The Reserve Bank of India: A Legacy of Stability
GS-3 Mains
Short Notes or Revision Notes
Question : Discuss the pivotal role played by the RBI in navigating India’s economic transitions, including the planned economy era, market-oriented reforms, and the emerging digital economy.
A Historic Institution (1935)
- Established on April 1, 1935, under the Reserve Bank of India Act, 1934.
- One of the oldest central banks among developing countries.
- Originally headquartered in Calcutta, permanently moved to Mumbai in 1937.
- Initially private, nationalized in 1949 and fully owned by the Indian government.
Navigating Change
- Played a key role in India’s economic transitions:
- Planned economy era
- Market-oriented reforms
- Emerging digital economy
Challenges and Achievements
- Faced numerous economic challenges over nine decades:
- 2008 Global Financial Crisis
- 2013 Taper Tantrum
- Demonetization
- Pandemic-induced disruptions
- Bad loan crisis in the banking sector
- Addressed bad loan crisis through:
- Recognition of the problem by banks (prodded by RBI)
- Insolvency and Bankruptcy Code (IBC) for faster resolution
- Government capital infusion into public sector banks
- Reduced bad loans from 11.25% (2018) to below 3% (Sept 2023)
- Resolved the “twin balance sheet problem” hindering investment
New Frontiers
- Adopted inflation targeting framework for price stability.
- Introduced UPI, revolutionizing the national payments system.
- Must prepare for future challenges:
- Evolving payment mechanisms
- Central bank digital currency (CBDC)
- Emerging financial risks
- Effective regulation and supervision
Conclusion
- An independent RBI is crucial for macroeconomic management.
- Effective coordination between monetary and fiscal policies is essential for a thriving economy (“Viksit Bharat”).
- The RBI must remain vigilant against unforeseen events.
MSP in Agriculture: A Flawed Solution
GS-3 Mains
Short Notes or Revision Notes
Question : Explain the concept of Minimum Support Price (MSP) and its significance in providing financial support to farmers. Discuss the reasons why governments are unlikely to cease announcing MSP despite its social and political importance.
Understanding MSP
- Minimum Support Price (MSP) is a government-determined price for specific crops.
- Aimed at providing farmers financial support through procurement for food security buffer stocks.
- No government is likely to stop announcing MSP due to its social and political significance.
Debates on Legalization of MSP
- No consensus exists on legally guaranteed MSP:
- Some farmers seek MSP for all crops (currently available for 23 crops, forming 28% of agricultural output).
- Academics debate the feasibility of MSP for perishable goods.
Misconceptions about Legalized MSP
- Farmers misunderstand the procurement process:
- Legalization wouldn’t mandate government purchase of all produce.
- MSP can be ensured through various means (procurement, price difference payment).
- Legalization wouldn’t stop market purchases below MSP.
- It would eliminate the crucial market price discovery mechanism.
Challenges of Legalized MSP
- Inter-regional Conflicts:
- MSP implementation based on area-specific crop plans would incentivize growing suitable crops.
- This could lead to reduced procurement of water-intensive crops like paddy in Punjab, sparking farmer conflict.
- Cost of Production Calculation:
- The current MSP calculation method based on national averages creates disparity.
- Legalization might lead to demands for state-specific MSP to benefit farmers in states with higher production costs.
- Cost Sharing Burden:
- The central government is assumed to bear the financial burden of legalized MSP.
- States with lower production costs might demand cost-sharing based on Finance Commission norms.
- This could strain relations and impact centrally sponsored agricultural schemes.
- Impact on Small and Marginal Farmers/Laborers:
- Legalized MSP primarily benefits those who produce a surplus for sale.
- It neglects the vast majority of landless laborers, marginal, and small farmers who have minimal surplus.
Conclusion
- Legalizing MSP might cause more harm than good.
- Farmer unions and the government should explore alternative solutions alongside MSP to ensure a sustainable future for agriculture and farmers.
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