Economy GS Paper III by Harshvardhan

Model Answer

Question #1. Monetary policy in India has been used more as an economic stabilization device than an instrument for economic development. Discuss. (150 Words)

Approach:

• Introduce by giving a definition of Monetary Policy and briefly list the tools of Monetary Policy
• Enumerate why monetary policy is called a tool of economic stabilization
• Give points on how monetary policy is not an instrument of economic development
• Conclusion

Hints:

Monetary policy is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses. The objectives of monetary policy include inflation control and price stability, full employment, and stable economic growth.

Central banks use various tools to implement monetary policies. The widely utilized policy tools include:

• Liquidity Adjustment Facility (LAF)
  • Repo Rate and Reverse Repo Rate
  • Marginal Standing Facility (MSF)
  • Corridor
• Bank Rate
• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)
• Open Market Operations (OMOs)
• Market Stabilisation Scheme (MSS)

Monetary Policy for economic stabilization in India:

• Price Stability: Monetary policy is better suited to the achievement of price stability, that is, containing inflation. Price stability means a reasonable rate of inflation. A high degree of inflation has adverse effects on the economy.
• Ensures Balance of Payments: High inflation has an adverse effect on the balance of payments. Thus, Emphasising the importance of price stability is also crucial from the viewpoint of India’s balance of payments.
• Legal Basis to control Inflation: The Reserve Bank of India Act of 1934, in May 2016, was amended to provide a legal basis for the execution of the flexible inflation targeting agenda.
• Flexible Inflation Targeting Framework (FITF)
  • Flexible Inflation Targeting Framework: Now there is a flexible inflation targeting framework in India (after the 2016 amendment to the Reserve Bank of India (RBI) Act, 1934).
  • Who sets the inflation target in India: The amended RBI Act provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once every five years.
  • Current Inflation Target: The Central Government has notified 4 percent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 percent and the lower tolerance limit of 2 percent.
  • Factors that constitute a failure to achieve the inflation target: (1) the average inflation is more than the upper tolerance level of the inflation target for any three consecutive quarters, OR (2) the average inflation is less than the lower tolerance level for any three consecutive quarters.

Monetary Policy for Economic Growth in India:

• Promoting economic growth is another important objective of monetary policy.
• In the past, the Reserve Bank has often been criticized for pursuing the objective of controlling inflation and achieving price stability and neglected the objective of promoting economic growth.
• Monetary policy can promote economic growth by ensuring adequate availability of credit and lower the cost of credit. Easy availability of credit at low-interest rates stimulates investment and thereby quickens economic growth.
• However, during periods of high inflation, the Reserve Bank followed a tight monetary policy under which Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) were raised to restrict the availability of credit for the private sector.
• Besides, by raising bank rate and repo rate at which banks borrow from the Reserve Bank of India lending rates of interest of banks were kept at high levels which discouraged private investment. This tight monetary policy worked against promoting growth.

Balancing of objectives:

• Growth: To ensure higher economic growth an adequate expansion of money supply and greater availability of credit at a lower rate of interest is needed.
  • It requires lower lending rates of interest and greater availability of credit for encouraging private investment
• Inflation: Large expansion in money supply and bank credit leads to an increase in aggregate demand which tends to cause a higher rate of inflation.
  • Inflation control requires tightening of monetary policy, that is raising of interest rate, reducing liquidity of the banking system so that banks restrict their credit supply
• Exchange rate risk: It may be noted that in the context of the openness of the economy and floating exchange rate system, as is the case of the Indian economy today, the objective of achieving a higher rate of economic growth through monetary measures may also conflict with the objective of exchange rate stability, that is, the value of rupee in terms of the US dollar and other foreign currencies.
• Tradeoff: Thus there seems to be a natural trade-off scenario between these two conflicting objectives.

Conclusion

There is no conflict between the objectives of price stability and sustainable growth. Price stability is a means to ensure economic growth. Price stability provides an appropriate environment under which growth can occur and social justice can be ensured. However, at times an easy monetary policy is required to give a push start to economic growth. RBI needs to balance both its objectives which can in long term lead to the resilient growth of the economy and prosperity of its people.

Question #2. Green revolution in the early phase yielded positive results, but in the later phase, it has shown the dark side too. Critically Analyze. (150 Words)

Approach:

• Introduce by giving a definition of Green Revolution and briefly give its overview
• Enumerate the positive results of Green Revolution
• Enumerate the negative impacts of Green Revolution
• Way Forward and Conclusion

Hints:

Green Revolution refers to the development of high yielding variety (HYV) seeds during the decade of 1960s which led to the phenomenal rise in the output of food crops in India. Norman-e-Borlaug is considered as the father of the Green Revolution in the World while M.S. Swaminathan is considered as the father of the Green Revolution in India.

Key features of the Green Revolution in India were - HYV seeds, irrigation, chemical fertilizers, and pesticides.

Positive Impacts of Green Revolution

• Increased Agriculture Production- The production of wheat increased from around 24 million tonnes in 1970-71 to around 96 million tonnes in 2013-14, and the production of rice increased from around 31 million tonnes in 1965-66 to around 106 million tonnes in 2013-14.
• The prosperity of Farmers- Earning of farmers increased with the increase in production.
• Reduction in the import of food grains.
• Dispersal of Rice and Wheat cultivation to non-traditional areas- Green Revolution spread the Rice cultivation to the semi-arid areas of Punjab, Haryana, and Western Uttar Pradesh, and the wheat cultivation has spread to the areas of Eastern Uttar Pradesh, Madhya Pradesh, Rajasthan, and some parts of Maharashtra, Gujarat, and West Bengal.
• Industrial Growth- Due to the large-scale mechanization which was brought by the Green Revolution, demand for different types of machines like tractors, harvesters, combines, etc increased, and along with increased demand for fertilizers, insecticides, pesticide, etc, the growth spurt in the industries producing these items.
• Rural Employment- A large number of farm laborers migrated from the areas like Eastern Uttar Pradesh, Bihar to Punjab, where they got better employment opportunities.

Negative Impacts of the Green Revolution

• Intercrop disparities- Green Revolution has promoted Monoculture of some remunerative species and it is wheat which has benefitted most and sometimes people due to this very reason, term Green Revolution as Wheat Revolution. Green Revolution has snatched areas from crops like coarse cereals, pulses, and oilseeds and at the same time, major commercial crops like Cotton, Jute, Sugarcane, Tea are also almost untouched by it.
• Regional Disparities- According to some estimates, the Green Revolution benefited only 40% of the total crop area and 60% is still untouched by it, this has given rise to regional disparities. The benefitted areas include Punjab, Haryana, Western UP in Northern India and Andhra Pradesh, and Tamil Nadu in South India.
• Rise in interpersonal disparities- Big farmers who own 10 hectares or more land, are benefited most from the Green Revolution, as they have more financial resources to buy better seeds, fertilizers and other required inputs. Thus, the green revolution made the rich richer and left the poor poorer, which resulted in widespread social and economic tensions.
• Unemployment- Except in Punjab, and to some extent in Haryana, Green Revolution-induced Farm Mechanisation has created widespread unemployment among the rural laborers.
• Ecological problems like Soil Salinity, Alkalinity, Waterlogging, Desertification, Soil Erosion.
• Depletion of Underground Water- As the canal irrigation is not sufficient in the semi-arid areas of Punjab, Haryana, Western Uttar Pradesh, to meet the irrigation demand farmers depend heavily on Tube well irrigation which has led to a depletion of the level of groundwater in these areas.
• Deforestation- Green Revolution heartland like Punjab and Haryana are almost devoid of the forest with around 3% of forest area in both while UP is having slightly more than 5% area under the forest.
• Environmental Pollution- Indiscriminate use of chemicals has led to environmental pollution as some of the chemicals enter the water by getting dissolved in it and pollute both surface and groundwater. Moreover, the chemicals enter the soil and destroy useful microorganisms.

Way Forward:

Due to the limitations of the first Green Revolution in increasing the production of pulses, oilseeds, fruits, and vegetables, which are very important for ensuring nutritional security, the second revolution was introduced. Important strategies of the Second green revolution are:

• Micro-irrigation System- It enables optimal synergies of 3 components of Green Revolution-improved seed, water, and fertilizer.
• Organic Farming
• Precision Farming- It is concerned with using fewer resources and reducing the production cost, by analyzing the variation in various aspects of the field and environment like- weather, Soil, vegetation, water etc.
• Green Agriculture- A system of agriculture-based upon, integrated pest management, integrated nutrient management and it does not eliminate the use of minimum quantities of fertilizer and chemical pesticides.

Conclusion

Overall, the Green Revolution was a major achievement for many developing countries, specially India and gave them an unprecedented level of national food security.  It represented the successful adaptation and transfer of the same scientific revolution in agriculture that the industrial countries had already appropriated for themselves. However, lesser heed was paid to factors other than ensuring food security such as environment, the poor farmers and their education about the know-how of such chemicals. As a way forward, the policymakers must target the poor more precisely to ensure that they receive greater direct benefits from new technologies and those technologies will also need to be more environmentally sustainable.