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What impacts petroleum prices?

Over the last few days, the retail prices of petrol and diesel have touched an all-time high.  In Delhi, petrol was selling at 74.6/litre on April 25, 2018, while diesel was at 66/litre.

Petroleum products are used as raw materials in various sectors and industries such as transport and petrochemicals.  These products may also be used in factories to operate machinery or generators.  Any fluctuation in the price of petrol and diesel impacts the production and transport costs of various items.  When compared to other neighbouring countries, India has the highest prices for petrol and diesel.

Note: Prices as on April 1, 2018. Prices for India pertain to Delhi. Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Note: Prices as on April 1, 2018. Prices for India pertain to Delhi.
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

How is the price of petrol and diesel fixed?

Historically, the price of petrol and diesel in India was regulated, i.e. the government was involved in the deciding the retail price.  The government deregulated the pricing of petrol in 2010 and diesel in 2014.  This allowed oil marketing companies to determine the price of these products, and revise them every fortnight.

Starting June 16, 2017, prices for petrol and diesel are revised on a daily basis.  This was done to with the idea that daily revision will reduce the volatility in retail prices, and protect the consumer against sharp fluctuations.  The break-up of retail prices of petrol and diesel in Delhi on April 25, 2018 can be found below.  As seen in the table, over 50% of the retail price of petrol comprises central and states taxes and the dealer’s commission.  In case of diesel, this amount is close to 40%.

Table 1: Break-up of petrol and diesel prices in Delhi (on April 25, 2018)

Component

Petrol

Diesel

Rs/litre % of retail price Rs/litre

% of retail price

Price Charged to Dealers 35.7 48% 38.4 58%
Excise Duty (levied by centre) 19.5 26% 15.3 23%
Dealer Commission 3.6 5% 2.5 4%
VAT (levied by state) 15.9 21% 9.7 15%
Retail Price 74.6 100% 65.9 100%
Source: Price Build-up of Petrol and Diesel at Delhi effective April 25, 2018; Indian Oil Corporation Limited.

 

Does India produce enough petroleum to support domestic consumption?

India imports 84% of the petroleum products consumed in the country.  This implies that any change in the global prices of crude oil has a significant impact on the domestic price of petroleum products.  In 2000-01, net import of petroleum products constituted 75% of the total consumption in the country.  This increased to 95% in 2016-17.  The figure below shows the amount of petroleum products consumed in the country, and the share of imports.

Note: Production is the difference between the total consumption in the country and the net imports. Sources: Petroleum Planning and Analysis Cell; PRS.

Note: Production is the difference between the total consumption in the country and the net imports.
Sources: Petroleum Planning and Analysis Cell; PRS.

What has been the global trend in crude oil prices? How has this impacted prices in India?

Over the last five years, the global price of crude oil (Indian basket) has come down from USD 110 in January 2013 to USD 64 in March 2018, having touched a low of USD 28 in January 2016.

While there has been a 42% drop in the price of global crude over this five-period, the retail price of petrol in India has increased by 8%.  During this period, the retail price of diesel increased by 33%.  The two figures below show the trend in prices of global crude oil and retail price of petrol and diesel in India, over the last five years.

Petrol price

Diesel price

 

Note: Subsidy indicated in the graphs is notional.  While calculating the subsidy amount, other factors such as cost of domestic inputs will also have to be accounted.  Global Crude Oil Price is for the Indian basket.  Figures reflect average monthly retail price of petrol and diesel in Delhi.
Sources: Petroleum Planning and Analysis Cell; Indian Oil Corporation Limited; PRS.

 

How has the excise duty on petrol and diesel changed over the last few years?

Under the Constitution, the central government has the powers to tax the production of petroleum products, while states have the power to tax their sale.  Petroleum has been kept outside the purview of the Goods and Services Tax (GST), till the GST Council decides.

Over the years, the central government has used taxes to prevent sharp fluctuations in the retail price of diesel and petrol.  In the past, when global crude oil prices have increased, duties have been cut.  Since 2014, as global crude oil prices declined, excise duties have been increased.

Sources: Petroleum Planning and Analysis Cell; PRS.

Sources: Petroleum Planning and Analysis Cell; PRS.

 

As a consequence of the increase in duties, the central government’s revenue from excise on petrol and diesel increased annually at a rate of 46% between 2013-14 and 2016-17.  During the same period, the total sales tax collections of states (from petrol and diesel) increased annually by 9%.  The figure below shows the trend in overall collections of the central and state governments from petroleum (including receipts from taxes, royalties, and dividends).

 

Notes: Data includes tax collections (from cesses, royalties, customs duty, central excise duty, state sales tax, octroi, and entry tax, among others), dividends paid to the government, and profit on oil exploration. Data sources: Petroleum and Planning Analysis Cell; Central Board of Excise and Customs; Indian Oil Corporation Limited; PRS.

Notes: Data includes tax collections (from cesses, royalties, customs duty, central excise duty, state sales tax, octroi, and entry tax, among others), dividends paid to the government, and profit on oil exploration.
Data sources: Petroleum and Planning Analysis Cell; Central Board of Excise and Customs; Indian Oil Corporation Limited; PRS.

Explainer: Removal of Judges from Office

Today, some Members of Parliament initiated proceedings for the removal of the current Chief Justice of India by submitting a notice to the Chairman of Rajya Sabha.  A judge may be removed from office through a motion adopted by Parliament on grounds of ‘proven misbehaviour or incapacity’.  While the Constitution does not use the word ‘impeachment’, it is colloquially used to refer to the proceedings under Article 124 (for the removal of a Supreme Court judge) and Article 218 (for the removal of a High Court judge).

The Constitution provides that a judge can be removed only by an order of the President, based on a motion passed by both Houses of Parliament.  The procedure for removal of judges is elaborated in the Judges Inquiry Act, 1968.  The Act sets out the following steps for removal from office:

  • Under the Act, an impeachment motion may originate in either House of Parliament. To initiate proceedings: (i) at least 100 members of Lok Sabha may give a signed notice to the Speaker, or (ii) at least 50 members of Rajya Sabha may give a signed notice to the Chairman.  The Speaker or Chairman may consult individuals and examine relevant material related to the notice.  Based on this, he or she may decide to either admit the motion or refuse to admit it.
  • If the motion is admitted, the Speaker or Chairman (who receives it) will constitute a three-member committee to investigate the complaint. It will comprise: (i) a Supreme Court judge; (ii) Chief Justice of a High Court; and (iii) a distinguished jurist.  The committee will frame charges based on which the investigation will be conducted.  A copy of the charges will be forwarded to the judge who can present a written defence.
  • After concluding its investigation, the Committee will submit its report to the Speaker or Chairman, who will then lay the report before the relevant House of Parliament. If the report records a finding of misbehaviour or incapacity, the motion for removal will be taken up for consideration and debated.
  • The motion for removal is required to be adopted by each House of Parliament by: (i) a majority of the total membership of that House; and (ii) a majority of at least two-thirds of the members of that House present and voting. If the motion is adopted by this majority, the motion will be sent to the other House for adoption.
  • Once the motion is adopted in both Houses, it is sent to the President, who will issue an order for the removal of the judge.

Central Transfers to States: Role of the Finance Commission

In November 2017, the 15th Finance Commission (Chair: Mr N. K. Singh) was constituted to give recommendations on the transfer of resources from the centre to states for the five year period between 2020-25.  In recent times, there has been some discussion around the role and mandate of the Commission.  In this context, we explain the role of the Finance Commission.

What is the Finance Commission?

The Finance Commission is a constitutional body formed every five years to give suggestions on centre-state financial relations.  Each Finance Commission is required to make recommendations on: (i) sharing of central taxes with states, (ii) distribution of central grants to states, (iii) measures to improve the finances of states to supplement the resources of panchayats and municipalities, and (iv) any other matter referred to it.

Composition of transfers:  The central taxes devolved to states are untied funds, and states can spend them according to their discretion.  Over the years, tax devolved to states has constituted over 80% of the total central transfers to states (Figure 1).  The centre also provides grants to states and local bodies which must be used for specified purposes.  These grants have ranged between 12% to 19% of the total transfers.

Fig 1Over the years the core mandate of the Commission has remained unchanged, though it has been given the additional responsibility of examining various issues.  For instance, the 12th Finance Commission evaluated the fiscal position of states and offered relief to those that enacted their Fiscal Responsibility and Budget Management laws.  The 13th and the 14th Finance Commissionassessed the impact of GST on the economy.  The 13th Finance Commission also incentivised states to increase forest cover by providing additional grants.

15th Finance Commission:  The 15th Finance Commission constituted in November 2017 will recommend central transfers to states.  It has also been mandated to: (i) review the impact of the 14th Finance Commission recommendations on the fiscal position of the centre; (ii) review the debt level of the centre and states, and recommend a roadmap; (iii) study the impact of GST on the economy; and (iv) recommend performance-based incentives for states based on their efforts to control population, promote ease of doing business, and control expenditure on populist measures, among others.

Why is there a need for a Finance Commission?

The Indian federal system allows for the division of power and responsibilities between the centre and states.  Correspondingly, the taxation powers are also broadly divided between the centre and states (Table 1).  State legislatures may devolve some of their taxation powers to local bodies.

Table 1

The centre collects majority of the tax revenue as it enjoys scale economies in the collection of certain taxes.  States have the responsibility of delivering public goods in their areas due to their proximity to local issues and needs.

Sometimes, this leads to states incurring expenditures higher than the revenue generated by them.  Further, due to vast regional disparities some states are unable to raise adequate resources as compared to others.  To address these imbalances, the Finance Commission recommends the extent of central funds to be shared with states.  Prior to 2000, only revenue income tax and union excise duty on certain goods was shared by the centre with states.  A Constitution amendment in 2000 allowed for all central taxes to be shared with states.

Several other federal countries, such as Pakistan, Malaysia, and Australia have similar bodies which recommend the manner in which central funds will be shared with states.

Tax devolution to states

Table 2The 14th Finance Commission considerably increased the devolution of taxes from the centre to states from 32% to 42%.  The Commission had recommended that tax devolution should be the primary source of transfer of funds to states.  This would increase the flow of unconditional transfers and give states more flexibility in their spending.

The share in central taxes is distributed among states based on a formula.   Previous Finance Commissions have considered various factors to determine the criteria such as the population and income needs of states, their area and infrastructure, etc.  Further, the weightage assigned to each criterion has varied with each Finance Commission.

The criteria used by the 11th to 14thFinance Commissions are given in Table 2, along with the weight assigned to them.  State level details of the criteria used by the 14th Finance Commission are given in Table 3.

  • Population is an indicator of the expenditure needs of a state. Over the years, Finance Commissions have used population data of the 1971 Census.  The 14th Finance Commission used the 2011 population data, in addition to the 1971 data.  The 15th Finance Commission has been mandated to use data from the 2011 Census.
  • Area is used as a criterion as a state with larger area has to incur additional administrative costs to deliver services.
  • Income distance is the difference between the per capita income of a state with the average per capita income of all states. States with lower per capita income may be given a higher share to maintain equity among states.
  • Forest cover indicates that states with large forest covers bear the cost of not having area available for other economic activities. Therefore, the rationale is that these states may be given a higher share.

Table 3

Grants-in-Aid

Besides the taxes devolved to states, another source of transfers from the centre to states is grants-in-aid.  As per the recommendations of the 14th Finance Commission, grants-in-aid constitute 12% of the central transfers to states.  The 14th Finance Commission had recommended grants to states for three purposes: (i) disaster relief, (ii) local bodies, and (iii) revenue deficit.

Healthcare Financing: Who is paying?

The Union Cabinet recently approved the launch of the National Health Protection Mission which was announced during Budget 2018-19.   The Mission aims to provide a cover of five lakh rupees per family per year to about 10.7 crore families belonging to poor and vulnerable population.  The insurance coverage is targeted for hospitalisation at the secondary and tertiary health care levels. This post explains the healthcare financing scenario in India, which is distributed across the centre, states, and individuals.

How much does India spend on health care financing vis-à-vis other countries?

The public health expenditure in India (total of centre and state governments) has remained constant at approximately 1.3% of the GDP between 2008 and 2015, and increased marginally to 1.4% in 2016-17.  This is less than the world average of 6%.   Note that the National Health Policy, 2017 proposes to increase this to 2.5% of GDP by 2025.

Including the private sector, the total health expenditure as a percentage of GDP is estimated at 3.9%.  Out of the total expenditure, effectively about one-third (30%) is contributed by the public sector.  This contribution is low as compared to other developing and developed countries.  Examples include Brazil (46%), China (56%), Indonesia (39%), USA (48%), and UK (83%) (see Figure 1).

Fig 1

Who pays for healthcare in India? Mostly, it is the consumer out of his own pocket.

Given the public-private split of health care expenditure, it is quite clear that it is the private expenditure which dominates i.e. the individual consumer who bears the cost of her own healthcare.  Let’s look at a further disaggregation of public spending and private spending to understand this.

In 2018-19, the Ministry of Health and Family Welfare received an allocation of Rs 54,600 crore(an increase of 2% over 2017-18).  The National Health Mission (NHM) received the highest allocation at Rs 30,130 crore and constitutes 55% of the total Ministry allocation (see Table 1).  Despite a higher allocation, NHM has seen a decline in the allocation vis-à-vis 2017-18.

Interestingly, in 2017-18, expenditure on NHM is expected to be Rs 4,000 crore more than what had been estimated earlier.  This may indicate a greater capacity to spend than what was earlier allocated.  A similar trend is exhibited at the overall Ministry level where the utilisation of the allocated funds has been over 100% in the last three years.

Table 1State level spending

NITI Aayog report (2017) noted that low income states with low revenue capacity spend significant lower on social services like health.  Further, differences in the cost of delivering health services have contributed to health disparities among and within states.

Following the 14th Finance Commission recommendations, there has been an increase in the states’ share in central pool of taxes and they were given greater autonomy and flexibility to spend according to their priorities. Despite the enhanced share of states in central taxes, the increase in health budgets by some states has been marginal (see Figure 2).

Fig 2Consumer level spending

If cumulatively 30% of the total health expenditure is incurred by the public sector, the rest of the health expenditure, i.e. approximately 70% is borne by consumers.  Household health expenditures include out of pocket expenditures (95%) and insurance (5%). Out of pocket expenditure dominate and these are the payments made directly by individuals at the point of services which are not covered under any financial protection scheme.  The highest percentage of out of pocket health expenditure (52%) is made towards medicines (see Figure 3).

Fig 3

This is followed by private hospitals (22%), medical and diagnostic labs (10%), and patient transportation, and emergency rescue (6%).  Out of pocket expenditure is typically financed by household revenues (71%) (see Figure 4).

Fig 4

Note that 86% of rural population and 82% of urban population are not covered under any scheme of health expenditure support.   Due to high out of pocket healthcare expenditure, about 7% population is pushed below the poverty threshold every year.

Out of the total number of persons covered under health insurance in India, three-fourths are covered under government sponsored health schemes and the balance one-fourth are covered by private insurers.  With respect to the government sponsored health insurance, more claims have been made in comparison to the premiums collected, i.e., the returns to the government have been negative.

It is in this context that the newly proposed National Health Protection Mission will be implemented.  First, the scheme seeks to provide coverage for hospitalisation at the secondary and tertiary levels of healthcare.  The High Level Expert Group set up by the Planning Commission (2011) recommended that the focus of healthcare provision in the country should be towards providing primary health care.  It observed that focus on prevention and early management of health problems can reduce the need for complicated specialist care provided at the tertiary level.  Note that depending on the level of care required, health institutions in India are broadly classified into three types: primary care (provided at primary health centres), secondary care (provided at district hospitals), and tertiary care institutions (provided at specialised hospitals like AIIMS).

Second, the focus of the Mission seems to be on hospitalisation (including pre and post hospitalisation charges).  However, most of the out of the pocket expenditure made by consumers is actually on buying medicines (52%) as seen in Figure 3.  Further, these purchases are mostly made for patients who do not need hospitalisation.

Status of Drinking Water and Sanitation in rural India

In Budget Session 2018, Rajya Sabha has planned to examine the working of four ministries.  The Ministry of Drinking Water and Sanitation is one of the ministries listed for discussion.  In this post, we look at the key schemes being implemented by the Ministry and their status.

What are the key functions of the Ministry of Drinking Water and Sanitation?

As per the Constitution, supply of water and sanitation are state subjects which means that states regulate and provide these services.  The Ministry of Drinking Water and Sanitation is primarily responsible for policy planning, funding, and coordination of programs for: (i) safe drinking water; and (ii) sanitation, in rural areas.  From 1999 till 2011, the Ministry operated as a Department under the Ministry of Rural Development.  In 2011, the Department was made an independent Ministry.  Presently, the Ministry oversees the implementation of two key schemes of the government: (i) Swachh Bharat Mission-Gramin (SBM-G), and (ii) National Rural Drinking Water Programme (NRDWP).

How have the finances and spending priorities of the Ministry changed over time?

In the Union Budget 2018-19, the Ministry has been allocated Rs 22,357 crore.  This is a decrease of Rs 1,654 crore (7%) over the revised expenditure of 2017-18.  In 2015-16, the Ministry over-shot its budget by 178%.  Consequently, the allocation in 2016-17 was more than doubled (124%) to Rs 14,009 crore.

In recent years, the priorities of the Ministry have seen a shift (see Figure 1).  The focus has been on providing sanitation facilities in rural areas, mobilising behavioural change to increase usage of toilets, and consequently eliminating open defecation.  However, this has translated into a decrease in the share of allocation towards drinking water (from 87% in 2009-10 to 31% in 2018-19).  In the same period, the share of allocation to rural sanitation has increased from 13% to 69%.Figure 1

What has been the progress under Swacch Bharat Mission- Gramin?

The Swachh Bharat Mission was launched on October 2, 2014 with an aim to achieve universal sanitation coverage, improve cleanliness, and eliminate open defecation in the country by October 2, 2019.

Expenditure on SBM-G:  In 2018-19, Rs 15,343 crore has been allocated towards SBM-G.  The central government allocation to SBM-G for the five year period from 2014-15 to 2018-19 has been estimated to be Rs 1,00,447 crore.  Of this, up to 2018-19, Rs 52,166 crore (52%) has been allocated to the scheme.  This implies that 48% of the funds are still left to be released before October 2019.  Figure 2

Construction of Individual Household Latrines (IHHLs):  For construction of IHHLs, funds are shared between the centre and states in the 60:40 ratio.  Construction of IHHLs account for the largest share of total expenditure under the scheme (97%-98%).  Although the number of toilets constructed each year has increased, the pace of annual growth of constructing these toilets has come down.  In 2015-16, the number of toilets constructed was 156% higher than the previous year.  This could be due to the fact that 2015-16 was the first full year of implementation of the scheme.  The growth in construction of new toilets reduced to 74% in 2016-17, and further to 4% in 2017-18.Table 1

As of February 2018, 78.8% of households in India had a toilet.  This implies that 15 crore toilets have been constructed so far.  However, four crore more toilets need to be construced in the next 20 months for the scheme to achieve its target by 2019.

Open Defecation Free (ODF) villages:  Under SBM-G, a village is ODF when: (i) there are no visible faeces in the village, and (ii) every household as well as public/community institution uses safe technology options for faecal disposal.  After a village declares itself ODF, states are required to carry out verification of the ODF status of such a village.  This includes access to a toilet facility and its usage, and safe disposal of faecal matter through septic tanks.  So far, out of all villages in the country, 72% have been verified as ODF.  This implies that 28% villages are left to be verified as ODF for the scheme to achieve its target by 2019.Table 2

Information, Education and Communication (IEC) activities:  As per the SBM-G guidelines, 8% of funds earmarked for SBM-G in a year should be utilised for IEC activities.  These activities primarily aim to mobilise behavioural change towards the use of toilets among people.  However, allocation towards this component has remained in the 1%-4% range.  In 2017-18, Rs 229 crore is expected to be spent, amounting to 2% of total expenditure.

What is the implementation status of the National Rural Drinking Water Programme?

The National Rural Drinking Water Programme (NRDWP) aims at assisting states in providing adequate and safe drinking water to the rural population in the country.  In 2018-19, the scheme has been allocated Rs 7,000 crore, accounting for 31% of the Ministry’s finances.Figure 3

Coverage under the scheme:  As of August 2017, 96% of rural habitations have access to safe drinking water.  In 2011, the Ministry came out with a strategic plan for the period 2011-22.  The plan identified certain standards for coverage of habitations with water supply, including targets for per day supply of drinking water.  As of February 2018, 74% habitations are fully covered (receiving 55 litres per capita per day), and 22% habitations are partially covered (receiving less than 55 litres per capita per day).  The Ministry aims to cover 90% rural households with piped water supply and 80% rural households with tap connections by 2022.  The Estimates Committee of Parliament (2015) observed that piped water supply was available to only 47% of rural habitations, out of which only 15% had household tap connections.

Contamination of drinking water:  It has been noted that NRDWP is over-dependant on ground water.  However, ground water is contaminated in over 20 states.  For instance, high arsenic contamination has been found in 68 districts of 10 states.  These states are Haryana, Punjab, Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, West Bengal, Assam, Manipur, and Karnataka.Table 3

Chemical contamination of ground water has also been reported due to deeper drilling for drinking water sources.  It has been recommended that out of the total funds for NRDWP, allocation for water quality monitoring and surveillance should not be less than 5%.  Presently, it is 3% of the total funds.  It has also been suggested that water quality laboratories for water testing should be set up throughout the country.

Internal Security: Examining the Working of the Home Ministry

Each year during the Budget Session, Rajya Sabha examines the working of certain ministries.  This year it has identified four ministries for discussion, which includes the Ministry of Home Affairs.  In light of this, we analyse some key functions of the Ministry and the challenges in carrying out these functions.

What are the key functions of Ministry of Home Affairs?  

The Ministry of Home Affairs (MHA) is primarily responsible for: (i) maintenance of internal security, (ii) governance issues between the centre and states, and (iii) disaster management.  It also discharges several other key functions that include: (i) border management, (ii) administration of union territories, (iii) implementation of provisions relating to the official languages, and (iv) conducting the population census every ten years.

Under the Constitution, ‘public order’ and ‘police’ are state list subjects.  The MHA assists the state governments by providing them: (i) central armed police forces, and (ii) financial assistance for modernising state police forces, communication equipment, weaponry, mobility, training and other police infrastructure.

What is the role of the central armed police forces?

Table 1The MHA manages seven central police forces: (i) Central Reserve Police Force (CRPF) which assists in internal security and law and order, (ii) Central Industrial Security Force (CISF) which protects vital installations (like airports) and public sector undertakings, (iii) National Security Guards which is a special counter-terrorism force, and (iv) four border guarding forces, namely, Border Security Force (BSF), Indo-Tibetan Border Police (ITBP), Sashastra Seema Bal (SSB) and Assam Rifles (AR).

As of January 2017, the total sanctioned strength of the seven CAPFs was 10. 8 lakhs.  However, 15% of these posts (i.e., about 1.6 lakhs posts) were lying vacant.  The vacancy in the CAPFs has remained above 7% for the last five years (see Table 1).  In 2017, the Sashastra Seema Bal had the highest vacancy (57%).  The CRPF, which accounts for 30% of the total sanctioned strength of the seven CAPFs, had a vacancy of 8%.

How does MHA assist the police forces?

In Union Budget 2018-19, Rs 1,07,573 crore has been allocated to the Ministry of Home Affairs.  The Ministry has estimated to spend 82% of this amount on police.  The remaining allocation is towards grants to Union Territories, and other items including disaster management, rehabilitation of refugees and migrants, and the Union Cabinet.

The MHA has been implementing Modernisation of Police Forces (MPF) scheme since 1969 to supplement the resources of states for modernising their police forces.  Funds from the MPF scheme are utilised for improving police infrastructure through construction of police stations, and provision of modern weaponry, surveillance, and communication equipment.  Some other important objectives under the scheme include upgradation of training infrastructure, police housing, and computerisation.

The scheme has undergone revision over the years.  A total allocation of Rs 11,946 crore was approved for the MPF scheme, for a five-year period between 2012-13 to 2016-17.  Following the recommendations of the 14th Finance Commission (to increase the share of central taxes to states), it was decided that the MPF scheme would be delinked from central government funding from 2015-16 onwards. However, in September 2017, the Union Cabinet approved an outlay of Rs 25,060 crore under the scheme, for the period 2017-18 to 2019-20.  The central government will provide about 75% of this amount, and the states will provide the remaining 25%.

The Comptroller and Auditor General (CAG) has found that weaponry in several state police forces is outdated, and there is a shortage of arms and ammunitions.  An audit of Rajasthan police force(2009-14) found that there was a shortage of 75% in the availability of modern weapons against the state’s requirements.  In case of West Bengal and Gujarat police forces, CAG found a shortage of 71% and 36% respectively.  Further, there has been a persistent problem of underutilisation of modernisation funds by the states.  Figure 1 shows the level of utilisation of modernisation funds by states between 2010-11 and 2016-17.

Figure 1

What are the major internal security challenges in India?

Maintaining internal security of the country is one of the key functions of the MHA.  The major internal security challenges that India faces are: (i) terrorist activities in the country, (ii) cross-border terrorism in Jammu and Kashmir, (iii) Left Wing Extremism in certain areas, and (iv) insurgency in the North-Eastern states.

Between 2015 and 2016, the number of cross-border infiltrations in Jammu and Kashmir increased by almost three times, from 121 to 364.   On the other hand, incidents of insurgency in Left Wing Extremism areas have decreased from 1,048 in 2016 to 908 in 2017.

The Standing Committee on Home Affairs noted in 2017-18 that security forces in Jammu and Kashmir are occupied with law and order incidents, such as stone pelting, which gives militants the time to reorganise and perpetrate terror attacks.  The Committee recommended that the MHA should adopt a multi-pronged strategy that prevents youth from joining militancy, curbs their financing, and simultaneously launch counter-insurgency operations.

In relation to Left Wing Extremism, the Standing Committee (2017) observed that police and paramilitary personnel were getting killed because of mine blasts and ambushes.  It recommended that the MHA should make efforts to procure mine-resistant vehicles.  This could be done through import or domestic manufacturing under the ‘Make in India’ programme.

What is the MHA’s role in border management?

India has a land border of over 15,000 kms, which it shares with seven countries (Pakistan, China, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan).  Further, it has a coastline of over 7,500 kms.  The MHA is responsible for: (i) management of international lands and coastal borders, (ii) strengthening of border guarding, and (iii) creation of infrastructure such as roads, fencing, and lighting of borders.

Construction of border outposts is one of the components of infrastructure at border areas.  The Standing Committee on Home Affairs (2017) noted that the proposal to construct 509 outposts along the India-Bangladesh, and India-Pakistan borders had been reduced to 422 outposts in 2016.  It recommended that such a reduction should be reconsidered since 509 outposts would reduce the inter-border outpost distance to 3.5 kms, which is important for the security of the country.

How is coastal security carried out?

Coastal security is jointly carried out by the Indian Navy, Indian Coast Guard, and marine police of coastal states and Union Territories.  The MHA is implementing the Coastal Security Scheme to strengthen the marine police of nine coastal states and four Union Territories by enhancing surveillance, and improve patrolling in coastal areas.  Under this scheme, the Ministry sought to construct coastal police stations, purchase boats, and acquire vehicles for patrolling on land, among other objectives.

The Standing Committee on Home Affairs (2017) observed that the implementation of Phase-II of this scheme within the set time-frame has not been possible.  It also noted that there was lack of coordination between the Indian Navy, the Indian Coast Guard, and the coastal police.  In this context, the Committee recommended that the Director General, Indian Coast Guard, should be the nodal authority for coordinating operations related to coastal security.

Indian Railways: Analysing the Budget

Finances of the Railways were presented along with the Union Budget on February 1, 2018 (the Railways Budget was merged with the Union Budget last year).  In the current Budget Session, Lok Sabha is scheduled to discuss the allocation to the Ministry of Railways.  In light of this, we discuss Railways’ finances, and issues that the transporter has been facing with regard to financing.

What are the different sources of revenue for Railways?

Indian Railways has three primary sources of revenue: (i) its own internal resources (revenue from freight and passenger traffic, leasing of railway land, etc.), (ii) budgetary support from the central government, and (iii) extra budgetary resources (such as market borrowings, institutional financing).

Figure 1Railways’ internal revenue for 2018-19 is estimated at Rs 2,01,090 crore which is 7% higher than the revised estimates of 2017-18.  Majority of this revenue comes from traffic (both freight and passenger), and is estimated at Rs 2,00,840 crore.  In the last few years, Railways has been struggling to run its transportation business, and generate its own revenue.  The growth rate of Railways’ earnings from its core business of running freight and passenger trains has been declining.  This is due to a decline in the growth of both freight and passenger traffic (see Figure 1).  Railways is also slowly losing traffic share to other modes of transport such as roads and airlines.  The share of Railways in total freight traffic has declined from 89% in 1950-51 to 30% in 2011-12.

 

The Committee on Restructuring Railways (2015) had observed that raising revenue for Railways is a challenge because: (i) investment is made in projects that do not have traffic and hence do not generate revenue, (ii) the efficiency improvements do not result in increasing revenue, and (iii) delays in projects results in cost escalation, which makes it difficult to recover costs.  Railways also provides passenger fares that are heavily subsidised, which results in the passenger business facing losses of around Rs 33,000 crore in a year (in 2014-15).  Passenger fares are also cross-subsidised by charging higher rates for freight.  The consequence is that freight rates have been increasing which has resulted in freight traffic moving towards roads.

Figure 2Figure 2 shows the trends in capital outlay over the last decade.  A decline in internal revenue generation has meant that Railways funds its capital expenditure through budgetary support from the central government and external borrowings.  While the support from central government has mostly remained consistent, Railways’ borrowings have been increasing.  Various committees have noted that an increased reliance on borrowings will further exacerbate the financial situation of Railways.

The total proposed capital outlay (or capital expenditure) for 2018-19 is Rs 1,48,528 crore which is a 24% increase from the 2017-18 revised estimates (Rs 1,20,000 crore).  Majority of this capital expenditure will be financed through borrowings (55%), followed by the budgetary support from the central government (37%).  Railways will fund only 8% of its capital expenditure from its own internal resources.

How can Railways raise more money?

The Committee on Restructuring Railways had suggested that Railways can raise more revenue through private participation in the following ways: (i) service and management contracts, (ii) leasing to and from the private sector, (iii) joint ventures, and (iv) private ownership.  However, private participation in Railways has been muted as compared to other sectors such as roads, and airports.

Figure 3One of the key reasons for the failure of private participation in Railways is that policy making, the regulatory function, and operations are all vested within the same organisation, that is, the Ministry of Railways.  Railways’ monopoly also discourages private sector entry into the market.  The Committee on Restructuring Railways had recommended that the three roles must be separated from each other.  It had also recommended setting up an independent regulator for the sector.  The regulator will monitor whether tariffs are market determined and competitive.

Where does Railways spend its money?

The total expenditure for 2018-19 is projected at Rs 1,88,100 crore, which is 4% higher than 2017-18.  Staff wages and pension together comprise more than half of the Railways’ expenditure.  For 2018-19, the expenditure on staff is estimated at Rs 76,452 crore.  Allocation to the Pension Fund is estimated at Rs 47,600 crore.  These constitute about 66% of the Railways’ expenditure in 2018-19.

Railways’ primary expenditure, which is towards the payment of salaries and pension, has been gradually increasing (with a jump of around 15% each year in 2016-17 and 2017-18 due to implementation of the Seventh Pay Commission recommendations).  Further, the pension bill is expected to increase further in the years to come, as about 40% of the Railways staff was above the age of 50 years in 2016-17.

The Committee on Restructuring Railways (2015) had observed that the expenditure on staff is extremely high and unmanageable.  This expense is not under the control of Railways and keeps increasing with each Pay Commission revision.  It has also been observed that employee costs (including pensions) is one of the key components that reduces Railways’ ability to generate surplus, and allocate resources towards operations.

What is the allocation towards depreciation of assets?

Railways maintains a Depreciation Reserve Fund (DRF) to finance the costs of new assets replacing the old ones.  In 2018-19, appropriation to the DRF is estimated at Rs 500 crore, 90% lower than 2017-18 (Rs 5,000 crore).  In the last few years, appropriation to the DRF has decreased significantly from Rs 7,775 crore in 2014-15 to Rs 5,000 crore last year.  Provisioning Rs 500 crore towards depreciation might be an extremely small amount considering the scale of infrastructure managed by the Indian Railways, and the requirement to replace old assets to ensure safety.

The Standing Committee on Railways (2015) had observed that appropriation to the DRF is the residual amount after appropriation to the Pension Fund, instead of the actual requirement for maintenance of assets.  Under-provisioning for the DRF has also been observed as one of the reasons behind the decline in track renewals, and procurement of wagons and coaches.

Is there any provision towards safety?

Last year, the Rashtriya Rail Sanraksha Kosh was created to provide for passenger safety.  It was to have a corpus of one lakh crore rupees over a period of five years (Rs 20,000 crore per year).  The central government was to provide a seed amount of Rs 1,000 crore, and the remaining amount would be raised by the Railways from their own revenues or other sources.

As per the revised estimates of 2017-18, no money was allocated towards this fund.  In 2018-19, Rs 5,000 crore has been allocated for it.  With the Railways struggling to meet its expenditure and declining internal revenues, it is unclear how Railways will fund the remaining amount of Rs 95,000 crore for the Rail Sanraksha Kosh.

What happened to the dividend that was waived off last year?

Railways used to pay a return on the budgetary support it received from the government every year, known as dividend.  The rate of this dividend was about 5% in 2015-16.  From 2016-17, the requirement of paying dividend was waived off.  The last dividend amount paid was Rs 8,722 crore in 2015-16.

The Standing Committee on Railways (2017) had noted that part of the benefit from dividend is being utilised to meet the shortfall in the traffic earnings of Railways.  This defeats the purpose of removing the dividend liabilities since they are not being utilised in creating assets or increasing the net revenue of Railways.

Explained: Law on holding an ‘Office of Profit’

Following the recommendation of the Election Commission (EC), the President disqualified 20 MLAs of the Delhi Legislative Assembly last month for holding an ‘office of profit’. The legislators in question were appointed as parliamentary secretaries to various ministries in the Delhi government. The Delhi High Court is currently hearing a petition filed by the disqualified MLAs against the EC’s recommendation. There have been reports of parliamentary secretaries being appointed in 20 states in the past with court judgments striking down these appointments in several cases. In this context, we discuss the law on holding an ‘office of profit’.

What is the concept of ‘office of profit’?

MPs and MLAs, as members of the legislature, hold the government accountable for its work. The essence of disqualification under the office of profit law is if legislators holds an ‘office of profit’ under the government, they might be susceptible to government influence, and may not discharge their constitutional mandate fairly. The intent is that there should be no conflict between the duties and interests of an elected member. Hence, the office of profit law simply seeks to enforce a basic feature of the Constitution- the principle of separation of power between the legislature and the executive.

According to the definition, what constitutes an ‘office of profit’?

The law does not clearly define what constitutes an office of profit but the definition has evolved over the years with interpretations made in various court judgments. An office of profit has been interpreted to be a position that brings to the office-holder some financial gain, or advantage, or benefit. The amount of such profit is immaterial.

In 1964, the Supreme Court ruled that the test for determining whether a person holds an office of profit is the test of appointment. Several factors are considered in this determination including factors such as: (i) whether the government is the appointing authority, (ii) whether the government has the power to terminate the appointment, (iii) whether the government determines the remuneration, (iv) what is the source of remuneration, and (v) the power that comes with the position.

What does the Constitution say about holding an ‘office of profit’? Can exemptions be granted under the law?

Under the provisions of Article 102 (1) and Article 191 (1) of the Constitution, an MP or an MLA (or an MLC) is barred from holding any office of profit under the central or state government. The articles clarify that “a person shall not be deemed to hold an office of profit under the government of India or the government of any state by reason only that he is a minister”. The Constitution specifies that the number of ministers including the Chief Minister has to be within 15% of the total number of members of the assembly (10% in the case of Delhi, which is a union territory with legislature).

Provisions of Articles 102 and 191 also protect a legislator occupying a government position if the office in question has been made immune to disqualification by law. In the recent past, several state legislatures have enacted laws exempting certain offices from the purview of office of profit.  Parliament has also enacted the Parliament (Prevention of Disqualification) Act, 1959, which has been amended several times to expand the exempted list.

Is there a bar on how many offices can be exempted from the purview of the law?

There is no bar on how many offices can be exempted from the purview of the law.

It was reported in 2015 that all 60 MLAs of the Nagaland Assembly had joined the ruling alliance. The Nagaland Chief Minister appointed 26 legislators as parliamentary secretaries in July 2017. Goa, an assembly of 40 MLAs, exempted more than 50 offices by means of an ordinance issued in June last year. Puducherry, an assembly of 33 MLAs, exempted more than 60 offices by passing an amendment bill in 2009.  In Delhi, the 21 parliamentary secretaries added to the seven ministerial posts would constitute 40% of the 70-member legislature.  In all, 20 states have similar provisions.

This raises an important concern. If a large number of legislators are appointed to such offices, their role in scrutinising the work of the government may be impaired. Thus, this could contravene the spirit of Articles 102 and 191 of the Constitution.

What is the debate around making appointments to the office of parliamentary secretaries?

Interestingly, the appointment of legislators as parliamentary secretaries, in spite of the office being exempted from purview of the office of profit law, has been struck down by courts in several states.

Why has the appointment as a parliamentary secretary been struck down while other offices are allowed to be exempt from the purview of the law? If legislators can be accommodated in positions other than ‘parliamentary secretary’, why do state governments continue to appoint legislators as parliamentary secretaries instead of appointing them to other offices?

These questions have been answered in a Calcutta High Court judgment in 2015 which held that since the position may confer the rank of a junior minister on the legislator, the appointment of MLAs as parliamentary secretaries was an attempt by state governments to bypass the constitutional ceiling on the number of ministers. In 2009, the Bombay High Court also held that appointing parliamentary secretaries of the rank and status of a Cabinet Minister is in violation of Article 164 (1A) of the Constitution.  The Article specifies that the number of ministers including the Chief Minister should not exceed 15% of the total number of members in the assembly.

Making Smart Cities

In the last decade, the government has implemented several schemes to address issues related to urbanisation and aid the process of urban development.  One of the schemes is the Smart Cities Mission, which intends to take advantage of the developments in information technology in developing the urban development strategy, across 100 cities.  Last week the government announced the list of 9 new Smart Cities, taking the total to 99.  In light of this, we look at the Smart Cities Mission and a few issues with it.

What is a Smart City?

The primary objective of the Mission is to develop cities that provide core infrastructure and give a decent quality of life to its citizens, a clean and sustainable environment, and apply ‘smart’ solutions.

However, the Mission document does not provide one definition of a Smart City.  Instead it allows cities to come up with their own solutions of what they identify as a Smart City.  The guidelines suggest that the core infrastructure elements in a Smart City will include: (i) adequate water supply, (ii) assured electricity supply, (iii) sanitation, including solid waste management, (iv) efficient urban mobility and public transport, (v) affordable housing, (vi) robust IT connectivity, and (vii) good governance.  ‘Smart’ solutions may include (i) energy efficient buildings, (ii) electronic service delivery, (iii) intelligent traffic management, (iv) smart metering, (v) citizen engagement, etc.

How were the Smart Cities selected?

The Mission was introduced in the form of a competition, called the Smart City challenge.  The first stage was in July 2015 when states nominated their cities for the competition.  In August 2015, the Ministry of Urban Development selected 100 of those cities to participate in the competition.  These cities were required to develop their smart city plans (SCPs) and compete against each other.  The SCPs were evaluated on the basis of the solutions, the processes followed, the feasibility and cost effectiveness of the plans, and citizen engagement.  Over the last 2 years, the Ministry has announced winner cities in batches.  So far, 99 cities have been selected under the Mission.

What information do these SCPs contain?

The cities had to prepare their SCPs with two primary strategic components: (i) area-based development, and (ii) pan-city development.  The area-based development would cover a particular area of the city, and could have either a redevelopment model, or be a completely new development.  Pan-city development would envisage application of certain smart solutions across the city to the existing infrastructure.

Each city had to formulate its own concept, vision, mission and plan for a Smart City that was appropriate to its local context and resources.  The Ministry of Urban Development provided technical assistance, through consultancy firms, to cities for helping them prepare these strategic documents.

How will the Mission be implemented?

The Mission will be implemented at the city level by a Special Purpose Vehicle (SPV).  The SPV will plan, approve, release funds, implement, manage, monitor, and evaluate the Smart City development projects.

The SPV will be a limited company incorporated under the Companies Act, 2013 at the city-level.  It will be chaired by the Collector/ Municipal Commissioner of the Urban Development Authority.  The respective state and the Urban Local Body (ULB or municipality) will be the promoters in this company having 50:50 equity shareholding.

How are the Plans getting financed?

The Mission will be operated as a Centrally Sponsored Scheme.  The central government will provide financial support of up to Rs 48,000 crore over five years, that is, an average of Rs 500 crore per city.  The states and ULBs will have to contribute an equal amount.  The central government allocated Rs 4,000 crore towards the Mission in the 2017-18 budget.

Since funding from the government will meet only a part of the funding required, the rest will have to be raised from other sources including: (i) states/ ULBs own resources from collection of user fees, land monetization, etc., (ii) innovative finance mechanisms such as municipal bonds, (iii) leverage borrowings from financial institutions (such as banks), and (iv) the private sector through Public Private Partnerships (PPPs).

The total cost of projects proposed under the various SCPs of the 90 winner cities is Rs 1.9 lakh crore.  About 42% of this amount will come from central and state funding, 23% through private investments and PPPs, and 19% through convergence with other schemes (such as HRIDAY, AMRUT, Swachh Bharat-Urban).  The remaining will be generated by the cities through the levy of local taxes, and user fees.

What are some of the issues to consider?

Financial capacity of cities:  Under the Mission, cities have to generate additional revenue through various sources including market borrowings, PPPs, and land monetization.  The High Powered Expert Committee on Indian Urban Infrastructure and Services (HPEC) had observed that ULBs in India are among the weakest in the world, both in terms of capacity to raise resources and financial autonomy.  Even though ULBs have been getting higher allocations from the centre and states, and tax devolution to them has increased, their own tax bases are narrow.  Further, owing to their poor governance and financial situation, ULBs find it difficult to access external financing.

Such a situation may pose problems when implementing the Mission, where the ULBs have to raise a significant share of the revenue through external sources (PPPs, market borrowings).  For example, the Bhubaneswar Smart City Plan has a total project cost of Rs 4,537 crore (over five years), while the city’s annual budget for 2014-15 was Rs 469 crore.

In order to improve the finances of the ULBs, committees have made various recommendations, which include:

  • State governments make legislative changes to give more taxation powers and autonomy to ULBs for improving their revenue collections.
  • ULBs could raise their own revenue by tapping into land-based financing sources, and introducing reforms to strengthen non-tax revenues (such as water and sewerage charges, parking fees, etc.).
  • Municipal bonds may also be used as a source of revenue for ULBs.

The government has recently introduced a few policies and mechanisms to address municipal financing.  Examples include value capture financing through public investments in infrastructure projects, and a credit rating system for cities.  In June 2017, the Pune Municipal Corporation raised Rs 200 crore by issuing municipal bonds.

Technical capacity of the ULBs:  The Smart Cities Mission seeks to empower ULBs to raise their own revenue, and also lays emphasis on the capacity building of ULBs.  The HPEC had observed that municipal administration has suffered due to: (i) presence of untrained and unskilled manpower, and (ii) shortage of qualified technical staff and managerial supervisors.  It had recommended improving the technical capacity of ULBs by providing technical assistance to state governments, and ULBs in planning, financing, monitoring, and operation of urban programmes.  The central government had allocated Rs 10.5 crore towards the capacity building component of the Mission in 2017-18.

The Ministry of Urban Development has been running several programmes to improve capacity of ULBs.  This includes MoUs with 18 states to conduct training programmes for their ULB staff.

Coverage of the Mission:  The Mission covers 100 cities, of which 99 have been announced as winners so far.   The urban population that will be impacted through the Mission is around 96 million (data for 90 cities excluding the recently announced 9 cities).

As per Census 2011, India’s urban population was 377 million.  The Mission impacts about 25% of this population.  Further, most of the SCPs approved so far focus on area-based development, thus affecting a particular area of the cities.  About 80% of the total project cost proposed is towards this model of development.  In each city, this area-based development will cover up to 50 acres of area.  The remaining 20% of the project cost is towards pan-city development proposals, which provide smart planning solutions for the entire city.  It may be argued that even within the selected cities, the Mission will only impact few selected areas, and not necessarily help with development of the entire city.

Explained: The draft Model Contract Farming Act, 2018

Recently, the Ministry of Agriculture released a draft Model Contract Farming Act, 2018.  The draft Model Act seeks to create a regulatory and policy framework for contract farming.  Based on this draft Model Act, legislatures of states can enact a law on contract farming as contracts fall under the Concurrent List of the Constitution.  In this context, we discuss contract farming, issues related to it, and progress so far.

What is contract farming?

Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a pre-harvest agreement between buyers (such as food processing units and exporters), and producers (farmers or farmer organisations).  The producer can sell the agricultural produce at a specific price in the future to the buyer as per the agreement.  Under contract farming, the producer can reduce the risk of fluctuating market price and demand.  The buyer can reduce the risk of non-availability of quality produce.

Under the draft Model Act, the producer can get support from the buyer for improving production through inputs (such as technology, pre-harvest and post-harvest infrastructure) as per the agreement.  However, the buyer cannot raise a permanent structure on the producer’s land.  Rights or title ownership of the producer’s land cannot be transferred to the buyer.

What is the existing regulatory structure?

Currently, contract farming requires registration with the Agricultural Produce Marketing Committee (APMC) in few states.  This means that contractual agreements are recorded with the APMCs which can also resolve disputes arising out of these contracts.  Further, market fees and levies are paid to the APMC to undertake contract farming.  The Model APMC Act, 2003 provided for contract farming and was released to the states for them to use this as reference while enacting their respective laws.  Consequently, 20 states have amended their APMC Acts to provide for contract farming, while Punjab has a separate law on contract farming.  However, only 14 states notified rules related to contract farming, as of October 2016.

What are the issues with the current structure, and how does the draft Model Act seek to address them?

Over the years, expert bodies have identified issues related to the implementation of contract farming.  These include: (i) role of APMCs which are designated as an authority for registration and dispute settlement in most states, (ii) provisions of stockholding limits on produce under contract farming, and (iii) poor publicity of contract farming among the farmers about its benefits.

Role of Agricultural Produce Marketing Committees/Marketing Boards

The NITI Aayog observed that market fees and other levies are paid to the APMC for contract framing when no services such as market facilities and infrastructure are rendered by them.  In this context, the Committee of State Ministers on Agricultural Reforms recommended that contract farming should be out of the ambit of APMCs.  Instead, an independent regulatory authority must be brought in to disengage contract farming stakeholders from the existing APMCs.

In this regard, as per the draft Model Act, contract farming will be outside the ambit of the state APMCs.  This implies that buyers need not pay market fee and commission charges to these APMCs to undertake contract farming.  Further, the draft Model Act provides for establishing a state-level Contract Farming (Promotion and Facilitation) Authority to ensure implementation of the draft Model Act.  Functions of the Authority include (i) levying and collecting facilitation fees, (ii) disposing appeals related to disputes under the draft Model Act, and (iii) publicising contract farming.  Further, the sale and purchase of contracted produce is out of the ambit of regulation of the respective state/UT Agricultural Marketing Act.

Registration and agreement recording

The Model APMC Act, 2003 released to the states provides for the registration of contract farming agreements by an APMC.  This was done to safeguard the interests of the producer and the buyerthrough legal support, including dispute resolution.  The procedures for registration and recording of agreements vary across states.  Currently, registration for contract farming has been provided with the APMC in few states, and with a state-level nodal agency in others.  Further, market fee on purchases under contract agreements is completely exempted in few states and partially exempted in others.  The Committee of State Ministers on Agricultural Reforms recommended that a instead of a APMC, district-level authorities can be set-up for registration of contract farming agreements.  Further, any registering authority should verify the details such as the financial status of the buyer.

Under the draft Model Act, every agreement should be registered with a Registering and Agreement Recording Committee, which will be set up consisting of officials from departments such as agriculture, animal husbandry, marketing, and rural development.  Such a Committee can be set up at the district, taluka or block levels.

Disputes between the producer and the buyer

The Ministry of Agriculture and Farmers Welfare observed certain risks related to upholding the contract farming agreement.  For example, producers may sell their produce to a buyer other than the one with whom they hold a contract.  On the other side, a buyer may fail to buy products at the agreed prices or in the agreed quantities, or arbitrarily downgrade produce quality.  The Committee of State Ministers on Agricultural Reforms recommended that dispute redressal mechanism should be at block, district or regional-level state authorities and not with an APMC.

Under the draft Model Act, in case of disputes between a producer and a buyer, they can: (i) reach a mutually acceptable solution through negotiation or conciliation, (ii) refer the dispute to a dispute settlement officer designated by the state government, and (iii) appeal to the Contract Farming (Promotion and Facilitation) Authority (to be established in each state) in case they are not satisfied by the decision of the dispute settlement officer.

Stockholdings limits on contracted produce

Stockholding limits are imposed through control orders as per the Essential Commodities Act, 1955.  Such provisions of stockholding limits can be restrictive and discourage buyers to enter into contracts.  It was recommended that the buyers can be exempted from stock limits up to six months of their requirement in the interest of trade.  Under the draft Model Act, limits of stockholding of agricultural produce will not be applicable on produce purchased under contract farming.

Other recommendations

While contract farming seeks to provide alternative marketing channels and better price realisation to farmers, several other marketing reforms have been suggested by experts in this regard.  These include: (i) allowing direct sale of produce by farmers, (ii) removing fruits and vegetables out of the ambit of APMCs, and (iii) setting-up of farmer-consumer markets, (iv) electronic trading, and (v) joining electronic National Agricultural Market for the sale of produce.