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

  • ECLGS ambit widened to cos with loan dues up to 60 days

    To provide relief to stressed companies, the Finance Ministry expanded the scope of a government-guaranteed credit facility to healthcare and stressed sector companies that have loan dues for up to 60 days (or SMA-1 accounts),as against 30 days earlier (SMA-0).

    Key highlights:

    • This has been expected to provide partial relief to stressed firms facing fresh uncertainty and business risks due to fresh lockdowns and restrictions being imposed by states.
    • SMA-1 borrowers in the healthcare sector and 26 other high stress sectorsare now eligible under ECLGS 2.0.
      • Companies from hospitality, travel & tourism, and leisure & sportingsectors are expected to benefit from the relaxation in the scheme.
    • Accounts that are classified as non-performing assets or where overdueshave crossed 60 days (SMA-II) are not eligible.
    • Companies that had loan dues up to 30 days (Special Mention Accounts or SMA-0) as on February 29, 2020, were being provided additional credit of 20 per cent outstanding under the scheme, which will now be given to SMA-1 accounts as well.
    • The government has recently extended the ECLGS till June 2021, as against March 31, 2021 earlier.

    About the ECLGS scheme:

    • The Finance Ministry unveiled a Rs. 20 Lakh Crore comprehensive package, known as the Emergency Credit Line Guarantee Scheme (ECLGS), in view of the economic distress caused by the COVID-19 pandemic.
    • This package is in aid of MSME sector, addressing working capital needs, operational liabilities and restart business impacted due the COVID-19 crisis.
    • Borrowers with up to Rs. 25 Crore outstanding as on Feb 29, 2020 and up to Rs. 100 Crore annual turnover for FY 2020 are eligible for this scheme.
    • Business Enterprises, MSMEs constituted as Proprietorship, Partnership, registered company, trusts and Limited Liability Partnerships (LLPs) shall also be eligible.
    • Borrower accounts which had NPA or SMA-2 status as on Feb 29, 2020 shall not be eligible under the scheme.
    • 20% of the total outstanding credit of borrowers can be sanctioned as a loan under the Guaranteed Emergency Credit Line (GECL), for those who having a loan as on Feb 29, 2020.

    Special Mention Accounts:

    • SMAs are those assets/accounts that shows symptoms of bad asset qualityin the first 90 days itself or before it being identified as NPA.
    • The classification of Special Mention Accounts (SMA) was introduced by the RBI in 2014, to identify those accounts that has the potential to become an NPA/Stressed Asset.
    • Logic of such a classification is because some accounts may turn NPA soon.
      • An early identification will help to tackle the problem better.
      • There are four types of Special Mention Accounts – SMA-NF, SMA 0, SMA1 and SMA 2.
    • The Special Mention Accounts are usually categorized in terms of duration.
    • For example, in the case of SMA -1, the overdue period is between 31 to 60 days.
      • On the other hand, an overdue between 61 to 90 days will make an asset SMA -2.
    • But some ‘Special Mention’ assets are identified on the basis of other factors that reflect sickness/irregularities in the account (SMA -NF).
    • In the case of SMA -NF, non-financial indications about stress of an asset is considered.

  • Harmonized System of Nomenclature Code

    It has been made mandatory for a GST taxpayer having a turnover of more than Rs 5 crore in the preceding financial year, to furnish 6 digits HSN Code (Harmonized System of Nomenclature Code). This comes into effect from April 1.

    HSN code

    • The Harmonized System, or simply ‘HS’, is a six-digit identification code developed by the World Customs Organization (WCO).
    • Called the “universal economic language” for goods, it is a multipurpose international product nomenclature.
    • Over 200 countries use the system as a basis for their customs tariffs, gathering international trade statistics, making trade policies, and monitoring goods.
    • The system helps in harmonizing customs and trade procedures, thus reducing costs in international trade.

    What makes the 6 digit code?

    • A unique six-digit code has numbers arranged in a legal and logical structure, with well-defined rules to achieve uniform classification.
    • Of the six digits, the first two denote the HS Chapter, the next two give the HS heading, and the last two give the HS subheading.
    • The HS Code for pineapple, for example, is 0804.30, which means it belongs to Chapter 08 (Edible fruit & nuts, peel of citrus/melons), Heading 04 (Dates, figs, pineapples, avocados, etc. fresh or dried), and Subheading 30 (Pineapples).

  • What is the 2008 Lehman Crisis?

    The fire sale of about $20 billion of Archegos assets, comprising Chinese and US stocks, has sent jitters in the global financial markets, raising worries that the event could be a possible “Lehman moment”.

    What is the Lehman Crisis?

    • The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis.
    • After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal Reserve summoned several banks to negotiate to finance for its reorganization.
    • These discussions failed, and Lehman filed a petition that remains the largest bankruptcy filing in US history, involving more than US$600 billion in assets.

    Note: The subprime mortgage crisis occurred when the real estate market collapsed and homeowners defaulted on their loans.

    What defines the moment?

    • It signalled a limit to the government’s ability to manage the crisis and prompted a general financial panic.
    • Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the interbank lending market tightened, threatening banks with imminent failure.
    • The government and the Federal Reserve system responded with several emergency measures to contain the panic.

    Other terminologies:

    Margin Call

    • Typically, a margin call occurs when the value of an investor’s margin account falls below the broker’s required amount during a market correction or sell-off.
    • As the margin account contains securities bought with borrowed money, a margin call occurs when lenders demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value.
    • A margin call is usually an indicator that the securities held in the margin account have decreased in value.
    • When a margin call occurs, the investor must choose to either deposit more money in the account or sell some of the assets held in their account.
    • If the investor fails to pay up the margin amount, the lender will resort to the sale of assets lying in the investor’s account.

  • Remission of Duties and Taxes on Export Products (RODTEP) Scheme

    The notification of benefit rates payable to exporters under the Remission of Duties and Taxes on Export Products (RODTEP) scheme is expected to take more time as it is facing ‘teething issues’.

    Try this PYQ:

    Q.Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

    (a) China

    (b) India

    (c) Myanmar

    (d) Vietnam

    RODTEP Scheme

    • RoDTEP is a scheme for Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
    • It has replaced the current Merchandise Exports from India Scheme, which is not in compliance with WTO norms and rules.
    • The new RoDTEP Scheme is a fully WTO compliant scheme.
    • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

    Why need such a scheme?

    • The scheme was announced last year as a replacement for the Merchandise Export from India Scheme (MEIS), which was not found not to be compliant with the rules of the World Trade Organisation.
    • Following a complaint by the US, a dispute settlement panel had ruled against India’s use of MEIS as it had found the duty credit scrips awarded under the scheme to be inconsistent with WTO norms.

    Back2Basics: Merchandise Exports from India Scheme (MEIS)

    • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
    • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and will be in existence till 2020.
    • MEIS intended to incentivize exports of goods manufactured in India or produced in India.
    • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
    • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

  • Vehicle scrapping policy will help Indian steel reduce GHG emissions

    The article explains the advantages of the vehicle scrapping policy announced in the Budget FY22.

    Greenhouse gas contribution  steel industry

    • Steel industry uses carbon as the main reducing agent as also as a fuel for steel production.
    • GHG emissions of the Indian steel industry is 2.0-2.8 tonnes of CO2 per tonne of crude steel, against global average of 1.8 tonne of CO2.

    Scrapping policy

    • Two seminal announcements have been made in Budget FY22, viz. introduction of vehicle scrapping policy and doubling ship-breaking capacity to 9 million tonnes per year.
    • This will minimise dependence on import of scrap and cause a reduction of the GHG footprint of iron & steel.

    Producing steel using scrap

    • Most steel-producing countries are trying to bring down emissions by shifting from iron-ore-based production to scrap-based production.
    • This route can bring CO2 emissions down to below 0.5 tonne of CO2 per tonne of steel.
    • Although most steel-producing countries are using Electric Arc Furnaces (EAF) for scrap-based production, in India, both EAF and Induction Furnaces (IF) are used.
    • The main CO2 load in EAF-based steel production doesn’t come from the off-gas but from producing the electricity used in melting of the scrap.
    • Thus, this can be further reduced if renewable power is used as a source of electricity.

    Saving in forex spending

    • Availability of ferrous scrap in India is very limited—around 25 million tonnes annually from domestic sources.
    • In 2018-19 and 2019-20, the country imported nearly 6.5 million tonnes of scrap each year and thus large forex spending was incurrred.
    • With the announcement of vehicle scrapping policy, steel industry can expect enhanced indigenous availability of ferrous scrap.

    Strengthening the resource efficiency and circular economy

    • The quality of the steel produced is dependent upon the quality of input material and hence any improvement made in ensuring quality of scrap will have marked influence on the steel produced.
    • This shall strengthen the process of resource efficiency & circular economy as considerable natural resources shall be conserved with significant reduction in emission and it will help in moving towards a sustainable steel industry.

    Consider the question “Discuss the advantages of vehicle scrapping policy announced by the government in Budget FY 22.”

    Conclusion

    The announcement of the vehicle scrapping policy couldn’t have come at a better time for steel industry in India, as well since the country lacks desired quality of coking coal and natural gas is also imported.

  • Insurance (Amendment) Bill, 2021

    The Rajya Sabha has passed the Insurance Amendment Bill 2021 that increases the maximum foreign investment allowed in an insurance company from 49% to 74%.

    It is very intriguing to see several amendments in news these days. Isn’t it?

    Insurance Amendment Bill

    • The Bill seeks to amend the Insurance Act, 1938.
    • The Act provided the framework for functioning of insurance businesses and regulates the relationship between an insurer, its policyholders and its shareholders.
    • It also had provisions regarding the regulator (the Insurance Regulatory and Development Authority of India).

    Key highlights of the bill

    The Bill seeks to increase the maximum foreign investment allowed in an Indian insurance company.

    () Foreign investment

    • The Act allows foreign investors to hold up to 49% of the capital in an Indian insurance company, which must be owned and controlled by an Indian entity.
    • The Bill increases the limit on foreign investment in an Indian insurance company from 49% to 74%, and removes restrictions on ownership and control.
    • However, such foreign investment may be subject to additional conditions as prescribed by the central government.

    () Investment of assets 

    • The Act requires insurers to hold a minimum investment in assets which would be sufficient to clear their insurance claim liabilities.
    • If the insurer is incorporated or domiciled outside India, such assets must be held in India in a trust and vested with trustees who must be residents of India.
    • The Act specifies in an explanation that this will also apply to an insurer incorporated in India, in which at least: (i) 33% capital is owned by investors domiciled outside India, or (ii) 33% of the members of the governing body are domiciled outside India.
    • The Bill removes this explanation.

    Expected outcomes

    • More capital at dispense: The FDI limit increase is also expected to provide access to fresh capital to some of the insurance companies, which are struggling to raise capital from their existing promoters.
    • Better solvency: This would not only increase the solvency position for some insurers but would provide long-term growth capital for other companies to invest in newer technologies.
    • Insurance penetration: These technologies would not only help in managing losses but also in customer acquisition and thus insurance penetration.
    • Technological impetus: The additional funds could be used to invest in technology to adapt to the evolving customer needs like responsive service through digital platforms.

  • Draft E-Commerce Policy

    The Department for Promotion of Industry and Internal Trade (DPIIT) will soon come out with a common acceptable draft e-commerce policy.

    Earlier policy

    • The previous draft in July last year had proposed a regulator, an e-commerce law, periodic audit of companies that store or mirror Indian users’ data overseas.
    • The latest draft calls for streamlining of regulatory processes to ease the burden of compliance for activities related to e-commerce and regulations for data that will provide for sharing mechanism.

    What are the provisions of the new law?

    Data Usage

    • According to a revised draft, the government would lay down principles for the usage of data for industrial development, where such norms do not already exist.
    • They aim to put in place safeguards to prevent misuse and access of data by unauthorized persons.
    • Such safeguards may include regulating the cross-border flow of data pertaining to Indians and transactions taking place in India and the requirement of adequacy audits to be carried out by Indian firms.
    • As per the recent draft policy, violation of safeguards shall be viewed seriously and attract heavy penalties.

    Regulation, exports

    • Conformity assessment procedures will be put in place to verify that goods and services sold on e-commerce platforms meet required standards and technical regulations.
    • The government shall collect information from e-commerce platforms to aid it in making necessary decisions.
    • In order to ensure that e-commerce is not used to defraud customers, registration with an authority identified by the Government shall be mandatory.
    • The policy shall bring e-commerce exports on par with non-e-commerce exports by enabling online grant of drawbacks, advance authorization and GST refund.

    Consumer protection

    • As per the draft, e-commerce operators must ensure to bring out clear and transparent policies on discounts, including the basis of discount rates funded by platforms.
    • Such a move aims to ensure fair and equal treatment.
    • It said consumers have a right to be made aware of all relevant details about the goods and services offered for sale including country of origin, value addition in India etc.
    • In case the seller fails to establish the genuineness of his products within a reasonable time frame, the e-commerce platform shall delist the seller.

  • What are AT1 Bonds?

    The decision of the Securities and Exchange Board of India (SEBI) to slap restrictions on mutual fund (MF) investments in additional tier-1 (AT1) bonds has raised a storm in the MF and banking sectors.

    What are AT1 Bonds?

    • AT1 Bonds stand for additional tier-1 bonds. These are unsecured bonds that have perpetual tenure. In other words, the bonds have no maturity date.
    • They have a call option, which can be used by the banks to buy these bonds back from investors.
    • These bonds are typically used by banks to bolster their core or tier-1 capital.
    • AT1 bonds are subordinate to all other debt and only senior to common equity.
    • Mutual funds (MFs) are among the largest investors in perpetual debt instruments and hold over Rs 35,000 crore of the outstanding additional tier-I bond issuances of Rs 90,000 crore.

    What action has been taken by the Sebi recently and why?

    • In a recent circular, the Sebi told mutual funds to value these perpetual bonds as a 100-year instrument.
    • This essentially means MFs have to make the assumption that these bonds would be redeemed in 100 years.
    • The regulator also asked MFs to limit the ownership of the bonds to 10 per cent of the assets of a scheme.
    • According to the Sebi, these instruments could be riskier than other debt instruments.

    Try this PYQ:

    Consider the following statements:

    1. The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
    2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
    3. Treasury bills offer are issued at a discount from the par value.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 3 Only

    (c) 2 and 3 only

    (d) 1, 2 and 3

    How MFs will be affected?

    • Typically, MFs have treated the date of the call option on AT1 bonds as the maturity date.
    • Now, if these bonds are treated as 100-year bonds, it raises the risk in these bonds as they become ultra long-term.
    • This could also lead to volatility in the prices of these bonds as the risk increases the yields on these bonds rises.
    • Bond yields and bond prices move in opposite directions and therefore, the higher yield will drive down the price of the bond, which in turn will lead to a decrease in the net asset value of MF schemes holding these bonds.
    • Moreover, these bonds are not liquid and it will be difficult for MFs to sell these to meet redemption pressure.

    What’s the impact on banks?

    • AT1 bonds have emerged as the capital instrument of choice for state banks as they strive to shore up capital ratios.
    • If there are restrictions on investments by mutual funds in such bonds, banks will find it tough to raise capital at a time when they need funds in the wake of the soaring bad assets.
    • A major chunk of AT1 bonds is bought by mutual funds.

    Why has the Finance Ministry asked Sebi to review the decision?

    • The FM has sought withdrawal of valuation norms for AT1 bonds as it might lead to mutual funds making losses and exiting from these bonds, affecting capital raising plans of PSU banks.
    • The government doesn’t want a disruption in the fund mobilization exercise of banks at a time when two PSU banks are on the privatization block.
    • Banks are yet to receive the proposed capital injection in FY21 although they will need more capital to face the asset-quality challenges in the foreseeable future.
    • Fitch’s own estimate pegs the sector’s capital requirement between $15 billion-58 billion under various stress scenarios for the next two years, of which state banks account for the bulk.

  • 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.