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

  • Respecting wealth creators

    The article deals with the recent acknowledgement of the private sector by the Prime Minister in the development of the country.

    Respecting wealth creators

    • In his recent speech in Parliament, the Prime Minister openly acknowledged the contribution and role of the private sector as an important engine of growth and employment in India.
    • The creation of wealth is essential for growth, employment and the reduction of poverty.
    • India’s successes in many fields in the last three decades are linked to the private sector.
    • The industries that have created growth, jobs, buzz and hope in the last three decades, the vast majority have been driven by private enterprise.

    Steps taken to promote business

    • India has been making commendable strides in the “Ease of Doing Business”.
    • It is easier to start a business in India than it was a decade ago.
    • We seem to have broken the shackles of a chained belief that business is bad.
    • The success of the Mudra Yojana and Start-up India are living testimony to this fact.
    • And that India is daring to look at sectors we were otherwise hesitant to — space, defence, aeronautics.
    • Some areas need work, but a government willing to listen gives a good head start to solving those problems.
    • Work on faceless tax assessment and PLI schemes are moves that have received encouraging responses far and wide.
    • The India stack has revolutionised the fintech sector.
    • The digital health stack will likely do the same for healthtech.

    Conclusion

    The recent Union budget has made clear the intent of this government to pursue economic reform and go for growth — whether it is the willingness to live with a higher fiscal deficit or to aggressively pursue divestment of public sector enterprises. Large spending on infrastructure is good news too.

  • [pib] SFURTI Scheme

    Union Minister for MSME has inaugurated 50 artisan-based SFURTI clusters, spread over 18 States.

    SFURTI is an off-track scheme compared to other HRD schemes with Hindi acronyms. Similar is the SPARSH scheme for philately.

    SFURTI Scheme

    • Scheme of Fund for Regeneration of Traditional Industries (SFURTI) is an initiative by the Ministry of MSME to promote Cluster development.
    • Khadi and Village Industries Commission (KVIC) is the Nodal Agency for the promotion of Cluster development for Khadi.
    • Under the Scheme, the MSME Ministry supports various interventions including the setting up of infrastructure through Common Facility Centers (CFCs), procurement of new machinery, design intervention, improved packaging and marketing etc.

    Types of clusters

    • SFURTI clusters are of two types i.e., Regular Cluster (500 artisans) with Government assistance of up to Rs.2.5 crore and Major Cluster (more than 500 artisans) with Government assistance up to Rs.5 crore.
    • The scheme focuses on strengthening the cluster governance systems with the active participation of the stakeholders so that they are able to gauge the emerging challenges and opportunities and respond to them.

  • Cabinet approves PLI Scheme for telecom

    The Union Cabinet has approved the production-linked incentive scheme for the telecom sector with an outlay of ₹12,195 crores over five years.

    Why such a scheme?

    • The scheme aims to make India a global hub for manufacturing telecom equipment.
    • The sector is expected to lead to an incremental production of about ₹2.4 lakh crore, with exports of about ₹2 lakh crore over five years and bring in investments of more than ₹3,000 crores.

    PLI Scheme

    • The PLI scheme aims to boost domestic manufacturing and cut down on imports by providing cash incentives on incremental sales from products manufactured in the country.
    • Besides inviting foreign companies to set shop in India, the scheme aims to encourage local companies to set up or expand, existing manufacturing units.

    UPSC can directly as the sectors included in the PLI scheme. Earlier it was only meant for Electronics manufacturing (particularly mobile phones).

    Benefits for MSMEs

    • For inclusion of MSMEs in the scheme, the minimum investment threshold has been kept at ₹10 crores, while for others it is ₹100 crore.
    • For MSMEs, a 1% higher incentive is also proposed in the first three years.

    Employment generation

    • The scheme was also likely to generate 40,000 direct and indirect employment opportunities and generate tax revenue of ₹17,000 crores from telecom equipment manufacturing.

    Which equipments?

    • The telecom manufacturing would include core transmission equipment, 4G/5G Radio Access Network and wireless equipment, access and Customer Premises Equipment (CPE), IoT access devices, other wireless equipment.

  • Indian investments and BITs

    The article examine the termination of agreement for the development of East Container Terminal by Sri Lanka in the context of unilateral termination of bilateral investment treaties by India.

    Context

    • Recently, Sri Lanka terminated 2019 agreement with India and Japan that aimed to jointly develop the strategic East Container Terminal (ECT) at the Colombo port.
    • Apart from analysing the diplomatic fallout of this problematic decision for India-Sri Lanka ties, the issue also needs to be looked at through the prism of the India-Sri Lanka bilateral investment treaty (BIT).

    India-Sri Lanka  BIT and its termination

    • In 1997, India and Sri Lanka signed a BIT to promote and protect foreign investment in each other’s territories.
    • It empowers individual foreign investors to directly sue the host state before an international tribunal if the investor believes that the host state has breached its treaty obligations.
    • This is known as investor-state dispute settlement (ISDS).
    • Article 3(2) of this treaty provides that investments and returns of investors of each country shall, at all times, be accorded fair and equitable treatment (FET) in the other country’s territory.
    • The normative content of the FET provision has been fleshed out by scores of ISDS tribunals in the last two decades.
    • The tribunals have persistently held that an important component of the FET provision is that the host state should protect the legitimate expectations of foreign investors. 
    •  In a case known as International Thunderbird Gaming Corporation v Mexico, it was held that the concept of legitimate expectations relates to a situation where the host state’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure to honour those expectations could cause the investor (or investment) to suffer damages.
    • Sri Lanka, by signing the agreement to jointly develop the ECT at the Colombo port, created such expectations on the part of Indian investors.
    • However, the twist in the tale is that India unilaterally terminated the India-Sri Lanka BIT on March 22, 2017.
    • This termination was part of the mass repudiation of BITs that India undertook in 2017 as a result of several ISDS claims being brought against it.
    •  In cases of such unilateral termination, survival clauses in BITs assume significance because they ensure that foreign investment continues to receive protection during the survival period.
    • But, in the case of the investment in developing the ECT at the Colombo port, this survival clause will be inconsequential, since the agreement was signed in 2019, i.e., after India unilaterally terminated the BIT.

    Important lessons

    • As a consequence of the onslaught of ISDS claims in the last few years, India has developed a protectionist approach towards BITs.
    • However, an important attribute that perhaps has not received much attention is that BITs are reciprocal.
    •  BITs do not empower merely foreign investors to sue India, but also authorise Indian investors to make use of BITs to safeguard their investment in turbulent foreign markets.
    • Accordingly, given India’s emergence as an exporter, and not just an importer of capital, the government should revisit its stand on BITs.

    Consider the question “Examine the implications of unilateral termination of bilateral investment treaties(BITs) by India.”

    Conlcusion

    India needs to adopt a balanced approach towards BITs with an effective ISDS provision. This will facilitate Indian investors in defending their investment under international law should a country, like Sri Lanka, renege on an agreement.

  • IBC as an enabler

    The article analyses whether or not the Insolvency and Bankruptcy Code is delivering on its objectives.

    Criticism of IBC

    • The Insolvency and Bankruptcy Code (IBC), 2016 was enacted to resolve the stress of companies.
    • However, the corporate insolvency resolution process (CIRP)  has been criticised as it rescues only about 25 per cent of companies and leads to liquidation for the rest.

    Is IBC delivering on its mandate

    Let’s analyse how Insolvency and Bankruptcy Code (IBC) 2016 is working towards value maximising outcomes.

    1) It enables the market to attempt to resolve

    • The CIRP enables the market to attempt to resolve stress through a resolution plan whereby the company survives.
    • When it concludes that there is no feasible resolution plan to rescue the company, the company proceeds for liquidation.
    • The market usually rescues a viable company and liquidates an unviable one.
    • There are quite a few companies which have negligible assets and/or are defunct when they enter CIRP.
    • Many of these are beyond rescue for a variety of reasons, including creative destruction, and their continuation is a cost to the economy.
    • In such cases, the code enables liquidation to release available resources to alternate uses.
    • It is welcome, as it releases the assets as well as the entrepreneur stuck up in an unviable company, which is a key objective of the code.

    2) Look at the total asset value not the number of companies

    • In terms of absolute numbers, 25 per cent of companies were rescued and 75 per cent proceeded for liquidation.
    • In value terms, however, 75 per cent of the assets were rescued and 25 per cent of assets proceeded for liquidation.
    • Of the companies sent for liquidation, 75 per cent were either sick or defunct, and of the companies rescued, 25 per cent were either sick or defunct.

    3) Look at the overall impact, not just final numbers

    • Third, the stress that a company suffers is like an illness which can be treated by a variety of options.
    • Normally, recovery is better if diagnosis and treatment start early.
    • Likewise, the health of the company deteriorates if the resolution process is delayed.
    • The percentage of rescue at this later stage may not be significant.
    • The credible threat of CIRP that a company may change hands has redefined the debtor-creditor relationship.
    • Faced with the possibility of the CIRP, a debtor makes all-out efforts to prevent the stress, or resolve it much before it translates into a default, or settles the default.
    • Even after an application is filed, a debtor continues efforts to resolve the financial stress midway through settlement, review, mediation, or withdrawal to avoid the consequences of CIRP.
    • The number of companies that recover before filing the application as a percentage of those that get starts the insolvency process would give the fair idea about the efficacy of the IBC.

    Consider the question “The IBC has often been criticised for liquidating the companies rather than rescuing them. Do you agree with this criticism? Give reasons in support of your argument.”

    Conclusion

    Liquidation or rescue is an outcome of the market forces; the law is only an enabler giving choices and nudging a company towards value maximising outcomes. The “invisible hands” of the market works towards the best outcome, which we should respect and accept.

  • What are the One-Person Companies (OPCs)?

    In her Budget speech, the Union Finance Minister had announced measures to ease norms on setting up one-person companies (OPCs).

    Q.What are One-Person Companies (OPCs)?  Discuss how they will help startups and non-resident Indians?

    What is an OPC?

    • As the name suggests, a one-person company is a company that can be formed by just one person as a shareholder.
    • These companies can be contrasted with private companies, which require a minimum of two members to get going.
    • However, for all practical purposes, these are like private companies.
    • It is not as if there was no scope for an individual with aspirations in business prior to the introduction of OPC as a concept.
    • As an individual, a person could get into the business through a sole proprietorship mode, and this is a path that is still available.

    Why do we need such companies?

    • A single-person company and sole proprietorship differ significantly in how they are perceived in the eyes of law.
    • For the former, the person and the company are considered separate legal entities. In a sole proprietorship, the owner and the business are considered the same.
    • This has an important implication when it comes to the liability of the individual member or owner. In a one-person company, the sole owner’s liability is limited to that person’s investment.
    • In a sole proprietorship set-up, however, the owner has unlimited liability as they are not considered different legal entities.
    • Some see the proposal as a move to encourage corporatization of small businesses. It is useful for entrepreneurs to have this option while deciding to start a business.

    Is this a new idea?

    • Such a concept already exists in many countries. In India, the concept was introduced in the Companies Act of 2013.
    • Its introduction was based on the suggestions of the J. Irani Committee Report on Company Law, which submitted its recommendations in 2005.
    • Pointing out that there was a need for a framework for small enterprises, it said small companies would contribute significantly to the Indian economy.
    • But because of their size, they could not be burdened with the same level of compliance requirements as large public-listed companies.

    Features of OPCs

    • The law on one-person companies that took shape, as a result, exempted such companies from many procedural requirements, and, in some cases, provided relaxations.
    • For instance, such a company does not need to conduct an annual general meeting, which is a requirement for other companies.
    • A one-person company also does not require signatures of both its company secretary and director on its annual returns. One is enough.
    • There was, however, criticism that some rules governing a one-person company were restrictive in nature. This year’s Budget has dealt with some of these concerns.

    How many OPCs does India have?

    • According to data compiled by the Monthly Information Bulletin on Corporate Sector, there were 34,235 OPCs out of a total number of about 1.3 million active companies in India (Dec 2020).
    • Data also show that more than half of the OPCs are in business services.

  • [pib] Hathkargha Samvardhan Sahayata (HSS) Yojana

    The Ministry of Textiles introduced the technology up-gradation scheme called Hathkargha Samvardhan Sahayata (HSS) Yojana.

    Much recently, in the budget, the Mega Investment Textiles Parks (MITRA) Scheme was launched.

    HSS Yojana

    • This scheme is introduced as an up-gradation scheme under National Handloom Development Programme (NHDP) and Comprehensive Handloom Cluster Development Scheme (CHCDS) in 2015-16.
    • It aims to provide upgraded looms/accessories to handloom weavers to improve the quality of the fabric and enhance productivity.
    • Under the scheme, the Union Govt bears 90% of the cost of looms/accessories.
    • It is designed for all the weavers, including SC/ST/OBC and women.
    • The performance of this scheme will be evaluated by independent third-party agencies.

  • [pib] New Industrial Development Scheme for Jammu & Kashmir (J&K IDS, 2021)

    The Union Govt. has formulated the New Industrial Development Scheme for Jammu & Kashmir (J&K IDS, 2021).

    Tap to read more about: Reorganization of J&K

    J&K IDS, 2021

    • It is a new Central Sector Scheme for the development of Industries in the UT of Jammu & Kashmir.
    • The main purpose of the scheme is to generate employment which directly leads to the socio-economic development of the area.

    Incentives available

    • Capital Investment Incentive at the rate of 30% in Zone A and 50% in Zone B on the investment made in Plant & Machinery (in manufacturing) or construction of the building is available.
    • Capital Interest subvention: At the annual rate of 6% for a maximum of 7 years on loan amount up to Rs. 500 crore for investment in plant and machinery (in manufacturing) or construction of the building.
    • GST Linked Incentive: 300% of the eligible value of actual investment made in plant and machinery (in manufacturing) or construction in building for 10 years.
    • Working Capital Interest Incentive: All existing units at an annual rate of 5% for a maximum of 5 years. Maximum limit of incentive is Rs 1 crore.

    Key features:

    • The scheme is made attractive for both smaller and larger units.
    • Smaller units with an investment in plant & machinery upto Rs. 50 crore will get a capital incentive upto Rs. 7.5 crore and get capital interest subvention at the rate of  6% for a maximum of 7 years
    • The scheme aims to take industrial development to the block level in UT of J&K, which is the first time in any Industrial Incentive Scheme of the GoI.
    • The scheme has been simplified on the lines of ease of doing business by bringing one major incentive- GST Linked Incentive- that will ensure less compliance burden without compromising on transparency.
    • It is not a reimbursement or refund of GST but gross GST is used to measure eligibility for industrial incentive to offset the disadvantages that the UT of J&K face

    Major Impact and employment generation potential:

    • The scheme is to bring about a radical transformation in the existing industrial ecosystem of J&K with emphasis on job creation, skill development and sustainable development.
    • It is anticipated that the proposed scheme is likely to attract unprecedented investment and give direct and indirect employment to about 4.5 lakh persons.
    • Additionally, because of the working capital interest subvention, the scheme is likely to give indirect support to about 35,000 persons.

  • Importance of Resilient supply chains

    What does supply chain resilience mean? 

    • When assembly lines are heavily dependent on supplies from one country, the impact on importing nations could be crippling if that source stops production intentionally (economic sanction) or unintentionally (natural disaster)
    • Example: Japan imported $169 billion worth from China, accounting for 24% of its total imports. Japan’s imports from China fell by half in February 2020 that impacted Japan’s economic activity.
    • In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few

    Recent incidents that led to supply chain disruption

    • Disruptions in supply chains can be natural or man-made.
    • When the novel coronavirus pandemic broke out, it had an immediate and telling effect on supply chains emanating from China.
    • In Japan’s case, a nuclear disaster (Fukushima Daiichi) caused a sharp drop in Japanese automobile exports to the United States.
    • Terrorist drone attacks on oil refineries in Saudi Arabia in September 2019 resulted in a drop of 5.7 million barrels of oil per day.
    • That attack triggered a steep plunge in Saudi Arabia’s stock market and a sharp spike in global oil prices.
    • Tensions with China led the United States government to impose restrictions on the export of microchips to China’s biggest semiconductor manufacturer SMIC.

    Supply Chain Resilience Initiative (SCRI)

    • Geo-politics and geo-economics can never be truly separated.
    • Also, there is a growing trend of weaponization of trade and technology.
    • China had imposed sanctions on its key exports of grain, beef, wine, coal, etc to Australia for demanding an inquiry into the origins of the coronavirus and advocating a robust Indo-Pacific vision.
    • It is against this backdrop that India, Japan, and Australia initiated the Supply Chain Resilience Initiative (SCRI).
    • It focuses on automobiles and parts, petroleum, steel, textiles, financial services, and IT sectors.
    • The SCRI may be strengthened by the future involvement of France.
    • Kingdom has also shown interest in the SCRI.

    “China plus one” strategy

    • For many Japanese companies, global performance and profits are linked to manufacturing facilities and supply chains in China.
    • Yet, they have shown an early capacity for risk mitigation through the “China Plus One” business strategy.
    • The “China plus one” strategy aims at diversification of investments to the Association of Southeast Asian Nations (ASEAN), India, and Bangladesh.
    • Japan announced a 2.2 billion Relocation Package.
    • Of the companies that availed this package, 57 relocated to Japan, 30 to Southeast Asia, and two to India.

    India’s vulnerability to supply chain disruptions

    • India can ill-afford the shocks of disruption in supply chains.
    • For instance, the pandemic caused a breakdown in global supply chains in the automotive sector.
    • For India, which imports 27% of its requirement of automotive parts from China, this quandary was a wake-up call.
    • It is t is noteworthy is that despite being the fourth largest market in Asia for medical devices, India has an import dependency of 80%. 
    • Given the renewed thrust in the health-care sector, this is the right time to fill gaps through local manufacturing.

    India increasing its presence in global supply chains

    1) Electronic industry

    • India’s electronics industry was worth $120 billion in 2018-2019 and is forecast to grow to $400 billion by 2025.
    • India is enhancing its presence in the global supply chains by attracting investments in the semiconductor components and packaging industry.
    • The Indian electronics sector is gradually shifting away from completely knocked down (CKD) assembly to high-value addition.

    2) Defence sector

    • Defence is among the key pillars of the ‘Atmanirbhar Bharat’ policy.
    • The government is providing a big boost to defence manufacturing under the ‘Make in India’ program.
    • It has identified a negative import list of 101 items.
    • There is a tremendous opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.

    Consider the question “Pandemic has demonstrated the damage vulnerable supply chains can cause. It also underscored the importance of resilient supply chains. In light of this, examine the importance of diversification of supply chains.”

    Conclusion

    India has the capacity and the potential to become one of the world’s largest destinations for investments, and one of the world’s largest manufacturing hubs, in the aftermath of the pandemic.

  • Fixed-term employees

    The recent incident of violence at the iPhone manufacturing factory brought into focus the issue of contract labour. The article explains the reasons for its persistence despite the provision of fixed-term employment.

    Difference between a contract worker and fixed-term worker

    • Contract workers, who are hired via an intermediary (contractor) and are not on the payrolls of the company on whose shop floors they work.
    • Fixed-term employees can be directly hired by employers without mediation by a middleman.
    • They are ensured of the same work hours, wages, allowances, and statutory benefits that permanent workers in the establishment are entitled to.
    • Employers are not required to provide retrenchment benefits to fixed-term employees.
    • With an aim to discourage the use of contract workers the government introduced the option of fixed-term employment in the Code on Industrial Relations (2020).

    Issues with the provision of fixed-term employment

    • Fixed-term employment in India is indeed quite open-ended.
    • The Code does not specify a minimum or maximum tenure for hiring fixed-term employees.
    • Nor does it specify the number of times the contract can be renewed.
    • The absence of such safeguards can lead to an erosion of permanent jobs.
    • Workers may find themselves moving from one fixed-term contract to another, without any assurance of being absorbed as permanent workers by their employer.

    So, why firms still hire contract workers?

    • The cost of hiring contract workers continues to remain lower than the cost of hiring fixed-term employees. who are required to be paid pro-rata wages and social security including gratuity.
    • In addition, the monitoring, legal compliance, and litigation costs are shifted onto the contractor in case of contract workers, thereby reducing the transaction costs of recruitment to firms.
    • To encourage a shift away from contract workers to fixed-term employees, the government should have completely prohibited the use of contract labor in core activities
    • Instead of completely prohibiting contract workers in core activities the Labour Code on Occupational Safety and Health has allowed it under certain conditions.
    • Such a provision encourages the use of contract workers, undermining the initiative of introducing fixed-term employment.

    Using PLI and Atmanirbhar Bharat to boost formal job creation

    • The production linked incentive scheme (PLI) offers government subsidies for a limited period which is five years for mobile handsets.
    • The objective of the PLI scheme is to create “good jobs”.
    • It may have been more useful to link these incentives for which a financial outlay of Rs 1.45 lakh crore has been approved over five years for 10 sectors explicitly to job creation.
    • Significantly, under the Atmanirbhar Bharat Rozgar Yojana, the government is offering provident fund subsidies to employers for hiring new formal workers.
    • Both these programs could jointly be leveraged to give a big boost to formal job creation in the manufacturing sector.

    Consider the question “Examine the reasons for the persistence of contractual labour despite the option of fixed-term employment. Also suggest the ways to increase the employment opportunities that are secure.” 

    Conclusion

    The government should focus on the creation of employment opportunities that are secure through policies and laws.