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

  • Government approves 50% incentive of project cost for setting up Semiconductor Units

    The Union Cabinet has approved a uniform incentive of 50% of the project cost for setting up semiconductor, display and compound semiconductor fabrication units.

    Why in news?

    incentive

    • Maharashtra is witnessing a political firestorm.
    • The Vedanta Limited shifted its decision to set up a $20 billion Vedanta-Foxconn semiconductor manufacturing facility in neighbouring Gujarat, despite finalising its location near Pune (Mh).
    • Foxconn is a major chip supplier to Apple. It has suspended its operations in the Chinese tech hub of Shenzhen and is now shifting to India.
    • Bigger companies, such as Intel, TSMC, Samsung, etc., have announced such plans.

    Spats between states over the location of critical industries display the grim picture of competitive bidding in India. This portrays India’s negative image as against ease of doing business.

    About the Incentive Scheme

    • The scheme has been named the “Programme for Development of Semiconductors and Display Manufacturing Ecosystem.”
    • Previously, the three schemes had an incentive range of 30-50%.
    • While incentives for setting up semiconductor fabrication were based on the size of the chip, for display fabrication and compound semiconductor fabs, the incentives were largely 30% of the total cost of the project.
    • This scheme aims to project India’s position as global hub for electronics manufacturing with semiconductors as the foundational building block.

    Why need such an incentive?

    • Huge Investments involved: Semiconductor Fabrication facility requires many expensive devices to function. Complex tools and equipment are required to test quality and move silicon from location to location within the ultra-clean confines of the plant.
    • Economy of scale:   In semiconductor fabrication, a high volume production is required to be maintain so as to meet the increasing demand of the marketplace, at the same time, a strong financial backing as Indian market is very much uncertain about financial fluctuations.
    • Requirement highly skilled labour:   Semiconductor fabrication is a multiple-step sequence of photolithographic and chemical processing steps during which electronic circuits are gradually created on a wafer made of pure semiconducting material. This actually requires high skills.
    • Scarcity of raw materials: From a value-chain perspective, it needs silicon, Germanium & Gallium arsenide and Silicon carbide which are not available in India and needs to be imported.
    • Uncertain Indian market: A semiconductor fabrication facility in India cannot independently rely on Indian customers for their entire sales structure. They have to maintain overseas customer base to balance inflections from Indian market due to market trends, government policies etc.
    • Disposal of hazardous waste: Many toxic materials are used in the fabrication process such as arsenic, antimony, and phosphorus. Hazardous impact on the environment by the industry may act as an impediment to India’s commitment to mitigate climate change.

    Other supportive initiatives in India

    • India Semiconductor Mission (ISM): It was announced with the aim to attract large-scale investments for manufacturing facilities in the midst of a global chip crisis.
    • Make in India: This aims to transform India into a global hub for Electronic System Design and Manufacturing (ESDM).
    • PLI scheme: In December 2021 the Centre sanctioned ₹76,000 crore under the production-linked incentive (PLI) scheme to encourage the manufacturing of various semiconductor goods within India.
    • DLI scheme: It offers financial incentives, design infrastructure support across various stages of development and deployment of semiconductor design for Integrated Circuits (ICs), Chipsets, System on Chips (SoCs), Systems & IP Cores and semiconductor linked design.
    • Digital RISC-V (DIR-V) program: It intends to enable the production of microprocessors in India in the upcoming days achieving industry-grade silicon and design wins by December 2023.
    • India Semiconductor Mission (ISM): The vision is to build a vibrant semiconductor and display design and innovation ecosystem to enable India’s emergence as a global hub for electronics manufacturing and design

    Way forward

    • Policy framework: As foundry setup is highly Capital intensive, it must be supported with a solid long term plan and financial backing. This backing is required from the entrepreneur & the government both.
    • Fiscal sustenance: In text of Indian Government as tax holiday, subsidy, zero duty, financial investment etc. will play an important role in promoting the Fab along with the semiconductor industry in India; this will put further pressure on already large Fiscal Deficit.
    • Support Infrastructure: World class, sustainable infrastructure, as required by a modern Fab be provided, with swift transportation, large quantity of pure water, uninterrupted electricity, communication, pollutant free environment etc.

     

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  • Why Should India choose manufacturing over services?

    ManufacturingContext

    • Manufacturing can create higher productivity jobs.

    What is service sector?

    • The service sector, also known as the tertiary sector, is the third tier in the three-sector economy. Instead of product production, this sector produces services maintenance and repairs, training, or consulting. Examples of service sector jobs include housekeeping, tours, nursing, and teaching.

    What is called manufacturing sector?

    • Manufacturing is the making of goods by hand or by machine that upon completion the business sells to a customer. Items used in manufacture may be raw materials or component parts of a larger product. The manufacturing usually happens on a large-scale production line of machinery and skilled labor.

    ManufacturingShould India focus on manufacturing over services?

    • Services sector failed to create more jobs: So far, in services, we have certainly developed some advantage and we are doing rather well. Services’ share of the economy has gone up to over 50% of the GDP. However, this sector has not been able to create enough jobs in a commensurate manner. The result is that agriculture still continues to sustain nearly half of India’s workforce, which means that 15% of GDP is supporting some 45% of the workforce.
    • Manufacturing can provide productive jobs: We need more productive job opportunities for the workforce to shift away from agriculture. We need to focus attention on the manufacturing sector because of the direct and indirect jobs that it can create.
    • Empirical fact: It is an empirical fact that manufacturing of all productive sectors has the highest backward and forward linkages.
    • Significant potential: So, all together, there is significant potential for the manufacturing sector to create higher productivity jobs for people stuck in agricultural activities. That is the future for India.

    ManufacturingWhat is PLI Scheme?

    • As the name suggests, the scheme provides incentives to companies for enhancing their domestic manufacturing apart from focusing on reducing import bills and improving the cost competitiveness of local goods.
    • PLI scheme offers incentives on incremental sales for products manufactured in India.
    • The scheme for respective sectors has to be implemented by the concerned ministries and departments.

    Criteria laid for the scheme

    • Eligibility criteria for businesses under the PLI scheme vary based on the sector approved under the scheme.
    • For instance, the eligibility for telecom units is subject to the achievement of a minimum threshold of cumulative incremental investment and incremental sales of manufactured goods.
    • The minimum investment threshold for MSME is Rs 10 crore and Rs 100 crores for others.
    • Under food processing, SMEs and others must hold over 50 per cent of the stock of their subsidiaries, if any.
    • On the other hand, for businesses under pharmaceuticals, the project has to be a green-field project while the net worth of the company should not be less than 30 per cent of the total committed investment.

    What are the incentives offered?

    • An incentive of 4-6 per cent was offered last year on mobile and electronic components manufacturers such as resistors, transistors, diodes, etc.
    • Similarly, 10 percent incentives were offered for six years (FY22-27) of the scheme for the food processing industry.
    • For white goods too, the incentive of 4-6 per cent on incremental sales of goods manufactured in India for a period of five years was offered to companies engaged in the manufacturing of air conditioners and LED lights.

    Benefits of PLI

    • The scheme has a direct employment generation potential of over 2,00,000 jobs over 5 years.
    • It would lead to large scale electronics manufacturing in the country and open tremendous employment opportunities. Indirect employment will be about 3 times of direct employment as per industry estimates.
    • Thus, the total employment potential of the scheme is approximately 8,00,000.

    Conclusion

    • In order to integrate India as a pivotal part of this modern economy, there is a strong need to step up our manufacturing capabilities.

    Mains question

    Q.Should India focus on manufacturing over services for job creation? Discuss the role Production Linked Incentive Scheme could play in boosting manufacturing in India.

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  • IIP gives us true health of our economy

    IIPContext

    • India’s statistics ministry generates only one high-frequency gauge of economic activity. And that lone barometer, the index of industrial production (IIP), is completely broken.

    What is IIP?

    • The Index of Industrial Production (IIP) is an index that indicates the performance of various industrial sectors of the Indian economy. It is a composite indicator of the general level of industrial activity in the economy.

    IIPHow is IIP calculated?

    • IIP is calculated as the weighted average of production relatives of all the industrial activities. In the mathematical calculation Laspeyre’s fixed base formula is used.

    What are the Core Industries in India?

    • The main or the key industries constitute the core sectors of an economy.
    • In India, there are eight sectors that are considered the core sectors.
    • They are electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilizers.

    Which has highest weightage in IIP?

    • The eight core sector industries in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.

    IIPWhy is IIP important?

    • IIP is the only measure on the physical volume of production. It is used by government agencies including the Ministry of Finance, the Reserve Bank of India, etc. for policy-making purposes. IIP remains extremely relevant for the calculation of the quarterly and advance GDP estimates.

    Who releases IIP data?

    How useful are monthly IIP figures to draw a conclusion about India’s growth?

    • IIP figures are monthly data and as such it keeps going up and down.
    • In fact, the release calls them “quick estimates” because they tend to get revised after a month or two.

    IIP Index Components

    • Mining, manufacturing, and electricity are the three broad sectors in which IIP constituents fall.
    • The relative weights of these three sectors are 77.6% (manufacturing), 14.4% (mining) and 8% (electricity).
    • Electricity, crude oil, coal, cement, steel, refinery products, natural gas, and fertilizers are the eight core industries that comprise about 40 per cent of the weight of items included in the IIP.

    Basket of products

    • Primary Goods (consisting of mining, electricity, fuels and fertilisers)
    • Capital Goods (e.g. machinery items)
    • Intermediate Goods (e.g. yarns, chemicals, semi-finished steel items, etc)
    • Infrastructure Goods (e.g. paints, cement, cables, bricks and tiles, rail materials, etc)
    • Consumer Durables (e.g. garments, telephones, passenger vehicles, etc)
    • Consumer Non-durables (e.g. food items, medicines, toiletries, etc)

    IIP base year change

    • The base year was changed to 2011-12 from 2004-05 in the year 2017.

    Way ahead

    • IIP remains extremely relevant for the calculation of the quarterly and advance GDP (Gross Domestic Product) estimates.

    Mains question

    Q. What do you understand by IIP? How it helps us to understand economic health?

     

     

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  • Contract Enforcement in India

    Ease of doing business in India remains low, dragged down by the way contracts are enforced in the country. Recent reforms have improved the business climate somewhat, but there is a long way to go.

    What is the Ease of Doing Business index?

    • It is an index designed by the World Bank to rank 190 economies.
    • A higher rank (closer to 1) means the country’s regulatory environment is favourable to business operations.
    • India was ranked 63rd in the overall index in 2020.
    • World Bank has now discontinued the Doing Business index.

    Indicators used

    The ranking is calculated on the basis of indicators such as:

    1. Starting a Business
    2. Dealing with Construction Permits
    3. Getting Electricity
    4. Registering Property
    5. Getting Credit
    6. Protecting Minority Investors, Paying Taxes
    7. Trading across Borders
    8. Enforcing Contracts and
    9. Resolving Insolvency

    How is ‘Enforcing Contracts’ measured?

    • In 2020, in the parameter of ‘Enforcing Contracts’, India was ranked 163rd, against 186th in 2015. The parameter considers time, cost and quality of the judicial process.
    1. Time considers the number of days to resolve a commercial dispute in courts;
    2. Cost measures the expenses of attorney, courts and enforcement as a percentage of claim value; and
    3. Quality considers the use of best practices which can promote efficiency and quality i.e., court proceedings, case management, alternative dispute resolution and court automation.
    • Each of the three indicators have a 33.3% weightage.

    How is India doing on this parameter now?

    • At 163rd position in 2020, the country continues to struggle, with the time taken to resolve a commercial dispute being approximately 1,445 days in the Doing Business Report 2020.
    • However, as of August 2022, law ministry data shows a marked improvement of close to 50% in days taken to resolve a dispute to 744 days in New Delhi and 626 days in Mumbai.

    What are some of the reforms undertaken?

    • The Department of Justice, the nodal point for ‘Enforcing Contracts’ indicator along with the eCommittee of the Supreme Court, has undertaken a series of reforms.
    • Some of the steps include the establishment of dedicated commercial courts with monetary jurisdiction up to ₹3 lakh.
    • There also exists online case filing, e-payment of court fees, electronic case management, special courts for infrastructure project contracts, as well as automatic and random allocation of commercial cases thereby eliminating human intervention.

    What further steps are required?

    • An efficient judiciary instils confidence in investors and signals the commercial viability of transactions.
    • The number of court hearings should be minimized too; often, lawyers have an incentive to stretch out the process.
    • The judicial system should encourage out-of-court settlements through the respective lawyers as practised in advanced countries.
    • It is equally important that the judiciary leaves matters relating to economic governance to governments.

     

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  • One Nation One Fertiliser (ONOF) Scheme

    The Ministry of Chemicals and Fertilisers will implement One Nation One Fertiliser (ONOF) by introducing a Single Brand for Fertilisers and Logo under the fertiliser subsidy scheme named “Pradhanmantri Bhartiya Janurvarak Pariyojna” (PMBJP).

    One Nation One Fertiliser (ONOF)

    • The single brand name for UREA, DAP, MOP and NPK etc. would be BHARAT UREA, BHARAT DAP, BHARAT MOP and BHARAT NPK etc. respectively for all Fertiliser Companies, State Trading Entities (STEs) and Fertiliser Marketing Entities (FMEs).
    • Also a logo indicating Fertiliser subsidy scheme namely Pradhanmantri Bhartiya Janurvarak Pariyojna will be used on said fertiliser bags.
    • Under the scheme, companies are allowed to display their name, brand, logo and other relevant product information only on one-third space of their bags.
    • On the remaining two-thirds space, the “Bharat” brand and Pradhanmantri Bharatiya Jan Urvarak Pariyojana logo will have to be shown.

    What is the government’s argument for introducing this scheme?

    The government’s logic for introducing a single ‘Bharat’ brand for all subsidised fertilisers being marketed by companies is as follows:

    (1) Subsidies normalization

    • The maximum retail price of urea is currently fixed by the government, which compensates companies for the higher cost of manufacturing or imports incurred by them.
    • The MRPs of non-urea fertilisers are, on paper, decontrolled.
    • But companies cannot avail of subsidy if they sell at MRPs higher than that informally indicated by the government.
    • Simply put, there are some 26 fertilisers (inclusive of urea), on which government bears subsidy and also effectively decides the MRPs;

    (2) Harmonizing markets

    • Apart from subsidising and deciding at what price companies can sell, the government also decides where they can sell.
    • This is done through the Fertiliser (Movement) Control Order, 1973.
    • Under this, the department of fertilisers draws an agreed monthly supply plan on all subsidised fertilisers in consultation with manufacturers and importers.
    • This supply plan is issued before the 25th of each month for the following month, with the department also regularly monitoring movement to ensure fertiliser availability as per requirement, including remote areas.

    (3) Farmers welfare

    • The government is spending vast sums of money on fertiliser subsidy (the bill is likely to cross Rs 200,000 crore in 2022-23).
    • By deciding where and at what price companies can sell, it would obviously want to take credit and send that message to farmers.

    What can be the drawbacks of the scheme?

    • It may disincentivise fertiliser companies from undertaking marketing and brand promotion activities.
    • They will now be reduced to contract manufacturers and importers for the government. Any company’s strength ultimately is its brands and farmer trust built over decades.
    • Currently, in case of any bag or batch of fertilisers not meeting the required standards, the blame is put on the company. But now, that may be passed on fully to the government.
    • Politically, the scheme might well boomerang rather than benefit the ruling party.

     

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  • Consumerism should be replaced by minimalism

    Consumerism Context

    • The COVID-19 pandemic brought shifts in consumer behaviour. The world witnessed a shrinkage of demand. But post-pandemic recovery and suppressed consumerism is now leading to ‘revenge shopping’.

    What is consumerism?

    • Consumerism is a social and economic order that encourages the acquisition of goods and services in ever-increasing amounts.

    What is minimalism?

    • Minimalism is owning fewer possessions. It is intentionally living with only the things we really need those items that support our purpose. Removing the distraction of excess possessions to focus more on those things that matter most.

    ConsumerismWhat Is Revenge Shopping?

    • Revenge shopping occurs when a customer who previously could not get access to certain goods or services for a period of time suddenly has access. It can also occur when customers have been deprived of other events or happenings.

    ConsumerismThe symptoms of excessive consumerism

    • You buy more than you planned: if you set out with a plan of what you need to purchase but consistently come back with more than you anticipated, then you’re falling in the consumerist trap.
    • You run out of storage space for your stuff: sometimes it can’t be helped if you live in a tight area or you’re disorganised. But suppose you’re in a reasonable situation and things you bring in don’t have an allocated home. In that case, you’re likely living excessively.
    • You rely too much on return policies: returning an item is useful. Particularly if you need to test a product for the intended purpose, be it sizing for clothes or a tool for a building project. However, suppose you’re depending on returns for purchases. In that instance, you’re not sure you need it, or if you can’t afford it, then you’re probably suffering from too much consumerism.
    • You routinely seek approval for your purchases: getting feedback on purchases can be reassuring, especially if you’re indecisive. Yet, there’s a difference between picking someone’s brain before buying and looking to justify your purchase after the fact. If you’re seeking post-acquisition approval, you probably don’t need the item.
    • You mistakenly buy things you already have: not much to say here. If you’re getting things only to realise you already have it, then you’re probably deep in a consumerist cycle.
    • You buy things on credit: if you’re strategic and disciplined, you can buy things on credit cards to acquire points and benefits. However, if you’re like the majority of us, then you’re vulnerable to buying things you can’t afford.
    • You constantly go over your budget: sometimes, you miss-forecast how much you need to spend each month. But if you set a realistic budget and find that you’re still going over, then you’re probably consuming excessively.
    • You regret your purchases: the most obvious sign that you have a shopping habit is you regret things you bought. Buyer’s remorse is an overwhelming feeling and one we want to avoid.

    ConsumerismNegatives of consumerism

    • Causes more pollution: Consumerism as a system can have devastating effects on the environment.
    • A major contributor to resource depletion: The second main negative of consumerism is resource depletion.  Simply put, resource depletion refers to the idea that human beings are using up the resources on the earth as an ever increasing rate such that we will ‘deplete’ or completely use up some resources.
    • Leads companies to develop low quality products: Modern companies practice a technique called ‘planned obsolescence’. In general, planned obsolescence is best understood as products that are designed to fail. Modern companies do this to encourage consumers to repurchase a product over and over again.
    • Does not necessarily lead to increased happiness beyond a certain point: The main negative aspect of consumerism is that it does not necessarily lead to higher levels of happiness for people.
    • Global inequality: The huge rise in resource consumption in wealthier countries has led to an ever widening gap between the rich and the poor. As the age old saying goes, “the rich get richer and the poor get poorer.”

    What can we do?

    • Extend the lifespan of your things: Repairing your things is not only an effective way to reduce your consumption, but it’s also beneficial to the environment.
    • Reframe shopping as a skill: When you focus on the role the thing you’re buying will play in the overall experience instead of the experience of shopping itself, you’ll be able to shift away from a consumerist mind-set.
    • Do the deathbed test: Not to get too dark, but if you were hypothetically on your deathbed today, and you were reflecting on your life, what would be your fondest memories? The quality of our lives is generally measured by moments of “that was a good time”, not “that thing I had was awesome”.
    • Borrow or rent instead of buy: A simple method for getting your consumerism under control is to rent or borrow items instead of buying them.
    • Practice minimalism: What’s the ultimate alternative to consumerism? Minimalism. A minimalist is someone who naturally rejects consumerism and sees value in having fewer things over more things. Minimalism is a powerful philosophy that impacts how you view material things, your relationships, commitments, and digital inventory.

    Conclusion:

    • The M.K. Gandhi once said: “The Earth provides-enough to satisfy everyone’s needs but not any one’s greed.” We shall find that Gandhian call to curtailment of wants is relevant in the rapidly depleting natural resources, bio-diversity and eco-system and its contemporary relevance

    Mains question

    Q. What do you understand by the term consumerism? Discuss importance of minimalism as there is rise in revenge shopping in post covid19 era.

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  • India’s first Global Bullion Exchange unveiled

    Prime Minister has launched India’s first International Bullion Exchange (IIBX) at the Gujarat International Finance Tec-City (GIFT City) near Gandhinagar.

    What is Bullion?

    • Bullion refers to physical gold and silver of high purity that is often kept in the form of bars, ingots, or coins.
    • It can sometimes be considered legal tender and is often held as reserves by central banks or held by institutional investors.

    When was the IIBX announced?

    • During her 2020 budget speech, Finance Minister announced the setting up of India International Bullion Exchange (IIBX) at International Financial Services Center (IFSC) at GIFT City in Gandhinagar.
    • The International Financial Services Centres Authority (Bullion Exchange) Regulations, 2020, was notified in December 2020 for trading of precious metals, including gold and silver.
    • These regulations also cover bullion exchange, clearing corporation, depository and vaults.

    What is the IIBX?

    • India for the first time had liberalised gold imports through nominated banks and agencies in the 1990s.
    • Now, the eligible qualified jewellers in India have been allowed to directly import gold through IIBX.
    • For this, jewellers will have to become a trading partner or a client of an existing trading member.
    • In addition, the exchange has set up necessary infrastructure to store physical gold and silver.
    • The exchange will sell physical gold and silver and aims to be set up on the lines of the Shanghai Gold Exchange and Borsa Istanbul in order to make India a key regional hub for bullion flows.

    How will it work?

    • The thought process behind setting this up is to enable the trading of commodities on an exchange.
    • Since this is international exchange, trading can take place in US dollars as well.
    • India has positioned itself as one of the biggest trading hubs in Asia.
    • Because of the competitive pricing on IIBX, international players will be happy to use our vaulting services.
    • Moreover, with this being a free trade zone, no duty will be paid.

    What was the practice up until now?

    • Currently, gold in India is imported on a consignment model into different cities by nominated banks and agencies approved by the RBI and then supplied to traders/jewellers.
    • The banks and other agencies get a fee from the gold exporter for handling, storage, etc, and also add a premium to the gold while transacting with domestic buyers.
    • The buyer passes this charge on to the value chain until it reaches the end customer.

    What change did IIBX bring?

    • With the IIBX becoming operational today, qualified domestic buyers can, through a branch in Gift City, purchase the bars and coins.
    • This purchase can be done from an international supplier who is a member of the IIBX.

    What is the advantage of an exchange?

    • Through the dis-intermediation by facilitating transactions through an anonymously traded exchange platform, bullion is made available across special economic zones (SEZs) at International Financial Services Centres Authority (IFSCA)-approved vaults.
    • This means the growth of IIBX is not just limited to GIFT City but across jewellery manufacturing hubs nationwide.
    • The qualified jeweller allowed to import gold through IIBX, or a jeweller who is a client of an IIBX member, can view the available stock and place the order.
    • This shall nudge jewellers towards just-in-time inventory management.
    • It will also result in greater transparency in pricing, and order sequencing, thereby removing any room for unfair preference by supplier, importing or logistics agency.

    Which jewellers have come on board?

    • So far, 64 big jewellers have come onboard and more applications are in the pipelines.
    • Some of the big names include Malabar Gold Pvt Ltd, Titan Company Ltd, Bangalore Refinery Pvt Ltd, RBZ Jewellers Pvt Ltd, Zaveri and Company Pvt Ltd.

    What are the new RBI guidelines for importing gold?

    • Banks may now allow qualified Jewellers to remit advance payments for 11 days for import of gold through IIBX in compliance to the extant Foreign Trade Policy and regulations issued under IFSC Act.
    • According to the RBI, all payments by qualified jewellers for imports of gold through IIBX shall be made through the exchange mechanism as approved by IFSCA.

    Who can enrol on the exchange?

    1. Non-Resident Individual / Proprietorship Firm
    2. Registered Partnership Firm
    3. Private Limited Company
    4. Public Limited Company
    5. Qualified Jewellers
    6. Branches of IBU at GIFT City
    7. Foreign Bullion Suppliers who follow OECD guideline
    • In order to become a qualified jeweller, entities require a minimum net worth of Rs 25 crore.
    • And 90 per cent of the average annual turnover in the last three financial years through deals in goods categorised as precious metals.
    • NRIs and institutes will also be eligible to participate in the exchange after registering with the International Financial Services Centre Association (IFSCA).
    • Jewellers will be able to transact on IIBX only as trading members or as clients of a trading member.
    • If one wants to become a trader, a qualified jeweller will have to establish a branch or a subsidiary in IFSC (international financial services centre) and apply to the IFSCA.

    What products does IIBX offer?

    • IIBX offers a diversified portfolio of products and technology services at a cost which is far more competitive than the Indian exchanges as well as other global exchanges in Hong Kong Singapore, Dubai, London and New York.
    • Gold 1 kg 995 purity and gold 100 gm 999 purity with a T+0 settlement (100% upfront margin) are expected to trade at IIBX initially.
    • All contracts will be listed, traded and settled in US Dollar
    • The exchange will have three vaults – one operated by Sequel Global (ready and approved), the second one to be operated by Brinks India is ready and awaiting final approval and the third is under construction.
    • Once the gold is imported by the authorised entities it will be deposited at one of the vaults which will issue bullion depository receipts.
    • These receipts will then be traded in dollars on the exchange.

    Significance of IIBX

    • The IIBX shall be the “Gateway for Bullion Imports into India”, wherein all the bullion imports for domestic consumption shall be channelized through the exchange.
    • The exchange ecosystem is expected to bring all the market participants to a common transparent platform for bullion trading.
    • It would provide efficient price discovery, assurance in the quality of gold, and enable greater integration with other segments of financial markets.

     

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  • Core Sector output expands by 12.7%

    India’s eight core sectors’ output growth moderated to 12.7% in June, from 18.1% in May, with all sectors except crude oil registering an uptick in production.

    What are the Core Industries in India?

    • The main or the key industries constitute the core sectors of an economy.
    • In India, there are eight sectors that are considered the core sectors.
    • They are electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilizers.

    Index of Eight Core Industries (ICI) vs Index of Industrial Production (IIP)

    [A] Index of Eight Core Industries

    • The monthly Index of Eight Core Industries (ICI) is a production volume index.
    • ICI measures collective and individual performance of production in selected eight core industries viz. Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity.
    • Prior to the 2004-05 series six core industries namely Coal, Cement, Finished Steel, Electricity, Crude petroleum and Refinery products constituted the index basket.
    • Two more industries i.e. Fertilizer and Natural Gas were added to the index basket in 2004-05 series. The ICI series with base 2011-12 will continue to have eight core industries.

    Components covered in these eight industries for the purpose of compilation of index are as follows:

    • Coal – Coal Production excluding Coking coal.
    • Crude Oil – Total Crude Oil Production.
    • Natural Gas – Total Natural Gas Production.
    • Refinery Products – Total Refinery Production (in terms of Crude Throughput).
    • Fertilizer – Urea, Ammonium Sulphate (A/S), Calcium Ammonium Nitrate (CAN), Ammonium chloride (A/C), Diammonium Phosphate (DAP), Complex Grade Fertilizer and Single superphosphate (SSP).
    • Steel – Production of Alloy and Non-Alloy Steel only.
    • Cement – Production of Large Plants and Mini Plants.
    • Electricity – Actual Electricity Generation of Thermal, Nuclear, Hydro, imports from Bhutan.

    [B] Index of Industrial Production

    • The Index of Industrial Production (IIP) is an index for India which details out the growth of various sectors in an economy such as mineral mining, electricity and manufacturing.
    • The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period.

    Difference between the two

    • IIP is compiled and published monthly by the National Statistics Office (NSO), Ministry of Statistics and Programme Implementation six weeks after the reference month ends.
    • However, ICI is compiled and released by Office of the Economic Adviser (OEA), Department of Industrial Policy & Promotion (DIPP), and Ministry of Commerce & Industry.
    • The Eight Core Industries comprise nearly 40.27% of the weight of items included in the Index of Industrial Production (IIP).
    • These are Electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilisers.

    Importance of Core Industries

    • The core sectors have a major impact on the Indian economy and significantly affect most other industries as well.
    • Their measures help account for the physical volume of production in India.
    • Their analysis offers a clearer and more realistic assessment of what’s happening in the economy
    • Their progress is used by government agencies for policy-making purposes.
    • They remain extremely relevant for the calculation of the quarterly and advanced Gross Domestic Product (GDP) estimates.
    • The core sector is also known as Infrastructure output as they represent the basic industries that form the base of the economy.

    Do you know about the Strategic Sectors?

    The government has identified four strategic sectors where the presence of state-run companies will be reduced to a minimum.

    1. Atomic energy, space and defence
    2. Transport and telecommunications
    3. Power, petroleum, coal and other minerals and
    4. Banking, insurance and financial services

     

    Try this PYQ:

    Q.In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight?

    (a) Coal production

    (b) Electricity generation

    (c) Fertilizer production

    (d) Steel production

     

    [wpdiscuz-feedback id=”25p2lmotyo” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

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  • India’s Tenfold Path to manage Exchange Rate Volatility

    The RBI is prepared to sell a sixth of its foreign exchange reserves to defend the rupee against a rapid depreciation after it plumbed record lows in recent weeks.

    Must read:

    [Burning Issue] Global Trade in Rupees

    Is there a forex crisis underway?

    • And the way in which India has tackled foreign exchange crises over the years has been quite profound.
    • A forex crisis can be loosely defined as one where the rupee starts depreciating rapidly or when forex reserves slide precipitously.
    • Ever since India’s reforms of 1991-92, the external sector has been liberalized, with even full capital account convertibility being considered at one point.

    In the rupee’s context, let’s look at options that have been used in the last three decades or so:

    (1) Selling dollars

    • The first course of action has been selling dollars in the spot forex market.
    • This is fairly straightforward, but has limits as all crises are associated with declining reserves.
    • While this money is meant for a rainy day, they may just be less than adequate.
    • The idea of RBI selling dollars works well in the currency market, which is kept guessing how much the central bank is willing to sell at any point of time.

    (2) NRI deposits

    • The second tool used is aimed at garnering non-resident Indian (NRI) deposits.
    • It was done in 1998 and 2000 through Resurgent India bonds and India Millennium Deposits, when banks reached out asking NRIs to put in money with attractive interest rates.
    • The forex risk was borne by Indian banks.
    • This is always a useful way for the country to mobilize a good sum of forex, though the challenge is when the debt has to be redeemed.
    • At the time of deposits, the rates tend to be attractive, but once the crisis ends, the same rate cannot be offered on deposit renewals.
    • Therefore, the idea has limitations.

    (3) Let oil importers buy dollars themselves

    • The third option exercised often involves getting oil importing companies to buy dollars directly through a facility extended by a public sector bank.
    • Its advantage is that these deals are not in the open and so the market does not witness a large demand for dollars on this account.
    • It is more of a sentiment cooling exercise.

    (4) Let exporters trade in dollars

    • Another tool involves a directive issued for all exporters to mandatorily bring in their dollars on receipt that are needed for future imports.
    • This acts against an artificial dollar supply reduction due to exporter hold-backs for profit.

    (5) Liberalized Exchange Rate

    • The other weapon, once used earlier, is to curb the amount of dollars one can take under the Liberalized Exchange Rate Management System.
    • This can be for current account purposes like travel, education, healthcare, etc.
    • The amounts are not large, but it sends out a strong signal.

    (6) Forward-trade marketing

    • Another route used by RBI is to deal in the forward-trade market.
    • Its advantage is that a strong signal is sent while controlling volatility, as RBI conducts transactions where only the net amount gets transacted finally.
    • It has the same power as spot transactions, but without any significant withdrawal of forex from the system.

    (7) Currency swaps

    • The other tool in India’s armoury is the concept of swaps.
    • This became popular post 2013, when banks collected foreign currency non-resident deposits with a simultaneous swap with RBI, which in effect took on the foreign exchange risk.
    • Hence, it was different from earlier bond and deposit schemes.

    Most preferred options by the RBI

    • Above discussed instruments have been largely direct in nature, with the underlying factors behind demand-supply being managed by the central bank.
    • Of late, RBI has gone in for more policy-oriented approaches and the last three measures announced are in this realm.

    (8) Allowing banks to work in the NDF market

    • First was allowing banks to work in the non-deliverable forwards (NDF) market.
    • This is a largely overseas speculative market that has a high potential to influence domestic sentiment on our currency.
    • Here, forward transactions take place without real inflows or outflows, with only price differences settled in dollars.
    • This was a major pain point in the past, as banks did not have access to this segment.
    • By permitting Indian banks to operate here, the rates in this market and in domestic markets have gotten equalized.

    (9) Capital account for NRI deposits

    • More recently, RBI opened up the capital account on NRI deposits (interest rates than can be offered), external commercial borrowings (amounts that can be raised) and foreign portfolio investments (allowed in lower tenure securities), which has the potential to draw in forex over time.
    • Interest in these expanded contours may be limited, but the idea is compelling.

    (10) Settlement in Rupees

    • RBI’s permission for foreign trade deals to be settled in rupees is quite novel; as India is a net importer, gains can be made if we pay in rupees for imports.
    • The conditions placed on the use of surpluses could be a dampener for potential transactions.
    • But the idea is innovative and could also be a step towards taking the rupee international in such a delicate situation.
    • Clearly, RBI has constantly been exploring ways to address our forex troubles and even newer measures shouldn’t surprise us.

     

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  • Poverty reduction lessons from China

    Context

    The United Nations latest report, “Population Prospects” forecasts that India will surpass China’s population by 2023, reaching 1.5 billion by 2030 and 1.66 billion by 2050.

    Poverty eradication: Lessons from China

    • China’s story since 1978 is unique – the country has achieved the fastest decline in poverty.
    • Its experiences hold some important lessons for India, especially because in 1978, when China embarked on its economic reforms, its per capita income at $156.4 was way below that of India at $205.7.
    • Today, China is more than six times ahead of India in terms of per capita income – China’s per capita income in 2021 was $12,556, while that of India was $1,933 in 2020.
    • China started its economic reforms in 1978 with a primary focus on agriculture.
    • Contribution of agriculture: It broke away from the commune system and liberated agri-markets from myriad controls.
    • Increase in agri-GDP: As a result, during 1978-84, China’s agri-GDP grew by 7.1 per cent per annum and farmers’ real incomes grew by 14 per cent per annum with the liberalisation of agri-prices.
    • Creation of demand: Enhanced incomes of rural people created a huge demand for industrial products, and also gave political legitimacy for pushing further the reform agenda.
    • The aim of China’s manufacturing through Town and Village Enterprises (TVEs) was basically to meet the surging demand from the hinterlands.
    • Population factor: China introduced the one-child per family policy in September 1980, which lasted till early 2016.
    • It is this strict control on population growth, coupled with booming growth in overall GDP over these years, that led to a rapid increase in per capita incomes.
    • Chinese population growth today is just 0.1 per cent per annum compared to India’s 1.1 per cent per annum.

    Growth story of Indian agriculture

    • Over a 40-year period, 1978-2018, China’s agriculture has grown at 4.5 per cent per annum while India’s agri-GDP growth ever since reforms began in 1991 has hovered at around 3 per cent per annum.
    • Market and price liberalisation in agriculture still remains a major issue, and at the drop of any hint of food price rise, the government clamps down exports, imposes stock limits on traders, suspends futures markets, and pushes other measures that strangle markets.
    • Implicit taxation of farmers: The net result of all this is reflected in the “implicit taxation” of farmers to favour the vocal lobby of consumers, especially the urban middle class.

    Way forward

    •  Population control: The only way is through effective education, especially that of the girl child, open discussion and dialogue about family planning methods and conversations about the benefits of small family size in society.
    • Effective education: As per the National Family Health Survey-5 (2019-21), of all the girls and women above the age of 6 years, only 16.6 per cent were educated for 12 years or more.
    • Based on unit-level data of NFHS5 (2019-21), it is found that women’s education is the most critical determinant of the status of malnutrition amongst children below the age of five.
    • Unless a focused and aggressive campaign is launched to educate the girl child and provide her with more than 12 years of good quality education, India’s performance in terms of the prosperity of its masses, and the human development index may not improve significantly for many more years to come
    • If  government can take up this cause in sync with state governments, this will significantly boost the labour participation rate of women, which is currently at a meagre 25 per cent, and lead to “double engine” growth.
    • Nutrition interventions: The NFHS-5 data shows that more than 35 per cent of our children below the age of five are stunted, which means their earning capacity will remain hampered throughout life. They will remain stuck in a low-level income trap.

    Conclusion

    From a policy perspective, if there is any subsidy that deserves priority, it should be for the education of the girl child. This policy focus can surely bring a rich harvest, politically and economically, for many years to come.

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