Current Affairs (2nd June 2021)

Circular on cryptocurrency

Context:

• Recently, some leading banks cautioned people against dealing in cryptocurrencies. The Reserve Bank of India (RBI) recently said banks and other regulated entities cannot cite its April 2018 order on virtual currencies (VCs) as it has been set aside by the Supreme Court of India in 2020.

What did the RBI say and what was the trigger?

• In view of the order of the Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from.
• The RBI clarification came after State Bank of India and HDFC Bank cautioned their customers against dealing in virtual currencies such as Bitcoin citing the April 2018 order of the RBI.
• Banks also warned customers that failure to adhere to the advisory may lead to cancellation or suspension of their cards.
• The RBI has no option but to allow it after the Supreme Court lifted the banking ban last year. So, the RBI intervened and asked banks to stop being notorious.

Does it clarify the policy position for cryptocurrency holders?

• The clarification from the RBI, which is developing its own virtual currency, is expected to give some relief to customers who have invested in cryptocurrencies.
• Many Indians have invested in cryptocurrencies like Bitcoin and Ethereum, the RBI move will be a big respite for them and their money.

What are banks expected to do now?

• Banks, as well as other entities, may continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002 in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.
• In other words, banks can’t take action against investors in virtual currencies following the court and RBI directives.

What’s the RBI’s position?

• The RBI’s 2018 position was more restrictive. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs.
• Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase or sale of VCs.
• Regulated entities which already provide such services should exit the relationship within three months from the date of the circular.

Conclusion:

• However, the RBI which is against other virtual cryptocurrencies has warned people against such currencies several times in the past.
• RBI has indicated it’s “very much in the game” and getting ready to launch its own digital currency. “Central bank digital currency is a work in progress.

Role of Rural India

Context:

• The economy saw its worst-ever contraction in 2020-21, but the farm sector grew by 3.6%. In the second year of the Covid-19 pandemic, however, farmers face new challenges and uncertainties.

About:

• 2020-21 saw the Indian economy register its worst-ever contraction since Independence and the first since 1979-80.
• The National Statistical Office has, in its Provisional Estimates released recently, pegged the growth in real gross value added at basic prices (previously known as GDP at factor cost) for 2020-21 at minus 6.2%.
• This time is that the farm sector (agriculture, forestry & fishing) has grown by 3.6%. There have been four instances of negative GDP growth earlier: 1979-80, 1972-73, 1965-66 and 1957-58.
• All four were drought years, with agricultural de-growth surpassing that of overall GDP in each of them. 2020-21 has been different.
• There has been record economic contraction, yet no drought; the farm sector grew by 3.6%.

Two main reasons why agriculture did not suffer the fate of the rest of the economy last year:

1. Monsoon:

• The rains were good not just in the main monsoon, but also the post-monsoon (October-December), winter (January-February) and pre-monsoon (March-May) seasons of 2019 and 2020.
• It led to the filling of reservoirs and recharging of groundwater tables and aquifers, unlike after the deficient monsoons of 2014 and 2015 and the near-deficient one of 2018. 2019-20 and 2020-21 produced back-to-back bumper harvests.

2. Exemption from the nationwide lockdown that followed the first wave of COVID-19:

• Last year, PDS ration shops and other stores selling food, groceries, fruits & vegetables, milk, meat and fish, animal fodder, seeds, and pesticides were spared. Later, government extended the lifting of curbs to fertiliser outlets, all field operations by farmers and farm workers, intra- and inter-state movement of agricultural machinery, sale of produce in wholesale mandis and procurement by government agencies.
• The conscious policy call taken to permit agriculture-related activities and the inherent resilience and adaptability of rural economic actors — meant that the farm sector was relatively insulated from lockdown-imposed supply-side
• Farmers made sure they did not waste a good monsoon, finding ways to even mobilize harvesting and planting labour during peak lockdown.

Challenges faced by agriculture:

• The problems agriculture encountered due to the lockdown had more to do with the demand side.
• The closure of hotels, restaurants, roadside eateries, sweetmeat shops, hostels, and canteens — and no wedding receptions and other public functions — resulted in a collapse of out-of-home consumption.
• This was demand destruction not from rising prices — “movement along the demand curve”. Instead, it was from forced consumption reduction, translating into lower demand for farm produce even at the same price — “a leftward shift in the demand curve”.

Steps taken:

• The Central government sought to partly address the demand-side problem through enhanced state crop procurement.
• The minimum support price (MSP) value of such purchases of wheat, rapeseed-mustard, chana(chickpea), tur (pigeon-pea), paddy and cotton amounted to roughly Rs 130,000 crore during April-July 2020.
• Together with nearly Rs 21,000 crore of first-installment direct transfers to farmer accounts under the PM-Kisan scheme, it added up to over Rs 1.5 lakh crore of liquidity infusion into the agricultural economy.
• One must emphasize that MSP procurement was effective largely in crops and regions where the institutions undertaking such operations.
• Food Corporation of India, NAFED, Cotton Corporation of India or even cooperative dairies were active and could stem price declines during the period of demand destruction from late-March till July.
• Such intervention was not possible in non-mainstream produce (vegetables, fruits, poultry, fish, flowers, spices, etc) and regions (maize in Bihar), where the corresponding institutional mechanisms were non-existent.

After lockdown:

• The demand situation improved, though, with the gradual lifting of lockdown restrictions and the recovery in global agri-commodity prices.
• The UN Food and Agricultural Organization’s food price index had plunged to a four-year low in May 2020, following synchronous worldwide lockdowns to contain the spread of the novel coronavirus.
• But as economies unlocked, prices started rising from around August and the index hit an 83-month-high in April 2021.
• The benefits of price recovery were really felt during the marketing of the 2020-21 rabicrop, which was a bumper one like that harvested during last year’s lockdown. But this time round, many farmers also realized good prices.
• The effects of good monsoon, lockdown exemptions, stepped-up government procurement, and better price realizations were also borne out by domestic tractor sales.
• While agriculture grew amid an unprecedented economic contraction, 2020-21 was also notable for the record 389.35 crore person-days of employment generated under MGNREGA.

Can rural playing “saviour” be repeated in 2021-22?

• That situation has changed with the second wave and rising share of rural districts in total cases, even without factoring in the higher probability of underreporting in these places.
• Covid’s impact on agriculture per se would depend on the spread, intensity, and duration of the infection.
• Given that the main kharif planting season will take off only after mid-June with the arrival of the monsoon rains, a reduction in the active caseload by then can help avert significant operational disruptions.
• While fear of the virus may induce precautionary behaviour and postponement of purchases of tractors, two-wheelers, or white goods, it is unlikely to affect normal agricultural operations.
• The second factor to be considered is the monsoon. The India Meteorological Department, in its latest June 1 update, has forecast a 74% probability of rainfall during the current season being “normal”, “above-normal” or “excess”.
• A third source of uncertainty is prices. Global prices — be it of wheat, maize, soyabean, palm oil, sugar, skimmed milk powder or cotton — have scaled multi-year highs in the recent period, helping India’s agri-commodity exports in 2020-21 to recover to near their peak 2013-14 levels.

Conclusion:

• Beyond 2021-22, the real challenge for Indian agriculture and farmers will be on the demand side. That is specifically going to come from declining real incomes and particularly affecting demand for milk, pulses, egg, meat, fruits, vegetables, and other protein/micronutrient-rich foods.
• While rising rural wages and overall incomes is what propelled the demand for these foods in the past — in turn, contributing to dietary and cropping diversification — the ongoing slide presents a frightening proposition. This is a topic deserving separate analysis.