Monetary Policy

INTRODUCTION

The emergence of monetary policy is a powerful tool of economic control and management.

MEANING OF MONETARY POLICY 

Monetary policy is essentially a program of action undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view achieving predetermined macroeconomic goals.

The objectives of monetary policy are the same as the objective of macroeconomic policy, viz. growth. employment, stability of price and foreign exchange, and the balance -of- payment equilibrium. The macroeconomic goals are determined on the basis of the economic needs of the country. Once macro goals are determined. the basic policy question arises as to whether to increase or decrease the supply of money. The next - step is to make the choice of instruments that can effectively increase or decrease money supply with the public.

Scope of Monetary Policy

The scope of monetary policy spans the entire area of economic transactions and the macroeconomic variables that monetary authorities can influence and alter by making changes in the monetary policy instruments. The scope of monetary policy depends, by and large. on two factors.

(i) The level of monetization of the economy, and 

(ii) The level of development of the capital market.

In a fully monetized economy, the scope of monetary policy encompasses the entire economic activities. In such an economy, all economic transactions are carried out with money as a medium of exchange. In that case, monetary policy works by changing the supply of and demand for money and the general price level. It is therefore capable of affecting all economic activities production, consumption, savings, investment and foreign trade. The monetary policy can influence all major macro variables--GDP, savings and investment, employment, the general price level, foreign trade and balance of payments.

Another factor that matters in determining the scope and the effectiveness of the monetary policy is how it developed and integrated the capital market . Some instruments of monetary control (bank rate and cash reserve ratio) work through the capital market. Where the capital market is fairly developed, monetary policy affects the level of economic activities through the changes in the capital market. It works faster and more effectively in an economy with a fully developed capital market. Incidentally, a developed capital market Is one which has the following features: 

(i) a large number of financially strong commercial banks, financial institutions, credit Organizations, and short-term bill market, 

(ii) a major part of financial transactions are routed through the capital markets, 

(iii) the working of capital sub-markets is inter linked and interdependent, and 

(iv) commodity sector is highly sensitive to the Changes in the capital market. 

Monetary weapons like bank rate and cash reserves ratio work through the commercial banks. Therefore, for the monetary policy to have a widespread impact on the economy, other capital sub-markets must have a strong financial link with the commercial banks.

INSTRUMENTS OF MONETARY POLICY

The instruments of monetary policy refer to the economic variables that the central bank can change at its discretion with a view to controlling and regulating the supply of and demand for money and the availability of credit. The instruments are also called 'weapons of monetary control. Samuelson and Nordhaus call them The Nuts and Bolts of Monetary Policy. Monetary instruments are generally classified under two categories:

(i) quantitative measures, and

(ii) qualitative or selective credit controls.

Quantitative Measures of Monetary Control 

quantitative measures, also called as traditional measures of monetary control are following.

(i) Open market operations,

(ii) Discount rate or bank rate, and

(iii) Cash reserve ratio (CRR).

(i) Open Market Operations

The open market operation' is the sale and purchase of government securities and Treasury Bills by the central bank of the country. When the central bank decides to pump money into circulation, it buys back the government securities, bills and bonds, and when it decides to reduce money in circulation, it sells the government bonds and securities. The open market operation is the most powerful and widely used tool of monetary control. First used, in the US by the Federal Reserve System in 1922 has ever since been used as a major weapon of credit control in most developed countries.

The central bank carries out its open market operations through the commercial banks it does not deal directly with the public. The buyers of the government bonds include commercial banks, financial corporations, big business corporations and individuals with high savings. These customers of government bonds hold their accounts with the banks.

(ii)  Discount Rate or Bank Rate Policy

'Discount rate' or Bank rate' is the rate at which the central bank rediscounts the bills of exchange presented by the commercial banks. The RBI Act 1935 defines 'bank rate' as the "standard rate at which (the bank) is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under this Act." The RBI rediscounts only the government securities, approved bills and the 'first class bills of exchange.' When commercial banks are faced with short- age of cash reserves, they approach the central bank to get their bills of exchange rediscounted. It is a general method of borrowing by the commercial banks from the central bank, the 'lender of the last resort'. The central bank rediscounts the bills presented by the commercial bank at a discount rate. This rate is traditionally called bank rate. A more appropriate name in usage now is the discount rate. However, for all practical purposes, the bank rate is the rate at which the central bank charges on the loans and advances to the commercial banks.

The central bank can change this rate-increase or decrease-depending on whether it wants to expand or reduce the flow of credit from the commercial bank. When it wants to increase the credit creation capacity of the commercial banks, it reduces the discount rate and when it decides to decrease the credit creation capacity of the banks, it increases the bank rate. This policy action by the central bank is called the bank rate policy or more appropriately, the discount rate policy. The bank rate policy was first adopted by the Bank of England in 1839. it was the only and the most widely used weapon of credit control until the open market operation, first used in 1922 in the Us, emerged as a more powerful instrument of monetary control.

In India, the RBI has been using, though infrequently, the bank rate since its inception in 1935. The bank rate remained constant at 3%. In 1951, it was increased to 3.5% and to 4% in 1956 and remained in force till 1962. In the subsequent year, the bank was increased more frequently and it rose to 12% in 1992. with growing need for credit facility with economy growing at 5-6% and also decreasing rate of inflation, the bank rate was reduced gradually to 6.5% in 2001. which is lowest since 1973.

(iii) The Cash Reserve Ratio or Statutory Reserve Ratio

 

The 'cash reserve ratio" is the percentage of total deposits which commercial banks are required to maintain in the form of cash reserve with the central bank. The objective of the cash reserve is to prevent shortage of cash for meeting the cash demand by the depositors. The cash reserve ratio (CRR) depends, normally, on the banks' experience regarding the cash demand by the depositors. But, "If there were no government rules, banks would probably keep only a very small fraction of their deposits in the form of re- serves." Since the cash reserves are non-interest bearing, commercial banks often keep their cash reserves below the safe limits. This situation might lead to a financial crisis in the banking sector and collapse of the banking system. In order to prevent this eventuality. the central bank imposes a CRR on the banks. This has come as a handy tool for the central bank to control money Supply. The central bank enjoys the legal powers to change the cash reserve ratio of the banks. The cash reserves under this provision is therefore a legal requirement. Therefore, the cash reserve ratio is also called a statutory reserve ratio (SRR).

By changing the CRR the central bank can change the money supply overnight. When economic conditions demand a contractionary monetary policy, the central bank raises the CRR And, when economic conditions demand monetary expansion, the central bank cuts down the CRR. 

The Statutory Liquidity Requirement (SLR). In India, the RBI has imposed another reserve requirement in addition to CRR. It is called Statutory Liquidity Requirement (SLR). The SLR was first imposed in 1949 and was fixed at 20%. The SLR is the proportion of time Total Deposits which commercial banks are statutorily required to maintain in the form of liquid assets (cash reserve, gold and government bonds) in addition to cash reserve ratio. This measure was undertaken to prevent the commercial banks from liquidating their liquid assets when CRR is raised. What commercial banks used to do, before SLR was imposed , was to convert their liquid assets into cash to replenish the fall in their loanable funds due to rise in the CRR.

Qualitative or Selective Credit Controls

The quantitative methods of monetary controls affect, when they are affective, the entire credit market in the same direction. They lead either to expansion or to contraction of the total credit. In other words, their impact on all the sector of the economy is uniform. This may not be always desirable or intended by the policy-makers. 

The monetary authorities are often faced with the problems of 

(a) rationing of credit, 

(b) diverting the flow of credit of from the non-priority sectors to the priority sectors, and 

(c) curbing speculative tendency based on the availability of bank credit. 

These objective of credit control are not well served by the quantitative measures of credit control. The monetary authorities resort, therefore, to qualitative or selective credit controls.

Credit rationing -

Change in Lending Margins -

Moral suasion-

Direct Controls-

-Transmission mechanism of monetary policy-

-Portfolio Adjustment-

-The Keynesian Approach -

-The Monetarist Approach -

-The Limitations and Effectiveness of Monetary Policy-

(i) The Time Lag

(ii) Problems in Forecasting 

(iii) Non - banking Financial Intermediaries

(iv) Underdeveloped Money and Capital Markets

Monetary Policy of India : 

The Core Issue

The RBI, the central monetary authority of India, has not clearly stated - surprising though--its monetary policy in its published documents. The RBI has, in fact, managed monetary affairs of the country, especially the control, regulation and allocation of bank credit as and when required by the needs of the country. The reason was that the RBI was severely constrained by the growing deficit financing by the Government of India. However, an idea of India's recent monetary policy can be had from the Chakravarty Committee Report' and the writings of C. Rangarajan, a former Governor of RBI.

Policy Objectives

The three major objectives of India's overall economic policy have been 

(i) economic growth. 

(ii) social justice, i.e., an equitable Distribution of income, and 

(iii) price stability. 

These objectives have in general been the objective of India's monetary policy. Of the various objectives, however , Chakravarty Committee considered promoting price stability as 'the dominant objective of the monetary policy'. For, in the Committee's opinion. "II is price stability which provides the appropriate environment under which growth can occur and social justice can be ensured, It is important to note here that, in RBI's perception, price stability implies stability of the general price level with four - percent inflation.

Targets

 

In order to achieve the objectives of its monetary policy, the RBI adopted a reconciliatory approach that incorporates the various kinds of interactions between the real and monetary sectors. On the monetary side, the RBI targeted to control the money supply (M) to ensure price stability with 4- Percent inflation. For this purpose, an annual 14- percent growth in money supply was recommended by the Chakravarty Committee. This was undoubtedly a very high growth rate of money supply but it was justified by the RBI in view of the growing demand for money. In the Committee's opinion this might help to keep inflation rate up to four percent. Is 14 percent annual Increase in money supply justified ? There is no unanimous answer to this question. In the opinion of Prof. S. B. Gupta, a five percent annual increase in money supply is the desirable rate for the Indian economy. The Chakravarty Committee finds a 10 percent growth in money supply for a zero annual rate of inflation. During the 1990s, however, money supply increased at an annual average of 13%, be it due to RBI targeting or spontaneous, but inflation continues to be around 5% per annum.

Monetary Measures

 

To control money supply, the RBI has been using all the three traditional measures, viz., open market operation, cash reserve ratio (CRR) and bank rate. open market operation and bank rate policy have not been very effective. Increasing CRR, as an instrument of monetary control, has been relatively more effective: it was intermittently increased from 4 percent in 1962 to 12 percent in !992, though it was decreased to 6.5 percent in 2001.

Fiscal Policy

The word 'Fisc' means 'state treasury' and 'fiscal policy' refers to policy concerning the use of 'state treasury' or government finances to achieve the macro-economic goals.

• economic stability

• price stability

• economic growth 

• BOP

The simple meaning of fiscal policy is the use of taxation and public expenditure by the government for stabilization or growth.

According to authors Smithies " A Policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment. "

Fiscal policy can be defined in more general terms that is fiscal policy is the government programme of making discretionary change in the pattern and level of its expenditure, taxation and borrowings in order to achieve intended economic growth, employment, income equality and stabilization of the economy on a growth path. fiscal policy is also called budgetary policy because the two sides of the govt budget are receipts and expenditure.

Objective -

1. To achieve full employment. 

A. Price stability 

B. To stabilize the growth rate of the economy.

C. To maintain equilibrium in the BOP

D. To ensure equitable distribution of income and wealth among peoples 

E. To mobilise resources for economic  growth

2. The ultimate aim of FP is the long run stabilization of the economy.

Instruments of FP-

FP through variations in government expenditure and taxation affects national income, employment output and prices. An increase in public expenditure during depression increases the aggregate demand (A. D.) For goods and services and leads to a large increase in income via the multiplier process while a reduction in taxes has the effect of raising disposable income there by increasing consumption and investment expenditure. So the government can control deflationary and inflationary pressure in the economy by a proper combination of expenditure and taxation programmes.

The major fiscal instruments are-

The budget is the principal instrument of F. P.

1. Budgetary Balance Policy --

When the government keeps its total expenditure equal to its revenue, it means the government has adopted a balanced-budget policy, when the government spends more than its expected revenue, it means that they have adopted deficit -budget policy. And when the government follows a policy of keeping its expenditure substantially below its revenue than it is following a surplus- budget policy this policy is adopted to control inflationary pressure within the economy.

2. Government expenditure -

The government expenditure is an injection of capital into the economy and through it ultimately manages aggregate demand. It includes total public spending on purchase of goods and services, payment of wages and salaries of public servants, transfer payment (Pension, subsidy, grants, aid, payment of interest etc.)

3. Taxation -

Direct tax - personal income tax

Corporate income tax

Indirect taxes- excise duty

Custom duty

Increase in tax rate is used for mobilising resources for capital formation in the public sector and also down consumption of goods and helps in checking inflation.

4. Public borrowings- it includes both internal and external borrowings. The government make borrowings generally to finance their budget deficits. Internal borrowings are of two types (a) borrowing from the public by means of government bonds and (b) borrowing from the central bank that is deficit financing. External borrowing includes borrowings from foreign governments, external organizations like the world bank and IMF etc.

Kinds of F.P. 

There is no unique fiscal policy suitable for all kinds of economic problems. in fact a variety of fiscal policies have been suggested by The Economists under different circumstances to achieve specific macroeconomic goals. however fiscal policy measures are generally classified under the following categories.

1. Automatic Stabilization of F.P.-

In this F.P., the tax structure and expenditure pattern are so designed that taxes and government spending vary automatically in the appropriate direction with the changes in national income. It means that these taxes and expenditure patterns without any special deliberate action by the government raises A.D in times of recession and reduces aggregate demand in times of boom and inflation that might occur in an economy.

These fiscal measures are therefore called Automatic or built in stabilizers.

Built in stabilizers means automatic adjustment in the government expenditure and tax revenue in response to raise and fall in GNP.

Since these automatic stabilizers do not require any fresh deliberate action by the government, they are also called non-discretionary F.P.

Built in stability of tax revenue new and government expenditure of transfer payments and subsidies is created because they vary with national income. these taxes and expenditure automatically bring about appropriate changes in aggregate demand and reduce the impact of recession and inflation that might occur in an economy. the various automatic stabilizers are personal income tax, corporate Income Tax, transfer payments such as unemployment compensation and other welfare benefits. these automatic stabilizer directly varies with change in N.I.

Personal Income Tax 

In our country this tax is progressive type. when national income increases during inflation, then increasing percentage of the peoples income are paid to the government and this will decline their disposable income. so automatically people will reduce consumption and therefore A.D. will be reduced. This decline in A.D. will reduce inflation. on the other hand, when national income decline at times of recession, the tax revenue which are based on percentage of national income automatically decline. at the same time government expenditure on unemployment compensation and social security benefits automatically increases. so there would be an automatic budget deficit which would counteract deflationary tendencies and finally recession.

The same will happen in case of corporate income tax. 

Corporate income tax 

Corporations or companies pay a percentage of their profit as tax to the government. Like personal income tax corporate income tax rate. Is also generally higher at higher levels of corporate profits. The revenue of corporate rises greatly during inflation and boom which will reduce their consumption and ultimately reduce A. D. And revenue from then falls during recession which tends to offset the decline in A.D.

Limitations -

1. Through Automatic stabilizers reduce the intensity of inflation and recession. but they cannot alone correct the recession and inflation significantly. therefore the role of discretionary fiscal policy that is deliberate change in the tax rate and amount of government expenditure are required to cure recession and inflation.

2. Automatic stabilization model works efficiently only in the advanced economies. when the economy is subjected to external socks, automatic stabilizers fail to work efficiently. in this case it becomes necessary to make discretionary changes in the fiscal policy.

Compensatory Fiscal policy-

 The compensatory F.P. is a deliberately budgetary action taken by the government to compensate for the deficiency in or excess of A.D. the compensatory action is taken by the government in the form of surplus budgeting or deficit budgeting. In this kind of fiscal policy, the government uses a greater degree of discretion than in automatic stabilization policy and this policy can be revised year after year.

During the period of depression, the government is required to boost up the A. D., especially when the economy is facing depression due to lack of effective demand. The government in this case is required to take compensatory fiscal measures. The compensatory measures may be in the form of tax reduction and increased government expenditure. This kind of fiscal measures increases A.D. increase in A.D. leads first to rise in price level. It adds to the producers profit and this increase in profit creates an optimistic environment. Entrepreneurs will encourage investment. And ultimately this will pusp up the level of employment and output. In this case the government adopts a deficit budget policy.

The policy of surplus budgeting is adopted and works effectively during the inflation, especially when inflation is caused by excessive demand.

This is a powerful tool to control the A.D. 

Under this policy the government keeps its expenditure lower than its revenue and the government may resort to a higher rate of taxation and cut its expenditure. Higher rate of taxation reduces disposable income. As a result the A.D. decreases at the rate of tax multiplier. On the expenditure side a cut in the government expenditure reduces the A.D. at the rate of expenditure multiplier. And ultimately inflation.

Tax multiplier-  It refers to multiple effects of a change in tax on the N.I.

Government expenditure multiplier - It shows the impact of a change in government expenditure on the equational level of the national income.

Discretionary Fiscal policy

It refers to deliberate change in the government expenditure and taxes to influence the level of national output and prices. On the other hand non discretionary F.P. of automatic stabilizers is a built in tax or expenditure mechanism that automatically increases A.D. when recession occurs and reduces A.D. when there is inflation without any special deliberate actions on the part of the government.

In discretionary F.P. government makes deliberate changes in,

1. Changing taxes with government expenditure constant 

2. Changing government expenditure with taxes constant 

3. Variation in both expenditure and taxes simultaneously 

4. The size and composition of public debt.

The main aim of F.P. is to change A.D. by suitable change in government expenditure and taxes so F.P. is mainly a policy of demand management.

At the time of recession the government increases its expenditure or cuts down taxes or adopts a combination of both that is to cure recession expansionary fiscal policy is adopted. In this condition the government will have a budget deficit. So we can say that the expansionary FP will cure the recession and unemployment is a deficit budget policy. On the other hand to control inflation the government cuts down expenditure or raises taxes that is to cure inflation, contractionary fiscal policy is adopted. In this condition the government will have a surplus budget. So we can say that the contractionary F.P. to cure inflation is a surplus budget policy.

Fiscal policy to cure recession 

The recession in an economy occurs when A. D. Decreases due to fall in private investment. Private investment may fall when business becomes highly pessimistic about making profits in future. As a result of this fall in private expenditure A.D. shifts down and creates deflationary gap or recessionary gap. Here F.P. plays an important role by filling up this gap by increasing government expenditure or reducing taxes.

A. I Option

Increase in government expenditure -

As for the discretionary F.P. is concerned about the government may start increasing expenditure on public works. There is a direct and indirect effect of this expenditure.

The direct effect is that it increases income of those who sell materials and supply labourers for these projects and also output of these related public work also increases together with the increase in income and the indirect effect of this expenditure comes in the form of the working of the multiplier.

Those who get more income spend them further on consumer goods depending on their MPC.

This increase in demand for consumer goods brings about further expansion in their output which further generates employment and incomes for the unemployed workers and so these new incomes are spent and respect further.

Here the question arises that how large should be the increase in expenditure depends on the magnitude of GNP gap caused by a deflationary gap on the one hand and the size of the multiplier on the other.

The impact of this government expenditure is given by diagrammatic presentation.

When government expenditure exceeds receipts (Budget deficit) larger amounts are put into the stream of N.I.

Involuntary unemployment -

It means that people are willing to work at the existing wage rates but are unable to unemployment find jobs.

B. II Option

Reduction in taxes to overcome recession -

The reduction in taxes increases the disposable income of the people and thus stimulates increase in consumption expenditure. So reduction in taxes will cause an upward shift upward. This will have an expansionary effect and the economy will be lifted out of recession.

Policy option 

Increase in government expenditure or reduction in taxes (Deficit Budget Policy)

The choice between tax reduction and increase in government expenditure depends  on the magnitude of the effect of expenditure multiplier and tax multiplier.

The value of the tax multiplier is less than the government expenditure multiplier.

Fiscal policy to control inflation (6)

(Surplus budget policy)

When A.D. increases beyond what the economy can potentially produce by fully employing its given resources, it will give rise to inflationary pressure in the economy.

1. Reducing government expenditure 

2. Increasing taxes.

Crowding out and F.P

The term crowding out refers to the reduction in private investment due to an increase in government expenditure. An increase in government expenditure raises AD, N.I and interest rates which ultimately reduces private investment this is called the crowding out effect of F.P.

Generally it happens that an increase in government expenditure (deficit budget) adversely affects private investment which offsets to some extent the expansionary effect of budget deficit. This adverse effect comes about as an increase in government expenditure or reduction in taxes causes the rate of interest to go up.

Rise in ROI is due to-

1. Increase in government expenditure leads to a rise in N.I which raises transaction demand for money given the supply of money in the economy, the increase in transaction demand for money will cause the ROI to go high.

2. To finance its budget deficit the government will borrow funds from the market. This will raise the demand for loanable funds which bring about a rise in the ROI.

A high ROI will crowd out (Reduce) private investment. So the crowding - out effect reduces the multiplier effect of the government expenditure on th N.I and the magnitude of crowding out reduces.

Crowding In

Crowding - in means rise in the private investment due to deficit budgeting (deficit spending) adopted by the government.

This is the country to the crowding - out effect.

Deficit expenditure leads to the rise in the ROI which discourages private investment. But government deficit expenditure leads to a rise in the A.D. this demand is met by increasing the production from the existing capital stock. This brings the acceleration principal in force and intensive use of existing capital results in a greater depreciation of capital. Therefore demand for capital increases. That deficit expenditure stimulates investment. But this argument holds only when there are unutilized resources.

The Acceleration Principals

Explains the process by which an increase (or decrease) in the demand for consumption goods leads to an increase (or decrease ) in investment in capital goods.

It is the ratio between induced investment and an initial change in consumption expenditure.

Sadhguru Said

Call to stop fossil fuel use must come with alternatives: Sadhguru

Sadhguru, speaking at the UN climate talks, argued that simply urging nations to abandon fossil fuels without offering alternatives is ineffective. He emphasized the need for technological advancements to provide viable alternatives and highlighted that excessive talk about abandoning fossil fuels without practical solutions might be counterproductive.

Spiritual leader Sadhguru, who has long been pitching for saving the soil as a solution to deal with climate change, on the sidelines of UN climate talks (COP29) here on Monday said just asking countries to turn away from fossil fuels without providing alternatives won’t work and “excessive talks” on not using them may be counter-productive.

Without naming US president-elect Donald Trump who used the phrase “drill, baby drill” during his election campaign in the context of allowing more and more extraction of fossil fuels during his presidentship, Sadhguru said it was a reaction to excessive green talks or carbon talks without actually providing workable alternatives to the world to maintain the standards of living the people have become used to.

“We are continuously talking about fossil fuels. It must happen. The shift is needed. But that’s not going to happen unless there are significant technological innovations. It’s not going to happen just because you wish. The world is not going to give up oil simply because you and I say it is not good. Substantive alternatives have to come.

Sadhguru noted that though the world is talking about solar and wind and has made some progress, their contribution in meeting the global energy demand is still quite low. He also underlined the global pitch towards electric vehicles, but said such vehicles at the most spare the cities from air pollution but it won’t help people beyond urban centers.

"I am not saying you can simply burn fuels whichever way you want. We have to transform. But, are we willing to risk the economic process to do it? No, nobody is willing to give up their lifestyles or standards of living. Transition can happen through transformative technologies. But, they don't happen overnight, and nobody can time it. If it happens sooner, the better. But there is no guarantee when it will happen... and now (we heard) drill, baby drill," said Sadhguru, founder of Isha Foundation that has been working on river rejuvenation, water conservation and soil health.

Emphasizing on what he noted about the phrase, he said, "Green talk is a wrong word...So somebody who reacts ‘enough is enough’ and says let’s use it (fossil fuels). Because people are not willing to give up their living standards and living standards are going down because fuel is becoming more and more expensive. So the first thing is to reduce the fuel price. After that we will talk. I'm saying this is the problem of doing anything in excess. The reverse will come."

At this point, Sadhguru emphasized the need for saving the health of the soil through awareness, policy interventions and even through law at a later stage. "So what we need to understand is that there are many issues. I'm not saying other issues are not important, but considering the size of the problem, what can be easily solved with minimum investment with maximum impact on the population is what we must aim at is soil. Fifty-four percent of the world 's population is working in soil (farming). Their lives will change," he said.

The agenda to save soil brought Sadhguru to COP29. He will be meeting prominent leaders to promote soil as a solution for climate change. He will also delve into key aspects of farmer livelihoods and food security, crucial elements in addressing climate change challenges.

Ahead of the conference, the Save Soil Movement of the Isha Foundation shared policy recommendations with the United Nations Framework Convention on Climate Change (UNFCCC). These recommendations bring attention to climate finance - key agenda of the COP29 - with a focus on agricultural soil regeneration. The recommendations have been endorsed by prominent global organizations, marking a significant milestone in the movement's impact.

"There are only two ways to put organic content back into the soil- animal waste & the green litter from the trees. If these two things are not on the farmland, there is no way to revive soil organic content and save soil. Tree-based agriculture is not just soil friendly, it has shown to increase farmer income by 3-8 times. It is time our farmers re-embrace ecologically and economically sustainable farming practices to keep the land healthy," said Sadhguru.

Source: TOI

Export of solar PV products skyrocket

           

Ashish Khanna became the new director general of the international solar Alliance (ISA)

• The 7th season of the international solar Alliance (ISA)assembly took place in New Delhi.

• India and France have been Re-elected as president and Co president of the ISA.

India will hold the presidency until 2026.

•ISA focuses on promoting solar energy globally addressing common challenges faced by member countries.

•With 120 member and signatory countries, ISA aims to mobilize $ trillion in solar energy investments by 2030.

•ISA was launched by the Prime Minister of India and the president of France at the 2015 United Nation climate change conference in Paris.

•ISA became the first international intergovernmental organization headquartered in India. 

Source: KGS

• Shipments up 23 times to $2 bn in FY22-FY24 
• Temporary stagnation in domestic demand for PV modules a reason for the surge in exports
• Rising demand for Indian PV products abroad, attractive incentive structure also pushed Indian makers to establish facilities
• US a key market for Indian solar PV products, accounting for 97% of shipments in FY23 and FY24

Solar Photovoltaic (PV) products soared 23 times between FY22 and FY24, when it touched $2 billion, and continuous to grow at scorching pace, The trend signals that the country is poised to be a net exporter of these products, even as it is eying big targets for solar capacity addition, and these products are meant to be in great demand locally.

According to industry source, apart from the availability of booming market in the US, robust growth in exports of PV items can also be attributed to temporary stagnation in domestic demand for PV modules owing to the delay in the implementation of the Approved List of Modules and Manufacturers have ended up looking to sell their products at a high premium abroad.

The US has emerged as a key market for Indian solar PV products, accounting for 97% of shipments in both FY23 and FY24.

But the short-term focus on exports, while leaving the domestic market high and dry, may also have some benefits according to analysts.

"Focusing on the US market can benefit the Indian PV manufacturing ecosystem. The exposure to the US market will enable Indian PV manufacturers to attain economies of scale, ultimately enhancing their product quality and competitiveness," said Vibhuti Garg,director-South Asia, Institute for Energy Economics and Financial Analysis (IEEFA).

However, she cautioned that to truly establish India as a global manufacturing hub for solar products in the long run, Indian PV manufacturers must focus on upstream backward integration.

This will help India maintain its foothold in existing markets like Europe, Africa, Latin America, etc. she added.

With the US move to withdraw duty-free access to PV products from Southeast Asian countries, and even impose countervailing duties on them, India can potentially replace these countries to become the leading PV exporting country to the US, Garg added.

The increasing demand for India PV products  abroad and the attractive incentive structure under the Inflation Reduction Act (IRA) America also pushed many Indian manufacturers to establish manufacturing facilities overseas, particularly in the United States of America.

Some prominent players are Waaree Energy, Vikram Solar, Saatvik Energy and Navitas Solar.

Waaree Energies is setting up a 5 GW per annum integrated PV cell and module manufacturing capacity in Taxas, US.

The first phase of 3 GW is expected to be commissioned by the end of 2024.

Vikram Solar has also announced a 4 GW PV module manufacturing facility in Colorado, which will be commissioned by the end of 2024.

Saatvik Energy, Navitas Solar, and Premiere Energies have announced that they will set up three units of 1.5 GW, 1.2 GW and 1 GW of PV module manufacturing capacity in the US.

However, analysts also note that it is important for the country to balance need of a growing export market with domestic availability, given the government's focus on increasing the share of renewable energy to 500 GW by 2030 and schemes like PM Suryaghar that mandate the use of domestic modules.

"During the period of domestic supply shortage, certain distributed renewable energy segments, such as residential rooftop solar, could be affected due to their smaller order sizes, " according to Jyoti Gulia, founder, JMK Research.

"This can make it difficult for developers to secure enough supplies to execute their projects.

The supply-demand gap also affects solar module prices, which is critical factor for the price-sensitive residential rooftop solar segment."

As per the report, the country's annual solar module production is likely to grow to 28 GW in FY25 and 35 GW in FY26.

"After accounting for exports, the resultant supply by Indian PV manufacturers in the next two years will be only 21 GW and 25 GW, respectively, which is less than the requirement of approximately 30 GW per annum to meet India's 2030 renewable energy target," said Prabhakar Sharma, Senior consultant, JMK Research.

(Source: FE) 

 

  

Role of Agriculture in Indian Economy

 

Agriculture plays a vital role in the Indian economy.  Over 70 per cent of the rural households depend on agriculture. Agriculture is an important sector of Indian economy as it contributes about 17% to the total GDP and provides employment to around 58% of the population. Indian agriculture has registered impressive growth over last few decades.  The food grains production has increased from 51 million tonnes (MT) in 1950-51 to 250MT during 2011-12 highest ever since independence

The share of agriculture in GDP increased to 19.9 per cent in 2020-21 from 17.8 per cent in 2019-20. The last time the contribution of the agriculture sector in GDP was at 20 per cent was in 2003-04.

Basic Facts about agriculture

• India is the biggest exporter of cotton in the world.
• India is the largest producer of ginger, okra, potatoes, onions, brinjal, etc., amongst vegetables.
• Sikkim is the first state in the world that claimed 100% organic farming.
• India ranks 2nd in the world in agriculture production.
• India’s world rank in services and industry sector is 9th and 5th respectively.
• Indian agricultural production has increased from 87 USD bn to 459 USD bn in the past 15 years (12% annual growth).

Globally India ranks 9th for the agricultural exports.

Significance of Agriculture in Economy

Agricultural influence on national income:

• The contribution of agriculture during the first two decades towards the gross domestic product ranged between 48 and 60%. In the year 2001-2002, this contribution declined to only about 26%.

Agriculture plays vital role in generating employment:

• In India at least two-thirds of the working population earn their living through agricultural works. In India other sectors have failed generate much of employment opportunity the growing working populations.

Agriculture makes provision for food for the ever-increasing population:

• Due to the excessive pressure of population labour surplus economies like India and rapid increase in the demand for food, food production increases at a fast rate. The existing levels of food consumption in these countries are very low and with a little increase in the capita income, the demand for food rise steeply (in other words it can be stated that the income elasticity of demand for food is very high in developing countries).
• Therefore, unless agriculture is able to continuously increase it marketed surplus of food grains, a crisis is like to emerge. Many developing countries are passing through this phase and in a bid to ma the increasing food requirements agriculture has been developed.

 

Contribution to capital formation:

• There is general agreement on the necessity capital formation. Since agriculture happens be the largest industry in developing country like India, it can and must play an important role in pushing up the rate of capital formation. If it fails to do so, the whole process economic development will suffer a setback.

Supply of raw material to agro-based industries:

• Agriculture supplies raw materials to various agro-based industries like sugar, jute, cotton textile and Vanaspati industries. Food processing industries are similarly dependent on agriculture. Therefore, the development of these industries entirely is dependent on agriculture.

Market for industrial products:

• Increase in rural purchasing power is very necessary for industrial development as two- thirds of Indian population live in villages. After green revolution the purchasing power of the large farmers increased due to their enhanced income and negligible tax burden.

Influence on internal and external trade and commerce:

• Indian agriculture plays a vital role in internal and external trade of the country. Internal trade in food-grains and other agricultural products helps in the expansion of service sector.

Contribution in government budget:

• Right from the First Five Year Plan agriculture is considered as the prime revenue collecting sector for the both central and state budgets. However, the governments earn huge revenue from agriculture and its allied activities like cattle rearing, animal husbandry, poultry farming, fishing etc. Indian railway along with the state transport system also earn a handsome revenue as freight charges for agricultural products, both-semi finished and finished ones.

Need of labour force:

• A large number of skilled and unskilled labourers are required for the construction works and in other fields. This labour is supplied by Indian agriculture.

Greater competitive advantages:

• Indian agriculture has a cost advantage in several agricultural commodities in the export sector because of low labour costs and self- sufficiency in input supply.

Recent contribution of Agriculture to Indian Economy

• In 2019-20 total production of horticultural products in India was about 310 million tonnes.
• In 2019-20, India produced about 24 million tonnes of onion and exported about 2 million tonnes from it.
• The potato production in 2019-20 was about 51 million tonnes and tomato production stood at about 19 million tonnes.
• As per estimates, total fresh vegetables production was about 97 million tonnes and about 16 lakh tonnes of it was exported.
• Grape’s production in 2019-20 was about 1.9 lakh million tonnes, mangoes stood at about 49 thousand million tonnes (besides processed mango pulp adding another 85 thousand tonnes).
• As of 2019, India’s livestock population rose to around 530 million including cattle, buffaloes, goats, sheep, pigs and poultry.
• India is world’s largest milk producer and exports milk to countries like Bangladesh, Nepal, Bhutan, the UAE, and Afghanistan etc.
• In 2019-20 about 190 million tonnes of milk was produced. In 2019-20, poultry meat in India accounted for about 4 million tonnes and buffalo meat for about 1.5 million metric tonnes.
• India’s fish production in 2019-20 was approximately 13 thousand tonnes.
• In terms of export, India exported about 11 lakh million tonnes of buffalo meat, 14 thousand million tonnes of sheep/goat meat and 3.5 lakh million tonnes of poultry products in 2019-20.

Characteristics and features of Indian Agriculture

• Source of livelihood: Agriculture is the main occupation. It provides employment to nearly 61% persons of total population. It contributes 25% to national income.
• Dependence on monsoon: Agriculture in India mainly depends on monsoon. If monsoon is good, the production will be more and if monsoon is less than average then the crops fail. Sometimes floods play havoc with our crops. As irrigation facilities are quite inadequate, the agriculture depends on monsoon.
• Labour intensive cultivation: Due is increase in population the pressure on land holding increased. Land holdings get fragmentated and subdivided and become uneconomical. Machinery and equipment can not be used on such farms.
• Under employment: Due to inadequate irrigation facilities and uncertain rainfall, the production of agriculture is less, farmers find work a few months in the year. Their capacity of work cannot be properly utilised. In agriculture there is under employment as well as disguised unemployment.
• Small size of holdings: Due to large scale sub-division and fragmentation of holdings, land holding size is quite small. Average size of land holding was 2.3 hectares in India while in Australia it was 1993 hectares and in USA it was 158 hectares.
• Traditional methods of production: In India methods of production of agriculture along with equipment are traditional. It is due is poverty and illiteracy of people. Traditional technology is the main cause of low production.
• Low Agricultural production: Agricultural production is low in India. India produces 27 Qtls. wheat per hectare. France produces 71.2 Qtls per hectare and Britain 80 Qtls per hectare. Average annual productivity of an agricultural labourer is 162 dollars in India, 973 dollars in Norway and 2408 dollars in USA.
• Dominance of food crops: 75% of the cultivated area is under food crops like Wheat, Rice and Bajra, while 25% of cultivated area is under commercial crops. This pattern is cause of backward agriculture.

Challenges of Indian Agriculture

• Instability: Agriculture in India is largely depends on monsoon. As a result, production of food-grains fluctuates year after year. A year of abun­dant output of cereals is often followed by a year of acute shortage.
• Cropping Pattern: The crops that are grown in India are divided into two broad catego­ries: food crops and non-food crops. While the former comprise food-grains, sugarcane and other beverages, the latter includes different kinds of fibres and oilseeds.
• Land Ownership: Although the owner­ship of agricultural land in India is fairly widely distributed, there is some degree of concentration of land holding. Inequality in land distribution is also due to the fact that there are frequent changes in land ownership in India. It is believed that large parcels of land in India are owned by a- relatively small section of the rich farmers, landlords and money-lenders, while the vast majority of farmers own very little amount of land, or no land at all.
• Sub-Division and Fragmentation of Hold­ing: Due to the growth of population and break­down of the joint family system, there has occurred continuous sub-division of agricultural land into smaller and smaller plots. At times small farmers are forced to sell a portion of their land to repay their debt. This creates further sub-division of land.
• Land Tenure: The land tenure system of India is also far from perfect. In the pre-independence period, most tenants suffered from insecurity of tenancy. They could be evicted any time. How­ever, various steps have been taken after Independ­ence to provide security of tenancy.
• Conditions of Agricultural Labourers: The conditions of most agricultural labourers in India are far from satisfactory. There is also the problem of surplus labour or disguised unemploy­ment. This pushes the wage rates below the sub­sistence levels.
• Manures, Fertilizers and Biocides: Indian soils have been used for growing crops over thousands of years without caring much for replenishing. This has led to depletion and exhaustion of soils resulting in their low productivity. The average yields of almost all the crops are among t e lowest in the world. This is a serious problem which can be solved by using more manures and fertilizers.
• Irrigation: Although India is the second largest irrigated country of the world after China, only one-third of the cropped area is under irrigation. Irrigation is the most important agricultural input in a tropical monsoon country like India where rainfall is uncertain, unreliable and erratic India cannot achieve sustained progress in agriculture unless and until more than half of the cropped area is brought under assured irrigation.
• Lack of mechanization: In spite of the large-scale mechanization of agriculture in some parts of the country, most of the agricultural operations in larger parts are carried on by human hand using simple and conventional tools and implements like wooden plough, sickle, etc. Little or no use of machines is made in ploughing, sowing, irrigating, thinning and pruning, weeding, harvesting threshing and transporting the crops.
• Agricultural Marketing: Agricultural marketing still continues to be in a bad shape in rural India. In the absence of sound marketing facilities, the farmers have to depend upon local traders and middlemen for the disposal of their farm produce which is sold at throw-away price.
• Inadequate transport: One of the main handicaps with Indian agriculture is the lack of cheap and efficient means of transportation. Even at present there are lakhs of villages which are not well connected with main roads or with market centres.

Government initiatives, policies and measures

Nowadays Government of India is giving more priority for the welfare of farmers. In this regard it is implementing several farmers welfare schemes to re-vitalize agriculture sector and to improve their economic conditions.  Therefore, the government has rolled out new initiatives, schemes, programmes and plans to benefit all the farmers.

 

National Agriculture Market (eNAM)

National Agriculture Market (eNAM) is a pan-India electronic trading portal which networks the existing APMC mandis to create a unified national market for agricultural commodities.

Small Farmers Agribusiness Consortium (SFAC) is the lead agency for implementing eNAM under the aegis of Ministry of Agriculture and Farmers’ Welfare, Government of India.

Vision

• To promote uniformity in agriculture marketing by streamlining of procedures across the integrated markets,
• Removing information asymmetry between buyers and sellers promoting real time price discovery based on actual demand and supply.

National Mission for Sustainable Agriculture (NMSA)

National Mission for Sustainable Agriculture (NMSA) has been formulated for enhancing agricultural productivity especially in rainfed areas focusing on integrated farming, water use efficiency, soil health management and synergizing resource conservation.

Schemes under NMSA

• Rainfed Area Development (RAD): RAD is being implemented by RFS Division
• Soil Health Management (SHM): SHM is being implemented by INM Division
• Sub Mission on Agro Forestry (SMAF): SMAF is being implemented by NRM Division
• Paramparagat Krishi Vikas Yojana (PKVY): PKVY is being implemented by INM Division
• Soil and Land Use Survey of India (SLUSI): Being implemented by RFS Division
• National Rainfed Area Authority (NRAA): Being implemented by RFS Division
• Mission Organic Value Chain Development in North Eastern Region (MOVCDNER): Being implemented by INM Division
• National Centre of Organic Farming (NCOF): Being implemented by INM Division
• Central Fertilizer Quality Control and Training Institute (CFQC&TI): implemented by INM division

Pradhan Mantri Krishi Sinchai Yojana (PMKSY)

Har Khet ko Pani “Prime Minister Krishi Sinchayee Yojana”

 Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) has been formulated with the vision of extending the coverage of irrigation ‘Har Khet ko pani’ and improving water use efficiency ‘More crop per drop’ in a focused manner with end-to-end solution on source creation, distribution, management, field application and extension activities.

Objectives:

• Achieve convergence of investments in irrigation at the field level (preparation of district level and, if required, sub district level water use plans).
• Enhance the physical access of water on the farm and expand cultivable area under assured irrigation (Har Khet ko pani).
• Integration of water source, distribution and its efficient use, to make best use of water through appropriate technologies and practices.
• Improve on – farm water use efficiency to reduce wastage and increase availability both in duration and extent.
• Enhance the adoption of precision – irrigation and other water saving technologies (More crop per drop).
• Enhance recharge of aquifers and introduce sustainable water conservation practices.

Paramparagat Krishi Vikas Yojana (PKVY)

The Paramparagat Krishi Vikas Yojana (PKVY), an initiative to promote organic farming in the country, was launched by the NDA government in 2015.

According to the scheme, farmers will be encouraged to form groups or clusters and take to organic farming methods over large areas in the country.

Objectives:

• Promotion of commercial organic production through certified organic farming.
• The produce will be pesticide residue free and will contribute to improve the health of consumer.
• It will raise farmer’s income and create potential market for traders.
• It will motivate the farmers for natural resource mobilization for input production.

Pradhan Mantri Fasal Bima Yojana (PMFBY)

Pradhan Mantri Fasal Bima Yojana (PMFBY) is the government sponsored crop insurance scheme that integrates multiple stakeholders on a single platform.

 Objectives

• To provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests & diseases.
• To stabilise the income of farmers to ensure their continuance in farming.
• To encourage farmers to adopt innovative and modern agricultural practices.
• To ensure flow of credit to the agriculture sector.

Gramin Bhandaran Yojana

Gramin Bhandaran Yojana, or Rural Godown Scheme, is an Indian government initiative to offer subsidies to individuals or organizations which build or repair rural godowns.

Objective of this Scheme:

• Create scientific storage capacity with allied facilities in rural areas.
• To meet the requirements of farmers for storing farm produce, processed farm produce and agricultural inputs.
• Promotion of grading, standardization and quality control of agricultural produce to improve their marketability.
• Prevent distress sale immediately after harvest by providing the facility of pledge financing and marketing credit by strengthening agricultural marketing infrastructure in the country.

Livestock insurance Scheme

This scheme aims to provide protection mechanism to the farmers and cattle rearers against any eventual loss of their animals due to death and to demonstrate the benefit of the insurance of livestock to the people and popularize it with the ultimate goal of attaining qualitative improvement in livestock and their products.

Benefits:

• The rural insurance policy is designed to offer insurance cover to indigenous cattle owned by farmers, cooperative societies, dairy farms and the like.
• Security in case of death of cattle shall be provided for the following: –
• Natural accidents. (Flood, famine, earthquake, etc.)
• Unpredictable circumstances. (Accidental in Origin.)
• Surgical Operations.
• Terrorist Act.
• Strikes and Riots
• Civil Commotion risk

 

Micro Irrigation Fund (MIF)

The government approved a dedicated Rs5,000 crore fund to bring more land area under micro-irrigation as part of its objective to boost agriculture production and farmers income.

The fund has been set up under NABARD, which will provide this amount to states on concessional rate of interest to promote micro-irrigation, which currently has a coverage of only 10 million hectares as against the potential of 70 million hectares.

 

Soil Health Card Scheme

 

• Launched in 2015
• the scheme has been introduced to assist State Governments to issue Soil Health Cards to all farmers in the country.
• The Soil Health Cards provide information to farmers on nutrient status of their soil along with recommendation on appropriate dosage of nutrients to be applied for improving soil health and its fertility.

Neem Coated Urea (NCU)

• This scheme is initiated to regulate use of urea, enhance availability of nitrogen to the crop and reduce cost of fertilizer application.
• NCU slows down the release of fertilizer and makes it available to the crop in an effective manner.
• The entire quantity of domestically manufactured and imported urea is now neem coated.
• It reduces the cost of cultivation and improves soil health management.

Rainfed Area Development Program (RADP)

Rainfed Area Development Program (RADP) was implemented as a sub-scheme under Rashtriya Krishi Vikas Yojana (RKVY).

 Aim

• To improve quality of life of farmers’ especially, small and marginal farmers by offering a complete package of activities to maximize farm returns.
• Increasing agricultural productivity of rainfed areas in a sustainable manner by adopting appropriate farming system based approaches.
• To minimize the adverse impact of possible crop failure due to drought, flood or un-even rainfall distribution through diversified and composite farming system.
• Restoration of confidence in rainfed agriculture by creating sustained employment opportunities through improved on-farm technologies and cultivation practices
• Enhancement of farmer’s income and livelihood support for reduction of poverty in rainfed areas.

National Watershed Development Project for Rainfed Areas (NWDPRA)

The scheme of National Watershed Development Project for Rainfed Areas (NWDPRA) was launched in 1990-91 based on twin concepts of integrated watershed management and sustainable farming systems.

 Aims:

• Conservation, development and sustainable management of natural resources.
• Enhancement of agricultural production and productivity in a sustainable manner.
• Restoration of ecological balance in the degraded and fragile rainfed eco-systems by greening these areas through appropriate mix of trees, shrubs and grasses.
• Reduction in regional disparity between irrigated and rainfed areas and;
• Creation of sustained employment opportunities for the rural community including the landless.

 

Farm Bills (Repeal)

Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020

• expands the scope of trade areas of farmers’ produce from select areas to “any place of production, collection, aggregation”.
• allows electronic trading and e-commerce of scheduled farmers’ produce.
• prohibits state governments from levying any market fee, cess, or levy on farmers, traders, and electronic trading platforms for the trade of farmers’ produce conducted in an ‘outside trade area’.

Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020

• provides a legal framework for farmers to enter into pre-arranged contracts with buyers including mention of pricing.
• defines a dispute resolution mechanism.

Essential Commodities (Amendment) Act, 2020

• removes foodstuff such as cereals, pulses, potato, onions, edible oilseeds, and oils, from the list of essential commodities, removing stockholding limits on agricultural items produced by Horticulture techniques except under “extraordinary circumstances”

requires that imposition of any stock limit on agricultural produce only occur if there is a steep price rise.

 

Source: Insights IAS