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

  • 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.

     

  • Forex Reserves of India

    India’s foreign exchange reserves rose by $943 million to touch a lifetime high of $462.16 billion according to the latest data from the RBI.

    Forex reserves of India

    • They are holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than Indian rupee.
    • The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets.
    • They act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs.
    • They facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
    • They act as a cushion against rupee volatility once global interest rates start rising.

    Composition of Forex

    • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
    • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
    • The Forex reserves of India consist of below four categories:
    1. Foreign Currency Assets
    2. Gold
    3. Special Drawing Rights (SDRs)
    4. Reserve Tranche Position

    What is Reserve tranche?

    • Reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes.

    What are Special Drawing Rights?

    • The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves
    • The SDR is neither a currency nor a claim on the IMF.
    • Initially SDR was defined as equivalent to 0.888671 grams of fine gold, which at the time, was also equivalent to one U.S. dollar.
    • After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.
    • This basket Includes five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

  • Specialized Supervisory and Regulatory Cadre (SSRC)

    The RBI has decided to recruit 35% of the specialised supervisory and regulatory cadre from the market while the remaining 65% will be recruited via internal promotions.

    Specialized Supervisory and Regulatory Cadre (SSRC)

    • The SSRC will comprise officers in Grade B to Executive Director level.
    • In Nov. last year RBI decided to reorganize its regulation and supervision departments.
    • It merged the three regulatory departments (department of banking, non-banking and cooperative bank) into one and did likewise for the three supervisory departments.
    • As a result, there is only one supervisory department which looks after supervision of banks, NBFCs and cooperative banks and only one regulatory department for these three.
    • The move is aimed at dealing more effectively with potential systemic risk that could come about due to possible supervisory arbitrage and information asymmetry.

  • InvITs and REITs

     

    Markets regulator SEBI has put in place a framework for the rights issue of units by listed REIT and InvITs.

    What are InvITs and REITs?

    Infrastructure Investment Trusts (InvIT)

    • An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as return.
    • InvITs work like mutual funds or real estate investment trusts (REITs) in features.
    • InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
    • They are similar to REIT but invest in infrastructure projects such as roads or highways which take some time to generate steady cash flows.

    Real Estate Investment Trusts (REIT)

    • A REIT is roughly like a mutual fund that invests in real estate although the similarity doesn’t go much further.
    • The basic deal on REITs is that you own a share of property, and so an appropriate share of the income from it will come to you, after deducting an appropriate share of expenses.
    • Essentially, it’s like a group of people pooling their money together and buying real estate except that it’s on a large scale and is regulated.
    • The obvious pitch for a REIT is that it enables individuals to generate income and capital appreciation with money that is a small fraction of what would be required to buy an entire property.
    • However, the resemblance to either mutual funds or to owning property ends there.
    • According to Indian regulation on REITs, these are meant to primarily own finished and rented out commercial properties –– 80 per cent of the investments must be in such assets. That excludes a real estate that is under development.

    Why need InvITs and REITs?

    • Infrastructure and real estate are the two most critical sectors in any developing economy.
    • A well-developed infrastructural set-up propels the overall development of a country.
    • It also facilitates a steady inflow of private and foreign investments, and thereby augments the capital base available for the growth of key sectors in an economy, as well as its own growth, in a sustained manner.
    • Given the importance of these two sectors in the country, and the paucity of public funds available to stimulate their growth, it is imperative that additional channels of financing are put in place.

    What did SEBI rule?

    • SEBI said the issuer will have to disclose objects of the issue, related-party transactions, valuation, financial details, review of credit rating and grievance redressal mechanism in the placement document.
    • The SEBI had first notified REITs and InvIT Regulations in 2014, allowing setting up and listing of such trusts which are popular in some advanced markets.

  • [pib] National Startup Advisory Council

    The Union Government has notified the structure of the National Startup Advisory Council to advice on measures needed to build a strong ecosystem for nurturing innovation and startups in the country.

    National Startup Advisory Council

    • The Council will be chaired by Minster for Commerce & Industry.
    • It will consist of the non-official members, to be nominated by Central Government, from various categories like founders of successful startups, veterans and persons capable of representing interests of incubators and accelerators etc.
    • The term of the non-official members of the Startup Advisory Council will be for a period of two years.
    • The nominees of the concerned Ministries/Departments/Organisations, not below the rank of Joint Secretary to the Government of India, will be ex-officio members of the Council.
    • Joint Secretary, Department for Promotion of Industry and Internal Trade will be the Convener of the Council.

    Various functions

    • The Council will suggest measures to foster a culture of innovation amongst citizens and students in particular, promote innovation in all sectors of economy across the country
    • It will also suggest measures to facilitate public organizations to assimilate innovation with a view to improving public service delivery, promote creation, protection and commercialization of intellectual property rights.
    • It would suggest making it easier to start, operate, grow and exit businesses by reducing regulatory compliances and costs, promote ease of access to capital for startups, and incentivize domestic capital for investments into startups.
    • It would also mobilize global capital for investments in Indian startups, keep control of startups with original promoters and provide access to global markets for Indian startups.