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GS Paper: Indian Economy

  • Why RBI has been wary of declaring an early victory over inflation?

    Why in the news? 

    Recently, the Monetary Policy Committee (MPC), which met here from April 3 to 5, decided to keep the repo rate unchanged at 6.5% and maintain the policy stance of ‘withdrawal of accommodation’ in the monetary policy.

    • Withdrawal of accommodation means reducing the money supply in the system which will rein in inflation further. (Temporary Provision)

    Why the RBI has been wary of declaring an early victory over inflation?

    • Persistent Food Inflation: Despite expectations of moderation in inflation, food inflation has remained a concern, especially due to the high prices of food grains and vegetables. In February, food inflation was at 8.7%, with foodgrain inflation still high at 9.8%.
    • Inflation Gap between Bottom and Top of Urban Population: Food inflation disproportionately affects lower-income deciles more than higher ones. In February, the bottom 20% of the urban population faced 5.5% inflation compared to 4.7% for the top 20%. This pattern is similar in rural areas as well.
    • Management Issues: The RBI faces challenges in managing inflation while maintaining growth, especially when inflation persists due to Geopolitical conditions. While central bank policy moves cannot directly bring down supply shock-driven inflation, they can prevent high prices from spilling over.

     Why RBI has kept policy rates unchanged?

    • High Economic Growth: The RBI is focused on maintaining price and financial stability to sustain high growth. The central bank expects the Indian economy to grow at 7% in fiscal year 2024-25
    • Benign Core Inflation: Benign core inflation, which has declined steadily over the past months, indicates that strong growth has not been inflationary. The RBI finds comfort in the declining core inflation levels
    • Monetary Policy Stance associated with food inflation: The RBI is likely to maintain policy rates until October 2024 to assess evolving risks associated with food inflation. The central bank is cautious and prefers to adopt a risk-minimization mode to align inflation towards the target while supporting growth
    • Global Economic Conditions: The RBI is monitoring global economic trends and external factors that could impact domestic inflation and growth. The central bank is aware of the risks posed by geopolitical tensions, volatility in international financial markets, and geo-economic fragmentation

     

    BACK2BASICS

    The Monetary Policy Committee (MPC)

    • It is a key body responsible for formulating the country’s monetary policy. It  is a statutory body constituted as per Section 45ZB under the RBI Act of 1934 by the Central Government
    •  It is a six-member committee established under the amended Reserve Bank of India Act, of 1934. The MPC’s primary objective is to determine the policy rate required to achieve the inflation target set by the government. The committee consists of the following members:
      • RBI Governor (ex officio chairperson)
      • Deputy Governor in charge of monetary policy
      • An officer of the Bank nominated by the Central Board
      • Three members appointed by the central government
    • The MPC meets at least four times a year, and decisions taken by the committee are binding on the Reserve Bank of India.
    • The committee’s composition ensures a mix of expertise in economics, banking, finance, and monetary policy to effectively manage the country’s Monetary Policy Framework.

     

    Conclusion: The RBI has been cautious due to persistent food inflation impacting lower income groups, challenges in managing it, and the need to assess evolving risks. MPC’s unchanged policy rates reflect this caution amidst high growth and benign core inflation.

    Mains pyq 

    Q Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC IAS/2019)

    Source https://indianexpress.com/article/opinion/columns/why-rbi-wary-of-declaring-early-victory-over-inflation-9253330/

  • Next government must urgently fix ‘unnecessarily complex’, counter-productive GST: 13th Finance Commission chair

    Why in the news? 

    Recently Vijay Kelkar (chaired 13th Finance Commission) attributes frauds in Indirect Tax regimes to high GST rates; Moots switched to a single 12% rate like most other countries.

    Reason behind the need for a Single GST rate:

    • Simplification of the structure: A single GST rate would simplify the structure, making it easier for businesses to comply with the tax system and reducing the complexity of classification issues
    • Promotion of manufacturing and exports: A single GST rate could help promote manufacturing and exports by reducing the burden of multiple rates and making the tax system more predictable
    • Single GST rate in many countries: In many developed and emerging market economies, a single GST or VAT rate has been successful in optimizing tax revenue and minimizing tax disputes for example Singapore, New Zealand, the United Arab Emirates, and Japan, have opted for a single GST or VAT rate
    • Addressing GST frauds: High GST rates can make it lucrative for fraudsters to evade taxes. A single, lower GST rate could potentially reduce the incentive for tax evasion and make the system more transparent
    • Reducing litigation: A single GST rate could help reduce litigation related to classification issues and subjective interpretation of tax rates

    How does the Indian GST model compare with GST in other countries?

    Particulars India  Canada UK Singapore
    Name of GST in the Country Goods and Service tax Federal Goods and Service Tax & Harmonized Sales Tax Value Added Tax Goods and Service Tax
    Standard Rate 0% (for food staples), 5%, 12%, 18% and 28% (+cess on luxury items) GST 5% and HST varies from 0% to 15% 20 %Reduced rates- 5 %, exempt, zero rated 7% Reduced rates- Zero rated, exempt
    Threeshold Exemption Limit Rs.40 lakh or Rs.20 lakh, depending on the state and supply Canadian $ 30,000 £ 85,000 Singapore $ 1 million
    Liability arises on Accrual basis: Issue of invoice ORReceipt of payment-earlier Accrual basis: The date of issue of invoice OR the date of receiptof payment- earlier. Accrual Basis: Invoice OR PaymentOR Supply-earliestCash basis (T/O up to 1.35mn): Payment Accrual Basis: Issue of invoice OR Receipt of payment OR Supply – earliestCash basis: (T/O up to SGD$1mn): Payment
    Reverse Charge Mechanism Applies on goods as well as services Reverse charge applies to the importation of services andintangible properties Applicable Reverse charge applies to the supply of services
    Exempt Supplies Sale of land and completed buildings, certain healthcare and educational services, essential food items, etc. Real estate, financial services, rent (Residence), charities, health, education Medical, education, finance, insurance, postal services Real estate, Financial services, Residential rental

    Significance of sharing GST with local bodies:

    • Promoting Co-operative Fiscal-federalism: Sharing GST revenues with local bodies could promote fiscal federalism by ensuring a fair distribution of tax revenues among all tiers of government.
    • Strengthening of their Fiscal base: Equitable sharing of GST with the third tier of government, i.e., local bodies, would strengthen their fiscal base and enable them to undertake investments for vital infrastructure and high-quality public goods
    • Building Fairness and appropriateness: GST is a consumption tax, and taxpayers should see direct benefits accruing from their payment of taxes. An arrangement for sharing GST revenues with local bodies would be fair and appropriate
    • Improves Local governance: Sharing GST revenues with local bodies would bolster the quality of governance provided by local governments, as citizens’ demand for quality public goods will grow louder.

    BACK2BASICS:

    About Goods and Services Tax:

    • GST was introduced through the 101st Constitution Amendment Act, 2016. It is one of the biggest indirect tax reforms in the country.
    • It was introduced with the slogan of ‘One Nation One Tax’.The GST has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax etc.
    • It is essentially a consumption tax and is levied at the final consumption point.
    • Tax Structure:
    • Central GST to cover Excise duty, Service tax etc, State GST to cover VAT, luxury tax etc. and Integrated GST (IGST) to cover inter-state trade.
    • IGST per se is not a tax but a system to coordinate state and union taxes.
    • It has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.

    Conclusion: Implementing a single GST rate streamlines compliance, promotes economic growth, and curbs fraud. Sharing GST revenue with local bodies strengthens fiscal bases, fosters fairness, enhances governance, and supports fiscal federalism for equitable distribution.

  • RBI to launch Mobile App for Retail Direct scheme

    Why in the news?

    The RBI has decided to introduce a Mobile App of its RBI Retail Direct scheme aimed at facilitating seamless investment in government securities by retail investors.

    What is Retail Direct Scheme?

    • Retail Direct Scheme was rolled out in November 2021, giving access to individual investors to maintain gilt accounts with RBI and invest in government securities.
    • Using this app, investors can buy central and state government bonds as well as Treasury bills.
    • It enables investors to buy securities in primary auctions as well as buy/sell securities through the Negotiated Dealing System-Order Matching system (NDS-OM) platform.
    • A Gilt Account can be compared with a bank account, except that the account is debited or credited with treasury bills or government securities instead of money.

    Treasury Bills:

    • They are promissory notes issued by the RBI on behalf of the government as a short term liability and sold to banks and to the public.
    • The maturity period ranges from 14 to 364 days.
    • They are the negotiable instruments, i.e. they are freely transferable.
    • No interest is paid on such bills but they are issued at a discount on their face value.

     How does it work?

    • Under the scheme, small investors can buy or sell government securities (G-Secs), or bonds, directly without an intermediary like a mutual fund.
    • However, the same tax rules apply to income from G-Secs.
    • The minimum amount for a bid is ₹10,000 and in multiples of ₹10,000 thereafter.
    • Payments may be made through Net banking or the UPI

    Benefits of RDS

    • With the government being the borrower, there is a sovereign guarantee for the funds and hence zero risk of default.
    • Also, government securities may offer better interest rates than bank fixed deposits, depending on prevailing interest rate trends.

    How can individuals access G-Sec offerings?

    • Investors wishing to open a Retail Direct Gilt account directly with the RBI can do so through an online portal set up for the purpose of the scheme.
    • Once the account is activated with the aid of a password sent to the user’s mobile phone, investors will be permitted to buy securities either in the primary market or in the secondary market.

    PYQ:

    [2018] Consider the following statements:

    1. The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.

    2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.

    3. Treasury bills offer are issued at a discount from the par value.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 3 only

    (c) 2 and 3 only

    (d) 1, 2 and 3

  • [pib] 15th CIDC Vishwakarma Awards 2024

    Why in the news?

    SJVN Limited has won two prestigious awards at the 15th Construction Industry Development Council (CIDC) Vishwakarma Awards 2024, for their Corporate Social Responsibility (CSR) initiatives.

    About CIDC Vishwakarma Awards

    • The CIDC Vishwakarma Awards is one of the most esteemed recognitions within the construction sector.
    • It was launched in the year 2005.
    • The awards are named after Vishwakarma, the divine architect and engineer in Hindu mythology, symbolizing craftsmanship, creativity, and skill in construction.

    Key details about the Award

    • Organizer: The awards are organized by the Construction Industry Development Council (CIDC), which is a body established by the GoI to promote the construction industry’s development and growth.
    • Categories: The awards cover a wide spectrum of categories, including:
      1. Construction Projects: Recognizing outstanding projects across different sectors such as residential, commercial, infrastructure, and industrial construction.
      2. Construction Technologies: Honoring innovative technologies and techniques that enhance construction processes, efficiency, and sustainability.
      3. Construction Equipment: Acknowledging advancements in construction machinery, tools, and equipment.
      4. Health, Safety, and Environment: Recognizing initiatives and practices that prioritize worker safety, environmental protection, and sustainability in construction.
      5. Individual Achievements: Celebrating the contributions of professionals and leaders who have made significant impacts in the construction industry.
      6. Others: Additional categories may include awards for sustainability, CSR initiatives, and emerging trends in construction.

    PYQ:

    [2020] In rural road construction the use of which of the following is preferred for ensuring environmental sustainability or to reduce carbon footprint?

    1.    Copper slag

    2.    Cold mix asphalt technology

    3.    Geotextiles

    4.    Hot mix asphalt technology

    5.    Portland cement

    Select the correct answer using the code given below:

    (a) 1, 2 and 3 only

    (b) 2, 3 and 4 only

    (c) 4 and 5 only

    (d) 1 and 5 only

    Back2Basics: Corporate Social Responsibility (CSR)

    Description
    What is it? Self-regulating business model for social and environmental impact.
    Regulation in India Mandated under Companies Act, 2013 (amendment in 2014).
    Investment Areas Promote rural development, healthcare, education, environment, etc.
    CSR Committee Mandatory for companies meeting Rs 500 Cr net worth or Rs 1000 Cr turnover criteria.
    Spending Requirement At least 2% of average net profits of the last three financial years.
    Applicability Criteria Net worth >= Rs 500 Cr, Turnover >= Rs 1000 Cr, or Net profit >= Rs 5 Cr.
    Adjustment for New Cos. Use average net profits of preceding years to calculate spending.
    Applicability Period Applies before the completion of three financial years for companies.

  • Should State Governments borrow more? | Explained

    Why in the News? 

    Recently, the SC rejected Kerala’s plea for immediate relief in its case urging the Union government to ease borrowing constraints, allowing the state to secure extra funds in the ongoing fiscal year.

    State governments receive funds from three sources:

    • Own revenues (tax and non-tax)
    • Transfers from the Union government as shares of taxes and as grants 
    • Market borrowings

    Fiscal Demands for Extra Funds: 

    • Increased Expenditure: In 2020-21, the Kerala government sharply increased its spending to 18% of its GSDP, to provide economic relief in the wake of the COVID-19 pandemic, aided by the relaxation in borrowing norms then
    • Central Gov transfers to Kerala declined: As ratios of GSDP, the Union government’s transfers to Kerala declined to 2.8% in 2023-24, significantly lower than previous years, even as the State’s revenues remained at around 8.0%. 
    • This meant that, in 2023-24, the State government could meet its modest budget expenditure, equivalent to 14.2% of GSDP, only by raising the borrowing to 3.4% of the GSDP

    Socio-Economic for Extra Funds: 

    • Aging Population: Kerala, like many other states, faces the challenge of an aging population, which puts pressure on pension funds and healthcare systems, necessitating long-term financial planning and investment.
    • Pension Liabilities: The substantial outgo for pensions poses a financial burden on the state’s budget, requiring strategies for sustainable pension management to ensure fiscal stability.
    • Youth Outmigration: Kerala experiences significant outmigration of its youth, leading to a loss of productive workforce and potential tax revenues, highlighting the need for policies to retain skilled workers and stimulate economic growth

    About Net Borrowing Ceiling (NBC):

    • The net borrowing ceiling for states in India denotes the maximum threshold set on the funds that state governments can borrow within a fiscal year.
    • Significance: Ensuring fiscal discipline and preventing states from accumulating excessive debt, the net borrowing ceiling plays a pivotal role. 
    • Factors: The criteria for setting these limits are shaped by various factors such as inputs from the Finance Commission, the Fiscal Responsibility and Budget Management (FRBM) Act, and specific directives from the central government, notably the Ministry of Finance.

     

    Basis of the Net Borrowing Ceiling:

    • Fiscal Responsibility Legislation: Both the central and state governments in India adhere to the FRBM Act, which establishes fiscal deficit goals to uphold fiscal discipline. Under the FRBM, states are required to maintain a fiscal deficit limit of 3% of the Gross State Domestic Product (GSDP).
    • Central Government Guidelines: The central government, through the Department of Expenditure in the Ministry of Finance, sets the annual borrowing limits for each state based on a formula that considers the state’s GSDP, existing debt levels, fiscal discipline, and other relevant factors. These limits can be revised in response to special circumstances, such as natural disasters or significant economic downturns.
    • Finance Commission Recommendations: The Finance Commission, which is constituted every five years, recommends how the central taxes are to be divided between the centre and the states and suggests measures to maintain fiscal stability. It also provides recommendations regarding the borrowing limits of states.

    Conclusion: States need to put in place an effective forecasting and monitoring mechanism for cash inflows and outflows so that a need-based approach is followed for market borrowings and the interest cost of cash surpluses is minimized.

     

    Mains PYQ

    Q What were the reasons for the introduction of Fiscal Responsibility and Budget Management (FRBM) Act, 2013? Discuss critically its salient features and their effectiveness. (UPSC IAS/2013)

  • Digital India Trust Agency (DIGITA) to check Illegal Lending Apps

    Why in the news?

    To address the rising threat of cyber fraud, the Reserve Bank of India (RBI) is planning to establish a Digital India Trust Agency (DIGITA).

    About Digital India Trust Agency (DIGITA)

    DIGITA aims to tackle the proliferation of illegal lending apps by verifying and maintaining a register of authenticated digital lending platforms.

    Role of DIGITA:

    1. Public Register: It will maintain a public register of verified apps, providing transparency and aiding law enforcement agencies in identifying unauthorised platforms.
    2. Verification Hub: It will serve as a central agency for vetting digital lending apps, ensuring their authenticity and compliance with regulations.

    Regulatory Implications

    • Apps lacking the ‘verified’ signature from DIGITA will be deemed unauthorized, enhancing law enforcement efforts against financial crimes in the digital domain.
    • Verification processes will promote transparency and accountability within the digital lending sector, curbing fraudulent activities.

    Progress made so far

    • The RBI has shared a list of 442 digital lending apps with the IT Ministry for whitelisting with Google.
    • Google has removed over 2,200 digital lending apps from its PlayStore, aligning with RBI and DFS directives to only allow apps from regulated entities or their partners.

    PYQ:

    2016:

    Regarding ‘DigiLocker’, sometimes seen in the news, which of the following statements is/are correct?

    1. It is a digital locker system offered by the Government under Digital India Programme.

    2. It allows you to access your e-documents irrespective of your physical location.

    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

     

    Practice MCQ:

    Consider the following statements about RBI led Digital India Trust Agency (DIGITA):

    1.    It aims to tackle the proliferation of illegal lending apps.

    2.    Apps lacking the ‘verified’ signature from DIGITA will be deemed unauthorized.

    Which of the given statements is/are correct?

    (a) Only 1

    (b) Only 2

    (c) Both 1 and 2

    (d) Neither 1 nor 2

  • Let’s make ₹ a global currency: PM to RBI

    Why in the news? 

    PM Modi asked the RBI to prepare a 10-year strategy to make the Indian rupee a globally “accessible and acceptable” currency and to meet the credit needs of every segment of the country

    What is Global Currency?

    A global currency refers to a single currency that is used by every country in the world. This concept involves all nations adopting the same currency for international trade and transactions

    What are the major challenges for India to make Rupeea a Global Currency?

    • Economic Stability: The Indian economy would need to demonstrate consistent stability and growth to inspire confidence among international investors and users of the currency.  
    • Liquidity in Financial Market Development:  These markets need to be deep and liquid to accommodate large volumes of international transactions denominated in INR.
    • Capital Controls: India currently has restrictions on capital flows in and out of the country. These would need to be eased to facilitate international trade and investment denominated in INR.
    • Legal and Regulatory Framework: There would need to be robust legal and regulatory frameworks in place to govern the use of the INR in international transactions, including clearing and settlement systems, as well as dispute resolution mechanisms.
    • International/ Investors Acceptance: Convincing other countries, businesses, and individuals to adopt the INR as a global currency would require concerted diplomatic efforts, as well as initiatives to promote its use in international trade and finance.
    • Currency Convertibility: Full convertibility of the INR would be necessary for it to become a global currency.

    Indian Efforts to Make Rupee a Global Currency:

    • RBI’s Roadmap for Rupee Internationalization: The RBI has published a report outlining a roadmap for the internationalization of the Rupee. This roadmap recommends actions such as including the Rupee in the Special Drawing Rights (SDR) basket, promoting its use in trade invoicing and settlement, facilitating its use in offshore markets, and developing financial products denominated in Rupees.
    • Promoting Use of Local Currencies for Cross-Border Transactions: India has been engaging in agreements with countries like the UAE to promote the use of local currencies, including the Rupee, for cross-border transactions.

    Way Forward:

    • Need for Transactions in Rupee: To be an accepted International Currency, the Indian rupee is to be freely used in transactions by residents and non-residents and as a reserve currency for global trade.
    • Need to increase the Exports: Indian Trades need to be promoted beyond the Asian region.  All export and import transactions need to be invoiced in Indian rupees.
    • Reducing the Constraints: Legal and Regulatory frameworks need to be freed to attract investors for their business profits without hampering security concerns.

    https://www.hindustantimes.com/india-news/lets-make-a-global-currency-pm-to-rbi-101711996093588.html

    https://theprint.in/opinion/indian-rupee-can-become-global-reserve-currency-but-modi-govt-must-bring-reforms-for-that/1738000/

  • 90 years of the Reserve Bank of India (RBI)

    Why in the news?

    Recently, the RBI celebrated its 90th year in Mumbai, marking a significant milestone.

    Dr. Ambedkar’s Role in the Establishment of RBI:

    • Dr. B.R. Ambedkar’s contributions were particularly notable during the Hilton Young Commission discussions in 1926, where he presented his recommendations based on his book “The Problem of the Rupee – Its Origin and Its Solution.”
    • These discussions laid the foundation for the establishment of the RBI on April 1, 1935.

    About Reserve Bank of India (RBI)

    • The RBI is the central bank and monetary authority of India.
    • It was established on April 1, 1935, under the Reserve Bank of India Act, 1934.
    • Its idea was incepted from the recommendations of the Hilton Young Commission.
    • Sir Osborne Arkell Smith, an Australian, served as the inaugural Governor.
    • He was succeeded by Sir C D Deshmukh, the first Indian to hold the position.
    • It is a centralized institution for India to effectively regulate its monetary and credit policies.
    • RBI had its initial headquarters in Kolkata, later moving permanently to Mumbai in 1937.
    • Initially, the RBI operated as a privately owned entity until its full nationalization in 1949.

    Functions and Initiatives:

    • Monetary Authority: The RBI controls the supply of money in the economy to stabilize exchange rates, maintain a healthy balance of payment, and control inflation.
    • Issuer of Currency: Sole authority to issue currency and combat circulation of counterfeit notes.
    • Banker to the Government: Acts as a banker to both the Central and State governments, providing short-term credit and financial advisory services.
    • Lender of Last Resort: Provides emergency liquidity assistance to banks during crises.
    • Custodian of Foreign Exchange Reserves: Manages foreign exchange reserves and administers the Foreign Exchange Management Act, 1999 (FEMA).
    • Regulator and Supervisor of Payment and Settlement Systems: Oversees payment and settlement systems in the country, ensuring efficiency and security.
    • Credit Control and Developmental Role: Promotes credit availability to productive sectors and fosters financial infrastructure development.

    Transformative Reforms initiated by the RBI

    • Green Revolution (1960s-1970s): Supported agricultural growth through credit facilities and rural credit accessibility enhancements.
    • Banks Nationalization (1969): Aimed at aligning banking sector objectives with national policy goals.
    • Priority Sector Lending (1972): Ensures timely credit flow to key sectors of the economy.
    • Economic Liberalization (1991): Opened up the economy to global markets, fostering market-oriented growth.
    • Unified Payment Interface (UPI), 2016: Enabled seamless and instant transactions across India.
    • Inflation Targeting Framework, 2016: Set inflation targets to guide monetary policy decisions.
    • Bharat Bill Payment System (BBPS), 2019: Launched an integrated bill payment system for customer convenience.
    • Aadhar-based eKYC (2019): Streamlined customer authentication processes for financial institutions.
    • Emergency Credit Line Guarantee Scheme (ECLGS), 2020: Provided credit assistance to SMEs affected by the COVID-19 pandemic.
    • Central Bank Digital Currency (2022): RBI is actively exploring the issuance of a CBDC known as e₹ (digital Rupee).
    • Cryptocurrency Regulation (2022): RBI has maintained a consistent stance against cryptocurrencies, advocating for an outright ban on them (after China and El Salvador imposed the complete ban). In 2020, the Supreme Court of India removed the ban on cryptocurrencies imposed by RBI.
    • Payment Vision 2025 Document (2023): The goals and vision of the RBI, are categorised in the Payments Vision 2025 documents into five anchor goalposts – Integrity, Inclusion, Innovation, Institutionalisation and Internationalisation.

     

    PYQ:

    2012:

    The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following?

    1.    Banks retain their deposits with the RBI.

    2.    The RBI lends funds to the commercial banks in times of need.

    3.    The RBI advises the commercial banks on monetary matters.

    Select the correct answer using the codes given below:

    (a) 2 and 3 only

    (b) 1 and 2 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

    2013: Consider the following statements: ​

    1.    The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.​

    2.    Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.​

    3.    The Governor of the RBI draws his power from the RBI Act.​

    Which of the above statements are correct?​

    (a) 1 and 2 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

  • UNCTAD Report Highlights Shifts in India’s Trade Relations

    What is the news?

    • The United Nations Conference on Trade and Development (UNCTAD) Global Trade Report revealed an evolving trade landscape for India, marked by increased reliance on China and the European Union (EU).

    About UNCTAD

    • UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964.
    • It is part of the UN Secretariat.
    • The UNCTAD Conference ordinarily meets once in four years.
    • It reports to the UNGA and the Economic and Social Council, but has its own membership, leadership and budget.
    • It is also a part of the United Nations Development Group.
    • It supports developing countries to access the benefits of a globalized economy more fairly and effectively.
    • Reports published by the UNCTAD are-
    1. Trade and Development Report
    2. World Investment Report
    3. Technology and Innovation Report
    4. Digital Economy Report

    Membership:

    • UNCTAD’s membership consists of all 195 member states of the United Nations.
    • India is an active member. The second UNCTAD Conference took place in New Delhi, India in 1968.

    Key Highlights of the Report:

    1. Key Findings on India
    • Trade Trends: India’s trade dependence on China and the EU rose by 1.2%, while reliance on Saudi Arabia declined by 0.6%.
    • Factors: This shift occurred amidst supply chain disruptions caused by the pandemic and the Russia-Ukraine conflict, leading to record-high food and fuel prices.
    • Policy Measures: Despite efforts to reduce dependency on China through initiatives like the Production-Linked Incentive (PLI) scheme and Quality Control Orders (QCOs), India’s trade relations with China strengthened.
    1. Insights from the Report
    • Stable Proximity: Geographical proximity of international trade remained relatively constant, indicating minimal near-shoring or far-shoring trends.
    • Political Proximity: However, there was a noticeable rise in the political proximity of trade, favouring countries with similar geopolitical stances.
    • Concentration of Trade: Global trade increasingly favored major trade relationships, although this trend softened towards the end of 2023.
    • Sectoral Trends: Most sectors experienced a decline in trade value, except for pharmaceuticals, transportation equipment, and electric cars.
    • Global Forecast: Global merchandise trade is expected to contract by 5% in 2023, with services trade projected to gain 8%.
    1. Impact of Russia-Ukraine Conflict
    • Shifts in Trade: The ongoing conflict led to a surge in Russia’s trade dependence on China by 7.1% while decreasing reliance on the EU by 5.3%.
    • Oil Trade: Russian oil shifted from the EU to China and India, with China becoming a significant trade partner for Russia.
    • US Trade Dynamics: The US managed to reduce reliance on China by 1.2% in 2023, while increasing dependence on the EU and Mexico.

    PYQ:

    The Global Infrastructure Facility is a/an: (2017)

    (a) ASEAN initiative to upgrade infrastructure in Asia and financed by credit from the Asian Development Bank.

    (b) World Bank collaboration that facilitates the preparation and structuring of complex infrastructure Public-Private Partnerships (PPPs) to enable mobilization of private sector and institutional investor capital.

    (c) Collaboration among the major banks of the world working with the OECD and focused on expanding the set of infrastructure projects that have the potential to mobilize private investment.

    (d) UNCTAD-funded initiative that seeks to finance and facilitate infrastructure development in the world.

     

    Practice MCQ:

    With reference to the United Nations Conference on Trade and Development (UNCTAD), consider the following statements:

    1. It is a permanent intergovernmental body established by the United Nations General Assembly.

    2. It is part of the UN Secretariat.

    3. India has never hosted the UNCTAD Conference.

    How many of the above statements is/are correct?

    (a) One

    (b) Two

    (c) Three

    (d) None

  • Drop in FDI inflows mirrors Global Trends: Finmin 

    Why in the News?

    India’s net Foreign Direct Investment (FDI) inflows have dropped almost 31% to $25.5 billion over the first ten months of 2023-24 as per the Finance Ministry

    Recent key Observations related to FDI inflow as per the Finance Ministry

    Recent FDI in the context of India:

    • From April 2023 to January 2024, the net inflows decreased more significantly due to increased repatriation of investment.
    • India remains one of the top destinations for global greenfield projects, with a stable number of new project announcements.
    • The country received significant FDI in sectors like services, pharmaceuticals, construction, and non-conventional energy.
    • The Netherlands, Singapore, Japan, the USA, and Mauritius contribute around 70% of total FDI equity inflows into India.
    • There’s a possibility of a modest increase in global FDI flows in the current year, driven by a decline in inflation and borrowing costs in major markets. However, significant risks remain, including geopolitical issues, high debt levels in many countries, and concerns about further economic fracturing.

    Recent FDI scenario in the context of the world:

    • Overall, global FDI flows rose by 3% to an estimated $1.4 trillion in 2023 due to economic uncertainty and higher interest rates led to a 9% fall in FDI flows to developing countries.
    • Drivers of Global FDI: Capital-intensive projects, particularly in renewable energy, batteries, and metals sectors, drove a large proportion of global FDI in 2023, highlighting the importance of energy transition.
    • Decline in International Investment Projects: Both greenfield projects and project finance (mainly infrastructure) and cross-border Mergers and Acquisitions (M&As) saw declines in 2023, attributed to higher financing costs. International project finance and M&A activity decreased by 21% and 16%, respectively.

      What is Foreign direct investment (FDI)?

      Foreign direct investment (FDI) is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.

      Government Bodies regulating FDI:

      India offers an automatic route for FDI in several sectors, simplifying the investment process for foreign investors in India. However, certain sectors require government approval, and reporting requirements, in line with the Foreign Exchange Management Act (FEMA), are in place to ensure transparency in foreign investments in India. FDI in India is subject to regulation and oversight by various government bodies, such as:

      • Department for Promotion of Industry and Internal Trade (DPIIT): DPIIT formulates and implements policies to promote and regulate foreign investment in India across sectors.
      • Reserve Bank of India (RBI): RBI manages the monetary aspects of foreign investments in India.
      • Securities and Exchange Board of India (SEBI): SEBI regulates FDI in the capital market.

      Conclusion:  India remains a top destination for greenfield projects, but international investment projects declined due to higher financing costs. This is indeed a silver lining for the Indian government to plan and execute for targeting more FDI inflow considering the Global scenario.

     

    Practice Question for mains

    Q- Explain the reasons for India’s decline in net FDI inflows in 2023-24 and analyze its implications amid global trends