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

  • RBI says no Foreign Investment cap on Sovereign Green Bonds

    green bond

    The sovereign green bonds issued by the Indian government will not have any restrictions on foreign investment, the Reserve Bank of India (RBI) said.

    What are Sovereign Green Bonds?

    • A bond is an instrument to raise debt.
    • Since 2007, a market for bonds specifically self-labeled or designated as ‘green’ has emerged.
    • This label differentiates a green bond from a regular bond, which signifies a commitment to exclusively use funds raised to finance or re-finance “green” projects, assets, or business activities.
    • When these bonds carry guarantees related to the repayment of principal and payment of interest by the sovereign or the government, they are called sovereign green bonds (SGrB).

    How are the projects for green bonds selected?

    • A project is classified “green” on the basis of four key principles. These include-
    1. Encouraging energy efficiency in resource utilisation
    2. Reducing carbon emissions and greenhouse gases
    3. Promoting climate resilience and
    4. Improving natural ecosystems and biodiversity, especially in accordance with SDG (Sustainable Development Goals).

    When is the first sovereign green bond likely to be issued? 

    • In her Budget speech early this year, Finance Minister announced that sovereign green bonds will be issued for mobilising resources for green infrastructure.
    • The proceeds will be deployed in public sector projects that help in reducing the carbon intensity of the economy.
    • These green bonds would be available in 5-year and 10-year tenure.

    How are they different from conventional government bonds?

    • Government bonds or government securities (G-Secs) are normally categorised into two — Treasury Bills and dated or long-term securities.
    • These bonds carry coupon rates and are tradable in the securities market.
    • SGrB is one form of dated security. It will have a tenor and interest rate.
    • Money raised through SGrB is part of overall government borrowing.

    Who are likely to be the buyers of these bonds? 

    • Both domestic and international investors are expected to be interested in SGrB.
    • However, one thinking is foreign investors may be slightly hesitant due to currency risk.

     

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  • What are Additional Tier-1 (AT-1) Bonds?

    The Bombay High Court has quashed the write-off of Additional Tier-1 (AT1) bonds worth Rs 8,400 crore issued by Yes Bank Ltd, bringing relief to investors.

    What are AT1 bonds?

    • AT-1, short for Additional Tier-1 bonds, are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
    • AT-1 bonds are complex hybrid instruments, ideally meant for institutions and smart investors who can decipher their terms and assess if their higher rates compensate for their higher risks.
    • They carry a face value of ₹10 lakh per bond.
    • There are two routes through which retail folk have acquired these bonds — initial private placement offers of AT-1 bonds by banks seeking to raise money; or secondary market buys of already-traded AT-1 bonds based on recommendations from brokers.

    Why are they important?

    AT-1 bonds have several unusual features lurking in their fine print, which make them very different from plain bonds.

    • One, these bonds are perpetual and carry no maturity date. Instead, they carry call options that allow banks to redeem them after five or 10 years. But banks are not obliged to use this call option and can opt to pay only interest on these bonds for eternity.
    • Two, banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value without getting into hot water with their investors, provided their capital ratios fall below certain threshold levels. These thresholds are specified in their offer terms.
    • Three, if the RBI feels that a bank is tottering on the brink and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors. This is what has happened to YES Bank’s AT-1 bond-holders who are said to have invested ₹10,800 crore.

     

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  • A Bumpy Ride for India’s Economy in 2023: A perspective

    Economy

    Context

    • India’s general elections, scheduled for 2024, will also bring in their wake high-pitched rhetoric and spin-doctoring to further muddy the waters. In short, buckle up because the next 12 months promise a flurry of conflicting signals and a rather bumpy ride. A perspective on Indian economy in 2023.

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    Turbulent global situation

    • Pandemic plus Ukraine war: One conflicting signal is already staring us in the face, the seemingly doomed future of globalization. Post-Brexit, the covid pandemic and Russia-Ukraine conflict, there are multiple signs indicating retrenchment of globalization.
    • Collapse of Supply chains: The collapse of global supply chains due to economic lockdowns has refocused attention towards near-shoring or on-shoring.
    • Trade barriers: In an associated move, nations have erected protective trade barriers; both the US and EU are using climate plans to renege on free-trade promises. The end result, reduced global trade.

    What are the prospects from international institute?

    • BlackRock Investment Institute’s 2023 Global Outlook: Various financial institutions across the globe are trying to wrap their heads around the phenomenon. According to BlackRock Investment Institute’s 2023 Global Outlook, “We see geopolitical cooperation and globalization evolving into a fragmented world with competing blocs.
    • Citi’s wealth outlook for 2023: Citi’s wealth outlook for 2023 intoned ominously, as a less globalized, more polarized world presents challenges for investors.

    Economy

    Effect of globalization and policy change by developed economies

    • Rising federal rates: As US employment numbers and demand data continue to stay elevated (despite, paradoxically, slowing growth), the Federal Reserve is likely to be unrelenting in its endeavor to bring the inflation rate back to 2%.
    • Rise in domestic interest rates: The Fed’s actions will undoubtedly strengthen the dollar further, forcing many central banks across the global economy to raise interest rates in tandem. Interestingly, central banks in emerging economies today face threats to their independence from an external agency and not from the political dispensation at home.
    • Increase in food and fuel cost: Beyond interest rates, inflation also travels easily across national boundaries, especially through food and fuel trade. The fractured supply chains and war in Europe have ensured that inflation’s harmful impact might sustain through 2023.
    • Omicron variant and travel restrictions: The other undesirable effect of globalization could be the persisting effect of the Omicron variant that has travelled seamlessly from one corner of the world to another. The Indian government has been forced to resume random screening of passengers arriving from different parts of the world to test for the numerous Omicron variants that have witnessed a resurgence in recent times.

    Economy

    Impact on Indian Economy

    • Over-priced equity markets: Indian equity markets have been soaring since early 2020, once the initial shock of the covid pandemic was negotiated. Cross-country comparisons across emerging markets by various valuation indices show the Indian market to be considerably over-priced currently, both relative to its own past performance as well as compared with the rest of the world.
    • High retail investors: Interestingly, the market held its own despite foreign portfolio investors (FPI) pulling out money over the past few months. Domestic investment institutions and retail investors are believed to have kept the market valuation up. But below this cheery visage lies a grim reality.
    • Worrisome credit records: Sectoral credit deployment data from the Reserve Bank of India (RBI) shows credit growth in commercial banks in recent months has been driven by only two segments: non-bank financial companies (NBFCs) and consumer loans.
    • High retail borrowings: A large chunk of the NBFC borrowing was also for on-lending to retail borrowers, given tepid industrial credit demand. RBI data for commercial banks shows consumer loans in four categories advances against fixed deposits, advances against shares or bonds, loans against gold jwellery and other personal loans grew by almost 71% between April 2020 and November 2022.
    • Loans for equity investments: It is quite likely that a large proportion of these loans have found their way into stock markets; the Nifty-50 index gained close to 118% between April 2020 and November 2022, at a time when FPI investments during the same period witnessed a net inflow of only ₹1,464 crore.

    Conclusion

    • The year 2023 appears to be very bumpy for economy in general and credit growth and recovery in particular. SEBI and RBI need to protect the retail investors from Ponzi scheme and fake promises of guaranteed returns.

    Mains Question

    Q. How policy changes in developed economies affects the India’s decision making? Assess the effect of turbulent global situation on credit growth in India.

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  • What is Purchasing Managers Index (PMI)?

    India’s Services sector reported a sharp growth with Services Purchasing Managers’ Index (PMI) surging to 58.5 last month from 56.4 in November 2022.

    Purchasing Managers’ Index (PMI)

    • PMI is an indicator of business activity — both in the manufacturing and services sectors.
    • It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
    • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
    • The PMI is compiled by IHS Markit based on responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers.

    How is the PMI derived?

    • The PMI is derived from a series of qualitative questions.
    • Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.

    How does one read the PMI?

    • A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
    • Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
    • If the figure is higher than the previous month’s then the economy is expanding at a faster rate.
    • If it is lower than the previous month then it is growing at a lower rate.

    What are its implications for the economy?

    • The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available.
    • It is, therefore, considered a good leading indicator of economic activity.
    • Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later.
    • Central banks of many countries also use the index to help make decisions on interest rates.

     

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  • Consumer Affairs Ministry unveils ‘Right to Repair’ Portal

    right to repair

    The Food and Consumer Affairs Minister introduced a host of new initiatives, including a right to repair portal.

    Right to Repair portal

    • On the ‘right to repair’ portal, manufacturers would share the manual of product details with customers so that they could either repair by self, by third parties, rather than depend on original manufacturers.
    • Initially, mobile phones, electronics, consumer durables, automobile and farming equipments would be covered.

    What is Right to Repair?

    • It refers to proposed government legislation that would allow consumers the ability to repair and modify their own consumer products (e.g. electronic, automotive devices).
    • The idea behind “right to repair” is in the name: If you own something, you should be able to repair it yourself or take it to a technician of your choice.
    • People are pretty used to this concept when it comes to older cars and appliances, but right-to-repair advocates argue that modern tech, especially anything with a computer chip inside, is rarely repairable.

    The Right to Repair movement aims for:

    1. Easy repair: The device should be constructed and designed in a manner that allows easy repairs
    2. Access to critical components: End users and independent repair providers should be able to access original spare parts and tools (software as well as physical tools) needed to repair the device at fair market conditions
    3. No technical barriers: Repairs should by design be possible and not hindered by software programming
    4. Proper communication: The repairability of a device should be clearly communicated by the manufacturer.

    How did it came to existence?

    • The average consumer purchases an electronic gadget, knowing that it will very quickly become obsolete as its manufacturer releases newer and more amped up version.
    • As your device grows older, issues start to crop up — your smartphone may slow down to a point where it is almost unusable, or your gaming console may require one too many hard resets.
    • When this happens, more often than not, you are left at the mercy of manufacturers who make repairs inaccessible and an inordinately expensive affair.

    Why is such right significant?

    • Exorbitant repair price: Often, manufacturers reduce the durability of the product, compelling consumers to either repurchase the product or get it repaired at exorbitant prices affixed by the manufacturers.
    • Lifespan enhancement: The goal of the movement is to increase the lifespan of products and to keep them from ending up in landfills.
    • Against planned obsolescence: The electronic manufacturers are encouraging such culture so that devices are designed specifically to last a limited amount of time and to be replaced.
    • Scarcity of natural resources: Obsolescence leads to immense pressure on the environment and wasted natural resources.
    • Mitigating climate change: Manufacturing an electronic device is a highly polluting process. It makes use of polluting sources of energy, such as fossil fuel.
    • Boost to repair economy: Right to repair advocates also argue that this will help boost business for small repair shops, which are an important part of local economies.

    Issues with obsolete devices

    • Unfair trade practice:  For manufacturers, either of these options is a win-win case, because high-priced repairs, as well as new sales, mean more profits.
    • High cost to consumers: This often led to higher consumer costs or drive consumers to replace devices instead of repairing them.
    • Generation of E-waste: The global community is concerned over the continuously growing size of the e-waste stream.
    • Recyclability: Up to 95% of raw materials used to produce electronic devices can be recycled, while the vast majority of newly produced devices use little to none recycled material due to the higher cost.

    Why do electronic manufacturers oppose this movement?

    Large tech companies, including Apple, Microsoft, Amazon and Tesla, have been lobbying against the right to repair.

    • IPR violations through reverse engineering: Their argument is that opening up their intellectual property to third party repair services.
    • Threats to device safety: Amateur repairers could lead to exploitation and impact the safety and security of their devices.
    • Personal data security: Tesla, for instance, has fought against right to repair advocacy, stating that such initiatives threaten data security and cyber security.
    • Sheer casualization: Tech giant has allowed repairs of its devices only by authorised technicians and not providing spare parts or DIY manuals on how to fix its products.

    Right to Repair in India

    The ‘right to repair’ is not recognised as a statutory right in India, but certain pronouncements within the antitrust landscape have tacitly recognized the right.

    • Necessary consumer right: Monopoly on repair processes infringes the customer’s’ “right to choose” recognised by the Consumer Protection Act, 2019.
    • Acknowledgment by agencies: Consumer disputes jurisprudence in the country has also partially acknowledged the right to repair.
    • Upholding Competition: In Shamsher Kataria v Honda Siel Cars India Ltd (2017), for instance, the Competition Commission of India ruled that restricting the access of independent automobile repair units to spare parts as anti-competitive.
    • Part of consumer welfare: The CCI observed that the practice was detrimental to consumer welfare.
    • Laws for recycle: The e-waste (management and handling) rules addresses not only to handle the waste in an environmentally friendly manner, but also has laid down rules about its transportation, storage and recycling.

    Way forward

    • Avoiding blanket waiver: While necessary clauses to maintain the quality of the product can be included, a blanket waiver should be avoided.
    • For instance, the quality assurance clause can be incorporated for use of company-recommended spare parts and certified repair shops.
    • Making available the repair manual: Making repair manuals available to certified business owners could go a long way in balancing the rights of consumers and manufacturers.
    • Sign a non-disclosure agreement to protect IP rights: Manufacturers can sign a non-disclosure agreement to protect the IP with certified repairers/businesses.
    • Alloting certification/license: Further, the lack of certification/licensing of repair workers is seen as a reflection of their lack of skills.
    • Insert right to repair in Consumer protection Act: The ‘right to repair’ can be said to be implicit in Section 2(9) of the Consumer Protection Act, 2019.
    • Reparability parameter: The product liability clause under Section 84 can be amended and expanded to impose product liability concerning various reparability parameters of the product.
    • Duration of product liability: The duration of imposing product liability may vary depending on the product and its longevity.

     

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  • Rupee Settlement Mechanism draws interest from more nations

    rupee

    India’s rupee trade settlement mechanism, a means of using rupees instead of dollars and other big currencies for international transactions, is attracting interest from more countries.

    More countries are interested

    • Tajikistan, Cuba, Luxembourg and Sudan have begun talking to India about using the mechanism.
    • They have shown interest in opening special rupee accounts, called vostro accounts.
    • Opening of these accounts needs approval from the Reserve Bank of India.
    • It has already been used by Russia following the imposition of sanctions on Moscow over the Ukraine war.

    Rupee Settlement System for International Trade

    • Banks acting as authorized dealers for such transactions would have to take prior approval from the regulator to facilitate this.
    • All exports and imports under the invoicing arrangement may be denominated and invoiced in Rupee.
    • The exchange rate between the currencies of the two trading partner countries may be market determined.
    • Exporters and importers can now use a Special Vostro Account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.
    • These accounts can be used for payments for projects and investments, import or export advance flow management, and investment in Treasury Bills subject to Foreign Exchange Management Act, 1999 (FEMA).
    • Also, the bank guarantee, setting-off export receivables, advance against exports, use of surplus balance, approval process, documentation, etc., related aspects would be covered under FEMA rules.

    Benefits of such a mechanism

    • Trade facilitation: This will also facilitate trade with countries like Russia which are facing sanctions.
    • FOREX savings: India imports more than it exports so the country will also save foreign currency under the new arrangement.
    • Rupee appreciation: The rupee is at a historic low against the dollar. It will also help stabilize rupee.
    • Mitigating war impact: Payments had become a pain point for exporters immediately after the Russia-Ukraine war broke out, especially after Russia was cut off from the SWIFT payment gateway.
    • Convertibility easing: We see this as a first step towards 100% convertibility of rupee.
    • Energy security: It will also help buy discounted crude oil from Russia, which now accounts for 10% of all imported crude.
    • Export promotion: As such, the new mechanism will help India promote its exports.

    Which countries would prefer this system?

    • War mongering Russia: For now, it looks like trade settlements in rupee will be limited to countries like Russia and Iran who are facing sanctions from the West
    • Bankrupt Sri Lanka: SL is going through economic turmoil and India has been consistently extending lines of credit to SL.
    • Immediate neighbors: Other countries may include immediate neighbors of India.

    Rupees over Dollars: Why countries would prefer Rupees?

    • At a very simplistic level, this is like two Indians deciding to use an alternative mode of exchange that they have come up with, instead of using rupees.
    • In other terms, this is similar to the barter system.
    • The main reason for countries to want to trade with India in rupees is this:
    1. USD has been going through a phase of strength against most currencies in the world
    2. Strong USD performance has essentially made imports expensive for most countries
    3. Sri Lanka, which is going through one of its worst economic crises in decades, is a glaring example of a country in which the economy has come to a halt due to a drastic fall in forex reserves
    • While the Sri Lankan Rupee has declined over 83 percent against the US Dollar, its fall against the Indian Rupee has been lower at 70 percent.
    • So instead of paying 83 percent more to make purchases in USD, Sri Lanka can pay in Indian Rupees and save some money.

    Challenges

    • Trade surplus countries’ preference: The question that RBI and the Indian government will have to answer is this – why would countries with a trade surplus with India want to trade in rupees?
    • Negative trade balance: China had a $73-billion trade surplus with India in 2021-22 – that is, Indian imports from China exceeded its exports to China by $73 billion.
    • Idle money lying useless: If China were to trade with India in rupees, it would have Indian rupees worth $73 billion (about ₹5.77 lakh crore) sitting idle in its Rupee Vostro accounts in an Indian bank.
    • Few countries interested: Countries whose exports to India are more than imports, will not be too enthusiastic to trade in rupees, especially if the difference is huge as in the case of China.

     

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  • India-China trade deficit is at $51.5 Bn

    The trade deficit, difference between import and exports, between India and China has touched $51.5 billion during April-October this fiscal.

    Widening deficit

    • The deficit during 2021-22 had jumped to $73.31 billion as compared to $44.03 billion in 2020-21.
    • According to the data, imports during April-October this fiscal stood at $60.27 billion, while exports aggregated at $8.77 billion.
    • The merchandise exports from India to China had increased from $11.93 billion in 2014-15 to $21.26 billion in 2021-22.

    India-China bilateral trade

    • In 2021, annual two-way trade crossed $100 billion for the first time, reaching $125.6 billion, with India’s imports accounting for $97.5 billion, pegging the imbalance at close to $70 billion.
    • This is certainly a healthy deficit compared to the industrial development in both nations.

    A quick backgrounder

    • Trade ties began to boom since the early 2000s.
    • This was driven largely by India’s imports of Chinese machinery and other equipment.
    • It rose up from $3 billion in the year 2000 to $42 billion in 2008, the year China became India’s largest trading partner.

    The Hindi-Chini buy buy

    • A third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China.
    • Automotive parts and fertilizers are other items where China’s share in India’s import is more than 25 per cent.
    • Several of these products are used by Indian manufacturers in the production of finished goods, thus thoroughly integrating China in India’s manufacturing supply chain.
    • For instance India sources close to 90 per cent of certain mobile phone parts from China.

    India’s export to China

    • Even as an export market, China is a major partner for India.
    • China is the third-largest destination for Indian shipments.
    • At the same time, India only accounts for a little over two percent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO).

    Should we worry about this?

    • Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
    • In this light, India’s trade imbalance with China should not be viewed in isolation.
    • For instance, pharmaceuticals that India exports to the world require ingredients that are imported from China.
    • Chinese imports of Indian seafood are one area that has recently shown robust growth and carries scope to grow in future.

    So, having a trade deficit is good?

    • Of course NOT. Running persistent trade deficits across all countries raises two main issues.
    1. Availability of foreign exchange reserves to “buy” the imports.
    2. Lack of domestic capacity to produce most efficiently.

    Can we ban trade with China?

    Ans. Certainly NOT!

    • It will hurt the Indian poor the most: This is because the poor are more price-sensitive. For instance, if Chinese TVs were replaced by either costlier Indian TVs or less efficient ones, unlike poor, richer Indians may buy the costlier option.
    • It will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market (as Indian exports).
    • Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 percent.
    • Ban will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
    • Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years. Chinese money, for instance, has penetrated India’s technology sector, with companies like Alibaba and Tencent strategically pumping in billions of dollars into Indian startups such as Zomato, Paytm, Big Basket and Ola.
    • India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China. This can be detrimental to India’s effort to attract foreign investment.

    China is our Frenemy. Here is why.

    • The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute.
    • Worse, given India and China’s position in both global trades as well as relative to each other, this trade war will hurt India far more than China.
    • Again, these measures will be most poorly timed since the Indian economy is already at its weakest point ever — facing a sharp GDP contraction.

    Way forward

    • In the long term, under the banner of self-reliance, India must develop its domestic capabilities and acquire a higher share of global trade by raising its competitiveness.
    • But no country is completely self-sufficient and that is why trade is such a fantastic idea.
    • For the long run, a more effective strategy needs to be built to provide an ecosystem that addresses the cost disability of Indian manufacturing leading to such imports.

     

     

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  • India’s Economic Growth story and the future roadmap

    Economic

    Context

    • By 2047, India will complete 100 years after Independence. By that time, India strives to achieve the status of a developed economy, which means achieving a minimum per capita income equivalent to $13,000.

    Economic growth during the British period

    • Poor state of economy: It is not realized often that India’s economic progress in the first half of the 20th century under British rule was dismal. According to one estimate, during the five decades, India’s annual growth rate was just 0.89%.
    • Negligible growth in per capita: With the population growing at 0.83%, per capita income grew at 0.06%. It is not surprising that immediately after Independence, growth became the most urgent concern for policymakers.

    Economic growth after Independence

    • In the early period, India’s strategy of development comprised four elements:
    1. Raising the savings and investment rate;
    2. Dominance of state intervention;
    3. Import substitution, and
    4. Domestic manufacture of capital goods.
    • Modest growth till 1970: India’s average growth till the end of the 1970s remained modest, with the average growth rate being 3.6%. With a population growth of 2.2%, the per capita income growth rate was extremely modest at 1.4%.
    • Improvement in social indicators: On certain health and social parameters, such as the literacy rate and life expectancy, there were noticeable improvements.
    • The success of green revolution: While India had to rely on the heavy imports of food grains on a concessional basis, initially, there was a breakthrough in agriculture after the Green Revolution.
    • Industrial base widened: The industrial base expanded with time. India became capable of producing a wide variety of goods including steel and machinery.
    • Unsustainable fiscal policy: Plan after plan, actual growth was less than what was projected. The Indian economy did grow at 5.6% in the 1980s. But it was accompanied by a sharp deterioration in the fiscal and current account deficits, and the economy faced its worst crisis in 1991-92.

    Economic

    Statistics of economic growth after 1991

    • Rapid economic growth: Between 1992-93 and 2000-01, GDP at factor cost grew annually by 6.20%. Between 2001-02 and 2012-13, it grew by 7.4% and the growth rate between 2013-14 and 2019-20 was 6.7%.
    • Sustained period of high growth rate: The best performance was between 2005-06 and 2010-11 when GDP grew by 8.8%, showing clearly what the potential growth rate of India was. This is the highest growth experienced by India over a sustained period of five to six years. This was despite the fact that this period included the global crisis year of 2008-09.
    • Rising investment rate: There was a corresponding increase in the savings rate. The current account deficit in the Balance of Payments (BOP) remained low at an average of 1.9%.
    • Setback to growth after 2011-12: However, the growth story suffered a setback after 2011-12. The growth rate fell to 4.5% in 2012-13 according to the 2004-05 series. The growth rate since then has seen ups and downs. The growth rate touched the 3.7% level in 2019-20.

    Economic

    Roadmap for Future Growth

    • Keeping the sustained growth rate: The first and foremost task is to raise the growth rate. Calculations show that if India achieves a 7% rate of growth continuously over the next two decades and more, it will make a substantial change to the level of the economy. India may almost touch the status of a developed economy.
    • Maintaining the incremental capital output ratio: If India maintains the incremental capital output ratio at 4, which is a reflection of the efficiency with which we use capital, India can comfortably achieve a 7% rate of growth.
    • Investment must be increased: Raising the investment rate depends on a number of factors. A proper investment climate must be created and sustained.
    • Private investment is crucial: While public investment should also rise, the major component of investment is private investment, both corporate and non-corporate. It is this which depends on a stable financial and fiscal system. The importance of price stability in this context cannot be ignored.
    • New technologies must be embraced: India needs to absorb the new technologies that have emerged, and that will emerge. Its development strategy must be multidimensional.
    • Strong Export and manufacturing: India need a strong export sector. It is a test of efficiency. At the same time, India needs a strong manufacturing sector. The organized segment of this sector must also increase.
    • Strengthened the social safety nets: As output and income increase, India must also strengthen the system of social safety nets. Growth without equity is not sustainable.

    Challenges for India’s growth

    • Low per capita income: India today is the fifth largest economy. This is an impressive achievement. However, in relation to per capita income, it is a different story. In 2020, India’s rank was 142 out of 197 countries. This only shows the distance we have to travel.
    • Declining growth in developing countries: The external environment is not going to be conducive. The Organization for Economic Co-operation and Development reports a secular decline in growth in developed countries.
    • Climate change may affect the growth: Environmental considerations may also act as a damper on growth. Some adjustment on the composition of growth may become necessary.

    Conclusion

    • Considering the India’s population, India has no option but to grow continuously. Government has undertaken major structural reform and policy initiatives like GATI-SHAKTI to give fillip to growth of economy. These are the steps in the right directions and more such liberalizing initiatives need to be encouraged.

    Mains Question

    Q. Briefly describe the history of economic growth of India after independence. What could be the roadmap for future growth of India till 2047?

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  • Remittances to India set to cross record $100-billion mark in 2022

    India is expected to receive a record $100 billion in remittance in 2022, the top recipient this year, the World Bank has said.

    What are Remittances?

    • A remittance is a non-commercial transfer of money by a foreign worker, a member of a diaspora community, or a citizen with familial ties abroad, for household income in their home country or homeland.
    • The World Bank defines it as “the sum of worker’s remittances, compensation of employees, and migrants’ transfers as recorded in the IMF Balance of Payments.
    • Workers remittances are current transfers by migrant who are considered residents in the source.
    • Remittances are a vital source of household income for low- and middle-income countries.

    India’s total remittances to grow

    • Remittances to India are money transfers from non-resident Indians (NRIs) employed outside the country to family, friends or relatives residing in India.
    • In its Migration and Development Brief, the World Bank has said India’s remittance will grow 12 per cent from 7.5 per cent last year, resulting in $100 billion flow as compared to $89.4 billion in 2021.
    • It attributed the feat to the large share of Indian migrants earning relatively high salaries in the US, UK and East Asia.

    Key points from the report by World Bank

    • Highly-skilled Indian migrants living in wealthy nations such as the US, UK, and Singapore were sending more money home.
    • Remittances to low and middle-income countries have grown by 5% in 2022 to around $626 billion – around half the rate of growth seen in 2021.
    • The amount of money sent back home by migrants around the world has grown by 5% in 2022.
    • Other top recipient countries for remittances include Mexico, China, Egypt and the Philippines.
    • Domestic and International shocks have affected countries like Pakistan, Bangladesh, and Sri Lanka for whom remittances earned by migrants are expected to drop this year
    • Barring India and Nepal, other south Asian countries saw a decline of more than 10% in their remittances from 2021, due to the end of government incentives introduced during the pandemic

    Why is remittance to India so high this year?

    • Upskilling: There has been a gradual shift in destinations for Indian migrants aided by a structural shift in qualifications.
    • Work from home: Indian migrants in high-income countries benefited from work-from-home and large fiscal stimulus packages.
    • Easing of pandemic: As the pandemic eased, the wage hikes and “record-high employment conditions” helped migrants send money home despite high global inflation.
    • Inflation control in India: The price support policies kept inflation at bay in India.
    • Crude oil dynamics: Demand for labour increased with higher oil prices, which in turn increased remittances for Indian labourers.

    Significance of remittances

    • Stable source of funds: Remittance flows tend to remain relatively stable through the business cycle, thereby having the potential to support households in the face of economic adversity.
    • Economic lifeline: In countries affected by political conflict, they are often an economic lifeline to the poor.
    • Labour contribution: While migrant remittances contribute to the development of their home country, and also to the host country by filling the gap between labour demand and supply and making a positive net fiscal contribution.
    • Globalization: In this way, remittances represent globalization with a human face, contributing to the spread of global interdependence at all levels – social, economic and political.

    Issues with Remittances

    • Fear of currency depreciation: It causes the rupee to weaken against the dollar, which in return impacts the businesses exposed to foreign exchange, and the economy overall.
    • Accuracy of data: A key challenge for policymakers, researchers and investors interested in remittance flows concerns the accuracy and consistency of available data.
    • Accounting inconsistencies: The varied nature of remittance transactions makes the compilation process complex, resulting in a systemic problem of under-reporting of flows and data asymmetries between host and recipient countries.
    • No formal registration in India: The main source of data on remittances is the World Bank, which combines national balance of payments data compiled by the IMF with country information.
    • Ignoring informal flows: A large share of remittances is believed to flow through informal channels, which are often more convenient and cheaper than formal ones.
    • Hawala transactions: In addition, Hawala (an international network of money brokers) and Hundi (a form of credit instrument) systems operate in parallel to formal remittance channels.

    Way forward

    • Promoting labour mobility: India should aim to increase remittances to say 10% of GDP. The Philippines’ model of promoting labour mobility should be replicated in India.
    • Reducing the costs involved: Both the cost of recruitment of such workers and the cost of sending remittances back to India should come down.

     

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  • Industry urges govt. to establish ‘India Rare Earths Mission’

    To counter India’s reliance on China for imports of critical rare earth minerals, industry has urged the government to establish ‘India Rare Earths Mission’.

    What are Rare Earth Metals?

    • The rare earth elements (REE) are a set of seventeen metallic elements. These include the fifteen lanthanides on the periodic table plus scandium and yttrium.
    • Rare earth elements are an essential part of many high-tech devices.
    • They have a wide range of applications, especially high-tech consumer products, such as cellular telephones, computer hard drives, electric and hybrid vehicles, and flat-screen monitors and televisions.
    • Significant defense applications include electronic displays, guidance systems, lasers, and radar and sonar systems.
    • Rare earth minerals, with names like neodymium, praseodymium, and dysprosium, are crucial to the manufacture of magnets used in industries of the future, such as wind turbines and electric cars.

    Minerals

    Applications of REMs in various fields:

    • Electronics: Television screens, computers, cell phones, silicon chips, monitor displays, long-life rechargeable batteries, camera lenses, light-emitting diodes (LEDs), compact fluorescent lamps (CFLs), baggage scanners, marine propulsion systems.
    • Defense Sector: Rare earth elements play an essential role in our national defense. The military uses night-vision goggles, precision-guided weapons, communications equipment, GPS equipment, batteries, and other defense electronics. These give the United States military an enormous advantage. Rare earth metals are key ingredients for making the very hard alloys used in armored vehicles and projectiles that shatter upon impact.
    • Renewable Energy: Solar panels, Hybrid automobiles, wind turbines, next-generation rechargeable batteries, bio-fuel catalysts.
    • Manufacturing: High strength magnets, metal alloys, stress gauges, ceramic pigments, colorants in glassware, chemical oxidizing agent, polishing powders, plastics creation, as additives for strengthening other metals, automotive catalytic converters
    • Medical Science: Portable x-ray machines, x-ray tubes, magnetic resonance imagery (MRI) contrast agents, nuclear medicine imaging, cancer treatment applications, and for genetic screening tests, medical and dental lasers.
    • Technology: Lasers, optical glass, fiber optics, masers, radar detection devices, nuclear fuel rods, mercury-vapor lamps, highly reflective glass, computer memory, nuclear batteries, high-temperature superconductors.

    DO YOU KNOW?

    Metals such as cadmium, lead are often used in manufacturing plastic and over time can enter coastal waters. These are acutely harmful for coastal wildlife and humans.Different kinds of plastic releases different kinds of metals  that may release when exposed to water and UV lights.

    What are the challenges in accessing Critical minerals?

    • Deposits in geopolitically sensitive regions: Reserves are often concentrated in regions that are geopolitically sensitive or fare poorly from an ease of doing business perspective.
    • Controlled production:  A portion of existing production is controlled by geostrategic competitors. For example, China wields considerable influence in cobalt mining in the Democratic Republic of Congo through direct equity investments and its Belt and Road Initiative.
    • Agreements in advance from outside: Future mine production is often tied up in off take agreements, in advance, by buyers from other countries to cater to upcoming demand.

    MineralsA step taken by Indian government for sourcing strategic minerals

    • For sourcing of strategic minerals, the Indian government established Khanij Bidesh  India Limited (KABIL) in 2019 with the mandate to secure mineral supply for the domestic market.

     India Rare Earths Mission

    • Industries in India have urged to set up a Mission, manned by professionals, like the India Semiconductor Mission and make their exploration a critical component of the Deep Ocean Mission plan of the government.
    • It would seek to encourage private sector mining in the sector and diversify sources of supply for these strategic raw materials.
    • The industry group has mooted making rare earth minerals a part of the ‘Make In India’ campaign, citing China’s ‘Made in China 2025’ initiative that focuses on new materials, including permanent magnets that are made using rare earth minerals.

    Why such move?

    • Though India has 6% of the world’s rare earth reserves, it only produces 1% of global output, and meets most of its requirements of such minerals from China.
    • In 2018-19, for instance, 92% of rare earth metal imports by value and 97% by quantity were sourced from China.

    What lies ahead?

    • There is a need to harness the potential of the country’s own rare earth reserves.
    • This would help build domestic capability and broad-base supply sources for such an important and strategic raw material.