India’s economy is projected to grow at 6.5% to 7% in the fiscal year ending March 2025.
The Economic Survey for 2023-24 highlights the need to address inequality and unemployment as policy priorities.
Policy Recommendations by Chief Economic Adviser (CEA)
Regulatory Burdens: CEA V. Anantha Nageswaran advocates for Central and State governments to reduce regulatory burdens on businesses.
Corporate Responsibility: He urges the corporate sector to create productive jobs, emphasizing their responsibility in generating employment.
Various Challenges discussed
(1) Challenges in the IT Sector:
Slowdown in Hiring: The CEA notes a significant slowdown in IT sector hiring over the last two years.
AI and Labor: He encourages the industry to use AI to augment labor rather than replace workers.
(2) Skilling Initiatives
Addressing Inequality: The Economic Survey suggests steps to tackle inequality, improve health, and bridge the education-employment gap.
Skilling Reboot: A reboot of India’s skilling initiatives is proposed to provide the industry with people having the right attitude and skills.
(3) Corporate Sector and Economic Growth
Demand and Employment: The Survey emphasizes the benefits for corporates from higher demand generated by employment and income growth.
Warning against Short-Termism: It warns against “short-termism” which can weaken economic linkages.
(4) State Capacity and Consensus Building:
Enhancing State Capacity: Enhancing state capacity is critical for the strategy to work.
Need for Consensus: The CEA stresses the need for consensus between governments, businesses, and the social sectors for effective transformation.
(5) Land Acquisition and Investment Concerns:
Land Use Norms: While the Survey does not mention land acquisition reform, it highlights the need to deregulate land use norms and consolidate farmland holdings.
Investment Cautions: The Survey cautions about private capital formation being cautious due to fears of cheaper imports, indirectly referencing China.
(6) Foreign Direct Investment (FDI) Challenges:
Attracting FDI: Attracting FDI will be challenging due to higher interest rates and developed countries encouraging domestic investments through subsidies.
Addressing Uncertainties: Despite progress, uncertainties related to transfer pricing, taxes, and import duties need to be addressed.
Structural Reforms
Existing Reforms: Structural reforms such as GST and the Insolvency and Bankruptcy Code are delivering expected results.
Next-Gen Reforms: The Survey calls for “next-gen reforms” that are bottom-up in nature to achieve sustainable, balanced, and inclusive growth.
Strategic Directions for Growth
Six-Pronged Strategy: The Survey outlines a six-pronged strategy for growth, emphasizing private sector investments and a fair share of income for workers.
Focus Areas: Other focus areas include financing the green transition, removing barriers for MSMEs, and implementing intelligent farmer-friendly policies.
Conclusion
Sustained Growth Potential: The economy can grow at over 7% on a sustained basis in the medium term by building on past reforms.
Tripartite Compact: Achieving this growth requires a tripartite compact between the Centre, States, and the private sector.
PYQ:
[2013] Economic growth in country X will necessarily have to occur if:
(a) There is technical progress in the world economy.
(b) There is population growth in X.
(c) There is capital formation in X.
(d) The volume of trade grows in the world economy.
Equity Linked Savings Schemes (ELSS) are mutual fund schemes that offer tax benefits under Section 80C of the Income Tax Act.
Recently, ELSS has seen a decline in popularity, with more money being withdrawn from these schemes than invested.
What is Section 80C of the Income Tax Act?
Section 80C permits certain investments and expenses to be tax-exempted.
By well-planning the 80C investments that are spread diversely across various options like National Savings Certificate (NSC), Unit Linked Insurance Plan (ULIP), Public Provident Fund (PPF), etc., an individual can claim deductions up to Rs 1,50,000.
By taking tax benefits under 80C, one can avail of a reduction in tax burden.
About Equity Linked Savings Schemes (ELSS)
An ELSS fund or an equity-linked savings scheme is the only kind of mutual funds eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961.
Investors can claim a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 a year in taxes by investing in ELSS mutual funds.
ELSS mutual funds’ asset allocation is mostly (65% of the portfolio) made towards equity and equity-linked securities such as listed shares.
They may have some exposure to fixed-income securities as well.
These funds come with a lock-in period of 3 years only, the shortest among all Section 80C investments.
Being market-linked, they are subject to market risk, but may offer potentially higher returns compared to traditional tax-saving instruments like National Savings Certificate (NSC) or Public Provident Fund (PPF).
Recent Trends in ELSS
In the past few months, more money has been taken out of ELSS than put in.
For example, last month ₹445 crore was withdrawn, while in April it was ₹144 crore.
In the last fiscal year, only ₹1,041 crore was invested in ELSS, compared to ₹7,744 crore the previous year.
Impact of the New Tax Regime
A new tax regime was introduced in 2020-21, which is now the default option.
The old tax regime offered various tax exemptions and deductions, helping to reduce income tax.
These benefits are not available under the new tax regime, making ELSS less attractive to investors.
PYQ:
[2021] Indian Government Bond Yields are influenced by which of the following?
Actions of the United States Federal Reserve
Actions of the Reserve Bank of India
Inflation and short-term interest rates
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3
The NSSO’s 2021-22 and 2022-23 survey outcomes reveal effects of significant economic shocks due to demonetisation, GST implementation, and the COVID-19 pandemic on India’s economy.
About NSSO:
The NSSO is India’s premier agency for conducting large-scale nationwide sample surveys on socio-economic aspects that collects data on employment, consumption, health, education, and other areas to provide essential inputs for policy and planning.
The NSSO was merged with the Central Statistical Office in 2019 to form the National Statistical Office.
Key highlight as per the recent survey by NSSO
Impact of Economic Shocks: The surveys reflect the aftermath of major economic events such as demonetisation (November 2016), the rollout of GST (July 2017), and the COVID-19 pandemic (starting March 2020).
Employment Trends: There has been a noticeable decline in employment within the informal sector over the past seven years, with around 16.45 lakh jobs lost.
Sectoral Dynamics: The unincorporated manufacturing sector saw a significant contraction, with the number of enterprises declining by 9.3% from 19.7 million in 2015-16 to 17.82 million in 2022-23.
What are unincorporated enterprises?
Unincorporated enterprises are informal businesses not legally registered as companies.
They include MSMEs, household units, own-account enterprises, and partnerships, operating outside formal regulatory frameworks but contributing significantly to employment and economic activity.
Why are these survey results important and what do they represent?
Timely Insights: These survey results offer current data crucial for understanding the evolving role of the informal sector in job creation, particularly during economic slowdowns when formal sector employment may decline.
Impact Assessment: They provide a detailed analysis of how significant economic events like demonetisation, GST implementation, and the COVID-19 lockdowns have affected the informal sector, highlighting vulnerabilities and resilience.
Policy Relevance: The findings inform policymaking aimed at supporting and regulating the informal sector, ensuring that measures address its unique challenges and contributions to overall economic stability and inclusivity.
What has been the pattern of ‘Informal Employment’ across states?
The data shows a mixed pattern across states, with 16 out of 34 states/UTs recording a decline in informal sector workers in 2022-23 compared to 2015-16.
Around 63 lakh informal enterprises shut down due to GST between 2015-16 and 2022-23, resulting in a loss of about 1.6 crore jobs.
The number of informal enterprises plunged from 50.32 lakh with 85.6 lakh workers in April-June 2021 at the peak of the COVID-19 second wave, to 1.91 crore firms with 3.12 crore employees in January-March 2022.
Way Forward:
The government should provide targeted support and incentives to help informal enterprises adapt to the post-GST and post-pandemic environment.
Policymakers should aim to facilitate a gradual transition of informal enterprises to the formal sector.
Mains PYQ:
Q How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country? (UPSC IAS/2016)
Mains: Q.1) How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? (UPSC IAS/2021) Q.2) How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss. (UPSC IAS/2018)
Prelims: With reference to the Finance Commission of India, which of the following statements is correct? (UPSC IAS/2011) (a) It encourages the inflow of foreign capital for infrastructure development (b) It facilitates the proper distribution of finances among the Public Sector Undertakings (c) It ensures transparency in financial administration (d) None of the statements (a), (b). and (c). given above is correct in this context.
Note4Students:
Prelims: Powers and Functions of Finance Commission;
Mains:Challenges to Fiscal Federalism;
Mentor comments: Fiscal devolution (Horizontal and Vertical), the transfer of fiscal powers and resources from the central government to state/local governments, is a crucial aspect of fiscal federalism. Fiscal devolution increases the financial resources and decision-making powers of state governments, allowing them to better address local needs and priorities. This strengthens fiscal federalism by empowering states to be more fiscally responsible and accountable to their citizens. It also helps in fostering competition among states to attract investments and provide better public services, driving overall economic development. This eventually contributes to macroeconomic stability. Further, the Fiscal devolution to local bodies (Municipalities and Panchayats) by State FC empowers them to undertake development activities and provide public services more efficiently. Hence it is a key pillar of cooperative and competitive fiscal federalism, promoting fiscal autonomy, equitable development, and overall macroeconomic stability in a federal polity like India.
Let’s learn!
Why in the News?
The fiscal devolution between the Union and States, as well as the distribution formula among states, is an ongoing debate with concerns about maintaining the balance of fiscal federalism and equitable development across generations within states.
The Finance Commission (FC) is responsible for recommending the distribution of net tax proceeds between the Union and the States every five years: • The 15th FC recommended a 41% share of central taxes for the states, which is lower than the 42% share recommended by the 14th FC. • The actual share of states in central taxes has been lower than the FC recommendations due to the increasing share of cess and surcharges levied by the Union government, which are not part of the divisible pool. • The horizontal distribution formula among states prioritizes equity (income gap, population, area, forest cover) over efficiency (demographic performance, tax effort). This has led to concerns about accentuating intergenerational inequity within states.
Intergenerational fiscal equity
It refers to a situation where every generation pays for the public services it receives and does not burden the future generation through borrowings. It is also the principle of providing equal opportunities and outcomes to every generation.
There are only two ways for any government to raise its revenue:
Tax: If, in a period, the tax revenue equals the current expenditure of the government, then the current taxpayers pay for the public services they receive.
Borrowing: If the government finances the current expenditure through borrowing, it means the future generation is going to pay higher taxes to repay this borrowing and interest. In other words, borrowing to meet the current expenditure of the government amounts to intergenerational inequity.
According to the Ricardian Equivalence Theory, whenever the government depends on borrowing to finance its current expenditure, households react through higher savings and thus enable the future generation to pay higher taxes as well as keep aggregate demand in the economy constant over different periods.
Presently, the current generations worldwide pay taxes less than the value of the current public services they receive, and thus it saves too. Whereas in our Indian present federal situation, this is not the case.
Condition of Developed States: The households in developed States pay taxes that are not entirely used within the specific States, thus compelling such States to borrow more or curtail current expenditures.
Condition of Developing States: The households in developing States pay taxes much less than the value of current expenditure and fill the gap by receiving higher financial transfers from the Union government.
Issues with Intragenerational Equity:
Low-income States (Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan, Odisha, and Jharkhand) finance a smaller portion of their revenue expenditure with their own tax revenue and also receive larger amounts of Union financial transfers.
The own tax revenue (collection from GST, VAT Excise, Stamp Duty, and Motor Vehicle Tax) financed up to 59.3% of revenue expenditure in high-income States, while in low-income States, their own tax revenue was financed only 35.9%.
High-income States (Tamil Nadu, Kerala, Karnataka, Maharashtra, Gujarat, Haryana) finance a substantial portion of their revenue expenditure with their own tax revenue but receive too few Union financial transfers.
The Revenue Expenditure to GSDP(Gross State Domestic Product) ratio for high-income States was 10.9%, which is lower than the similar ratio of 18.3% for low-income States.
Nearly 57.7% of revenue expenditure in low-income States was financed by Union financial transfers, and only 27.6% of revenue expenditure was financed by Union financial transfers in high-income States.
Government can also deduce that the high-income States had to incur a deficit of 13.1%, and the low-income States ended up with a deficit of only 6.4% of revenue expenditure.
Thus, the high-income States raise higher amounts of their tax revenue and curtail their revenue expenditure, yet incur higher deficits because of lower Union financial transfers compared to low-income States.
Address the Impacts and Conflicting Equities
Issue with Indicators Used by FC: The indicators presently used by the FC are per capita income, population, and area to reflect differences in demand for public services and revenue availability among states which carries a larger weight to assure equitable distribution of Union transfers.
Efficiency indicators like tax effort and fiscal discipline have smaller weightage to reward the fiscal efficiency of states.
Impact of Lower Transfers: States have Fiscal Responsibility Acts restricting deficit and debt but the reduced Union transfers compel some states to breach these legal limits.
Larger weight to fiscal indicators and incentivizing tax effort and expenditure efficiency through higher transfers can ensure intergenerational fiscal equity and sustainable debt management by states
Way Forward:
Balancing intragenerational and intergenerational equity is crucial to balancing equity and efficiency in the tax devolution formula.
Incentivize tax effort and expenditure efficiency through higher Union transfers
The Finance Commission (FC) should assign larger weight to fiscal indicators.
The Swadeshi Jagran Manch (SJM), affiliated with the Rashtriya Swayamsevak Sangh (RSS), wants a ‘robot tax’ to help employees who lose their jobs because companies are using Artificial Intelligence (AI).
SJM’s Proposals and Suggestions
Robot Tax Proposal: SJM proposes a ‘robot tax’ to create a fund supporting workers displaced by AI adoption to upskill and adapt to new technologies.
Tax Incentives for Job Creation: Suggestions include tax incentives for industries based on their employment-output ratio to encourage job creation.
Fund for Worker Upskilling: Emphasizes the need for economic measures to cope with the human cost of AI. SJM suggests using a ‘robot tax’ to fund worker upskilling programs.
Additional Budgetary Recommendations
Incentivise job creation: SJM suggests tax incentives for industries generating more employment, based on an employment-output ratio.
Subsidies for Small Farmers: SJM proposes subsidies for micro irrigation projects to boost productivity among small farmers.
SJM recommends that micro-irrigation projects be made eligible for funding via CSR by adding them to Schedule VII of the Companies Act, 2013.
Wealth tax on Vacant Lands: SJM suggests a wealth tax on “vacant land” to discourage unnecessary landholding for future requirements.
What is a Robot Tax?
A robot tax is a proposed tax on companies that use automation and artificial intelligence (AI) technologies to replace human workers.
The idea behind this tax is to generate revenue that can be used to support workerswho lose their jobs due to automation.
This can include retraining programs, unemployment benefits, and other forms of social support.
Need for a Robot Tax
Job Displacement:
Automation Impact: AI and automation can lead to significant job losses in various industries as machines and software perform tasks previously done by humans.
Worker Support: A robot tax can provide financial resources to support displaced workers, helping them transition to new roles or acquire new skills.
Economic Inequality:
Wealth Distribution: Automation tends to concentrate wealth among those who own the technology, leading to increased economic inequality.
Redistribution: Taxing companies that benefit from automation can help redistribute wealth more fairly across society.
Funding for Public Programs:
Social Safety Nets: Revenue from a robot tax can fund social safety nets such as unemployment benefits, retraining programs, and other social services.
Infrastructure: It can also support public infrastructure projects and other initiatives that benefit society as a whole.
Incentivising Human Employment:
Employment Decisions: By imposing a tax on automation, companies might be more inclined to consider human workers over robots for certain tasks.
Balanced Approach: This can help maintain a balance between technological advancement and human employment.
Examples and Proposals
Bill Gates’ Proposal: Bill Gates in 2022 advocated for a robot tax, suggesting that the revenue could fund job retraining and other social benefits.
European Parliament: In 2017, the European Parliament considered a robot tax as part of broader regulations on AI and robotics, though it was ultimately not implemented.
Criticisms and Challenges
Implementation: Determining how to effectively implement and enforce a robot tax can be challenging.
Innovation Stifling: Critics argue that a robot tax could hinder innovation and technological progress.
Global Competition: There are concerns that companies might relocate to countries without such a tax, affecting global competitiveness.
Conclusion
A robot tax is a controversial yet potentially beneficial approach to addressing the economic and social impacts of AI and automation.
It aims to provide support for displaced workers, reduce economic inequality, and ensure that the benefits of technological advancements are shared more broadly across society.
The Karnataka government released the draft of the Karnataka Platform-based Gig Workers (Social Security and Welfare) Bill, becoming the second Indian state to take such an initiative, following Rajasthan.
Who are the Gig workers?
Gig workers are independent contractors, freelancers, or temporary workers who are hired for specific projects or tasks, often through online platforms, rather than being employed in traditional long-term employer-employee relationships.
Key highlight of the Bill proposed for the welfare of gig workers:
Social Security and Welfare Fund: Establishment of a welfare boards, social security and welfare fund for gig workers, funded by a welfare fee on transactions or company turnover, and contributions from the Union and State governments.
Grievance Redressal Mechanism: Introduction of a two-level grievance redressal mechanism to address workers’ complaints and ensure transparency in the automated monitoring and decision-making systems used by platforms.
Fair Termination Procedures: Requirement for contracts to list exhaustive grounds for termination, with a 14-day prior notice and valid reasons in writing needed before terminating a worker.
Payment and Deductions: Mandate weekly payments to workers, with clear communication regarding any payment deductions, and the right for workers to refuse a specified number of gigs per week without adverse consequences.
Safe Working Conditions and Contract Transparency: Obligation for aggregators to provide reasonable and safe working conditions, registration of all gig workers, and contracts to be written in simple language with a 14-day notice for any changes, allowing workers to terminate the contract without losing existing entitlements.
What are the impacts of the labour market in a larger domain, and why are safeguards necessary?
Lack of Basic Rights and Social Security: Gig workers are often classified as “partners” rather than employees, leaving them security outside the purview of labour protection laws and without access to basic rights and social benefits.
Arbitrary Terminations and Lack of Grievance Redressal: Instances of arbitrary terminations, blacklisting, and dismissals without hearing the worker’s side are common in the absence of regulatory laws. Automated monitoring and decision-making systems often make these decisions, leaving no room for grievance redressal.
Reduced Payments and Exploitation: Over the years, gig workers have faced reduced payments, arbitrary deductions, and exploitation due to the lack of regulatory laws governing the gig economy.
The wide gap between the purchasing power of these workers and the affluent consumers they serve raises questions about the long-term sustainability of this model.
Need for Transparency and Fair Contracts: The absence of transparency in automated monitoring systems and decision-making by platforms, as well as the lack of fair contracts, has led to the exploitation of gig workers.
There is a need for the state to review contract templates and ensure fair contracts with gig workers.
Lack of Access to Credit and Skill Development: Gig workers often lack access to credit and skill development opportunities, hindering their growth and formalization.
There is a need for enabling platforms to provide these benefits to gig workers.
State-level and National level Initiatives taken previously:
Code on Social Security, 2020: At the national level, the Code on Social Security, 2020 recognized those who freelance or work under short-term contracts. It mandated employers to provide benefits similar to those of regular employees to gig workers.
Rajasthan Platform-Based Gig Workers (Registration and Welfare) Act: Rajasthan became the first state to introduce a bill for the welfare of gig workers in 2023.
The bill, which became an Act in September 2023, sought to establish a welfare board and fund for gig workers.
However, the Act has gone into cold storage after the changed government in November 2023.
Haryana Gig Workers Welfare Board Bill: The bill aims to establish a state-level board dedicated to the social and economic security of gig workers involved in delivering goods, services, and food at doorsteps.
Case study:
In California (USA), the Proposition 22 ballot measure allows app-based transportation and delivery companies to classify drivers as independent contractors while providing them with some benefits like a health insurance subsidy and minimum earnings guarantee.
New York City (USA) has passed legislation requiring food delivery apps to provide workers with benefits like paid sick leave and minimum pay.
Way forward:
Unified Legislation: Introduce a comprehensive national-level legal framework specifically addressing the rights and welfare of gig workers. This legislation should encompass social security, fair wages, occupational safety, and grievance redressal mechanisms.
Strict Enforcement: Ensure robust enforcement of these laws through dedicated government bodies and regular audits of gig economy platforms. Penalties for non-compliance should be substantial enough to deter exploitative practices.
Mains PYQ:
Q Examine the role of ‘Gig Economy’ in the process of empowerment of women in India. (UPSC IAS/2021)
JP Morgan is including Indian Government Bonds in its emerging markets bond indices starting June 28. This move is expected to attract significant foreign investment, boosting India’s bond market and economic stability.
What would be India’s weight in the index?
India is poised to achieve a maximum weighting of 10% in the GBI-EM Global Diversified Index. This increased allocation is anticipated to attract greater investment from global investors into Indian debt, with analysts projecting monthly inflows of $2-3 billion.
Benefits of Higher Inflows from the Inclusion of Indian Government Bonds in JP Morgan’s Emerging Markets Bond Indices
Increase in Foreign Exchange Reserves: The inflows from foreign investments will directly boost India’s foreign exchange reserves, providing a stronger buffer against external economic shocks.
Strengthening the Rupee: The surge in foreign investment will enhance demand for the rupee, leading to its appreciation and contributing to a more stable and robust currency.
Enhanced External Financial Management: With increased foreign exchange reserves, India will have greater flexibility and resilience in managing its external financial obligations and mitigating balance of payment issues.
Reduction in Borrowing Costs: Higher reserves and a stronger rupee can lead to improved credit ratings and reduced risk premiums, lowering borrowing costs for the government and corporates.
Promotion of Economic Confidence: The inflows signify international investor confidence in India’s economic prospects, boosting overall economic sentiment and encouraging further investments.
What about the impact on inflation as RBI mops up the dollars and releases an equivalent amount in rupees?
Liquidity Injection: When the RBI mops up dollars from the market, it releases an equivalent amount of rupees into the financial system. This injection of liquidity can potentially increase the supply of money circulating in the economy.
Demand-Pull Inflation: Increased liquidity can stimulate demand for goods and services, potentially leading to demand-pull inflation if the production capacity of the economy does not keep pace with the increased demand.
Asset Price Inflation: The influx of liquidity can also inflate asset prices such as real estate and stocks, impacting affordability and potentially creating asset price inflation.
Exchange Rate Stability: On the flip side, mopping up dollars can help stabilize the exchange rate by reducing downward pressure on the rupee due to excessive inflows.
RBI’s Policy Response: The RBI has various monetary policy tools, such as open market operations, repo rates, and reserve requirements, to manage liquidity and inflationary pressures arising from such inflows. It may use these tools to absorb excess liquidity and stabilize inflation.
Way forward:
Prudent Monetary Policy Management: The RBI should continue to employ effective monetary policy measures, such as open market operations and repo rate adjustments, to carefully manage liquidity and inflationary pressures stemming from increased foreign inflows.
Enhanced Economic Diversification: India should use the influx of foreign investment to diversify its economy further, focusing on infrastructure development, technological advancements, and sustainable growth initiatives to bolster long-term economic resilience and stability.
Hindenburg Research received a SEBI show cause notice for short-selling Adani Enterprises Ltd stock before and after their report accusing Adani of fraud.
What is the Hindenburg Report on Adani?
On January 24, 2023, the New York-based Hindenburg Research accused the Adani Group of “brazen stock manipulation and accounting fraud scheme over the course of decades.”
The report led to a significant drop in the shares of Adani companies and the calling off of Adani Enterprises Ltd’s Rs 20,000-crore follow-on Public Offer (FPO). Adani Group denied all allegations, claiming the report was a “calculated attack on India.”
What is SEBI’s show cause notice about?
Hindenburg received a show-cause notice from SEBI on June 27, 2024.SEBI alleged that Hindenburg colluded with certain entities to use non-public information to short-sell Adani Enterprises Ltd (AEL) stock before and after the release of its report, making profits.
The notice named Hindenburg, its founder Nathan Anderson, investor Mark Kingdon, and related entities, accusing them of sharing the report draft and building short positions in AEL futures.
How has Hindenburg responded to the show cause notice?
Hindenburg dismissed the notice as an attempt to silence those exposing corruption. They stated their investment stance was legal and disclosed, and criticized SEBI for targeting them instead of investigating the Adani Group’s alleged malpractices.
Accusations: Hindenburg accused SEBI of pressuring brokers to close short positions in Adani stocks to protect the stock prices.
Where does Kotak come into this picture?
Involvement of Kotak: SEBI’s notice did not name Kotak Bank, which Hindenburg claims created the offshore fund structure used for shorting Adani stocks.
Response: Kotak Mahindra Bank stated that Hindenburg has never been a client and that their KYC procedures were followed with regard to clients, with investments made by Kingdon as a principal.
How much profit did Hindenburg earn by short selling Adani stocks?
Revenue: Hindenburg earned approximately $4.1 million in gross revenue through gains related to Adani shorts from its investor relationship.
Own Short Position: Hindenburg made about $31,000 from their short of Adani US bonds.After legal and research expenses, Hindenburg indicated they might only slightly come out ahead of break-even on their Adani short.
Way forward:
Conduct Investigation: SEBI should initiate an independent, comprehensive investigation into the allegations against both Adani Group and Hindenburg Research. This investigation should be conducted by a neutral third party to ensure impartiality and transparency.
Policy Review: SEBI could review and possibly update its regulations on short-selling and market manipulation to prevent similar incidents in the future. This could include stricter disclosure requirements for short sellers and enhanced monitoring of market activities.
Mains PYQ:
Q The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.(UPSC IAS/2013)
Reserve Bank of India (RBI) has proposed to rationalise regulations governing export and import transactions. The aim is to promote ease of doing business and empower banks to provide more efficient service to their foreign exchange customers.
RBI Proposal and Directions
The RBI issued ‘Regulation of Foreign Trade under Foreign Exchange Management Act (FEMA), 1999 – Draft Regulations and Directions.’
Key propositions include:
Repatriation Timeline: The full export value of goods and services must be realised and repatriated to India within 9 months from the date of shipment for goods and the date of invoice for services.
Caution Listing: Exporters who fail to realise the full value within the specified time may be caution-listed by the authorised dealer.
Caution-Listed Exporters: Caution-listed exporters can undertake exports only against receipt of advance payment in full or an irrecoverable letter of credit, to the satisfaction of the authorised dealer.
Advance Remittance Restrictions: No advance remittance for the import of gold and silver is permitted unless specifically approved by the RBI.
Expected Benefits
Ease of Doing Business: The proposed regulations are intended to promote ease of doing business, especially for small exporters and importers.
Empowerment of Banks: The regulations aim to empower authorised dealer banks to provide quicker and more efficient service to their foreign exchange customers.
About Foreign Exchange Management Act (FEMA), 1999
The FEMA, 1999, regulates foreign exchange and trade in India.
FEMA replaced the older Foreign Exchange Regulation Act (FERA), 1973.
How does FEMA regulate EXIM Transaction?
Regulation under FEMA
Resident Indian Criteria
Defined in Section 2(v) of FEMA;
A person residing in India for more than182 days during the course of the preceding financial year.
Current Account Transactions
Permitted freely for EXIM activities, including trade payments and remittances.
Capital Account Transactions
Regulated by RBI, includes FDI in export-oriented units and overseas investments by Indian entities.
Documentation and Declarations
Exporters and importers must furnish declarations to RBI to ensure compliance and monitor foreign exchange.
Export Declarations
Declare the value of goods/services exported, expected earnings, and timeframe for realization.
Import Declarations
Provide details of goods/services imported, and foreign exchange spent, and ensure payments through authorized channels.
Authorized Dealers
Only RBI-approved dealers (banks/financial institutions) can handle foreign exchange transactions for EXIM.
Import Payment Regulations
Payments must be made through authorized channels within prescribed time limits, complying with DGFT terms.
Foreign Currency Accounts
Entities can maintain foreign currency accounts for efficient handling of foreign exchange for EXIM activities.
Significance of FEMA in Regulating EXIM Transactions
Facilitates Trade: By providing a clear regulatory framework, FEMA facilitates smoother and more efficient EXIM transactions, contributing to the growth of international trade.
Economic Stability: Ensures that foreign exchange earnings and expenditures are monitored and regulated, maintaining economic stability and preventing illegal outflows.
Investor Confidence: A transparent and regulated foreign exchange environment boosts investor confidence, attracting more foreign investment.
Liberalization: Replaces the stringent controls of FERA with a more liberal approach, encouraging businesses to engage in global trade.
PYQ:
[2013] Which of the following constitutes Capital Account?
1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment
Select the correct answer using the codes given below.
The 16th Finance Commission, under Article 280, focuses on devolving funds. Amendments like 73rd and 74th mandate it to bolster state funds for panchayats and municipalities.
About 16th Finance Commission
The 16th Finance Commission of India was constituted on December 31, 2023, with Dr. Arvind Panagariya as its Chairman.
The President of India appointed the Commission in pursuance of Article 280(1) of the Constitution
How do other countries devolve funds to their local governments?
International Comparison: Countries like South Africa, Mexico, the Philippines, and Brazil allocate significantly higher percentages of their GDP (1.6% to 5.1%) to urban local bodies compared to India’s 0.5%.
Importance of Intergovernmental Transfers (IGTs): IGTs make up about 40% of Urban Local Bodies (ULBs) revenue in India but suffer from unpredictability, lack of earmarking for vulnerable groups, and horizontal equity.
Financial Health of ULBs: Despite efforts by multiple Finance Commissions, financial devolution to cities in India remains inadequate, affecting city productivity and quality of life.
Why is the Census significant?
Data Dependence: The absence of the 2021 Census data makes it challenging to accurately assess urban growth and demographic changes crucial for evidence-based fiscal devolution.
Urban Dynamics: India has approximately 4,000 statutory towns, an equal number of Census towns, and a large number of effectively urban villages, which need accurate enumeration for effective planning and resource allocation.
Migration Impact: The Census data is essential to capture the significant migration to Tier-2 and Tier-3 cities, impacting their infrastructure and service needs.
What about cities and the Taxation system?
Impact of GST: The introduction of GST has reduced ULBs’ tax revenue (excluding property tax) significantly, impacting their financial autonomy.
Low IGTs: Intergovernmental transfers from States to ULBs in India are minimal (around 0.5% of GDP), much lower than other developing nations, exacerbating fiscal challenges.
Constitutional Provisions: Despite the 74th constitutional amendment aimed at empowering ULBs, progress has been limited over three decades, hampering urban development.
Parallel Agencies: The growth of parallel agencies and schemes like MP/MLA Local Area Development Schemes distort the federal structure and weaken ULBs’ financial and operational autonomy.
Way forward:
Enhanced Intergovernmental Transfers (IGTs): Increase IGTs from States to Urban Local Bodies (ULBs) to at least 2% of GDP, ensuring predictability and earmarking for vulnerable groups.
Reform in Urban Governance and Fiscal Autonomy: Strengthen constitutional provisions to empower ULBs further, reducing dependence on parallel agencies like MP/MLA Local Area Development Schemes.
Mains PYQ:
Q How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss. (UPSC IAS/2018)
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