount of time vessels spend in port actively loading or unloading cargo) at Indian ports. This has reached an optimum level of about three days only as compared to four days in countries like the UAE and South Africa, seven days in the US, and 10 days in Germany. 
  • India has done well in another parameter that measures port operational efficiency: The country’s average turnaround time (TRT) of only 0.9 days is amongst the best in the world. In Belgium, Germany, the UAE, Singapore, Malaysia, Ireland, Indonesia, and New Zealand it is 1.4 days, in the US 1.5 days.
  • This achievement is the result of large investments in the upgradation of infrastructure in the ports and shipping sector in the past few years. There has been a consistent focus on improvements in port efficiency and productivity through reforms, induction of new technologies, a greater thrust on public-private partnership and an overall commitment to the ease of doing business.
  • The capacity at 12 major ports in the country has increased from 871 million metric tonnes (MMT) in 2015 to 1,617 MMT in 2023. 
  • The total capacity of Indian ports has gone up from about 1,560 MMT in 2015 to more than 2,600 MMT. 
  • There has also been a nearly 150 percent increase in the value of operationalisation of PPP projects in the major ports from about Rs 16,000 crore in 2015 to more than Rs 40,000 crore in 2022-23.

Read also: List of Major important ports in India

Skill Impact Bonds

What are Impact Bonds?

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  • Impact bonds are innovative financing instruments that leverage private sector capital and expertise, with a focus on achieving results. 
  • It shifts the focus from inputs to performance and results. 
  • Rather than a government or a donor fina­ncing a project upfront, private investors (risk investors) initially finance the initiative and are repaid by outcome funders only if agreed-upon outcomes are achieved.

Skill Impact Bond

  • It is a public-private partnership model in India for the skilling and employment sector.
  • As an innovative outcomes-based financing tool that leverages private sector capital and expertise, the Skill Impact Bond shifts its focus from inputs like training and certification to outcomes like job placement and retention for India’s youth.
  • The collaboration also aims at strengthening the capacity of India’s technical and vocational education ecosystem through knowledge exchange, evidence and data generation and mainstreaming good practices.
  • Under the Skill Impact Bond:
    • Risk Investors such as NSDC provided upfront working capital to the trainers to implement skill development programmes. 
    • Service Providers deliver skilling interventions to improve employment outcomes. 
    • Outcome Funders repay risk investors initial investment for each positive outcome achieved. 
    • Third-party Evaluator: The employment outcomes are assessed by an independent third-party evaluator.
  • Targets: To skill and provide employment to 50,000 youths over four years. Sixty per cent of the youths will be women and girls. 
  • Sectors: The trainees are being skilled and provided access to wage employment in sectors that are recovering from the Covid-19 economic shock, such as retail, apparel and logistics.
  • Nodal Authority: It is pioneered by National Skill Development Corporation (NSDC) under the aegis of the Ministry of Skill Development and Entrepreneurship (MSDE) and a coalition of mission-aligned partners.
  • Objective: To transform the way skill training programmes are implemented in the country, with major emphasis on bridging the gap between skilling and employment, especially for women.

Evaluation

  • Until May 2023, the Skill Impact Bond had skilled more than 18,000 first-time job seekers from low-income families, of whom 72 percent were women. 
  • The first cohort of the Skill Impact Bond also indicates a better retention rate in jobs, as one in two women who have enrolled in the training have continued to work in wage employment for three months.
  • This is in stark contrast to other skilling initiatives, as the retention rate in employment hovers at as low as 10 per cent, once the training gets over. 
  • Post-placement tracking and guidance such as regular check-ins with candidates and migratory assistance are unique features under the impact bond that helps women adapt to new environments and challenges, thus reducing dropouts.

World’s Largest Grain Storage Plan in the Cooperative Sector

Context: The Union Cabinet recently approved the constitution of an Inter-Ministerial Committee (IMC) to facilitate the world’s largest grain storage plan in the cooperative sector. The IMC is constituted under the Chairmanship of the Minister of Cooperation. It also consists of three other ministers i.e. the Minister of Agriculture and Farmers Welfare; the Minister of Consumer Affairs, Food and Public Distribution; and the Minister of Food Processing Industries, while the Secretaries will be members of the committee.

What is the world’s largest grain storage plan in the cooperative sector?

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  • Agencies involved in grain management presently:
    • Food Corporation of India (FCI)
    • Central Warehouse Corporation
    • Warehouse Development Regulatory Authority, Railways
    • Civil supply departments of states 
  • Under the new plan, the Ministry of Cooperation aims to set up a network of integrated grain storage facilities through Primary Agricultural Credit Societies (PACS) across the country. There are more than 1,00,000 PACS spread across the country with a huge member base of more than 13 crore farmers. 

Why the need for such a facility?

  • Large Population: India, the most populous country in the world, accounts for 18 per cent (1.4 billion) of the global population (7.9 billion). However, it accounts for only 11 per cent (160 million hectare) of the arable land (1,380 million hectare) in the world. 
  • Food Security Imperative: India also runs the world’s largest food programme under the National Food Security Act, 2013, that covers about 81 crore people. 
  • Present Storage Capacity: India has a foodgrain storage capacity of 145 million metric tonnes (MMT) against the total food production of 311 MMT - which leaves a gap of 166 MMT. 
  • Regional Variation: India has a storage capacity of 47 per cent of its total foodgrains production. At the regional level, only a few southern states have the storage capacity of 90 per cent and above. In northern states like Uttar Pradesh and Bihar, it is below 50 per cent.
  • Prevent Wastage: In the absence of sufficient storage facilities, foodgrains are sometimes stored in the open, which results in damage.
  • Other Countries: China has a storage capacity of 660 MMT, against the total foodgrain production of 615 MMT. USA, Brazil, Russia, Argentina, Ukraine, France, and Canada are among other countries with the capacity to store more food grains than they produce.
  • Therefore, to ensure food security of a billion plus population, a robust network of foodgrain storage facilities becomes essential.

About Integrated Facility

  • New storage plan is based on the hub and spoke model.
  • Of the 63,000 PACS across the country:
    • 55,767 PACS will function as spoke and will have a grain storage capacity of 1,000 metric tonnes each
    • Rest 7,233 PACS will function as hubs and will have a storage capacity of 2,000 metric tonnes each. 
    • Put together, all the 63,000 PACs will have a combined grain storage capacity of 70 million tonnes.
  • Area: Spread over 1 acre of land
  • Cost: The facility will be built at a cost Rs 2.25 crore. 
  • Facilities available: The integrated modular PACS will have a custom hiring centre, a multi-purpose hall - procurement centres, primary processing units for cleaning and winnowing - a storage shed, and container storage and silos.
  • Funding: Of the Rs 2.25 crore, Rs 51 lakh will come as subsidy, while the remaining will come as margin money or loan. It is expected that the PACS will earn Rs 45 lakh in a year.
  • Equipment: PACS will purchase agricultural equipment like tillers, rotary tillers, disc harrows, harvesters, and tractors under various government schemes, such as Sub-Mission on Agricultural Mechanisation (SMAM) and Agriculture Infrastructure Fund (AIF). It will then offer this equipment to farmers on rent.
  • Modern Silos: The modern silos will have the facility of computerised real-time monitoring systems. These will be rented out to the FCI and other private agencies.

Budgetary Allocation

  • The plan does not have a separate allocation.
  • It will be implemented by the convergence of 8 schemes:
  1. Ministry of Agriculture and Farmers Welfare
  • Agriculture Infrastructure Fund (AIF)
  • Agricultural Marketing Infrastructure Scheme (AMI)
  • Mission for Integrated Development of Horticulture (MIDH)
  • Sub Mission on Agricultural Mechanisation (SMAM)
  1. Ministry of Food Processing Industries
  • Pradhan Mantri Formalisation of Micro Food Processing Enterprises Scheme (PMFME)
  • Pradhan Mantri Kisan Sampada Yojana (PMKSY)

(c)  Ministry of Consumer Affairs, Food and Public Distribution

  • Allocation of food grains under the National Food Security Act (NFSA). 
  • Procurement operations at Minimum Support Price (MSP).

Benefits of the Plan

  • Addresses the shortage of storage infrastructure in the country by facilitating establishment of godowns at the level of PACS
  • Enables PACS to undertake other activities: Functioning as Procurement centres for State Agencies/ Food Corporation of India (FCI); Serving as Fair Price Shops (FPS); Setting up custom hiring centres; Setting up common processing units, including assaying, sorting, grading units for agricultural produce, etc.”
  • Brings down post-harvesting losses.
  • Reduces Logistical Cost: Brings down the food grain handling and transportation cost
  • Prevents Distress Sale: Farmers would have a choice to sell their produce depending on the market conditions, and not be forced into distress sale.

Conclusion

  • Therefore, to ensure food security of a billion plus population, a robust network of foodgrain storage facilities becomes essential.

The Problem Associated with the Indian Informal Sector

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  • Underemployment: We believe that the cause and consequence of the widespread informal sector is commonly estimated to account for 90% of employment, but generate only a third of the value added in the economy.
  • Low-productivity trap: It is huge with limited efficiency because of its many constraints and is a low-productivity trap that chokes off the formation of a genuine middle class in India.
  • Small scale: Typically, informal workers either work as individual casual labour or in micro-enterprises with very small operations, having fewer than 10 employees under conditions of instability in both employment and income.
    • There is a large contingent of what we call solo service providers even among higher-skilled occupations like carpenters, tailors, and auto mechanics — and even when they are a part of digital aggregator platforms, are still largely on their own.
    • The International Labour Organization (ILO) has estimated that in 2017, a full one-third of Indian workers in the informal sector were the so-called “own account workers”. The result is persistently low productivity.
  • Lack of Security: The nature of temporary or contract workers in the informal economy disincentivises the employer from investing in productivity-enhancing tools and training workers to use them, since the payoff time horizon is longer term than the workers’ tenure; Besides, informal employers themselves do not have the wherewithal to invest in worker productivity.
  • Lack of stable teamwork: However, in the informal sector, because of the transient nature of the workforce, even if a person is part of a work crew of thousands (for example in delivery services or large construction projects), working with others as a stable team does not happen.
  • Poor access to financing: The problems of access to financing for informal workers and micro-enterprises which are not a part of any formal supply chain is well known, and we will not reiterate it.
    • The ratio of domestic credit to GDP, which measures how much credit has been extended to people and businesses benchmarked against the size of the economy, is far lower in India than in, say, China or the United States, and has also been stagnant for the entire decade ending in 2022, while it expanded in all the key economies in the world.

Demands for Legalisation of MSP Regime

Context: Ineffective implementation of MSP and ‘non-procurement’ of all the crops at the MSP is one of the main concerns of farmers. Such a scenario builds a strong rationale for giving ‘legal status’ to MSP as it is the floor or reference price.

Present Status of MSP

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  • Presently, MSP does not enjoy statutory recognition. This means that there is no onus on the private sector to buy at MSP. 
  • Legalisation of MSP would ensure that the private sector would buy commodities at MSP.  Failure to do so would attract a penalty.

Need For Legalisation of MSP

  • Enhancement in Income Levels: Even though the Government declares MSP; procurement is quite limited to certain crops and certain regions. Most of the farmers sell commodities below MSP in the open market to the traders and middlemen.
  • Promote Crop Diversification: Only three to four crops (mainly wheat, paddy and cotton and at times some pulses), were being procured at MSP while the remaining crops were being procured at much below the MSP. Hence, absence of any dependable or assured market mechanism of procurement-purchase for crops on the MSP in most parts of the country discourages efforts towards crop diversification. 

Challenges and Concerns

  • Goes against Interest of Farmers: Legalisation of MSP will encourage over-production of Rice and Wheat. This may have severe environmental costs such as decline in soil fertility, depletion of ground water etc. In the long term, this would negatively affect income levels of farmers.
  • Adverse Impact on Economy: Higher costs of procurement due to a statutory MSP will increase the food prices, leading to inflation in the economy. Higher prices of commodities would adversely affect exports of agricultural commodities.
  • Financing needs: According to some estimates, if the Government were to procure all the 23 crops at MSP, it would amount to half of the Government's Budget.
  • Unsustainable Food grain Management Policy: The Food subsidy bill has already become quite unsustainable at around Rs 2 lakh crores. The excess procurement of food grains by the FCI has led to surplus buffer stocks leading to higher storage costs and wastages. Legalisation of MSP would further worsen the scenario.
  • Administrative Challenge: Lack of government machinery to procure all crops that are under the MSP system.
  • Violation of WTO Agreement on Agriculture (AoA): Legalisation of MSP would further violate the limit on the subsidies under AoA and it can be challenged by other countries. India's quest for Permanent solution on public stockholding could be in jeopardy.
  • Promote Inequality: Only 6 percent of farmers are able to benefit from the MSP. Similarly, most of the Rice and Wheat are sourced from states such as Punjab, Haryana, MP etc. Hence, legalisation of MSP could worsen socio-economic inequality and promote regional disparity.
  • Environmental cost: Encourage farmers to grow more rice and wheat leading to further environmental problems.
  • Adverse Impact of Government's Intervention: In any free-market economy, the price of any goods and services produced in the country must be decided by market forces and not by the state. As highlighted by Eco Survey 2019-20, Government's intervention, sometimes though well intended, often ends up adversely affecting the market. For example, the regulation of prices of drugs through the DPCO 2013, has led to an increase in the price of a regulated pharmaceutical drug vis-à-vis that of a similar drug whose price is not regulated.

Conclusion

  • The MSP attempts to strike a balance between the interests of growers and consumers. The government’s price support policy attempts to provide a fair return to farmers while keeping in view the interest of consumers in a way that prices of food and other agricultural commodities are kept at a reasonable level. 
  • Farming over the years, for the majority, especially small and marginal farmers, has not turned out to be remunerative. A rise in their income could be the long-term answer to farmers’ financial distress. 
  • To ensure this rise in income, the government should focus on setting up an effective system to provide assured purchase and returns to farmers for all major crops at the MSP, as is done in the case of wheat and rice or extend subsidies on input costs.

National Bank for Financing Infrastructure and Development (NaBFID)

Context: The National Bank for Financing Infrastructure and Development (NaBFID) plans to introduce takeout financing products to help finance projects and allow timely exits for commercial lenders.

What is Takeout Financing

  • Take out financing scheme means a long-term lending institution in the infrastructure sector like the NaBFID is purchasing the infrastructure loan sanction given by a commercial bank from its book. 
  • This will relieve the commercial bank from locking assets in a long-term manner. 
  • Takeout financing offers a window to the banks to free their balance sheet from exposure to infrastructure loans, lend to new projects and also enable better management of the asset liability position. 
  • Hence, takeout financing enables financing longer term projects with medium-term funds.
National Bank for Financing Infrastructure and Development (NaBFID)

About NaBFID

  • Union Budget 2021-22 has proposed to set up a development Bank in the form of NaBFID as financier, enabler and catalyst for the National Infrastructure pipeline. NaBFID is expected to reduce pressure on banks, lower the cost of capital and meet investment needs of $ 5 trillion economy.
  • Global Examples: China (China Development Bank), UK (Green Investment Bank), Germany (KfW). 
  • Indian Examples: NABARD (Agriculture and Rural Development), Industrial Finance Corporation of India (Industrial Development), SIDBI and MUDRA (MSME Development), EXIM Bank (Trade Development), National Housing Bank (Housing Infrastructure).
  • Note: IFCI was the first ever development bank that was established in 1948. ICICI and IDBI Banks were initially set up as Development Banks but were later converted into Commercial banks based upon the recommendations of Narasimham Committee.
  • Ownership: NaBFID will be set up as a corporate body with authorised share capital of one lakh crore rupees.  Shares of NaBFID may be held by: (i) central government, (ii) multilateral institutions, (iii) sovereign wealth funds, (iv) pension funds, (v) insurers, (vi) financial institutions, (vii) banks, and (viii) any other institution prescribed by the central government.  Initially, the central government will own 100% shares of the institution which may subsequently be reduced up to 26%.
  • Source of Funds: Raise money in the form of loans in Indian Rupees and Foreign currencies. NaBFID may borrow money from: (i) central government, (ii) Reserve Bank of India (RBI), (iii) scheduled commercial banks, (iii) mutual funds, and (iv) multilateral institutions such as World Bank and Asian Development Bank.

Assistance Provided By  Development Banks

The Development Banks may offer the following kinds of assistance to the companies:

  • Extend long term finance at concessional rates to the companies.
  • Subscribe/buy the shares of the companies which are involved in financing of infrastructure, industrial or housing projects.
  • Partial Credit Guarantee on the repayment of the bonds issued by the companies. 

How The Setting Up Of NaBFID Would Benefit Indian Economy?

  • Meet Investment Needs: to realise $ 5 trillion by the end of 2024-25.
  • Reduce Pressure on Commercial Banks: Banks have mainly relied on short-term deposits for lending to long term infrastructure projects leading to Asset-Liability Mismatch and higher NPAs.
  • Lower Cost of Capital: Credit enhancement provided by the development Banks would enable the companies to raise loans at lower rates of interest leading to decrease in the cost of capital.
  • Reduce Foreign Currency Exposures: Presently, some of the Infrastructural and housing finance companies borrow loans from overseas markets. The depreciation in the value of Rupee may put additional burden on them and expose them to fluctuations in the exchange rate.

Strategies Needed To Ensure Success Of NaBFID

India's experience with the Development Banks has so far been a mixed bag. On one hand, some of the development banks were embroiled in controversies (National Housing Bank was involved in the Harshad Mehta Scam). While on the other hand, some of the development banks such as the one established by Karnataka Government provided necessary funding to Infosys company during its initial days, which in turn enabled Infosys to become a global giant.  Hence, India has to learn from its past experiences in order to ensure the success of NaBFID.

Independence and Autonomy: Ensure professionalism, autonomy and effective control and audit mechanism. Otherwise, NaBFID's performance would be lacklustre and similar to that of Public Sector Banks.

Enhance Access to Long-term Capital: Budget 2021-22 has allocated only around Rs 20,000 crores, which is too little for our mammoth infrastructure needs. Enhanced financing can be provided by:

  • Long-term credit from RBI to NaBFID through Long-term Repo Operations (LTROs).
  • Declaration of Bonds issued by NaBFID as eligible securities for meeting SLR requirements of the Banks. (Encourage the Banks to buy Bonds issued by NaBFID 🡪 Enable NaBFID to raise money from Banks).
  • Enable NaBFID to borrow money from International Institutions such as World Bank, ADB etc.

Infuse Competition: Monopoly by NaBFID in infrastructure financing may lead to operational inefficiencies; need to encourage private sector to establish Development Banks so as to infuse competition.

Enhancing Investor Base: Make it easier for the pension fund companies, Insurance companies, mutual fund companies to invest in bonds issued by NaBFID; Tax incentives to the individuals upon investing in bonds issued by NaBFID etc.

Conclusion

Takeout financing is an accepted international practice of releasing long-term funds for financing infrastructure projects. It can be used to effectively address Asset-Liability mismatch of commercial banks arising out of financing infrastructure projects and also to free up capital for financing new projects.

RBI Allows Compromise Settlement with Wilful Defaulters, Fraud Accounts

Context: Banks can take on compromise settlements on accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.

What is a Compromise Settlement?

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  • A compromise settlement with the borrowers is negotiated by the bank with or without involving remission or sacrifices.
  • Recovery of debts due to banks is an important activity that aims at protecting the interest of the depositors and other stakeholders. If banks do not recover NPAs, depositors and other stakeholders will ultimately suffer.
  • Hence, any compromise settlement should have an underlying objective of recovery of dues to the maximum extent possible at minimum expense and within the shortest possible time frame.

About RBI Circular

  • RBI has allowed banks to enter into a compromise settlement for accounts termed as wilful defaulters and fraud. A wilful defaulter is a borrower who refuses to repay loans despite having the capacity to pay up.
  • Cooling off period: A wilful defaulter or a company involved in fraud can apply for new loans after at least 12 months of executing a compromise settlement. However, a regulated entity (banks and finance companies) are free to stipulate higher cooling periods as per their board-approved policies. 

Analysis

  • Reduction in NPAs: Write-offs, or bad loans taken out from the NPA books for accounting and tax purposes, were used by banks to show lower non-performing assets (NPAs). In the last ten years, the reduction in NPAs due to write-offs was Rs 13,22,309 crore.
  • Early Recovery & Cost Savings: Such settlement ensures early recovery of dues and results in saving of cost to the bank in terms of legal expenses and other costs.
  • May lead to a tricky situation: Possibility that more public money will be lost in the process.
  • Misuse: Banks and corporates often misuse restructuring for evergreening problem accounts to keep reported NPA levels low.

Primary Agricultural Credit Societies

Context: The government said Primary Agricultural Credit Societies (PACS) can be employed as drone entrepreneurs for spraying fertilizers and pesticides and for a survey of the property. PACS will also be connected with the marketing of organic fertilizers, especially Fermented Organic Manure (FoM)/ Liquid Fermented Organic Manure (LFOM)/ Phosphate Enriched Organic Manure (PROM).

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About PACS

  • It is village-level cooperative credit societies that serve as the last link in a three-tier cooperative credit structure headed by the State Cooperative Banks (SCB) at the state level.
  • It is an association of borrowers and non-borrowers residing in a particular locality. It is the final link between the borrower at the village level on one hand and the higher agencies like the central cooperative bank, state cooperative bank, and reserve bank of India.
  • The first PACS was established in 1904.

Regulation of PACS

  • It is registered under the Co-operative Societies Act which means they are regulated by the State government (specifically administrative aspects) and also regulated by the RBI. 
  • NABARD is a nodal refinancing agency for PACS including other cooperative banks. 
  • They are governed by the Banking Regulation Act-1949, Banking Laws, and Co-operative Societies Act 1965.

Financial Structure of PACS

  • PACS derives its working capital from its own funds, share capital, membership fee, and reserve fund, deposits, borrowing, and other sources.
  • PACS are involved in short-term lending or what is known as crop loans. At the start of the cropping cycle, farmers avail credit to finance their requirement of seeds, fertilisers, etc.
  • Banks extend this credit at 7 percent interest, of which 3 percent is subsidised by the Centre, and 2 percent by the state government. Effectively, farmers avail the crop loans at 2 percent interest only.
  • It collects deposits from its members.
  • The funds of the society are derived from the share capital and deposits of members and loans from a central cooperative bank.
  • Credit from the SCBs is transferred to the district central cooperative banks, or DCCBs, that operate at the district level. The DCCBs work with PACS, which deals directly with farmers.
  • They also supply agricultural inputs and other services (in the form of money or in-kind) to their members.
  • They can also provide a storage facility to produce its members.

Formation of PACS

  • A group of ten or more people in a village or from many villages can form PACS.
  • Since these are cooperative bodies, individual farmers are members of the PACS, and office-bearers are elected from within them. 
  • A village can have multiple PACS.
  • Membership fees are there to be a member of PACS but it is very low so that the poorest man can join it.
  • Members of the PACS have unlimited liability, which means each member assumes full responsibility for the society’s entire loss in the event of failure.
  • Management of the PACS is overseen by the elected body

Significance of PACS

  • PACS accounts for 41% of all Kishan Credit Card loans provided by all entities in the country.
  • PACS is the main source of credit for rural marginal farmers because around 60% of beneficiaries of PACS are small and marginal farmers according to NABARD’s annual report of 2021-22.

MPC’s Unwavering Focus on Price Stability

Context: The Monetary Policy Committee (MPC) has kept inflation front and centre of its approach to policy. The MPC’s recent unwavering focus on price stability is informed largely by its mandate to achieve the Consumer Price Index (CPI) inflation target of 4%, a goal that it has struggled to actualise right since January 2021 — a period during which inflation remained stuck above or close to the upper tolerance band of 6% in 20 of the 27 months. 

About Monetary Policy

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  • Monetary policy is a set of tools used by a nation's central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.
  • Under the Reserve Bank of India, Act,1934 (RBI Act,1934) (as amended in 2016), RBI is entrusted with the responsibility of conducting monetary policy in India with the primary objective of maintaining price stability while keeping in mind the objective of growth.

The Monetary Policy Framework

  • In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
  • Inflation Target: Under Section 45ZA, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in five years and notifies it in the Official Gazette. 
  • Accordingly, the Central Government notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent. On March 31, 2021, the Central Government retained the inflation target and the tolerance band for the next 5-year period – April 1, 2021 to March 31, 2026.
  • Section 45ZB of the RBI Act provides for the constitution of a six-member Monetary Policy Committee (MPC) to determine the policy rate required to achieve the inflation target.

Monetary Policy Committee

  • Section 45ZB of the amended RBI Act, 1934 provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government by notification in the Official Gazette. The first such MPC was constituted in September, 2016. The present MPC members, as notified by the Central Government in the Official Gazette of October, 2020, are as under:
    • Governor of the Reserve Bank of India - Chairperson, ex officio
    • Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy - Member, ex officio
    • One officer of the Reserve Bank of India to be nominated by the Central Board - Member, ex officio
    • Prof. Ashima Goyal, Professor, Indira Gandhi Institute of Development Research - Member
    • Prof. Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad - Member
    • Dr. Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi - Member
  • Last three persons are to be appointed by the central government. This category of appointments must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”. (Section 45ZC)
  • The MPC determines the policy repo rate required to achieve the inflation target.
  • The MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members.
  • Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
  • Each Member of the Monetary Policy Committee writes a statement specifying the reasons for voting in favour of, or against the proposed resolution.

Positives of Recent RBI Rate Hikes

  • Headline inflation had eased appreciably in March and April, slowing to 4.7% in the first month of the current fiscal year from the bruising 6.7% average pace in 2022-23.
  • Macroeconomic fundamentals have strengthened after the unrelenting focus on preserving price and financial stability.

Negative Impact of Recent Rate Hikes

  • Increase in credit costs since the RBI started raising its benchmark interest rates in May 2022 appears to have retarded investment and consumption activity last year. 
  • Bank credit data show the pace of growth in loans to industry, particularly the MSME and medium sectors, slowed appreciably last year. 
  • The sequential contraction in estimated private consumption spending in the fourth quarter of the last fiscal year is also likely a fallout of the higher borrowing costs.

Risks to Inflation Projections

  • The spatial and temporal distribution of rainfall during this monsoon in the wake of El Niño conditions.
  • Unabated geopolitical tensions.
  • Uncertainty over international commodity prices including those of sugar, rice and crude oil.
  • Volatility in global financial markets.

Conclusion

Policymakers cannot afford to take their eyes off inflation. Price stability is after all a public good and achieving durable disinflation must remain a non-negotiable goal, especially amid widening income inequality and high levels of joblessness.

First Loan Default Guarantee (FLDG)

What is FLDG?

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  • First Loan Default Guarantee (FLDG) is a lending model serviced between digital-lending fintechs and their partner banks and NBFCs.
  • Under these agreements, the fintech originates a loan and promises to compensate the partners up to a pre-decided percentage in case customers fail to repay.
  • The bank/NBFC partners lend through fintech but from their own books. 

RBI Framework

  • Regulated Entities (REs) shall ensure that the total amount of default loss guarantee (DLG) cover on any outstanding portfolio which is specified upfront shall not exceed 5% of the amount of that loan portfolio.
  • In the case of implicit guarantee arrangements, the DLG Provider shall not bear a performance risk of more than the equivalent amount of 5% of the underlying loan portfolio.
  • The RE shall invoke DLG within a maximum overdue period of 120 days, unless made good by the borrower before that.
  • In terms asset quality, recognition of individual loan assets in the portfolio as NPA and consequent provisioning shall be the responsibility of the RE as per the extant asset classification and provisioning norms irrespective of any DLG cover available at the portfolio level. The amount of DLG invoked shall not be set off against the underlying individual loans. Recovery by the RE, if any, from the loans on which DLG has been invoked and realised, can be shared with the DLG provider in terms of the contractual arrangement.
  • Any DLG arrangement shall not act as a substitute for credit appraisal requirements and robust credit underwriting standards need to be put in place irrespective of DLG cover.

Benefits

  • Expand the customer base of traditional lenders but relies on the fintech’s underwriting capabilities.
  • Enhances the deeper partnerships and collaboration between legacy institutions (Banks, regulated entities, NBFCs) and new age fintech’s - democratises access to credit and fuel growth for the unserved and underserved.
  • Strengthens credit penetration and boosts the digital lending ecosystem.
  • Promotes more transparency and discipline in the digital lending environment.
  • Widens the scope of resolution of stressed assets.

Do PLI schemes for Manufacturing Work?

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About the PLI Scheme

  • Production Linked Incentive refers to a rebate given to producers. This rebate is calculated as a certain percentage of sales of the producer (sales referred to in it can be total sales or incremental sales). 
  • The incentives, calculated on the basis of incremental sales, range from as low as 1 per cent for the electronics and technology products to as high as 20 per cent for the manufacturing of critical key starting drugs and certain drug intermediaries. 

Key Features of PLI Scheme

  • The scheme is outcome-based, which means that incentives will be disbursed only after production has taken place.
  • The calculation of incentives is based on incremental production at a high rate of growth. In some sectors such as advanced chemistry cell batteries, textile products and the drone industry, the incentive to be given will be calculated on the basis of sales, performance and local value addition done over the period of five years.
  • The scheme focuses on size and scale by selecting those players who can deliver on volumes.
  • The selection of sectors covering cutting-edge technology, sectors for integration with global value chains, job-creating sectors and sectors closely linked to the rural economy, is highly calibrated.
  • Also, the design of the PLI scheme is such that it is compatible with World Trade Organization commitments as the quantum of support is not directly linked to exports or value-addition.

Significance of this Scheme

  • Utilising the comparative advantage: In some sectors the domestic industry has comparative advantage over other countries, focusing on these sectors could generate higher returns. For instance The Indian pharmaceutical industry is the third largest in the world by volume and 14th largest in terms of value. It contributes 3.5% of the total drugs and medicines exported globally.
  • Increased ability to tap the high global and domestic demand: This will help satisfy the growing domestic demand in the respective sectors and also give a fillip to exports.
  • Attracts Global Manufacturers: The renewed scheme could attract big global IT hardware manufacturers to shift their production base to India and give a boost to local production of laptops, servers and personal computers among others.
  • Generates Employment: The expected incremental production value could touch Rs 3.35 lakh crore, and the scheme could generate 75,000 direct jobs – in total, the employment figure could touch 2 lakh when accounted for indirect jobs. 
  • Promotes Digital Economy: By deepening & broadening the electronics ecosystem in India, this scheme will play a key role in catalysing India’s Techade and in achieving the $1 trillion digital economy goal – including $300 billion of electronics manufacturing by 2025-26
  • Increased Exports: The IT hardware industry is targeted to reach a production of $24 billion by 2025-26, with exports anticipated to be in the range of $12-17 billion during the same period.
  • Promotes Private Investment: From the perspective of industry, the scheme indicates an attitudinal shift from ‘discouragement’ to ‘encouragement’ for large industries and simultaneously provides the much-needed fiscal space required during the Pandemic.

Potential Issues with the Scheme

  • Absence of Common Parameters: DPIIT has raised concerns there were no common set of parameters to understand the value addition by companies that have received or are likely to receive incentives under the PLI scheme. At present, different ministries monitor the value addition of their respective PLI schemes. There is no way to compare two different schemes.
  • Multiple Deliverables: Also, there are various deliverables such as the number of jobs created, the rise in exports and quality improvement. There is no centralised database to gauge all these.
  • Steep Targets: Departments and ministries which interact with companies operating in their sector also face certain specific issues. For instance, at times, the target for companies to qualify for incentives are too steep. As for the Information Technology hardware sector, until last fiscal, only 3-4 companies managed to achieve the incremental sales targets to qualify for the PLI scheme out of the 14 companies that had been approved.
  • Designing sector specific incentives: The implementation of PLI scheme in the Electronics sector and Pharmaceutical sector has highlighted that every sector has to have different eligibility thresholds. Given the large range of activities covered in the 10 sectors, effectively determining the thresholds for each could become a difficult task.
  • Interfering with natural economic processes: In the long run, an economy can become competitive only when sectors can die and be born. Resources get reallocated to sectors that see higher productivity growth. External interference may hinder optimised allocation of resources. 
  • Relative disadvantage for sectors with no incentives: The limited resources of the economy in the form of Capital and human resources will be nudged towards incentivized sectors thus indirectly disincentivizing other sectors.

Way Forward

  • Pre-defined Sunset clause on scheme: It will not only be beneficial for the sector in the long-term, it will also encourage the individual players to see it as a one-time opportunity for capacity building.
  • Improve technological competence: The breathing room created by these incentives could be used by the industry players to increase their technological competence and transition towards becoming globally competitive.
  • Improve business environment: It can be done by improving transparency and predictability in the policy framework. For example, simplification of the taxation regime or easing the land acquisition process etc. This becomes even more important for industries which are outside the purview PLI Scheme.
  • Managing the real exchange rate better to strengthen the export regime: The real exchange rate (adjusted for inflation) in India has appreciated 19% in the last decade on account of both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). This appreciation negatively affects the overall exports.
  • Augment industrial infrastructure and connectivity by increasing expenditure on infra creation for improved competitiveness.
  • Regular scheme review to keep track of progress and address concerns over raw materials, funds, skilled workforce, payments etc
  • Increased investments in innovation, research and skill development is necessary to build talent for PLI success.

Conclusion

  • The scheme and its associated ecosystem have ensured that India is well-positioned to develop resilient GVCs, which will continue to provide national security in the evolving global scenario. Indian manufacturers now feel emboldened to move out of their comfort zone with a clear vision of becoming global champions even as India marches towards its emergence as developed India.
  • However, the incentives should be well-crafted and temporary so that the industries receiving support can mature and become economically viable without protection. Keeping them in place for too long may slow down, rather than accelerate growth in these sectors.

UPI transaction limit set by Indian banks

Context: Unified Payments Interface (UPI) related frauds have been on the rise. To check the number of transactions and reduce the risk of big financial frauds, leading banks including HDFC Bank, State Bank of India (SBI), Axis Bank, and ICICI Bank have implemented some restrictions on UPI transactions. These come as the National Payments Corporation of India (NPCI) has set guidelines to regulate the expanding digital payment ecosystem.

What is UPI

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  • UPI is an instant real-time payment system developed by the National Payments Corporation of India (NPCI)
  • The mobile-based fast payment system is built over the Immediate Payment Service (IMPS) infrastructure.

Features:

  • The payments can be made round-the-clock and in real time.
  • It eliminates the risk of sharing bank account details by the remitter as customers are not required to enter the details such as Card no, account number, IFSC, etc.
  • UPI supports both Person-to-Person (P2P) and Person-to-Merchant (P2M) payments and it also enables a user to send or receive money.
  • It enables the use of a single mobile application for accessing different bank accounts.
  • Transactions are carried out through mobile devices with two-factor authentication using device binding and a UPI PIN as security.
  • Registration of Beneficiary is not required for transferring funds through UPI as the fund would be transferred based on using a Virtual Payment Address (VPA) created by the customer.

Daily limits for UPI

Set by NPCI

  • At present, users can make up to 20 transactions or ₹1 lakh in a single day either all at once or through the day. For certain specific categories of transactions such as the capital markets, collections (such as bills, among others), insurance, and forward inward remittances, the limit is ₹2 lakh. 
  • In December 2021, the limit for the UPI-based ASBA (Application Supported by Blocked Amount) IPO and retail direct schemes was increased to ₹5 lahks for each transaction.

Set by banks and apps

  • The transaction limits can vary between banks and may depend on factors such as the type of account, customer profile, and the bank's risk assessment policies and individual banks have established their own limits for UPI transactions like PNB’s daily limit is ₹50,000, SBI’s daily limit is 1 lakh, etc.
  • As for apps, have established their own limits for UPI transactions like Paytm and Amazon Pay UPI have set a daily limit of Rs. 1 lakh, with a total of up to 10 transactions permitted across all UPI apps and bank accounts. However, these limits can vary depending on the banks if you use their UPI application for transactions.

Rationale behind the limits on UPI transactions

  • Security and Fraud Prevention: By imposing limits, banks can reduce the potential loss in case of unauthorized transactions or account breaches. Limiting transaction amounts helps to detect suspicious activities and prevent large-scale financial fraud.
  • Customer Protection: Transaction limits serve as a safeguard for customers, ensuring that any fraudulent transactions or errors are contained within a manageable threshold. 
  • Risk Management: Limiting transaction amounts allows banks to monitor and identify unusual patterns or activities more effectively.
  • Compliance with Regulatory Guidelines: The transaction limits for different types of transactions, ensuring adherence to regulatory requirements.

Growth of UPI

  • Digital transactions: To compare the amount with May of the previous financial year (2022-23), the volume of transactions has grown by 58%, while the overall value has surged by 37%.
  • UPI Frauds: However, until February in the financial year 2022-23, the total number of reported UPI frauds had also increased by about 13% in comparison to the previous financial year to 95,402. 
  • However, this was alongside a decline in the fraud-to-sales ratio at 0.0015%. Thus, to combat the growing incidences, there is an imperative need to have safeguard infrastructure in a growing ecosystem.

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