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Context: The PM has announced the Atma-nirbhar Bharat Abhiyan (or Self-reliant India Mission) and said that in the days to come the government would unveil the details of an economic package — worth Rs 20 lakh crore or 10% of India’s GDP in 2019-20 — aimed towards achieving this mission.
Prelims: Current events of national and international importance.
Mains: GS III-
- Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment. Inclusive growth and issues arising from it.
|‘Atmanirbhar Bharat Abhiyan'
- Recently, the Prime Minister has announced the ‘Atmanirbhar Bharat Abhiyan (or Self-reliant India Mission)’ with an economic stimulus package — worth Rs 20 lakh crores aimed towards achieving the mission.
- The announced economic package is 10% of India’s Gross Domestic Product (GDP) in 2019-20.
- The amount includes packages already announced at the beginning of the lockdown incorporating measures from the RBI and the payouts under the Pradhan Mantri Garib Kalyan Yojana.
- The package is expected to focus on land, labour, liquidity, and laws.
|Self-Reliant India Mission
- The Self-Reliant India Mission aims towards cutting down import dependence by focussing on substitution while improving safety compliance and quality goods to gain global market share.
- Self-Reliance neither signifies any exclusionary or isolationist strategies but involves the creation of a helping hand to the whole world.
- The Mission focuses on the importance of promoting “local” products.
|The Mission will be carried out in two phases
- Phase 1:
- It will consider sectors like medical textiles, electronics, plastics, and toys where local manufacturing and exports can be promoted.
- Phase 2:
- It will consider products like gems and jewellery, pharma and steel, etc.
- The Mission would be based on five pillars namely:
- Vibrant Demography
- The Mission is also expected to complement the ‘Make In India Initiative’ which intends to encourage manufacturing in India.
|Five pillars of a self-reliant India
PM iterated that a self-reliant India will stand on five pillars viz.
- 1) Economy:
- Which brings in quantum jump and not incremental change
- 2) Infrastructure:
- which should become the identity of India
- 3) The system:
- Based on 21st-century technology-driven arrangements
- 4) Vibrant Demography:
- Which is our source of energy for a self-reliant India and
- 5) Demand:
- Whereby the strength of our demand and supply chain should be utilized to full capacity
|Analysis of Declared Economic Package
- Inclusion of RBIs’ Expenditure in Fiscal Package:
- The declared package is considered to be substantially less because it includes the actions of RBI as part of the government’s “fiscal” package, even though only the government controls the fiscal policy and not the RBI (which controls the ‘monetary’ policy).
- Thus, the Government expenditure and RBI’s actions are neither the same nor can they be added in this manner. And thus nowhere in the world fiscal packages are declared in this manner.
- For instance, when the US announced a relief package of $3 trillion (Rs 225 lakh crore), it only refers to the money that will be spent by the government — and does not include the expenditure of the Federal Reserve (US central bank).
- The implication of Inclusion of RBIs’ Expenditure :
- If the government is including RBI’s liquidity decisions in the calculation, then the actual fresh spending by the government could be considerably lower.
- That’s because RBI has been coming out with Long Term Repo Operation (LTRO), to infuse liquidity into the banking system worth Rs 1 lakh crore at a time. If RBI launches another LTRO of Rs 1 lakh crore, then the overall fiscal help falls by the same amount.
- The direct expenditure by a government usually includes wage subsidy or direct benefit transfer or payment of salaries, etc, immediately and necessarily stimulates the economy. In other words, that money necessarily reaches the people, either as through salary or purchase.
- But measures from RBI include credit easing, that is, making more money available to the banks so that they can lend to the broader economy, is not like government expenditure.
- In times of crisis, banks may take that money from RBI and, instead of lending it, may park it back with the RBI.
- Recently, Indian banks have parked Rs 8.5 lakh crores with the central bank. So in terms of calculations, RBI has given a stimulus of Rs 6 lakh crore. But in reality, RBI has received an even bigger amount back from the banks.
- Thus, the declared amount is 10% of GDP, but less than 5% of cash outgo is expected.
|Why shouldn’t RBI’s package be included in the overall package?
- That is because direct expenditure by a government — either by way of wage subsidy or direct benefit transfer or any, immediately and necessarily stimulates the economy.
- In other words, that money necessarily reaches the people — either as someone’s salary or someone’s purchase.
- But credit easing by the RBI, that is, making more money available to the banks so that they can lend to the broader economy, is not like government expenditure.
- That’s because, especially in times of crisis, banks may take that money from RBI and elsewhere and, instead of lending it, park it back with the RBI.
|Long Term Repo Operations (LTRO)
- The LTRO is a tool under which the RBI provides 1-3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
- Funds through LTRO are provided at the repo rate.
- But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
- According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
- The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo, etc.
What are Repo and Reverse Repo rates?
- The repo rate is the rate at which the RBI lends money to the banking system (or banks) for short durations.
- The reverse repo rate is the rate at which banks can park their money with the RBI.
- With both kinds of the repo, which is short for repurchase agreement, transactions happen via bonds — one party sells bonds to the other with the promise to buy them back (or repurchase them) at a later specified date.
- In a growing economy, commercial banks need funds to lend to businesses.
- One source of funds for such lending is the money they receive from common people who maintain savings deposits with the banks. Repo is another option.
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