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

  • Increase in Current Account Deficit (CAD)

    The Finance Ministry has asserted that the current account deficit (CAD) could, however, deteriorate this year mainly due to rising trade deficits.

    What is Current Account Deficit (CAD)?

    • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
    • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
    • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

    Components of Current Account

    Current Account Deficit (CAD) = Trade Deficit + Net Income + Net Transfers

    (1) Trade Deficit

    • Trade Deficit = Imports – Exports
    • A Country is said to have a trade deficit when it imports more goods and services than it exports.
    • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
    • A trade deficit represents an outflow of domestic currency to foreign markets.

    (2) Net Income

    • Net Income = Income Earned by MNCs from their investments in India.
    • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
    • This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.
    • Net income is measured by the following things:
    1. Payments made to foreigners in the form of dividends of domestic stocks.
    2. Interest payments on bonds.
    3. Wages paid to foreigners working in the country.

    (3) Net Transfers

    • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.
    • It Includes Remittances, Gifts, Donation etc

    How Current Account Transaction does takes place?

    • While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.
    • Current account transactions are transactions that require foreign currency.
    • Following transactions with from which component these transactions belong to :
    1. Component 1 : Payments connection with Foreign trade – Import & Export
    2. Component 2 : Interest on loans to other countries and Net income from investments in other countries
    3. Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

    What has been the recent trend?

    • In Q4 FY 2021-22, CAD improved to 1.5% of GDP or $13.4 billion from 2.6% of GDP in Q3 FY 2021-22 ($22.2 billion).
    • The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22.
    • However, based on robust performance by computer and business services, net service receipts rose both sequentially and on a year-on-year basis.
    • Remittances by Indians abroad also rose.

    What are the reasons for the current account deficit?

    • Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.
    • A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.
    • However, with global demand picking up, merchandise exports have also been rising.

    How will a large CAD affect the economy?

    • A large CAD will result in demand for foreign currency rising, thus leading to depreciation of the home currency.
    • Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments (FDI).
    • However, worsening CAD will put pressure on inflow under the capital account.
    • Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

     

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  • Govt. extends RoSCTL Scheme for Garment Exports

    The RoSCTL scheme will continue for export of garments/apparels, and made-ups till March 31, 2024, according to a press release from the Union Ministry of Textiles.

    What is RoSCTL Scheme?

    • RoSCTL stands for Rebate of State and Central Taxes and Levies (RoSCTL).
    • It is an export incentive in the form of transferable and sellable duty credit scrips (certificate) offered on the basis of the value of the export.
    • It replaces the Rebate of State Levies (RoSL) scheme, a monetary incentive scheme under which Customs would deposit the rebate directly into the exporter’s bank account.
    • This scheme was seen as India’s reaction to the increasing international pressure on export incentives provided by the Indian government.

    Why was this scheme introduced?

    • The US, in particular, has been very vocal, urging the discontinuation of export incentive schemes like the Merchandise Exports from India Scheme (MEIS).
    • It held that they flouted the WTO Agreement on Subsidies and Countervailing Measures.

    Why was this scheme extended to textile sector?

    • With a view to boost exports and job creation in the textile sector, the government has approved the continuation of the scheme.
    • The scheme aims to help them cut high logistics and other costs and enable them to compete globally.

     

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  • India’s imports from China rose to a record in first half of 2022

    India’s imports from China reached a record $57.51 billion in the first half of the year, according to China’s trade figures.

    India-China Bilateral Trade

    • China is India’s largest trading partner.
    • Major commodities imported from China into India were: electronic equipment; machines, engines, pumps; organic chemicals; fertilizers; iron and steel; plastics; iron or steel products; gems, precious metals, coins; ships, boats; medical, and technical equipment.
    • Major commodities exported from India to China were: cotton; gems, precious metals, coins; copper; ores, slag, ash; organic chemicals; salt, sulfur, stone, cement; machines, engines, and pumps.

    Recent measures to curb imports from China

    • Blame it on the pandemic and the border dispute, but the result is the same: some Indian businesses are boycotting China.
    • The government is now asking Indian e-commerce companies like Flipkart and Amazon India to label country of origin for all products sold on its websites.
    • The govt banned many Chinese mobile applications, including top social media platforms such as TikTok, Helo and WeChat and games such as PUBG.

    Can we completely boycott Chinese products?

    • Trade deficits are not necessarily bad: Both Indian consumers and Chinese producers are gainers through trading.
    • Will hurt the Indian poor the most: This is because the poor are more price-sensitive.
    • 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.
    • 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 per cent.
    • 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.
    • India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China.

    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.
    • The government’s “Atmanirbhar” focus is expected to help ministries handhold industries where self-reliance needs to be built.
    • 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.

     

    We would love to see you attempting these questions. Post your answer snaps in the comment box.

     

    Q. India’s quest for self-reliance is still a distant dream. Critically comment in light of the popular sentiment against the Chinese imports in India.

     

    Q.“Curbing Chinese imports to India will do more harm than any good”. Analyse.

     

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  • RBI sets up system to settle International Trade in Rupees

    RBI has decided to put in place an additional arrangement of international trade for invoicing, payment, and settlement of exports / imports in INR.

    • Banks acting as authorised 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.
    • 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.

    Nostro and Vostro Accounts

    • Nostro and vostro are terms used to describe the same bank account; the terms are used when one bank has another bank’s money on deposit.
    • They are used to differentiate between the two sets of accounting records kept by each bank.
    • Nostro comes from the Latin word for “ours,” as in “our money that is on deposit at your bank.”
    • Vostro means “yours,” as in “your money that is on deposit at our bank.”

    Why such move?

    • The rupee is at a historic low against the dollar.
    • The mechanism is meant to facilitate trade with countries under sanction.
    • 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.
    • As a result of the trade facilitation mechanism, we see easing of payment issues with Russia.
    • The move would also reduce the risk of forex fluctuation specially looking at the Euro-rupee parity.
    • We see this as a first step towards 100% convertibility of rupee.
    • It will also help stabilize rupee.

    What does the change mean for exports?

    • Several countries including Sri Lanka and some in Africa and Latin America are facing forex shortage.
    • As such, the new mechanism will help India promote its exports.
    • It will also help buy discounted crude oil from Russia, which now accounts for 10% of all imported crude.

    Will the move help narrow trade deficit?

    • The gap between India’s exports and imports widened to record highs.
    • This puts pressure on the current account deficit, which some economists estimate would nearly double to more than 3% of GDP in FY23.
    • RBI’s decision may not benefit the external account immediately, but over the medium term, demand for dollars may come down.
    • This is partly because opening of new vostro accounts between banks may take some time.

    Back2Basics: Currency Convertibility

    • Convertibility is the ease with which a country’s currency can be converted into gold or another currency through global exchanges.
    • It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country.
    • Currencies that aren’t fully convertible, on the other hand, are generally difficult to convert into other currencies.
    • Having a convertible currency allows a government to pay for goods and services in a currency that may not be the buyer’s own.

    Convertibility of Rupee

    • In order to face the serious current account deficit in the balance of payments, the Government of India introduced the partial convertibility of rupee from March 1, 1992.
    • This was an inevitable move for the expeditious integration of Indian economy with that of the world.
    • Under this system, 60 per cent of the exchange earnings were convertible in rupees at market-determined exchange rate and the remaining 40 per cent were at the officially determined exchange rate.
    • Current account convertibility relates to the removal of restrictions on payments relating to the international exchange of goals, services and factor incomes.
    • Capital account convertibility refers to a similar liberalization of a country’s capital transactions such as loans and investment, both short term and long term.

     

    A bit difficult, but pls take an effort to try this PYQ from CSP 2020:

    If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India?

    1. Not depending on short-term foreign borrowings
    2. Opening up to more foreign banks
    3. Maintaining full capital account convertibility

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 1 and 2 only

    (c) 2 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”3pp3us2fwp” question=”Please leave a feedback on this” opened=”1″]Post your answers here. Detailed explanation will be provided.[/wpdiscuz-feedback]

     

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  • Draft Development of Enterprise and Service Hubs (DESH) Bill

    The Centre plans to table the Development of Enterprise and Service Hubs (DESH) Bill in the monsoon session of the Parliament, which will overhaul the special economic zones (SEZ) legislation.

    What are SEZs?

    • A Special Economic Zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
    • SEZs are located within a country’s national borders, and their aims include increasing trade balance, employment, increased investment, job creation, and effective administration.
    • Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

    SEZs in India

    • The SEZ policy in India first came into inception on April 1, 2000.
    • The prime objective was to enhance foreign investment and provide an internationally competitive and hassle-free environment for exports.
    • The idea was to promote exports from the country and realize the need for a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally.
    • Subsequently, the SEZ Act 2005, was enacted to provide the umbrella legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.
    • SEZ units used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the ploughed back export profit for another five years

    Why replace the existing SEZ Act?

    • The World Trade Organization’s dispute settlement panel has ruled that India’s export-related schemes, including the SEZ Scheme, were inconsistent with WTO rules.
    • India has been accused of giving tax benefits to exports through SEZs.
    • Countries aren’t allowed to directly subsidize exports as it can distort market prices.
    • SEZs also started losing their allure after the introduction of minimum alternate tax and a sunset clause to remove tax sops.

    How is the DESH legislation different?

    • The DESH legislation goes beyond promoting exports.
    • It has a much wider objective of boosting domestic manufacturing and job creation through ‘development hubs’.
    • These hubs will no longer be required to be net foreign exchange positive cumulatively in five years (i.e, export more than they import) as mandated in the SEZ regime.
    • They will be allowed to sell in the domestic area more easily. The hubs will, therefore, be WTO-compliant.
    • DESH legislation also provides for an online single-window portal for the grant of time-bound approvals for establishing and operating the hubs.

    Will there be any tax benefits at these hubs?

    • It’s not clear yet.
    • However, the draft Bill does state that states and the Centre will be allowed to give further incentives in the form of tax rebates, incentives, exemptions, and duty drawbacks.
    • Subsidy schemes may be offered for goods and services at these hubs.
    • States and the Centre may take fresh measures to speed up clearances and simplify compliance.

    Will it be easier to sell in the domestic market?

    • Companies can sell in the domestic market with duties only to be paid on the imported inputs and raw materials instead of the final product.
    • In the current SEZ regime, duty is paid on the final product when a product is sold in the domestic market.
    • Besides, there is no mandatory payment requirement in forex, unlike in the case of SEZs.
    • However, the government may impose an equalization levy on goods or services supplied to the domestic market to bring taxes at par with those provided by units outside

    What role will states play in DESH?

    • DESH is expected to play a larger role, definitely.
    • In the SEZ regime, most decisions were made by the commerce department at the Centre.
    • Now, states will be able to participate and even directly send recommendations for development hubs to a central board for approval.
    • Besides, state boards would be set up to oversee the functioning of the hubs.
    • They would have the powers to approve imports or procurement of goods, and monitor the utilization of goods or services, warehousing, and trading in the development hub.

    Way forward

    • If indeed India needs the special hubs, the govt must address the critical gaps in existing SEZ law through the DESH bill and it must be thought through before bringing it to the Parliament.
    • Effective implementation of the law could act as a lever to India’s growth.

     

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  • What are Critical Minerals?

    India and Australia have decided to strengthen their partnership in the field of projects and supply chains for critical minerals.

    What is the news?

    • Australia has confirmed that it would commit A$5.8 million to the three-year India-Australia Critical Minerals Investment Partnership”.

    What are Critical Minerals?

    • Critical minerals are elements that are the building blocks of essential modern-day technologies, and are at risk of supply chain disruptions.
    • These minerals are now used everywhere from making mobile phones, computers to batteries, electric vehicles and green technologies like solar panels and wind turbines.
    • Based on their individual needs and strategic considerations, different countries create their own lists.
    • However, such lists mostly include graphite, lithium, cobalt, rare earths and silicon which is a key mineral for making computer chips, solar panels and batteries.
    • Aerospace, communications and defence industries also rely on several such minerals as they are used in manufacturing fighter jets, drones, radio sets and other critical equipment.

    Why is this resource critical?

    • As countries around the world scale up their transition towards clean energy and digital economy, these critical resources are key to the ecosystem that fuels this change.
    • Any supply shock can severely imperil the economy and strategic autonomy of a country over-dependent on others to procure critical minerals.
    • But these supply risks exist due to rare availability, growing demand and complex processing value chain.
    • Many times the complex supply chain can be disrupted by hostile regimes, or due to politically unstable regions.
    • They are critical as the world is fast shifting from a fossil fuel-intensive to a mineral-intensive energy system.

    What is China ‘threat’?

    • China is the world’s largest producer of 16 critical minerals.
    • China alone is responsible for some 70% and 60% of global production of cobalt and rare earth elements, respectively, in 2019.
    • The level of concentration is even higher for processing operations, where China has a strong presence across the board.
    • China’s share of refining is around 35% for nickel, 50-70% for lithium and cobalt, and nearly 90% for rare earth elements.
    • It also controls cobalt mines in the Democratic Republic of Congo, from where 70% of this mineral is sourced.
    • In 2010, China suspended rare earth exports to Japan for two months over a territorial dispute.

    What are countries around the world doing about it?

    • US has shifted its focus on expanding domestic mining, production, processing, and recycling of critical minerals and materials.
    • India has set up KABIL or the Khanij Bidesh India Limited to ensure mineral security of the nation.
    • Australia’s Critical Minerals Facilitation Office (CMFO) and KABIL had recently signed an MoU aimed at ensuring reliable supply of critical minerals to India.
    • The UK has unveiled its new Critical Minerals Intelligence Centre to study the future demand for and supply of these minerals.

     

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  • Recruitment of 10 lakh people in “mission mode

    Context

    The government recently announced that 10 lakh government jobs will be provided over the next 18 months on a “mission mode”.

    Background

    • The government recently announced it would recruit 10 lakh people in “mission mode” over the next one-and-a-half years.
    • The announcement came at a time when the unemployment rate for youth (aged 15-29 years) in urban areas has been hovering at over 20 per cent for the last several quarters.
    • According to the Quarterly Bulletin of Periodic Labour Force Survey (PLFS), the youth unemployment rate, according to current weekly status, stood at 20.8 per cent in urban areas during October-December 2021.
    • The annual PLFS report too shows that the overall youth unemployment rate, according to usual status (ps+ss), was at 12.9 per cent — 18.5 per cent in urban areas and 10.7 per cent in rural areas — during July-June 2020-21.

    Three takeaways from the announcement

    • One, the creation of employment is indeed a problem and can no longer be hidden from the public discourse.
    • Two, the private sector, especially modern sectors such as the service and manufacturing sectors, which are dominated by multinational companies, have not created many jobs.
    • Even if the Information Technology sector or the modern gig economy have created jobs, these are either very high-skilled jobs or low-skilled ones.
    • Three, the government in the Nehruvian scheme of development occupied an important place in the labour market.
    • The government is now forced to step in as persistently rising inflation, unemployment and underemployment threaten to politically affect it.

    Employment data and issues with it

    • Government is at present relying on the Employees’ Provident Fund Organisation/National Pension System/Employees’ State Insurance Scheme registrations and exits as indicators of the formal labour market.
    • This could be misleading as companies may be increasing registrations to cross the threshold to become eligible to fall under any of these.
    • Formalisation: Hence, this might be more a case of formalisation rather than employment generation.
    • Second, media reports show that more than 85% of those aspiring for those 10 lakh jobs could be consumed by existing vacancies in Central government departments (8,72,243).
    • The decline in PSU jobs: Third, 241 central public sector enterprises (CPSEs) have been shedding jobs in recent years.
    • The decline in quality of jobs: Even though the labour force and workforce participation rates have increased marginally, there is a decline in the quality of jobs, viz. there is a rise in the unpaid segment of the self-employed and a rise in the share of the agricultural sector in total employment over the last three Periodic Labour Force Surveys (43% to 47%).

    Role of the private sector

    • The private sector creates jobs in response to market forces and while taking into consideration radically altering technological developments.
    • We cannot avoid placing the government at the centre of employment creation beyond a certain point.
    • Projects in the modern private sector consume a lot of capital to generate very few jobs.
    • For instance, recently, there was a report that the Adani Group has invested ₹70,000 crore (or ₹700 million) in Uttar Pradesh to create merely 30,000 jobs.
    • Foreign Direct Investment, which at any rate is highly capital-intensive, goes mostly into the non-manufacturing sectors.

    Way forward

    • The government’s role in employment generation has entered into popular discourse and discussions on policy formation.
    • The government should play a significant role soon.
    • Government as principal employment generator: The government should re-establish its role as the principal employment generator through jobs in its ministries and CPSEs and through assured employment generation programmes like MGNREGA.

    Conclusion

    Employment is not merely about numbers and growth figures.  We need to concentrate on enabling the creation of decent work and a sustainable labour market to which India is committed as a member of the United Nations and the International Labour Organization.

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  • International North–South Transport Corridor (INSTC)

    Iran started the first transfer of Russian goods to India via a new trade corridor which transits the West Asian nation, people on the Iranian side familiar with the developments told news outlets.

    The cargo will travel through the International North-South Transport Corridor (INSTC).

    What is the news?

    • The cargo ship departed St. Petersburg for the Caspian Sea port city of Astrakhan.
    • It will reach the northern Iranian port of Anzali and then will be transferred by road to the southern port of Bandar Abbas on the Persian Gulf.
    • From Bandar Abbas it will reach via ship to India at Jawaharlal Nehru Port Trust (JNPT).

    International North–South Transport Corridor (INSTC)

    • The INSTC is a 7,200 km-long multimodal transportation network encompassing sea, road, and rail routes to offer the shortest route of connectivity.
    • It was established on 12th September 2000 in St. Petersburg, by Iran, Russia and India for the purpose of promoting transportation cooperation among the Member States.
    • It links the Indian Ocean to the Caspian Sea via the Persian Gulf onwards into Russia and Northern Europe.
    • It will move freight between India, Iran, Afghanistan, Armenia, Azerbaijan, Russia, Central Asia and Europe.

    Significance of INSTC

    • Trade facilitation: INSTC is aimed at reducing the carriage cost between India and Russia by about 30 per cent and bringing down the transit time by more than half.
    • New corridor in making: It has the potential to transform the economies of countries along the corridor into specialized manufacturing, logistics, and transit hubs by facilitating access to newer markets.
    • Multimodal transit: The recent Suez Canal blockade, which cost the global economy hefty damage amounting to US$9 billion, has amplified the optimistic outlook towards the INSTC as a cheaper and faster alternative multimodal transit corridor.

    Benefits offered to India

    • Export promotion: The INSTC connects India with Central Asia, and Russia, and has the potential to expand up to the Baltic, Nordic, and Arctic regions, increasing the scope of trade multifold.
    • Ease of trade: For India, it provides a shorter trade route with Iran, Russia, and beyond to Europe, creating scope for increased economic engagement.
    • Alternative Route to Central Asia: It opens up a permanent alternative route for India to trade with Afghanistan and Central Asia, given the hurdles in the direct route through Pakistan.

     

     

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  • The way forward on 5G

    Context

    The near-death of competition signalled by the incipient exit of Vi late last year pushed the Department of Telecommunications (DoT) to announce steps to prevent the premature exit of a sagging operator.

    About 5G

    • 5G is the 5th generation mobile network.
    • It is a new global wireless standard after 1G, 2G, 3G, and 4G networks.
    • 5G can be significantly faster than 4G, delivering up to 20 Gigabits-per-second (Gbps) peak data rates and 100+ Megabits-per-second (Mbps) average data rates.
    • 5G enables a new kind of network that is designed to connect virtually everyone and everything together including machines, objects, and devices.
    • 5G wireless technology is meant to deliver higher multi-Gbps peak data speeds, ultra low latency, more reliability, massive network capacity, increased availability, and a more uniform user experience to more users.
    • Higher performance and improved efficiency empower new user experiences and connects new industries.
    • With high speeds, superior reliability and negligible latency, 5G will expand the mobile ecosystem into new realms.
    • 5G will impact every industry, making safer transportation, remote healthcare, precision agriculture, digitized logistics — and more — a reality.

    India’s telecom sector: From monopoly to hyper-competition to duopoly

    • India’s telecom market has seen monopoly as well as hyper-competition.
    • Twenty-five years ago, the government alone could provide services.
    • Technology and deregulation: In the following years, the combined forces of technology and deregulation helped break the shackles of public sector dominance despite the latter’s stiff resistance
    • In the following years, there were nearly a dozen competing operators. Most service areas now have four players.
    • However, the possible exit of the financially-stressed Vodafone Idea would leave only two dominant players-Airtel and Jio in the telecom sector.
    • A looming duopoly, or the exit of a global telecommunications major, are both worrying.
    • They deserve a careful and creative response.

    Government package for telecom sector to prevent duopoly

    • The near-death of competition signalled by the incipient exit of Vi late last year pushed the Department of Telecommunications (DoT) to announce steps to prevent the premature exit of a sagging operator.
    • As a part of its support package for the telecom sector, in October 2021, it dispensed with the requirement of performance bank guarantees required earlier as security.
    • It increased the tenure of spectrum holding from 20 to 30 years.
    • It allowed for the surrender of the unutilised or underutilised spectrum after 10 years.
    • Most importantly removed the levy of spectrum usage charges. 

    Why competitive telecom market is important?

    • Key to achieving digital ambitions: A competitive telecom sector is fundamental to realising India’s digital ambitions.
    • Innovation: Monopolies have no incentive to innovate.
    • Investment: The competition will guarantee that operators find it attractive to invest in network infrastructure upgradation and offer consumers a wide range of innovative service options.
    • Source of revenue: A competitive telecom sector would be an indirect source of tax revenue as well.
    • How to make market competitive? Competition cannot be willed into the sector.
    • It needs careful nurturing, assiduous fostering and regulatory neutrality. 

    Way forward on 5G

    • Structural changes: While the package may have prevented the exit of Vi from the market, to embed competition within the sector, structural changes are necessary.
    • The imminent 5G networks demand massive investment and sophistication of operations.
    • 1] Level playing field: This will not be achieved unless the playing field is level across the relevant operators and honest incentives are provided to operators to embrace new technology.
    •  2] Change the spectrum allocation method: There is no doubt that spectrum auctions have served India well in the past due to the acrimonious political economy associated with administrative spectrum assignment, including First Come First Serve (FCFS) method.
    • The auction regime worked well when demand exceeded supply, but if there is an adequate quantity of spectrum for everyone, that constraint would not exist.
    • Administrative assignments can thus be considered once again.
    • 3] Administrative assignments:  An administrative assignment will include the possibility that all spectrum can be assigned at reasonable prices and in the process, a grand bargain can be struck with telecom operators.
    • 4] Assigning 5G spectrum for private enterprise business: TRAI and the Digital Communications Commission (DCC) are considering whether 5G spectrum should be assigned to companies like TCS, Amazon and Google, among others, for their private enterprise business.
    • 5G spectrum assignment for enterprises would adversely affect the business model of telcos.
    • But there will be enterprises that telcos could serve that are not large enough to purchase 5G spectrum.
    • A grand bargain that allows enterprises to buy 5G spectrum while assigning spectrum to the existing telcos through the administrative route will also serve the revenue needs of the government.
    • 5] Privatise public sector operator: This is an opportunity to also signal to the public sector operator that 5G business is outside the range of its capability set.
    • Hence like Air India it needs to be privatised in the fullness of time.
    • These are difficult decisions and will need much more political will than in 1994.

    Consider the question “Why a competitive telecom market is a prerequisite for achieving India’s digital dream and why an eminent duopoly in the sector stands to threaten that dream? Suggest way forward.”

    Conclusion

    It would be tragic if India’s telecom-access market was to be reduced to only two competing operators, as we have a long way to go. What we need is structural changes in the sectors as well as the way the sector is regulated.

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    Back2Basics: Spectrum usage charges

    • Companies had to pay 3-5 per cent of their adjusted gross revenue (AGR) as spectrum usage charge to the department of telecom.
    • If they share spectrum with another operator, operators must pay an additional 0.5 per cent of AGR for that band as SUC.
    • However, in September 2021, the Department of Telecommunications (DoT) decided to remove the floor rate of 3% of the adjusted gross revenue (AGR) for operators to pay their spectrum usage charge (SUC).
    • The removal of the clause fixing a floor rate of 3% was done to give effect to the recently announced telecom relief package.
    • Though the telecom package talks of scrapping SUC only on spectrum acquired in future auctions like that of 5G, if the 3% floor is abolished, as and when operators acquire more spectrum in future auctions, their SUC will become zero on the entire holding.
    • This is because of a complex weighted average formula to calculate the SUC of operators who have a mix of administratively allocated spectrum and acquired through auctions.

  • What is a Not-for-Profit Company?

    The Enforcement Directorate (ED) has summoned Rahul Gandhi and Sonia Gandhi following a trial court order in a tax assessment case of his not-for-profit company.

    What is the case?

    • A case alleged cheating and misappropriation of funds on part of the leaders in acquiring the newspaper.
    • The alleged persons acquired it through a Section 25 company — in which they have 86% stake.

    What is a Section 25 company?

    • It is defined under the Companies Act, 1956.
    • It is a not-for-profit charitable company.
    • It is formed with the sole object of promoting commerce, art, science, religion, charity, or any other useful object.
    • It intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members
    • Section 8 of the Companies Act, 2013 includes other objects such as sports, education, research, social welfare and protection of the environment among others.

    Fiscal activities allowed

    • While it could be a public or a private company, a Section 25 company is prohibited from payment of any dividend to its members.
    • Section 25 states that by its constitution the company is required/ intends to apply its profits, if any, or other income in promoting its objects and is prohibited from paying any dividend to its members.

    What are prominent examples of such companies?

    • According to details available with the Ministry of Corporate Affairs, a large number of companies have been formed under the Section.
    • Among these are Reliance Foundation, Reliance Research Institute, Azim Premji Foundation, Coca Cola India Foundation, and Amazon Academic Foundation.

    Why are such companies formed?

    • Most people looking to form a charitable entity go for forming a company under Section 25, now Section 8, rather than a Trust structure.
    • This is because most foreign donors like to contribute to a company rather than Trust because they are more transparent and provide more disclosures.
    • If a company has to be converted into a not-for-profit company, they can’t be converted into a Trust, however, they can be converted into a Section 25/ Section 8 company.

     

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