Mains Q & A 20 May 2023

Q 1. Philanthropy is a critical part of a democratic society as it focuses on the elimination of social problems in the country. Explain. (250 words)

Paper & Topic: GS I à Social Issues

Introduction:

Philanthropy involves charitable giving to worthy causes on a large scale, but it is much more than just a charitable donation. Philanthropy can include donating money to a worthy cause or volunteering time, effort, or other forms of altruism. Philanthropy is an effort an individual or organization undertakes based on an altruistic desire to improve human welfare, and wealthy individuals sometimes establish private foundations to facilitate their philanthropic efforts. In modern times, philanthropy is often undertaken by those seeking tax breaks, in addition to feeling good and helping others.

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Importance of Philanthropy for a democratic society:

In the early years of independent India, traditional Indian philanthropy has focussed largely on supporting and enabling delivery of essential services and creating livelihood opportunities primarily in the areas of health and education for the poor, and in rural areas.

Philanthropy is a critical part of a democratic society. It is different than charity, which focuses on eliminating the suffering caused by social problems, while philanthropy focuses on the elimination of social problems.

It supports projects and endeavours from which we all benefit, such as libraries, museums and scientific research; and it also supports efforts that may be too unpopular or controversial to gain the widespread support of the general public or the government.

Philanthropy is important to society because governments can’t address the needs of all causes.

Frequently, certain government budgets get slashed because of politics or a need to shift the money elsewhere. This can leave gaps in areas where support is needed.

For instance, by combining funding from government, bilateral donors, large philanthropies, and leading corporates, Samridh Healthcare Blended Finance Facility has mobilised a capital pool of Rs 1,875 crore. It provides both grants and debt financing to enterprises and innovators that are expanding the availability of affordable and quality healthcare solutions to the bottom-of-the-pyramid populations.

Philanthropic individuals and businesses help fill in the gaps by supporting causes and organizations that don’t use government funding. Without philanthropy, many needs in society would go unmet.

Philanthropy is adaptable and can be swiftly mobilized.

For instance, think of any natural disaster over the past five years. In the aftermath, humanitarian organizations inevitably urged citizens around the world to open their pockets and donate whatever they could afford to support relief efforts.

Philanthropic Donor partners are also deploying hybrid financing mechanisms that directly benefit under-served populations.

For instance, During the pandemic’s first wave, REVIVE Alliance, a collaborative platform hosted by Samhita Social Ventures, used direct cash transfers to cover the basic needs of daily wage workers who had lost their income.

Way forward:

Philanthropic capital enjoys much greater independence than governments and corporations and are better-placed to support complex and under-invested areas by experimenting with novel approaches. This should motivate philanthropists to experiment with innovative methods and plans for development .

With the recent emergence of data on deepening incomes and wealth inequalities- and their corresponding differential impacts on various communities and regions, philanthropy must go beyond traditional approaches and projects that address symptoms of poverty and begin to play a part in addressing underlying systemic causes of poverty and injustice.

Philanthropic capital must be patient and seek to support longer-term, systemic change as Social change is a long and complex process; success is often not immediately visible.

The areas which require long term investment but also provide long term gains are research, developing sector-level institutions and infrastructure, and also .developing the capacity of NGOs themselves

Multi-year funding commitments based on trust can allow NGOs to focus on impact rather than worrying about fundraising. Also, collaboration will help in shared learnings which will have a multiplier effect.

Funders should acknowledge that things may not always go as planned and that that require them to re-evaluate their approach or priorities. Having robust feedback loops is will help in this.

Q2. FRBMA has taken concrete steps towards intergenerational equity in fiscal management and long-term macro-economic stability by removing fiscal impediments in the effective conduct of the monetary policy and prudential debt management. Critically Examine. (250 words)

Paper & Topic: GS III à Indian Economy

Introduction:

Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in the fiscal operations of the Government.

It provides a legal and institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce the fiscal deficit, to eliminate revenue deficit and to generate revenue surplus in the subsequent years. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation.

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Performance of FRBM Act:

The implementation of FRBM Act/FRLs improved the fiscal performance of both centre and states.

The States have achieved the targets much ahead the prescribed timeline.

Government of India was on the path of achieving this objective right in time. However, due to the global financial crisis, this was suspended and the fiscal consolidation as mandated in the FRBM Act was put on hold in 2007-08.

FRBM act has been violated more than adhered to since its enactment. The target fiscal deficit to GDP ratio of 3% for the Union government was achieved only once, in 2007-08, when it was 2.5%. That achievement has yet to be emulated again.

The FRBM Act was amended twice, in 2012 and 2015. The revisions in 2015 shifted the date for achieving the 3% target to 2017-18. By this year, the amended revenue deficit target was put at 2% of GDP.

Budget 2018-19 has proposed amending the FRBM Act again, which will shift the target of 3% fiscal deficit-GDP ratio to end-March 2021. No target has been set for revenue deficit.

Shortcomings of the Act:

Reduction of expenditure in critical sector: While there is a drastic fall in deficits, it has largely been on account of reductions in expenditure in critical sectors of the economy such as education, health etc.

The Union government’s development expenditure as a proportion of GDP has declined over time.

Reduced development expenditure: An analysis of revenue account of the development expenditure by states shows that in almost all sectors of development, there has been a decline in the FRBM era.

Manipulation: Also, at times it has been seen that the government has achieved the deficit targets by manipulating the revenue and expenditure accounts such as curtailing the capital expenditure; demanding interim dividend from Public Sector Undertakings (PSUs) in advance etc.

No force majeure clauses: Further, the FRBM Act ignores the possible inverse link between fiscal deficit (fiscal expansion) and bank credit (monetary expansion). That is, if credit growth falls, fiscal deficit may need to rise and if credit rises, fiscal deficit ought to fall — to ensure adequate money supply to the economy.

Investment starved: Data on money supply growth, bank credit and GDP establishes that both money supply growth and credit expansion have significantly reduced in relation to GDP growth. Thus, the FRBM Act has not only reduced the fiscal deficit but also starved the growing economy from much-needed investment.

Reformation of FRBM needed:

The government should start by defining a clear objective, based not on arbitrary targets but on sound first principles: It should aim to ensure debt sustainability. To this end, the government could adopt a strategy based on four principles.

Remove multiple fiscal criteria: The current FRBM sets targets for the overall deficit, the revenue deficit and debt. Such multiple criteria impede the objective of ensuring sustainability since the targets can conflict with each other, This creates confusion about which one to follow and thereby obfuscating accountability.

Target must not be fixed: Around the world, countries are realising that deficit targets of 3 per cent of GDP and debt targets of 60 per cent of GDP lack proper economic grounding. In India’s case, they take no account of the country’s own fiscal arithmetic or its strong political will to repay its debt. Any specific target, no matter how well-grounded, encouraging governments to transfer spending off-budget such as with the “oil bonds” in the mid-2000s and subsidies more recently.

Focus on one measure for guiding fiscal policy: In this regard, Arvind Subramanian and Josh Felmanwe propose targeting the primary balance. This concept is new to India and will take time for the public to absorb and accept. But it is inherently simple and has the eminent virtue that it is closely linked to meeting the overall objective of ensuring debt sustainability.

Have a long-term plan: The Centre should not set out yearly targets for the primary balance. Instead, it should announce a plan to improve the primary balance gradually, by say half a percentage point of GDP per year on average. Doing so will make it clear that it will accelerate consolidation when times are good, moderate it when times are less buoyant, and end it when a small surplus has been achieved. This strategy is simple and easy to communicate; it is gradual and hence feasible.

Conclusion:

Economic disruption caused by the COVID has prompted calls for a relook at the Fiscal Responsibility and Budget Management Act (FRBM). The introduction of the FRBM in 2003 reflected the belief that setting strict limits on fiscal deficits, both for the centre and the states, was the solution. But this framework didn’t work. It is time to learn from past experience and adapt. Adopting a simple new fiscal framework based on the primary balance could be the way forward.