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

  • USTR takes India off Developing Country List

    Context

    The United States’s annual exercise of designating developing, and least developed countries has assumed importance for India this year: it has been dropped from the list of developing countries.

     ‘Developing’ or ‘developed’ country designation by the US

    • Last week, the United States officially designated developing and least-developed countries for the purposes of implementing the countervailing measures.
      • The division is provided by the Agreement on Subsidies and Countervailing Measures (ASCM) of the World Trade Organisation (WTO).
    • Why the designation matters?
      • The higher level of subsidies allowed: According to the ASCM, developing countries are allowed to grant higher levels of subsidies as compared to the developed countries before countervailing duties (CVD) can be imposed.
      • What are the limits? The maximum limit of the subsidy is-
      • For developed country: Limit is maximum 1% of the import value of the investigated product.
      • For developing country: Limit is a maximum 2% of the import value of the investigated product.
      • If the limit is breached the importing country can impose a countervailing duty on the product.

    India as a target by the US

    • Provision of self-designation: Under the WTO rules, any country can “self-designate” itself as a developing country.
    • No criteria specified by the WTO: The WTO does not lay down any specific criteria for making a distinction between a developed and a developing country member, unlike in the World Bank where per capita incomes are used to classify countries.
    • Arbitrary criteria used to designate India: Despite this clearly laid down criterion in the WTO rules, the United States Trade Representative (USTR) employed an arbitrary methodology that took into consideration-
      • “Economic, trade, and other factors, including the level of economic development of a country (based on a review of the country’s per capita GNI) and a country’s share of world trade” to exclude India from list of designated developing countries.
    • Second such instance after denying GSP: Excluding India from the lists of developing countries for the purposes of using countervailing measures or denying benefits of GSP are but two of the more recent initiatives that the U.S. has taken to challenge India’s status as a developing country in the WTO.

    What would the impact on India?

    • Loss of Special and Differential Treatment (S&DT): India would lose the ability to use the special and differential treatment (S&DT) to which every developing country member of the WTO has a right.
      • What is S&DT? In short, S&DT lessens the burden of adjustment that developing countries have to make while acceding to the various agreements under the WTO.
      • How S&DT benefited India?S&DT has been particularly beneficial for India in two critical areas: one, implementation of the disciplines on agricultural subsidies and, two, opening up the markets for both agricultural and non-agricultural products.
    • Limits on subsidies: The WTO Agreement on Agriculture(AoA) provides an elaborate discipline on subsidies.
      • Subsidies are classified into three categories, but two of these are virtually outside the discipline since the WTO does not limit spending on these categories of subsidies.
      • Limits on price support measures: The discipline exists in case of price support measures (minimum support price) and input subsidies which is the more common form of subsidies for most developing countries, including in India.
      • Limits on spending on prices support measures: For developing countries, spending on price support measures and input subsidies taken together cannot exceed 10% of the total value of agricultural production.
      • In contrast, developed countries are allowed to spend only 5% of their value of agricultural production.

    Shifting to DBT

    • Why shifting to DBT necessary? India is a major user of price support measures and input subsidies.
      • And given the constraints imposed by the AoA, the government has spoken about its intention to move into the system of direct benefit transfer (DBT) for supporting farmers.
      • No limit on spending through DBT: A shift to DBT is attractive for India since there are no limits on spending, unlike in case of price support measures and input subsidies.
      • Rework subsidies’ programme: Faced with on-going farm distress, the government has had to rework its subsidies’ programme in order to extend greater benefits, especially to small and marginal farmers.
    • Challenges in the implementation of DBT
      • Implementation of DBT in agriculture has several insurmountable problems.
      • Difficulty in identifying the beneficiary: Targeting potential beneficiaries of DBT seems difficult at this juncture for a number of reasons, including inadequate records of ownership of agricultural land on the one hand, and the presence of agricultural labour and tenants on the other.
      • This implies that in the foreseeable future, India would continue to depend on price support measures and input subsidies.
      • How it matters: Given this scenario, the government needs the policy space to provide adequate levels of subsidies to a crisis-ridden agricultural sector.
      • And therefore it is imperative that continues to enjoy the benefits as a developing country member of the WTO.

    Issue of tariffs

    • The issue of market access, or the use of import tariffs, is one of the important trade policy instruments.
    • Provision of no reciprocal tariff cuts: It has some key provisions on S&DT, which the developing countries can benefit from. The most important among these is the undertaking from the developed countries that they would not demand reciprocal tariff cuts.
      • Over the past two years, the government of India has been extensively using import tariffs for protecting Indian businesses from import competition.
      • With the increasing use of tariffs, almost across the board, India’s average tariffs have increased from about 13% in 2017-18 to above 17% at present.
    • Why it matters? Developed country members of the WTO have generally maintained very low levels of tariffs, and, therefore, India’s interests of maintaining a reasonable level of tariff protection would be well served through its continued access to S&DT, by remaining as a developing country member of the WTO.

    Conclusion

    With the changing stance of the US towards India, the government must ensure its international trade and agriculture at home is not adversely impacted.

     

  • Adjusted Gross Revenue (AGR)

    The Supreme Court came down heavily on the Department of Telecommunications (DoT) for issuing a notification that asked for no coercive action against telecom companies even though they had not paid the adjusted gross revenue (AGR) dues by the stipulated deadline.

    What is AGR?

    • Adjusted Gross Revenue (AGR) is the usage and licensing fee that telecom operators are charged by the Department of Telecommunications (DoT).
    • It is divided into spectrum usage charges and licensing fees.

    What does SC order on AGR mean?

    • The order by the top court means that the telecom companies will have to immediately clear the pending AGR dues, which amount to nearly Rs 1.47 lakh crore.
    • Vodafone Idea, which has to pay up nearly Rs 53,000 crore, faces the prospect of shutting down business.
    • Bharti Airtel, which faces a payout of more than Rs 21,000 crore, could also be in trouble for not paying the AGR dues on time.
    • Other than the telcos, non-telecom companies could also be facing huge payouts individually, which amount to total of Rs 3 lakh crore.

    What exactly did the government notification say?

    • The Licensing Finance Policy Wing of the DoT last month directed all government departments to not take any action against telecom operators if they failed to clear AGR-related dues as per the Supreme Court’s order.
    • The order came as a huge relief for operators — mainly Bharti Airtel and Vodafone Idea — that would have otherwise faced possible contempt action for not paying dues by the deadline that ran out on that same day.

    No more relief to telecoms

    • Bharti Airtel and Vodafone Idea together owe the telecom department Rs 88,624 crore.
    • Prior to the DoT order restraining coercive action, the companies had told the government that they would wait for the outcome of the Supreme Court hearing.
    • Reliance Jio paid up its dues of Rs 195 crore on January 23.
    • As things have turned out, however, the companies have got no relief from the Supreme Court.

    What is the background of SC’s AGR order?

    • On October 24, 2019, the court had agreed with DoT’s definition of AGR, and said the companies must pay all dues along with interest and penalty.
    • Bharti Airtel and Vodafone Idea had tried to persuade DoT to relax the deadline and, after failing, moved the court seeking a review of its judgment.
    • The court dismissed the review petition in mid-January, and also did not extend the deadline for paying AGR dues.
    • It had, however, agreed to hear the companies’ modification plea.

    Where does the government stand in this situation?

    • The payout by telecom and non-telecom companies is likely to lead to windfall gains for the central government, which could help it close some of the fiscal deficit gap for the current financial.
    • At the same time, however, the government will be under pressure to ensure that the telecom market does not turn into a duopoly if Vodafone Idea does indeed decide to shut shop.
    • It will also have to manage the payouts to be done by non-telecom companies as most of them, such as Oil India, Power Grid, Gail, and Delhi Metro Rail Corporation are public sector units.

    What does this situation mean for customers and lenders?

    • If Vodafone Idea does exit, an Airtel-Jio duopoly will be created, which could lead to bigger bills, considering it was the cutthroat competition in the sector that made mobile telephony and Internet almost universally affordable.
    • The AGR issue has triggered panic in the banking industry, given that the telecom sector is highly leveraged.
    • Vodafone Idea alone has a debt of Rs 2.2 lakh crore that it has used to expand infrastructure and fund spectrum payments over the years.
    • The mutual fund industry has an exposure of around Rs 4,000 crore to Vodafone Idea.

    Assist this newscard with:

    https://www.civilsdaily.com/news/explained-adjusted-gross-revenue-agr-in-telecom-sector/

  • Missed call

    Context

    As the dust settles after the Union budget and the Supreme Court’s decision to not provide relief to telcos from their licence fee liabilities, it is an appropriate moment to step back and examine how we got here.

    The issue over the definition of AGR (Aggregate Gross Revenue)

    • What is AGR issue: Since the New Telecom Policy of 1999 (NTP 1999), operators were required to pay a percentage of their AGR to the government as licence fees instead of a one-time licence fee.
      • License fee based on earnings: This was done in exchange for moving operators from fixed licence fee-based on irrationally exuberant bids they had made in the mid-nineties-to a regime that determined licence fee based on revenue earned, thereby de-risking the obligation.
      • Why it matters? What constitutes AGR is important for the purpose of the computing licence fee and thousands of crore are dependent on this.
    • Consequences of ambiguity over the definition of AGR: Bundling – a pervasive phenomenon in most telecom markets have not taken off in India.
      • What is bundling? Product bundling is a marketing strategy that involves offering several products and/or services for sale as one combined product.
      • The fear is that handset sales will also come under the purview of AGR. Handsets, it could still be argued are part of the service offering.
      • Dividend on earning is considered as the part of AGR: Interest and dividend earnings on investments have also been included in AGR.

    Unfair practices and cancellation of licences by the court

    • Controversy over conversion charges: In 2003, “limited” mobility service was converted into a fully mobile service with a one-time payment of Rs 1,658 crore as “conversion” charges, generating controversy. It was labelled as a “back door entry” to full mobility.
    • Disguising international calls as domestic: Around the same time, the DoT used to levy a fee of Rs 4.75 per minute on international calls known as “access deficit charge” (ADC) to fund universal coverage. It is well known that an operator disguised international calls as domestic to bypass ADC.
    • Showing call revenue as internet services revenue: For some time, internet services attracted lower or no licence fee and it became expedient for operators to indulge in license fee “arbitrage” by showing more revenue from internet services.
    • Inflating subscriber numbers: Another manoeuvre was to inflate subscriber numbers to gain access to scarce spectrum in the days when fresh spectrum was administratively assigned based on subscriber numbers.
    • First come first serve policy: Finally, the shameful spectacle was the battle fought by operators to jump the queue to deposit earnest money for gaining rights over the spectrum that was oddly sought to be assigned by a method called “first come first served” and whose definition itself was quite elastic.
    • Cancellation of licence by the Court: Thereafter, in the litigation that inevitably followed, the Court cancelled 122 telecom licences and mandated allocation of spectrum by auction.

    Conclusion

    • Erosion of trust between the public and private sector in general and in the telecom sector, in particular, has been a negative externality of the reform process.
    • Restoration of trust between public and private sector is necessary: In this context, the appeal made by the finance minister during her budget speech for the restoration of “vishwaas” between the public and private sectors and between citizens and government is critical

  • India’s rerun of its protectionist folly mars the liberalization era

    Context

    The latest budget’s import tariff hikes signal that a three-decade commitment to trade openness has been all but abandoned.

    Detrimental effects of protectionism

    • In brief, both economic theory and a vast weight of evidence point to the detrimental effects of protectionism. These are-
      • Fostering inefficiency: Far from jump-starting the domestic industry, tariffs, quotas and other trade restrictions foster inefficiency among domestic firms that survive only because of
      • And do not become more productive under it, as the government’s threat to withdraw the protection is never credible.
      • The consumer is the ultimate loser: Meanwhile, upstream industries suffer higher than necessary input costs.
      • Consumers of final goods end up footing the bill.
      • Governments earn some tariff revenue, but never enough to warrant the distortion costs to the economy.
    • Tariff inversion: The tariff “spikes” cause greater distortion than a revenue-equivalent uniform tariff, and may lead to the problem of tariff “inversion”.
      • What is tariff inversion? A situation in which intermediate goods are taxed more heavily than final goods, thus paradoxically further disadvantaging, rather than aiding, domestic producers of final goods.
    • Rent-seeking by domestic industries: Tariffs worsens rent-seeking by domestic industries-
      • Protectionism increases lobbying: A force which would be muted in a world where tariffs are locked at a uniform level by statute, and, as a result, industries individually have less of an incentive to lobby for tariffs that are to be applied economy-wide rather than only for their own benefit.
      • Economists Arvind Panagariya and Dani Rodrik had formalized this intuition many years ago, and it matches both common sense and observation.
      • The apparently random list of sectors that would benefit from tariff increases in the recent budget-strongly suggests the possibility of rent-seeking behaviour.

    Conclusion

    Ample experience of import substitution in economies across the emerging world and over many decades, including in India until 1991, attest to the fact that protectionism, especially abetted by rent-seeking behaviour, is like a rabbit-hole: once inside, one keeps going deeper and deeper, and egress is difficult at best.

  • Purified Terephthalic Acid (PTA)

    • During her Budget speech, FM Mrs. Sitharaman said that the government was abolishing in “public interest” an anti-dumping duty that was levied on imports of a chemical called PTA.
    • Domestic manufacturers of polyester have called the move a huge relief for the industry, claiming they had been fighting to remove the duty for four-and-a-half years.

    What is PTA?

    • Purified Terephthalic Acid (PTA) is a crucial raw material used to make various products, including polyester fabrics.
    • PTA makes up for around 70-80% of a polyester product and is, therefore, important to those involved in the manufacture of man-made fabrics or their components, according to industry executives.
    • This includes products like polyester staple fibre and spun yarn.
    • Our cushions and sofas may have polyester staple fibre fillings. Some sportswear, swimsuits, dresses, trousers, curtains, sofa covers, jackets, car seat covers and bed sheets have a certain proportion of polyester in them.

    What led to the government decision?

    • There has been persistent demand that they should be allowed to source that particular product at an affordable rate, even if it means importing it.
    • She had said easy availability of this “critical input” at competitive prices was desirable to unlock “immense” potential in the textile sector, seen as a “significant” employment generator.
    • The duty had meant importers were paying an extra $27-$160 for every 1,000 kg of PTA that they wanted to import from countries like China, Taiwan, Malaysia, Indonesia, Iran, Korea and Thailand.
    • Removing the duty will allow PTA users to source from international markets and may make it as much as $30 per 1,000 kg cheaper than now, according to industry executives.

  • Integrating “Assemble in India” into Make in India

    Giving a new dimension to ‘Make in India’, the Economic Survey 2019-20 suggested that the government should integrate ‘Assemble in India for the world’ into ‘Make in India’ to boost exports and generate jobs.

    Assemble in India

    • Survey says India has unprecedented opportunity to chart a China-like, labour-intensive, export trajectory.
    1. By integrating “Assemble in India for the world” into Make in India, India can:
    2. Raise its export market share to about 3.5 % by 2025 and 6 % by 2030.
    3. Create 4 crore well-paid jobs by 2025 and 8 crore by 2030.
    • Exports of network products can provide one-quarter of the increase in value added required for making India a $5 trillion economy by 2025.

    How to harness the situation?

    • The US-China trade war is causing major adjustments in global value chains and firms are scouring alternative locations for operations.
    • Even before the trade war began, China’s image as a low-cost location for final assembly of industrial products was rapidly changing due to labour shortages and increases in wages.
    • These developments present India an unprecedented opportunity to chart a similar export trajectory as that pursued by China and create unparalleled job opportunities for its youth.
    • As no other country can match China in the abundance of its labour, we must grab the space getting vacated in labour-intensive sectors.

    Key suggestions made by the Survey

    Survey suggests a strategy similar to one used by China to grab this opportunity by:

    1. Specialization at large scale in labour-intensive sectors, especially network products.
    2. Laser-like focus on enabling assembling operations at mammoth scale in network products.
    3. Export primarily to markets in rich countries.
    4. Trade policy must be an enabler.

  • Dividend Distribution Tax (DDT)

     

    Finance Minister announced abolition of DDT to be paid by companies in her budget speech.

    What is DDT?

    • A dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year.
    • Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax.
    • However, the income tax laws in India provide for an exemption of the dividend income received from Indian companies by the investors by levying a tax called the DDT on the company paying the dividend.

    Who were required paid DDT?

    • Any domestic company which is declaring/distributing dividend is required to pay DDT at the rate of 15% on the gross amount of dividend as mandated under Section 115O of the Income Tax Act.
    • DDT was also applicable on mutual funds.

    Why it is scrapped?

    • Every MNE investing in India is faced with the question of tax-efficient repatriation of profits that accumulate here.
    • The dividend that the holding company would receive would have already suffered substantial tax in India, although indirectly.
    • The foreign company would normally be required to pay tax on the dividend so received in its home jurisdiction.
    • DDT being a tax in the Indian company and the foreign company not paying taxes directly on such dividend income in India, it would not be able to claim foreign tax credit in its home jurisdiction.
    • This resulted in a double whammy for foreign companies as, at a group level, they suffered double taxation.

  •  India’s imports of palm oil — dynamics of the trade with Malaysia

     

    India has cut import duty on crude palm oil (CPO) and refined, bleached and deodorized (RBD) palm oil, and also moved RBD oil from the “free” to the “restricted” list of imports.

    A move against outspoken Malaysia

    • Curbing palm oil imports has been construed as retaliation against Malaysia’s PM Mahathir Mohamad, who has criticised India’s internal policy decisions such as the revocation of the special status for J&K and CAA.
    • Malaysia has also been sheltering since 2017 the Islamic preacher Zakir Naik who is wanted by India on charges of money laundering, hate speech, and links to terror.

    Has India banned import of Malaysian palm oil because of political reasons?

    • Not really. The import of RBD palm oil has been restricted, not banned — and this is from all countries, not just Malaysia. Also, CPO can still be imported freely.
    • Under the trade classification system that India follows, except for goods that can be imported only by state trading enterprises all goods whose import is not restricted or prohibited are traded freely.
    • Normally, a special licence is required to import a restricted good. The government has neither specified what the restrictions entail nor issued any licences.
    • However, it has been reported that vessels carrying RBD palm oil are stuck at several ports because buyers have been asked to shun the product.

    How much palm oil does India import?

    • India imported 64.15 lakh metric tonnes (MT) of CPO and 23.9 lakh MT of RBD in 2018-19, the bulk of which was from Indonesia.
    • India imported $10 billion worth of vegetable oil in 2019-20, making it the country’s fifth most valuable import after mineral oil ($141 bn), gold ($32 bn), coal ($26 bn), and telecom instruments such as cell phones ($17 bn).

    Why does India need so much palm oil?

    • It is the cheapest edible oil available naturally.
    • Its inert taste makes it suitable for use in foods ranging from baked goods to fried snacks.
    • It stays relatively stable at high temperatures, and is therefore suitable for reuse and deep frying. It is the main ingredient in vanaspati (hydrogenated vegetable oil).
    • However, palm oil is not used in Indian homes.
    • That, and the fact that CPO continues to be imported, makes it unlikely that the decision to restrict refined palm oil imports will impact food inflation immediately.

    Who will be impacted by the decision?

    • Indonesia and Malaysia together produce 85% of the world’s palm oil, and India is among the biggest buyers.
    • Both Indonesia and Malaysia produce refined palm oil; however, Malaysia’s refining capacity equals its production capacity — this is why Malaysia is keen on exporting refined oil.
    • Indonesia, on the other hand, can supply CPO, which would allow India to utilise its full refining capacity.

    Why import Crude Palm Oil?

    • The CPO that India imports contains fatty acids, gums and wax-like substances. Refining neutralises the acids and filters out the other substances.
    • The filtrate is bleached so that the oil does not change colour after repeated use. Substances that may cause the oil to smell are removed physically or chemically.
    • This entire process increases the value of a barrel of crude oil by about 4%.
    • Additionally, there are costs to transporting the crude, which makes it more cost-effective to import the refined oil.
    • But the refining industry has been demanding that the import duty on refined oil be increased, which would make importing crude oil cheaper than importing refined oil.
    • The decision to restrict imports of refined oil will benefit refiners, which include big-ticket names like the Adani Wilmar group.

    Will restricting imports of RBD palm oil help farmers?

    • Restricting refined oil imports will not help farmers directly, as they are not involved in the process of refining.
    • However, the restrictions have caused refined palm oil prices to increase. If prices continue to hold, farmers will get a better realization for their crop.
    • But the timeframe over which the changes in import policy will have an effect on domestic crop realization is fairly long, given that palm trees take over four years to provide a yield.
    • Also, if the demand is met entirely by importing and refining CPO, farmers will be left out of the picture.

    How will Malaysia be affected?

    • Malaysia has said that it cannot retaliate against India because it is “too small”.
    • With imports to its largest market restricted (India bought over 23% of all CPO produced by Malaysia in 2019), Malaysian palm oil futures fell by almost 10% in January, although it has recovered since then.
    • India and Malaysia signed a free trade agreement — Malaysia-India Comprehensive Economic Cooperation Agreement — in February 2011.
    • In 2018, Malaysia exported 25.8% of its palm oil to India.
    • If India does not issue licenses for importing refined oil, Malaysia will have to find new buyers for its product.

  • Air India Disinvestment

    The government has kicked off the complete disinvestment process of Air India for the second time after it failed to receive a single bid in the first attempt back in 2018.

    100% stake sale

    • Most significantly, the government will offload 100% of its stake in Air India, compared with 76% put on the block last time.
    • The government holding even a minor stake in the airline post disinvestment was seen as a huge negative for any potential buyers.
    • The buyer will have to take on Rs 23,286 crore of debt out of a total Rs 60,074 crore.
    • Compared with this, in the last attempt, a potential buyer would have to take on Rs 33,392 crore of debt and current liabilities.
    • The amount of debt being bundled with the airline in this attempt is towards the aircraft that are being sold off along with the carrier as part of the transaction.
    • The working capital and other non-aircraft debt will be retained by the government.

    Air India’s assets

    • The new owner will be taking on a fleet of 121 aircraft in Air India’s fleet and 25 planes in Air India Express’ fleet.
    • These exclude the four Boeing 747-400 jumbojet aircraft that the airline plans to transfer to its subsidiary Alliance Air, which is not a part of the current transaction.
    • However, like the last attempt, the properties currently in use by Air India, including the Nariman Point building and the company’s headquarters near Connaught Place in New Delhi will be retained by the government.

    Will the new terms attract investors?

    • Air India has a 50.64% market share in international traffic among Indian carriers.
    • The government is hopeful of attracting investors with the new sale criteria, coupled with the main benefits of the airline, which are prime slots in capacity-constrained airports across the world.
    • However, any potential investor is also expected to look at the size of the airline’s operations with reference to what those operations generate.
    • For example, both Air India and Singapore Airlines operate with a fleet of 121 aircraft, but in 2018-19 Air India posted a net loss of Rs 8,556 crore, whereas Singapore Airlines reported a net profit of Singapore $ 779.1 million (approx Rs 4,100 crore).

    What will the new investor get?

    • The most attractive proposition in acquiring Air India is the slots and landing rights that it holds at airports such at Delhi, Mumbai, London, New York, Chicago, Paris, etc.
    • These could be helpful both to airlines looking to expand into long-haul international operations, and to entities looking to set up global operations from scratch.
    • Air India currently operates to 56 Indian cities and 42 international destinations.
    • The new investor also gets hold of the ground-handling firm AI-SATS, which offers end-to-end ground handling services such as passenger and baggage handling, ramp handling, aircraft interior cleaning etc. at Bengaluru, Delhi, Hyderabad, Mangaluru and Thiruvananthapuram airports.
    • This would provide the investor with an ancillary services firm with captive use.

    Loss makers in AI

    • Several of Air India’s international and domestic routes are profit-generating, while a number of them are loss-making or witness low load factors.
    • This is a legacy problem that the airline comes with for the new promoter.
    • Additionally, while the airline comes with 121 aircraft primed as domestic and international workhorses, 18 of them are grounded for lack of funds to make them airworthy.

    How will consumers and employees be impacted?

    Consumers

    • If and when Air India is taken over by a private entity or consortium, experts believe the first move could be pruning of operations to ensure the airline inches closer to profitability.
    • This could cause Air India to cease operations on certain loss-making domestic and international routes — leading to a rise in fares.
    • It is believed that Air India’s continuous loss-making operations have skewed the market, wherein private companies have to play ball even when fares are artificially low.
    • Cutting certain routes could also impact consumers in terms of the unique offerings by Air India, such as higher baggage allowance, etc.

    Employees of AI

    • Air India’s bloated staff strength was flagged by potential investors in the last disinvestment attempt.
    • The airline has 17,984 employees, of which 9,617 are permanent staff.
    • Whether the employees will be retained by the new investor is unclear.
    • The government is expected to provide more clarity on conditions for retaining staff in the request-for-proposal stage, which will come after expressions of interest are received.

  •  [op-ed of the day] The convergence of rich nations with the rest has gone off track

    Context

    Sound policies are needed to put emerging economies back on a higher growth path and ameliorate regional inequalities.

    The theory of convergence

    • The theory of convergence is one of the most powerful and noblest ideas in economics.
      • What is it? It is the concept that other things being equal, poorer economies should catch up with richer ones so that inequality between the rich and the poor attenuates, and conceivably even disappears over time.
    • Capital is more productive in poor economies: The premise driving convergence is that capital (whether physical or human) is more productive in poor economies than rich ones due to what economists call “diminishing marginal productivity”.
      • In layman’s terms, a small amount of investment yields a greater increase in output where there is less capital than where there is more.
      • Lesser the development more the development: Even more simply, the rate of return on investment is inversely related to the level of economic development.
    • Experience of Japan and Germany after WW 2: The experience of advanced economies gave economists reason to be optimistic that convergence occurs according to the script.
      • Thus, the devastated economies of Europe, along with Japan, quickly caught up with the advanced economies that had not been ravaged by World War II, most notably, the US.
      • Germany and Japan closing the gap: At the end of the war, with their capital stocks destroyed, Germany and Japan were much poorer than the US; by the 1960s, they had closed the gap.

    Globalisation and the unfulfilled hopes of convergence

    • Replication of the rise of Japan and Germany? At one time, it appeared that the same play was at work between emerging economies and advanced economies.
      • Rise of India and China: Economies such as China and India, as well as others, were far outstripping the growth rates of the US and other rich economies,
      • Hope of closing gap: India and China gave hope that at least the more rapidly growing of the emerging economies would close the gap with the rich world within decades rather than centuries.
    • Adoption of technology at low cost: There was presumed to be an additional powerful force working toward convergence.
      • Poorer economies are, almost by definition, far away from the technological frontier at which the richest economies operate.
      • There is thus ample room to absorb newer technologies at relatively low cost and in a relatively short span of time, without encountering slowing growth like the rich economies,
      • In simpler terms, it is difficult and costly to innovate the latest Apple iPhone, but relatively easy to reverse engineers at least some of Apple’s technology.

    Reality: Convergence is faltering

    • Recent evidence suggests that convergence is faltering.
    • World Bank report of retarding convergence: A recent World Bank report documents a worrying slowdown in productivity growth in emerging economies, significantly retarding convergence.
      • Lower productivity: The report’s calculations suggest that emerging economies have 14% lower productivity than they would have had if previous trends of high productivity growth were maintained.
      • Lower commodity exports: For commodity exporters, this is a whopping 19%.
    • The silver lining for faltering economies: According to the World Bank, the main driver of falling productivity are-
      • Insufficient investment in physical and human capital.
      • Insufficient mobility of machines and workers from less productive to more productive sectors of the economy.
    • India’s case: The Indian case clearly bears this out, with languishing investment and unfinished productivity-enhancing reforms, especially in the country’s labour market, being the key culprits behind the sharp slowdown in growth.

    Way forward

    • Repair financial systems: Governments, including India’s, need to do the heavy lifting of repairing damaged financial systems overladen with bad debt.
    • Restore fiscal rectitude.
    • Inflation focused monetary policy: Ensure that monetary policy remains focused on stable inflation rather than being excessively loose as a risky substitute for structural reforms.
    • Reforms: Press ahead with unfinished reforms to capital, land and labour markets.
    • Address the regional disparities: There is a further critical dimension in the case of large multi-region economies such as India.
      • Not only has convergence been faltering between nations, but it has also been faltering between the richer and poorer regions of large nations such as India.

    Conclusion

    The data does not present an epistle of despair, but of hope. The pursuit of sensible and conventional sound economic policies ought to put emerging economies as a group back on a higher growth trajectory. Convergence may yet end up being a parable of promise rather than a fable of folly.