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

  • 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.

     

  • Centre sets ‘standard’ for product Reviews on E-Commerce Platforms

    review

    The Centre is bringing out a standard for publishing product reviews for e-commerce platforms this week.

    What are the reviews on e-com platforms?

    • Reviews are the ratings given by customers who make any purchase on the e-commerce platform.
    • This is generally a star-rating system followed by user comments.
    • It is particularly a social proof given by people who make judgments and decisions based on the collective actions of others.

    Why do e-coms take such reviews?

    • Reviews are much more than just comments and can result in relevant content and information, both for you and your customers.
    • Since the biggest disadvantage of e-commerce is not offering the possibility for consumers to be face to face with the product, reviews can break this barrier.
    • Reviews can help sell more, gain new customers, accompany the consumer’s satisfaction, and target better.

    Why reviews matter?

    • Ensure a good purchasing experience;
    • Create surveys and debates on products and/or services;
    • Provide a field for comments and instigate interaction;
    • Know how to deal with complaints and try to resolve them.

    Why discuss this?

    • Consumer grievances ignored: More than one in two (58 per cent) consumers complain that their negative product ratings and reviews are not being published by e-commerce platforms.
    • Positive bias: Only 23 per cent consumers said that their negative reviews or ratings on e-commerce sites were published as it is.
    • Fake and deceptive reviews: Wasteful products are highly publicised with fake reviews and praises.

    What are the standards set out by the govt.?

    The framework for the standard was prepared by the Bureau of Indian Standards (BIS). It is titled IS 19000:2022.  The outlines are-

    • Guiding principle: The guiding principles of the standard are integrity, accuracy, privacy, security, transparency, accessibility and responsiveness.
    • Voluntary compliance: To start with voluntary, the standard could become mandatory after observing compliance to the standards by such platforms.
    • Grievance redressal: Once made mandatory, a consumer may submit grievances to the National Consumer Helpline, Consumer Commissions, or the CCPA, against misleading reviews.
    • Punishment: If made mandatory, the violation of the standard, can invite punishment for unfair trade practice or violation of consumer rights.
    • Review authentication: The standard prescribes specific responsibilities for the review author and the review administrator. For the review author, these include confirming acceptance of terms and conditions, providing contact information.
    • Consumer data protection: For review administrator, these include safeguarding personal information and training of staff.
    • Traceability and genuineness of the review author: The standard also provides for methods for verification of the review author through email address, identification by telephone call or SMS, confirming registration by clicking on a link, using captcha system.

    Significance of the standards

    • The standard is expected to benefit all stakeholders in the e-commerce ecosystem, that is, consumers, e-commerce platforms, sellers, etc.
    • It will help usher in confidence among consumers to purchase goods online and help them take better purchase decisions.

     

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  • Everything you need to know about ‘Friendshoring’

    friendshoring

    In her visit to India last week, US secretary of treasury Janet Yellen reiterated her country’s stance of pushing for “friendshoring” to diversify away from countries that present geopolitical risk.

    What is Friendshoring?

    • Friendshoring is a strategy where a country sources the raw materials, components and even manufactured goods from countries that share its values.
    • The dependence on the countries considered a “threat” to the stability of the supply chains is slowly reduced.
    • It is also called “allyshoring”.
    • Apple’s announcement to shift its iPhone manufacturing facilities from China to India.

    US push for friendshoring

    • In the current case, Yellen said that Russia has long presented itself as a reliable energy partner, but in the Ukraine war, Putin has weaponized the gas “against the people of Europe”.
    • Another country Yellen mentioned in her speech was China.
    • She said it currently controls over 80 per cent of global solar panel production.
    • However, there are reports that in parts of the country, like Xinjiang, the production of panels takes place through forced labour.

    Issues with friendshoring

    • Friendshoring may push the world towards a more isolated place for trade and reverse the gains of globalisation.
    • It is a part of the “deglobalisation” process.
    • While moving supply chains away from East Asia could increase security in the long run, an ill-conceived implementation of this friendshoring strategy could result in price hikes and a stronger China over time.

     

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  • National Investment and Infrastructure Fund (NIIF)

    Finance Minister has urged the National Investment and Infrastructure Fund (NIIF) to expand its operations and explore ways to crowd in private capital for projects under the National Infrastructure Pipeline, PM Gati Shakti and National Infrastructure Corridor.

    What is NIIF?

    • National Investment and Infrastructure Fund (NIIF) is India’s first infrastructure specific investment fund or a sovereign wealth fund that was set up in February 2015.
    • The objective behind creating this fund was to maximize economic impact mainly through infrastructure investment in commercially viable projects, both Greenfield and Brownfield.
    • It was proposed to be established as an Alternative Investment Fund to provide long tenor capital for infrastructure projects with an inflow of ₹20,000 crore from the GoI.
    • It was registered with SEBI as Category II Alternative Investment Fund.

    Types of funds in NIIF

    • NIIF manages three funds: Master Fund, Fund of Funds and Strategic Fund.
    • The funds were set up to make investments in India by raising capital from domestic and international institutional investors.
    1. Master Fund: It is an infrastructure fund with the objective of primarily investing in operating assets in the core infrastructure sectors such as roads, ports, airports, power etc.
    2. Fund of Funds: The Fund of Funds anchor and/or invest in funds managed by fund managers who have good track records in infrastructure and associated sectors in India. Some of the sectors of focus include Green Infrastructure, Mid-Income & Affordable Housing, Infrastructure services and allied sectors.
    3. Strategic Opportunities Fund: It is registered as an Alternative Investment Fund II under SEBI in India. Its objective is to invest largely in equity and equity-linked instruments. It has been established to provide long-term capital to strategic and growth oriented sectors in the country with the aim to build domestic leaders.

    Functions of NIIF

    The functions of NIIF are as follows:

    1. Fund raising through suitable instruments including off-shore credit enhanced bonds, and attracting anchor investors to participate as partners in NIIF;
    2. Servicing of the investors of NIIF.
    3. Considering and approving candidate companies/institutions/ projects (including state entities) for investments and periodic monitoring of investments.
    4. Investing in the corpus created by Asset Management Companies (AMCs) for investing in private equity.
    5. Preparing a shelf of infrastructure projects and providing advisory service

     

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  • BASIC nations oppose ‘Carbon Border Tax’

    carbon

    BASIC countries that includes India has jointly stated that carbon border taxes, that could result in market distortion and aggravate the trust deficit amongst parties, must be avoided.

    EU proposes, BASIC opposes

    • The European Union has proposed a policy — called the Carbon Border Adjustment Mechanism– to tax products such as cement and steel that are extremely carbon intensive, with effect from 2026.
    • BASIC, a group constituting Brazil, India, South Africa and China have opposed this move.
    • These are large economies that are significantly dependent on coal, has for several years voiced common concerns and reiterated their right to use fossil fuel.

    What is Carbon Pricing?

    • Carbon pricing is an approach to reducing carbon emissions that uses market mechanisms to pass the cost of emitting to emitters.
    • Its goal is to discourage the use of fossil fuels, address the causes of the climate crisis and meet national and international agreements.
    • Well-designed carbon pricing can change the behavior of consumers, businesses and investors while encouraging technological innovation and generating revenue that can be used productively.
    • There are a few carbon pricing instruments, such as a carbon tax and cap-and-trade programmes.

    What is Carbon Border Tax?

    • A carbon border tax (CBT) is a tax on carbon emissions attributed to imported goods that have not been carbon-taxed at source.
    • The carbon border tax proposal is part of the European Commission’s European Green Deal that endeavours to make Europe the first climate-neutral continent by 2050.

    Objective:

    • To ‘incentivize’ greener manufacturing around the world and create parity with European manufacturers who are already subjected to substantial carbon levies.

    A move to benefit local EU manufacturers

    The carbon border tax has wide appeal in Europe. It is supported by the new president of the European Commission.

    • A carbon border tax is able to protect a country’s local manufacturers, motivating them to adhere to green regulations.
    • Many EU companies are at a cost disadvantage as they have been paying a carbon border tax and for carbon emissions since 2005 under the EU’s Emissions Trading System.
    • The new carbon border tax can therefore lead to a more level playing field against importers, especially those from nations with more lax environmental standards.

    What could the new proposal mean politically?

    • Notably, China’s continuing reliance on non-renewable energy to power its economy leaves it particularly vulnerable in this matter.
    • For example, given that China produces steel with blast furnaces that release a large amount of carbon, it will have to pay an additional layer of carbon border tax, which will increase its costs and its market price.
    • This will consequently reduce the competitiveness of steel produced in China, compared to steel from other countries that is made in more carbon-efficient mills that do not have to pay this additional tax.

    This suggests that the carbon border tax is also politically preferable to Europe as it slows down the gradually rising economy in China, and would therefore preserve the European countries’ competitiveness.

    How does this impact India?

    • As India’s third largest trading partner, the EU accounted for €62.8 billion ($74.5 billion) worth of trade in goods in 2020, or 11.1% of India’s total global trade.
    • India’s exports to the EU were worth $41.36 billion in 2020-21, as per data from the commerce ministry.
    • The CBT would cover energy-intensive sectors such as cement, steel, aluminium, oil refinery, paper, glass, chemicals as well as the power sector.
    • By increasing the prices of Indian-made goods in the EU, this tax would make Indian goods less attractive for buyers and could shrink demand.
    • Sadly, India’s many ‘self-reliance’ tariffs are also a contributor to this.

    Issues with CBT

    • Impact on trade: The degree of impact on industrial sectors would be largely influenced by two factors: carbon intensity and trade intensity.
    • Altering competitiveness: For companies, it will raise the administrative burden of crossing borders and increase trade frictions, especially for small businesses. That will inevitably reduce choice and raise costs for consumers.
    • Promoting protectionism: The carbon tax may end up being protectionist, and will hit emerging economies like India hard.
    • Unfair practices under WTO: Depending on their design they could fall foul of WTO measures designed to prevent importing countries from discriminating against particular exporting countries.
    • A violation of Paris Accord: CBT compels developing countries to pay the same price as the developed countries to climate change. The EU is essentially bypassing the principle of ‘common but differentiated responsibilities’ that should guide international climate action.

    Way forward

    • Carbon taxing is just one way of holding large emitters accountable for their role in harming the environment.
    • However, fundamental changes can’t be forced by tariffs.
    • If the planet is to have any hope of meeting the Paris Agreement goals, drastic measures that consider both the economic and social wellbeing of nations’ inhabitants must be taken.
    • This should take all nations into confidence than imposing such overnight tariffs.
    • It is no doubt that India must be in the forefront in climate politics. But it must also be cautious about the negotiations in global laws to protect domestic interests.

     

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  • In news: Vostro Accounts

    vostro

    Russian banks have been permitted by the RBI to open special Vostro accounts to pave the way for rupee-based export-import transactions.

    Why such move?

    • Logged out of SWIFT -the messaging service to facilitate and confirm cross-border payments – most Russian banks are looking for alternative ways.
    • India and several other countries too want a way out so that trade can continue.
    • India and Russia are now exploring to directly trade in rupee-ruble.

    And this is where Nostro and Vostro may come into play.

    What is a Vostro Account?

    • A Vostro account is defined as an account that a correspondent bank holds on behalf of another bank.
    • Vostro is a Latin word that means “your”, therefore, a vostro account implies that it is “your account”.
    • An example of such an account would be HSBC vostro account is held by SBI in India.

    Understanding a Vostro Account

    • The banks are acting in a fiduciary relationship and they share a principal-agent relationship.
    • The correspondent foreign bank is a financial intermediary in the transactions that they are involved in.
    • The foreign bank acts as an agent that provides services such as executing wire transfers, performing foreign exchange, enabling deposits, enabling withdrawals, expediting international trade on behalf of the domestic bank.
    • It is most used in settlement of foreign exchanges or foreign trade.
    • No interest will be paid on the vostro account maintained, as per the directives that have been issued by the RBI in India.
    • An overdraft facility can only be availed if it is specifically sanctioned.

    Other related terms: Nostro and Loro Accounts

    • Vostro and Nostro accounts are often confused to be the same.
    • While in essence, it is the same account that is being spoken about, the perspective from which it is being seen matters.
    • In a vostro account, it is the correspondent foreign bank point of view, whereas in a nostro account, it is the point of view of the domestic bank.
    • Vostro accounts are maintained in the domestic currency whereas, nostro accounts in foreign currency.
    • A Loro account is a current account that is maintained by one domestic bank for another domestic bank in the form of a third party account, unlike nostro and vostro which is bilateral correspondence.

    Why is it used?

    • This account serves as an economic way for small domestic banks to access the financial resources and services of a larger foreign bank.
    • Enables one to offer international banking solutions to a customer without opening a bank branch in a foreign nation.
    • It minimizes the time for transfer of funds.
    • Closely monitored nostro accounts can be used for better reconciliation of statements.

     

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