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

  • Reaping India’s demographic dividend

    Context

    Countries like Singapore, Taiwan and South Korea have already shown us how demographic dividend can be reaped to achieve incredible economic growth by adopting forward-looking policies and programmes.

    The window of demographic opportunity

    • With falling fertility (currently 2.0), rising median age (from 24 years in 2011, 29 years now and expected to be 36 years by 2036), a falling dependency ratio (expected to decrease from 65% to 54% in the coming decade taking 15-59 years as the working age population), India is in the middle of a demographic transition.
    • This provides a window of opportunity towards faster economic growth. India has already begun to get the dividend.
    • As fertility declines, the share of the young population falls and that of the older, dependent population rises.
    • If the fertility decline is rapid, the increase in the population of working ages is substantial yielding the ‘demographic dividend’.
    • The smaller share of children in the population enables higher investment per child.
    • Therefore, the future entrants in the labour force can have better productivity and thus boost income.
    • With the passage of time, the share of the older population rises and that of the working age population begins to fall and hence the dividend is available for a period of time, ‘the window of demographic opportunity’.

    Need for forward-looking policies

    • Without proper policies, the increase in the working-age population may lead to rising unemployment, fueling economic and social risks.
    • This calls for forward-looking policies incorporating population dynamics, education and skills, healthcare, gender sensitivity, and providing rights and choices to the younger generation.

    Lessons for India

    • Countries like Singapore, Taiwan and South Korea have already shown us how demographic dividend can be reaped.
    •  There are important lessons from these countries for India.
    • 1) NTA data: The first is to undertake an updated National Transfer Accounts (NTA) assessment.
    • Using NTA methodologies, we find that India’s per capita consumption pattern is way lower than that of other Asian countries.
    • A child in India consumes around 60% of the consumption by an adult aged between 20 and 64, while a child in China consumes about 85% of a prime-age adult’s consumption.
    • The NTA data for India needs to be updated to capture the progress made on such investments since 2011-12.
    • 2) Invest more in children and adolescents: India ranks poorly in Asia in terms of private and public human capital spending.
    • It needs to invest more in children and adolescents, particularly in nutrition and learning during early childhood.
    • 3) Make health investments: Health spending has not kept pace with India’s economic growth.
    • The public spending on health has remained flat at around 1% of GDP.
    • Evidence suggests that better health facilitates improved economic production.
    • Hence, it is important to draft policies to promote health during the demographic dividend.
    • 4) Make reproductive healthcare services accessible on a rights-based approach: We need to provide universal access to high-quality primary education and basic healthcare.
    • The unmet need for family planning in India at 9.4% as per the latest National Family Health Survey-5 (2019-21) is high as compared to 3.3% in China and 6.6% in South Korea, which needs to be bridged.
    •  5) Bridge gender differentials in education: The gender inequality of education is a concern.
    • In India, boys are more likely to be enrolled in secondary and tertiary school than girls. This needs to be reversed.
    • 6) Increase female workforce participation: As of 2019, 20.3% of women were working or looking for work, down from 34.1% in 2003-04.
    • New skills and opportunities for women and girls befitting their participation in a $3 trillion economy is urgently needed.
    • It is predicted that if all women engaged in domestic duties in India who are willing to work had a job, female labour force participation would increase by about 20%.
    • 7) Address the diversity between StatesWhile India is a young country, the status and pace of population ageing vary among States.
    • Southern States, which are advanced in demographic transition, already have a higher percentage of older people.
    • These differences in age structure reflect differences in economic development and health – and remind us of States’ very different starting points at the outset of the 2030 Sustainable Development Goals Agenda.
    • But this also offers boundless opportunities for States to work together, especially on demographic transition, with the north-central region as the reservoir of India’s workforce.
    • 8) Governance reform: A new federal approach to governance reforms for demographic dividend will need to be put in place for policy coordination between States on various emerging population issues such as migration, ageing, skiling, female workforce participation and urbanisation.

    Conclusion

    In India, the benefit to the GDP from demographic transition has been lower than its peers in Asia and is already tapering. Hence, there is an urgency to take appropriate policy measures.

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  • What is Antrix- Devas Multimedia Deal?

    A Canadian court has ordered the seizure of more than $30 million worth of Airport Authority of India’s assets.

    Background

    • In 2005, Devas Multimedia signed an agreement with Antrix —a commercial arm of the IISRO —to provide multimedia services to mobile users using the leased S-band satellite spectrum to be provided by Antrix.
    • In 2011, the UPA-2 government canceled this agreement on the ground that it needed the S-band satellite spectrum for national security and other social purposes.
    • This led to arbitration between Antrix and Devas at the International Chambers of Commerce (ICC) and two bilateral investment treaty (BIT) arbitrations. India lost all three disputes.

    India’s non-compliance

    • AAI and Air India are being targeted because they are Indian public sector entities with overseas assets and serve as a proxy for the government of India.
    • The Canada court can do so through the concept of restrictive immunity.
    • In the meanwhile, the National Company Law Tribunal (India) ordered the liquidation of Devas Multimedia on the ground that the affairs of the company were being carried on fraudulently.

    Why did India cancel the deal?

    • The scandal first came to light when in 2011, the news reported that there were some irregularities in the agreement between Antrix and Devas.
    • They reported the findings of a draft audit report and pointed out discrepancies including financial mismanagement, conflict of interest, non-compliance of rules, and favoritism.
    • This revelation came at the heel of the 2G spectrum scam which was condemned for the high level of corruption.

    How can a Canadian court order the attachment of Indian assets?

    • State immunity — a well-established principle of international law — shields a state and its property against legal proceedings in the courts of other countries.
    • This covers immunity from both jurisdiction and execution.
    • However, there is no international legal instrument in force dealing with state immunity in the municipal legal systems of different countries, which has created an international void.
    • Consequently, countries have filled this void through their national legislations and domestic judicial practices on state immunity.
    • Typically, prominent jurisdictions such as Canada follow the concept of restrictive immunity (a foreign State is immune only for sovereign functions) and not absolute immunity.

    How can assets of AAI be seized when the claim is against India?

    • In execution proceedings, assets of an entity can be seized if that entity is an alter ego of the State that fails to comply with the arbitral award.
    • In other words, if the foreign sovereign exercises such extensive control over the entity, then the presumption that the entity has a separate corporate character is set aside.
    • Thus, the Canadian court must have concluded that the Indian government extensively controls AAI.

    What options does India have?

    • The first option is to comply with the two adverse BIT awards. However, it is highly unlikely that India would do so.
    • The second option is to challenge this decision in an appellate court in Canada as per Canadian law where India can try proving that the ‘extensive control requirement’ is not met in the case of AAI.
    • However, state immunity from execution is purely a procedural hurdle to the enforcement of the BIT award.
    • It cannot justify India’s breach of its international law obligations enshrined in the two BITs and the continued failure to comply with the arbitral awards.

    Back2Basics: New Space India Limited (NSIL)

    • It functions under the administrative control of the Department of Space (DOS).
    • It aims to commercially exploit the research and development work of ISRO Centres and constituent units of DOS.
    • The NSIL would enable Indian Industries to scale up high-technology manufacturing and production base for meeting the growing needs of the Indian space program.
    • It would further spur the growth of Indian Industries in the space sector.

    ANTRIX

    • Antrix Corporation Limited (ACL), Bengaluru is a wholly-owned Government of India Company under the administrative control of the Department of Space.
    • It is as a marketing arm of ISRO for promotion and commercial exploitation of space products, technical consultancy services and transfer of technologies developed by ISRO.
    • Antrix is engaged in providing Space products and services to international customers worldwide.

     

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  • Global shortage of Semiconductor Chips

    Worldwide carmakers have slashed production due to an abrupt and cascading shortage of semiconductors.

    Semiconductor Chips

    • Semiconductors — also known as integrated circuits (ICs), or microchips — are most often made of silicon or germanium, or a compound like gallium arsenide.
    • It’s the thing that makes electronic items smart and faster.
    • Made from a material, usually silicon, that “semi-conducts” electricity, the chip performs a variety of functions.
    • Memory chips, which store data, are relatively simple and are traded like commodities.
    • Logic chips, which run programs and act as the brains of a device, are more complex and expensive.

    Reasons for shortages

    • Stay-at-home shift: This pushed chip demand beyond levels projected before the pandemic. Lockdowns spurred growth in sales of smartphones, laptops etc to the highest in a decade
    • Fluctuating forecasts: Automakers that cut back drastically early in the pandemic underestimated how quickly car sales would rebound.
    • Stockpiling: Chinese smartphone industry dominates the global market for 5G networking gear — began building up inventory to ensure it could survive US sanctions.

    How is the chip crisis playing out in geopolitics?

    • The global chip crisis and geopolitical tensions with China have shifted focus back on semiconductors.
    • The US, which was once a leader in chip manufacturing, wants the crown back.
    • The protectionist US is looking to bring manufacturing back to America and reduce its dependency on a handful of chipmakers mostly concentrated in Taiwan and South Korea.
    • China’s renewed aggression on Taiwan is also being seen in light of the chip crisis.

    Impact of semiconductor shortages

    • Chip shortages are expected to wipe out $210 billion of sales for carmakers this year, with the production of 7.7 million vehicles lost.
    • Broadband providers were facing delays of more than a year when ordering internet routers.

    Why is it so hard to compete?

    • Manufacturing advanced logic chips requires extraordinary precision, along with huge long-term bets in a field subject to rapid change.
    • Plants cost billions of dollars to build and equip, and they have to run flat-out 24/7 to recoup the investment.
    • A factory also consumes up enormous amounts of water and electricity and is vulnerable to even the tiniest disruptions, whether from dust particles or distant earthquakes.

     

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  • Reining in the Direct Selling Industry

    The Government has notified the Consumer Protection (Direct Selling) Rules, 2021, that prohibits all direct selling entities from promoting pyramid schemes or money circulation schemes, while also providing for a mechanism for redressal of consumer complaints.

    What is Direct Selling?

    • In Direct Selling, goods or services are directly sold to consumers through sellers who act as individual representatives of the direct selling entities, instead of a retail premises.
    • For example: Brands such as Amway, Herbalife , Oriflame and Modicare etc. directly sell their products through outlets. They are generally expensive.

    What are the new rules?

    • The new Rules were primarily introduced to prohibit the promotion of pyramid and money circulation schemes by the direct selling industry.
    • Apart from that, entities are now required to be registered in the country.
    • Further, to provide a redressal mechanism for consumers, the Rules mandate that direct selling entities appoint grievance redressal officers who will put up their contact details on the website.
    • Direct selling entities that are not established in India, but offer goods or services to consumers here, will also need to comply with the newly notified rules.

    How big is the Indian Direct Selling industry?

    • As per a report, the number of active direct sellers in the country stood at around 7.4 million in 2019-20.
    • The two big categories were ‘wellness & nutraceuticals’ – which accounted for 57% of the sales, followed by cosmetics and personal care which contributed 22% to the sales.

    Whom do these Rules apply?

    • These Rules apply on all models of direct selling and all goods and services bought or sold through direct selling.
    • Direct selling entities that are not established in India, but offer goods or services to consumers in India, will also need to comply with the newly notified Rules.

    Why have they been notified now?

    • Fraud prevention: The guidelines aim for preventing fraud and protecting consumer interest. Earlier, these were not regulated under enforceable law.
    • Costly products: A direct selling entity or a direct seller cannot refuse to take back “spurious goods or deficient services” and provide a refund, or charge consumers any entry fee or subscription fee.
    • Coercive persuasion: They often tend to persuade consumers to make a purchase based upon the representation that they can reduce or recover the price by referring prospective customers.
    • Providing legitimacy to DS: The Rules provide legitimacy to the industry and also help attract more foreign direct investment (FDI).

    What do the rules say?

    • Registration: Every direct selling entity with operations in India needs to be registered in the country, and have a minimum of one physical location as its registered office within India.
    • Self-declaration: The entities will need to make a self-declaration that it is in compliance with these Rules and is not involved in any pyramid scheme or money circulation scheme.
    • Data storage within India: Additionally, such entities are required to store sensitive personal data within India and take steps to ensure the protection of such data.
    • Grievance redressal: The Rules mandate that direct selling entities appoint one or more grievance redressal officers and put up their details such as name, telephone number and email address, on their website.
    • Officer to ensure compliance: Every direct selling entity will need to appoint a nodal officer who will be responsible for ensuring compliance with the provisions of the Act.
    • Restricted visits: A direct seller will not visit a consumer’s premises without identity card and prior appointment or approval, or provide any literature to a prospect, which has not been approved by the direct selling entity.

     

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  • What is Tokenization of Debit and Credit Cards?

    The Reserve Bank of India (RBI) has decided to defer the implementation of tokenization of debit and credit cards for online transactions by a further six months following representations from stakeholders.

    RBI decision

    • RBI has also extended tokenization of Card-on-File (CoF) transactions where card details are saved by merchants — and directed the merchants not to store card details in their systems from January 1, 2022.
    • A CoF transaction is one in which a cardholder has authorized a merchant to store his or her Mastercard or Visa payment details, and to bill the stored account.
    • E-commerce companies and airlines and supermarket chains often store card details.

    What is Tokenisation?

    • Tokenisation refers to the replacement of credit and debit card details with an alternative code called a ‘token’.
    • This token is unique for a combination of card, token requestor (the entity that accepts a request from the customer for tokenisation of a card and passes it on to the card network to issue a token) and the device.

    Benefits of Tokenization

    • Transaction safety: Tokenization reduces the chances of fraud arising from sharing card details.
    • Easy payments: The token is used to perform contactless card transactions at point-of-sale (PoS) terminals and QR code payments.
    • Data storage: Only card networks and card-issuing banks will have access to and can store any card data.

    How are the transactions currently processed?

    • There are many players involved in processing one card transaction today:
    1. Merchant
    2. Payment aggregator
    3. Issuing bank
    4. Card network
    • When a transaction happens on a merchant platform, the data is sent to the payment aggregator (PA).
    • The PA next sends the details to either the issuing bank or the card network.
    • Then issuing bank sends an OTP and the transaction flows back.

    Which companies dominate card transactions in India?

    Is the industry ready to implement this?

    • Not fully, that is why the RBI had to extend the deadline.
    • The industry currently can convert CoF into a tokenized number. However, the readiness to process the token is negligible.
    • About 90% of banks are ready with provisioning of token on Visa. Only 25-30% banks are ready on Mastercard.

    Impact on businesses

    If the industry isn’t ready, several business models would be impacted.

    • E-mandates (recurring payments) will stand ineffective from 1 July.
    • Card EMIs account for 25% of online e-commerce sales. That option will no longer be available.
    • Cashbacks/discount offers by banks will be impacted, too.
    • A user may not be able to use Mastercard saved cards on a merchant platform to make a transaction and will have to enter the card details every time a transaction is made.
    • This could be the same for some Visa cards.

    Way forward

    • The new system is a much bigger disruption to the way digital payments will henceforth be processed.
    • Integration of systems and the ability to process is one part.
    • The industry also needs to test the performance and success rate of the tokenization solution.

     

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  • Amendment to the Multi-State Cooperatives Act, 2002

    The Union Home and Cooperation Minister has announced the decision to amend the Multi-State Cooperative Societies (MSCS) Act, 2002 to plug the loopholes in the Act.

    What is MSCS Act?

    • Cooperatives are a state subject, but there are many societies such as those for sugar and milk, banks, milk unions etc whose members and areas of operation are spread across more than one state.
    • The MSCS Act was passed to govern such cooperatives.
    • For example, most sugar mills along the districts on the Karnataka-Maharashtra border procure cane from both states.

    What are Multi-State Cooperatives?

    • They draw their membership from two or more states, and they are thus registered under the MSCS Act.
    • Their board of directors has representation from all states they operate in.
    • Administrative and financial control of these societies is with the central registrar, with the law making it clear that no state government official can wield any control on them.

    Why does the government plan to amend the Act?

    (1) Issues with Central Registrar

    • The exclusive control of the central registrar, who is also the Central Cooperative Commissioner, was meant to allow smooth functioning of these societies.
    • The central Act cushions them from the interference of state authorities so that these societies are able to function in multiple states.
    • What was supposed to facilitate smooth functioning, however, has created obstacles.
    • For state-registered societies, financial and administrative control rests with state registrars who exercise it through district- and tehsil-level officers.

    (2) Multiple checks and balances

    • Thus if a sugar mill wishes to buy new machinery or go for expansion, they would first have to take permission from the sugar commissioner for both.
    • Post this, the proposal would go to the state-level committee that would float tenders and carry out the process.
    • While the system for state-registered societies includes checks and balances at multiple layers to ensure transparency in the process, these layers do not exist in the case of multistate societies.
    • Instead, the board of directors has control of all finances and administration.

    (3) Lack of govt control

    • There is an apparent lack of day-to-day government control on such societies.
    • Unlike state cooperatives, which have to submit multiple reports to the state registrar, multistate cooperatives need not.
    • The central registrar can only allow inspection of the societies under special conditions — a written request by one-third of the members of the board.
    • Inspections can happen only after prior intimation to societies.

    (4) Lack of infrastructure

    • The on-ground infrastructure for central registrar is thin — there are no officers or offices at state level, with most work being carried out either online or through correspondence.
    • For members of the societies, the only office where they can seek justice is in Delhi, with state authorities expressing their inability to do anything.

    (5) Ponzi schemes functioning as MCS

    • There have been instances across the country when credit societies have launched ponzi schemes taking advantage of these loopholes.
    • Such schemes mostly target small and medium holders with the lure of high returns.
    • Fly-by-night operators get people to invest and, after a few instalments, wind up their operations.

    What kind of amendments can be expected?

    • The Centre is holding extensive consultations with experts from various fields: bankers, sugar commissioners, cooperative commissioners, housing societies federations etc.
    • The centre might increase their manpower, first in Delhi and then in the states, to ensure better governance of the societies.
    • Also, technology will be used to bring in transparency.

     

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  • What is Q-Commerce Model?

    Online grocer Grofers has rebranded itself “Blinkit”, in line with its new focus on “quick commerce”, which essentially involves delivering customer orders much faster than it does currently.

    Q-Commerce Model

    • Q-commerce (‘quick commerce’) – sometimes used interchangeably with ‘on-demand delivery’ and ‘e-grocery’ – is e-commerce in a new, faster form.
    • It combines the merits of traditional e-commerce with innovations in last-mile delivery.
    • The premise is largely the same, with speed of delivery being the main differentiator. Delivery is not in days but minutes – 30 or less, to be competitive.
    • This has in turn expanded the breadth of what individuals can order, with perishable goods – like groceries – being a large niche q-commerce companies speak to.
    • It tends to focus on the micro – smaller quantities of fewer goods.

    Features of this model

    • Countering pandemic: The supply chain disruptions triggered by the Covid-19 pandemic led to the emergence of a new sub-vertical in the online grocery segment.
    • Quickest delivery: It is the unique selling proposition (USP) of which was the promise of delivery within 10-30 minutes of ordering.
    • Micro-warehousing : The focus of most of these ventures is on setting up micro-warehouses located closer to the point of delivery, and of restricting stocks of high-demand items.

    Back2Basics:  Marketplace and Inventory-Based Model

    (1) Marketplace Model

    • It provides an IT platform by an e-commerce entity on a digital & electronic network to act as a facilitator between the buyer and seller. Ex. India Mart, Amazon, Flipkart.
    • The e-commerce firm does not directly or indirectly influence the sale price of goods or services and is required to offer a level playing field to all vendors.

    (2) Inventory-Based Model

    • Inventory based model of e-commerce means an e-commerce activity where the inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly.
    • Ex. Alibaba

     

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  • How is Gold Hallmarking being implemented?

    The Government has made it mandatory for the introduction of a Hallmark Unique Identification (HUID) number in every piece of jewellery.

    What is HUID?

    • HUID is a six-digit alphanumeric code, or one that consists of numbers and letters. It is given to every piece of jewellery at the time of hallmarking and is unique for each piece.
    • It is being implemented by the Bureau of Indian Standards (BIS) in a phased manner.
    • Hallmarking & HUID are mandatory for 14-, 18- and 22-carat gold jewellery and artefacts.
    • Before buying any piece of gold jewellery, the buyer should check all these three symbols.

    Implementation of HUID

    • Symbols: The hallmark consists of three symbols which give some information about the jewellery piece. The first symbol is the BIS logo; the second indicates purity and fineness; and the third symbol is the HUID.
    • A&H centre: Jewellery is stamped with the unique number manually at the Assaying & Hallmarking centre.

    Why is it being introduced?

    • Authentication: HUID gives a distinct identity to each piece of jewellery enabling traceability.
    • Credibility: It is critical to the credibility of hallmarking and to help address complaints against adulteration.
    • Registration: In HUID-based hallmarking, registration of jewellers is an automatic process with no human interference.
    • Prevents malpractice: It also helps check malpractice by members of the trade.
    • Data privacy: It is a secure system and poses no risk to data privacy and security.
    • Financial tracking: HUID provides traceability and financial tracking of purchases.

    Issues with HUID

    • Time-consuming: It is cumbersome to number each piece of jewellery
    • Intricate jewellery: HUID cannot be engraved in tiny pieces.
    • Unnecessary expense: Also it will increase cost for consumers.
    • Infrastructural issues: there needs to be ample AH Centres.

    What does this mean for the consumer?

    • Consumer protection: Given that gold plays a big role in the lives of Indians, mandating gold hallmarking is aimed at protecting consumer interests.
    • Assurance of quality: It provides ‘third-party assurance’ to consumers on the purity of gold jewellery.

    Conclusion

    • HUID concept is innovative, out-of-the-box thinking and more than makes up for stepping in late with mandatory hallmarking.
    • It is the sort of global leadership India has and needs to show in gold-related reforms.

     

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  • Semiconductor Shortage and the tech industry

    Chips or processors power every possible product on the market from high-end cars to washing machines. There is a worldwide shortage of semiconductor chips.

    What are Semiconductors?

    • A semiconductor sits between a conductor and an insulator and is commonly used in the development of electronic chips, computing components, and devices.
    • It’s generally created using silicon, germanium, or other pure elements.
    • Semiconductors are created by adding impurities to the element.

    Giants of global chip industry

    • Semiconductor manufacturing is now dominated by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Samsung Electronics in South Korea.
    • American chipmaker Intel now plans to spend $20 billion to build two new chip factories in Chandler, Arizona.
    • These new fabs will also manufacture chips designed by Amazon, Qualcomm, and other customers.

    Why is there a semiconductor shortage?

    • During the pandemic, manufacturing came to a standstill impacting the supply chains of products that need one or more of these.
    • As the automotive sector almost shut down last year, chip makers shifted capacity to cater to increased demand for electronics items such as cell phones and laptops.
    • Since orders for advanced chips are placed well in advance, manufacturers have not yet been able to come back to pre-pandemic production schedules to cater to all sectors.
    • The automotive chips are of medium-level complexity, compared to the really small and extremely complicated ones on smartphones and personal computers.
    • Building something this small, featuring billions of transistors is an expensive process.

    Has India missed the bus in setting up chip factories?

    • There is a lot of risks involved in setting up a chip plant.
    • Past initiatives to set up chip manufacturing units in the country never took off due to lack of long-term vision, lack of government incentives, and poor planning.
    • Now the government is keen to promote manufacturing and has even proposed tax incentives under Production Linked Incentive Scheme.
    • Things are progressing slowly, but the recent announcement of Tata Group entering semiconductor manufacturing is being seen positively.

    How is the chip crisis playing out in geopolitics?

    • The global chip crisis and geopolitical tensions with China have shifted focus back on semiconductors.
    • The US, which was once a leader in chip manufacturing, wants the crown back.
    • The protectionist US is looking to bring manufacturing back to America and reduce its dependency on a handful of chipmakers mostly concentrated in Taiwan and South Korea.
    • China’s renewed aggression on Taiwan is also being seen in light of the chip crisis.

    Impact

    • The crisis is expected to cost the global automotive industry $210 billion in revenue in 2021.
    • The global semiconductor shortage has affected many industries for more than a year and because of that, they are either forced to pay more for products or being asked to wait a little more.
    • The consumption of integrated circuits in products is ever increasing and a large manufacturing sector for these kinds of integrated circuits are a part of the supply chain.
    • The shortage has affected smartphones, personal computers, game consoles, automobiles, and medical devices.

     

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  • What is Cartelization?

    The Competition Commission of India (CCI) has slapped certain penalties on paper manufacturing companies from agricultural waste and recycled wastepaper against Cartelization.

    What is a Cartel?

    • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
    • The International Competition Network, which is a global body dedicated to enforcing competition law, has a simpler definition.
    • The three common components of a cartel are:
    1. an agreement
    2. between competitors
    3. to restrict competition

    What is Cartelization?

    • Cartelization is when enterprises collude to fix prices, indulge in bid rigging, or share customers, etc.
    • But when prices are controlled by the government under a law, that is not cartelization.
    • The Competition Act contains strong provisions against cartels.
    • It also has the leniency provision to incentivise a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
    • This has proved a highly effective tool against cartels worldwide.
    • Cartels almost invariably involve secret conspiracies.

    How do they work?

    • According to ICN, four categories of conduct are commonly identified across jurisdictions (countries). These are:
    1. price-fixing
    2. output restrictions
    3. market allocation and
    4. bid-rigging
    • In sum, participants in hard-core cartels agree to insulate themselves from the rigours of a competitive marketplace, substituting cooperation for competition.

    How do cartels hurt?

    • While it may be difficult to accurately quantify the ill-effects of cartels, they not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
    • A successful cartel raises the price above the competitive level and reduces output.
    • Consumers choose either not to pay the higher price for some or all of the cartelized product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

    Are there provisions in the Competition Act against monopolistic prices?

    • There are provisions in the Competition Act against abuse of dominance.
    • One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in purchase or sale of goods or services.
    • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as an abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
    • However, it should be understood that where pricing is a result of normal supply and demand, the Competition Commission may have no role.

    How might cartels be worse than monopolies?

    • It is generally well understood that monopolies are bad for both individual consumer interest as well as the society at large.
    • That’s because a monopolist completely dominates the concerned market and, more often than not, abuses this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

    How to stop the spread of cartelization?

    • Cartels are not easy to detect and identify.
    • As such, experts often suggest providing a strong deterrence to those cartels that are found guilty of being one.
    • Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel.
    • However, it must also be pointed out that it is not always easy to ascertain the exact gains from cartelization.
    • In fact, the threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

    Back2Basics: Competition Commission of India (CCI)

    • The CCI is the chief national competition regulator in India.
    • It is a statutory body within the Ministry of Corporate Affairs.
    • It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

     

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