Building India’s talent base
Heed the federal framework
Should the RBI issue a digital currency?
Building India’s talent base
Synoptic line: It throws light on issue of a research for skills policy options across India.
(GS paper II)
- India acquired 103rd position in the recent World Economic Forum ranking of 130 nations on the preparedness of talent and it was just another indication of the skills challenge.
- According to the government’s skill gap analysis report, it was estimated that an extra 40 crore workers need to be skilled, reskilled or upskilled. The current official estimate is that slightly more than half a crore people are being trained annually.
Assessment of a research
- New research commissioned by Tata Trusts and the Copenhagen Consensus Center for the India Consensus projects, ‘Andhra Pradesh Priorities’ and ‘Rajasthan Priorities’, helps answer the question (With limited resources and time, which skills policies will make the biggest impact?) for the two States.
- The Copenhagen Consensus has worked with hundreds of stakeholders to identify the best policies in more than 40 different areas for each State, ranging from education and child marriage to agricultural performance and disaster management. Economists from India and around the globe are now analysing the costs, benefits and impacts of these policies.
- The new research will highlight for each State which policies can make the biggest difference for every rupee spent. But already the research casts a bright light on what can be done within a specific policy area.
- In Andhra Pradesh, the skills challenge is clear as more than 97% of the 21 lakh individuals expected to join the workforce between now and 2022 will be totally or partially unskilled according to the National Skill Development Corporation. To meet demand, Andhra Pradesh needs to skill about half its workforce (or 10.5 lakh people) entering the labour market by 2022
- The first policy examined is the provision of loan assistance to small- and medium-enterprises (SMEs) to encourage expansion and job creation. This may seem a roundabout route to up-skilling, but as a powerhouse of SMEs (like many Indian States), Andhra Pradesh can create jobs by supporting their growth and development.
- But to compete on a global stage, Andhra Pradesh needs direct upskilling policies. One approach studied is apprenticeship schemes that combine vocational education with work-based learning. For the employer, the cost is ₹1.5 lakh, including salary, supervision, training and administration. The government spends another ₹0.2 lakh reimbursing employers and on marketing.
- The individual misses out on about ₹0.16 lakh in income during the apprenticeship. The total cost to everyone involved for one apprenticeship is approximately ₹1.9 lakh. Therefore, every rupee spent on a year-long apprenticeship programme is worth ₹7.2 to the A.P. economy. This is even stronger than supporting SMEs in generating societal benefits.
- Also expanding the current vocational training programme to incentivise more people to join. This is job-specific, technical and hands-on. A similar analysis is undertaken: this time, the cost for each apprenticeship, both public and private, is about ₹0.46 lakh.
- Demographics and economic realities differ for each State in India- research conducted for Rajasthan found that while skilling is broadly a good investment, the pay-offs are different. Vocational training, for example, has less of an impact than in A.P.
- This research highlights the strong case for A.P. to invest more in expanding access vocational training programmes and the need to study the costs and benefits of skills policy options across India.
Question- With limited resources and time, it is crucial for States to assess which skills policies will make the biggest impact, explain along with examples.
Heed the federal framework
Synoptic line: It throws light on the issue of resource allocation by the 15th finance commission.
(GS paper III)
- Most federations in the world have different arrangements for the mobilisation and devolution of resources. In India, the Constitution provides for the appointment of a Finance Commission every five years to recommend methodology to share resources such that the fiscal space of the constituents, especially the States, is well protected.
- The terms of reference of the 15th Finance Commission are thus a matter of utmost importance to the resources available to the States of India.
- The terms of reference of this Commission have created apprehension among States about principles of fairness and equity in the distribution of public resources for development. Article 1 of the Constitution of India recognises India as a Union of States. The unity of India can be preserved only if there is real fairness and equity in the matter of devolution of powers and resources to the States by the Central government. The foremost objective of the Finance Commission is an equitable distribution of financial resources between the two units of the Union.
- Also the State List in the Seventh Schedule of the Constitution shows that in the allocation of duties between the Centre and the States, fundamental tasks of enhancing human development, income growth, livelihoods, and protecting and sustaining the environment are entrusted to the States. However, although these major tasks of nation-building are the duty of the States, the resources to finance them are substantially controlled by the Centre.
- The States in India today neither have the resources to fulfil their tasks as laid down in the Constitution, nor do they have the right to raise such resources. The present situation is not because of the action or inaction of the States but is directly the consequence of Central government policy. There is thus a great asymmetry in India’s federal system.
- The Centre’s capacity to mobilise resources is far greater than that of the States, but the latter are required to undertake development expenditures that far exceed their revenue generating capabilities. The Constitution of India entrusts the Finance Commission with the responsibility of addressing this anomaly. So the basic mandate of the Finance Commission should be seen as that of deciding an appropriate quantum of unconditional devolution of resources from the Centre to the States, combined with more specific grants.
- The devolution of resources by the 15th Finance Commission assumes further significance in the current environment, in which the finances of States have received a double blow in the form of demonetisation and the Goods and Services Tax (GST). The freedom of States to raise resources has been restricted by the introduction of the GST. They now have hardly any major tax left with them to make a difference to State resources.
- The use of population data of 2011 as the base for tax devolution should not reduce the allocation of resources to States that have successfully reduced their rate of population growth. These States have incurred huge fiscal costs in order to achieve a lower population growth and healthy demographic indicators. They have made substantial investments on education, health and directly on family welfare programmes.
- Many States of India today have achieved a replacement rate of growth of population or have gone below that rate in a short span of time. An immediate effect of this is a sharp rise in the proportion of elderly in the population. The care of the elderly is the responsibility of State governments. The enhanced costs of such care must be considered by the Commission in making its awards and in deciding the population criterion to be used.
- Also it is not the task of a Finance Commission to recommend “road maps for fiscal management” or to impose its perception of what policies are good for the people of the States. That is for democratically elected State governments to decide.
- The Finance Commission should not take a “residual approach” to the question of vertical devolution. The approach should not be that of distributing what is left over after providing for the requirements of the Centre.
- The terms of reference are unprecedented in asking the 15th Finance Commission to consider proposing performance-based incentives beyond those relating to fiscal responsibility, population and devolution to local bodies. This reflects the viewpoint and ideological inclinations of the Central government and is an attempt to micro-manage the fiscal domain of the State governments.
- States have set the agenda for development. These sectors include health, education, forest management, public distribution of food, agricultural production -the list goes on. Such development was not because the concerned States received Central incentives. Best practices were created on their own initiative.
- For the Finance Commission to propose “measurable performance-based-incentives” is nothing short of an attack on the federal structure mandated by the Constitution. It is not the duty of the Finance Commission to venture into the realm of day-to-day governance. The elected governments of States will decide what policies are appropriate for our people.
- Also it is not correct that the fiscal space available to the Centre has shrunk following the 14th Finance Commission recommendations. The argument today that an increase in devolution from 32% to 42% led to a reduction of the fiscal space available to the Union government is not borne out by the evidence. In practice, when implementing the award of the 14th Finance Commission, the Union government cut allocations to several Centrally Sponsored Schemes in 2015-16.
- To recognise the diversity in India is also to recognise that States will follow diverse paths of development. The Finance Commission must facilitate diversity and a democratic path of development by respecting principles of equity and fairness in allocating resources between the Centre and States in India.
Question – The Finance Commission must respect principles of equity and fairness in allocating resources between Centre, States. Explain in the context of 15th finance commission.
Should the RBI issue a digital currency?
Synoptic line: It throws light on the issue of digital currencies in India.
(GS paper III)
- The Reserve Bank of India (RBI), like many of its global peers, has decided to look into the possibility of issuing a central bank digital currency (CBDC). Globally, governments are striving to make monetary transactions trackable to prevent illicit activities. It is not obvious yet why the government would launch digital currencies that would make online transactions untrackable.
- Given the disruptive potential of the concept and its enabling technology, that is, distributed ledger technology (DLT), much broader public debate is required.
What is a digital currency?
- Currency is a subset of a broader economic concept of money. Currency is the “token” which facilitates movement of money, shifting its purchasing power from the current holder to its future holder. Currency facilitates the exchange feature of money, that is, payment.
- Currency, driven by technology, has evolved into several forms; from good old cash/coins, to electronic money and, more recently, cryptocurrency. Currencies are typified by key features, namely physical existence, issuer, ultimate liability, universal accessibility and peer-to-peer exchangeability.
- Cash ticks most boxes it exists physically, is issued by central banks, with the ultimate liability being that of the government, it’s universally accessible within the jurisdiction, can be used anonymously at zero cost, and can be used in peer-to-peer exchange. Electronic money represents electronic payments facilitated by banks and payment networks differ from cash in lacking physical existence and peer-to-peer exchange being trackable by authorities, thus not being anonymous.
- Cryptocurrency addresses the need to enable peer-to-peer anonymous transactions on the lines of cash. However, cryptocurrency provides this anonymity in online/electronic transactions which credit card/debit card/internet banking-based payments cannot. This explains the “crypto” aspect of the cryptocurrency. However, cryptocurrencies have limited social acceptance since they are neither issued by central banks nor are they a liability for anyone-even private entities, forget governments.
- Modern fiat money, and by extension currency, is a social contract as much as a legal contract. The success of any mode of payment, or a new currency, depends on wider acceptance by citizens and governments.
- If society is comfortable with the idea that all electronic payments are trackable by authorities, prima facie, there will be limited demand for cryptocurrencies (this is different from the demand for “investment” purposes). The limited anonymous peer-to-peer transaction can be done with cash. It is not yet clear how society sees this issue.
- The feasibility of idea of a digital currency can be assess through distributed ledger technology (DLT), a specific version of which is blockchain. In a conventional payment system, there is a centralized computation-cum-storage facility, where one’s bank or currency account details are maintained. This facility may be called a “trusted authority”.
- When a payment is made, the payer’s account is debited, the payee’s is credited, and the system is updated to reflect the updated account status. The trusted authority is responsible for ensuring that the system correctly and promptly captures the transactions and reflects the latest account position. Other authorized systems can access the central database to find the state of the payer and the payee.
- In DLT, there is no trusted authority, that is, no centralized facility to ensure data integrity. In DLT, the users (nodes) of the distributed system each have a copy (instance) of the entire database. From a user perspective, when bank money is transferred, it takes seconds or a few minutes to confirm the transaction to the parties.
- In DLT, the transaction confirmation sometimes takes hours. Financial services process upwards of 25,000 transactions per second. A large blockchain network processes a mere fraction of this.
- Societies and governments must decide if they should be adopting digital currency or central bank cryptocurrency just because technology can enable it. Though the technology will evolve to address the operational inefficiencies in the long term.
Question – What is digital currency? What societal need will digital currency solve? Explain in the context of India.