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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • Why was a Customs Duty hike imposed for Lab Chemicals?   

    Why in the News?

    The Finance Ministry has reversed the proposed post-Budget customs duty hike on imported laboratory chemicals following an outcry from scientists.

    What are the different kinds of chemicals which are imported into the country?  

    • Inorganic Chemicals: This category includes substances like ammonia, phosphoric acid, and sulfuric acid, which are essential for various industrial applications.
    • Organic Chemicals: Key imports in this category are methanol, acetic acid, and phenol, which are used in the production of plastics, solvents, and pharmaceuticals.
    • Petrochemicals: Significant imports include polyethene, polypropylene, and styrene, which are crucial for manufacturing plastics and synthetic materials.
    • Speciality Chemicals: Chemicals such as ethyl vinyl acetate and maleic anhydride are imported for specific applications in industries like adhesives and coatings.
    • Agrochemicals: This includes various pesticides and herbicides, which are vital for agricultural productivity and crop protection.

    How important are these chemicals for scientific research?    

    • Foundation for Experimental Work: Laboratory chemicals are essential for conducting experiments in various scientific fields, enabling researchers to test hypotheses and validate results.
    • Facilitate Innovation: These chemicals allow for the development of new products and technologies, driving advancements in industries such as pharmaceuticals, biotechnology, and materials science.
    • Support Medical Diagnostics: Laboratory chemicals play a crucial role in medical testing and diagnostics, aiding in disease detection and treatment monitoring, which is vital for public health.

    What was the issue?

    • Steep Duty Increase: The hike in customs duty on laboratory chemicals alarmed the scientific community, with prices of essential chemicals projected to rise dramatically, such as a batch that typically costs ₹1,00,000 now estimated at ₹2,50,000.
    • Impact on Research: Researchers expressed concerns that the increased costs would hinder scientific research and experimentation, as many essential chemicals are imported and the hike could disrupt ongoing projects.

    Is Ethanol also imported into the country?

    • Import Volume: India imported approximately 635 million liters of ethanol in 2022, primarily for use as fuel and in industrial applications.
    • Types of Ethanol: There are two main types of ethanol relevant to India:
      • Denatured Ethanol: This type is mixed with additives to make it unfit for consumption and is primarily used in laboratories and industrial applications. India has reduced the import tariff on denatured ethanol to encourage its use in manufacturing.
      • Undenatured Ethanol: This type incurs a higher import tariff of 150% and is generally used for beverage production.
    • Domestic Production Challenges: Although India has a significant capacity for ethanol production, it often faces challenges such as insufficient molasses supply. The government has set ambitious goals for ethanol blending in gasoline, aiming for a 20% blend by 2025.

    How was the issue resolved?

    • The Finance Ministry clarified that all imported laboratory chemicals, except undenatured ethyl alcohol, will be taxed at the original 10% customs duty rate instead of the proposed 150% hike.
    • The customs department had initially hiked the duty to 150% to curb the import of undenatured ethyl alcohol that was being mis-declared as laboratory chemicals to avoid the higher 150% duty on undenatured ethanol.

    Way forward: 

    • Strengthen Local Production of Niche Chemicals: Need to invest in domestic manufacturing capabilities for niche and specialty chemicals to reduce dependency on imports, enhance self-sufficiency, and lower costs for research institutions.
    • Facilitate Smooth Import Processes: Govt. should streamline import regulations for essential laboratory chemicals, ensuring clear guidelines and minimal delays, while maintaining necessary checks to prevent misclassification and misuse.

  • Balancing competition and sustainability for India

    Why in the News?

    • In 2023, the Securities and Exchange Board of India (SEBI) introduced an updated framework for corporate sustainability reporting.
    • The revised Business Responsibility and Sustainability Report (BRSR) framework mandates that companies assess and disclose the environmental impact of their entire value chain.

    Business Responsibility and Sustainability Report (BRSR) 

    • In 2021, the Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Report (BRSR) framework, mandating that the top 1,000 listed companies in India disclose their performance on environmental, social, and governance (ESG) parameters.
    • This initiative aimed to enhance transparency and encourage responsible business practices, building on the earlier Business Responsibility Report (BRR) introduced in 2012.

    Key Features of the BRSR Framework

    • Expanded Reporting Requirements: The BRSR Core builds upon the initial Business Responsibility and Sustainability Report (BRSR) introduced in 2021, which mandated the top 1,000 listed companies in India to disclose their ESG performance.
    • Mandatory Assurance: Starting from FY 2023-24, the BRSR Core mandates that the top 150 companies obtain reasonable assurance on their ESG disclosures. This requirement aims to improve the credibility of the reported data and combat greenwashing, ensuring that companies provide reliable information about their sustainability practices.
    • Nine ESG Attributes: The framework is structured around nine critical ESG attributes, which include greenhouse gas emissions, water usage, energy consumption, and employee well-being.
    • Comply or Explain Principle: SEBI has adopted a “comply or explain” approach, allowing companies to either adhere to the specified reporting requirements or provide valid reasons for non-compliance.
    • Alignment with International Standards: The BRSR Core is aligned with several internationally recognized frameworks, such as the EU Taxonomy and the Global Reporting Initiative (GRI) standards.  
    • Focus on Value Chain: A significant aspect of the BRSR Core is its emphasis on assessing the ESG impacts of a company’s supply chain.

    For India, every economic sector must contribute to greener means of production 

    For India to achieve its sustainability goals and contribute effectively to greener means of production, every economic sector must play a vital role.

    Importance of Sectoral Contribution to Sustainability

    • Diverse Economic Sectors: The key sectors such as agriculture, construction, power, manufacturing, transport, and tourism are crucial for transitioning to a green economy. For example, electric transport and eco-tourism.
    • Government Initiatives: The Indian government is actively promoting green growth through investments in priority sectors, which include manufacturing, renewable energy, and electric mobility.  For example, An allocation of ₹19,700 crore for the production of green hydrogen.
    • Green Manufacturing: The manufacturing sector is a significant focus for greening efforts, with studies indicating that sustainable manufacturing practices can lead to substantial reductions in greenhouse gas emissions. For example, the (Zero Defect Zero Effect) ZED initiative aims to create a competitive, qualitative, and clean manufacturing ecosystem.
    • Renewable Energy Commitment: India has set ambitious targets for increasing its non-fossil energy capacity to 500 gigawatts by 2030.
    • Collaboration and Policy Frameworks: Initiatives like the Partnership for Action on Green Economy (PAGE) and various policy dialogues aim to facilitate collaboration among sectors to promote inclusive and sustainable economic growth.

    Way forward: 

    • Enhanced Accountability: Ensure stricter enforcement of the BRSR and BRSR Core frameworks, expanding the scope to cover more companies and sectors beyond the top 1,000 listed companies.
    • Capacity Building: Provide training and resources to companies, especially small and medium enterprises (SMEs), to improve their ESG reporting capabilities and integrate sustainability into their core operations.

    Mains question for practice:

    Q Discuss the significance of the Business Responsibility and Sustainability Report (BRSR) framework introduced by the Securities and Exchange Board of India (SEBI) in promoting sustainable business practices among Indian corporations. 15M

  • [30th July 2024] The Hindu Op-ed: The problem with India’s blocking of the Chinese

    [30th July 2024] The Hindu Op-ed: The problem with India’s blocking of the Chinese

    PYQ Relevance:

    Mains:

    Q1 China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia’, In the light of this statement, discuss its impact on India as her neighbour. (UPSC IAS/2021) 

    Q2 With respect to the South China sea, maritime territorial disputes and rising tension affaire the need for safeguarding maritime security to ensure freedom of navigation and ever flight throughout the region. In this context, discuss the bilateral issues between India and China. (UPSC IAS/2014) 

    Prelims: 

    Q ‘Belt and Road Initiative’ is sometimes mentioned in the news in the context of the affairs of (2016)
    (a) African Union 
    (b) Brazil 
    (c) European 
    (d) Union China

    Note4Students: 

    Prelims: Bordering countries with China;

    Mains: Dependency on Chinese technician;

    Mentor comments:  Chinese technicians are vital for the Indian economy as they help bridge significant skill gaps in various industries, including manufacturing and technology. Their expertise is crucial for effectively operating Chinese machinery, which many Indian businesses have acquired but cannot utilize efficiently without skilled personnel. This dependency is highlighted by the urgent need for faster visa approvals for Chinese experts, as delays have led to substantial production losses, estimated at $15 billion over recent years. Integrating their knowledge is essential for enhancing productivity and achieving India’s manufacturing ambitions.

    Let’s learn!

    __

    Why in the News? 

    Indian authorities plan to increase visas for Chinese technicians, acknowledging a significant skill gap between them and Indian workers, which is crucial for enhancing productivity in various industries.

    Dependency on Chinese Technicians

    • Skill Gaps: Indian businesses are facing a substantial skill deficit compared to their Chinese counterparts, which hampers productivity and the effective use of advanced machinery.  
    • Declining Visa Issuance: The number of visas issued to Chinese nationals has drastically decreased from approximately 200,000 in 2019 to just 2,000 in 2024, largely due to geopolitical tensions following border clashes in 2020. 
      • This reduction has created a bottleneck in the manufacturing sector, leading to estimated production losses of around $15 billion over the past four years.
    • Government Response: In light of these challenges, Indian authorities are working to expedite the visa process for Chinese technicians, aiming to reduce processing times from several months to about 30 days. 

    Importance of Foreign Knowledge Integration:

    • Role of Foreign Knowledge in Development: Foreign knowledge is crucial for economic development but is most effective when combined with a well-educated domestic workforce. This integration enhances the ability to utilize foreign expertise effectively.
    • Korea’s Successful Model: In the 1980s, South Korea leveraged foreign technology by purchasing machines to dismantle and reverse engineer them.
      • This was possible due to a strong educational foundation that had been established over three decades, allowing minimal reliance on foreign assistance.
    • China’s Strategic Approach: China began its rapid economic growth in the early 1980s, despite having a weaker educational base than Korea. However, the quality of primary education during the Communist era prepared China for development.
      • Deng Xiaoping’s initiatives, including sending policymakers on international study tours and attracting foreign investors, facilitated the absorption of global knowledge.
    • India’s Educational Challenges: India has focused on building school infrastructure and increasing enrollment, but the quality of education remains low.
      • Only about 15% of Indian students possess the basic skills necessary for participation in the global economy, compared to 85% of Chinese students.
    • Global Competitiveness: China’s performance in international assessments, such as the Programme for International Student Assessment (PISA), has consistently improved, with Chinese students outperforming their peers globally.
      • In contrast, India’s participation in PISA ended after a poor showing in 2009, highlighting a significant gap in educational outcomes.

    Red Queen Race: 

    • Fundamental lesson from the Red Queen: The phrase “You must run twice as fast as you can to stay in the same place” illustrates the necessity for continuous improvement and adaptation in the face of competition, especially in the context of global technological advancements.
    • China’s educational advancements: Chinese universities are now among the world’s best, particularly in fields like computer science and mathematics, reflecting a strong emphasis on integrating foreign knowledge with domestic education.
    • Scientific progress: Chinese scientists are making significant strides in applied sciences relevant to industrial progress, positioning China as a leader in electric vehicles, solar technology, and artificial intelligence.
    • Western response to competition: Instead of addressing deficiencies in their education systems, Western leaders are resorting to protectionist measures against Chinese imports, which may not effectively resolve underlying issues in their own educational frameworks.
    • India’s educational challenges: Indian elites appear to overlook the lessons from China, with economists suggesting a shift towards technology-enhanced service exports while ignoring the need for a robust base of high-quality education to support such initiatives.

    Way forward: 

    • Streamline Visa Approval Processes: India should expedite the visa application process for Chinese technicians by implementing a fast-track system that reduces approval times to less than a month.  
    • Enhance Domestic Education and Training: To complement foreign expertise, India must invest in improving its educational system, focusing on vocational training and technical skills.  

  • New Asset Class proposed by SEBI

    Why in the News?

    • The markets regulator, SEBI, has proposed a new asset class designed to offer investment products positioned between mutual funds (MFs) and portfolio management services (PMS).
      • This new category aims to fill an opportunity gap for investors and offer greater flexibility in portfolio construction.

    Note:

    • PMS provides customized investment solutions to high net-worth individuals (HNIs) with a minimum investment limit of Rs 50 lakh.
    • MFs, on the other hand, have a much lower minimum investment limit of just Rs 100, managed by a professional fund manager.

    About the New Asset Class

    • The new asset class aims to provide an intermediate option with more flexibility in portfolio construction, helping investors avoid unregistered and unauthorized schemes.
    • It will have a risk-return profile between MFs and PMS, targeting investors with higher risk tolerance and larger investment amounts than those typical of MFs but lower than PMS.
    • The current range of investment products includes:
    1. MF schemes: Focused on retail investors,
    2. PMS: For HNIs, and
    3. Alternative investment funds (AIF): For sophisticated investors.

    How will investments in the new asset class work?

    • The new asset class will be introduced under the MF structure with necessary relaxations in prudential norms.
    • The minimum investment amount is proposed to be Rs 10 lakh per investor within the asset management company (AMC)/MF.
    • This high threshold is intended to deter retail investors while attracting those with investible funds between Rs 10 lakh and Rs 50 lakh.

    Significance of the New Asset Class:

    • SEBI noted that the gap between investment opportunities in MFs and PMS has led some investors towards unauthorized investment avenues.
    • The new asset class will help curb the proliferation of unregistered investment products and provide a structured and regulated option for investors.
    • SEBI emphasized that the new asset class would offer a regulated and structured investment suited to investors looking for opportunities between MFs and PMS.

    Investment Strategies:

    • Like MF schemes, the new asset class will provide options for Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP).
    • AMCs can offer ‘investment strategies’ under a pooled fund structure with tailored redemption frequencies (daily, weekly, monthly, etc.).

    PYQ:

    [2021] Indian Government Bond Yields are influenced by which of the following?

    1. Actions of the United States Federal Reserve
    2. Actions of the Reserve Bank of India
    3. Inflation and short-term interest rates

    Select the correct answer using the code given below.

    (a) 1 and 2 only
    (b) 2 only
    (c) 3 only
    (d) 1, 2 and 3

  • RBI Circular on Liberalised Remittance Scheme (LRS)

    Why in the News?

    The Reserve Bank of India (RBI) has broadened the regulations governing remittances to International Financial Services Centres (IFSCs) under the Liberalised Remittance Scheme (LRS). The RBI’s circular authorizes “authorised persons” to facilitate remittances for all permissible purposes under LRS to IFSCs.

    About Liberalised Remittance Scheme (LRS)

    • LRS is governed by the Foreign Exchange Management Act (FEMA) 1999, regulated by the Reserve Bank of India (RBI).
    • The scheme was introduced by the RBI in 2004 to facilitate outward remittances from India.
    • LRS allows resident individuals, including minors, to remit a specified amount of money abroad each financial year (April – March).
    • Currently, individuals are allowed to remit up to USD 250,000 per financial year under LRS.
    • Funds remitted under LRS can be used for permissible current or capital account transactions, or a combination of both.
    • Permissible Uses:
      • Expenses related to travel (private or for business).
      • Medical treatment abroad.
      • Payment of fees for education abroad.
      • Gifts and donations.
      • Maintenance of close relatives.
      • Investment in shares, debt instruments, and immovable properties overseas.
    • Accounts: Individuals can open and maintain foreign currency accounts with banks outside India for transactions permitted under LRS.
    • Exclusions: LRS is NOT available to corporations, partnership firms, Hindu Undivided Families (HUFs), trusts, etc.

    Prohibited Transactions:

    • Remittances for activities prohibited under Schedule-I of FEMA, such as purchase of lottery tickets, sweepstakes, proscribed magazines, etc.
    • Trading in foreign exchange abroad.
    • Remittances to countries identified as non-cooperative by the FATF.
    • Remittances to individuals/entities identified as posing a terrorism risk by the RBI.

    Significance of the move

    • The RBI’s decision reinforces GIFT IFSC’s position as a prominent international financial services hub.
    • By broadening the scope of LRS, GIFT IFSC aims to attract more diverse investments and transactions, contributing to the growth of India’s financial sector.

  • MSMEs need funds for tech upgrades, green transition

    Why in the news? 

    Union Minister for MSMEs Jitan Ram Manjhi outlined six strategic pillars identified to foster the growth of the MSME sector.

    What are the 6 pillars for the growth of the MSME Sector   

    • Formalisation and Access to Credit: Promoting formalization of MSMEs to enhance their credibility and access to formal financial institutions.Improving access to credit through schemes like Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
    • Increased Access to Market and E-commerce Adoption: Facilitating MSMEs’ access to domestic and international markets through initiatives like market linkages and export promotion schemes.
    • Higher Productivity Through Modern Technology: Encouraging MSMEs to adopt modern technologies and digital tools to improve productivity and efficiency.
    • Enhanced Skill Levels and Digitalisation in the Service Sector: Focusing on skill development and training programs to enhance the capabilities of the MSME workforce.
    • Support to Khadi, Village, and Coir Industry for Globalisation: Promoting traditional industries like Khadi and Coir by providing marketing support and international exposure.
    • Empowerment of Women and Artisans Through Enterprise Creation: Encouraging entrepreneurship among women and artisans through skill development and financial support.

    How can Employment be raised?   

    • Promoting MSME Growth: Support MSMEs with policies for credit access, market expansion, tech modernization, and encourage startups for job creation.
    • Skill Development and Training: Invest in industry-aligned skill development, collaborating with educational institutions and industry partners for vocational training.
    • Infrastructure Development: Invest in infrastructure projects for job creation; develop industrial clusters and economic zones for manufacturing jobs.
    • Supporting Employment-intensive Sectors: Promote high-employment sectors like tourism, agriculture, healthcare, renewable energy; prioritize job creation in rural areas.

    Indian Government steps taken for MSME 

    • Prime Minister Employment Generation Programme (PMEGP): It aims to create employment opportunities through the setting up of new micro-enterprises.
    • Credit Guarantee Scheme for Micro & Small Enterprises (CGTMSE): Provides collateral-free loans of up to ₹1 crore to individual Micro and Small Enterprises (MSEs).
    • Financial Support to MSMEs in ZED Certification Scheme: Provides up to 80% subsidy to MSMEs to inculcate Zero Defect and Zero Effect (ZED) practices in manufacturing.
    • A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE): Facilitates innovative business solutions, promotes entrepreneurship, and creates new jobs at the grassroots level.

    Way to Green Transition and R&D (Way forward)

    • Financial Incentives and Soft Funds: Offer MSMEs financial incentives, subsidies, and soft loans for green tech and support R&D with grants and tax incentives.
    • Policy Support and Regulatory Framework: Develop supportive policies and regulatory frameworks that encourage MSMEs to integrate environmental sustainability into their operations.
    • Capacity Building and Technical Assistance: Offer capacity-building programs and technical assistance to MSMEs to enhance their knowledge and capabilities in green technologies.
    • Promotion of Green Products and Market Access:Promote green products via marketing campaigns, certification programs, and platforms for showcasing and selling.

    Mains PYQ: 

    Q Economic growth in the recent past has been led by an increase in labour productivity.” Explain this statement. Suggest the growth pattern that will lead to the creation of more jobs without compromising labour productivity. (UPSC IAS/2022)

  • The shape of the Manufacturing Base in India

    Why in the News? 

    Prime Minister Narendra Modi has formed the government again, now leading a coalition in his third term. The new administration must intensify its focus on economic reforms, especially those related to manufacturing.

    Significance of Manufacturing Base

    • Economic Growth: Enhancing the manufacturing sector is vital for India’s economic growth. Increasing manufacturing output can significantly boost GDP, as evidenced by the government’s initial target to raise manufacturing from 15% to 25% of GDP by 2025.
    • Employment Creation: A robust manufacturing sector can generate substantial low-skilled employment, which is crucial for absorbing the large workforce transitioning from agriculture. This can help mitigate stress on urban governance structures caused by rapid urbanization.
    • Trade Balance: Strengthening manufacturing can help reduce India’s goods trade deficit, particularly by decreasing reliance on imports of manufactured goods such as electronics, which currently contribute to a significant trade imbalance.
    • National Security: A strong manufacturing base can provide the resources needed for national security. By enhancing industrial capacity, India can better support its defense needs and contribute to regional security, aligning with American interests.
    • Supply Chain Resilience: Developing manufacturing capabilities in India can improve the viability of U.S. supply chains by having production bases in friendly countries. This is particularly important in the face of China’s rising economic and geopolitical influence.

    Issues with the “Business Reforms Action Plan (BRAP)” and the States

    • Outdated Rankings: The BRAP rankings, designed to foster competition among states, have not been updated since the COVID-19 pandemic. This has diminished their effectiveness in motivating states to improve their business environments.
    • Self-Reporting Issues: The BRAP rankings rely heavily on states’ self-reporting of their local business practices, which often does not align with actual investor experiences. This discrepancy undermines the credibility of the rankings.
    • Model Industry Laws: The central government’s initiative to create model industry laws for states has been underwhelming. There is a lack of robust and effective frameworks to guide states in implementing these laws.
    • State-Level Control: Many critical factors of production, such as power, water, sanitation, labor regulations, land acquisition rules, and environmental regulations, are controlled by state governments. This decentralization complicates the implementation of cohesive national policies.
    • Need for Transparent Policies: Encouraging states to adopt thoughtful and transparent industrial policies is challenging. The current toolkit of incentives and penalties needs enhancement to motivate states effectively.

    Role of the US in Improving the Business Attractiveness of Indian States

    • Guidance on Economic Governance: The U.S. can expand engagement with Indian states by providing direct guidance on effective economic governance. This can help states create more investor-friendly environments.
    • Investment Pathways: Improving pathways for potential investors to engage with state governments is crucial. The U.S. can facilitate connections between American investors and Indian states, helping to streamline investment processes.
    • Senior Officials’ Engagement: U.S. officials visiting India should go beyond the major economic hubs of Delhi, Mumbai, and Bengaluru. Engaging with a wider set of large states can highlight the importance and opportunities arising from global supply chain shifts.
    • Policy Redirection: The recent national election provides an opportunity for policy assessment and redirection. The U.S. can support India in aligning its policies with the core needs of the manufacturing push — jobs, trade, and security.
    • Encouraging Job-Creating Sectors: The U.S. can emphasize the importance of job-creating manufacturing sectors such as textiles, paper mills, and furniture, rather than focusing solely on capital-intensive sectors like semiconductors and robotics. This approach can help create more employment opportunities in India.

    Way forward: 

    • Establishment of State-level Economic Advisory Councils: Create advisory councils comprising experts from academia, industry, and government to advise state governments on economic policies, including manufacturing incentives and regulatory frameworks.
    • Review and Update of BRAP Rankings: Overhaul the Business Reforms Action Plan (BRAP) to include independent evaluations and audits alongside self-reporting. Ensure transparency and accuracy in ranking states’ business environments to provide credible guidance for investors.

    Mains PYQ: 

    Q Can the strategy of regional-resource-based manufacturing help in promoting employment in India? (UPSC IAS/2019)

  • How to read India’s Balance of Payments?  

     Why in the news? 

    India’s current account showed a surplus in Q4 of 2023-24. However, current account surpluses are not always beneficial, and deficits are not inherently detrimental.

    Latest Data from the Reserve Bank of India (RBI)

    • Current Account Surplus: India registered a current account surplus during the fourth quarter (Jan-Mar) of the 2023-24 financial year, marking the first surplus in 11 quarters.
    • Quarterly vs. Annual Data: Despite the Q4 surplus, the current account balance for the entire FY2023-24 remained in deficit, indicating underlying economic trends and demands.

    What is Balance of Payments (BoP)?

    • The BoP is a ledger of a country’s transactions with the rest of the world, recording all monetary transactions between residents of a country and the rest of the world.
    • It shows the amount of money flowing into and out of the country, indicating the relative demand for the rupee compared to foreign currencies (usually in dollar terms).

    Constituents of the BoP

    The BoP has two main accounts: the Current Account and the Capital Account.

    • Current Account: It covers the trade in goods (exports and imports), trade in services (transportation, tourism, licensing, etc.), Income (wages, interest, dividends, etc.), and current transfers (remittances, foreign aid, etc.).
      • Trade of Goods (Merchandise Account): Records export and import of physical goods. A trade deficit occurs when imports exceed exports.
      • Invisibles of Trade: Includes services (banking, insurance, IT, tourism), transfers (remittances), and income (earnings from investments). These are transactions not visible like physical goods.
      • Net Balance: The sum of the merchandise trade and invisible trade determines the current account balance. Q4 showed a surplus in the current account due to a surplus in invisible despite a trade deficit.
    • Capital Account: It covers debt forgiveness, migrants’ transfers of financial assets, taxes on gifts and inheritances, and ownership transfers of fixed assets.
      • Investments: Captures transactions related to investments such as Foreign Direct Investment (FDI) and Foreign Institutional Investments (FII).
      • Net Balance: Q4 showed a net surplus of $25 billion in the capital account.

    Impact on the Indian Economy: 

    • Exchange Rate Stability: The current account surplus in Q4 helped stabilize the exchange rate of the rupee. By absorbing excess dollars, the Reserve Bank of India (RBI) prevented excessive appreciation of the rupee, which helps maintain the competitiveness of Indian exports.
    • Improved Sovereign Ratings: A current account surplus can positively impact India’s sovereign credit ratings, as it indicates stronger external financial health and reduces reliance on foreign borrowing.
    • Foreign Exchange Reserves: The surplus contributed to an increase in India’s foreign exchange reserves, enhancing the country’s ability to manage external shocks and providing a buffer against global economic uncertainties.
    • Investment Climate: A surplus in the capital account, driven by Foreign Direct Investment (FDI) and Foreign Institutional Investments (FII), indicates investor confidence in the Indian economy, potentially leading to more robust economic growth and development.
    • Economic Health Indicators: Despite the Q4 surplus, the annual current account deficit suggests robust domestic demand and investment needs. This aligns with a growing economy that requires imports of capital goods to enhance production capacity and future export potential.

    Way forward: 

    • Enhance Export Competitiveness: India should focus on boosting its export sector by diversifying export products and markets, improving product quality, and providing incentives for export-oriented industries.
    • Promote Sustainable Foreign Investment: Encouraging sustainable and long-term foreign investments, particularly in sectors like manufacturing, technology, and renewable energy, can strengthen the capital account. 

    Mains PYQ: 

    Q Craze for gold in Indian has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme. (UPSC IAS/2015)

  • Surge in Silver Imports from UAE through Gift City

    Why in the News?

    • India’s majority of silver imports are now handled by few private players from Dubai through the India International Bullion Exchange (IIBX), Gift City.
      • This trend, aimed at reducing import duties by the traders, poses potential long-term revenue losses for India.

    India’s Silver Imports

    • India imported a record 4,172 metric tons of silver in the first four months of 2024, far exceeding the total of 3,625 tons imported in all of 2023.
      • In February 2024 alone, India imported a record 2,295 metric tons of silver, up from 637 tons in January. This represents a 260% increase.
    • The surge in imports has been driven by increasing demand from the Solar panel industry as well as a rise in Speculative Investment, with investors betting on silver outperforming gold.
    • Nearly half of India’s silver imports in 2024 so far have come from the United Arab Emirates (UAE) due to a lower import duty under the India-UAE Comprehensive Economic Partnership Agreement (CEPA).
      • India generally imposes a 15% import duty on silver.
      • However, because of the CEPA signed between India and the UAE in 2022, allows private traders to import silver through the India International Bullion Exchange (IIBX) paying 9% duty, and an extra 3% in value-added tax.
    • The government is now concerned about the 647-fold spike in silver imports from the UAE and plans to discuss the issue with Abu Dhabi.
      • The Gift City exchange, while clearing imports from Dubai since December 2023, is under scrutiny for potential violations of these rules compared to imports from other ports.

    About India International Bullion Exchange (IIBX)

    • Bullion refers to physical gold and silver of high purity that is often kept in the form of bars, ingots, or coins.
    • The IIBX was announced during the 2020 budget speech by the Finance Minister.
    • It is set up at the International Financial Services Center (IFSC) located in GIFT City, Gandhinagar.
    • It is India’s first bullion exchange, launched on 29 July 2022 in Gujarat.
    • It is the 3rd exchange of its kind in the globe.

    Regulations and Setup:

    • The International Financial Services Centres Authority (Bullion Exchange) Regulations, 2020, were notified in December 2020 specifically for the trading of precious metals, including gold and silver.
    • These regulations encompass the operations of the bullion exchange, Clearing Corporation, depository, and vaults associated with IIBX.

    Operational Framework

    • Previously, India had liberalized gold imports through nominated banks and agencies in the 1990s.
      • With IIBX, eligible qualified jewellers in India can directly import gold.
    • Jewellers need to become trading partners or clients of an existing trading member to participate in the exchange.

    Comparison with Previous Practices

    • Previously, bullion in India was imported under a consignment model by nominated banks and agencies approved by the RBI, which added handling fees and premiums.
    • The introduction of IIBX aims to streamline the supply chain by allowing direct imports through the exchange, potentially reducing costs for traders and consumers alike.

    Recommendations for Addressing Challenges

    • Renegotiation of CEPA Terms: The Global Trade Research Initiative (GTRI) advocates for revising CEPA terms to curb duty arbitrage and enforce stricter checks on value addition claims by Gift City exchange.
    • Enhanced Regulatory Oversight: GTRI proposes limiting silver imports to RBI/DGFT-nominated agencies to mitigate risks associated with mis-declared imports and ensure compliance with CEPA conditions.
    • Investigation and Oversight: There is a call for a thorough investigation into relationships between export and import firms to identify and mitigate conflicts of interest or familial ties that could influence import practices.

    PYQ:

    [2016] What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

    1. To bring the idle gold lying with Indian households into the economy.
    2. To promote FDI in the gold and jewellery sector.
    3. To reduce India’s dependence on gold imports.

    Select the correct answer using the code given below:

    (a) 1 only
    (b) 2 and 3 only
    (c) 1 and 3 only
    (d) 1, 2 and 3

  • ICEA calls for reduction in Import Duties to Boost Mobile Phone Sector

    Why in the News?

    • The Indian Cellular & Electronics Association (ICEA), representing domestic electronics manufacturers, called for a reduction of import duties in the upcoming Union budget.
      • ICEA highlighted that the growth of the mobile phone sector now depends on demand in the global market rather than domestic demand, facilitated by supportive policies like the Production Linked Incentive (PLI) scheme.

    About India Cellular and Electronics Association (ICEA) 

    • The ICEA is the apex industry body representing the interests of the mobile and electronics sector in India.
    • It was established in 2017.
    • It plays a crucial role in shaping policies and promoting the growth of the industry through advocacy, policy formulation, and strategic initiatives.
    • Membership:
      • ICEA comprises leading mobile handset manufacturers, electronics companies, and industry stakeholders.
      • This includes both Indian and global companies operating in the electronics sector.
    • Collaborations:
      • ICEA works closely with government bodies, regulatory authorities, and other industry associations to align its initiatives with national economic goals.

    ICEA’s Key Demands

    • Reduction of Import Duties: ICEA is calling for a reduction in import duties on manufacturing inputs for electronics, particularly in the mobile phone sector.
      • Current high tariffs are increasing manufacturing costs in India by 7-7.5% on the bill of materials.
    • Alignment with Global Standards: The demand includes aligning tariffs with those of countries like China and Vietnam, which have lower tariffs on fewer components.
    • Improvement of Customs Procedures: ICEA is urging for streamlined customs procedures to prevent delays in the shipment of key components.

    Significance of ICEA’s Demands

    • Reducing import duties enhances competitiveness, boosts exports, stimulates investment and job creation, reduces trade deficit, and fosters long-term growth in India’s electronics and mobile phone manufacturing sectors.

    Key Initiatives and Programs by ICEA

    • Electronics Manufacturing Clusters: ICEA promotes the development of electronics manufacturing clusters to create a robust supply chain and manufacturing base in India.
    • Skill Development: The association emphasizes the need for skill development in the electronics sector to ensure a skilled workforce capable of supporting industry growth.
    • R&D and Innovation: ICEA encourages research and development (R&D) and innovation within the sector to maintain competitiveness and technological advancement.

    Boost in Mobile Phone Exports from India

    • ICEA Report: According to ICEA, mobile phone exports from India have doubled to surpass Rs 90,000 crore (about USD 11.12 billion) in FY 2022-23 from Rs 45,000 crore in FY22.
    • Government Targets: The government has set a target of USD 10 billion worth of mobile phone exports, with an ambitious goal of achieving USD 300 billion worth of electronics manufacturing by 2025-26, of which USD 120 billion is expected from exports.

    Major Contributors to Export Growth:

    • Apple’s Contribution: Apple is estimated to have a 50% share of mobile phone exports from India, contributing USD 5.5 billion (about Rs 45,000 crore).
    • Samsung’s Contribution: Samsung accounts for approximately 40% of exports, worth Rs 36,000 crore.
    • Third-Party Exports: Third-party exports contributed around USD 1.1 billion to the total export, comprising phones of various brands made in India.

    Future Projections:

    • Export Contribution: Mobile phones are anticipated to contribute more than USD 50 billion worth of exports by 2025-26.
    • Overall Contribution: Mobile phone exports now account for 46% of the overall electronic goods exports, according to ICEA.

     

    PYQ:

    [2016] Recently, India’s first ‘National Investment and Manufacturing Zone’ was proposed to be set up in:

    (a) Andhra Pradesh

    (b) Gujarat

    (c) Maharashtra

    (d) Uttar Pradesh