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GS Paper: Indian Economy

  • Current Account Deficit (CAD): Desirable and Undesirable Components

    CAD

    Central Idea

    • As per the RBI’s quarterly statistics, the current account deficit (CAD) widened to 4.4 per cent of GDP in the second quarter of 2022-23, down from 2.2 per cent in the preceding quarter. This marks a reversal from an unusual surplus of 0.9 per cent of GDP in 2020-21. In the third quarter of this financial year, while the merchandise trade deficit has widened, the CAD may witness a fall.

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    What is Current Account Deficit (CAD)?

    • Current Account Deficit (CAD) = Trade Deficit + Net Income + Net Transfers
    • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
    • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
    • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

    Components of Current Account

    1. Trade Deficit
    • Trade Deficit = Imports – Exports
    • A Country is said to have a trade deficit when it imports more goods and services than it exports.
    • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
    • A trade deficit represents an outflow of domestic currency to foreign markets.
    1. Net Income
    • Net Income = Income Earned by MNCs from their investments in India.
    • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
    • Net income is measured by Payments made to foreigners in the form of dividends of domestic stocks, Interest payments on bonds and Wages paid to foreigners working in the country.
    1. Net Transfers
    • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners. It also Includes Remittances, Gifts, Donation etc.

    CAD

    India’s CADs have both desirable and undesirable components

    • Desirable:
    • A desirable deficit is a natural reflection of rising investment, portfolio choices and the demographics of the country.
    • If CADs can be financed by stable capital inflows, such as FDI inflows, they are desirable as they are less prone to capital flight.
    • Stable capital flows are desirable as they allow debtor countries, such as India, to utilize and allocate them into sectors that may yield long-term productive gains and foster higher economic growth.
    • Undesirable:
    • Large and persistent CADs can be undesirable if they reflect bigger problems such as poor export competitiveness and are financed by unstable financing.
    • If deficits are financed by volatile capital flows such as portfolio flows, there may be a cause of concern. Portfolio flows are capricious and more susceptible to reversals in case of any global financial shock.

    The countercyclical nature of India’s CAD: A matter of concern

    • Dominance of external shocks: Research suggests that the country’s CAD rises when output falls rather than when demand rises, indicating the dominance of external shocks.
    • For instance: If oil prices rise, and as oil is an input in the production process, it raises the cost of production and leads to a fall in economic growth. In this case, CADs rise with falling growth due to both the inelasticity of oil import demand as well as its major share in India’s total imports.

    Remarks to be Noted

    • Remittances and services exports have provided a counter-balance to rising merchandise trade deficits.
    • India’s services exports grew at 23.5 per cent in 2021-22.
    • While capital flows are pro-cyclical and react negatively to contractionary monetary policy by the Fed, remittances have exhibited remarkable stability.

    Challenges and a Way ahead

    • The composition of financing is crucial. While FDI inflows were enough to finance the deficit in 2021-22, these inflows have been weak in the current fiscal year.
    • Over the medium term, policymakers need to arrest the negative spillovers from the slowdown in global trade on merchandise exports.
    • Further rate hikes by the US Fed may lead to capital outflows leading to additional exchange rate market pressures. This could be challenging in the current situation as a weaker currency, coupled with a sticky import basket will lead to imported inflation.
    • Policy measures thus must facilitate exports by focusing on structural reforms to improve trade competitiveness, alongside which the government must sign free trade agreements.

    CAD

    Conclusion

    • India is currently facing the twin-deficit problem of high fiscal and CADs. While aggressive fiscal consolidation may be undesirable in the face of rising fears about a global slowdown, a comfortable external environment can be maintained by ensuring stable financing, along with using exchange rates as a shock absorber to weather the adverse global economic situation.

    Mains Question

    Q. Explain the concept of Current account deficit? India’s CAD have both desirable and undesirable components. Discuss.

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  • Invest In People For The Brighter Future

    Invest

    Central Idea

    • The world is indeed looking up to the Indian economy as a bright star, as the finance minister noted in the Budget speech on February 1. In 2020, India accounted for 20.6% of the worldwide population of 15- to 29-year-olds. Which means that in the years ahead, one out of every five workers deployed globally could be an Indian. No doubt, the rest of the world foresees a fortune in India’s young population. But are our policymakers doing enough to realise the possibilities that are unfolding?

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    The key proposals in this year’s Union budget are the following

    • Increase in capital expenditures for infrastructure: There will be a considerable increase in capital expenditures, for the building of physical infrastructure, mainly in transport, energy and defence. The figures under this head are expected to be higher in 2023-24 compared to the corresponding level in 2022-23 (revised estimates).
    • Modest tax revenue: The growth of the tax revenues is going to be modest, the government is nevertheless committed to reducing the fiscal deficit to 5.9% of GDP. That could have been achieved only by reducing the spending on some other sectors
    • The axe has fallen on subsidies and social sector expenditures: Compared to its previous year, in 2023-24, the Union government’s expenditure on food subsidy will fall by ₹0.9 trillion (or 90,000 crore), on fertilizer subsidy by ₹0.5 trillion, and on the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) by ₹0.3 trillion.
    • Marginal increase unlikely to make impact: The marginal increases in the allocations on health, education, agriculture and the Angwandi scheme are unlikely to make an impact, after taking into account the effect of inflation.

    Public-private complementarities

    • Capital spending indicates country’s productive capability: A jump in capital spending by the government, as proposed in the Budget, is a much-needed step to reinvigorate the Indian economy. Investment as a proportion of income or GDP indicates the rate at which a country’s productive capabilities are growing.
    • High rates of investment; Fast rates of economic progress: In India, this proportion rose steadily during the mid-2000s and peaked at 42% in 2007, which was even better than China’s record at that point in time. High rates of investment translated into extremely fast rates of economic progress in the country, which lasted until the early 2010s.
    • Crowd in Private investments: If the proposed investments by the government come through, and they indeed crowd in private investments as the finance minister has predicted, that can set the stage for a revival of the Indian economy.

    Global financial crisis in 2007-08 was a turning point

    • China responded with high domestic investment: China responded to the crisis by increasing domestic investment, a large part of which coming from its public sector.
    • India restrained its expenditures: In India, the government restrained its expenditures, worrying about the rising fiscal deficits. As public expenditures nosedived, private investors lost confidence as well. Investment as a proportion of GDP was on a steady downward slide

    Invest

    Investing in people is an investment in the future

    • Expenditure on social sector: Public expenditures on the social sectors constitute an investment for the future more so for a country with a predominantly young population.
    • For instance: The income a destitute mother receives for work through MGNREGA may ensure that her children do not have to go to school with empty stomachs.
    • Underinvestment in education: Underinvestment in education and health will undercut India’s chances in a global economy that is increasingly dominated by knowledge. Millions of young people are denied access to affordable education and decent jobs, leading to frustration.
    • For instance: In 2022, only 2.6% of the nearly 1.9 million candidates who wrote the NEET managed to secure a seat for MBBS in a government college.
    • Government expenditure to boost to supply and demand: Government expenditure on health and education can provide a boost to both the supply and the demand fronts in a knowledge-driven economy, more new jobs as teachers and doctors, especially for women, and a greater supply of younger professionals and skilled workers.

    Importance of social sector spending for long-term growth and social welfare

    • Contrasting Capital Expenditures with Social Sector Spending: Unlike capital expenditures, which are generally considered productive, subsidies and social sector spending are often labeled as wasteful. It is commonly believed that cutting social sector spending will not harm economic growth; however, this perception is incorrect.
    • The Negative Impact of Reducing Social Sector Spending: Cutting social sector spending not only exacerbates existing social inequalities but also dampens the prospects for long-term growth.
    • For instance: In India, for example, only 9.8% of workers have access to regular jobs that provide some form of social security. Therefore, measures such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the free provision of food have been a lifeline for millions of poor Indians who have been affected by the COVID-19 pandemic and joblessness.

    Unwarranted fears about fiscal deficit

    • The Counterproductive Nature of Inflated Fears: Inflated fears about the fiscal deficit and government debt will only be counterproductive in a country possessing vast reserves of untapped human and other resources as India does.
    • India’s government debt is held largely by domestic financial institutions does not pose threat: Only a small portion of India’s public debt is owed to external agencies (amounting to 4.2% of GDP in 2022), which does not pose a threat. India’s public debt is held largely by domestic financial institutions, including public sector banks, insurance companies. This is a debt the government owes to the people of this country, whose savings the financial institutions have mobilised.
    • For example: Greece and the most recent example of Sri Lanka’s economic crisis was a result of external debt.
    • A Virtuous Cycle of Debt: Higher levels of development and incomes will lead to the creation of fresh savings, which can help pay off the debts. Borrowing to feed and educate all of its young citizens will provide asset-poor and socially disadvantaged households the opportunity to pick up qualifications required to enter the new job market.

    Invest

    Conclusion

    • For a generation of young Indians, this is, without a doubt, a ‘make or break moment’. without increased public spending on human capabilities, there is little hope for them to escape poverty, lack of skills, and discontent. However, if the government invests in food security, health, and education, India’s young people can thrive and become bright stars that illuminate the world.

    Mains question

    Q. Without increased public spending on human capabilities, there is little hope for young Indians to escape poverty and discontent. Discuss.

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  • Repo Rate Hike: Impact Should be Considered Before Making Decisions

    Rate

    Central Idea

    • In its last meeting, held just a few days after the Union budget, the monetary policy committee (MPC) of the RBI had voted to raise the benchmark repo rate by 25 basis points. The MPC noted that calibrated action was warranted to break the persistence in core inflation. This surprise uptick in inflation is likely to complicate the policy choices before the MPC members when it meets next in the first week of April.

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    What is Basis points we often hear about?

    • A basis point is a unit of measurement used to express changes in interest rates, bond yields, and other financial indicators.
    • One basis point is equal to one-hundredth of a percentage point, or 0.01%.
    • For example, If the Reserve Bank of India (RBI) raises the repo rate by 25 basis points, it means that the interest rate has increased by 0.25%.

    What it indicates?

    • If the Reserve Bank of India (RBI) keeps raising the repo rate by basis points, it is an indication that the central bank is tightening its monetary policy stance to manage inflationary pressures in the economy.

    Back to basics: Monetary Policy Committee (MPC)

    • Committee of RBI to fix the benchmark policy: The Monetary Policy Committee (MPC) is a committee of the RBI, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
    • To bring transparency and accountability: The RBI Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC to bring more transparency and accountability in fixing India’s Monetary Policy.
    • Policy is published after discussion: The policy is published after every meeting with each member explaining his opinions.
    • Answerable to GOI: The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.

    What is Inflation?

    • Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices.
    • Typically, prices rise over time, but prices can also fall (a situation called deflation).

    The current trends of Inflation

    • Rise in retail inflation: Retail inflation, as measured by the consumer price index, rose to 6.52 per cent in January, up from 5.72 per cent in December, reversing the declining trend seen in the preceding months.
    • Much of the surge was driven by food inflation: The consumer food price index rose to 5.94 per cent, up from 4.19 the month before, driven largely by cereals.
    • Price pressure remain across the economy: Inflation remained elevated in clothing and footwear, household goods and services, personal care effects and education, signalling that price pressures remain fairly broad-based across the economy.

    RBI’s Upper tolerance limit for inflation

    • Highest level of inflation that can be tolerated: The upper tolerance limit for inflation set by the Reserve Bank of India (RBI) is the highest level of inflation that the RBI will tolerate before taking action to bring inflation back within its target range.
    • RBI’s limit: The target range is defined in terms of the Consumer Price Index (CPI) inflation and the RBI has set an upper tolerance limit of 6% and a lower tolerance limit of 2% with a central target of 4%. This means that the RBI aims to keep CPI inflation within the range of 2-6%, with a target of 4%.
    • Tools to contain inflation: If inflation exceeds the upper tolerance limit of 6%, the RBI is required to take steps to bring inflation back within the target range. The RBI uses a variety of monetary policy tools to control inflation, including adjusting the policy interest rate, changing reserve requirements for banks, and using open market operations to manage liquidity in the financial system.

    Conclusion

    • Monetary policy experts Varma and Goyal suggest pausing to observe the impact of previous tightening before taking further action. Despite a cumulative 250 basis point increase, inflation is still expected to remain above the 6% target. The full impact of previous tightening should be considered before making any decisions.

    Mains Question

    Q. What is upper threshold of the RBI’s inflation targeting framework? Discuss the impact of policy interest rate hikes on the economy.

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  • GST revenues hit a record ₹1.59 lakh CR in January

    gst

    India’s Goods and Services Tax (GST) revenues grew 12.7% in January to hit almost ₹1.59 lakh crore ($17.9 billion), the second-highest monthly collections on record, as per revised figures from the Finance Ministry.

    What led to hike in GST revenue collection?

    • Economic recovery: Discusses how the steady economic recovery in India has led to higher consumption and spending, resulting in increased GST collections
    • Crackdown on Tax evasion: Several measures were taken by the government to streamline the GST system and reduce tax evasion, including the implementation of e-invoicing and the use of technology to track compliance.
    • Crackdown on fraudulent claims: The government’s efforts to crack down on fraudulent input tax credit claims, have also contributed to the increase in GST collections
    • Increase in imports: The higher value of imported goods due to rising commodity prices is another reason behind the increase in GST collections from imports.

    What is GST?

    • GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
    • The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017.
    • It is a single domestic indirect tax law for the entire country.
    • It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
    • Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

    Answer this PYQ in the comment box:

    Q. All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):

    (a) Contingency Fund of India

    (b) Public Account

    (c) Consolidated Fund of India

    (d) Deposits and Advances Fund

     

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    What are the components of GST?

    There are three taxes applicable under this system:

    1. CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
    2. SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
    3. IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

    Advantages of GST

    • GST has mainly removed the cascading effect on the sale of goods and services.
    • Removal of the cascading effect has impacted the cost of goods.
    • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
    • Also, GST is mainly technologically driven.
    • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

    Issues with GST

    • High operational cost
    • GST has given rise to complexity for many business owners across the nation.
    • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
    • Petrol is not under GST, which goes against the ideals of the unification of commodities.

    Take a look at the share of GST in government earnings for the previous fiscal:

    gst

    UPSC can ask about the majority component of the Revenue Receipts of the govt. See how Corporate tax is nearing the GST revenues.

    Do you think it will surpass GST revenue when the economy is fully recovered?

     

     

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  • The National Land Monetisation Corporation (NLMC)

    The National Land Monetisation Corporation (NLMC) has decided to involve international property consultancy firms to speed up the process of making money by selling or leasing the land owned by the government.

    What is NLMC?

    • NLMC is a Special Purpose Vehicle (SPV) announced in the Union Budget 2021-22 to carry out monetisation of government and surplus land holdings of public sector undertakings (PSU).
    • It falls under the administrative jurisdiction of the Ministry of Finance and is set up with an initial authorised share capital of ₹5,000 crore and a paid-up capital of ₹150 crore.
    • It is a firm, fully owned by the government, to carry out the monetisation of government and public sector assets in the form of surplus, unused or underused land assets.

    Aims and objectives

    • Monetize underutilised or unused land parcels of Central Public Sector Enterprises (CPSEs)
    • Facilitate the monetisation of assets belonging to PSUs that have ceased operations or are in line for a strategic disinvestment.
    • Transfer of revenue rights: When the government monetises its assets, it essentially means that it is transferring the revenue rights of the asset (could be idle land, infrastructure, PSU) to a private player for a specified period of time.
    • Govt as facilitator: In such a transaction, the government gets in return an upfront payment from the private entity, regular share of the revenue generated from the asset, a promise of steady investment into the asset, and the title rights to the monetised asset.

    Significant outcomes of land monetization

    • Maximum value realization: It will help monetise them in an efficient and professional manner, maximizing the scope of value realisation.
    • Speed up the process: The setting of the NLMC will speed up the closure process of the CPSEs and smoothen the strategic disinvestment process.
    • Capitalize land assets: It will also enable productive utilisation of these under-utilized assets by setting in motion private sector investments.
    • Economic revitalization: It will boost new economic activities such as industrialisation, boosting the local economy by generating employment and generating financial resources for potential economic and social infrastructure.
    • Advisory to the govt: Besides managing and monetising, the NLMC will act as an advisory body and support other government entities and CPSEs in identifying their surplus non-core assets.

    Need for land monetization

    There are different reasons why the government monetizes its assets.

    • New sources of revenue: One of them is to create new sources of revenue essential to fulfil the government’s target of achieving a $5 trillion economy.
    • Plummeting underutilized assets: Monetisation is also done to unlock the potential of unused or underused assets by involving institutional investors or private players.
    • Capital generation: It is also done to generate resources or capital for future asset creation, such as using the money generated from monetisation to create new infrastructure projects.

    Possible challenges for NLMC

    (1) Volatile market situation

    • The performance and productivity of the NLMC will also depend on the government’s performance on its disinvestment targets.
    • In FY 2021-22, the government has hardly been able to raise expected amounts through various forms of disinvestment.

    (2) Issues with transfer of rights

    • The process of asset monetisation does not end when the government transfers revenue rights to private players.
    • Identifying profitable revenue streams for the monetised land assets, ensuring adequate investment by the private player and setting up a dispute-resolution mechanism are also important tasks.

    (3) Unattractiveness of PPP Model

    • Posing as another potential challenge would be the use of Public Private Partnerships (PPPs) as a monetisation model.
    • For instance, the results of the Centre’s PPP initiative launched in 2020 for the Railways were not encouraging.

    (4) Red tapism

    • The success of the initiative will depend on a range of factors, including the availability of suitable land parcels, market demand etc.
    • It will be highly dependent upon the ability of the government to execute the transactions efficiently.

    Conclusion

    • The government’s move to monetize its vast land assets is aimed at reducing the fiscal burden and boosting infrastructure development in the country.
    • By bringing in international property consultants to help with the process, the government hopes to improve efficiency and transparency, and maximize the returns on its land assets.
    • If successful, the government’s land monetization drive could provide a much-needed boost to the economy and create new opportunities for private investment in the real estate sector.

     

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  • Latest spike in Inflation and RBI’s efforts

    RBI

    Central Idea

    • India’s post-pandemic economic recovery has hit a roadblock with the resurgence of inflation, hindering progress despite three consecutive months of softening. Recent significant spike in inflation, leading the Reserve Bank of India to adopt an inflation-targeting stance by raising interest rates. However, the battle to curb inflation is still ongoing, and the latest data raises doubts about whether the RBI’s efforts are sufficient.

    RBI

    What is Inflation?

    • Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices.
    • Typically, prices rise over time, but prices can also fall (a situation called deflation).

    Consumer Price Index (CPI)

    • CPI is used to monitor changes in the cost of living over time.
    • When the CPI rises, the average Indian family has to spend more on goods and services to maintain the same standard of living.
    • The economic term used to define such a rising prices of goods and services is Inflation.

    RBI

    Inflation outlook

    • RBI’s Inflation target: The inflation targeting framework mandates the RBI to achieve a CPI consumer price index inflation target of 4 per cent.
    • Inflation during the pandemic was still within the target band: During the pandemic period of March 2020 to September 2021, CPI inflation averaged 5.9 per cent. This was higher than the point target of 4 per cent but still within the inflation targeting band of 2-6 per cent.
    • Inflation outlook has been worsening: In 2022, CPI inflation was above the upper threshold of the RBI’s targeting band for 10 consecutive months, which meant the target was not achieved for three quarters in a row.
    • Optimism that the Inflation began softening: By December 2022, CPI inflation was down to 5.7 per cent. This led many to believe that the inflation peak had passed, and that inflation was on its way to the official target.
    • This optimism was misplaced: Underlying inflationary pressures still persist. The softening of inflation in November and December 2022 was largely driven by a steep fall in vegetable prices. Excluding vegetables, CPI inflation was in fact more than 7 per cent.
    • The misplaced optimism has now become evident: The January 2023 CPI inflation came out to be 6.5 per cent, once again crossing the upper threshold of the RBI’s inflation targeting band.

    Back to basics: Core Inflation

    • The core inflation rate measures rising prices in everything except food and energy.
    • That’s because gas prices tend to escalate now and then. Higher gas costs increase the price of food and anything else that has large transportation costs.

    inflation

    What contributed to the latest spike in inflation?

    • Rise in food prices: With food accounting for 46 per cent of the overall CPI basket, a rise in food inflation from roughly 4 per cent in December 2022 to almost 6 per cent in January 2023 has played an important role in overall inflation going up.
    • Cereal inflation is soaring high: Within food, one component that has proved rather stubborn is cereal inflation. Between May and December 2022, year-on-year cereal inflation nearly doubled from 5 per cent to 14 per cent. In January 2023, this increased to 16 per cent. Within cereals, inflation in wheat has been steadily going up. Between May and December 2022, wheat inflation increased from 9 per cent to 22 per cent. It increased even further to 25 per cent in January 2023.
    • The steep rise in wheat prices reflects shortages: Data from the Food Corporation of India shows that stocks in government warehouses declined. The government has recently approved a release of three million tonnes in the open market. However, this is insufficient to restore market supplies.
    • Persistently high core inflation: Second, core (non-food, non-fuel) inflation in January came out to be 6.2 percent. This is consistent with the unyielding core inflation of 6 per cent for nearly three years now. A persistently high core inflation implies that price pressures have become entrenched in the system.
    • External factors also play a role: Inflation in developed countries continues to be high (6.4 per cent in the US; 8.5 per cent in the EU; 10.5 per cent in the UK). India is importing some of this elevated inflation through international trade in goods and services. Moreover, with China gradually opening up its economy after nearly three years of zero-Covid restrictions, commodity prices are likely to go up, which could exert renewed pressures on India’s inflation.

    What have the policymakers been doing to address the inflationary concerns?

    • The government has done its bit by announcing a conservative Union budget for 2023-24: It has accorded primacy to much needed fiscal consolidation, and has refrained from announcing populist measures that could have arguably fuelled demand, and hence inflation.
    • The RBI has been doing its job as well: It increased the policy repo rate from a pandemic low of 4 per cent to 6.5 per cent in a span of 10 months. Unlike last year, when despite rising inflation, the monetary policy statements did not contain any forward guidance, the RBI, in its February 2023 statement, emphasised the importance to remain alert on inflation, thereby hinting that the monetary tightening cycle is not over yet.

    Conclusion

    • Inflation has been a challenge for India’s economy post-pandemic, despite the RBI’s attempt to control it by raising interest rates. A credible glide path to bring inflation down is essential today.

    Mains question

    Q. Despite of RBI’s efforts there is significant spike in inflation In India. Discuss the factors that contributed to the latest spike in inflation in India and what are the policymakers doing to address inflationary concerns?

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  • Role of regulators in the Stock Market

    regulator

    Context

    • On 25 January, US-based Hindenburg Research put out a tweet, talking about a negative report on the Adani Group that it had published. The report made many allegations against the group which triggered a fall in the price of their listed stocks.

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    Just think of this situation

    • A research report is released by a global firm that is also a short seller (that is, one who sells shares that it does not own, but buys them back at a lower price once the price falls).
    • The report outlines areas of concern in a company that is listed in another jurisdiction. The issues raised could relate to the firm’s accounting or market practices.
    • The report is released, quite curiously, before the company is going in for an equity issuance.

    What happens after the news?

    • Panic sale: As equity markets run on sentiments, such news leads to a panic sale and the share price of the company comes down sharply.
    • Widespread uncertainty: The market sees investor wealth eroding sharply, leading to widespread uncertainty, as this is how contagions progress.
    • Outrage: Denials are issued by the concerned company while the short seller stands firm on its views. However, shareholders have seen an erosion in their wealth and there is outrage everywhere.

    In such a situation, what can the regulator do?

    • Policies and system in place to put verified facts in public domain: It is for regulators in other jurisdictions to have policies/systems in place for verified facts to be put in the public domain.
    • In the current context: The Securities and Exchange Commission of the US would matter and if the broker complied with its rules, then there is nothing to stop their views from being aired in a globalised world. This is why it is said that if any company opts for listing in overseas markets, there is more reason to ensure that its accounts are in place and there are no deviations from best practices.

    What can regulators do to protect investors?

    • It is necessary to understand that when share prices tumble: Only when someone sells the shares that have declined in value will a loss be actually incurred. This is the first point that ordinary investors need to keep in mind. While the media will talk of the loss of value and wealth, it is notional for those shareholders who don’t sell. And stock prices will return to their equilibrium once the storm passes.
    • There is a need to have a wide market intelligence network: A special division that continuously analyses the messaging about Indian companies across the world. Given that such reports do not come up without signals being sent along the way, monitoring of views on companies listed overseas would be essential.
    • While citing financial accounting irregularities need to be looked into: the accounting and auditing firms need to take on more responsibility to ensure that the Generally Accepted Accounting Practices (GAAP) are followed for overseas-listed firms. They will have to be made partners in any such crisis in terms of taking ownership and clarifying the same.
    • Detecting price manipulation: Price manipulation, for instance, is one practice that has always been a concern for regulators. And it takes a lot of experience to detect it. Thus exchanges need to ensure that their market watch and surveillance practices are robust. This is where trading patterns can show if there has been market manipulation.
    • Restoring assurance and sanity in the market: It is necessary that investors have some assurance from the regulator, which may be needed to restore sanity in the markets. However, this should be an immediate and time-bound investigation which looks at the allegations or the shortcomings of the report.
    • Investing derivative segments too: As a corollary, the regulator needs to investigate the derivative segment too and probably talk to other regulators to analyse how the short positions have been created and whether they were in order. This will mean being in touch with other regulators, especially the SEC which regulates the jurisdiction for most overseas listings.
    • Audit firms can be employed to flag off the concerns: The regulator should insist that all overseas listed companies have regular investor calls with stakeholders where meetings are recorded and transmitted back home for special teams to examine so that there is a sense of how potential investors feel about the companies.

    Conclusion

    • In the cases of overseas reports, investors must have some assurance from the regulator, which can restore sanity in the markets. But investors also need to be proactive when investing. Those who are more active investors would perhaps need to be aware of developments in the companies that they have invested in.

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  • No Rationalization of GST structure for now: Revenue Secretary

    The long-awaited rationalization of the multiple rate structure of the Goods and Services Tax (GST) regime is off the table for now and unlikely to materialize in the near future.

    What is GST?

    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
    • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

    What are GST Slabs?

    • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
    • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
    • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
    • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
    • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

    Issues with GST structure

    • Complexity of the GST Structure: The GST structure is quite complex and difficult to understand, which has led to confusion among businesses and consumers alike. This has also led to an increase in the cost of compliance and administration for businesses.
    • Heterogeneity of Rates: One of the main issues with the GST structure is the heterogeneity of rates across different goods and services. This has led to an increase in the cost of compliance for businesses as they need to be aware of the applicable GST rate for each product and service.
    • Dual GST System: India has a dual GST system, which has led to confusion and complexity for businesses that have to deal with both the central GST (CGST) and the state GST (SGST). This has also led to an increased cost of compliance for businesses.
    • Cascading Taxation: The GST structure has led to the problem of cascading taxation, wherein taxes are levied at every stage of the supply chain, leading to an increase in the cost of goods and services.
    • Lack of Transparency: The GST structure has led to a lack of transparency in the pricing of goods and services, as the applicable taxes are not clearly indicated in the invoice.
    • Poor collection infrastructure: The GST system requires a strong infrastructure in order to function properly, which is not always present in India. This can lead to delays in filing and other issues.

    Why rationalize GST slabs?

    • Complex duty structure: From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs taxed more than the final product.
    • Multiple rate changes: This has been since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
    • Stipulated revenue losses: Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.

    Benefits of GST rationalization

    • Easier compliance: Rationalizing GST slabs helps simplify the tax structure and make it easier for businesses to comply with the law.
    • Fairness of taxation: It also helps to ensure that the tax burden is shared fairly and that the revenue generated is used efficiently.
    • Efficiency in tax collection: Finally, rationalizing GST slabs leads to more efficient collection of taxes, which helps to reduce the cost of compliance for businesses.

    Conclusion

    • Rate rationalization is probably the biggest ‘reform’ that is required to make the GST regime more efficient.
    • As and when the exercise is complete, it is expected that the GST would be a less complex system that not only would make compliances easier but also boost revenue collection.

     

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  • Explained: Status and proceeds of Disinvestment

    disinvestment

    In the Union Budget for 2023-24, the government has set a disinvestment target of ₹51,000 crore, down nearly 21% from the budget estimate for the current year and just ₹1,000 crore more than the revised estimate.

    Lowest Disinvestment target in years

    • It is also the lowest target in seven years.
    • The Centre has not met the disinvestment target for 2022-23 so far.
    • It has realised ₹31,106 crore to date, of which, ₹20,516 crore or close to a third of the budgeted estimate came from the IPO of 3.5% of its shares in the Life Insurance Corporation (LIC).

    What is Disinvestment?

    • Disinvestment or divestment, in this context, is when the government sells its assets or a subsidiary, such as a Central or State public sector enterprise.
    • There are the three main approaches to disinvestment
    1. Minority disinvestment: The government retains a majority in the company, typically greater than 51%, thus ensuring management control.
    2. Majority disinvestment: The government hands over control to the acquiring entity but retains some stake.
    3. Complete privatisation: 100% control of the company is passed on to the buyer.

    Objectives of disinvestment

    The following main objectives of disinvestment were outlined:

    • To reduce the financial burden on the Government.
    • To improve public finances.
    • To introduce, competition and market discipline.
    • To fund growth.
    • To encourage wider share of ownership.
    • To depoliticize non-essential services.

    Institutional mechanism

    Ans. DIPAM

    • The Union Finance Ministry has a separate department for undertaking disinvestment-related procedures called the Department of Investment and Public Asset Management (DIPAM).

    Why need disinvestment?

    • Reduce money crunch: The government may disinvest in order to reduce the fiscal burden or bridge the revenue shortfall for that year.
    • Deficit financing: It also uses disinvestment proceeds to finance the fiscal deficit, to invest in the economy and development or social sector programmes, and to retire government debt.
    • Promote private ownership facilitation: Disinvestment also encourages private ownership of assets and trading in the open market.
    • Do away with loss-making: If successful, it also means that the government does not have to fund the losses of a loss-making unit anymore.

    Other importance of disinvestment lies in the utilization of funds for:

    1. Financing large-scale infrastructure development
    2. Investing in the economy to encourage spending
    3. For social programs like health and education

    How has disinvestment fared in India?

    Ans. Disinvestment in India has had mixed results.

    • Since the current government came to power in 2014, it has made significant progress in disinvestment, having raised a record ₹1.05 trillion (US$14.6 billion) for the fiscal year of 2017–18.
    • However, the government has also failed to reach its disinvestment targets in other years, due to various reasons such as market conditions, investor sentiment, and political opposition.
    • The government has also been criticized for not doing enough to find potential buyers for state-owned companies.
    • Despite this, recent years have seen several successful disinvestment deals, such as the strategic sale of Air India and the privatization of BPCL.

    Issues with CPSEs through years

    • Inherent flaws in PSU’s: The entire PSU’s mechanism did not turn out as efficient as it ought to be, all thanks to the prevailing hierarchy and bureaucracy.
    • Lack of autonomy: Lack of autonomy, political interference, nepotism & corruption has further deteriorated the situation.
    • Revenue losses: Due to the expenditure on items such as interest payments, wages and salaries of PSU employees and subsidies, the Government is left with hardly any surplus for capital expenditure on social and physical infrastructure.
    • Lack of Competitiveness: In an era of LPG industrial competitiveness has especially assumed an important role, necessitating privatization or disinvestment of PSUs.
    • Poor performance: Despite the huge injection of funds in the past decades, the functioning of many public sector units (PSUs) has traditionally been characterized by poor management, slow decision-making procedures, lack of accountability, low productivity, unsatisfactory quality of goods, excessive manpower utilization etc.

    Conclusion

    • Confronted with an unprecedented fiscal deficit and worried by an economy in crisis, the government has to find resources.
    • Disinvestment is a preferred option for ideological and practical reasons.
    • Short-term financial exigencies should not be the Centre’s sole reason for disinvestment in core sectors like petroleum.
    • The government could utilize the money gained by selling off PSUs to improve services in public goods like infrastructure, health and education.

     

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  • RBI announces pilot for QR code-based Coin Vending Machine

    qr

    To improve the distribution of coins among members of the public, the Reserve Bank of India (RBI) is preparing a pilot project on QR code-based Coin Vending Machine (QCVM) in collaboration with a few leading banks.

    QR code-based Coin Vending Machine (QCVM)

    • The QCVM is a cashless coin dispensation machine which would dispense coins against a debit to the customer’s bank account using Unified Payments Interface (UPI).
    • Unlike cash-based traditional Coin Vending Machine, the QCVM would eliminate the need for physical tendering of banknotes and their authentication.
    • Customers will also have the option to withdraw coins in the required quantity and denominations in QCVMs.

    When will it be launched?

    • The pilot project is planned to be initially rolled out at 19 locations in 12 cities across the country.
    • Machines will be installed at public places such as railway stations, shopping malls, marketplaces to enhance ease and accessibility.
    • Based on the learnings from the pilot tests, guidelines would be issued to banks to promote better distribution of coins using QCVMs.

     

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