UPSC Mains Previous Year Questions 2019: GS3 Indian Economy | Indian Economy for UPSC CSE PDF Download

Q1: Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017.(Economic Development)
Ans: Goods and Services Tax (GST) is an indirect, comprehensive, multi-stage, destination-based tax applied to every value addition.
The Goods and Service Tax Act was enacted in March 2017 and became effective on July 1, 2017.
At the Central level, GST subsumed the following taxes:

• Central Excise Duty
• Additional Excise Duty
• Service Tax
• Countervailing Duty
• Special Additional Duty of Customs

At the State level, GST incorporated the following taxes:

• State Value Added Tax/Sales Tax
• Entertainment Tax (excluding local bodies' levy)
• Central Sales Tax (levied by the Centre and collected by the States)
• Octroi and Entry tax
• Purchase Tax
• Luxury tax
• Taxes on lottery, betting, and gambling

Revenue Implications of GST since July 2017: Introduced in July 2017, GST initially faced transitional issues. However, revenue collection improved, rising from an annual average of 89.8 thousand crores in 2017-18 to 98.1 thousand crores in 2018-19.

In 2018-19, indirect taxes fell short of budget estimates by around 16%, mainly due to a GST revenue shortfall (including CGST, IGST, and compensation cess). Indirect taxes declined by 0.4 percentage points of GDP, primarily attributed to the GST collections shortfall.

According to the Economic Survey, though there's been an improvement in the tax-to-GDP ratio in the last six years, gross tax revenues as a proportion of GDP declined by 0.3 percentage points in 2018-19 compared to 2017-18.

Q2. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.(Economic Development)
Ans: The Economic Survey 2018-19 notes a gradual shift in the economy from a period of high and fluctuating inflation to a more stable and lower inflation level during 2014-18. However, the current fiscal quarter has seen a significant drop in headline inflation, accompanied by a reduction in Gross Value Added (GVA). This has sparked debates regarding the efficacy of inflation-targeted monetary policies and their impact on the overall economy.

Points of Agreement:

• Provided policy stability: A consistent growth rate and low inflation have created favorable market conditions for investment and production planning.
• More equitable: Low inflation positively affects the poor by increasing their purchasing power, fostering higher investment in the economy.
• Maintaining the fiscal deficit: Controlled price levels have aided in reducing subsidies and unnecessary tax cuts.
• Helping urban economy: A low inflation rate has kept living costs in urban areas manageable, providing relief to the middle class.

Points of Disagreement:

• Fall in consumption demand: The declining Consumer Price Index (CPI) indicates reduced disposable income in rural areas, reflected in the Q2 GDP growth rate dropping to 5%.
• Reduction in investment: Economic contraction from declining consumption has limited opportunities for further investment.
• Double Balance Sheet Problem: Economic slowdown has led to revenue shortages for corporations, resulting in a Non-Performing Asset (NPA) problem for banks.
• Revenue Shortfall of the Government: Lower income generation has led to a decline in direct tax revenue, limiting the government's capacity for increased public expenditure.

Way Forward:

• Increasing liquidity: Recent measures such as corporate tax cuts and loans to MSMEs aim to inject more liquidity into the economy and boost investment.
• Increasing public expenditure: Effective implementation of schemes like MGNREGS and rural housing can stimulate rural income generation and create demand.
• Promoting labor-intensive industries: Focusing on sectors like Food Processing Industries and Leather Industries can generate demand in the economy and provide employment opportunities.
• Continued monetary policy easing: Sustained efforts in easing monetary policies can rejuvenate the investment cycle of the Indian economy. Maintaining a sustainable inflation rate within the range of 4-6% is crucial for maximizing income generation.

Q3: It is argued that the strategy of inclusive growth is intended to meet the objective of inclusiveness and sustainability together. Comment on this statement.(Economic Development)
Ans: Inclusive Growth (IG) is defined by the World Bank as growth that is 'broad-based,' 'shared,' and 'pro-poor.' It encompasses both the speed and pattern of growth, considering them interconnected and requiring simultaneous attention. Inclusiveness involves concepts such as equity, equal opportunities, and protection during market and employment transitions, making it a crucial element of any successful growth strategy.

Rapid growth is essential for substantial poverty reduction, but for long-term sustainability, it should span across sectors and include a significant portion of the country's labor force. IG prioritizes productive employment over income redistribution as a means to increase incomes for excluded groups. The focus extends beyond incremental employment growth to include productivity improvement.

Growth is deemed 'inclusive' and 'pro-poor' only if the incomes of poor people grow faster than those of the entire population, leading to a reduction in inequality. By addressing inequality, inclusive growth can optimize outcomes for both poor and non-poor households.

Sustained high growth rates and poverty reduction can only be achieved when the sources of growth expand, and a growing share of the labor force is efficiently included in the process. Growth associated with progressive distributional changes has a more significant impact on poverty reduction than growth that maintains the existing distribution.

The inclusive growth approach adopts a longer-term perspective, acknowledging the time lag between reforms and outcomes. Inclusive growth analytics focus on short-term policies for immediate implementation while aiming for sustainable, inclusive growth in the future.

For instance, the time delay between investments in education and realizing returns from improved labor skills underscores the importance of identifying future constraints to growth for sustainable and inclusive growth.

Sustainable development should encompass not only inclusivity regarding people but also incorporate environmental inclusion to minimize resource depletion, promoting a circular economy.

In recent years, the government has actively embraced the strategy of inclusive growth in various programs and policies. For example, Jan Dhan Yojana has concentrated on integrating the unbanked population into the financial sector, significantly improving financial inclusion statistics to over 80%.

Despite India's phenomenal growth story in the past few decades, the outcomes were not visible on the ground, reflected in poor performance across social indicators and the Human Development Index. Inclusive growth emerges as the idea to realize the vision of sustainable and qualitative development for present and future generations.

Q4: The public expenditure management is a challenge to the Government of India in the context of budget making during the post-liberalization period. Clarify it. (Economic Development)
Ans: Public Expenditure Management (PEM) serves as both an instrument of state policy and a mechanism for good governance, aiming at overall fiscal discipline, strategic resource allocation, operational efficiency, and macroeconomic stability.

Challenges in Government's Public Expenditure Management:

• Global Shocks: External factors like global economic slowdown, changes in federal rates, trade wars, and oil prices impact budget estimates, affecting subsidies allocation and tax revenue collection.
• Narrow Tax Net: Overreliance on indirect taxes makes the taxation policy regressive, limiting the government's ability to increase social spending compared to other major global economies.
• Less Capital Expenditure: The budget's capital expenditure, vital for inter-generational equity and economic competitiveness, has remained around 10%-12% of government expenditure.
• Populist Tendencies: Unproductive spending of government resources, such as tax sops and farm loan waivers during pre-election periods.
• Fiscal Deficit: Maintaining the fiscal deficit within desired limits is crucial for fiscal prudence.
• Managing Public Debt: Ensuring that the current generation's needs do not burden the next generation.
• Trade Deficit: Efforts to reduce the trade deficit for healthier global trade and improved market competitiveness.
• Containing Inflation: A key objective of monetary policy impacted by government revenue and expenditure policies.
• Estimates of Revenue and Expenditure: The need for comprehensive and realistic estimates for effective PEM, with the current uncertainty in providing accurate budget estimates.
• Equitable Development Across Regions: Ensuring balanced development across regions poses a significant challenge.
• Inadequate Capacity and Efficiency of Public Institutions: Poor implementation and structural bottlenecks result in underutilized budget allocations and cost overruns, such as stalled road projects.

Government Measures for Effective PEM:

• FRBM (Amendment) Act: Targeting a gradual reduction in fiscal deficit to stabilize it at 2.5% by 2023.
• Removing Plan/Non-Plan Distinction: Shifting to revenue-capital classification for public expenditure, eliminating plan/non-plan categorization, to allocate more resources for creating capital assets and improving economic efficiency.
• Monetary Policy Framework: Adopting inflation targeting by the Monetary Policy Committee to ensure price stability, a key aspect of effective PEM.
• Deepening Fiscal Federalism: Devolving more tax revenue to states from the divisible tax pool for better allocation based on state needs.
• Monitoring System Framework: Implementing a central-level framework for outcome budgeting and timely assessment of resource utilization, exemplified by the Public Financial Management System (PFMS).

In the era of globalization since the 1991 reforms, effective PEM becomes crucial to achieving various state policy objectives. Prudent adherence to fiscal targets and robust monitoring of resource utilization are imperative.

Q5: What are the reformative steps taken by the Government to make the food grain distribution system more effective? (Economic Development)
Ans: The National Food Security Act (NFSA), 2013, aims to provide a legal entitlement to subsidized food grains, ensuring the Right to Food for nearly two-thirds of the population. However, the existing food grain distribution system faces several challenges.

Issues with the Food Grain Distribution System:

• Inaccurate Identification of Households: Beneficiary identification suffers from inclusion and exclusion errors.
• Leakages in the Delivery System: Occur during the transportation of food grains to ration shops and from there to the open market.
• Financial Inefficiency: The central government bears a significant financial burden due to high costs of procuring and delivering food grains.
• Storage Shortfall: Insufficient storage capacity leading to food grain rot.

Reformative Steps Taken by the Government:

• Procurement: Promotion of nationwide procurement, with efforts to revamp and restructure the system by the Food Corporation of India (FCI).
• Stocking and Storage: Introduction of modern technology like Irradiation Technology to prevent food grain rot. Implementation of an Online Monitoring System for FCI godowns.
• Distribution: Digitization of ration cards and the use of AADHAR to eliminate duplicate beneficiaries. Technology-based reforms by states and GPS tracking of delivery trucks.
• Direct Benefit Transfer (DBT) in Public Distribution System (PDS): Pilot projects initiated in Delhi and Puducherry.

Way Forward:

• Decentralized Procurement: Encouraging leading states with experience to undertake decentralized procurement, allowing FCI to focus on lagging states.
• Engagement of the Private Sector: In modernizing stocking and warehousing facilities.
• Home Delivery of Food Grains: Enhancing last-mile connectivity.
• Full Implementation of Shanta Kumar Committee Recommendations.

Ensuring food security is vital for leveraging the benefits of demographic dividend, and a robust food distribution system is crucial. Promoting competitive federalism among states can facilitate learning from each other's best practices in managing the food economy.

Q6: Elaborate the policy taken by the Government of India to meet the challenges of the food processing sector. (Economic Development)
Ans: The food processing industry (FPI) has emerged as a crucial sector in recent times, fostering significant connections between the pillars of our economy—industry and agriculture.

Challenges faced by the food processing industry:

• Poor supply chain linkages leading to high wastage and costs.
• Infrastructure bottlenecks such as inadequate packaging facilities, cold storage, and transportation causing substantial food wastage.
• Lack of basic standardization and certification infrastructure, including shortages in laboratories, trained personnel, and certification agencies.
• Insufficient trained human resources due to a lack of training infrastructure and specialized programs.
• Additional challenges like limited demand-based innovations, access to credit, and proper branding.

Government policy initiatives to address these challenges:

• Implementation of PMKSY (Pradhan Mantri Kisan SAMPADA Yojana) by the Ministry of Food Processing Industries, focusing on modern infrastructure and efficient supply chain management.
• Schemes under PMKSY include Mega Food Parks, integrated cold chains, value addition, preservation infrastructure, agro-processing clusters, and more.
• FDI policy allowing up to 100% foreign direct investment under the automatic route in food processing industries.
• Role of APEDA in promoting the 'export' of scheduled products.
• FSSAI's efforts to strengthen food testing infrastructure by upgrading existing laboratories and establishing new mobile testing labs.
• The Ministry of Food Processing Industries introducing a scheme for Human Resource Development (HRD) with components like infrastructure creation, entrepreneurship development, and training at recognized institutions.

The food processing industry plays a pivotal role in India's growth, and government support through strategic policy implementations can propel the sector towards substantial progress. With the right measures, the industry has the potential to position India as a strong and prosperous player in the global economy.

Q7: How far is Integrated Farming System (IFS) helpful in sustaining agricultural production.(Agriculture)
Ans: The Integrated Farming System (IFS) is a comprehensive approach aimed at efficient and sustainable resource management to enhance productivity in cropping systems. The IFS strategy encompasses various objectives, including sustainability, food security, farmer's well-being, and poverty reduction, achieved through the integration of livestock, vermicomposting, organic farming, etc.

Key Considerations for the Indian Farm Sector:

• Productivity: IFS presents an opportunity to boost economic yield per unit area, particularly benefiting small and marginal farmers through the intensification of crop and allied enterprises.
• Profitability: It has the potential to enhance sector profitability by reducing reliance on chemical fertilizers and promoting nutrient recycling.
• Sustainability: The IFS approach involves interlinked subsystems, ensuring environmental sustainability by minimizing the use of weed killers and pesticides. IFS components are integral to integrated pest management.
• Recycling: Effective recycling of products, by-products, and waste material forms the foundation for the sustainability of farming systems, particularly in resource-poor rural areas.
• Year-round Income: Through interactions with crops, eggs, meat, and milk, IFS facilitates a continuous flow of income within the farming community throughout the year.
• Optimal Land Utilization: IFS enables the best use of small landholdings, particularly in regions like the northeastern part of India, where subsistence agriculture is prevalent. Traditional practices in water harvesting and soil management can be efficiently incorporated under IFS.
• Addressing Fodder Crisis: By effectively utilizing byproducts and waste materials from crops as fodder for livestock, IFS helps address the fodder crisis. Grain and maize can also be used as feed for monogastric animals like pigs and poultry.
• Employment Generation: The integration of crop and livestock enterprises under IFS significantly increases labor requirements, contributing to a reduction in underemployment and unemployment issues. IFS offers ample opportunities for year-round employment for family labor.

Overall, IFS provides a multitude of sustainable benefits and can pave the way for climate-smart agriculture. Adopting a well-designed Integrated Farming System is crucial for India to achieve the vision of doubling farmers' income by 2022 and promoting sustainable agricultural practices.

Q8: Elaborate the impact of National Watershed Project in increasing agricultural production from water stressed areas. (Agriculture)
Ans: Watershed projects encompass the conservation, rejuvenation, and prudent utilization of all resources, including land, water, plants, animals, and humans within a designated watershed area.

The National Watershed Project, also known as Neeranchal National Watershed Project, is a World Bank-assisted initiative focused on watershed management. The project aims to support the Integrated Watershed Management Program (IWMP) by providing technical assistance to enhance incremental conservation outcomes for natural resources like water, soil, and forests. Simultaneously, it aims to improve agricultural yields sustainably for farming communities.

In water-stressed regions like Northwest India and the Vidarbha region of Maharashtra, prone to drought and water scarcity, the National Watershed Project has the potential to increase agricultural production:

• Reduction of surface runoff: This leads to increased groundwater recharge, improved soil moisture, and better water availability in water-stressed areas, enabling farmers to manage surface and groundwater resources more effectively.
• Incremental agriculture productivity: The project results in increased crop yields and cropping intensity by optimizing the utilization of natural resources, including land, water, and vegetation.
• Shift towards higher-value crops: Illustrated by the success of a watershed project in Bangaru, Telangana, where there was a notable increase in crop yields and a shift towards higher-value horticultural crops.
• Adaptation to climatic change: The project helps mitigate the adverse effects of drought, prevents ecological degradation, and supports farmers in water-stressed areas to adapt to climate change, thereby improving livelihoods.
• Ecological balance restoration: Through afforestation and crop plantation, the project contributes to the restoration of ecological balance in degraded and fragile water-stressed areas by increasing vegetative cover and reducing soil erosion.
• People's involvement: Active participation of farmers and tribal communities is crucial for the success of any watershed management program, particularly in soil and water conservation. Successful examples include watershed management in Sukhomajri, Panchkula, and Haryana, achieved through the engagement of local people.

Challenges faced by watershed projects:

• Community participation: Some projects encounter minimal community involvement.
• Lack of coordination: Challenges arise due to insufficient coordination between implementing departments and ministries.

Effective solutions include proper education about project benefits and incentives for community participation. Implementing watershed development on a large scale is deemed the most effective solution to address water-stressed problems.