Analysis of Growing Economic Divide in India

  • 29 Oct 2024

Overview

The Economic Advisory Council to the Prime Minister (EAC-PM)'s report titled "Relative Economic Performance of Indian States: 1960-61 to 2023-24" highlights an alarming trend of widening economic disparities across India's states, which is increasingly threatening the principles of federalism and national unity. The findings reveal significant regional imbalances in terms of contributions to the national income, per capita income, and overall economic development. This analysis delves into the key insights from the report and explores the broader implications for India's federal structure, governance, and policy approaches.

Key Insights from the Report

  • Regional Economic Disparities:
    • Western and Southern States' Dominance: States such as Maharashtra, Gujarat, Tamil Nadu, and Karnataka have consistently outperformed others. These states have benefited from higher private investments, better infrastructure, and a more business-friendly environment. They also enjoy proximity to international markets, especially coastal regions like Gujarat and Tamil Nadu, which have access to ports and export markets.
    • Underperformance of Northern and Eastern States: On the other hand, northern states (with exceptions like Delhi and Haryana) and eastern states like Bihar, Odisha, and West Bengal lag behind in economic performance. These regions face challenges such as poor infrastructure, low levels of investment, and weak governance structures, which hinder their growth potential.
  • Impact of Liberalization (1991):
    • The 1991 economic reforms marked a shift toward market-oriented growth, benefiting states that were already more industrialized or had better urban infrastructure. Southern states, in particular, adapted well to the liberalized environment, attracting higher levels of private investment and expanding their economies.
    • The liberalization process disproportionately favored urban centers like Delhi, Mumbai, Chennai, and Bengaluru, where investments were channelized into growing service sectors, technology, and industries, creating a feedback loop of wealth accumulation in these hubs. Meanwhile, the hinterland remained underdeveloped due to insufficient public investment and the lack of private sector interest in these regions.
  • Investment Disparities:
    • Private Investment: Wealthier states attract a disproportionate share of private investment, which is driven by profitability and market opportunities. These states have better infrastructure, which reduces transaction costs and increases returns on investment. In contrast, underdeveloped states struggle to attract investment due to poor governance, inadequate infrastructure, and perceived higher risks.
    • Public Investment: While the public sector still plays a role in investment, the New Economic Policies (NEP) since 1991 have shifted the focus towards private sector-driven growth. This has further widened the investment gap, as the poorer states receive less public investment relative to their needs.
  • Role of Infrastructure and Governance:
    • The availability and quality of infrastructure are significant determinants of economic performance. States with better roads, energy supply, ports, and communication networks tend to attract more investments. Additionally, good governance, characterized by reduced corruption, better policy implementation, and transparency, also plays a critical role in fostering economic development.
    • In contrast, states with weaker governance structures and poor infrastructure struggle to create an enabling environment for businesses, further compounding regional disparities.
  • Impact on Federalism:
    • The growing economic divide is leading to tensions between the Centre and state governments, particularly in wealthier states that contribute significantly to national income but feel short-changed in resource allocation. These states argue that they are not receiving a fair share of national resources in return for their contributions, leading to growing dissatisfaction with the federal system.
    • The tension is exacerbated by political factors, such as accusations from opposition-led states that the Centre uses public investment to favor states aligned with the ruling party. The growing perception of politicization of resource allocation has the potential to undermine the spirit of cooperative federalism.

Structural Causes of Regional Inequality

  • Economic and Investment Magnetism:
    • Wealthier states attract more private investments, as they offer better returns due to established markets, skilled labor, and urbanization. Cities like Mumbai, Delhi, and Bengaluru serve as economic magnets, drawing talent, technology, and capital, which further consolidates their economic dominance.
    • In contrast, states without such economic hubs or access to global markets struggle to attract investment. The absence of urban agglomerations and the concentration of wealth and resources in a few states perpetuate regional disparities.
  • Policy and Investment Bias:
    • Post-liberalization policies have disproportionately benefited the organized sector, often at the expense of the unorganized sector, which is more prevalent in poorer states. The emphasis on industrial growth and infrastructure development has largely bypassed the rural and informal sectors, which are critical in underdeveloped states.
    • The organized sector has also benefited from government support, such as tax concessions and subsidized infrastructure, which have enabled these industries to thrive in already developed regions. This has widened the gap between the haves and the have-nots.
  • Cronyism and the Black Economy:
    • Crony capitalism and the prevalence of the black economy in poorer states further exacerbate regional imbalances. In some cases, political patronage and corruption divert resources and investments from areas that need them most. This weakens the investment climate, especially in states with higher levels of informal and illegal economic activity.

Implications for Federalism

The growing economic disparity poses a serious threat to India's federal structure. The increasing dissatisfaction of wealthier states with the current fiscal arrangements and the growing demand for fairer resource allocation challenge the spirit of cooperative federalism. A well-functioning federal system relies on equitable distribution of resources and opportunities for all regions to develop.

Policy Recommendations

To address these disparities and strengthen India's federal framework, several policy measures need to be implemented:

  • Enhancing Governance and Infrastructure in Lagging States:
    • Improved governance and reducing corruption are essential in attracting both private and public investments. Additionally, there must be a focus on developing critical infrastructure, such as roads, energy, and health facilities, which are essential for economic growth.
    • States need to increase public investment in sectors like education, healthcare, and social security to improve human capital and productivity.
  • Focus on the Unorganized Sector:
    • A significant portion of the labor force in poorer states is employed in the unorganized sector. Policies should aim to formalize this sector by providing social security benefits, improving labor rights, and increasing productivity through skill development. This could help raise incomes and stimulate local demand, attracting more private investment.
  • Balancing the Organized and Unorganized Sectors:
    • While the organized sector has benefited from liberalization, more attention should be given to the unorganized sector, which forms the backbone of the economy in many poorer states. A balanced approach to economic growth, which includes both organized and unorganized sectors, can help reduce disparities.
  • Shifting Focus from Urban Centers to Hinterlands:
    • Private sector investment must be incentivized in underdeveloped regions through tax breaks, subsidies, and targeted infrastructure projects. This will encourage businesses to expand beyond the major urban centers, thus promoting a more balanced distribution of economic activities.

Conclusion

The widening economic divide in India, as revealed by the EAC-PM report, poses a significant challenge to the country's federalism and unity. To ensure inclusive and balanced development, policy reforms must focus on reducing regional disparities by improving governance, infrastructure, and investment in lagging states. A shift towards equitable growth, addressing the needs of both the organized and unorganized sectors, is essential to promoting national cohesion and ensuring sustainable economic progress across all regions.

Pradhan Mantri Mudra Yojana (PMMY)

  • 27 Oct 2024

Introduction

The Pradhan Mantri Mudra Yojana (PMMY) was launched by Prime Minister Narendra Modi on April 8, 2015, with the aim of providing financial support to non-corporate, non-farm small and micro enterprises in India. Through this initiative, loans are provided to individuals and small businesses who are unable to access formal institutional finance.

In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman announced an increase in the loan limit under PMMY from ?10 lakh to ?20 lakh, with the introduction of a new loan category, Tarun Plus, aimed at fostering growth in the entrepreneurial sector.

Key Features of the Pradhan Mantri Mudra Yojana

Loan Limit Increase

  • Loan Limit Raised: The loan limit has been increased from ?10 lakh to ?20 lakh for eligible entrepreneurs.
  • New Loan Category: The newly introduced Tarun Plus category caters to entrepreneurs who have previously availed and successfully repaid loans under the Tarun category.
  • Credit Guarantee: The Credit Guarantee Fund for Micro Units (CGFMU) will cover these enhanced loans, further ensuring the security of micro-enterprises.

Categories of MUDRA Loans

PMMY provides collateral-free loans through financial institutions like Scheduled Commercial Banks, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Non-Banking Financial Companies (NBFCs), and Micro Finance Institutions (MFIs). These loans are provided for income-generating activities in sectors like manufacturing, trading, services, and allied agriculture activities.

Objectives of PMMY

  1. Financial Inclusion: PMMY targets marginalized and socio-economically neglected sections of society, promoting financial inclusivity.
  2. Support to Small Businesses: By providing affordable loans, the scheme encourages small-scale entrepreneurs, particularly women and minority groups, to establish and expand their businesses.
  3. Fostering Entrepreneurship: PMMY aims to unlock the potential of India’s entrepreneurial spirit, especially in rural and underserved areas.

MUDRA: The Institutional Backbone

Role of Micro Units Development & Refinance Agency Ltd. (MUDRA)

MUDRA is the primary institution set up by the Government of India to manage and implement the Mudra Yojana. It acts as a refinancing agency that provides financial support to small and micro-enterprises by working through financial intermediaries, such as banks and micro-finance institutions.

Funding Sources

  • Scheduled Commercial Banks
  • Regional Rural Banks (RRBs)
  • Small Finance Banks (SFBs)
  • Non-Banking Financial Companies (NBFCs)
  • Micro Finance Institutions (MFIs)

Application Process

Applicants can avail loans through any of the aforementioned financial institutions or apply online via the Udyami Mitra Portal.

Benefits of Pradhan Mantri Mudra Yojana

  • Collateral-free Loans: No security is required to obtain loans, which reduces the financial burden on borrowers.
  • Easily Accessible: PMMY loans are available across India, making them accessible to entrepreneurs in both rural and urban areas.
  • Quick and Flexible Loans: Loans can be disbursed quickly with flexible repayment terms (up to 7 years).
  • Empowering Women Entrepreneurs: The scheme offers special incentives for women entrepreneurs, helping them to establish and grow their businesses.
  • Support to Rural Areas: Special emphasis on empowering rural enterprises and reducing regional disparities.
  • MUDRA Card: The MUDRA Card is a RuPay debit card that allows borrowers to access funds through an overdraft facility, enhancing liquidity for businesses.
  • No Default Penalty: In case of loan defaults due to unforeseen circumstances, the government will step in to reduce the burden on entrepreneurs.

Categories of Loans Under PMMY

1. Shishu Category: Loans up to ?50,000

  • Targeted at micro-enterprises at the initial stage of their business journey.

2. Kishore Category: Loans between ?50,000 and ?5 lakh

  • Targeted at enterprises looking to expand their operations and upgrade their infrastructure.

3. Tarun Category: Loans between ?5 lakh and ?10 lakh

  • For established businesses that are in need of funds to scale up.

4. Tarun Plus: Loans between ?10 lakh and ?20 lakh

  • A new category designed for entrepreneurs who have repaid loans under the Tarun category and wish to further expand their business.

Achievements of PMMY (2023-24)

  • Total Loans Sanctioned: ?5.4 trillion across 66.8 million loans in FY 2023-24.
  • Loans Disbursed: Significant amounts were disbursed under each category:
    • Shishu: ?1,08,472.51 crore
    • Kishore: ?1,00,370.49 crore
    • Tarun: ?13,454.27 crore
  • Women Borrowers: A large share of loans have gone to women entrepreneurs, ensuring gender inclusivity.
  • Minority Borrowers: The scheme also emphasizes financial empowerment of minority communities.
  • NPA Reduction: The Non-Performing Assets (NPA) in Mudra loans have reduced to 3.4% in FY 2024, compared to higher levels in earlier years.

Digital Tools and Support Systems

MUDRA MITRA App

The MUDRA MITRA mobile app helps users access information about the PMMY scheme, loan application procedures, and other resources. The app is available for download on Google Play Store and Apple App Store.

Online Loan Application

Entrepreneurs can apply for loans online via portals such as PSBloansin59minutes and Udyamimitra, providing greater convenience and accessibility.

Steps to Improve Implementation

  • Handholding Support: Assistance in submitting loan applications is available for applicants.
  • Intensive Awareness Campaigns: The government conducts publicity campaigns to raise awareness about PMMY.
  • Simplified Loan Process: The loan application forms have been simplified to encourage wider participation.
  • Performance Monitoring: Regular monitoring of PMMY implementation to ensure its success.
  • Interest Subvention: A 2% interest subvention is offered for prompt repayment of Shishu loans.

Conclusion

The Pradhan Mantri Mudra Yojana has been a transformative scheme in fostering entrepreneurship and ensuring financial inclusion for small and micro-businesses across India. With the recent increase in loan limits and the addition of the Tarun Plus category, the scheme continues to empower emerging entrepreneurs and provides a crucial lifeline for business growth and sustainability. By supporting women, minorities, and new entrepreneurs, PMMY has contributed significantly to economic upliftment and inclusive growth in the country.

What are the stress factors for Indian Railways?

  • 22 Oct 2024

In News:

On October 17, eight coaches of the Agartala-Lokmanya Tilak Express derailed in Assam with no casualties. On October 11, a passenger train rear-ended a stationary goods train near Chennai, also with no casualties. Indian trains have been involved in multiple accidents of late. The Balasore accident on June 2, 2023, had the greatest death toll, more than 275, yet pressure on the Railways to improve safety competes with pressures straining its subsistence.

Railway Accident Trends

  • Decline in Accidents Over Time:
    • From 1,390 accidents per year in the 1960s, railway accidents have reduced to about 80 accidents per year in the last decade.
  • Recent Consequential Accidents:
    • 34 accidents in 2021-2022
    • 48 accidents in 2022-2023
    • 40 accidents in 2023-2024
  • Primary Causes of Accidents:
    • 55.8% due to staff errors (railway personnel).
    • 28.4% due to non-staff errors.
    • 6.2% due to equipment failure.
  • Role of Signalling Failures:
    • Major accidents, such as Balasore and Kavaraipettai, were attributed to signalling system failures.

Key Safety Technologies and Measures

  • Kavach System:
    • Kavach is an automatic train protection system designed to prevent collisions by monitoring train positions and activating alarms or braking.
    • As of February 2024, Kavach was implemented on only 2% (1,465 route km) of the railway network, limiting its effectiveness.
  • Signalling System Overhaul:
    • Outdated and faulty signalling systems contribute significantly to accidents. Both Balasore and Kavaraipettai incidents were linked to failures in signalling infrastructure.

Financial Strain on Indian Railways

  • Operating Ratio (OR):
    • The Operating Ratio (OR) in 2024-2025 is estimated to be ?98.2, indicating that the Railways spends ?98.2 for every ?100 earned.
    • A higher OR reduces available funds for safety improvements and infrastructure upgrades.
  • Budgetary Constraints:
    • The 2023-24 budget showed a 7.2% reduction in capital outlay for track renewal and a 96% decrease in the Depreciation Reserve Fund, which is used to replace aging assets.
  • Revenue Imbalance:
    • Freight services account for 65% of Railways’ revenue but face capacity constraints, with 30% of the network operating at over 100% capacity.
    • Passenger services, however, continue to incur significant losses, with ?68,269 crore loss in 2021-22.

Challenges in Rail Infrastructure

  • Slow Infrastructure Development:
    • The government's Dedicated Freight Corridors (DFCs), intended to alleviate congestion, are severely delayed:
    • The Eastern DFC is the only fully operational corridor.
    • Other corridors, including the Western DFC and additional planned routes, remain incomplete.
  • Track and Equipment Maintenance:
    • Ongoing delays in upgrading and maintaining essential infrastructure (tracks, wagons, signalling) contribute to the rising number of accidents.

Loco Pilot Working Conditions

  • Extended Working Hours:
    • Loco pilots often work 12-hour shifts due to manpower shortages, leading to fatigue and increased risk of human error.
    • Stress and exhaustion are significant contributors to accidents caused by human error, including Signal Passed at Danger (SPAD).

Recommendations for Improving Railway Safety

  • Loco Pilot Vacancies:Immediate recruitment to fill the 18,799 vacant loco pilot positions to prevent overworking and reduce fatigue-related errors.
  • Expand Kavach Deployment:Accelerate the nationwide installation of the Kavach system, particularly on high-risk and high-traffic routes, to enhance safety.
  • Complete Dedicated Freight Corridors (DFCs):Expedite the completion of DFCs to ease congestion and increase freight movement efficiency.
  • Independent Railway Safety Authority:Establish an independent Railway Safety Authority with statutory powers, as recommended by the Kakodkar Committee (2012), to enforce safety standards and monitor implementation.
  • Improve Signal Infrastructure:Invest in advanced and reliable signalling systems to prevent errors stemming from outdated or malfunctioning infrastructure.
  • Regulate Working Hours:Enforce strict work hour limits to reduce fatigue among railway staff and ensure proper rest between shifts.
  • Strengthen Trackside Infrastructure:Install fencing along tracks in high-risk areas to prevent cattle run-overs, a common cause of derailments in rural and semi-urban areas.

Conclusion

  • Indian Railways faces a complex set of challenges, balancing safety requirements with financial constraints. Despite technological advancements like Kavach, its limited deployment and outdated infrastructure continue to present significant risks.
  • A holistic approach to reform is needed, including addressing manpower shortages, upgrading safety technologies, and investing in infrastructure development. This will be essential for reducing accidents, improving safety, and ensuring the long-term sustainability of India’s vast railway network.