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

  • General Insurance Business (Nationalization) Amendment Bill, 2021

    The General Insurance Business (Nationalization) Amendment Bill, 2021, was recently passed by both houses of parliament.

    What is the amendment?

    • The Bill seeks to amend the General Insurance Business (nationalization) Act, 1972.

    What is the GIB Act?

    • The 1972 Act set up the General Insurance Corporation of India (GIC).
    • The businesses of the companies nationalized under the Act were restructured in four subsidiary companies of GIC: (i) National Insurance, (ii) New India Assurance, (iii) Oriental Insurance, and (iv) United India Insurance.
    • The Act was subsequently amended in 2002 to transfer the control of these four subsidiary companies from GIC to the central government, thereby making them independent companies.
    • Since 2000, GIC exclusively undertakes the reinsurance business.

    Answer this PYQ:

    Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. The service/ services rendered under micro-finance is/are: (CSP 2011)

    1. Credit facilities
    2. Savings facilities
    3. Insurance facilities
    4. Fund Transfer facilities

    Select the correct answer using the codes given below the lists:

    (a) 1 only

    (b) 1 and 4 only

    (c) 2 and 3 only

    (d) 1, 2, 3 and 4

     

    [wpdiscuz-feedback id=”dq8yt6bg6b” question=”Please leave a feedback on this” opened=”1″]Post your answers here: [/wpdiscuz-feedback]

    Key highlights of the Amendment Bill

    • Government shareholding threshold: The Act requires that shareholding of the central government in the specified insurers (the above five companies) must be at least 51%.  The Bill removes this provision.
    • Change in definition of general insurance business: The Act defines general insurance business as fire, marine or miscellaneous insurance business.
    • Transfer of control from the government: The Bill provides that the Act will not apply to the specified insurers from the date on which the central government relinquishes control of the insurer.
    • Notifying terms and conditions: The Bill provides that schemes formulated by the central government in this regard will be deemed to have been adopted by the insurer.
    • Liabilities of directors: The Bill specifies that a director of a specified insurer, who is not a whole-time director, will be held liable only for certain acts.

    Significance of the bill

    • De-regulation: The move is part of the government’s strategy to open up more sectors to private participation and improve efficiency.
    • Capital infusion: Privatization will bring in more private capital in the general insurance business and improve its reach to make more products available to customers.
    • Insurance coverage: This will enhance insurance penetration and social protection to better secure the interests of policyholders and contribute to faster growth of the economy

    Concerns of the opposition

    • The Opposition is of the view that privatization will be detrimental to the interests of the public.
    • They wanted a proper discussion on the pros and cons of the Bill rather than passing it in a hurry.
    • They wanted an expert committee of the Cabinet to study the impact before passing the legislation.
    • They are worried about large-scale employee layoffs and short-term investors entering and exiting these entities once the Act comes into force.

    Also read:

    [Burning Issue] Divestment of LIC

  • What changed for Indian industry after 1991 economic reforms?

    Context

    It has been 30 years since the spirit of liberalisation was unleashed in 1991 economic reforms. The private sector, which had been seen very differently up to 1990, was placed at the centre of the reform process. And this has continued and grown since then.

    Challenges and opportunities for Indian industry after economic reforms

    1) Entry of MNCs and centrality to consumers

    • The first challenge was the entry of MNCs through the joint venture (JV) route.
    • Centrality to consumers: The reforms gave centrality to the consumer who till 1991 did not have a choice.
    • The Indian consumer was given choices and companies, both foreign and Indian, wanted to be their first choice.
    • Growth in demand: The surge of new demand from the marketplace transformed the scenario, reflected in GDP growth rapidly moving up to 7 per cent per annum.

    2) Increased competition

    • For the first time, Indian companies faced real competition from other Indian as well as foreign companies.
    • But, many corporates restructured themselves and transformed into competitive forces.
    • The new reality of reduced customs duties and industrial licensing disappearing, removed the protection umbrella and Indian companies, by and large, who had been planning for this day, were ready to face this challenge.

    3) Government-industry partnership

    • Till June 1991, the government and industry were at a distance from each other.
    • June 1991 changed all of that, the government’s dialogue with industry deepened, consultations were frequent.
    • Feedback on what was happening on the ground was taken regularly.
    • A government-industry partnership became a reality.

    4) Boost to aspiration of industries

    • The most significant change brought about by the reforms pertained to the level of “aspirations” of the industry.
    • There was excitement and ambition to be world-class.
    • Rise of IT industry: In this, the IT industry led by TCS, Infosys and Wipro played a major role.
    • They showed that Indian engineers and managers were the best in the world.
    • They exuded confidence which spread to others.

    5) Boost to entrepreneurship

    • Not just the big industry, but also, the small and medium sectors that became part of the new energy in industry.
    • Component manufacturing and exports were new initiatives from ancillaries and suppliers of major manufacturers.

    6) Infrastructure

    • The public sector had a monopoly over infrastructure.
    • This changed and the private sector was invited to participate, to get into public-private partnerships and end the government’s monopoly.

    7) Birth of new private sector bank

    • Banking had been nationalised in 1969.
    • But the reforms of 1991 gave birth to a new private sector bank — HDFC Bank — which, after due diligence by the government and the Reserve Bank of India, opened its doors in 1994.
    • This was a huge step forward in the reform process.

    8) Improvement in corporate governance

    • An industry-led initiative brought out the first-ever task force guidelines and report on corporate governance.
    • This was followed by many other actions and policies.

    Conclusion

    There is still a long way to go, but the die that was cast in 1991 has led to a new tsunami of change.

  • Essential Defence Services Bill, 2021

    The Minister of State for Defence has introduced the Essential Defence Services Bill in the Lok Sabha.

    Essential Defence Services Bill

    • Essentially, the bill is aimed at preventing the staff of the government-owned ordnance factories from going on strike.
    • Around 70,000 people work with the 41 ordnance factories around the country.
    • It is aimed to provide for the maintenance of essential defence services so as to secure the security of the nation and the life and property of the public at large and for matters connected therewith or incidental thereto.

    Why need such a bill?

    • Indian Ordnance Factories is the oldest and largest industrial setup that functions under the Department of Defence Production of the Ministry of Defence.
    • The ordnance factories form an integrated base for indigenous production of defence hardware and equipment, with the primary objective of self-reliance in equipping the armed forces with state-of-the-art battlefield equipment.
    • It is essential that an uninterrupted supply of ordnance items to the armed forces be maintained for the defence preparedness of the country and the ordnance factories continue to function without any disruptions.

    What does it allow the government to do?

    • The Bill empowers the government to declare services mentioned in it as essential defence services the cessation of work of which would prejudicially affect the production of defence equipment or goods.
    • It also prohibits strikes and lockouts in “any industrial establishment or unit engaged in essential defence services”.

    Why does the government feel its need?

    • In June the government announced the corporatization of the Ordnance Factory Board.
    • The OFB was directly under the Department of Defence Production and worked as an arm of the government.
    • The government has claimed that the move is aimed at improving the efficiency and accountability of these factories.
    • The Bill mentioned that there is a threat, though, that the employees of these factories can go on a strike against the decision.

    Also read:

    Ordinance Factory Board corporatization gets Cabinet approval

  • Special Economic Zones

    Key Highlights of the report

    • If India is to become a US $5 trillion economy by 2025, then the current environment of manufacturing competitiveness and services has to undergo a basic paradigm shift.
    • The report notes that the success seen by services sectors like IT and ITES (IT enabled services) has to be promoted in other services sector like health care, financial services, legal, repair and design services.

  • [pib] India improves score in Ease of Cross-Border Trade

    As per the latest UN Global Survey on Digital and Sustainable Trade Facilitation, India’s rank moved up from 78.49% in 2019 to 90.32% in 2021.

    About the Survey

    • The Global Survey on Digital and Sustainable Trade Facilitation is conducted every two years by UNESCAP.
    • The 2021 Survey includes an assessment of 58 trade facilitation measures covered by the WTO’s Trade Facilitation Agreement.
    • The Survey is keenly awaited globally as it evidences whether or not the trade facilitation measures being taken have the desired impact and helps draw comparison amongst countries.
    • A higher score for a country also helps businesses in their investment decisions.

    Global performance

    • Among developed countries, Australia, New Zealand, Netherlands, Japan, and Belgium have scored more than 93%.
    • In South Asia, Bangladesh and Sri Lanka were behind India with a score of 64.5% and 60.2%, the survey showed.

    India’s improvement

    • India has scored 90.32% in United Nation’s Economic and Social Commission for Asia Pacific’s (UNESCAP) latest Global Survey on Digital and Sustainable Trade Facilitation.
    • The Survey hails this as a remarkable jump from 78.49% in 2019.

    India’s significant improvement in the scores on all 5 key indicators, as follows:

    1. Transparency:100% in 2021 (from 93.33% in 2019)
    2. Formalities: 95.83% in 2021 (from 87.5% in 2019)
    3. Institutional Arrangement and Cooperation: 88.89% in 2021 (from 66.67% in 2019)
    4. Paperless Trade: 96.3% in 2021 (from 81.48% in 2019)
    5. Cross-Border Paperless Trade: 66.67% in 2021 (from 55.56% in 2019)
    • The Survey notes that India is the best-performing country when compared to the South and southwest Asia region (63.12%) and the Asia Pacific region (65.85%).
    • The overall score of India has also been found to be greater than many OECD countries including France, UK, Canada, Norway, Finland etc. and the overall score is greater than the average score of EU.
    • India has achieved a 100% score for the Transparency index and 66% in the “Women in trade” component.

  • [pib] Authorised Economic Operators

    Central Board of Indirect Taxes & Customs (CBIC) has inaugurated the online filing of Authorised Economic Operators (AEO) T2 and T3 applications.

    Who are Authorised Economic Operators?

    • The AEO concept is one of the main building blocks within the WCO SAFE Framework of Standards (SAFE).
    • The latter is part of the future international Customs model set out to support secure trade.
    • The growth of global trade and increasing security threats to the international movement of goods have forced customs administrations to shift their focus more and more to securing the international trade flow and away from the traditional task of collecting customs duties.
    • Recognizing these developments, the World Customs Organization, drafted the WCO Framework of Standards to Secure and Facilitate global trade (SAFE).
    • In the framework, several standards are included that can assist Customs administrations in meeting these new challenges.
    • Developing an Authorized Economic Operator programme is a core part of SAFE.

    AEOs in India

    • AEO is a voluntary programme.
    • It enables Indian Customs to enhance and streamline cargo security through close cooperation with the principal stakeholders of the international supply chain viz. importers, exporters, logistics providers, custodians or terminal operators, customs brokers and warehouse operators.

    Back2Basics: World Customs Organization (WCO)

    • WCO is an intergovernmental organization headquartered in Brussels, Belgium.
    • The WCO is noted for its work in areas covering international trade facilitation, customs enforcement activities, combating counterfeiting in support of Intellectual Property Rights (IPR), drugs enforcement, illegal weapons trading, integrity promotion, and delivering the sustainable capacity building to assist with customs reforms and modernization.
    • The WCO represents 179 Customs administrations that collectively process approximately 98% of world trade.
    • As the global centre of Customs expertise, the WCO has the tools and expertise to assist implementation of all legal, policy, procedural, technological, and human resource aspects related to trade facilitation.
    • The WCO maintains the international Harmonized System (HS) goods nomenclature and administers the technical aspects of the World Trade Organization (WTO) Agreements on Customs Valuation and Rules of Origin.

  • What is the Purchasing Managers’ Index (PMI)?

    India’s manufacturing industry has slid back to a decline in June, as per the IHS Markit Manufacturing Purchasing Managers’ Index (PMI).

    Purchasing Managers’ Index

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

    How is the PMI derived?

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

    How does one read the PMI?

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

    What are its implications for the economy?

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

  • [pib] NATRAX: Asia’s longest and world’s fifth longest High-Speed Track

    Minister of Heavy Industries and Public Enterprises has inaugurated the 11.3 km NATRAX- the High-Speed Track (HST) in Indore which is the longest such track in Asia.

    NATRAX

    • NATRAX, developed in an area of 1000 acres of land is a one-stop solution for all sorts of high-speed performance tests for the widest categories of vehicles from 2 wheelers to heavy tractor-trailers.
    • It has multiple test capabilities like measurements of maximum speed, acceleration, constant speed fuel consumption.
    • It can conduct emission tests through real road driving simulation, high-speed handling and stability evaluation during manoeuvred such as lane change, high-speed durability testing, etc.
    • Also, it is a Centre of excellence for Vehicle Dynamics.

    Features of the HST

    • The vehicle can achieve a max speed of 375 Kmph on curves with steering control and it has less banking on ovals making it also one of the safest test tracks globally.
    • It is the one-stop solution for all sorts of high-speed performance tests, being one of the largest in the world.
    • It can cater to the widest category of vehicles; say from two-wheelers to the heaviest tractor trailers

    Its significance

    • HST is used for measuring the maximum speed capability of high-end cars like BMW, Mercedes, Audi, Ferrari, Lamborghini, Tesla and so forth which cannot be measured on any of the Indian test tracks.
    • Being centrally located in Madhya Pradesh, it is accessible to most of the major OEMs.
    • Foreign OEMs will be looking at NATRAX HST for the development of prototype cars for Indian conditions.
    • At present, foreign OEMs go to their respective high-speed track abroad for high-speed test requirements.

  • Privatisation of public sector enterprises in India

    The article suggests the privatisation of public sector enterprises by analysing their performance and devising strategy for privatisation accordingingly.

    Three categories of public sector enterprises

    1) Sick for long time and beyond redemption

    • There is the category of enterprises which have been sick for a long time.
    • Their technology, plants and machinery are obsolete. 
    • They should be closed, and assets sold.
    • The labour in these enterprises have had a political constituency which has prevented closure.

    What should be done with these enterprises?

    • The Government should close these in a time-bound manner with a generous handshake for labour.
    • After selling machinery as scrap, there would be valuable land left.
    • Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
    • All this would need the creation of dedicated efficient capacity as the task is huge and challenging.
    • These enterprises may be taken away from their parent line Ministries and brought under one holding company.
    • This holding company should have the sole mandate of speedy liquidation and asset sale.

    2) Financially troubled but can be turned around

    • Private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
    • Air India and the India Tourism Development Corporation (ITDC) hotels are good examples.

    What should be done with these enterprises?

    • Air India should ideally be made debt free and a new management should have freedom permitted under the law in personnel management to get investor interest.
    • As valuation rises, the Government could reduce its stake further and get more money.
    • If well handled, significant revenues would flow to the Government.

    3) Profitable enterprises

    • Pragmatism instead of ideology should guide thinking about them.
    • The Chinese chose to nurture their good state-owned enterprises as well as their private ones to succeed in the domestic and global markets by increasing their competitiveness in cost, quality, and technology.
    • The Chinese chose to promote both their public as well as their private sector enterprises to rise.
    • Both have made China the economic superpower that it is today.

    What should be done with profitable enterprises?

    • The Government can continue to reduce its shareholding by offloading shares and even reducing its stake to less than 51% while remaining the promoter and being in control.
    • Calibrated divestment to get maximum value should be the goal instead of being target driven to get a lower fiscal deficit number to please rating agencies.
    • In parallel, managements may be given longer and stabler tenures, greater flexibility to achieve outcomes, and more confidence to take well-considered commercial risks.

    Challenges

    • First, the number of Indian private firms which can buy out public sector firms are very few.
    • Their limited financial and managerial resources would be better utilised in taking over the large number of private firms up for sale through the bankruptcy process.
    • Then, these successful large corporates need to be encouraged to invest and grow both in brownfield and greenfield modes in the domestic as well as international markets.
    • Sale at fair or lower than fair valuations to foreign entities, firms as well as funds, has adverse implications from the perspective of being ‘Atma Nirbhar’.
    • Again, greenfield foreign investment is what India needs and not takeovers.
    • Public sector enterprises provide for reservations in recruitment.
    • With privatisation, this would end and unnecessarily generate social unrest.

    Conclusion

    Would it be in India’s interest to lose the strategic capacity that its ownership of public enterprises including financial ones provide it? It would be better to think carefully now.

  • MCA raises threshold of Small and Medium Companies

    The Ministry of Corporate Affairs has expanded the turnover and borrowing thresholds for Small and Medium-sized Companies (SMC), allowing a larger number of firms to benefit from reporting exemptions under accounting norms.

    What is the change?

    • The MCA has increased the turnover threshold for SMCs to Rs 250 crore from Rs 50 crore, and the borrowing threshold to Rs 50 crore from Rs 10 crore.
    • SMCs are permitted to avail a number of exemptions under the Company (Accounting Standards) Rule 2021 to reduce the complexity of regulatory filings for smaller firms.
    • Banks, financial institutions, insurance companies, and listed companies cannot be classified as SMCs.
    • Further, any company which is either the holding company or subsidiary of a company that is not an SMC cannot be classified as an SMC.

    What are the exemptions available to SMCs that are not available to other firms?

    • SMC are completely exempted from having to file cash flow statements and provide a segmental break up of their financial performance in mandatory filings.
    • SMCs can also avail partial reporting exemptions in areas including reporting on employee benefits obligations such as pensions.
    • SMCs are exempted from having to provide a detailed analysis of benefit obligations to employees, but are still required to provide actuarial assumptions used in valuing the company’s obligations to employees.
    • SMCs are also exempted from having to report diluted earnings per share in their filings.
    • Diluted earnings per share reflect the per-share earnings of a company assuming that all options to convert other securities into shares are exercised.

    Answer this PYQ in the comment box:

    Q. What is/ are the recent policy initiative(s) of the Government of India to promote the growth of the manufacturing sector?

    1. Setting up of National Investment and Manufacturing Zones.
    2. Providing the benefit of single window clearance.
    3. Establishing the Technology Acquisition and Development Fund.

    Select the correct answer using the codes given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

    How does this impact these firms?

    • Experts have noted that the move would promote ease of doing business for the firms that would now be included under the definition of SMC.
    • The Accounting Standards for SMC, which were notified in December 2006 and amended from time to time, are much simpler as compared to Indian Accounting Standards (Ind AS).
    • These accounting standards involve less complexity in their application, including the number of required disclosures being less onerous.
    • Ind AS standards are applied to larger firms and are largely similar to International Financial Reporting Standards (IFRS) used in most developed jurisdictions.