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

  • Welcome Policy On APIs, Devices

    Context

    It is most welcome that the Centre has announced a `14,000-crore incentive package to boost the manufacture of drugs, especially active pharmaceutical ingredients (API).

    What should be the immediate policy focus?

    • Focus on protective gear: The immediate policy focus must be to swiftly overcome shortages of critical protective gear like gowns and face masks, diverting production lines if required.
    • We also need to anticipate and step-up production of vital devices like ventilators.
    •  Provisions in the package: What is proposed now are industrial parks for bulk drugs and APIs, together with a policy for multi-year fiscal benefits. And ditto for parks for the manufacture of medical devices and attendant fiscal incentives.
    • The state governments need to identify 1,000 acres for the parks that are well-integrated with knowledge centres and nationally accredited labs.

    What additions need to be made in the package?

    • Public-private partnership: In tandem, the pharmaceuticals package issued on Saturday needs to be followed through, with a forward-looking public-private partnership, to avoid import-dependency in this critical sector.
    • What is envisaged is a set of schemes to reap economies of scale and ready availability of inputs in the production of APIs and medical devices via the cluster approach.

    How India became uncompetitive in API?

    • Policy rigidities and price controls: APIs are, of course, bulk drugs that provide medicines with their therapeutic value, and it is unfortunate that since circa 1995, India has become steadily uncompetitive in API production, thanks to a panoply of policy rigidities such as onerous price controls.
    • Export competition from China: Opaque export competition from China has been game-changing indeed: APIs for most medicines are mostly imported.
    • This needs to change, fast. We do need to competitively and efficiently boost output of pharmaceuticals right across the value chain.

    Conclusion

    The government must understand that manufacture by itself is not enough. The policy must ensure competition and quality, keep prices down.

  • [pib] Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS)

    The Union Cabinet has approved Scheme for Promotion of manufacturing of Electronic Components and Semiconductors.

    About SPECS

    • The scheme aims to offer the financial incentive of 25% of capital expenditure for the manufacturing of goods that constitute the supply chain of electronic products.
    • The scheme will help offset the disability for domestic manufacturing of electronic components and semiconductors in order to strengthen the electronic manufacturing ecosystem in the country.

    Benefits

    The proposal, when implemented, will lead to the development of electronic components manufacturing ecosystem in the country. Following are the expected outputs/outcomes in terms of measurable indicators for the scheme:

    • Development of electronic components manufacturing ecosystem in the country and deepening of Electronics value chain
    • New investments in Electronics Sector to the tune of at least Rs. 20,000 crore
    • Total employment potential of the scheme is approximately 6,00,000
    • Reducing dependence on import of components by large scale domestic manufacturing that will also enhance the digital security of the nation

  • [pib] Production Linked Incentive Scheme

    The Union Cabinet has approved the Production Incentive Scheme (PLI) for Large Scale Electronics Manufacturing.

    Production Incentive Scheme (PLI)

    • The scheme proposes production linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components including Assembly, Testing, Marking and Packaging (ATMP) units.
    • The scheme shall extend an incentive of 4% to 6% on incremental sales (over a base year) of goods manufactured in India and covered under target segments, to eligible companies, for a period of five (5) years subsequent to the base year as defined.
    • The proposed scheme is likely to benefit 5-6 major global players and few domestic champions, in the field of mobile manufacturing and Specified Electronics Components and bring in large scale electronics manufacturing in India.

    Benefits

    • The scheme has a direct employment generation potential of over 2,00,000 jobs over 5 years.
    • It would lead to large scale electronics manufacturing in the country and open tremendous employment opportunities.  Indirect employment will be about 3 times of direct employment as per industry estimates.
    • Thus, the total employment potential of the scheme is approximately 8,00,000.

  • Schemes for Electronic Manufacturing

    The Union Cabinet has approved financial assistance to the Modified Electronics Manufacturing Clusters (EMC2.0) Scheme

    Background

    • To build and create requisite infrastructure ecosystem for electronics manufacturing; Ministry of Electronics and Information Technology notified Electronics Manufacturing Clusters (EMC) Scheme which was open for receipt of applications upto October, 2017.
    • A period of 5 years is available for disbursement of funds for the approved projects.
    • There was a need for continuation of such scheme in modified form for further strengthening the infrastructure base for electronics industry in the country and deepening the electronics value chain.

    EMC 2.0 Scheme

    • The Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme would support setting up of both Electronics Manufacturing Clusters (EMCs) and Common Facility Centers (CFCs).
    • For the purpose of this Scheme an EMC would set up in geographical areas of certain minimum extent, preferably contiguous, where the focus is on development of basic infrastructure, amenities and other common facilities for the ESDM units.
    • For Common Facility Centre (CFC) there should be a significant number of existing ESDM units located in the area and the focus is on upgrading common technical infrastructure and providing common facilities for the ESDM units in such EMCs, Industrial Areas/Parks/industrial corridors.

    Aims and objectives

    • The scheme aims for development of world class infrastructure along with common facilities and amenities through Electronics Manufacturing Clusters (EMCs).
    • It is expected that these EMCs would aid the growth of the ESDM sector, help development of entrepreneurial ecosystem, drive innovation and catalyze the economic growth of the region by attracting investments in the sector, increasing employment opportunities and tax revenues.

    Benefits

    The Scheme will create a robust infrastructure base for electronic industry to attract flow of investment in ESDM sector and lead to greater employment opportunities.  Following are the expected outputs/outcomes for the Scheme:

    • Availability of ready infrastructure and Plug & Play facility for attracting investment in the electronics sector:
    • New investment in electronics sector
    • Jobs created by the manufacturing units;
    • Revenue in the form of taxes paid by the manufacturing units

  • Short Selling of Stocks

    The stock exchanges have clarified that the Securities and Exchange Board of India (SEBI) was not considering any proposal regarding a ban on short selling to curb the ongoing volatility and equity sell-off.

    What is Short Selling?

    • Short-selling allows investors to profit from stocks or other securities when they go down in value.
    • In order to do a short sale, an investor has to borrow the stock or security through their brokerage company from someone who owns it.
    • The investor then sells the stock, retaining the cash proceeds.
    • The short-seller hopes that the price will fall over time, providing an opportunity to buy back the stock at a lower price than the original sale price.
    • Any money left over after buying back the stock is profit to the short-seller.

    When does short-selling makes sense?

    • Most investors own stocks, funds, and other investments that they want to see rise in value.
    • Over time, the stock market has generally gone up, albeit with temporary periods of downward movement along the way.
    • For long-term investors, owning stocks has been a much better bet than short-selling the entire stock market.
    • Sometimes, though, you’ll find an investment that you’re convinced will drop in the short term (as in case of COVID 19 outbreak).
    • In those cases, short-selling can be the easiest way to profit from the misfortunes that a company is experiencing.
    • Even though short-selling is more complicated than simply going out and buying a stock, it can allow making money when others are seeing their investment portfolios shrink.

    The risks of short-selling

    • Short-selling can be profitable when one makes the right call, but it carries greater risks than what ordinary stock investors experience.
    • When we buy a stock, the most we can lose is what you pay for it. If the stock goes to zero, we suffer a complete loss, but will never lose more than that.
    • By contrast, if the stock soars, there’s no limit to the profits one can enjoy. With a short sale, however, that dynamic is reversed.

    Example:

    • For instance, say you sell 100 shares short at a price of $10 per share. Your proceeds from the sale will be $1,000.
    • If the stock goes to zero, you’ll get to keep the full $1,000. However, if the stock soars to $100 per share, you’ll have to spend $10,000 to buy the 100 shares back.
    • That will give you a net loss of $9,000 — nine times as much as the initial proceeds from the short sale.

  • [pib] The Mineral Laws (Amendment) Bill, 2020

    Parliament has passed The Mineral Laws (Amendment) Bill, 2020 for amendments in Mines & Mineral (Development and Regulation) Act 1957 and The Coal Mines (Special Provisions) Act, 2015. The bill will transform the mining sector in the country boosting coal production and reducing dependence on imports.

    Acts to be amended

    • The MMDR Act regulates the overall mining sector in India.
    • The CMSP Act provides for the auction and allocation of mines whose allocation was cancelled by the Supreme Court in 2014.
    • Schedule I of the Act provides a list of all such mines; Schedule II and III are sub-classes of the mines listed in the Schedule I.
    • Schedule II mines are those where production had already started then, and Schedule III mines are ones that had been earmarked for a specified end-use.

    Features of the Mineral Laws (Amendment) Bill, 2020 

    Removal of restriction on end-use of coal

    • Currently, companies acquiring Schedule II and Schedule III coal mines through auctions can use the coal produced only for specified end-uses such as power generation and steel production.
    • The Bill removes this restriction on the use of coal mined by such companies.
    • Companies will be allowed to carry on coal mining operation for own consumption, sale or for any other purposes, as may be specified by the central government.

    Eligibility for auction of coal and lignite blocks

    • The Bill clarifies that the companies need not possess any prior coal mining experience in India in order to participate in the auction of coal and lignite blocks.
    • Further, the competitive bidding process for auction of coal and lignite blocks will not apply to mines considered for allotment to:
    1. a government company or its joint venture for own consumption, sale or any other specified purpose; and
    2. a company that has been awarded a power project on the basis of a competitive bid for tariff.

    Composite license for prospecting and mining

    • Currently, separate licenses are provided for prospecting and mining of coal and lignite, called prospecting license, and mining lease, respectively.
    • Prospecting includes exploring, locating, or finding mineral deposit.  The Bill adds a new type of license, called prospecting license-cum-mining lease.
    • This will be a composite license providing for both prospecting and mining activities.

    Non-exclusive reconnaissance permits holders to get other licenses

    • Currently, the holders of non-exclusive reconnaissance permit for exploration of certain specified minerals are not entitled to obtain a prospecting license or mining lease.
    • Reconnaissance means preliminary prospecting of a mineral through certain surveys.
    • The Bill provides that the holders of such permits may apply for a prospecting license-cum-mining lease or mining lease.   This will apply to certain licensees as prescribed in the Bill.

    Transfer of statutory clearances to new bidders

    • Currently,upon expiry, mining leases for specified minerals (minerals other than coal, lignite, and atomic minerals) can be transferred to new persons through auction.
    • This new lessee is required to obtain statutory clearances before starting mining operations.
    • The Bill provides that the various approvals, licenses, and clearances given to the previous lessee will be extended to the successful bidder for a period of two years.

    Reallocation after termination of the allocations

    • The CMSP Act provides for the termination of allotment orders of coal mines in certain cases.
    • The Bill adds that such mines may be reallocated through auction or allotment as may be determined by the central government.
    • The central government will appoint a designated custodian to manage these mines until they are reallocated.

    Prior approval from the central government

    • Under the MMDR Act, state governments require prior approval of the central government for granting reconnaissance permit, prospecting license, or mining lease for coal and lignite.
    • The Bill provides that prior approval of the central government will not be required in granting these licenses for coal and lignite, in certain cases.
    • These include cases where: (i) the allocation has been done by the central government, and (ii) the mining block has been reserved to conserve a mineral.

    Advance action for auction

    • Under the MMDR Act, mining leases for specified minerals (minerals other than coal, lignite, and atomic minerals) are auctioned on the expiry of the lease period.
    • The Bill provides that state governments can take advance action for auction of a mining lease before its expiry.

    With inputs from PRS India

  • Online versus offline

    Context

    Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise.

    Duopolies and scrutiny by the CCI

    • Duopolies in the most segment: The online marketplace or the platform/intermediation service market is now largely characterised by duopolies in most segments:
      • Amazon and Flipkart in e-commerce, Uber and Ola in transport, Zomato and Swiggy in food service, MakeMyTrip and Yatra in travel bookings.
      • Some niche players do exist in these segments, but by and large, the market has been carved up by large players.
    • Why CCI is scrutinising these companies? Several of these companies have come under the scrutiny of the Competition Commission of India (CCI).
      • What are the issues involved? The issues involved here have far-reaching ramifications for both online and offline market places. Some of the more contentious issues are:
      • Do such market structures restrict online competition?
      • Are the players engaging in predatory pricing?
      • If so, is it driving out both online and offline competition and does this adversely impact consumer welfare?
      • Is there a need for policy intervention, and, if so, what should be the underlying framework?

    Lower barrier to entry not translating into greater competition

    • Market not working as per theory: In theory, the online market structure should facilitate greater competition given the lower barriers to entry. But this may not be the case.
      • Take-over: Most other firms in the segments mentioned above have either been taken over or have folded up.
    • What is the reason for the emergence of such marker structures
    • Positive feedback loop: One explanation for the emergence of these market structures is that as companies grow, with more users coming on board these platforms, they benefit from what CCI calls positive feedback loop.
      • This leads to market concentration.
      • Difficulties for new players: Given the network effects, which are common in digital spaces, it becomes difficult for new players to enter these spaces, and gain market share as there isn’t much space for many such networks.
    • Capital intensive market: Another possible explanation is that, contrary to perception, the online space is highly capital intensive.
      • Deep pockets are required to fund the discounts to get customers on board initially.
      • Such market structures are more likely in capital deficit countries like India.
    • Incumbents restricting new entrant: Incumbents, as in other sectors, may also engage in various strategies to restrict entry and thus competition.
      • Even small actions by these platforms coupled with the network effects can adversely impact competition.

    Predatory pricing-issues involved in it

    • Allegations of predatory pricing driving out the competition: Many allege that these two-sided online platforms engage in predatory pricing or below-cost pricing either by funding it themselves (deep pockets) or by squeezing producers.
      • This drives out the competition — both online as well as offline.
      • Predatory pricing is anti-competition, to begin with.
      • How it is harmful to the customers? While consumers do benefit in the short run, once the competition is driven out, the platform starts raising prices to recoup previous losses.
      • But is it that straightforward?
    • What are the issues involved in predatory pricing?
    • First- Assessing whether a platform is engaged in predatory pricing.
      • In India, it is defined as price falling below average variable cost — may not be a straightforward exercise.
      • Why it is not a straight forward exercise? The dynamics of online pricing (prices change over time), their unique cost structures — in such two-sided platforms, prices/costs on both sides should be seen in conjunction — as well as the impact of economies of scale and organisational efficiency in lowering costs, all need to be factored in.
      • Discount for clearing inventories: Besides, one would also have to take into account that even offline firms engage in deep discounting to clear inventories.
      • As do both online and offline firms to acquire customers in the early stages of their business.
    • Second-The impact of such pricing strategies on competition and on consumer welfare must be carefully assessed.
      • Driving out competitors is not equal to driving out the competition: It is quite likely that once the competition is eliminated and the platform starts to raise prices, new players will enter the market, attracted by higher prices.
      • Driving out competitors may not be the same as driving out the competition — though the extent to which new firms are able to enter the market will depend on the degree to which barriers to entry exist.
      • Concerns of recovering the losses: Platforms will be mindful that losses will be hard to recover, and may not engage in below-cost pricing to drive out competitors for extended periods.
      • Consumers are unlikely to lose out as prices are likely to remain low.
    • Third- Possibility of collusion
      • There is also an argument for closer examination of such market structures because of the possibility of collusion.
      • Customers moving towards cheaper options: In most such markets, as the consumer has little to differentiate between the two platforms, it is the price that sets them apart.
      • Consumers tend to gravitate towards the cheaper option. This ensures continuous competition between the major players to offer low prices.
      • Possibility of customer left with no option: It is possible that at some point, the players will find it in their interest to venture into some sort of agreement that allows both of them to survive, rather than be engaged in a race to the bottom — as has seemingly happened in the telecom sector.
    • Fourth- Linking predatory pricing with abuse of dominant market position must be reexamined.
      • The dominant position is not always linked with predatory pricing: As the experience of the telecom sector shows, a dominant position may not be a prerequisite for predatory pricing.
      • Accepting this argument would imply that if regulatory intervention is required to check predatory pricing, it could kick in before market power or dominance is established.
      • Taking into account deep pockets: Alternatively, the definition of market dominance could be expanded to take into account deep pockets.

    Conclusion

    • Set of guidelines instead of the fixed framework: Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise. Having a fixed predetermined framework is unlikely to be helpful. Instead, it would be more useful to have a set of guiding principles based on which regulatory intervention, if required, can be undertaken.
    • Safeguarding competition not competitors: Competition policy should be driven by safeguarding competition, not competitors. It should seek to bring about greater transparency in pricing and reduce information asymmetry.

     

  • National Technical Textiles Mission

    The Cabinet Committee on Economic Affairs has given its approval to set up a National Technical Textiles Mission with a view to position the country as a global leader in Technical Textiles.

    What are Technical Textiles?

    • Technical textile is a textile product manufactured for non-aesthetic purposes, where the function is primary criterion.
    • They are functional fabrics that have applications across various industries including automobiles, civil engineering and construction, agriculture, healthcare, industrial safety, personal protection etc.
    • Technical Textiles is a high technology sunrise sector which is steadily gaining ground in. India.

    National Technical Textiles Mission

    • The Mission would have a four year implementation period from FY 2020-21 to 2023-24.
    • It will move into sunset phase after four years period.
    • A Mission Directorate in the Min. of Textiles headed by an eminent expert in the related field will be made operational.
    • The Directorate will not have any permanent employment and there will be no creation of building infrastructure for the Mission purpose.

    Components of the mission

    Component-I:  Promoting both (i) fundamental research at fibre level and (ii) application-based research in geo-textiles, agro-textiles, medical textiles, mobile textiles and sports textiles and development of bio­degradable technical textiles.

    Component-II: Promotion and Market Development.

    Component-III: Export promotion of technical textiles and ensuring 10% average growth in exports per year upto 2023-24. An Export Promotion Council for Technical Textiles will be set up for this purpose.

    Component-IV: Promoting technical education at higher engineering and technology levels related to technical textiles.

  • [pib] SPICe+ web form

     

    The Ministry of Corporate Affairs has launched SPICe+ web form.

    SPICe+

    • It would offer 10 services by 3 Central Govt Ministries & Departments (Ministry of Corporate Affairs, Ministry of Labour & Department of Revenue in the Ministry of Finance) and One State Government (Maharashtra).
    • It saves as many procedures, time and cost for Starting a Business in India and would be applicable for all new company incorporations.

    Following are the features of the new Spice+ web form:

    • SPICe+ would be an integrated Web Form.
    • SPICe+ would have two parts viz.: Part A-for Name reservation for new companies and Part B offering a bouquet of services viz.
    • Registration for Profession Tax shall also be mandatory for all new companies to be incorporated in the State of Maharashtra through SPICe+.
    • All new companies incorporated through SPICe+ would also be mandatorily required to apply for opening the company’s Bank account through the AGILE-PRO linked web form.

  • Trading with America

    Context

    Trump has made India’s trade headache more acute. But he has also opened up opportunities.

    Political polarisation in both countries

    • Impeachment attempt: The Democrats in the US have struggled to oust Trump from the White House and rarely find anything they can agree with their President on.
    • The deeper political divide in India: While ousting Narendra Modi through a legal process of impeachment is not an option in India, the political divide is even deeper.
    • No consensus on foreign policy
      • Under Trump, consensus on foreign policy in Washington has broken down.
      • In Delhi, the Opposition has never been willing to acknowledge the diplomatic successes of the government.
      • But the usually bipartisan support for foreign policy in the strategic community has eroded.
      • Many leading voices of the establishment who have a long and distinguished service have become major critics of foreign policy.

    Comparison of India’s trade with the US and China

    • Trade with the US: In 1995, total two-way trade, including goods and services, between India and the US was $11 billion.
      • In 2018, it crossed $140 billion.
      • It is reported to be around $150 billion in 2019.
      • In trade with the US, India enjoys a surplus of nearly $23 billion.
      • A 14-fold increase in trade turnover in 25 years is certainly not something to sneer at.
      • Can India and the US do better on trade? Yes, of course.
      • Only a few years ago, the two sides were looking at an annual trade target of $500 billion. That looks rather ambitious amidst the current disputes
    • Trade with China: India’s China trade too has risen, even more rapidly.
      • From a couple of hundred million dollars in the mid-1990s to nearly $90 billion in 2019.
      • India has a deficit of nearly $57 billion with China.

    Trade disputes between India-US

    • Trade has long been a contentious issue between Delhi and Washington.
    • There had been enduring tension since the late 1980s between the US demand for-
      • Greater market access.
      • Intellectual property protection.
      • And a host of other demands and India’s own cautious approach to economic liberalisation.
    • Rise in pressure under Trump administration: All recent US administrations have applied continuous pressure on India for trade agreements.
      • The pressure has significantly risen under President Trump.
    • Trade dispute at the centre of the relationship: If his predecessors were willing to cut some slack for India by citing larger political and strategic considerations in the bilateral ties, Trump has put trade disputes at the front and centre of the relationship.
      • Officials in the Department of Commerce and the US Trade Representative’s office have adopted extremely aggressive tactics in the negotiation with India.
    • Result of a radical reorientation of US trade policy: Trump has undertaken a radical reorientation of US trade policy.
      • For Trump, this is a matter of long-standing ideological conviction as well as a political convenience.
      • He has bet that the anti-free-trade White working classes in the American rust belt are the key to his re-election.
    • No option but to deal with it: Given America’s pole position in the global trading system, you have no option but to deal with it.
      • Trump is getting away with his demand for the restructuring of trade relations with key economic partners.
      • He has renegotiated the NAFTA with neighbours Canada and Mexico and has compelled China to start reducing the massive trade deficit with the US.
    • The difference in India and China’s response to the US: In response to Trump’s pressure, Xi reaffirmed his commitment to economic globalisation and domestic liberalisation and wooed American investors with even greater vigour than before.
      • India embracing protectionism: India appears to be sending the opposite signal — of a definitive drift towards protectionism. India’s trade troubles are certainly not limited to the engagement with the US.

    Problem with India’s trade policies

    • India walking away from RCEP: Delhi walked away at the very last minute from signing the RCEP agreement last year to deep disappointment among its partners including the ASEAN, Australia, Japan and New Zealand.
      • The trade deficit with China: One of the main arguments cited by India was the massive trade deficit with China and the potential danger of it widening further under RCEP.
    • Failure in negotiations with the EU: The European Union is reluctant so far to restart trade negotiations that ended in great frustration for Brussels some years ago.
    • No deal with Australia and New Zealand: Australia and New Zealand have given up.
    • Neighbours complaint: India’s immediate neighbours complain that India’s rhetoric on connectivity and regionalism is matched by the multiple non-tariff barriers that continue to constrain commerce across the South Asian frontiers.
    • Why so many deals are pending? It is certainly probable, statistically, one in a million, that the fault lies, always, with India’s partners. But one would think there might be a real problem with Delhi’s own trade policies.

    Conclusion

    • New opportunity: Trump has certainly made India’s trade headache more acute. But he has also opened up opportunities.
      • His trade war on China has put pressure on the global supply chains centred around China.
      • India not the beneficiary of the US-China trade war: Many companies are moving their production out of China, but only a few are turning towards India.
      • While Delhi has talked the talk on taking advantage of the US-China trade war, it is yet to get its act together.
    • No opposition against protectionism at home: What makes Delhi’s devaluation of trade as a key instrument of economic growth potentially irreversible is the fact that there is little domestic political opposition to it.
    • Time to take a hard look at trade policy: For now, though, India’s partnership with the US might not only survive the current trade tensions but advance during Trump’s visit.
      • There is so much happening elsewhere in the relationship — especially in the defence and security domain.
      • But the time has come for Delhi to take a hard look at its current trade policy that threatens to undermine India’s regional and international prospects.