GS PAPER III 2020 - ECONOMY QUESTIONS AND MODEL ANSWERS

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1. Explain intra-generational and inter-generational issues of equity from the perspective

of inclusive growth and sustainable development.

ANSWER
After the 1991 LPG reforms, India moved from the Hindu rate of growth of 3.5% to a higher
growth trajectory of over 6% in 1990s and 8% to 9% in 2000 decade. But then questions
started being raised that whether our growth is inclusive and sustainable or not and whether it
is leading to overall development of the people at the lower strata of the society.

Inclusive growth is economic growth that creates opportunity for all segments of the population
and distributes the dividends of increased prosperity to every section of the society. Intra-
generational equity represents availability of opportunities regardless of their economic class,
gender, sex, disability and religion.

Sustainable development seeks to promote human well-being, in the senses of both economic
growth and social well being, while simultaneously protecting and conserving the environment.

Following are the major intra-generational issues:

 Lack of healthcare facilities

 Lack of quality education leading to difference in capabilities
 Lack of job opportunities in remote areas of the country like North-east and hilly states
 Exclusion of women from various employment categories

Inter-generational equity represents providing for the preservation of natural resources and the
environment for the benefit of the future generations.

Following are the major inter-generational issues:

 Degradation of natural resources like water bodies, forests, soil, etc.

 Too much focus of GDP growth while ignoring the environment
 Excessive exploitation of our natural resources
 Blind consumerism

We need to focus on the development that meets the needs of the present without
compromising the ability of future generations to meet their own needs. The continuing
relevance of intergenerational equity as a guiding principle shaping climate action has been
reaffirmed by the Paris Agreement also.
2. Define potential GDP and explain its determinants. What are the factors that have
been inhibiting India from realizing its potential GDP?

ANSWER
Potential GDP is the real value of goods and services that can be produced when a country's
factors of production are fully employed. It is the maximum sustainable level of output that an
economy can produce.

As per the Economic Survey 2015-16, the determinants of potential GDP are:

 Physical capital (capital stock of the economy should be fully utilized)

 Human capital
 Labour (Labour force should be productively employed)
 Productivity (Factor productivity of various factors of production should be high)
 Economy’s technological efficiency

Potential GDP tends to grow slowly because inputs like labour and capital and the level of
technology changes quite slowly over time. As per Economic Survey 2015-16, India's medium/
long term growth potential is somewhere between 8 to 10 percent.

Following are the major factors hindering India from realizing its potential GDP:

Demand side factors

 Less domestic demand due to low purchasing power of majority of the population
 Foreign demand is also weak due to protectionist measures taken by several countries and
trade war
 The recent Covid-19 crisis will add up to the already low demand

Supply side factors

 Infrastructure bottlenecks
 Low manufacturing base
 Huge informal labour force which lacks productivity
 Lack of skills among the youth
 Less focus on research and development

But the recent structural reforms initiated by the Government in various fields like Agri
reforms, GST, IBC 2016, coal sector reforms, increase in FDI in defence manufacturing to
100% etc. will help India to achieve its potential GDP growth in the coming years.
3. What are the main constraints in transport and marketing of agricultural produce in
India?

ANSWER
India produces thousands of agricultural products which are traded and transported within the
States, across the States and exported outside India also. The following are the major
constraints which the agricultural produce faces in transportation and marketing in India.

Marketing challenges
 State APMC Acts do not allow wholesale trade outside APMC mandis and in other states
 Lack of private mandi infrastructure for trading agri produce
 Lack of assaying facility for agri produce for electronic trading
 86% of small and marginal farmers have uneconomical lot for selling in mandis
 A long chain of intermediaries who often work non-transparently leading to the situation
where the producer receives only a small part of the value that the ultimate consumer pays

Transportation challenges
 Non availability of timely railway wagons
 Costly rail and road transportation
 Lack of refrigerated vehicles for transportation of perishable agri products
 Lack of multi-modal logistics service provider

The three recent Acts passed by the Govt. of India reforming the agriculture sector will resolve
most of the marketing challenges for agricultural produce in India. And to resolve the
transportation challenge, Ministry of Railway recently on 8th July 2020 started Kisan Rail
services between Deolali (in Maharashtra) and Danapur (Bihar) station and till now more than
100 Kisan Rails have been launched. These Kisan Rails help in transporting the agricultural
produce of farmers to different parts of the country at a nominal cost.
4. What are the challenges and opportunities of food processing sector in the country?
How can income of the farmers be substantially increased by encouraging food
processing?

ANSWER
Food processing is a sunrise industry in India and is increasingly seen as a potential source
for driving the rural economy as it brings about synergy between the consumer, industry and
agriculture. It contributes 9% to manufacturing GDP and has an annual growth rate of 8%.
But this industry is facing the following challenges:

 Inadequate infrastructure facility like cold storage and food parks

 Lack of processing facilities leading to less value addition
 Lack of technology and applied research
 Lack of skilled manpower
 Lack of organized retail
 Regulatory challenges: The food supply chain is regulated through APMC acts of States.
Multiple clearances are required for setting up of food processing units.

India possesses a large arable land resource of 160 million hectares with 127 agro climatic
zones and has 46 of the 60 soil types in the world. It is the largest producer of milk and second
largest producer of fruits and vegetables. Hence there exist numerous opportunities and
growth drivers for the food processing sector in India, some of which are mentioned below:

 With favourable economic & cultural transformation, shift in attitudes & lifestyles,
consumers are experimenting with different cuisines, tastes and new brands.
 One-third of the population will be living in urban areas by 2022 and this urbanization will
shift the consumption towards packaged and ready-to-eat foods.
 Demand for processed food rising with growing disposable income, urbanisation young
population, growing middle-class, and nuclear families.
 The large population base and distinct consumer segments support customised offerings/
new categories and brands within each segment.

Food processing will result in increasing the farmers’ income in the following way:

 Consistent demand of agri products round the year and hence no distress sell by the
farmers during harvesting season
 Food processing will result in increased demand of agri products in the domestic as well as
export market
 Reduce wastage of agri products
 Generate employment in rural areas
 Will promote crop diversification and will help in increase in yield

The government’s recent initiatives of allowing 100% FDI in food processing and 100% FDI in
multi brand retail for food products will go a long way in development of the food processing
industry and increase in farmers’ income.
11. Explain the meaning of investment in an economy in terms of capital formation.
Discuss the factors to be considered while designing a concession agreement between a
public entity and a private entity.

ANSWER
Investment is defined as the total value of capital goods produced in the economy (which is also
called capital formation) plus net of export and import of capital goods. Gross fixed capital
formation is defined as the production of machinery, equipments, new construction and
intellectual property rights.

Capital formation is important for any economy as it helps in boosting output and income.
Following is the past trend of Gross fixed capital formation (investment) in the economy in the
last few years.

34.00%
33.40%
33.00%
Gross fixed capital
32.00% formation (investment)
as % of GDP 31.30%
31.00%
30.00% 30.10%
29.30%
29.00%
28.50% 28.50% 28.50%
28.00% 28.10%

27.00%
26.00%
25.00% Year
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

When the government decides that a certain project should be done through PPP model then it
first selects a private party and signs a “Concession Agreement” (also called PPP Agreement)
with the private party. This agreement provides details as in what would be the roles and
responsibilities of the private sector and the government sector during the entire life of the
project. The following are the important factors to be kept in mind while designing these
agreements:

 All the risks which could emanate in the project and who will handle it should be written in
the agreement
 All the force majeure events should be mentioned in the agreement like Covid-19 is a Force
majeure event, earthquake, other natural calamities etc.
 A clause should be there for handling the impacts of any change in domestic/international
laws
 The Agreement should be futuristic in nature and should be properly designed keeping in
mind the possibilities and scenarios that may arise in future.

If the Concession Agreement is poorly designed then it becomes a major hurdle in the
implementation of that PPP project and the project may get stuck in future. For example, the
first Ultra Mega Power Project developed by Tata Power and Govt. of India under PPP model got
stuck for several years because of the increase in export duty by the Indonesian Govt.
12. Explain the rationale behind the Goods and Services Tax (Compensation to States)
Act of 2017. How has Covid-19 impacted the GST Compensation fund and created new
federal tensions.

ANSWER
Goods and Services Tax (GST) became effective from 1 st July 2017, which subsumed 17
indirect Central and States taxes.

When Central government was planning to introduce GST, States were worried that after the
implementation of GST, tax revenue of States may fall and they will not have the freedom
under GST regime to impose extra taxes. So, Government of India calculated the tax revenue
growth of State's indirect taxes from 2012-13 to 2013-14, 2013-14 to 2014-15 and 2014-15
to 2015-16 i.e. for three years and it found an average annual growth of 14% . So, Govt. of India
promised States that if after implementation of GST, the States Indirect Revenue growth will be
less than 14% annually from 2015-16 (base year) onwards then Govt. of India (through GST
council) will impose Cess on luxory and demerit goods and that money it will give to States as
compensation for the next five years (2017-22). For this purpose Goods and Services Tax
(Compensation to States) Act 2017 was enacted.

In the present FY, monthly collection of GST (Centre and States combined) was projected to be
around Rs. 1.21 lakh crore every month. But due to Covid-19 there is a major shortfall and
even Cess cannot help in guaranteeing 14% revenue growth to States. In 2019-20, Central
government has compensated more than Rs. 1 lakh crore to states as GST compensation.

So, tussle started between Centre and States regarding what should be done when the 'GST
Compensation Fund' does not have enough money (resources collected from compensation
cess) to compensate for the States to ensure they get 14% tax revenue growth.

First Centre was asking states to borrow for the shortfall (which they can repay through GST
cess collection even after June 2022) but States were asking Centre to borrow and give it to
States. But after various discussions and consultations, Centre agreed to State's demand, and
Centre said it will borrow Rs. 1.1 lakh crore and will pass on to states on "back-to-back
basis/loan". This means that the States will have to repay for the interest and principal
through GST cess collection (even) after June 2022 and it will be reflected as "Capital Receipts"
in States account.

So, now all the States have received most of the GST shortfall through the above mechanism
and the dispute stands resolved.
13. What are the major factors responsible for making rice-wheat system a success? In
spite of this success how has this system become bane in India?

ANSWER
When India got independence, we were a net import of agri commodities and we used to import
wheat from US under PL-480 programme to feed our country. In 1966-67, India imported High
Yielding Variety (HYV) of wheat (and later on rice also) and started using modern equipments,
fertilizers, pesticides which is also termed as Green Revolution which ultimately made our
country self sufficient in food grain production and India became a net exporter of agri
commodities and the largest exporter of rice in the world.

The following were the main reasons of success for the rice-wheat system:

 Procurement support by Government through MSP operations

 Various subsidies/support provided by Government like fertilizer subsidy, electricity
subsidy, free water etc.
 Better irrigation facilities and fertile soil in the indo Gangetic plains and coastal areas
 Cheap labour
 Less prone to climatic changes and pest attack

But the rice-wheat cropping system is turning into a major challenge for the regions following
this cropping pattern because of the following reasons:

 Water table is going down and getting contaminated due to the leaching of chemicals
 Soil quality has degraded because of excessive use of fertilizers like urea
 Yield of the crops is stagnating
 Distortion in agricultural production. For example India is producing too much rice-wheat
which we are exporting and we are importing other crops like edible oil, pulses etc.
 A drain on government’s financial resources which has led to huge debt on FCI

Government needs to stop subsidizing the rice-wheat system and should start giving subsidies
on per hectare basis which will lead to diversification of crops and farmers will sow those crops
as demanded in the market rather than based on subsidy provided by Government.
16. Describe the benefits of deriving electric energy from sunlight in contrast to the
conventional energy generation. What are the initiatives offered by our Government for
this purpose?

ANSWER
Electric energy can be produced from conventional sources of energy (also called non-
renewable sources of energy) like coal, oil, natural gas etc. as well as from non-conventional
sources (also called renewable sources) like sun, wind, hydro etc.

Following are the major benefits of producing electric energy from the sunlight:

 Solar energy is clean and has the least negative impact on environment compared to any
other energy source
 Reduced energy cost (cost of solar power is Rs. 2/unit as compared to coal which is Rs.
3.5/unit or wind Rs. 3/unit)
 Abundantly available and will never exhaust
 Will reduce India’s import bill and save our forex reserves
 Rooftop solar panel gives energy independence

Government has set an ambitious target of producing 1,00,000 MW solar power by 2022 and
till now we have achieved 34,000 MW which is around 10% of the total electric energy
generation capacity. The following are the various initiatives taken by our Government in this
regard:

 Solar Parks: Central Government is giving financial support to State Governments to

establish Solar Parks
 PM Kusum: Under PM Kusum Scheme, farmers are being provided subsidy for setting up
stand-alone solar pumps. Farmers are also being helped to solarise their grid-
connected pump sets.
 JNNSM: Central government is giving “Viability Gap Funding” support for grid connected
solar power projects (institutional) under Jawaharlal Nehru National Solar Mission
(JNNSM).
 Grid Connected Rooftops: Central Government is giving financial assistance for Grid
Connected Rooftops for residential purposes

With the above schemes, Government is progressing well on its way of achieving the said
target.