17th June – Editorials/Opinions Analyses

Contents

1. For better conditions of work: Cooperatives and Unions
2. The case for a Second budget, Switch to a new fiscal year
3. Debt: An unwanted burden across most of India’s economy

FOR BETTER CONDITIONS OF WORK: COOPERATIVES AND UNIONS

Focus: GS-II Social Justice, Governance

Introduction

After a stressful lockdown period, thousands of migrant workers who have returned to their villages would no longer yearn to go back to their work in the cities, given the treatment meted out to them during the lockdown period.

This is an opportunity for people involved in cooperative movement and others working for the skill development to help the migrant workers and take part on upliftment of the rural livelihoods.

Forming cooperative societies

• The migrants, and even MGNREGA workers can form cooperative societies at their villages.
• These cooperative societies, if they expand and form hubs, could start developing their services or products that can be sold with better terms and conditions.
• There are many government agencies that have been mandated to help build cooperative societies.
• There are also cooperative banks to help such societies.
• With large national institutions enabling such cooperative societies, groups of migrant workers can find institutional strength.
• Another possibility for those whose skills or products do not have enough marketing in a local area is to re-enter the city as labour cooperatives, or even unions, with demands that they get housing and other support systems that help them have a decent living, not only a wage.

Constitutional Provisions for Cooperative societies

• The 97th Constitution Amendment Act, 2011 provided for amendment of following things:
• It amended Article 19(I) c by inserting, after the words ‘or unions’ the words ‘or Co-operative Societies’.
• It also inserted Article 43B in Part IV of the Constitution as “The State Shall endeavor to promote Voluntary formation, autonomous functioning, democratic Control and professional management of the Co-operative societies” and
• After Part IX-A of the Constitution, Part IX-B was inserted. Part IX-B extended from Article 243ZH to Article 243ZT.
• Part IX-B contains provisions relating to the incorporation, board structure, election of members and board directors, application of this part among others, etc in order to bring about uniformity in the process of election of its members and board of directors and therefore solve the problems faced by them in respect of such issues.

Way forward: A pyramid of group economic activity

• This is a valuable opportunity for the state to build new kinds of economic structures in India, a pyramid of group economic activity going from the rural areas through collective marketing to fill the demand from the cities.
• What has been lacking so far in this dispersed production model is lack of concern for the fair treatment of the workers.
• Successful unionisation of workers can protect them from exploitation.
• It is possible to have dispersed production, home-based or small-unit based, to start a supply chain to markets, whether local markets or capital city markets or export markets.
• Arrangements that can provide an optimal solution to the workers as well as contribute to the GDP must be made.

-Source: The Hindu

THE CASE FOR A SECOND BUDGET, SWITCH TO A NEW FISCAL YEAR

Focus: GS-III Indian Economy

Introduction

There is a strong case building up for finance minister to present a second budget, as the one passed before the lockdown now seems to have become irrelevant.

India is vulnerable to global trends in risk-aversion, capital flows, commodity prices and trade winds, hence, we cannot afford to have fiscal and monetary policies that do not have an embedded plan.

The case for a Second Budget and changes in Fiscal Year

A second budget for 2020-21 or a new one for calendar 2021 is a strong change that is asked for since we need a roadmap that only a full budget can provide.

The main benefits of a shift in the Fiscal year to (January-December) are:

1. It will allow us to segregate the 2020 calendar year’s fiscal performance from the relatively regular years of the future
2. It will let us integrate better knowledge of our agricultural performance, as we will know what happened with the kharif crop
3. The traditional start of the busy season in October-March will coincide with the new budget dates, which means that any post-covid stimulus plan will have a multiplier effect on demand

Is such a change possible?

• Most multinational companies anyway need to meet two sets of accounting standards (and years), one for their home country and another for India.
• In any event, since quarterly reporting of numbers is the norm, the redesignation of quarter 1 as quarter 2 is hardly going to cause any loss of sleep for most corporations.
• Whether the fiscal year is changed or not, the budget numbers, if they have to have any meaning, will need revision by October, once a fuller picture of the economic impact of the pandemic will be clear and reasonable guesses can be made about government revenues and expenditures up ahead.

-Source: Livemint

DEBT: AN UNWANTED BURDEN ACROSS MOST OF INDIA’S ECONOMY

Focus: GS-III Indian Economy

Why in news?

• New data shows that household debt has come down by nearly ₹1.5 trillion in the 12 months to March 2020.
• The Reserve Bank of India (RBI) had released some provisional estimates which showed there was a sharp increase in household leverage (HOUSEOLD LEVERGAE = COMBINED DEBT OF ALL PEOPLE IN A HOUSEHOLD) in fiscal year 2017-18 which fell a bit (by 0.4% of GDP) in 2018-19 and then fell sharply (by 1% of GDP) in 2019-20.
• In other words, household leverage in the fiscal year has come back to the average in the six fiscal years between 2011-12 to 2016-17.
• However, net financial assets of households increased by 50 basis points despite the drop in gross financial assets.

Why is this happening?

• Economists generally believe that the way people react to an economic shock depends a lot on whether they see it as a temporary one or a permanent one.
• The thumb rule to remember is that economic agents will try to smoothen consumption by borrowing in case they think the shock is temporary. And they will smoothen savings by cutting consumption in case they interpret the shock as permanent.
• One simple way to understand why households hold financial assets, including cash, is by purpose—for transactions, precaution or speculation. Precautionary savings tend to increase when people face income uncertainty.
• There are already signs from banking data that people are holding more cash than before as well as preferring to park their financial savings in time rather than demand deposits.
• A change in the financial decisions of households—both in terms of higher precautionary savings as well as lower borrowings—will have broader economic implications that policymakers need to pay attention to.
• Higher savings will on one hand reduce the chances of a recovery led by consumer spending, but on the other, it will also help fund higher fiscal spending.
• It is also important to remember that a shrinking current account deficit will eat into some of the benefits of higher household financial savings in terms of funding the fiscal deficit.

But what about the increase in borrowings from banks as reported by RBI?

RBI data on financial savings of households shows that borrowings from banks did spike in the fourth quarter of 2019-20, partly because of seasonal factors but also perhaps because of economic distress from covid-19.

Effect of cutting Corporate tax rates

• The flip side of corporate deleveraging over the past five or six years has been a collapse in the growth of bank credit to companies.
• Companies have used their free cash flow to pay back debt.
• The gross savings of non-financial enterprises in the private sector have increased as a percentage of GDP.
• Banks switched to providing consumer loans in response to the lack of demand for credit from companies.
• The recent trends in household leverage—as well as the anticipated rise in precautionary savings in response to the covid-19 shock—could see consumer loan growth drying up as well.

Conclusion

• The response to these trends will be especially important when the economy stabilizes, because it is quite likely that the two main drivers of domestic aggregate demand will be weak because of risk aversion—capital investment by the private sector and consumer spending by households.
• A combination of corporate and household deleveraging will pose profound challenges to our economy in the post-covid recovery phase.

-Source: Livemint