Вы находитесь на странице: 1из 30

FISCAL SPACE

A difficult phase in Indian fiscal history began with Lehman crisis of 2008. The fiscal
deficit increased by 4%, which was equally shared between reduction in revenue
due to large indirect tax cuts and rise in expenditures. In the initial years (20092011), current expenditures (public consumption) increased dramatically due to
rising subsidy bill (1% of GDP), increase in pay and allowances after the
implementation of 6th Pay Commission recommendation (0.4% of GDP) and social
benefit entitlements like MNREGA (0.3% of GDP).
Hence as a mid-term strategy Govt should focus on reducing the fiscal
deficit to 3% and eliminating the revenue deficit as per the FRBM Act. This is
essential for ensuring the credibility of the nation and also to bring India closer to its
emerging market peers. The adherence to fiscal in the mid-term is necessary
because the Govt come and go, but as a nation we need to instill confidence and
certainty in the mind of investor and this would not be possible if we keep changing
the targets of FRBM frequently. Govt should also reverse the trend of revenue deficit
and move towards the golden rule of 0% revenue deficit and ensuring that
borrowing is only for capital formation.
The above reduction in fiscal deficit should come through
rationalization of expenditure and switching of expenditure from consumption (via
rationalization of subsidies) to investment. This switch will be beneficial in the long
run by reigning in inflationary tendencies because investment will add to the
capacity and boost the supply side of economy.
Also, it is expected with the picking up of growth and implementation of
GST when combined with expenditure control will help us meet the fiscal target.
According to the history of growth surge in last decade, it is expected that after
implementation of GST and growth in economy, more tax revenue will be generated
for the govt due to tax buoyancy.

Why Subsidy needs to be rationalized?


After 7 decades from Independence India is still struggling with mass poverty. One
of the most important and constant measure which have Govt has resorted to fight
poverty has been the subsidy. Govt subsidies a range of services and commodities
for the poor like for example rice, wheat, kerosene, railways, electricity, water etc.
The subsidy bill cost us around 4.8% of GDP. This clearly highlights despite huge
spending subsidies have not worked in the way intended. Issues with subsidies:
1. Subsidies are regressive in nature Although subsidies have been planned
and disbursed for the poor to benefit but they tend to benefit more the rich
household than the poor. For example according to the IMF paper, electricity
benefit does not reach the people living in destitution due to lack of
electricity connection in the first place. Even among the household which

have connection bottom quintile of the household use only 10% of the
subsidy whereas top quintile uses 37% of the subsidy bill because rich
household consume more power due to their better lifestyle. Similarly,
bottom 50% of household use only 25% of LPG subsidy. Another example
would be the cross subsidization of railway fares in India. It benefits more the
rich household because bottom 80% of the household constitutes only 28% of
the total originating passengers.
2. Price Subsidies Distort the Market which ultimately hurt the poor In a free
market economy price plays a very important role in the resource allocation.
A subsidy in the price affects the decision making of the producer and
consumer resulting in misallocation of the resources and their suboptimal
usage. This ultimately dampens the aggregate productive and thus hurt the
poor. For Example:
Due to higher MSP offered for the rice and wheat, farmers resort to overcultivation of cereals and under-cultivation of non-MSP supported crops. This
demand and supply gap in non-MSP supported crops give rise to food inflation
which hurt the poor most because they tend to have uncertain income
streams and do not have the capability to withstand inflationary spikes.
Similarly subsidy in water leads to cultivation of water-intensive crops,
irrespective of the agro-ecological region, resulting in lowering of the water
table. Marginalized farmers without the infrastructure for irrigation are thus
hurt in the long run.
Similarly, due to high price elasticity of the poor farmer in fertilizer
consumption, fertilizer subsidy is more beneficial for the fertilizer producer
and rich farmer who are less elastic to the price. Also since price of fertilizer
is controlled, it offers no incentive to producer to supply fertilizer to remote
areas. Remote geographical locations are already economically poor and in
absence of agricultural inputs they are bound to remain poor in perpetuity. To
correct this anomaly Govt of India introduced freight subsidy for fertilizer
transportation but that is insufficient as railway freight rates are already very
high due to cross subsidization. This is how multiple subsidies sometimes
interact and hurt the poor.
Indian railway passenger fares are highly cross
subsidized due to which freight tariffs are one of the highest in the world. This
reduces the competitiveness of the Indian manufacturing and raises the cost
of manufactured goods. Also this leads to switching over of freight traffic from
railways to road transport adding to the problems like pollution, road
congestion, road accidents etc. This ultimately hurt the economy and mostly
the poor.
3. Structure of subsidy is extremely complex The implementation of subsidy is
extremely complex giving opportunity for corruption and making the market
highly inefficient. For example, in case of fertilizer they are firm specific and
import consignment specific, sometimes based on fixed quantity basis or
variable quantity and sometimes based on kind of fertilizer.

4. Large Scale leakage in the subsidy platform For example only 46% of the
distributed kerosene reaches the poor household, rest all is consumed in the
black market either for adulteration for petrol and diesel or as a fuel in small
businesses.
Above reason make it necessary for the Govt to rationalize the subsidy. The
rationalization of subsidy should not be seen as anti-poor. As already mentioned the
subsidy are regressive in nature and distort the market which hurt the poor. Also
leakage in the system reduces the effectiveness of the subsidy program. In fact with
the rationalization of subsidy Govt will be able to enhance its fiscal space which can
used in the social sector welfare schemes.
Transferring the subsidies directly in
cash form is an alternative to rationalize the subsidy program. With the growth of IT
and communication services it has become possible for the government to
implement direct transfer of subsidies. Direct transfer of subsidies offer various
benefits like
-

Cash transfer will augment the efficiency of the anti-poverty measures.


Recent experimental evidence has concluded that it boost the household
consumption and asset ownership.
By eliminating a lot of middle offices and human administration interface it
reduces the leakage substantially and results in lot of saving for the
Government.
It results in better targeting of the beneficiary and eliminates ghost
beneficiary.
Direct cash transfer fulfill the task of supporting the poor household without
distorting the market and hence result in efficient utilization of resources.

Govt does not intend to eliminate the subsidy but want to provide the support in
another form. The JAM trinity Jan Dhan Yojana, Aadhar and Mobile number allows
the Govt to offer support in a targeted and less distortive manner.
Scope of JAM
As of December 2014, 720 mio Aadhar cards have already been issued and with the
current subscription rate it is expected that by the end of 2015 it will cross 1 bio
mark.
Govt has launched the Jan Dhan Yojana
under which each poor household is provided with zero balance bank account and a
RuPay card. This enables the financial inclusion of the poor and greatly enhances
the capability of the govt to provide other financial services like insurance and
pension coverage. Linking the bank account with the Aadhar number is the
prerequisite for the transfer of subsidies and to this effect already 100 mio bank
accounts have been seeded with Aadhar number.
Two other viable alternatives for financial delivery are mobile money

and post office transfers. India has close to 900 mio plus mobile phone users with
600 mio unique subscribers. Moreover 370 mio of mobile phone users are based in
rural areas. Mobile thus offers are very viable solution to last mile connectivity.
Given Aadhar card number already having mobile number as one of the information
and phone operators showing interest in payment banks floated by RBI, mobile
money offers tremendous opportunity for the cash subsidy transfer.
India has a vast network of roughly 1.55 lakh post-offices with nearly
90% of them in rural areas. They have already earned the reputation and
experience of working in the remotest of the area which banks do not find
economically viable to open a branch. Thus, post-office could act as payment
transfer or regular bank if allowed by the RBI. They can register through an IFSC
code and open bank account linked with the Aadhar number.

Story of Indias stalled projects and way out for troubled PPP

As per the Economic survey India has close to 7% of GDP (8.8 lakh crore) worth of
projects pending in the public and private due to different reason. The situation has
improved a bit from last year when around 8.3% of GDP worth of projects was
stalled. An analysis of the same would give us better understanding why projects
are stalled.
Out of 8.8 lakh crore, 7 lakh crore are in the private sector and 1.8 lakh
crore in the public sector. Hence overwhelmingly large numbers of projects are
stalled in the private sector. Private projects are held up on account of poor market
conditions and non-regulatory factors contrary to the general perception of lack of
governmental clearances. Whereas majority of the public projects are stalled due to
absence of regulatory clearances. In private sector mainly manufacturing and
infrastructure projects and in public sector mainly infrastructure projects are stuck.
Manufacturing is stifled due to poor macro-economic environment.
With poor growth in demand from USA, Greece crisis in EU, slowing down of China
etc demand has decreased.
On the other hand electricity sector projects are hauled up due to lack of fuel
and feedstock problem. Coal India has not been able to provide raw material as per
its commitment in Fuel Supply Agreement. Production of coal has almost stagnated
in last 3-4 years.

Mining and construction activities have suffered on the hand of


environmental clearances. Hence each sector is suffering from different problem but
the distribution of stalled projects is top heavy. That means, clearing the top 100
projects by value will address the 83% problem of the stalled projects.
Balance Sheet Syndrome The stalled projects have not only
dampened the growth of economy but have also severely stretched the balance
sheet of corporates and raised the stressed assets of public sector banks to an
alarming level. Hence this creates a vicious cycle where corporates do not have
enough credit to make new investment and they have passed on stressed assets to
banks due to which they cannot disburse further credit leading to slowing down in
investment.
The balance sheet syndrome of Indian corporates has a certain Indian
characteristic to it. The high debt-equity ratio of the corporates is accompanies by
relatively high growth of 6-7% and secondly it has been in a high inflation
environment. Usually in developed countries debt overhang develops with
deflationary pressure. The public sector is exposed to private sector in the form PPP
and lending by the public sector banks. Unlike the developing countries, Indias high
debt-equity ratio of corporates is financed by the banks rather than the corporate
bond market and this has led to high stressed assets and NPA in banks.
Although the debt-equity ratio has been rising, economy has slowed
down in last 5 years, weak balance sheets and higher NPA, equity market has been
on rise for past 3 years. This has puzzled the market readers and only plausible
explanation could be that investors expect significant turnaround in the investment
cycle. Also they must have expectation that Govt will step in before the projects fail
as they are mostly funded by public sector banks which Govt cannot allow to fail.
Govt of India has drawn 2 policy lessons from the above investment environment:
1. Due to bloated balance sheets of corporates and high stressed assets with
the public sector banks they are in no place to make further investment.
Hence, public sector investment is required to crowd in private sector
investment. Govt has to make this investment keeping in light the fiscal
deficit target and hence there is an urgent need of rationalization of
government expenditure especially subsidy.
2. PPP model has so far not worked properly and hence need to be revitalized. In
addition, we need to think about the setting up of Independent Renegotiation
Committee to come out with innovative solution for PPP struggling with
litigation. Also we need to devise easy mechanism for bankruptcy and exit to
clear the failed projects and distribute the loss among the stakeholders.
Problem with the current PPP model
Many infrastructure projects today are financially stressed and account for roughly
one-third of the stressed assets in banks. Banks due to higher NPAs are no position

to provide credit and new projects are not able to attract new bidders as seen in
NHAI bids. Also pension and insurance sector are reluctant to invest in infrastructure
due to inherent risk in the projects. The PPP projects are struggling for a variety of
reason dealing with the poorly designed framework, namely:
1. More focus on Revenue: Existing projects focus excessively on the revenue
earned by the Govt rather than the provision of services for the customer.
This leads to higher payment by the user for a sub-optimal service.
2. Misallocation of Risk: The risk of the projects are severely misallocated and
given to the parties who are not able to manage it. For Ex Traffic risks are
borne by the developer in the highway project when clearly traffic is not
under the control of developer.
3. Lack of Renegotiation avenues: There are no ex-ante structures for
renegotiation. There is no incentive for a bureaucrat to renegotiate a stalled
project in fact if done it can open the doors for charges of graft against the
bureaucrat. The structure asymmetrically favours failure of the projects over
renegotiation.
4. Excessive Overbidding: Contractors have relentlessly relied on excessive
overbidding to get the project and then exploit loopholes in the framework
through litigation at the later date to revise the contract.
5. Limited Penalties: The source of revenue for the projects is mostly user
collected charges. In case of gap between the revenue stream and project
cost Govt provides viability gap funding to make the project viable. This is
provided at the start of the project. Later even in the case of
underperformance or non-performance of the project Govt can only rely on
the termination of the contractor.

New Model for the PPP projects:


Firstly, the projects should continue with the combining of construction and
maintenance to incentivize quality building in the first place. In some projects like
highways maintenance cost is more than the building cost and hence combined
bidding will make the bidder to take into account the life cycle cost.
Secondly, risk should be transferred to only those parties who can control and
manage it. For ex traffic risk should not be transferred in railway or highway project
to operator where as in port or telecommunication project it can be done as due to
presence of other competitor pricing and quality affect the demand.

Thirdly, financing structure should attract the pension and insurance funds because
they have the capability to fund long term infrastructure projects. At the same time
Govt should also focus on building up the corporate bond market.

BANKING
Status of the Banking Sector in India
Currently banking sector of India is struggling with many problems like high
proportion of stressed assets, NPAs, difficulty in acquiring resources to meet the
BASEL 3 requirement and the need for Governance reform (PJ Nayak Committee
Reform). These are comparatively new problems but there are other problems which
have existed for long and are related to the policy and structure of the banking
industry in India.

Financial Repression: This reflects the policy challenge faced by the Indian banks.
The Indian financial system is afflicted with double financial repression. On the
assets side of the balance sheet this is caused by the SLR requirement that forces
the bank to hold government securities and priority sector lending that forces suboptimal allocation of financial resources. Financial repression on the liability side
arises from the high inflation from 2007 onwards which has led to negative real
interest rates and hence fall in household savings.
Structural Problem: This relates to the lack of competition and ownership. Lack of
increase in presence of private sector banks shows the lack of competition in the
market. The biggest anomaly is during the high growth phase of last decade which
was achieved by the private sector growth and investment was funded by the public
sector and the private sector banks growth was close to stagnant. So India
witnessed a growth led by private sector which was not funded by the private sector
banks.
How to deal with these problems?
SLR Reduction and its benefits
SLR has long history and has been started around in 1970s. Earlier they were
around 38% in the period before 1991 and later declined to close to 25%. Over the
years SLR has become the source of cheap financing for the Govts fiscal deficit and
hence reduction highly depends on the Govts fiscal position.
SLR is a form of financial repression in which government consumes the
public savings at the cost of private sector. Recently RBI has reduced the in steps
from 25% to 21.5%. With the projected growth of India in the coming years, reigning
in of the inflation and improvement of debt outstanding for India from 80% to 60%
offers a unique opportunity to further pursue reduction in SLR. Although the
reduction in SLR would lead to Govts cost of loan going up but with lowering of
inflation real interest would also come down negating the effect of increase due to
SLR.
Another benefit of SLR is that it offers the opportunity to the banks to
meet their recapitalization target for BASEL 3. With the reduction in the interest
rates, G-Secs have gone capital appreciation and banks can offload, if SLR reduction
is allowed, and use the capital gain for meeting the capital requirements under
BASEL 3.
SLR requirement has prevented the development and deepening of the
G-Secs market which in turn have hampered the growth of corporate bond market.
Corporate bond market is the need of the hour for the alternative financing of the
financially starved infrastructure projects.
Also the freed up capital due to reduction of SLR would create more
space in the balance sheet for the disbursement of the capital leading to higher
investment and growth
Rationalization of Priority Sector Lending

Govt has over the year tried to alleviate poverty and achieve inclusive growth
through equality of credit via priority sector lending scheme. Under the scheme it is
mandatory for the domestic public and private sector banks to disburse 40% of their
adjusted net bank credit in the pre-defined priority sectors like agriculture, housing
etc. For foreign banks with more than 20 branches in India they have to disburse
32%. Although scheme seems to be targeted approach of growth which is necessary
for inclusive growth but it is suffering from many problems. For example lets take
the example of agriculture sector:
-

Over the years credit to agriculture has increased tremendously. In fact in last
15 years it has grown 8 times in nominal terms and yet the contribution of
agriculture to GDP remains roughly same. This highlights that the allocation
of credit is not being used efficiently and has not resulted in growth of
agriculture.
There has been sharp increase in the large size loans highlighting the fact PSL
is being appropriated by the large and wealthy farmers.
The outstanding and defaulted loans against the credit made in agricultural
sector are mainly from urban and metropolitan areas. So the rich farmers are
defaulting more than the poor farmers. Also this highlights that the loan
waiver benefits more to rich farmer than the poor farmer.
There has been sharp decrease in disbursement of long term credit from 70%
in 1990-91 to 40% in 2011-12 which shows that credit is not being used for
asset creation which was the intended purpose of PSL.
March Rush - Disbursal of credit is concentrated around the last 4 months of
fiscal year. This is not the agriculture season when farmers need the credit.
This show the loans are disbursed inefficiently towards the end of year just to
meet the annual target.

How to revive the Banking sector?


4D policy
1. Deregulate: As the inflation has come under control this automatically
removes the liability side repression. To tackle the asset side liability
repression, Govt should in steps decrease the SLR to provide liquidity to the
banks and depth to the govt bond market. Also Govt should provide
incentives for a deeper bond market. Govt should also have a relook in the
PSL and remodel along the evidence-based policy making guidelines to make
it better targeted and need-driven.
2. Differentiate within PSB: All the PSBs are not identical in their performance
and there is significant variation. Thus one size fits all approach should be
avoided and different PSB should be approached with different governance
reforms, public ownership, exit and recapitalization methods.
3. Diversify within and outside the banking system: More and more kinds of
bank should be encouraged. RBI has already taken steps by allowing
payment banks, shadow banks and giving licenses for new private banks.

Also healthy competition should be development between banks and the


capital market which needs govt policy support.
4. Disinter: India needs better policies for bankruptcy and easy exit. India should
revisit the idea of Independent Renegotiation Commission.
- Debt recovery tribunals are over-burdened and under-resourced.
- Asset Restructuring Companies in which banks themselves have significant
ownership creates misaligned incentives.
- SARFAESI seems to act more against the small and medium terms
enterprises.
How to Develop Corporate Bond Market?
1. Improvement in Legal Framework Strengthening of the legal framework for
regulation of corporate bond market by amendments in the rules framed by
Ministry of Corporate Affairs, SARFAESI Act and Income Tax Act.
2. Promoting Investment in the market Govt should modify the guidelines of
investment for pension fund and insurance fund to allow them to invest in the
market. This will provide a stable and long term investor to the capital
market. Also rationalization of the withholding tax on FIIs for G-Secs and
corporate bonds will promote investment.
3. Deepening and diversification of the market Govt should allow introduction
of new products such as credit default swaps, municipal bonds, securitization
swaps etc. This will diversify and deepen the markets and make it more
stable. Also insurance companies should be allowed to participate in repo
market to make it more liquid.
4. Supporting Infrastructure New trading platform and risk management
system for corporate bonds including a centralized database on outstanding
amount, settlement value and traded volume to eliminate fragmentation of
information.

Railways

IMF in its World Economic Report has highlighted the benefits of public investment
in infrastructure. In the short run it boosts aggregate demand and crown in the
private investment. In the long run, it adds to the capacity and check the inflation
by boosting the supply side. To boost the growth of Indian economy Govt of India
has selected railway as one of the avenue for public investment.
Issues?
Railway is closely linked with the other sectors of Indian economy like
manufacturing, tourism, transportation etc. Investment in railways has positive
spillover effect in terms of reduction of cost, boost agglomeration economies and
improve the competitiveness of the economy.
Over the years investment in railways has remained almost stagnant. The
consequences of the under investment:
-

Capacity expansion of the railways has been severely hampered. In 1990


Indias and Chinas railway network was roughly equal with India having a
slightly higher coverage. But today Chinas coverage is roughly 1.5 times that
of India. Indias railway expansion has increased marginally. Due to lack of
capacity addition the share of railways in GDP has fallen to 1% in recent
years.
Apart from the stagnant capacity Indian railways has not been able to
improve on the speed of the trains and its haulage capacity. Due to lack of
investment wagon, engine and track design has remained same over the
years making India the slowest railways amongst its emerging countries
peers.
Sub-Optimal Use of Resources - Due to poor network capacity traffic
congestion is widespread on all routes. This has led transfer of passenger and
freight traffic from railways to road sector. Railway as mode of transport is
more cost and fuel efficient and is also less polluting compared to the road
transport. Hence this shift is a huge economic burden on the country and is
leading to sub-optimal usage of resources.
Reduction in competitiveness of industries - Same track network is used by
both passenger and freight trains in India. With 65% of the network capacity
being used by the passenger trains, this has posed constraints on the freight
movement. The outcomes have been longer delivery time, delay and more
inventories holding by the companies to battle uncertainty. This has reduced
the competitiveness of our industries.

Poor infrastructure development Railways still have age old infrastructure in


the form old and creaking platforms, old technology wagons etc. The biggest
downfall has been the upgradation of safety technology. On account of lack
investment India still uses outdated safety measure and signaling system
leading to frequent accidents causing huge economic and human loss.

How can railways boost growth?


Railways have strong backward linkages i.e. investment in railway creates demand
in other sector like manufacturing. Increasing the railway out by 1 increase the
economy output by 3.3, this multiplier has been increasing over time and the effect
is greatest on the manufacturing sector. Thus scheme to invest in railways is a
natural partner to Make in India program.
Further there are many sectors where railway services are used as an
input and hence it has strong forward linkages too. Forward linkage multiplier is
close to 2.5. This multiplier has declines over time but this has been due to capacity
constraint in railways caused by under-investment in railways.
How can finances be arranged for railway expansion?
We should take a cue from China on how they expanded their network in last 20
years.
-

Significant proportion of investment in Chinese Railways comes from the


collaboration between the centre and the provincial government.
For specific freight projects major users such as coal mines, industries etc
contribute to the development of the project.
A part of the freight tariff is allocated to specific fund which is used only for
infrastructure capital spending. This eases the pressure on fiscal budget for
capacity expansion
Chinese railway has been corporatized and is allowed to raise loans in China
and in foreign markets.

APMC
With the liberalisation of economy in 1991 industrial sector was allowed to buy and
sell on their own choice but the agriculture sector has still not seen the benefits of
the same. Indian farmers, in many states, still have to sell their produce to APMC
licensed entities. A national market for agricultural produce has still not emerged.
The APMC act was passed with the dual intention of preventing exploitation of
farmers by traders and making sure they get the right price for their produce.
In the early years after independence, the farmers had to deal with money lenders.
Lack of credit sources and supply alternatives, the farmer had to sell his produce
to money lenders at the latters whims and fancies. The money lender also fixed
its selling price arbitrarily. Thus both the farmer and consumers were at loss.
In order to tackle this APMC Act was brought so as to regulate the market for
Agricultural Produce, mainly fruits and vegetables. Although other items were also
there. In this system every state setup its APMC i.e. Agricultural Produce Marketing
Committee. The role of it was similar to what FCI does in food grains. APMC procures
the fruits and vegetables of farmers and regulates its sale in regulated markets.
This system was successful in eliminating the dependency of farmers on money
lenders. But another type of spoil system developed. The middlemen i.e.
contractors, commission agents, suppliers, transporters etc have made a mockery
of the intended process. The result is large cartels among them. New entrants
find it extremely difficult to compete and negotiate so as sustain in this business.
Also the APMC staff is often found indulging in corrupt practices, thus neglecting this
foul system.
The provisions and issues with the act
1) Membership the act provides for timely elections for the membership of the
marketing committees. But, hardly any elections take place, thus run mostly by
bureaucrats. Hence red tapism and nepotism prevails.
2) License to traders to trade in the market yards, traders have to acquire a
license according to the act. But, in most states the issuing of new licenses has

come to a halt, thereby reducing competition and making it easier for the
established traders to exploit farmers.
3) Double commission by traders the traders buy from the farmers at a low
price, makes commission there. They sell to the consumers at a high price, earn
commission there. Thus, the customer and farmer are both affected.
4) Politicization There has been perception that the position of head of the
market committee at the state level and market board are occupied by political
influential. Licensed agents enjoy close relationship with these politicians and enjoy
monopoly power and hence lead to cartelization.
5) Monopoly of trader - Due to the act farmers are not allowed to sell their
produce in other markets like retail chains, exporters which are ready to offer better
prices saved from eliminating the middle man. This creates artificial monopoly of
the traders and act needs reform to remove the barrier entry for other players
6) Multiple Fees APMC levy multiple fees that are of substantial magnitude and
are non-transparent in nature. Such high level of taxes at the entry level has
cascading effects on the prices of the commodity.
7) Lack of Infrastructure Although the fees are collected like a tax but they
dont go to the state exchequer and does not require the approval of the state for
spending. This generates scope for corruption and it has been observed that the
proceeds are not invested properly and hence APMC mandis lack state of the art
infrastructure.

These and several other procedural and structural loopholes have led to increased
prices for customers. Leading to food inflation, lower savings and as a result
adversely affecting the whole economy. For the farmers, the price received for the
produce is low, reducing their spending power, as a result no expenditure on
improving farm productivity or education, health etc. which is vital for improving
their quality of life.
Though the model APMC act of 2003 seeks to address these issues by providing for
contract farming, expansion of licenses and provision of e-services to make market
yards more accountable and transparent. But, only 14 states have adopted the
act and the traders have become a powerful lobby preventing any reforms.
Thus, it is imperative that the states adopt the act and reform the marketing system
at the earliest.
Salient Features of the APMC Model Act 2003:
1. Creation of alternative market Model act provides for direct sale of produce
through contract farming. It also permits for setting up of specialized markets

for specialized products especially perishables. It provides scope for setting


up of private markets in any area by producers and consumers. It envisages
setting up of farmers and consumers market for direct sale of commodity to
consumers.
2. The model act provides for the single levy of market fee in a transparent way.
3. The model act provides for the replacement of licensing with the registration
of agents which would facilitate agents to operate in one or more markets.
This would eliminate monopoly power enjoyed by the agents and hence
destroy cartels.
Few Inadequacies with the Model Act:
1. The act still requires buyers paying the APMC charges irrespective of if they
have bought it from the APMC mandis or not. This will prevent the formation
of the national and state market. Also the owner of private market will need
to collect these charges on behalf of APMC market committees. Since the
private market would be charges APMC fees along with the fees it needs for
providing the trading platform and other services, would make the private
market uncompetitive.
What alternative steps Govt can take to set up National Market?
1. State govt should be persuaded to drop the perishables like fruits and
vegetables to be dropped from the APMC schedule of regulated commodities.
2. Private markets on their own are not capable to compete with the already set
up APMC mandis. State govt should provide policy support for setting up
infrastructure, making land available etc.
3. Although the APMC act of states have been enacted under the State List
Entries like Agriculture, Trade and Commerce, yet there are many entries in
Concurrent List like Supply and Distribution of Foodstuffs, Trade and
Commerce etc under which Govt can enact laws to facilitate national market.

Tax Reforms
GST
Introduction of the GST would be the biggest financial reform after Independence.
By subsuming a large number of indirect taxes into a single tax it would mitigate
cascading or double taxation in a major way and pave the way for common national
market. From the consumers point of view it would lessen the tax burden on goods
and from the Govts point of view due to transparent characteristic of GST it would
be easier to administer. It also makes perfect economic sense because introduction
of GST is expected to spur economic growth and make Indian goods competitive in
Indian and international markets.
Details of the GST Bill
1. GST would be applicable on the supply of goods or services as opposed to the
current practice of manufacture or on sale of goods or provision of services.
2. GST would be a destination based tax as opposed to the origin based tax i.e.
the tax would be levied at the point where sale is made rather than at the
point where production is done. Thats why many of the manufacturing states
like Gujarat were opposing it as it led to loss of their tax revenue. As a
compromise for the manufacturing states a non-vatable additional tax not
exceeding 1% would be levied by the centre and retained by the origin state
on inter-state supply of goods. This would be done at least for a period of 2
years. [Inter-state taxes have been the biggest source of nuisance in the tax
structure. They have created an opportunity of arbitrage for the marketers
and hence fostered wide scale corruption and tax avoidance and evasion.

3.

4.

5.

6.
7.

Introduction of GST is expected to curb this to a significant extent, although


the non-vatable tax of 1% will still distort the market but the incentive in no
enough to create an arbitrage market.]
It will be a dual GST where both centre and state will simultaneously levy
taxes on the common agreed base. (CGST and SGST). This unique model has
been developed keeping in mind the federal nature of India
An integrated GST (IGST) would be levied on inter-state supply. This would be
collected by the centre to avoid breaking of the credit chain. Import of goods
will be treated as inter-state supply and hence IGST would be levied apart
from the custom duties.
States were not ready to let go the high revenue items and argued to keep
them out of the GST. As a compromise, GST would be not applicable on
alcohol. GST on petroleum products would be applicable from a date
recommended by the GST council.
Exports would be zero rated.
Credit of CGST paid on inputs may be used only for paying CGST on the
output and similarly for the SGST. Hence there is no cross-utilization of input
tax credit.

AGRICULTURE
Factors causing moderation in inflation:
-

Drop in the price of crude due to weak global demand and competition
generated by shale gas production in US
Softness in the prices of commodities especially edibles and coal
Tight monetary policy followed by the RBI resulting in the moderation of
demand
Rupee has been stable for last 1 year compared to other emerging peers.
This has stabilized the import prices and hence helped in reducing the
inflation
Moderation in wage growth rate specifically in rural areas has reduced the
demand of protein based items.
Base effect also contributed to the decline in headline inflation.

Specific actions taken by Govt to tackle food inflation:


-

Extra allocation of 5 mio tonnes of rice to BPL and APL families in the state
pending the implementation of the National Food Security Act and allocation
of 10 mio tonnes of wheat for the open domestic market sale by FCI
Suggestion to the states to delist vegetables and fruits from the APMC. This
allowed free movement and sale of fruits and vegetables.

Bringing onion and potatoes under the purview of the Essential commodities
act. This gave state the power to define the stock limit to deal with the
cartelization and hoarding and making violation of stock a non-bailable
offence.
Moderation in the increase of MSPs and also creating disincentive for states
giving bonus on top of MSP by FCI not procuring grain from those states.

Story of Wage Growth Rate


Over the years Govt under the impression of fostering growth and supporting the
agriculture has been increasing MSPs. Also, GOI launched MNREGA to provide
guaranteed rural employment. The combined effect of both the policies has been a
general rise in the wage rate. Increasing wage rate, being a critical cost of
agriculture, further fueled the increase in MSP. Also since cereals, vegetables and
fruits and allied sector all draw labor from the same pool of agricultural work force,
this led to the increase in the price of fruits and vegetables. The high demand for
protein generated, due to rising income, led to inflation in prices of protein based
food items. This is how wage rate affected the food inflation over last few years.
Only few items like pulses and edible escaped the trend because they can be easily
imported from the international markets without any restrictions.

Factors driving the growth of Agriculture


1. RESEARCH AND EDUCATION and EXTENSION
ICAR has been developing new varieties of crops with specific traits that have
higher yield along with better nutritional quality. Special emphasis has been placed
on generating varieties which have better tolerance and can adapt to the climate
change. The paradigm shift in productivity can only be achieved through better
yield as scope of areal expansion is limited. Also promoting more production
through higher MSPs i.e price-led growth is no longer possible as it has many
detrimental effects to the market. GOI has provided for establishment of excellence
in agricultural research and education: one in Assam and another in Jharkhand.
According to the NSSO survey 59% of the farmers do not get much technical
assistance and know-how from govt funded farm research institutes or extension
services. They have to rely on local progressive farmers, media or private
commercial agents supplying farms inputs like fertilizers, machinery etc. Despite
having institutional capability of research India is struggling in extending those
services to rural and last mile connectivity.
- Effectiveness of the lab-to-farm can be improved through application of IT,

mobile and e-platforms, participation of NGOs etc.


- Govt has announced a Kisan TV to disseminate real time information to
farmers regarding new farming techniques, water conservation, organic farming etc.
2. Mechanization of Agriculture in India
From 2003 onwards there has been an upward surge in the sale of tractors
highlighting the mechanization of agriculture in India. It is a desirable trend as
mechanization improves the productivity of agriculture. The above surge has mainly
to do with the rising farm incomes due to global commodity boom and higher level
of MSPs provided by govt. But these are not the only factors.
In the past decade there has been a boom in the construction, manufacturing and
services sectors also providing non-farm jobs in the urban areas. This has led to
male specific migration to the cities resulting in shortage of labor in the rural. The
effect has been a rise in the wage rate. This made sense for the farmer to invest in
mechanization rather than paying high wages.
Although India is in the top in food production in the world but we have on average
40% mechanization as compared to 90% mechanization in developed world. These
levels vary significantly across states.
Reason for poor mechanization in India:
-

India is a highly diverse country with different soil and climatic zones,
requiring different and customized farm machinery.
Size of land holding in India is very small in India making use machinery
unviable.
Mechanization is capital intensive and due to lack of availability of credit
mechanization process has been hampered. Less than 3% of the agricultural
credit flow to mechanization.

Govt of India has launched a dedicated Sub-Mission on Agricultural Mechanization.


3. CREDIT
Steps Govt has taken to provide easy credit to farmers:
1. Priority Sector Lending
2. Interest Subvention Scheme Farmers are given a reduction in interest if they
make timely repayments of the loan
3. In order to discourage distress sales Govt has made available the benefits of
interest subvention against the Negotiable Warehouse Receipts for farmers
who have Kisan Credit Card. For other farmers they can avail post-harvesting
loans against NWRs.
4. In the case of calamity interest subvention of 2% will be available to the
banks on the restructured amount of loan for the first year.

Rationalization of Priority Sector Lending


Govt has over the year tried to alleviate poverty and achieve inclusive growth
through equality of credit via priority sector lending scheme. Under the scheme it is
mandatory for the domestic public and private sector banks to disburse 40% of their
adjusted net bank credit in the pre-defined priority sectors like agriculture, housing
etc. For foreign banks with more than 20 branches in India they have to disburse
32%. Although scheme seems to be targeted approach of growth which is necessary
for inclusive growth but it is suffering from many problems. For example lets take
the example of agriculture sector:
-

Over the years credit to agriculture has increased tremendously. In fact in last
15 years it has grown 8 times in nominal terms and yet the contribution of
agriculture to GDP remains roughly same. This highlights that the allocation
of credit is not being used efficiently and has not resulted in growth of
agriculture.
There has been sharp increase in the large size loans highlighting the fact PSL
is being appropriated by the large and wealthy farmers.
The outstanding and defaulted loans against the credit made in agricultural
sector are mainly from urban and metropolitan areas. So the rich farmers are
defaulting more than the poor farmers. Also this highlights that the loan
waiver benefits more to rich farmer than the poor farmer.
There has been sharp decrease in disbursement of long term credit from 70%
in 1990-91 to 40% in 2011-12 which shows that credit is not being used for
asset creation which was the intended purpose of PSL.
March Rush - Disbursal of credit is concentrated around the last 4 months of
fiscal year. This is not the agriculture season when farmers need the credit.
This show the loans are disbursed inefficiently towards the end of year just to
meet the annual target.

4. IRRIGATION
Accelerated Irrigation Benefit Program.
Command Area Development Program CADP has been amalgamated with
the AIBP to reduce the gap between irrigation potential that has been created
and that is utilized.
5. SEEDS
The efficacy of all other inputs like fertilizer, irrigation etc is dependent and
greatly enhanced by the quality of seeds. It has been estimated that quality
of seeds accounts for 20-25% of productivity. We have enough quantity of
certified seeds for the cereals like rice and wheat but we have shortage of
quality seeds in pulses, soyabean, pea, potato etc. Since we are heavily

dependent on import on these commodities we should promote research and


develop quality seeds.
6. FERTILIZERS
Govt has notified New Investment Policy 2012 to promote and facilitate fresh
investment in the urea sector. This envisages to end the import dependence.

Mission for Integrated Development of Horticulture


Mission for Integrated Development of Horticulture (MIDH) is a Centrally Sponsored
Scheme for the holistic growth of the horticulture sector covering fruits, vegetables,
root & tuber crops, mushrooms, spices, flowers, aromatic plants, coconut, cashew,
cocoa and bamboo. While Government of India (GOI) contributes 85% of total
outlay for developmental programmes in all the states except the states in North
East and Himalayas, 15% share is contributed by State Governments. In the case
of North Eastern States and Himalayan States, GOI contribution is 100%. Similarly,
for development of bamboo and programmes of National Horticulture Board (NHB),
Coconut Development Board (CDB), Central Institute for Horticulture (CIH),
Nagaland and the National Level Agencies (NLA), GOI contribution will be 100%.

MIDH will have the following sub-schemes and area of operation:


Sl.
No.
1.

Sub Scheme
NHM

Target
group
/
area
of
operation
All states & UTs except states in

2.

HMNEH

NE and Himalayan Region.


All states in NE and Himalayan

3.
4.

NBM
NHB

Region.
All states & UTs
All states & UTs focusing on

5.

CDB

commercial horticulture
All States and UTs where coconut

6.

CIH

is grown.
NE states, focusing on HRD and
capacity building.

Special Provisions:
-

MIDH will work closely with National Mission on Sustainable Agriculture


(NMSA) towards development of Micro-Irrigation for all horticulture crops and
protected cultivation on farmers field.
MIDH will also provide technical advice and administrative support to State
Governments/ State Horticulture Missions (SHMs) for the Saffron Mission and
other horticulture related activities like Vegetable Initiative for Urban Clusters
(VIUC), funded by Rashtriya Krishi Vikas Yojana (RKVY)/NMSA
The Mission seeks to achieve holistic growth of the horticulture with an endto-end approach, predominantly focusing on providing quality planting
material, Integrated Pest Management, Integrated Nutrient Management,
Micro Irrigation and infrastructure for post-harvest management and
marketing like cold storage etc.

ALLIED SECTORS DAIRYING and LIVESTOCK


Rashtriya Gokul Mission
objectives to:
a) development and conservation of indigenous breeds
b) undertake breed improvement programme for indigenous cattle breeds so as
to improve the genetic makeup and increase the stock;
c) enhance milk production and productivity;
d) upgrade nondescript cattle using elite indigenous breeds like Gir,
Sahiwal, Rathi, Deoni, Tharparkar, Red Sindhi and
e) distribute disease free high genetic merit bulls for natural service

Under this component it is proposed to establish Integrated Indigenous Cattle


Centres or Gokul Grams in the breeding tracts of indigenous breeds. Gokul
Grams will be established in:
i) the native breeding tracts and
ii) near metropolitan cities for housing the urban cattle.

Gokul Gram will act as Centres for development of Indigenous Breeds and a
dependable source for supply of high genetic breeding stock to the farmers in
the breeding tract. The Gokul Gram will be self-sustaining and will generate
economic resources from sale of A2 milk, organic manure, vermi-composting,
urine distillates, and production of electricity from bio gas for in house consumption
and sale of animal products. The Gokul Gram will also function as state of the art in
situ training centre for Farmers, Breeders and MAITRIs.
----------- -------------- -------------- -------------- -------------- --------------- ----------------------------- -------------National Livestock Mission
With the rise in wage rate in rural areas demand for protein based food has gone up
fueling the inflation. To ensure a sustainable growth of the sector Govt of India has
launched a National Livestock Mission. The sector focuses on improving the
livestock production through quality feed and fodder, health care facilities, risk
coverage, effective extension and improved flow of credit.
Four sub-missions with in the NLM are:
1. Sub-Mission on Livestock Development - Includes activities to address the
concerns for overall development of livestock species including poultry, other
than cattle and buffalo, with a holistic approach.
2. Sub-Mission on Feed and Fodder Development - Designed to address the
problems of scarcity of animal feed and fodder resources. Scheme would
focus on improving the production and productivity of feed and fodder
through adoption of better technologies suited to the agro-climatic zones in
both arable and non-arable areas.
3. Sub-Mission on Skill Development, Technology Transfer and Extension The
extension services do not ensure last mile connectivity and technologies
developed in research institutes are not spread effectively to the farmers. The
mission would provide a platform for the dissemination of technology
developed to the farmers. It would ensure skill development of the farmers
with frontline field demonstration and direct engagement with the
researchers.

4. Sub-Mission on Skill Development in NE Region


Few problems associated with the sector:
1. Livestock Diseases - Biggest impediment to growth of dairy and livestock
productivity is the large-scale prevalence of animal diseases like Foot and
Mouth Disease, PPR, Brucellosis, Avian Influenza etc, which adversely affect
the productivity.
2. Productivity and Breed Improvement Despite having the largest no of
livestock in the world and being the largest producer of milk, yield of Indian
cattle is one of the lowest in the world. Govt of India has launched the
Rashtriya Gokul Mission in this regard.
3. Cold Chain Infrastructure - Steps are needed to reduce wastage of milk by
expanding the cold chain infrastructure in the rural areas to collect and
preserve milk till such time it is collected for sale or taken for processing.

Food Management
Shanta Kumar Committee Report
Below is a summary of major recommendations of HLC keeping in mind how
procurement benefits can reach larger number of farmers; how PDS system can be
re-oriented to give better deal to economically vulnerable consumers at a lower cost

and in a financially sustainable manner; and finally how stocking and movement
operations can be made more efficient and cost effective in not only feeding PDS
but also in stabilizing grain markets.
1. On procurement related issues
- Transfer procurement operation to states and should focus only on
deficit states -> HLC recommends that FCI hand over all procurement
operations of wheat, paddy and rice to states that have gained sufficient
experience in this regard and have created reasonable infrastructure for
procurement. (AP, CG, Haryana, MP, Odisha and Punjab). FCI will accept only
the surplus (after deducting the needs of the states under NFSA) from these
state governments (not millers) to be moved to deficit states. FCI should
move on to help those states where farmers suffer from distress sales at
prices much below MSP, and which are dominated by small holdings, like
Eastern Uttar Pradesh, Bihar, West Bengal, Assam etc. This is the belt from
where second green revolution is expected, and where FCI needs to be proactive providing benefits of MSP and procurement to larger number of
farmers, especially small and marginal ones.
-

Rationalization of procurement norms and attracting private sector


-> Three issues are critical to be streamlined to bring rationality in
procurement operations and bringing back private sector in competition with
state agencies in grain procurement: (1) Centre should make it clear to states
that in case of any bonus being given by them on top of MSP, Centre will not
accept grains under the central pool beyond the quantity needed by the state
for its own PDS and OWS; (2) the statutory levies including commissions,
which vary from less than 2 percent in Gujarat and West Bengal to 14.5
percent in Punjab, need to be brought down uniformly to 3 percent, or at
most 4 percent of MSP, and this should be included in MSP itself (states losing
revenue due to this rationalization of levies can be compensated through a
diversification package for the next 3-5 years); (3) quality checks in
procurement have to be adhered to, and anything below the specified quality
will not be acceptable under central pool.

Check Distress sales and Use NWRs -> Negotiable warehouse receipt
system (NWRs) should be taken up on priority and scaled up quickly. Under
this system, farmers can deposit their produce to the registered warehouses,
and get say 80 percent advance from banks against their produce valued at
MSP. They can sell later when they feel prices are good for them. This will
bring back the private sector, reduce massively the costs of storage to the
government, and be more compatible with a market economy. GoI (through
FCI and Warehousing Development Regulatory Authority (WDRA)) can
encourage building of these warehouses with better technology, and keep an
on-line track of grain stocks with them on daily/weekly basis. In due course,

GoI can explore whether this system can be used to compensate the farmers
in case of market prices falling below MSP without physically handling large
quantities of grain.
-

Modification of MSP Policy and aligning it with trade policy. Promote


Pulses and Edible Oil -> GoI needs to revisit its MSP policy. Currently, MSPs
are announced for 23 commodities, but effectively price support operates
primarily in wheat and rice and that too in selected states. This creates highly
skewed incentive structures in favour of wheat and rice. While country is
short of pulses and oilseeds (edible oils), their prices often go below MSP
without any effective price support. Further, trade policy works independently
of MSP policy, and many a times, imports of pulses come at prices much
below their MSP. This hampers diversification. HLC recommends that pulses
and oilseeds deserve priority and GoI must provide better price support
operations for them, and dovetail their MSP policy with trade policy so that
their landed costs are not below their MSP.

2. On PDS and NFSA related issues


- Rethink NFSA and restrict it to states taking steps for checking
leakage -> HLC recommends that GoI has a second look at NFSA, its
commitments and implementation. Given that leakages in PDS range from 40
to 50 percent, and in some states go as high as 60 to 70 percent, GoI should
defer implementation of NFSA in states that have not done end to end
computerization; have not put the list of beneficiaries online for anyone to
verify, and have not set up vigilance committees to check pilferage from PDS.
- Reduce coverage under NFSA and rationalize pricing of food grains
as per the household capacity -> HLC's examination of these issue
reveals that 67 percent coverage of population is on much higher side, and
should be brought down to around 40 percent, which will comfortably cover
BPL families and some even above that; 5kg grain per person to priority
households is actually making BPL households worse off, who used to get
7kg/person under the TPDS. So, HLC recommends that they be given
7kg/person. On central issue prices, HLC recommends while Antyodya
households can be given grains at Rs 3/2/1/kg for the time being, but pricing
for priority households must be linked to MSP, say 50 percent of MSP. Else,
HLC feels that this NFSA will put undue financial burden on the exchequer,
and investments in agriculture and food space may suffer.
- Phased introduction of cash transfer of subsidy -> HLC recommends
gradual introduction of cash transfers in PDS, starting with large cities with
more than 1 million population; extending it to grain surplus states, and then
giving option to deficit states to opt for cash or physical grain distribution.
This will be much more cost effective way to help the poor, without much
distortion in the production basket, and in line with best international

practices. HLC's calculations reveal that it can save the exchequer more than
Rs 30,000 crores annually, and still giving better deal to consumers. Cash
transfers can be indexed with overall price level to protect the amount of real
income transfers, given in the name of lady of the house, and routed through
Prime Minister's Jan-Dhan Yojana (PMJDY) and dovetailing Aadhaar and Unique
Identification (UID) number. This will empower the consumers, plug high
leakages in PDS, save resources, and it can be rolled out over the next 2-3
years.

3. On stocking and movement related issues


- Outsource Stocking Operation -> HLC recommends that FCI should
outsource its stocking operations to various agencies such as Central
Warehousing Corporation, State Warehousing Corporation, Private Sector
under Private Entrepreneur Guarantee (PEG) scheme, and even state
governments that are building silos through private sector on state lands (as
in Madhya Pradesh). It should be done on competitive bidding basis, inviting
various stakeholders and creating competition to bring down costs of storage.
- Improve and modernize handling and storing facilities -> India needs
more bulk handling facilities than it currently has. Many of FCI's old
conventional storages that have existed for long number of years can be
converted to silos with the help of private sector and other stocking agencies.
Better mechanization is needed in all silos as well as conventional storages.
Covered and plinth (CAP) storage should be gradually phased out with no
grain stocks remaining in CAP for more than 3 months. Silo bag technology
and conventional storages where ever possible should replace CAP.

4. On Buffer Stocking Operations and Liquidation Policy


- Rationalize Buffer Stocking and develop an institutionalized process
of offloading excess buffer stock -> One of the key challenges for FCI has
been to carry buffer stocks way in excess of buffer stocking norms. During
the last five years, on an average, buffer stocks with FCI have been more
than double the buffer stocking norms costing the nation thousands of crores
of rupees loss without any worthwhile purpose being served. The underlying
reasons for this situation are many, starting with export bans to open ended
procurement with distortions (through bonuses and high statutory levies), but
the key factor is that there is no pro-active liquidation policy. DFPD/FCI have
to work in tandem to liquidate stocks in OMSS or in export markets, whenever
stocks go beyond the buffer stock norms. The current system is extremely adhoc, slow and costs the nation heavily. A transparent liquidation policy is the
need of hour, which should automatically kick-in when FCI is faced with

surplus stocks than buffer norms. Greater flexibility to FCI with business
orientation to operate in OMSS and export markets is needed.

5. On end to end computerization


- HLC recommends total end to end computerization of the entire food
management system, starting from procurement from farmers, to stocking,
movement and finally distribution through TPDS. It can be done on real time
basis, and some states have done a commendable job on computerizing the
procurement operations. But its dovetailing with movement and distribution
in TPDS has been a weak link, and that is where much of the diversions take
place.

6. On the new face of FCI


- The new face of FCI will be akin to an agency for innovations in Food
Management System with a primary focus to create competition in every
segment of foodgrain supply chain, from procurement to stocking to
movement and finally distribution in TPDS, so that overall costs of the system
are substantially reduced, leakages plugged, and it serves larger number of
farmers and consumers. In this endeavour it will make itself much leaner and
nimble (with scaled down/abolished zonal offices), focus on eastern states for
procurement, upgrade the entire grain supply chain towards bulk handling
and end to end computerization by bringing in investments, and technical
and managerial expertise from the private sector. It will be more business
oriented with a pro-active liquidation policy to liquidate stocks in
OMSS/export markets, whenever actual buffer stocks exceed the norms. This
would be challenging, but HLC hopes that FCI can rise to this challenge and
once again play its commendable role as it did during late 1960s and early
1970s.

Govt of India has taken several steps to boost industrial growth (remember to make
notes in detail under respective heads):
1. Ease of doing business
2. Make in India
3. E-Biz Project Under the project Govt is setting up a G2B portal for one stop
shop for delivery of services to businessmen. The project will provide services
from the inception over the entire life cycle of the business.
4. Skill Development
5. Streamlining Environment and Forest Clearances Process for online
submission of applications for environment, coastal regulation zone and
forest clearances have been started. The decision making has been
decentralized to a great extent to the state level strengthening federalism as
well as speeding up the decision making.
6. Labour Sector Reforms

Mines and Minerals (Development and Regulation) Act


Govt of India has recently amended the MMRD Act to give fillip to the mining and
minerals sectors. Salient features of the amendment are:
1. Auction for Realization of Fair Value: Mining Rights will be given through an
auction only by competitive bidding. This will ensure fair valuation of the
minerals and bring transparency in the allocation process.
2. Removing Discretion: To remove discretion of executive mining rights will not
be renewed after 50 years but a fresh lease auction will be held.
3. Relief to Project Affected People: In order to earmark funds for the benefits of
persons affected by the mining in the region a District Mineral Foundation will
be formed in each affected district. Fund will be capitalized from the
additional levy charged on mining and will be decided by GoI. But the
governance structure of the foundation and usage of the funds have been left

with the states to allow local participation and decentralized planning and
implementation.
4. Boost to Exploration: The establishment of National Mineral Exploration Trust
has been proposed for the purpose of regional and detailed exploration. Trust
will be funded by an additional levy of not exceeding 2%.
5. Easy Transferability to encourage private players: To promote private players
and latest technology to be used, mining rights will be allowed to be
transferred easily.
6. Deterrents against illegal mining: Stricter fines and punishment
imprisonment up to 5 year or fine up to Rs 5 lakh per hectare of the area.