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GS Paper: Indian Economy

  • Economic growth and the government disintermediation

    Context

    • Between spending and saving, governments are generally better at the former. High growth comes with the advantage that government revenue expands and gets spent, as is happening this fiscal. But this is also habit-forming. If growth tapers down as is expected in FY 2024 cutting back government spending will be politically rocky just before a general election. Better then, to get selective on spending early on.

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    Current economic indicators

    • Finance Minister Nirmala Sitharaman took over the hot seat in May 2019. True to character, she resolved to pick up this rolling can by tabling in the FY 2021 budget, an amount of INR 2.64 trillion (1.2 percent of GDP) to pay these overdues.
    • India, yet again, in an era of high inflation and high oil import prices. It has taken courage and sagacity to reduce the FD from 9.2 percent (FY 2021—the COVID-19 year) to a targeted 6.4 percent this fiscal.

    Challenges to establish a declining trend back towards an FD of 3.5 percent of GDP

    • The oil slick of global uncertainty and inflation: Oil price uncertainties, created by the Ukraine standoff, which was partially cushioned via nimble Indian diplomacy resisting the boycott of cheaper Russian oil, has kept imported oil at US$77.7 per barrel in January 2023. But the ongoing opening up of China could firm up oil prices.  
    • India’s high-debt burden compromises fiscal resilience: Interest payments in FY 2023 (budgeted) at INR 9.4 trillion, are the largest expense outlay bucket, accounting for 43 percent of budgeted Union net revenue receipts, up from 41.7 percent in FY 2021. Defence and domestic security services at 15 percent come next, followed by subsidies (food, fertilizers, and fuel) at 14 percent and inflation-indexed government pensions at 9 percent.
    • Infrastructure lags: Infrastructure remains a drag on growth although intercity highways have improved. Multimodal transport solutions remain underdeveloped as do train stations and bus terminals in most towns and rural areas. The competitiveness of major Indian ports in 2018 was ranked 42nd well below China, Malaysia and Thailand- pulled down by low outcomes in infrastructure and turn-around time. The gas grid remains nascent with just 10.1 million connections versus 309 million users for LPG canisters a more volatile substitute for cooking fuel, than piped natural gas.

    What is the worrying situation?

    • Inflation: The Reserve Bank of India (RBI) expects retail inflation, assessed at 5.78 percent (December 2022) to trend downwards in FY 2024. But signals of embedded inflation via core inflation (other than volatile food and fuel) above 6 percent are worrying.
    • Disrupted energy supply: A disruption in energy supplies could upset sanguine inflation expectations.
    • Taming inflation would increase fiscal crunch: Taming the resulting inflation by reducing taxes on the retail supply of petroleum products would increase the fiscal crunch.
    • Interests funded by additional borrowings is risky strategy: High-growth economies can afford to fund by borrowings as can start-ups, which borrow against their future growth prospects. For a large, lower middle-income economy like India, with historically moderate long-term growth rates (4 to 6 percent), it compromises reserve fiscal capacity to respond, through counter-cyclical measures, to economic downturns induced by economic shocks a risk-laden strategy.

    What India should do?

    • Resume much delayed disinvestment: Resume the much-delayed privatisation and disinvestment of public sector enterprises and government-owned financial sector entities.
    • Make Indian railway and autonomous entity: Second, make Indian Railway an autonomously regulated, commercially run entity, providing a surplus to the government rather than looking for budgetary support.
    • Encourage public finance outlays: Maximise the economic impact by encouraging public finance outlays to be driven by competitive metrics of allocative efficiency across investment options and program/project implementation models.

    Conclusion

    • For a new phase of growth, government disintermediation is appropriate. It allows for increased competition and innovation in the private sector, leading to greater efficiency and economic growth. India has momentum. What it needs is for the reins to be lightly held.

    Mains question

    Q. What obstacles does the Indian economy face as it enters a new era of growth, and what should India do?

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  • In news: National Export Co-operative Society

    The first consignment expected to be exported by the first-ever National Export Co-operative Society.

    Why in news?

    • The Union Cabinet on January 11 approved the setting up Multi-State Seed Society, Multi-State Organic Society and Multi State Export Society.

    What is National Export Co-operative Society (NECS)?

    • The society will have an authorised share capital of ₹2,000 crore with the area of operation all over the country.
    • It will be registered under the Multi-State Cooperative Societies (MSCS) Act, 2002.
    • It will have its registered office in Delhi.
    • The Society’s registration will be complete in the next few days and the first consignment will be exported in three months.
    • It will work as an export house for handicrafts, handlooms, khadi and other products, ensuring enhancement of income of the cooperative member entrepreneurs.

    Funding of NECS

    • Leading cooperatives like IFFCO, KRIBHCO, NAFED, Amul and National Cooperative Development Corporation (NCDC) will be the promoters of the Society.
    • They will contribute ₹100 crore each.

    Working of NECS

    • The Society will be different from the Export Promotion Council under the Ministry of Commerce.
    • This Society will provide end-to-end services to the cooperatives.
    • It will open foreign bank accounts and complete all the formalities, including necessary permissions for exporting a product.
    • The dividends will be shared with the manufacturer instantly and without any brokerage fee.
    • The Society will hire consultants in foreign countries who will help expand its footprint across continents.

    Why need cooperatives for export promotion?

    • Cooperatives contribute 28.80% in fertilizer production, 35% in fertilizer distribution, 30.60% in sugar production and 17.50% in milk in the national economy.
    • However, their contribution to exports is negligible.
    • Society will benefit the smallest of farmer or artisan who has a good product but does not have access to the right platform.
    • Through this Society, they will get access to international market and good returns too.
    • Once a product has been tested for international standards, the packaging and export will be done by the Society.

     

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  • UPI for NRIs: What it means for India and Indians abroad

    upi

    The National Payments Corp. of India (NPCI) has allowed Indians abroad to use fast payments network UPI, if their domestic bank accounts are linked to their foreign mobile numbers.

    What is UPI?

    • UPI is an instant real-time payment system developed by National Payments Corporation of India (NPCI) facilitating inter-bank transactions.
    • The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform.

    What exactly has NPCI allowed on UPI?

    • NPCI issued a circular that paved the way for wider adoption of homegrown payments platform UPI.
    • So far, only Indian phone numbers were allowed on UPI, leaving out non-resident bank accounts linked to their phone numbers abroad.
    • In the first phase, phone numbers from 10 countries including Singapore, Australia, Canada, Hong Kong, Oman, Qatar, the US, Saudi Arabia, United Arab Emirates, and the UK have been allowed to be used on UPI.
    • NPCI said it could extend this to other nations as well.

    How will it benefit Indians abroad?

    • Once the systems are in place, non-resident Indians will be able to transact using UPI, irrespective of whether they are in India or abroad.
    • To use UPI, non-residents need to have either a non-resident external (NRE) account or a non-resident ordinary (NRO) account in India.
    • It would, of course, be more useful when account holders visit India, given the scale of UPI merchant infrastructure in India.
    • While abroad, they can use UPI to transfer funds to families in India and use it on e-commerce portals that allow such payments.

    What are the prerequisites for this facility?

    • NPCI has asked banks to onboard only those accounts that meet the Foreign Exchange Management Act guidelines and instructions issued by the departments of the Reserve Bank of India (RBI).
    • Apart, the remitter, as well as beneficiary banks, will have to ensure they comply with anti-money laundering (AML) and combating of financial terrorism (CFT) checks.

    Does it help the plan to take UPI global?

    • NPCI has been attempting to make UPI a global phenomenon and the idea to tap NRIs is a step towards that.
    • 10 countries are just to begin with and the list will expand in future.
    • NPCI has been trying to push homegrown payment systems in other countries through NPCI International Payments Ltd, a subsidiary it set up in 2020.
    • It has already tied up with payment system operators in Nepal, UAE, France, UK and others to allow UPI usage there.
    • There is also a plan to link UPI with Singapore’s Paynow.

    How will it help the UPI ecosystem?

    • UPI is almost synonymous with digital payments in India, clocking over ₹12.8 trillion worth of transactions in December.
    • After a slow start in 2016, UPI payments have grown at a rapid pace. Given there are over 13.5 million NRIs, the availability of UPI is expected to raise transaction volumes.
    • Industry experts said that just like resident Indians do not have to pay for UPI, it will also be available to NRIs at no extra cost.
    • That said, it might be off to a slow start as the acceptance infrastructure abroad is still being developed.

     

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  • Making The Case for Wealth Tax

    Wealth Tax

    Context

    • The discourse on efficient, effective and equitable public spending often takes us into the realm of limited resources facing competing demands. India definitely needs to widen its revenue collection as well as base. In this context, it is important to discuss the need for levying a wealth tax, and levying it now.

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    Why wealth needs to be taxed?

    • Accumulation of wealth: The most compelling reason stems from evidence that there has been massive accumulation of wealth in a few hands. A small section of people has access to a large share of economic assets and resources that remain almost completely untaxed and thus unavailable for public allocation.
    • Wealth without hard work: Wealth, much less than even income, has little to do with one’s education, merit or efforts; it is largely dependent on inheritance and opportunities that come with the advantages associated with belonging to one of India’s privileged classes and castes.
    • Income inequality: India’s top 10% population owns 65% of the country’s wealth, while the bottom 10% owns only 6%, according to the World Inequality Database, 2022.
    • Wealth of rich doubled in pandemic: An Oxfam report has highlighted how India’s richest doubled their wealth during the pandemic. This happened for a variety of reasons, including profits made on vaccines and commodity and asset price movements.
    • Wealth doesn’t translate into productive resources: But the fact remains that India, despite facing grave financial and economic challenges, has no means to convert any of this growing wealth into productive resources that can generate employment opportunities and push up the incomes of multitudes, which in turn can drive demand for goods something that is needed to counter an economic drag-down.

    What is the government’s attitude towards wealthy?

    • Rich knows how to invest: One may argue and it is common to hear this that wealth is better left to the wealthy, as they know best how to invest. This has not been in sufficient evidence, at least in India.
    • Corporate tax lowered: The government lowered the corporate tax rate significantly from 30% to 22% in 2019-20, which has continued despite the economic crises caused by the pandemic. However, this did not elicit much private investment.

    Wealth Tax

    History of Wealth taxation in India

    • Wealth tax: Wealth tax, which is a direct tax unlike the goods and services tax or value-added tax, can take several forms, such as property tax, inheritance or gift tax and capital gains tax.
    • Capital gains tax: Capital Gains tax exists in India, but applies only to transactions and hence is limited in its base.
    • Estate duty: India scrapped its estate duty in 1985 and has no inheritance tax. Although the receipt of gifts is subject to income tax in the beneficiary’s hands, it has various exemptions; it is almost entirely exempt if received from within the family, including the extended family of self and spouse.
    • Exemption leads to accumulation: These exemptions shrink the base significantly, as most accumulated wealth is acquired through family, and that remains outside the gift tax’s ambit. Given the cultural context of wealth inheritance, some exemptions make sense, but upper thresholds can be easily added to make it more effective.

    Present status of wealth taxation

    • No wealth tax: India presently does not have any wealth tax i.e., a tax levied on one’s entire property in all forms.
    • One time solidarity tax: It did not impose a one-time ‘solidarity tax’ on wealth in post-covid budgets that could have generated resources for essential public investment.
    • Example of developing countries: A number of Latin American countries, including Argentina, Peru and Bolivia, have either introduced or are introducing a progressive annual wealth tax levied on the wealth gains of each year or a one-time covid ‘solidarity’ tax.

    Wealth Tax

    Conclusion

    • Idea of wealth tax appear good on paper however; it may negatively impact the domestic and foreign investment in the country. Direct tax slab for superrich in India is already among the highest in the world. The idea of wealth taxation needs careful deliberation before implementation.

    Mains Question

    Q. Comment on history of wealth tax in India. why wealth tax is necessary in India? elaborate.

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  • RBI proposes Expected Loss-based Approach for Loan Provisioning

    The Reserve Bank of India (RBI) has proposed a framework for the adoption of an expected loss-based approach for loan provisioning by banks.

    What is Loan-Loss Provision?

    • The RBI defines a loan loss provision as an expense that banks set aside for defaulted loans.
    • Banks set aside a portion of the expected loan repayments from all loans in their portfolio to cover the losses either completely or partially.
    • In the event of a loss, instead of taking a loss in its cash flows, the bank can use its loan loss reserves to cover the loss.
    • Since the bank does not expect all loans to become impaired, there is usually enough in the loan loss reserves to cover the full loss for any one or a small number of loans when needed.
    • An increase in the balance of reserves is called loan loss provision.
    • The level of loan loss provision is determined based on the level expected to protect the safety and soundness of the bank.

    And what is the expected loss-based approach?

    • Under this practice, a bank is required to estimate expected credit losses based on forward-looking estimations, rather than wait for credit losses to be actually incurred before making corresponding loss provisions.
    • As per the proposed framework, banks will need to classify financial assets (primarily loans, including irrevocable loan commitments, and investments classified as held-to-maturity or available-for-sale) into one of three categories — Stage 1, Stage 2, or Stage 3.
    • This depends upon the assessed credit losses on them, at the time of initial recognition as well as on each subsequent reporting date, and make necessary provisions.
    1. Stage 1 assets are financial assets that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. For these assets, 12-month expected credit losses are recognised and interest revenue is calculated on the gross carrying amount of the asset.
    2. Stage 2 assets are financial instruments that have had a significant increase in credit risk since initial recognition, but there is no objective evidence of impairment. For these assets, lifetime expected credit losses are recognised, but interest revenue is still calculated on the gross carrying amount of the asset.
    3. Stage 3 assets include financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime expected credit loss is recognised, and interest revenue is calculated on the net carrying amount.

    What are the benefits of this approach?

    • The forward-looking expected credit losses approach will further enhance the resilience of the banking system in line with globally accepted norms.
    • It is likely to result in excess provisions as compared to shortfall in provisions as seen in the incurred loss approach.

    What is the problem with the incurred loss-based approach?

    • The incurred loss approach requires banks to provide for losses that have already occurred or been incurred.
    • The delay in recognising expected losses under an “incurred loss” approach was found to exacerbate the downswing during the financial crisis of 2007-09.
    • Faced with a systemic increase in defaults, the delay in recognising loan losses resulted in banks having to make higher levels of provisions which ate into the capital maintained precisely at a time when banks needed to shore up their capital.
    • This affected banks’ resilience and posed systemic risks.
    • Further, the delays in recognising loan losses overstated the income generated by the banks which, coupled with dividend payouts, impacted their capital base

     

    Which banks are covered under this approach?

    • The proposed norms are for all scheduled commercial banks, excluding regional rural banks.
    • Regional rural banks and smaller cooperative banks (based on a threshold to be decided based on comments) are proposed to be kept out of the framework.

     

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  • Ganga Vilas: A boost to riverine tourism

    tourism

    Context

    • The travel-tourism-hospitality sector got a symbolic boost on Friday, with the Prime Minister launching the MV Ganga Vilas from Varanasi. The luxury 51-day cruise operated in partnership with private players by the Inland Waterways Authority will traverse several states, two countries and make stops at about 50 tourist and heritage sites along the Ganga and Brahmaputra River systems.

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    tourism

    All you need to know about MV Ganga Vilas

    • MV Ganga Vilas is the first indigenously made and the world’s longest river cruise
    • The Ministry of Ports, Shipping and Waterways is the coordinator of this ship tourism project.
    • The cruise has three decks, 18 suites on board with a capacity of 36 tourists, with all the modern amenities and avoids river pollution.
    • It has its own sewage treatment plant besides a water treatment plant that lifts water from the river for daily use.
    • The cruise has a gymnasium, a spa, restaurant, sunbath deck and other amenities on board to entertain the tourists and also to provide them a comfortable experience.

    tourism

    Journey of MV Ganga Vilas

    • From Varanasi to Dibrugarh: Set to sail from Varanasi, the cruise ship, MV Ganga Vilas, will cover 3,200 km over 51 days, crossing 27 river systems and several states before ending its journey at Dibrugarh.
    • It will cover World heritage sites: The voyage is packed with visits to 50 tourist spots, including World Heritage spots, national parks, river ghats, and major cities like Patna in Bihar, Sahibganj in Jharkhand, Kolkata in West Bengal, Dhaka in Bangladesh and Guwahati in Assam.
    • Pilgrimage plus environmental tourism: It will make pit-stops to cover the famous Ganga Arti in Varanasi, the Buddhist site of Sarnath; and even Majuli, the largest river island in Assam.

    What are the concerns highlighted?

    • Silting and pollution of rives must be addressed on priority: Two of the greatest threats to India’s rivers silting and pollution must be addressed.
    • Employment generation must go hand-in-hand with ecological repair: Both the PM and Shipping & Ports Minister Sarbananda Sonowal have cited the jobs that riverine tourism could bring to states like Uttar Pradesh, West Bengal, Bihar and Assam. But employment generation must go hand-in-hand with ecological repair.

    tourism

    Way ahead

    • Involve local communities: For the government to realise its goal to increase cruise passenger traffic from 4 lakh people to nearly 10 times that figure. But this growth, to be sustainable, must involve local communities.
    • Smaller vessels could be involved: While there is potential for larger, luxury liners, riverine tourism could also expand and cater to travellers from different economic strata. Also, smaller vessels may pose less of an ecological challenge.
    • Lesson to be learnt from Kerala: While the Centre’s push in the sector, with the PM as the face, is welcome, states and the private sector too must be brought on board. There is, for example, much that east Indian states can learn from how Kerala monetizes and maintains its backwaters.
    • Further expansion with worlds best practices: The Ganga cruise, though, should be just a beginning in tapping the unrealized potential of India’s numerous and diverse river systems for tourism. At the same time, the expansion must take into account the best practices from around India and the world, while ensuring local communities and the environment are not given short shrift.

    Conclusion

    • The hospitality sector is labor-intensive and can provide some of the formal jobs that a transitioning Indian economy so desperately needs. And given the growing global market for ecologically-conscious travel, India can if it is meticulous and enterprising in its planning protect its rivers and create jobs at the same time.

    Mains question

    Q. Recently government launched MV Ganga Vilas cruise. Discuss how it will change the face of tourism in India?

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  • Hospitality Industry in India: Adhering to the principle of Atithi Devo Bhava

    Hospitality

    “To other Country, I may go as a tourist. But to India I come as a pilgrim”-Martin Luther King 

    Context

    • As the world moves on, the service sector travel and tourism business included is emerging as a major growth engine for the Indian economy. People are once again flying in great numbers, airports are crowded, hotels are well booked, and travellers want to explore, connect and feel alive through the exhilarating emotion of travel. Despite several difficulties and challenging infrastructure in hospitality, the industry has fared extremely well.

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    Hospitality

    What is mean by Hospitality?

    • Hospitality refers to the friendly and generous treatment of guests or strangers.
    • It involves making guests feel welcome, comfortable, and attended to during their stay or visit.
    • The goal of hospitality is to create a positive experience for the guest and to ensure that they have everything they need to feel at home and enjoy their time.

    Hospitality Industry in India

    • Hospitality contributes to the economy: The hospitality industry in India is a growing industry which contributes significantly to the country’s economy.
    • India a choiced tourist destination: India is home to number of popular destinations for tourists, due to its diverse culture, ancient civilization, art and architecture, spiritual knowledge centre and the paradise of natural beauty.
    • Infrastructure upgraded with time: The hospitality industry in India has undergone significant growth in recent years, fueled by an increase in domestic and international tourism, as well as the development of new infrastructure, such as airports and roads.
    • Hospitality companies determined to offer diverse experience: Hospitality companies have consistently added supply across all segments budget, business and luxury hotels, homestays, villas and so forth by developing new circuits and offerings that tap into the diverse and myriad potential of Incredible India.

    Hospitality

    How Hospitality Industry contributes to the Economy?

    • Tourism a driving force: Tourism is seen as a major driving force for any economy. It has a multiplier effect on associated industries like hospitality.
    • Spillover earning: Not only improves economic condition but also enhances standard of living: The spillover of earnings from tourism into other industries not only improves economic conditions but also enhances the standards of living of the local population.
    • For instance, GDP and employment in Goa: This is most apparent at the popular beach destination of Goa. Contributing over 16 per cent to the GDP and 35 per cent to direct employment within the state as per the IBEF Report 2022, the domino effect of the sector on indirect job creation is unrivalled. Today, led by tourism, Goa leads the nation in per capita NSDP (Net State Domestic Product) as per the RBI.
    • Significant impact on high employability: As per trends, every hotel room generates five to seven jobs, both directly and indirectly, further leading to a significant impact on other high-employability sectors such as real estate and infrastructure.
    • Will generate more than 100 million jobs globally: In fact, according to the latest World Travel and Tourism Council (WTTC) report, the sector is expected to create nearly 126 million new jobs globally within the next decade with at least 20 per cent of these from the Indian subcontinent. However, government support will be instrumental in achieving this.
    • Will augment the Indian economy to reach $1 trillion by 2047: With Indian companies reporting positive earnings this fiscal, the sector is poised to potentially grow three times compared to the pre-pandemic levels to touch $250 billion by 2030 and further accelerate to reach $1 trillion by 2047.

    Way ahead

    • Upgrading the infrastructure to cater new consumer demands well: The travel and tourism industry is constantly evolving, catering to rapidly changing consumer demands. A capital-intensive industry, the hospitality sector needs to continually plough back to keep the ball rolling.
    • Attracting more investments: A good start will be the Centre according infrastructure status to the sector, which will boost the industry, incorporating required incentives including regulatory ease, cheaper loans, tax concessions and contributing to a cycle of attracting more investments.
    • Augmenting the infrastructure growth: In addition, industry status at the state and Union territories-level and augmenting the infrastructure growth will also have a much-needed positive impact. States like Maharashtra, Karnataka, Assam, Goa, Gujarat, Madhya Pradesh and Rajasthan have taken the lead, and more should follow suit.

    Hospitality

    India’s G20 presidency an opportunity for India

    • Challenge to provide world class experience to visiting dignitaries: As India takes on the G20 presidency and starts preparing for the summit in 2023, positioning the country as a safe, tourist-friendly destination hinges on how the government can work together with the industry and provide world-class experiences to visiting dignitaries.
    • Meeting mostly be hosted in hotels: Around 300 plus meetings are expected to take place during the summit, most of which will be hosted within the corridors of the finest hotels across the country.
    • Adhering to the principle of Aithi Devo Bhava: Hospitality companies are leaving no stone unturned to showcase India’s cultural essence, and the inherent warmth of Atithi Devo Bhava in our service philosophy.
    • India can set an impression: Using the summit to highlight the country’s unique and differentiated travel offerings, India can claim its position on the world tourism stage.

    Conclusion

    • India’s growth story remains immensely encouraging. On the back of strong consumer demand, travel and tourism offers promising growth and are at an important inflection point. Through collective action between industry stakeholders and government, we can undoubtedly shape an even more thriving future for the industry one that can have a positive impact on the economy and society at large.

    Mains question

    Q. Tourism and Hospitality is a growing industry in India. In light of this discuss how this industry contributes to the economy? Illustrate with an example.

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  • New India: The world’s next engine of growth

    growth

    “The mantle of the G20 presidency has come at the right time, allowing India to influence the global agenda based on its own priority of accelerated, inclusive and resilient growth”

     Context

    • The pandemic has proven to be the breakout moment in India’s long overdue emergence as the world’s next engine of growth. New India is bearing fruit at a time when one-third of the world’s economy is facing a slowdown. Speaking at FICCI’s 95th annual general meeting, Finance Minister said that the upcoming budget will set the template for the next 25 years, which is India’s Amrit Kaal.

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    A gloomy global outlook

    • Prospectus of global growth: According to the International Monetary Fund (IMF), global growth will nearly halve to 3.2 per cent in 2022 and fall further to 2.7 per cent in 2023, reflecting stalling growth in the US, China and the Euro Zone.
    • Global inflation: Higher food and energy prices have led to global inflation peaking at 8.8 per cent in 2022 which is, however, expected to decline to 6.5 per cent in 2023 and 4.1 per cent in 2024.
    • Developed nations are struggling to tame inflation: Developed nations have adopted excessive stimulus measures. According to a report by the McKinsey Global Institute, in 2020 and 2021, households globally added $100 trillion to global wealth on paper as asset prices soared and $39 trillion in new currency and deposits were minted and debt and equity liabilities increased by about $50 trillion and $75 trillion, respectively, as governments and central banks stimulated economies.
    • Russia- Ukraine conflict inflicting fiscal pain: Meanwhile, the continuing Russia-Ukraine conflict is inflicting fiscal pain beyond the immediate region
    • Disrupted supply chain by China’s covid policy: While China’s Covid policy has disrupted supply chains, which are now once again threatened by a potential fallout of an abrupt reversal.
    • India’s inflation is largely imported: India’s own fight against inflation, which is largely imported, has been aided by fiscal and monetary policy working in tandem with a little help from easing commodity prices.

    growth

    India stands at a bright spot amidst significant challenges

    • Fastest-growing large economy in the world: However, India stands out as a rare bright spot with the economy estimated to grow around 7 per cent in FY23 and a growth forecast of 6.1-6.5 per cent in FY24, thus retaining the tag of the fastest-growing large economy in the world.
    • Inflation coming down within RBI’s tolerance level: In an encouraging sign, retail inflation eased to 5.88 per cent in November, thus coming within the RBI’s tolerance band after 11 months. While it is too early to declare victory in terms of taming inflation, policymakers must now chart out a path that prioritises growth
    • India likely to overtake Japan and Germany to become 3rd largest economy: Having recently surpassed the UK to become the world’s fifth-largest economy, India is likely to overtake Japan and Germany before the end of the decade to become the third-largest economy in the world.
    • What made this possible: Reforms aimed at enhancing ease of doing business and reducing the cost of doing business in a large, unified domestic market along with a focus on boosting the manufacturing sector through the Production Linked Incentive (PLI) schemes, which are helping attract large investments including in critical areas like semiconductors.

    growth

    What India has to share with the world?

    • G20 leadership to bring about structural transformation: Its priority as G20 president is to focus on areas, which have the potential to bring about structural transformation leading to accelerated, inclusive and resilient growth.
    • Concept of LiFE for a sustainable lifestyle: Similarly, the concept of LiFE (Lifestyle for the Environment) draws upon ancient sustainable traditions to reinforce modern-day environmentally conscious practices.
    • Knowledge sharing: Finally, knowledge sharing in areas like digital public infrastructure and financial inclusion will enable the wider adoption of disruptive technologies.

    growth

    Conclusion

    • Investors both domestic and global must now come forward and participate in the India growth story which, in turn, will give a much-needed boost to global growth going ahead. Speaking at the World Economic Forum last year, PM Modi said “Make in India, Make for the World”. There has never been a better time to invest in India and reap the benefits of what it has to offer.

    Mains question

    Q. At a time when one-third of the world’s economy is facing a slowdown India stands at a brighter spot Discuss. Highlight what India has to share with the world?

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  • Indian economic growth forecast

    growth

    Context

    • The Indian economy is expected to grow at 7 per cent in 2022-23 as per the first advance estimates of national income released by the National Statistical Office (NSO) on Friday. This is marginally higher than the RBI’s most recent assessment in the December monetary policy committee meeting, the central bank had lowered its expectation of growth to 6.8 per cent.

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    growth

    Estimate: Indian economic growth

    • As per the latest estimates growth is likely to slow down in later half: Considering that the economy grew by 9.7 per cent in the first half of the financial year (April-September), the latest estimate implies that growth is likely to slow down to 4.5 per cent in the second half of the year (October-March) as the base effect wanes.
    • Full year growth estimates India will be fastest growing economy: Notwithstanding that, the full-year growth estimate suggests that India will be one of the fastest-growing economies in the world.

    Positive signs in the Indian Economy

    • Positive medium-term growth prospects: Company and bank balance sheets are healthier, credit growth is rising, and capacity utilisation has increased, all of which augur well for investment activity.
    • Positive impact on tourism: The waning of Covid-19 should hopefully have a positive impact on travel, transport and tourism. Construction activity should pick up further with the reduction in housing inventory and almost stable prices over the last decade.
    • On inflation India is doing better: On the inflation front, India is doing better than many advanced economies and emerging markets.

    growth

    Areas of concern

    • Private consumption is likely to contract in the second half of the year: While the pace of contraction is expected to be marginal, the slowdown in spending could be due to either the exhaustion of pent-up demand or the lagged impact of a tighter monetary policy.
    • Exports growth likely to grow: As per the estimates, exports are likely to grow at almost 12 per cent in the second half of the year. This is at odds with recent data which showed that export growth has actually slowed down considerably as advanced economies have come under pressure.
    • Agriculture growth likely to slow down: Agricultural growth is expected to slow down in the second half. As per some analysts this is not in sync with the healthy sowing rates and reservoir levels.
    • Manufacturing will go upward: The manufacturing sector, which was almost flat in the first half of the year, is expected to witness an uptick in the second half. It is difficult to reconcile this with the view that both domestic demand and exports are likely to remain subdued, which would in turn impact industrial production.
    • Government spending will remain almost flat: Public administration, defence and other services, which largely connotes government spending, is expected to remain more or less flat in the second half. This is odd considering that government consumption expenditure is pegged to grow at 7.2 per cent during the period.

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    As the data is not yet concrete, estimates made are likely to change

    • As the first advance estimates suffer from data limitations, they are based only on seven to eight months of data these are likely to change once more data is available.
    • However, they do provide some sense of underlying momentum in economic activities, and are useful in the context of the upcoming Union budget.
    • The last budget had assumed a nominal GDP growth of 11.1 per cent. However, as per the latest estimates, nominal GDP is expected to grow at a significantly higher pace of 15.4 per cent.

    Conclusion

    • Along with trends in tax collections as per which the government’s revenues will surpass budgeted targets by a significant margin, these growth estimates only increase the likelihood of the Centre meeting its budgeted fiscal deficit target for the year.

    Mains question

    Q. As per the first advance estimates of national income released by the National Statistical Office, Indian economy is expected to grow at 7 per cent in 2022-23. In light of this discuss some of the latest projections and the areas of concern for Indian economic growth.

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  • What is New Umbrella Entity (NUE) Network?


    umbrella

    The Reserve Bank of India (RBI) is said to have put on hold licensing of the New Umbrella Entity (NUE) network, a fintech institution planned as a rival to National Payments Corporation of India (NPCI).

    Why in news?

    • Six groupings, which included Facebook, Google, Amazon, Flipkart and others, had applied for NUE licences.

    What is New Umbrella Entity (NUE)?

    • NUE is an entity (under the Companies Act 2013) that will manage and operate the new payment system in the retail sector such as ATMs, POS, UPI etc.
    • NUEs will be set up for profit entities that will manage payments in the retail space.
    • These could offer a host of retail payment services, including setting up of ATMs, offering white-label, point of sale terminals, Aadhaar-based payments, remittance services, and develop newer payment methods.
    • They will also manage clearing and settlement systems that could be an alternative to the bank-promoted NPCI.
    • They will be allowed to charge fees for transactions (unlike the existing NPCI).
    • All NUEs will have to be interoperable with the National Payments Corporation of India (NPCI).

    Why need NUEs?

    • The NPCI is at the epicentre of the digital payments in the country.
    • RBI has introduced NUEs to end the so-called monopoly of NPCI.
    • The central bank also noted that during the pandemic, with people spending more time at home the usage of e-commerce has increased, and there’s been a significant rise in the incidence of internet fraud, cyber-crimes.

    If NPCI is doing its job well, then why NUE?

    • 48% of all electronic retail payments in the country pass through the NPCI infrastructure.
    • RBI’s concern stems from having the operations of so much of the country’s payment system concentrated in one entity.

    How will NUE aid Consumers?

    • With the introduction of NUEs, options for payment will increase for users.
    • This will result in more competition and eventually help boost transaction volumes for both platforms as e-commerce expands and reaches deeper into India’s unbanked hinterland.
    • In the World Bank’s most recent report on financial inclusion in 2017, some 190 million Indians did not have a bank account and more than half did not make or receive digital payments.
    • Customers who face frequent sever transaction due to server overload currently have few options.
    • In the new regime, they’ll be able to try the other platform.

    What about Data Safety?

    • Compliance as far as data safety and privacy is concerned holds good for all and sundry in the payments and banking space.
    • Every entity involved in payments and settlement have to follow the same set of rules.
    • RBI already have a new set of guidelines on “Regulation of Payment Aggregators and Payment Gateways” .
    • It ensures that neither the authorised Payment Aggregators (PAs) nor the merchants on-boarded by them can store customer card credentials within their database or server to avoid data breaches and potential abuse.

    Will NUEs replace NPCI?

    • NUEs will co-exist with NPCI to strengthen the payment infrastructure network.
    • A robust and resilient infrastructure is needed to ensure the government’s ambitious target of one billion digital transactions per day is achieved.
    • NUEs will not replace but complement NPCI in taking India’s digital payment success story to new heights.
    • By establishing a neutral and independent standards-setting body, we can make sure that the system as a whole in our country evolves in the best traditions of digital infrastructure adopted anywhere in the world.

     

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