💥Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

GS Paper: Indian Economy

  • What are the Reasons for Rise in Global Debt?

    global debt

    Central Idea

    • Record High: The Institute of International Finance (IIF) reported that global debt reached an all-time high of $307 trillion by the end of June 2023, marking an increase of about $100 trillion over the last decade.
    • Debt-GDP Ratio: After seven consecutive quarters of decline, global debt as a share of gross domestic product (GDP) has started rising again, reaching 336%.

    Understanding Global Debt

    • Global debt encompasses borrowings by governments (sovereign), private businesses, and individuals.
    • Governments borrow to cover various expenses and pay interest on past debts, while the private sector borrows primarily for investments.

    Drivers of Rising Global Debt

    • Historical Trend: Both nominal global debt and the debt-to-GDP ratio have been steadily increasing over the years. The pandemic briefly halted this trend as economic activity slowed, but debt levels have been on the rise again.
    • Advanced Economies: Over 80% of the first-half increase in global debt came from advanced economies like the U.S., the U.K., Japan, and France. Among emerging markets, China, India, and Brazil saw substantial debt growth.
    • Surge Amid Rising Interest Rates: Despite expectations of declining demand for loans due to rising interest rates, global debt increased by $10 trillion in the first half of 2023. This trend is not unusual as increased savings often lead to higher debt levels when channelled into investments.

    Inflation’s Impact on Debt

    • Unique Trend: More intriguing than rising debt levels is the preceding seven consecutive quarters of declining global debt as a share of GDP before 2023.
    • Inflation’s Role: The IIF attributes this decline to price inflation, which allowed governments to erode their debts denominated in local currencies through inflation. This process, known as inflating away debt, involves central banks creating new currency to pay off government debt, indirectly taxing the economy through rising prices.

    Causes for Concern

    • Debt Sustainability: Rising global debt levels often raise concerns about debt sustainability, especially in the case of government debt driven by reckless borrowing for populist programs.
    • Impact of Rising Interest Rates: As central banks raise interest rates to combat inflation, governments with heavy debt burdens may struggle to service their debt. Rising rates could lead to defaults or attempts to inflate away the debt.
    • IIF Warning: The IIF warns that the global financial infrastructure is ill-prepared to handle unsustainable domestic debt levels.
    • Private Debt Concerns: Rapidly increasing private debt levels also raise alarms as they are often linked to unsustainable booms that can culminate in economic crises, particularly when such lending lacks genuine savings.
    • Looming Financial Crisis: The 2008 global financial crisis serves as a recent example of an economic boom fueled by easy credit policies, such as those by the U.S. Federal Reserve, preceding an economic downturn.

    Conclusion

    • The surge in global debt warrants attention, given its potential implications for economic stability, sustainability, and the capacity of financial systems to address mounting debt challenges.

  • India’s Inclusion in Government Bond Index-Emerging Markets (GBI-EM)

    Central Idea

    • In a groundbreaking development, JPMorgan has announced the inclusion of Indian government bonds in its Government Bond Index-Emerging Markets (GBI-EM), slated to commence from June 2024.
    • This decision could pave the way for substantial inflows of billions of dollars into local currency-denominated government debt.

    What is Government Bond Index-Emerging Markets (GBI-EM)?

    Definition An index that tracks the performance of government bonds issued by emerging market countries.

    It reflects the returns of local-currency-denominated sovereign bonds.
    Purpose To provide a benchmark for measuring the performance of emerging market government bonds, helping investors assess the attractiveness of these bonds for investment.
    Issuer J.P. Morgan
    Components Includes government bonds issued by various emerging market countries.

    The composition may change over time based on eligibility criteria.
    Coverage Covers a broad range of emerging market countries and their local currency government bonds.

    Different GBI-EM indices may have specific regional or maturity focuses.
    Currency Denominated in the local currencies of the respective emerging market countries.

     

    India’s inclusion in GBI-EM

    • Long-Awaited Discussion: India’s consideration for inclusion in global indexes began in 2013. However, limitations on foreign investments in domestic debt impeded progress.
    • Fully Accessible Route (FAR): In April 2020, the Reserve Bank of India introduced select securities exempt from foreign investment restrictions through the “fully accessible route” (FAR), rendering them eligible for inclusion in global indexes.
    • Index-Eligible Bonds: Currently, there are 23 Indian Government Bonds (IGBs) with a combined notional value of $330 billion that meet index eligibility criteria, according to JPMorgan.
    • Investor Support: Approximately 73% of benchmarked investors voted in favor of India’s inclusion in the index, marking a significant endorsement.

  • Bima Sugam: Is it a ‘UPI moment’ for insurance sector, and how will it benefit customers?

    Central idea

    • The Insurance Regulatory and Development Authority of India (IRDAI) is poised to introduce Bima Sugam, a groundbreaking initiative set to transform the insurance landscape in India. IRDAI envisions Bima Sugam as the UPI moment for the insurance sector, aiming to establish it as the world’s largest online marketplace for insurance products and services.

    What is Bima Sugam?

    • Bima Sugam is an innovative online platform developed by This platform is designed to revolutionize the insurance sector in India by providing a comprehensive and user-friendly solution for insurance-related activities.

    Key aspects and developments regarding Bima Sugam

    • Comprehensive Insurance Marketplace: Bima Sugam serves as a comprehensive online marketplace where customers have access to a wide range of insurance options offered by various insurance companies. It covers all types of insurance requirements, including life insurance, health insurance, and general insurance, which encompasses policies such as motor and travel insurance.
    • Efficient Claim Settlement: Bima Sugam focuses on enhancing the efficiency of claim settlements. Whether policyholders need to make claims related to health coverage or death benefits, the platform enables paperless claim processing based on policy numbers.
    • Data Storage: Details and information about insurance schemes are expected to be stored within the platform through an insurance repository. This repository acts as a centralized database for insurance policies, making it convenient for customers to access and manage their policy information.
    • Budget Increase: The overall budget allocated for the development and implementation of Bima Sugam has been increased to Rs 200 crore, a substantial increase from the initial budget of around Rs 85 crore. This increased budget reflects the significance and scale of the project.
    • Committee Appointment: IRDAI has appointed a dedicated committee to oversee the creation and deployment of the Bima Sugam platform. The committee is tasked with ensuring that the platform is developed effectively and meets the objectives set by IRDAI.
    • Request for Proposals (RFPs): IRDAI plans to issue requests for proposals (RFPs) soon to select a suitable service provider for the Bima Sugam platform. These service providers will serve as technological partners responsible for creating and operating the platform, offering a one-stop solution for all insurance-related services.

    What is its role and utility for customers?

    • Single Window for Insurance Needs: Bima Sugam serves as a single, centralized platform where customers can fulfill all their insurance needs. It offers a diverse range of insurance options, including life insurance, health insurance, and general insurance (such as motor and travel insurance). This eliminates the need for customers to visit multiple websites or deal with various agents to explore and purchase insurance policies.
    • Streamlined Policy Selection: The platform simplifies the process of selecting the right insurance policy. Customers can easily compare and evaluate various insurance schemes from different insurers, helping them make informed decisions. This streamlined approach ensures that customers can identify policies that align with their specific requirements and preferences.
    • Efficient Claim Settlement: Bima Sugam places a strong emphasis on efficient claim settlement processes. Customers can initiate and track claims related to health coverage or death benefits through the platform. The use of policy numbers and paperless processing speeds up the claim settlement process, reducing hassles for customers during critical times.
    • Paperless Transactions: With the platform’s paperless transactions, customers can access, manage, and store their insurance policies electronically. This not only reduces the need for physical documentation but also contributes to environmental sustainability. Policyholders can view and retrieve their policy details conveniently online.
    • Cost Savings: Bima Sugam is expected to lower the commissions associated with insurance policies, resulting in cost savings for customers. Additionally, the overall cost of purchasing insurance policies is likely to decrease, making insurance more affordable and accessible.
    • Real-time Data Access: Insurance companies can access validated and authentic customer data in real-time through the platform. This enhances insurers’ ability to offer personalized services and respond promptly to customer inquiries and needs.
    • User-Friendly Interface: The platform is designed with a user-friendly interface, making it accessible and easy to navigate for customers of varying levels of technological proficiency. This ensures that a wide range of users can benefit from its services.

    What the IRDAI says about Bima Sugam?

    • Electronic Marketplace Protocol: IRDAI describes Bima Sugam as an electronic marketplace protocol. It envisions this platform as a means to universalize and democratize insurance by providing a digital infrastructure for seamless service delivery.
    • Integration with India Stack: The Bima Sugam will be connected with India Stack, which is a set of application programming interfaces (APIs). These APIs enable governments, businesses, startups, and others to utilize India’s unique digital infrastructure for delivering services efficiently.
    • Empowering Insurance Stakeholders: The IRDAI Chairman, Debasish Panda, said that Bima Sugam will enable and empower all stakeholders across the insurance value chain. This suggests that the platform aims to benefit not only customers but also insurers, intermediaries, and agents by streamlining processes and improving access to data.

    Implementation of the Bima Sugam

    • Initial Target: Initially, IRDAI aimed to have Bima Sugam up and running by January 2023.
    • First Postponement: The implementation timeline was postponed, and the platform’s launch was rescheduled for August 1. This delay indicated that more time was needed to develop and prepare the platform for public use.
    • Latest Implementation Date: The implementation of Bima Sugam has been postponed once again, with the new target for its launch set for June 2024. This suggests that the platform is still under development, and IRDAI is working to ensure its readiness before its official release.

    Conclusion

    • Bima Sugam represents a significant leap forward in the Indian insurance sector, promising convenience, transparency, and cost-efficiency for customers while revolutionizing the way insurers conduct business. As its implementation date approaches, stakeholders eagerly anticipate the positive impact this transformative platform will have on the insurance industry and financial security for millions of Indians.

  • Establishment of GST Appellate Tribunals across India

    Central Idea

    • The Finance Ministry has formally established 31 Appellate Tribunals spanning 28 States and eight Union Territories for the Goods and Services Tax (GST).
    • This significant move aims to address the increasing number of taxpayer disputes with the Revenue Department.

    What is GST Appellate Tribunal?

    • The GST Appellate Tribunal is a quasi-judicial body proposed to be established to resolve disputes related to the Goods and Services Tax (GST) in India.
    • It will function as an independent body to hear appeals against orders passed by the GST authorities or the Appellate Authority.
    • The tribunal will be composed of a national bench and various regional benches, headed by a chairperson appointed by the central government.
    • The proposed tribunal is expected to help expedite the resolution of disputes related to GST and reduce the burden on the judiciary.

    Under GST, if a person is not satisfied with the decision passed by any lower court, an appeal can be raised to a higher court, the hierarchy for the same is as follows (from low to high):

    1. Adjudicating Authority
    2. Appellate Authority
    3. Appellate Tribunal
    4. High Court
    5. Supreme Court

    Need for such Tribunal

    • Unburden judiciary: GST Appellate Tribunal will help resolve the rising number of disputes under the 68-month-old indirect tax regime that are now clogging High Courts and other judicial fora.
    • Improve efficiency of GST System: Overall, the establishment of the GST Appellate Tribunal is expected to improve the efficiency and effectiveness of the GST system in India.
    • Independent mechanism: The proposed Tribunal will provide an independent and efficient mechanism for resolving disputes related to GST.
    • Avoid tax evasion: It will help to expedite the resolution of disputes, reduce the burden on the judiciary, and promote greater certainty and predictability in the GST system.

    Issues with present litigation

    • Compliance issues: The GST system is relatively new in India, having been implemented in 2017, and there have been several issues with compliance and interpretation of rules and regulations.
    • Complex adjudication hierarchy: The current dispute resolution mechanism involves multiple layers of adjudication, starting with the GST officer and as mentioned above.
    • Time consuming process: This process can be time-consuming, costly, and burdensome for taxpayers, especially small and medium-sized enterprises.

    Significance

    • The creation of these tribunals had been in the pipeline since the implementation of the GST regime on July 1, 2017.
    • The number of pending appeals by taxpayers related to central GST levies had surged to over 14,000 (June 2023).

  • RBI to discontinue Incremental Cash Reserve Ratio (I-CRR)

    Central Idea

    • The Reserve Bank of India (RBI) announced the phased discontinuation of the Incremental Cash Reserve Ratio (I-CRR) on September 8, 2023.
    • This measure aimed to absorb surplus liquidity created by factors such as the return of Rs 2,000 notes to the banking system.

    RBI’s Decision

    • RBI conducted a review and decided to discontinue I-CRR in stages.
    • The central bank aims to release the impounded amounts gradually to avoid sudden shocks to the system’s liquidity, ensuring orderly money market functioning.

    Understanding Cash Reserve Ratio (CRR)

    • CRR is a fundamental concept before delving into Incremental Cash Reserve Ratio (ICRR).
    • Banks are mandated to maintain a certain portion of their deposits and specific liabilities in liquid cash with the RBI.
    • CRR serves as a crucial tool in the RBI’s arsenal for managing liquidity in the economy and acts as a safety net during times of banking stress.
    • Currently, banks are required to uphold 4.5% of their Net Demand and Time Liabilities as CRR with the RBI.

    Introduction to ICRR

    • I-CRR was introduced on August 10, 2023, as a temporary measure by RBI to absorb surplus liquidity.
    • Banks were required to maintain an I-CRR of 10% on the increase in their Net Demand and Time Liabilities (NDTL) between May 19, 2023, and July 28, 2023.
    • It came into effect from the fortnight starting August 12, 2023.
    • The RBI has the authority to implement an additional measure called Incremental Cash Reserve Ratio (ICRR), in addition to the standard CRR.
    • ICRR is employed during periods characterized by excess liquidity in the financial system.
    • Essentially, ICRR mandates that banks park even more liquid cash with the RBI than what is required under CRR.
    • This serves as a means to further manage and control liquidity in the banking system.

    Reason for I-CRR

    • Excessive liquidity emerged due to factors like the return of Rs 2,000 banknotes, RBI’s surplus transfer to the government, increased government spending, and capital inflows.
    • The daily liquidity absorption by RBI in July reached Rs 1.8 lakh crore.
    • Managing surplus liquidity was necessary to maintain price and financial stability.

    Impact on Liquidity Conditions

    • I-CRR was expected to absorb over Rs 1 lakh crore of excess liquidity from the banking system.
    • It temporarily shifted the banking system’s liquidity from surplus to deficit on August 21.
    • Factors like GST outflows and central bank selling of dollars contributed to tight liquidity.
    • However, liquidity conditions reverted to surplus from August 24.
    • On September 8, RBI absorbed Rs 76,047 crore of surplus liquidity from the system.

  • Self-Regulatory Organizations (SROs) in the Fintech Sector

    sro

    Central Idea

    • In the rapidly evolving landscape of the fintech sector, the Reserve Bank of India (RBI) Governor has called upon fintech entities to establish Self-Regulatory Organizations (SROs).

    What is an SRO (Self-Regulatory Organization)?

    • An SRO is a non-governmental entity entrusted with the task of formulating and enforcing rules and standards governing the behaviour of participants within a specific industry.
    • The primary objective of an SRO is to safeguard consumer interests, uphold ethical practices, promote equality, and nurture professionalism within the industry.
    • Typically, SROs collaborate with all industry stakeholders to establish and administer regulations.

    Key Characteristics of an SRO

    • Impartial Governance: SROs maintain impartial mechanisms to oversee self-regulatory processes, ensuring that industry members operate within a disciplined framework and accept penalties when necessary.
    • Beyond Industry Interests: SROs extend their concerns beyond the narrow interests of the industry itself. They aim to protect not only industry players but also workers, customers, and other participants in the ecosystem.
    • Supplement to Existing Regulations: While SROs formulate regulations, standards, and mechanisms for dispute resolution and enforcement, they do not replace applicable laws or government regulations. Instead, they complement existing legal frameworks.

    Functions of an SRO

    • Communication Channel: SROs serve as intermediaries between their members and regulatory authorities like the RBI, facilitating two-way communication.
    • Establishment of Standards: SROs work to establish minimum benchmarks and industry standards, fostering professionalism and healthy market behavior among their members.
    • Training and Awareness: SROs provide training to their members’ staff and conduct awareness programs to promote industry best practices.
    • Grievance Redressal: They establish uniform grievance redressal and dispute management frameworks to resolve issues within the industry.

    Why is an SRO Necessary?

    • As the fintech sector continues to evolve, SROs can play a pivotal role in ensuring the industry’s responsible growth and maintaining ethical standards.
    • They address critical issues such as market integrity, conduct, data privacy, cybersecurity, and risk management.
    • SROs contribute to building trust among consumers, investors, and regulators.

    RBI’s Expectations from Fintech Players

    • The Reserve Bank of India expects fintech companies to:
    1. Evolve industry best practices and privacy/data protection norms in compliance with local laws.
    2. Set standards to prevent mis-selling and promote ethical business practices.
    3. Ensure transparency in pricing.
    • RBI Governor has encouraged fintechs to establish an SRO voluntarily.

    Benefits of an SRO

    • Industry Expertise: SROs possess deep industry knowledge, making them valuable contributors to industry discussions and educational initiatives.
    • Standardized Conduct: SROs promote a standardized code of conduct that encourages ethical business practices, ultimately boosting confidence in the industry.
    • Watchdog Role: SROs act as watchdogs, preventing unprofessional and unethical practices within the industry.

    Conclusion

    • In the dynamic fintech sector, Self-Regulatory Organizations (SROs) emerge as indispensable entities.
    • Their role in shaping industry behaviour, promoting ethical conduct, and safeguarding consumer interests cannot be overstated.

  • Unemployment: Measurement Challenges in Developing Economies

    Central Idea

    • The Periodic Labour Force Survey (PLFS) in 2017 revealed India’s highest-ever recorded unemployment rate at 6.1%.
    • The 2021-22 PLFS indicated a reduction to 4.1%, still higher than some developed economies like the U.S., where unemployment rates varied from 3.5% to 3.7% between July 2022 and July 2023.
    • Comparing India and the U.S. unemployment rates is complex due to their vastly different economies.

    unemployment

    About Periodic Labour Force Survey (PLFS)

    Established 2017 (The PLFS was initiated in 2017 as part of the larger National Sample Survey (NSS) program)
    Administered by National Sample Survey Office (NSSO), Ministry of Statistics and Programme Implementation, Government of India
    Objective To collect data on labor force participation, employment, and unemployment in India.
    Key Data Collected – Workforce Participation

    – Employment Types and Sectors

    – Unemployment

    – Demographic and Socioeconomic Characteristics
    Significance Provides vital information for policymaking, research, and analysis related to the labor market in India.
    Frequency Periodic surveys conducted at regular intervals.

     

    Defining Unemployment

    • Unemployment, as per the International Labour Organization (ILO), involves being jobless, available for work, and actively seeking employment.
    • The unemployment rate is the ratio of the unemployed to the labor force, but it can decrease if the economy lacks job creation or people stop job hunting.

    Measuring Unemployment in India

    • In developing economies, like India, social norms can limit job search decisions.
    • The 2009-10 National Sample Survey Organisation (NSSO) survey revealed that many women who engaged in domestic work would work if opportunities were available within their households but are not considered unemployed since they aren’t actively seeking jobs.
    • Measuring unemployment in India is complicated due to the informal job market, where individuals hold various roles throughout the year.

    Different Metrics for Classification

    • The Usual Principal and Subsidiary Status (UPSS) and the Current Weekly Status (CWS) are two major measures for classifying individuals in India.
    1. UPSS considers an individual employed even if they worked for more than 30 days in a subsidiary role.
    2. CWS counts an individual as employed if they worked at least one hour on one day within the past week.
    • UPSS typically yields lower unemployment rates than CWS since finding work over a year is more likely than in a week.

    Impact of Informal Economy

    • The low bar for classifying individuals as employed means that unemployment rates are lower in rural areas than urban regions in agrarian economies.
    • Definitions may ‘underestimate’ unemployment but are designed to capture the informal economy’s nuances.

    The Lockdown Effect

    • The lockdown in March 2020 disrupted the Indian economy, but PLFS unemployment rates did not reflect this immediately.
    • UPSS status may still consider those who lost jobs during the lockdown as employed if they spent most of the previous year working.
    • CWS criteria show higher unemployment rates due to shorter reference periods but may not fully capture the long-term impact of the lockdown when aggregated across different periods.

    Conclusion

    • Unemployment is becoming a significant factor in upcoming elections, making it crucial to understand its definition and measurement complexities in developing economies.

  • Strengthening export control measures for Dual-Use Items

    dual-use items

    Central Idea

    • The government has recently announced its commitment to enhancing the control of dual-use items to prevent their misuse by non-state actors and terrorists.
    • Dual-use items refer to goods that can be utilized for both civilian and military purposes.

    Understanding Dual-Use Items

    • Dual-use items are commodities with the potential for application in both civilian and military contexts.
    • They are heavily regulated due to their capacity to be initially intended for civilian use and later repurposed for military or even terrorist activities.
    • Some examples include global positioning satellites, missiles, nuclear technology, chemical and biological weapons, night vision technology, thermal imaging equipment, specific models of drones, precision-engineered aluminium pipes, and certain types of ball bearings.

    Control Mechanisms for Dual-Use Items

    • International Cooperation: Most industrialized nations have established export controls on specific categories of designated dual-use technologies.
    • Multilateral Agreements: Various international treaties and agreements govern the export of these items.
    • India’s Participation: India is a signatory to major multilateral export control regimes like the Missile Technology Control Regime (MTCR), Wassenaar Arrangement (WA), Australia Group (AG), and Nuclear Suppliers Group (NSG). It is also party to key conventions such as the Chemical Weapons Convention (CWC) and Biological and Toxic Weapons Convention (BWC).
    • DGFT’s Role: In India, the Director General of Foreign Trade (DGFT) plays a pivotal role as a facilitator of exports and imports. The DGFT maintains a specialized list known as SCOMET (Specialty Chemicals, Organisms, Materials, Equipment, and Technologies) to regulate dual-use items.

    What is the SCOMET List?

    • SCOMET item is an acronym for Special Chemicals, Organisms, Materials, Equipment, and Technologies.
    • These are dual-use items that can be used for both civilian and military applications. India’s Foreign Trade Policy regulates the export of items on the SCOMET List.
    • Exporting these items and technologies falls under strict regulations. It can either be prohibited or permitted only under a license.
    • The SCOMET control list aligns with the control lists of various multilateral export control regimes and conventions.

    Necessity of Controlling Dual-Use Items

    • India’s Commitment: India is firmly committed to non-proliferation efforts related to dual-use items.
    • Integral Component: Export control over these items forms an integral part of India’s broader export control system.
    • Compliance: It ensures that sensitive and dual-use goods, including those covered by the Missile Technology Control Regime (MTCR), are traded in full compliance with India’s obligations under various international regimes.

    Conclusion

    • The government’s commitment to enhancing export control measures for dual-use items reflects its dedication to global non-proliferation efforts and the responsible trade of sensitive technologies.
    • Collaborative efforts among governments, industries, and stakeholders remain crucial in achieving effective export control of these items.

  • The tax base is growing – government shouldn’t waste the opportunity

    What’s the news?

    • India sees a surge in taxpayer base amidst tax policy challenges; a stable tax-to-GDP ratio raises questions on fiscal maneuverability and economic growth prospects.

    Central idea

    • In the lead-up to each budget, the Union government cites limited tax revenues as a spending constraint. Recent years have seen a surge in direct and indirect tax payers, challenging the idea that only a small segment contributes. This should ideally raise the tax-to-GDP ratio, yet tax rate cuts and pandemic disruptions have limited fiscal gains, hinting at a deliberate shift to a low-tax regime.

    What is meant by fiscal maneuverability?

    • It refers to the government’s ability to adjust its revenue and expenditure policies in response to changing economic conditions, budget constraints, and policy goals.

    What is Tax-to-GDP Ratio?

    • The Tax-to-GDP ratio is a financial indicator that measures the total tax revenue collected by a government as a percentage of its overall GDP for a specific period, typically a fiscal year.
    • This ratio is used to assess the level of taxation relative to the size of the economy.
    • A higher Tax-to-GDP ratio suggests that a larger portion of a nation’s economic output is being collected in the form of taxes.

    What Factors Have Led to the Government’s Limited Fiscal Maneuverability Before Budgets?

    • The common refrain: Historically, the Union government has often cited its limited tax revenues as a significant constraint on its ability to maneuver effectively in the run-up to budgets.
    • Steady increase in tax base: It’s noteworthy that there has been a consistent increase in both direct and indirect tax payers over recent years.
    • Economic context: This expansion in the tax base has occurred during a phase of slower, uneven economic growth.
    • Impact of tax cuts and disruptions: Despite the increase in taxpayers, cuts in both direct and indirect tax rates (including GST) and pandemic-induced economic disruptions have limited the fiscal gains from this surge in taxpayers.

    How Has the Taxpayer Base Evolved in Recent Years?

    • Growth in the taxpayer base: The tax base has shown substantial growth in recent years, challenging the belief that only a small section of society pays taxes.
    • Direct tax base expansion: The number of companies paying tax grew by about 43 percent, from 7.46 lakh to 10.7 lakh, between the assessment years 2014–15 and 2022–23.
    • Individual taxpayers: Individual taxpayers increased by 65 percent over the same period, rising from 5.38 crore to 8.9 crore.
    • Role of small taxpayers: It’s important to note that a significant number of these new tax payers have incomes less than Rs 5 lakh.

    Trends and Factors in the Expansion of the Indirect Tax Base

    • Indirect tax base growth: The number of active GST payers increased from 1.2 crore in 2019 to 1.4 crore by June 2023.
    • Composition: About 80 percent of these taxpayers are proprietorships, with another 10 percent being partnerships.
    • Incentives for registration: Smaller establishments are incentivized to register under GST to avail of the input tax credit.
    • Indirect tax impact: The growth in the indirect tax base may also be influencing the increase in direct tax payers.

    Impact of Tax Rate Reductions

    • Corporate tax rate reduction: In September 2019, the government announced a cut in the corporate tax rate for existing companies from 30 percent to 22 percent.
    • Impact on revenue: As per government figures, the revenue loss on account of this corporate tax reduction was Rs 1.28 lakh crore in 2019–20 and Rs 1 lakh crore in 2020–21.
    • Corporate tax-to-GDP ratio: The corporate tax-to-GDP ratio declined from 3.5 percent in 2018–19 to around 3.1 percent by 2022–23.
    • Personal income tax rebates: In the interim budget of 2019, the government announced that individual taxpayers with taxable income up to Rs 5 lakh would get a full tax rebate.
    • Personal income tax-to-GDP ratio: The personal income tax-to-GDP ratio increased from 2.5 percent in 2018–19 to 3 percent by 2022–23.
    • Increase in zero tax liability: Notably, the number of individuals with zero tax liability also increased from 2.9 crore in 2019–20 to 5.16 crore in 2022–23, which may limit the gains from an expansion in the tax base.

    What are the challenges?

    • Revenue Sustainability: A challenge arises in ensuring that the gains from an expanding tax base translate into sustainable revenue streams. Despite the increase in taxpayers, tax cuts and disruptions may limit the fiscal benefits.
    • Tax Evasion and Avoidance: Addressing tax evasion and avoidance remains a significant challenge. Although the formalization of the economy makes tax evasion more complicated, it requires effective measures to combat tax evasion further.
    • Balancing Tax Cuts: The reduction in tax rates, such as the corporate tax cut, has implications for government revenue. Striking a balance between encouraging economic growth through lower taxes and maintaining adequate fiscal resources is a constant challenge.
    • Targeted Spending: As the government’s fiscal space expands with a growing tax base, it faces the challenge of allocating resources effectively. Prioritizing and targeting spending on key development objectives while avoiding wasteful expenditures is essential.

    Future Prospects

    • Fiscal Sustainability: With an expanding economy and tax base, there is potential for improved fiscal sustainability. If managed effectively, this can provide the government with more resources to meet its long-term financial commitments.
    • Development Opportunities: The growth in the tax base offers opportunities for increased public investment in critical sectors, fostering economic development, and improving the overall quality of life for citizens.
    • Reduced Reliance on Borrowing: An increased tax base can reduce the government’s reliance on borrowing to meet budgetary needs, potentially leading to lower interest payments and debt management challenges.
    • Incentive for Formalization: As more individuals and businesses enter the tax net, there’s a natural incentive for greater formalization of the economy. This can reduce the size of the informal sector and promote economic stability.
    • Policy Flexibility: A broader tax base can provide the government with greater policy flexibility. It can consider adjustments to tax rates, exemptions, and deductions to support specific policy goals, such as promoting investment or addressing income inequality.
    • Enhanced Economic Growth: With appropriate fiscal policies, the increased revenue potential from a growing tax base can contribute to sustained economic growth, job creation, and poverty reduction.

    Conclusion

    • The government’s strategic choices regarding tax rates have influenced the country’s tax landscape, expanded the taxpayer base while maintained stable tax-to-GDP ratios. As India’s economy continues to evolve, these gains should not be squandered through excessive giveaways but rather strategically allocated to promote sustainable development and economic growth.

  • UPI QR Code-Central Bank Digital Currency interoperability: How does it work and how do customers benefit?

    interoperability

    What’s the news?

    • The fusion of UPI and CBDC is an essential component of the Reserve Bank of India’s (RBI) ongoing pilot project aimed at propelling the retail digital rupee.

    Central idea

    • Banks are boosting digital rupee (e₹-R) adoption by integrating UPI QR codes with CBDC or e₹ apps. Users can now scan any UPI QR code for transactions, while merchants can accept digital rupee payments using their existing UPI QR codes.

    Definition- Interoperability

    • Interoperability, as defined by the RBI, is the technical compatibility that enables a payment system to operate harmoniously with other payment systems.
    • This fosters the seamless execution, clearance, and settlement of payment transactions across diverse systems.
    • The synergy between payment systems contributes to fostering adoption, coexistence, innovation, and efficiency for end-users.

    Understanding QR Codes

    • A Quick Response (QR) code is a pattern of black squares arranged in a grid on a white background, interpretable by imaging devices like cameras. It carries information about the attached item.
    • This versatile tool provides an alternative contactless payment channel, allowing merchants to directly receive payments into their bank accounts.

    What is a Central Bank Digital Currency (CBDC)?

    • CBDC is a legal tender issued by the central bank in digital form. Like rupee notes or coins, which are in physical form.
    • Simply put, it’s just like rupee (₹) notes but in digital form (e₹). You can also exchange e₹ for physical currency notes.
    • However, unlike fiat currency that’s usually stored in banks and hence their liability, CBDC is a liability on the RBI’s balance sheet. That’s why you don’t necessarily need to have a bank account to own a digital rupee.

    What is the Unified Payments Interface (UPI)?

    • UPI is India’s mobile-based fast payment system, which enables customers to make round-the-clock payments instantly using a virtual payment address (VPA) created by the customer.
    • It eliminates the risk of the remitter sharing bank account details with the remitter.
    • UPI supports both Person-to-Person (P2P) and Person-to-Merchant (P2M) payments, and it also enables a user to send or receive money.

    The interoperability between UPI and CBDC

    • The interoperability between UPI and CBDC introduces the concept of UPI QR code-CBDC interoperability. This entails the compatibility of all UPI QR codes with CBDC applications.
    • In the pilot phase of the retail digital rupee, e₹-R users had to scan a specific QR code for transactions. However, with UPI-CBDC interoperability, transactions can now be initiated using a single QR code.
    • The digital rupee, a tokenized digital variant of the rupee, is issued by the RBI as CBDC. The e₹ is stored within a digital wallet linked to a customer’s existing savings bank account, while the UPI directly connects to the customer’s account.

    Significance of Interoperability

    • Enhanced User Experience: Interoperability simplifies the payment process, allowing users to seamlessly make transactions using any UPI QR code. This eliminates the inconvenience of switching between multiple payment apps or systems, enhancing user satisfaction.
    • Accelerated Adoption of the Digital Rupee: Leveraging the popularity of UPI, interoperability promotes the adoption of the retail digital rupee. This aligns with the government’s objectives to drive digital currency usage and reduce reliance on physical cash.
    • Merchant-Friendly: Merchants benefit from this interoperability as it eliminates the need for them to manage a separate QR code for digital rupee payments. This lowers the entry barrier for merchants to accept digital currency, making it more accessible to a wider range of businesses.
    • Expanding Financial Inclusion: Interoperability has the potential to extend financial inclusion efforts, particularly in underserved regions. Users and merchants with limited exposure to digital payments can now participate more easily in the digital economy.
    • Efficiency and Cost Savings: For both users and merchants, interoperability reduces the operational costs associated with maintaining multiple payment platforms. It simplifies accounting and transaction management for businesses.

    How will it drive CBDC adoption?

    • Presently, UPI is a widely used payment method. The interoperability between UPI and CBDC is poised to accelerate the adoption of the digital rupee.
    • With over 70 mobile apps and 50 million merchants accepting UPI payments, the existing UPI ecosystem sets the stage for the retail digital rupee’s growth.
    • The RBI reported 1.3 million customers and 0.3 million merchants using e₹-R in July, with daily transactions ranging from 5,000 to 10,000.
    • Prominent banks, including State Bank of India, Bank of Baroda, Kotak Mahindra Bank, Yes Bank, Axis Bank, HDFC Bank, and IDFC First Bank, have introduced UPI interoperability on their digital rupee applications.

    interoperability

    Benefits for Users

    • Seamless Transactions: Users can effortlessly execute digital rupee transactions by scanning any UPI QR code, eliminating the need for multiple apps or QR codes for different transactions.
    • Wider Acceptance: Users are no longer restricted to specific QR codes; they can utilize their digital wallets linked to UPI for transactions at various merchants, increasing flexibility.
    • Financial Inclusion: Interoperability ensures that users, including those in remote areas, can easily access and use the digital rupee without specialized infrastructure or additional QR codes, promoting financial inclusion.
    • Reduced Transaction Costs: Users can avoid extra fees associated with using multiple payment platforms. Interoperability makes digital rupee transactions more cost-effective.
    • Streamlined Wallet Management: Users can consolidate their digital transactions within a single digital wallet, simplifying financial management.

    Benefits for Merchants

    • Ease of Adoption: Merchants can accept digital rupee payments without the complexity of creating and maintaining a separate QR code for CBDC, simplifying onboarding for businesses, including small retailers.
    • Expanded Customer Base: With interoperability, merchants can cater to a broader range of customers using digital rupees, regardless of whether customers possess a specific QR code.
    • Reduced Infrastructure Costs: Merchants save on expenses related to setting up and maintaining additional payment infrastructure, such as separate QR codes or payment terminals.
    • Efficient Settlement: The integration allows for efficient settlement of digital rupee payments, whether or not the merchant has a CBDC account. This ensures prompt and secure payment receipts for merchants.
    • Increased Sales: Simplified payment options often lead to smoother and quicker checkouts, potentially boosting customer satisfaction and increasing sales for merchants.

    Conclusion

    • The convergence of UPI and CBDC through interoperability marks a transformative phase in the realm of digital payments. With the fusion of two powerful platforms, the retail digital rupee is poised to gain widespread adoption, revolutionizing the landscape of digital transactions in India.

    Also read:

    India’s Central bank digital currency (CBDC) in detail