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GS Paper: Indian Economy

  • What are Digital Services Taxes?

    Digital services taxes adopted by India, Italy and Turkey discriminate against U.S. companies and are inconsistent with international tax principles, the U.S. Trade Representative’s office has said.

    Do you remember?

    GAFA tax—named after Google, Apple, Facebook, Amazon—is a proposed digital tax to be levied on large technology and internet companies.

    Fact of the matter: Equalization Levy

    • India has earlier expanded the scope of the Equalization Levy, or digital tax, to the sale of goods and services in the country by overseas e-commerce firms.
    • The Equalization Levy was introduced for the first time in 2016 as 6 per cent tax on revenues earned by non-residents from online advertising and related services.
    • The burden of this tax eventually fell on local firms advertising on these platforms.

    Contention for E-Commerce

    • In March 2020, the government expanded the scope of this levy to include the sale of goods and services in the country by overseas e-commerce operators.
    • The transactions were to be taxed at 2 per cent if businesses earned more than Rs 2 crore.
    • Globally, the rate of digital tax varies from 1.5 per cent (in Poland and Kenya) to 15 per cent (Paraguay). In Europe, the tax rate varies from 3 per cent (France, UK, Spain) to 7.5 per cent (Hungary).

    Digital Services Taxes

    • The “digital services tax” (DST) is a levy on the overall revenues earned by the supplier of specific digital services.
    • The DST should not be confused with the so-called “Netflix tax,” which one may find in some western countries.
    • The Netflix tax is essentially a “value-added tax” on digital services where the consumer bears the entire tax burden on the value of the final product.

    The US Question

    • The need to tax digital companies – the likes of Amazon, Google and Netflix – arises because these companies collect digital revenues from countries where they do not have a significant business presence.
    • These are new-age companies, which can use virtual infrastructure to operate in another country.
    • Countries across the globe have felt the need to tax revenues generated by such companies in a particular jurisdiction.
    • Talks began in 2018 under the aegis of the OECD to formalize a framework on what and how to tax revenues earned by such companies in a country in which they have no physical or significant presence.
    • But an abrupt US decision to pull out of the negotiations, involving 137 countries and threats of retaliatory action against those levying digital taxes have hit the 2020 deadline.

    India’s response

    • USTR has concluded the digital taxes imposed by France, India, Italy and Turkey discriminate against big U.S. tech firms, such as Google, Facebook, Apple and Amazon.com
    • For India, it created enormous uncertainty, since the country has always been at the forefront of adopting the concept of taxing foreign digital companies.
    • It is now subject to a probe initiated by the US called the ‘Section 301’ investigations into the digital taxes.

    A populist fuss by the US

    • The US is a bit confused and so is the exiting President. They are not able to decide what they want to do.
    • It is being argued that it could lead to tariffs before Donald leaves office or early in the administration of President-elect Biden.
    • This arguably another populist measure that Trump administration wants to leave behind.

    Conclusion

    • Given that a global consensus at the OECD or even the UN level may take several more months, countries including India are likely to continue with their unilateral DSTs.
    • At this juncture, when economies are reeling under the ill-effects of the pandemic, no country would want to give up its share of revenue and wait for a global consensus to emerge.

  • Faceless Tax Scheme

    The government’s faceless tax assessment scheme has managed to deliver about 24,000 final orders since its introduction in August 2020.

    Try this PYQ:

    Q. With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?

    1. It is introduced as a part of the Income Tax Act.
    2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

    Faceless Tax Scheme

    • The Central Government introduced the Faceless Assessment Scheme to provide greater transparency, efficiency and accountability in Income Tax assessments.
    • It is an attempt to remove individual tax officials’ discretion and potential harassment for income taxpayers.
    • All provisions introduced under Faceless Assessment, under the Income Tax Act, 1961, are introduced to-
    1. Eliminate the interface between the Assessing Officer and the assesses during the course of proceedings, to the extent that is technologically feasible
    2. Optimize the utilization of resources through the economies of scale and functional specialization and
    3. Introduce a team-based determination of arm’s length price with dynamic jurisdiction.

  • Blueprint of post covid development model

    The article discusses the themes of the post-covid world which will be somewhat more aware and mindful of the dangers of global dimension.

    Collaborative model and public-private partnership

    • A few weeks back, Prime Minister visited the private companies involved with the formulation of the anti-COVID vaccine.
    • The PM’s visit was one more reminder of the critical importance of public-private partnerships.
    • The PM signalled the government’s receptivity to external expert advice.
    • The CEOs reaffirmed their commitment to partnering with the state to help address not just this medical crisis but also the many other social and humanitarian problems.
    • The government has appreciated that the model for sustainable development in a post-COVID world must be a collaborative one.
    • Businesses will repurpose their goals and look beyond profits.

    Working together to deal with the crises of global dimensions

    • COVID-19 was not the first, nor will it be the last crisis of global dimensions.
    • The threat of global warming, for instance, hangs over our heads.
    • Its impact is less immediate and for the present, at least less palpable.
    • But it looms and its consequences are existential.
    • COVID has offered, it is the tangible evidence that no one entity or group — the state, markets, businesses, entrepreneurs, scientists — can tackle existing and emergent economic and social problems on their own.
    • They have to work together to resolve them.

    Business uncertainties

    • Businesses has been the uncertainty of operating in the post-COVID digital world.
    • Every business leader has, in some form or other, expressed three types of uncertainties.
    • 1) Is their business facing a hinge moment, necessitating the reimagining and re-engineering of their strategy and product portfolio?
    • Or are they witnessing no more than another turn of the business cycle and that, once the vaccine is developed and distributed, the market will return to business as usual?
    • Or will conditions necessitate a middle of the road approach: Stay the pre- COVID course but at the same time, speed up the pivot toward a new business model.
    • Most business leaders are adopting this third hybrid path.
    • The key to corporate success in a digital world in which a distinct incident could influence it, is the capability of leaders to think out of the box and to handle the unexpected.
    • Financial, technological and human resources will be necessary, but they will not be sufficient.

    Consider the question “The post-covid development model must be based on the cooperation underscored by the public-private partnership as the challenges that could emerge are not possible to be tackled by any on entitiy. Comment”

    Conclusion

    COVID has “obliterated the one remaining obstacle to a digital future — human attitudes”. Covid forced them to adopt and adapt. The challenge for our business leaders will be to navigate a pathway that sustains the benefits of these tools but without deepening the existing social and economic inequalities. Life is not digital for millions in our country.

  • RBI comes up with Digital Payments Index

    The RBI has constructed a composite Digital Payments Index (DPI) with March 2018 as the base period to capture the extent of digitization of payments across the country.

    Note various indicators of the DPI.

    Digital Payments Index

    • RBI-DPI will be published on the central bank’s website on a semi-annual basis from March 2021 onwards with a lag of four months.
    • It comprises five broad parameters that enable the measurement of deepening and penetration of digital payments in the country over different time periods.
    • The parameters are:
    1. Payment enablers (weight 25 percent)
    2. Payment infrastructure–demand-side factors (10 percent)
    3. Payment infrastructure – supply-side factors (15 percent)
    4. Payment performance (45 percent) and
    5. Consumer centricity (5 percent)
    • Each of these parameters has sub-parameters which, in turn, consist of various measurable indicators, RBI said.

    Why need such an Index?

    • Digital payments in India have been growing rapidly.
    • The DPI reflects accurately the penetration and deepening of various digital payment modes.

  • [pib] Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme

    The Union govt. has decided to extend the benefit of the Scheme for Remission of Duties and Taxes on Exported Products (RoDTEP) to all export goods with effect from 1st January 2021.

    Try this PYQ:

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

    (a) China

    (b) India

    (c) Myanmar

    (d) Vietnam

    RoDTEP Scheme

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

    Why need such a scheme?

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

    Back2Basics: Merchandise Exports from India Scheme (MEIS)

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

  • The growth India deserve

    The Indian economy has been showing the green shoots in the results of the third quarter. However, the recovery is far from complete. The article suggests the strategy to get to the 5 per cent trend line.

    Divergent performance after lockdown

    • At the end of the third quarter, the economy is showing a hugely divergent performance.
    • Pharmaceuticals and chemicals are showing growth on their Year-To-Date numbers.
    • FMCG reached last year’s level in the second quarter.
    •  Construction equipment are showing a huge recovery, with record sales numbers in the last three months, driven by rural demand from sales to individuals.
    • Capital goods are still sluggish with YTD numbers well down on last year, but are now showing some signs of life.
    • In contrast, travel and tourism, real-estate and construction, and retail, are all still at under half last year.
    • These are high employment sectors, and salaried employment has correspondingly taken a big hit, with potentially longer term effects.

    How to achieve ‘full recovery’

    • Full recovery means getting back to the trend line of growth where we would have been pre-COVID.
    • We need to aspire to grow 9 per cent for three years, which is what will get us back to our 5 per cent trend line of growth by 2024.
    • The recovery underway is solid, but we need measures to sustain and deepen it.
    • The government can do three things.

    3 suggestions to sustain the recovery

    1) Stimulate the economy

    • The most immediate fiscal stimulus possible is to put cash into the economy.
    • Distribute the pending tax refunds, pay the bills of all companies, pay off the arbitration awards pending where the government has lost cases, and pay state governments their pending GST dues.
    • All this will run into a few trillion rupees, and it will be cash that immediately stimulates the economy.

    2) Invest in public health infrastructure

    • Some preparation is underway to distribute vaccines, but there is need to go much further.
    • Centre should finance state government efforts to build an extensive public health network so we are equipped to handle a possible second wave of the virus.
    • If we demonstrate that we are much more prepared in February and March 2021 than we were in April and May 2020, we will spread confidence.
    • Government should work in partnership with private sector hospitals.

    3) Invest in inftrstructure

    • There are dozens of projects stuck as funds are not available.
    • The 20 trillion infrastructure pipeline needs to have some cash flow in it.
    • The COVID crisis revealed awful things about living conditions in slums across our cities.
    • We can put in place the right public-private programme to provide decent, accessible housing, with quick and cheap connectivity into our cities.
    • This could trigger a building boom that would stimulate demand like nothing else.

    How to finance the spending: Privatisation program

    • Government can manage the resource for spending through privatisation program.
    • Our current stock market boom says that buyers are ready to invest. But public-sector stock values are still depressed.
    • The best way to see them take off is to announce that the government intends to reduce its share-holding to 26 per cent across public-sector banks, steel companies, oil companies, and every manufacturing company and hotel it currently owns.
    • To avoid opposition to such reforms, we must operate consistent with our democratic institutions.
    • We need discussion papers for public comment, the debate in Parliament, hearing out stakeholders, and compromise with the interests of state governments.

    Consider the question “What are the measures India needs to take to achieve the complete recovery of the Indian economy disrupted in the wake of the pandemic.”

    Conclusion

    Unless we act now we will have a stunted recovery. We must use our economic crisis to set some bigger things right. 2021 will be a year to welcome if it returns us to the growth trajectory we deserve.

  • Importance of Resilient supply chains

    What does supply chain resilience mean? 

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

    Recent incidents that led to supply chain disruption

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

    Supply Chain Resilience Initiative (SCRI)

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

    “China plus one” strategy

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

    India’s vulnerability to supply chain disruptions

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

    India increasing its presence in global supply chains

    1) Electronic industry

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

    2) Defence sector

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

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

    Conclusion

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

  • [pib] Action Agenda for an AtmaNirbhar Bharat (AAAN)

    The Health Ministry has released the report Action Agenda for an AtmaNirbhar Bharat (AAAN) prepared by Technology Information, Forecasting and Assessment Council (TIFAC).

    Q.‘Doubling Farmer’s Income’ and ‘USD 5 trillion economy’  seems more like slogans today in wake of COVID pandemic. Comment on the statement with keeping in view the Atmanirbhar Bharat Abhiyan of the government.

    AAAN Report

    • The report AAAN is a consequential follow-up of the TIFAC’s White Paper on Focused Interventions for ‘Make in India’: post-COVID -19 which was released earlier this year.
    • The White Paper highlighted five thrust sectors namely, Healthcare, Machinery, ICT, Agriculture, Manufacturing, and Electronics that would be critical for India’s economic growth post-COVID.
    • This AAAN action plan has been structured with reference to timeline, highlighting short/medium and long term interventions in various identified sectors.

    Why need such an agenda?

    • The World is experiencing unprecedented health and economic crisis. A widespread deep global recession has been bolstered, undermining global cooperation and multilateralism.
    • The most outward global economies have turned inwards and are designing enhanced measures for rebooting and resilience of the economy.
    • The document also specifically defines overarching policy recommendations with reference to technological inputs, focusing towards Local to Global.
    • It would thereby revive the Indian economy, in identified domains of Innovation and Technology Development, Technology Adoption/Diffusion, Boosting up Manufacturing and Productivity, Trade and Globalization etc.

  • What are Zero Coupon Bonds?

    The government has used financial innovation to recapitalize a bank by issuing the lender Rs 5,500-crore worth of non-interest bearing bonds called Zero-Coupon Bonds.

    Try this PYQ:

    Q.Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

    Zero-Coupon Bonds

    • These are non-interest bearing, non-transferable special GOI securities that have a maturity of 10-15 years and are issued specifically to Punjab & Sind Bank.
    • These bonds are not tradable; the lender has kept them in the held-to-maturity (HTM) investments bucket, not requiring it to book any mark-to-market gains or losses from these bonds.
    • This will earn no interest for the subscriber; market participants term it both a ‘financial illusion’ and ‘great innovation’ by the government.

    How do they differ from bonds issued by private firms?

    • There is a difference between zero-coupon bonds issued by other corporates and these.
    • Zero-coupon bonds by private companies are normally issued at discount, but since these special bonds are not tradable these can be issued at par.

  • Dangers lurking beneath economic recovery

    As Indian economy recovers from the economic disruption caused by the pandemic, there are dangers of rising inequality and cosequently the rising inflation. The article deals with these issues.

    3 features of Indian recovery

    • 1) The number of new cases has fallen while the fatality rate continues to drop.
    • 2) India has rolled out one of the smallest fiscal support packages globally, with central government spending flat so far this year.
    • 3) Inflation is now a big problem, with consumer prices above the 6 per cent tolerance level for the past eight months.

    Consequences of low fiscal spending

    • It may seem that India is back on the path to recovery.
    • But  the low level of fiscal spending could leave behind other problems, such as rising inequality.
    • Although, in India there was a focus on vulnerable section, there were some misses, such as the urban poor being left out, and the overall outlay was small.
    • For instance, demand for the rural employment guarantee programme continues to outstrip supply.
    • There is the rise in inequality between large and small firms, which is likely to be felt by individual employees.
    • Large firms were helped by cost-cutting, low interest rates, access to buoyant capital markets and increased spending in the formal economy probably helped.
    • The smaller listed firms did not do as well.
    • Small firms are more labour intensive than large firms.
    • If small firms do poorly, it impacts a large number of people.
    • All this could impact demand over time.
    • Rising inequality could stoke inflation (in services particular).
    • Consumption patterns show that the rich in India tend to consume more services than the poor.
    • And rising inequality could, therefore, stoke inflation.

    Possibility of services inflation

    • 1) As a vaccine comes into play, there could be a release of pent-up demand for high-touch services.
    • 2) As large firms and their employees do relatively well, they are likely to demand more services, stoking prices.
    • 3) Many service providers did not do a regular annual price reset in 2020, so they may raise prices to cover the two years once demand picks up.
    • If inflation does become persistent and leads to tighter monetary policy, that could weigh on growth over time.

    Way forward

    • To control inflation in 2021, the RBI may have to take steps such as:-
    • 1) Gradually drain the excess liquidity in the banking sector,
    • 2) Provide a floor for short-term rates, which have fallen below the reverse repo rate.
    • 3) Narrow the policy rate corridor by raising the reverse repo rate.
    • A quicker exit from loose monetary policy could become another area where India differs from the world.

    Consider the question “What are the consequences of economic recovery in the wake of pandemic? Suggest the ways to deal with these consquences.”

    Conclusion

    Putting all of this together, it seems India will come full circle in 2021. For a while it was worried more about weak growth than high inflation. But as growth recovers, inflationary concerns could reappear.