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GS Paper: Indian Economy

  • RBI to issue first-ever Sovereign Green Bonds

    green bond

    The RBI would issue Sovereign Green Bonds (SGrBs) in two tranches of ₹8,000 crore each on January 25 and February 9.

    What are Sovereign Green Bonds?

    • A bond is an instrument to raise debt.
    • Since 2007, a market for bonds specifically self-labelled or designated as ‘green’ has emerged.
    • This label differentiates a green bond from a regular bond, which signifies a commitment to exclusively use funds raised to finance or re-finance “green” projects, assets, or business activities.
    • When these bonds carry guarantees related to the repayment of principal and payment of interest by the sovereign or the government, they are called sovereign green bonds (SGrB).

    How are the projects for green bonds selected?

    • A project is classified “green” on the basis of four key principles. These include-
    1. Encouraging energy efficiency in resource utilisation
    2. Reducing carbon emissions and greenhouse gases
    3. Promoting climate resilience and
    4. Improving natural ecosystems and biodiversity, especially in accordance with SDG (Sustainable Development Goals).

    When is the first sovereign green bond likely to be issued? 

    • In her Budget speech early this year, Finance Minister announced that sovereign green bonds will be issued for mobilising resources for green infrastructure.
    • The proceeds will be deployed in public sector projects that help in reducing the carbon intensity of the economy.
    • These green bonds would be available in 5-year and 10-year tenure.

    How are they different from conventional government bonds?

    • Government bonds or government securities (G-Secs) are normally categorised into two — Treasury Bills and dated or long-term securities.
    • These bonds carry coupon rates and are tradable in the securities market.
    • SGrB is one form of dated security. It will have a tenor and interest rate.
    • Money raised through SGrB is part of overall government borrowing.

    Who are likely to be the buyers of these bonds? 

    • Both domestic and international investors are expected to be interested in SGrB.
    • However, one thinking is foreign investors may be slightly hesitant due to currency risk.

     

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  • Demonetization and the digital payment ecosystem

    digital

    Context

    • Paperless payments have been a big national goal ever since 8 November 2016, when India rendered ₹500 and ₹1,000 currency notes useless in a stunning decision that was upheld as valid by the Supreme Court on recently. Today, our cash intensity remains roughly on the same incline as it was earlier. But online payments have soared. This means a fine policy judgement call will need to be made soon.

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    digital

    Demonetization: A brief Analysis

    • The supreme court rejected petitions arguing that demonetization was done illegally and by 4:1 bench majority Supreme court held the process as satisfactory.
    • The overnight note-ban was also found to satisfy a general test of proportionality. For all the hardship caused by weeks of cash starvation, that exercise of authority was not judged too drastic for its aims.
    • The extent to which unaccounted-for money was flushed out, terror funding frozen and commerce formalized cannot reliably be estimated, but small businesses were clearly hit hard and India’s economy slowed down soon after.

    digital

    The changing trend: How we are transacting?

    • Rise of digitals payments: The past half decade’s big trend in our use of money has been the exponential rise of a platform that’s part of our digital stack of public goods.
    • Spectacular success of UPI: Designed for instant transfers between bank accounts done via mobile phones, the Unified Payments Interface (UPI) has been a spectacular success since its 2016 launch.
    • UPI transactions for instance: According to National Payments Corporation of India (NPCI), its operator, UPI processed more than 74 billion transactions in 2022, up 90% over 2021, worth almost ₹126 trillion, a 76% leap.

    Examining feasibility of levying user fee on UPI and the E-rupee

    • Financial support to UPI: The case for UPI as India’s payment bedrock is weakened by the fact that while it levies no user fee, it isn’t a costless service. Last year, the finance ministry justified financial support for UPI on the ground that it’s a digital public good with immense convenience for the public and productivity gains for the economy.
    • Coast benefit review must be done: If public funds are increasingly needed to back UPI as it expands, we must put it to a cost-benefit review as we go along; UPI is already logging huge sums and the total for 2023 may be much more.
    • Promoting E-rupee: It’s not just a cost consideration that should make us promote RBI’s retail e-rupee instead for routine payments.
    • E-rupee is a direct liability of RBI: The E-rupee’s mass usage would involve circulation of money that’s a direct liability of the central bank (an IOU issued by it, i.e., like cash), which would better serve the cause of economic stability. This is because what RBI owes its currency bearers is entirely free of risk, while the same cannot be said of banks.

    digital

    Why India needs a digital rupee?

    • Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
    • High currency in circulation: India has a fairly high currency-to-GDP ratio.
    • Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.

    Conclusion

    • For superior systemic safety, the e-rupee should get a significant share of online payment swipes. Even if its holdings earn no interest, it could catch on if the security of its value, ease of liquidity and erasure of data trails (below a limit) are duly advertised. For an e-rupee to aid macro level prudence, it will have to eat into UPI.

  • Blue economy and marine pollution

    Blue economy

    Context

    • Blue economy relates to presentation, exploitation and regeneration of the marine environment. It is used to describe sustainability-based approach to coastal resources. The worry is that the oceans are under severe threat by human activities, especially when the economic gains come at the cost of maintaining environmental sanity.

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    Blue economy

    From the beginning: The Blue economy

    • Origin of the concept: Gunter Pauli’s book, “The Blue Economy: 10 years, 100 innovations, 100 million jobs” (2010) brought the Blue Economy concept into prominence.
    • A project to find best nature inspired and sustainable technologies: Blue Economy began as a project to find 100 of the best nature-inspired technologies that could affect the economies of the world. While sustainably providing basic human needs potable water, food, jobs, and habitable shelter.
    • Inclusive approach and objective: This is envisaged as the integration of Ocean Economy development with the principles of social inclusion, environmental sustainability and innovative, dynamic business models
    • Environment friendly maritime infrastructure: It is creation of environment-friendly infrastructure in ocean, because larger cargo consignments can move directly from the mothership to the hinterland through inland waterways, obviating the need for trucks or railways

    Blue economy

    Significance of Maritime transport

    • One of the largest employers within ocean-related activities: Maritime transport plays a big role in the globalised market in the form of containerships, tankers, and ports, coastal tourism is the largest employer within ocean-related activities.
    • Eighty percent trade happens on the seas: Eighty per cent of world trade happens using the seas, 40 per cent of the world’s population live near coastal areas, and more than three billion people access the oceans for their livelihood.
    • Annual value makes up equivalent to seventh largest GDP: A healthy marine environment is essential for a sustainable future for people and the planet. Its value is estimated to be over $25 trillion, with the annual value of produced goods and services estimated to be $2.5 trillion per year, equivalent to the world’s seventh largest economy in gross domestic product (GDP) terms.
    • Ensures food security: The oceans, seas and coastal areas contribute to food security and economic viability of the human population. The ocean is the next big economic frontier, with the rapidly growing numerous ocean-based industries.

    What are the concerns?

    • Human induced Oceanic pollution: Marine activities have brought in pollution, ocean warming, eutrophication, acidification and fishery collapse as consequences on the marine ecosystems.
    • Oceans are rarely financial institutions: The ocean is uncharted territory, and rarely understood by financial institutions. Hence preparedness of these institutions in making available affordable long-term financing at scale is nearly zero.
    • Developing nations pay heavy price: In this journey of achieving blue economy goals, it is developing nations that pay a heavy economic price.
    • Lack of capacity is a critical hindrance: Many of the developing nations have high levels of external debt. Lack of capacity and technology for transition between agri economy and marine economy is also a critical hindrance.
    • Not having a elaborative guiding principles is a major concern: There is concern that without the elaboration of specific principles or guidance, national blue economies, or sustainable ocean economies, economic growth will be pursued with little attention paid to environmental sustainability and social equity.

    Blue economy

    What should be the approach towards achieving Blue economy?

    • Inclusive discussion and participation is must: The blue economy is based on multiple fields within ocean science and, therefore, needs inter-sectoral experts and stakeholders. It is imperative to involve the civil society, fishing communities, indigenous people and communities for an inclusive discussion.
    • SDG-14 journey cannot undermine the other SDGs: The UN stresses that equity must not be forgotten when supporting a blue economy. Land and resources often belong to communities, and the interests of communities dependent on the ocean are often marginalised, since sectors such as coastal tourism are encouraged to boost the economy.
    • Integrated marine spatial planning with national and global expertise is necessary: Developing the blue economy should be based on national and global expertise. It is important that any blue economy transformation should include using integrated marine spatial planning. This would provide collaborative participation of all stakeholders of the oceans, and would make room for debate, discussion and conflict resolution between the stakeholders.

    Where does India stand at this hour?

    • Suitable natural geography: Vast coastline of almost 7,500 kilometres, with no immediate coastal neighbours except for some stretches around the southern tip. In some sense, India has the advantage of its natural geography
    • Opportunity on G20 presidency: It is an opportunity for India to use its G20 Presidency to ensure environmental sustainability, while providing for social equity.
    • Rising role and significance: India’s engagement in the blue economy has been rising, with its active involvement in international and regional dialogues, and maritime/marine cooperation.

    Conclusion

    • Achieving the Blue economy goal would need tremendous human effort, and would call for global cooperation through various legal and institutional frameworks. This also includes the need to develop newer sectors such as renewable ocean energy, blue carbon sequestration, marine biotechnology and ex-tractive activities, with due attention paid to the environmental impacts.

    Mains question

    Q. What do you understand by mean Blue economy? Highlight the importance of maritime transport and discuss what need to be done to achieve blue economy in a true sense?

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  • Levying the Wealth tax to reduce income inequality

    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 its time to consider a wealth tax.

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    What is wealth tax?

    • Wealth tax 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.
    • It aims to reduce the inequalities of wealth.
    • It is based on the market value of assets owned by a taxpayer and charged on the net wealth of super rich individuals.

    Wealth tax

    Wealth Tax in India

    • Abolished wealth tax: The government abolished wealth tax as announced in the budget 2015. In its place, the government decided to increase the surcharge levied on the ‘super rich’ class by 2% to 12%. (Super rich are persons with incomes of Rs.1 crore or higher and companies that earn Rs.10 crores or higher).
    • Abolished to simplify tax structure and discourage tax evasion: The abolition was a move to do away with high costs of collection and also to simplify the existing tax structure thereby discouraging tax evasion.
    • No wealth tax at present: India presently does not have any wealth tax i.e., a tax levied on one’s entire property in all forms. It did not impose a one-time ‘solidarity tax’ on wealth in post-covid budgets that could have generated resources for essential public investment.

    What is the need for levying a wealth tax?

    • High 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.
    • 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.
    • Capital gains tax has limited base: Capital Gains tax exists in India, but applies only to transactions and hence is limited in its base.
    • Wealth largely depends on inheritance and privilege: 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.
    • India does not have inheritance tax: India scrapped its estate duty in 1985 and has no inheritance tax.
    • Almost entirely exemptions on gift 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. 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.

    Wealth tax

    Comprehensive PoV: Why wealth tax is necessary at present economic condition

    • Wealth of rich doubled during the pandemic but not channelised well to create productive resou: An Oxfam report has highlighted how India’s richest doubled their wealth during the pandemic. This happened for a variety of reasons. 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.
    • There is no sufficient increase in private investment: 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. Obviously, there is something else at work, and one cannot assume that accumulated wealth in private hands will necessarily be invested in the domestic economy.
    • Not only investment is important but also the right application is important: It is not only investment that is important, but also where that investment is going and whether it is creating employment opportunities for the youth.

    Present status and economic projections

    • Data on youth unemployment: Data from diverse sources show high unemployment rates during May-July 2022 for the youth: 28.3% in the 15-24 age group and an even higher 43.3% for the 20-24 age-group.
    • Likely global recession overhead: The likelihood of a global recession and the related layoffs being announced by corporate giants will make the situation worse.
    • Jobless growth and wealth inequality: The recent economic growth experienced in India, especially in the post-covid recovery phase, has largely been jobless growth and can further deepen both income and wealth inequalities.
    • Economy cannot afford to have such high level of youth unemployment: No economy can afford to have such youth unemployment rates for long without adversely affecting economic growth and social cohesion.

    Way ahead

    • 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.
    • There is no reason why India cannot do so too. This is the right time to introduce a progressive wealth tax along with other fiscal steps that can directly reverse the trend of growing inequalities in the country.

    Conclusion

    • India needs a shift in its fiscal policy, as suggested by a number of economists, to adopt measures that create employment opportunities and in turn drive demand for products made by small and medium level producers. This would also push up growth while not necessarily widening inequalities.

    Mains question

    Q. What is wealth tax? Why wealth tax abolished? Considering the present economic situation Discuss the need to levy wealth tax in India?

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  • Stock Trade and the Economy

    Stock

    Context

    • Even as the RBI steadily downgraded India’s growth forecasts for the year from 7.2 per cent in April to 6.8 per cent in December, and the benchmark Nifty50 index ended the year up a mere 4.1 per cent, a handful of stocks delivered outsized returns to investors.

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    Expansion of business and reward

    • Adani gained because of expansion: The top trade was undoubtedly that of Adani Enterprises with the stock more than doubling over the year. But that should not come as a surprise. After all, the group has embarked on a breathless pace of expansion (both organic and inorganic) that is perhaps unparalleled in recent times.
    • Unexpected rise in prices: Share prices of associated companies such as Adani Green have also seen a remarkable surge, catapulting the group into the top leagues of Indian conglomerates.
    • Risky price-to-rent ratio: One should be forgiven for thinking that residential real estate in Delhi, with a price-to-rent ratio that ranges between 40-50, is expensive. Adani Enterprises is currently trading at a price-to-equity ratio of 394 as per NSE. The Nifty50, in comparison, is trading just above 21.

    Performance of Public sector banks

    • SBI AND PNB gained: The year also belonged to Indian banks, more specifically to public sector banks, who at last seemed to have turned the corner. SBI is up more than 30 per cent, while Punjab National Bank is up almost 50 per cent. Others like Bank of Baroda and UCO Bank have more than doubled.
    • Outperforming private banks: While private sector bank stocks have also seen a sharp rise Axis is up almost 35 per cent, while ICICI is up 17 per cent, public sector banks have outperformed their private counterparts by a significant margin. The Nifty PSU bank index is up 70 per cent for the year, while in comparison, the private bank index is up only 21 per cent. This was perhaps to be expected.
    • Cleaning up balance sheet: Public sector banks have been on a multi-year drive to clean up their balance sheets, and shore up capital. And while there are still some concerns over possible slippages from accounts that were restructured during the pandemic, gross non-performing assets or bad loans were down to 6.5 per cent at the end of September 2022.
    • Rising lending rates: Moreover, lending is growing at a brisk pace. And banks’ spreads also have improved with the interest rate cycle on the upswing. In typical fashion, lending rates have risen faster than deposit rates. But, as credit growth picks up and competition for deposits among banks begins to intensify, deposit rates are likely to edge upwards, putting pressure on the spread.

    Status of Consumption and auto sector

    • Consumption is up: while concerns over the unevenness of the economic recovery persist, consumption stocks have fared well. ITC is up more than 50 per cent, as are Britannia (almost 20 per cent) and HUL (9 per cent).
    • Real wages have not increased: But with firms underlining the continuing pressure on volumes with elevated inflation, real wage growth has been subdued in rural areas it is likely that in some product segments, the formalisation theme is still playing out.
    • Size of market is not expanding: The bigger formal firms gaining market share even as the overall size of the market isn’t expanding as hoped.
    • Auto sector have done well: Among the auto stocks, M&M and Maruti are up 50 per cent and 12 per cent respectively, though Tata motors is down 22 per cent, while among the two-wheelers, both Bajaj and Hero are up.

    Better performance of Infrastructure

    • Moderate uptick in infrastructure: Infrastructure stocks are a mixed bag. Larsen & Toubro, often thought of as a proxy for the domestic capex cycle, is up almost 9 per cent, recently hitting a new high.
    • Impact of PLI scheme: Perhaps, this reflects a pick up in the public sector capex or the private sector push under the government’s production-linked investment scheme.
    • Mix picture of steel and cement: Among cement stocks, Ultratech is down, though ACC is up, while among steel stocks, SAIL is down, Tata steel is almost flat, but JSW Steel is up.

    IT sector was worst performing

    • IT NIFTY significantly down: The sector which has taken a beating has been IT. The Nifty IT index is down 26 per cent.
    • Heavy correction in market: All major IT firms from TCS to Infosys to Wipro have witnessed heavy correction.
    • Impact of slowdown in advanced economy: Valuations of the sector will be heavily influenced by market views over the slowdown in advanced economies which are major revenue centres for these firms.

    Conclusion

    • Though stock market doesn’t reflect the entirely true picture of economy but it certainly a good indicator of where the retail investor and common man invest his money. India’s stock market is going to be top 3 in the world. SEBI must protect the retail investor from this highly volatile terrain.

    Mains Question

    Q. Analyze the performance of the auto and IT sector in India through lenses of stock market? Why the balance sheet of public sector banks is improving?

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  • What are Systemically Important Banks?

    State Bank of India, ICICI Bank, and HDFC Bank have again been named as Domestic Systemically Important Banks (D-SIBs) by the Reserve Bank of India (RBI).

    What are Systemically Important Banks (SIBs)?

    • SIBs are perceived as certain big banks in the country/world. They enjoy a huge customer base and also engage in cross sector activities and are perceived as ‘Too Big to Fail (TBTF)’.
    • The system of D-SIBs was adopted in the aftermath of the 2008 financial crisis where the collapse of many systematically important banks across various regions further fuelled the financial downturn.
    • A failure of any of these banks can lead to systemic and significant disruption to essential economic services across the country and can cause an economic panic.
    • As a result of their importance, the government is expected to bail out these banks in times of economic distress to prevent widespread harm.
    • D-SIBs follow a different set of regulations in relation to systemic risks and moral hazard issues.

    Types of SIBs

    There are two types of SIBs:

    1. Global SIBs: They are identified by BCBS (BASEL Committee on Banking Supervision)
    2. Domestic SIBs: They are declared by Central Bank of the country

    How are D-SIBs determined?

    • Since 2015, the RBI has been releasing the list of all D-SIBs.
    • They are classified into five buckets, according to their importance to the national economy.
    • In order to be listed as a D-SIB, a bank needs to have assets that exceed 2 percent of the national GDP.
    • The banks are then further classified on the level of their importance across the five buckets.
    • ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three, with bucket five representing the most important D-SIBs.

    What regulations do these banks need to follow?

    • Due to their economic and national importance, the banks need to maintain a higher share of risk-weighted assets as tier-I equity.
    • SBI, since it is placed in bucket three of D-SIBs, has to maintain Additional Common Equity Tier 1 (CET1) at 0.60 percent of its Risk-Weighted Assets (RWAs).
    • ICICI and HDFC on the other hand, have to maintain Additional CET1 at 0.20 percent of their RWA due to being in bucker one of D-SIBs.

     

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  • New Year and the Indian economic growth

    economic

    Context

    • The new year begins on a slightly more optimistic note for India. Global crude and food prices are down, the rupee has stabilised at 82-83 to the dollar after dropping from 74.5 levels at the start of 2022, even as official foreign exchange reserves have recovered. However, there are challenges to the economic growth of India which needs an immediate attention and action.

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    The current scenario and the optimism around Indian economy

    • Global crude and food prices: Global crude and food prices are roughly 38 per cent and 15 per cent down respectively from their highs in March, following Russia’s invasion of Ukraine.
    • Stabilised rupee: The rupee has stabilised at 82-83 to the dollar after dropping from 74.5 levels at the start of 2022
    • FOREX recovered: even as official foreign exchange reserves, which had plunged to $524.5 billion on October 21 from a year-ago peak of $642 billion, have since recovered to $562.8 billion.
    • Environmental conditions are good for Rabi crops: With the prospects for the upcoming rabi crop looking good, as there is favourable soil moisture conditions, timely onset of winter and improved fertiliser availability on the back of declining international prices one can expect consumer inflation to ease further.

    economic

    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).

    economic

    What are the challenges?

    • Challenge is more on growth than on Inflation: The challenge for India this year is likely to be more on the growth than on the inflation front.
    • It seems, Chinese’s authoritarian policies making India a favourable investment destination: On paper, the world’s disillusionment with China (more specifically, the authoritarian policies of Xi Jinping, both at home and beyond) and its diminishing economic prospects, worsened by a looming demographic crisis, should be making India every investor’s favourite destination.
    • On paper government efforts are honest to attract investment: The present government’s focus on improving the country’s physical as well as digital infrastructure plus schemes such as production-linked incentive to attract investments in specific sectors, from solar photovoltaic modules and drones to specialty steels ought to have given added impetus to this process.
    • But on the ground, neither domestic nor foreign companies are really investing: The biggest drag on investment during the last decade was over-leveraged corporates and bad loans-saddled banks.
    • Deepening global slowdown is a major challenge to the economic growth: That twin balance sheet problem has more or less resolved itself. Today’s problem has mainly to do with strained government and household balance sheets. That, coupled with a deepening global slowdown constricting export demand, could have a bearing on India’s economic growth.

    What is Current Account Deficit (CAD)?

    • 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.

    economic

    What should the government do?

    • Refrain from fiscal stimulus and maintain macroeconomic stability: It should certainly refrain from any fiscal stimulus to kick-start investment or drive growth. Far from stimulus, what the country needs is macroeconomic stability and policy certainty.
    • Managing current account deficit: The current fiscal deficit and public debt levels are far too high to allow any new populist schemes in the name of putting money in people’s hands or sharp tax cuts to supposedly revive investor sentiment. Large government deficits will invariably spill over into current account deficits. The latter number, at 4.4 per cent of GDP in July-September, was the highest for any quarter since October-December 2012 and the prelude to the last so-called taper tantrum-induced balance of payments crisis.
    • Must prioritize fiscal consolidation: The coming budget must prioritize fiscal consolidation. This will enable the RBI to also pause interest rate hikes and further monetary tightening, which is probably not the best thing for an economy already facing multiple growth headwinds.

    Conclusion

    • India’s challenge has shifted from inflation management to facilitating growth in 2023. Policy stability and credibility should be the mantra that will ultimately work for India.

    Mains question

    Q. It is said that the new year 2023 is starting on a slightly more optimistic note for the Indian economy. In this background, discuss the challenges facing India’s economy and what the government should do?

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  • India’s tech startups and the dearth of funding

    startups

    Context

    • The Indian government is emphasizing and celebrating its tech startups as an important component of its economic development policy. Prime Minister Modi recently pointed out that the number of Indian ‘unicorns’ technology startup companies with a valuation of US$ 1 billion or more has doubled since 2021. Some sectors within these startups, such as climate tech, do demonstrate strong promise.

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    startups

    Funding a major problem

    • Though India has emerged as the third largest ecosystem for startups, funding is becoming a growing problem, with the number of unicorns dropping by half in 2022.
    • One of the sectors that appear to be not doing very well is the Indian online tech startups.

    Present status of Indian tech startups

    • Good performance during the pandemic: These Indian tech startups did very well during the two-year-long pandemic. With the dramatic increase in work-from-home (WFH) office interactions, online consulting for various services but especially heathcare, online classes at schools and colleges and other educational centres, and other online services and platforms proliferate.
    • Indian techs became popular for online services: Overnight, technological solutions and electronic communications using virtual platforms, digital payments system, video consultations and edtech all became popular.
    • As people returning to normal lives Indian techs looks weak: But with the pandemic now relatively under control and people returning to normal lives, the future of Indian startups that provided online services is beginning to look bleak.
    • Negative assumptions: Going by recent media reports, the future of such tech startup companies is not so bright. Funds are drying up and not all startups are going to survive.
    • Global uncertainties adding up to the existing problems: Further, issues like the Russian invasion of Ukraine, a spike in global inflation rates, and fears of a possible recession have also brought down the prospects for many startups in general.

    Impact of shortage in funding to tech startups

    • Complete shutdown of many startups: Shortage of capital that is critical for the startups to sustain has led to cost-cutting measures with layoffs, mergers and consolidation and even complete shutdowns of some of them.
    • Shut down as it unable to find market fit product: According to Inc42, a tech media platform, eight startups shut shop in 2022. These include Matrix Partners-backed SaaS startup, Protonn, which closed its operations in January 2022 since it was unable to find the right product-market fit.
    • For instance, the funding case of Protonn: Protonn was a Bengaluru and San Francisco-based startup, focused on providing its platform to professionals such as lawyers, graphic designers and nutritionists to launch their businesses online, create videos, conduct live sessions, generate payment links, and track their business’s financial performance. The company had raised US$9 million in seed funding. The company, founded by former Flipkart executives, Anil Goteti and Mausam Bhatt, returned US $ 9 million to its investors.

    startups

    Problem faced by edtch startups in a post pandemic world

    • A case of edtech startup Uday: Uday ended its operations in April this year. The Gurgaon-based startup had difficulties finding ways to stay in business in the post-pandemic world. The startup co-founder, Soumya Yadav stated that the company was witnessing the post-pandemic world for the first time, as the kids went back to school, we faced roadblocks in growing the original model of online, live learning. We evaluated multiple different strategies and adjacent pivots however none of them were promising enough.
    • Financial crunch and laying off the employees by well-established edtechs: Edtech startups such as Vedantu and Unacademy are also facing severe financial crunch, leading to hundreds of layoffs or shutting down certain verticals.
    1. Vedantu for instance: Earlier in the year, Vedantu laid off around 620 employees. Unacademy, earlier in the year, shut down its medical test preparation vertical, USMLE.
    2. Unacademy laying off its verticle: As of November, Unacademy has done three rounds of layoffs, starting with 600-800 employees from its sales and marketing team.
    3. Byjus: Byju’sa rival of Unacademy has also felt the pinch and is reported to have laid off close to 2,500 employees.
    4. SuperLearn: Another startup in the education sector, a Bengaluru-based SuperLearn, shut its operations in June because of “a dearth of funds and diminishing investor confidence.”

    Other positive side of the startups

    • Biotech and healthcare startups did well: While the edtech is possibly the worst hit, startups in the biotech and healthcare sector and e-commerce and fintech may not be as badly affected in the coming year.
    • Healthcare startups not only survived but also benefitted: Several startups gained from the inadequacy of the Indian healthcare system and thus phenomena like online pharmacy, healthcare-at-home services, and fitness and wellness companies have sprung up and they are likely to stay.
    • Funds received by healthcare startups will be helpful: Healthcare startups reportedly received funds of around US$2.2 billionn across 131 deals. They also appear to have found an appealing business model that might help them pull on with reasonable success in the coming years.

    Way ahead

    • Nevertheless, there is a likelihood that after seeing a boom and a significant spike in the demand in these sectors in the last two years, there may be some balancing in the next two years.
    • Another possible way that startups will deal with the financial crunch, lack of adequate response is to consolidate the several different edtech and e-commerce platforms and so, one could expect a few merger and acquisition to come through in the coming years.
    • Enterprisetech sector saw some of this playing out already. Startups, at least within a few exclusive sectors, have gained fair amount of prominence and appears that they are here to stay despite the possibility of a rough couple of years until issues around funds and market are evened out.

    Conclusion

    • It is evident that not only the economic crisis caused closures, but growing businesses in post-pandemic conditions was proving to be a challenge. Overall, Indian tech startups therefore suggest a mixed picture. Strong government support is positive but business model and market competition issues need to be addressed.

    Mains question

    Q. Indian edtech startups are witnessing financial crunch however, healthcare start-ups are benefitting in a post pandemic world. Therefore, Indian tech startups suggest a mixed picture. Discuss.

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  • Why India’s bankruptcy regime needs to be fixed?

    The government is proposing to make changes to India’s six-year-old Insolvency and Bankruptcy Code (IBC).

    What is the Insolvency and Bankruptcy Code (IBC)?

    • The IBC, 2016 is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
    • It is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
    • The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

    Key features

    Insolvency Resolution: The Code outlines separate insolvency resolution processes for individuals, companies, and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals.

    1. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree.
    2. For startups (other than partnership firms), small companies, and other companies (with assets less than Rs. 1 crore), the resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.

    Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the RBI.

    Insolvency professionals: The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.

    Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies:

    1. National Company Law Tribunal: for Companies and Limited Liability Partnership firms; and
    2. Debt Recovery Tribunal: for individuals and partnerships

    What are the changes being proposed?

    bank

    • Easier settlements: The process is being proposed to be divided into two phases—phase I will focus on finding potential buyers and handing over the management to the acquirer. Phase II would address the distribution of proceeds among creditors and settle inter-creditor disputes. This would make an effort to revive the units with better management, wherever possible.
    • Preventing delays: Average days taken to resolve a case has risen to 679 days in H1FY23 from 230 days in FY18. The changes presently under consideration seek to address inter-creditor disputes, which have been identified as the leading cause of delays.

    Why is the IBC seen as a game-changer?

    • The IBC has proved to be a deterrent for many unscrupulous borrowers and imparted tools to banks to be reasonably confident about recovering NPAs.
    • Fear of losing control of the firm nudges debtors to settle their dues.
    • Till September 2022, 23,417 applications for initiation of the Corporate Insolvency Resolution Process (CIRP), with an underlying default amount of ₹7.31 trillion, were resolved before admission.
    • Indirectly, the code provides an exit route by winding up commercially unviable units.

     

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  • NITI Aayog cautions against cutting trade ties with China

    Amid demands for snapping trade ties with China for its transgressions on the border, former NITI Aayog Vice-Chairman has opined that cutting trade ties with Beijing would amount to sacrificing India’s potential economic growth.

    What is the news?

    • Panagariya said both countries can play the trade sanctions game.
    • The ability of a $17 trillion economy (China) to inflict injury on a $3 trillion economy (India) is far greater than the reverse.

    Why in news?

    • The trade deficit, the difference between imports and exports, between India and China touched $51.5 billion during April-October this fiscal.
    • The deficit during 2021-22 had jumped to $73.31 billion as compared to $44.03 billion in 2020-21.

    A quick backgrounder

    • Trade ties began to boom since the early 2000s.
    • This was driven largely by India’s imports of Chinese machinery and other equipment.
    • It rose up from $3 billion in the year 2000 to $42 billion in 2008, the year China became India’s largest trading partner.

    The Hindi-Chini buy buy

    • A third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China.
    • Automotive parts and fertilizers are other items where China’s share in India’s import is more than 25 per cent.
    • Several of these products are used by Indian manufacturers in the production of finished goods, thus thoroughly integrating China in India’s manufacturing supply chain.
    • For instance India sources close to 90 per cent of certain mobile phone parts from China.

    India’s export to China

    • Even as an export market, China is a major partner for India.
    • China is the third-largest destination for Indian shipments.
    • At the same time, India only accounts for a little over two percent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO).

    Should we worry about this?

    • Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
    • In this light, India’s trade imbalance with China should not be viewed in isolation.
    • For instance, pharmaceuticals that India exports to the world require ingredients that are imported from China.
    • Chinese imports of Indian seafood are one area that has recently shown robust growth and carries scope to grow in future.

    So, having a trade deficit is good?

    • Of course NOT. Running persistent trade deficits across all countries raises two main issues.
    1. Availability of foreign exchange reserves to “buy” the imports.
    2. Lack of domestic capacity to produce most efficiently.

    Can we ban trade with China?

    Ans. Certainly NOT!

    • It will hurt the Indian poor the most: This is because the poor are more price-sensitive. For instance, if Chinese TVs were replaced by either costlier Indian TVs or less efficient ones, unlike poor, richer Indians may buy the costlier option.
    • It will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market (as Indian exports).
    • Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 percent.
    • Ban will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
    • Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years. Chinese money, for instance, has penetrated India’s technology sector, with companies like Alibaba and Tencent strategically pumping in billions of dollars into Indian startups such as Zomato, Paytm, Big Basket and Ola.
    • India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China. This can be detrimental to India’s effort to attract foreign investment.

    China is our Frenemy. Here is why.

    • The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute.
    • Worse, given India and China’s position in both global trades as well as relative to each other, this trade war will hurt India far more than China.
    • Again, these measures will be most poorly timed since the Indian economy is already at its weakest point ever — facing a sharp GDP contraction.

    Way forward

    • Panagariya suggested to expand trade faster with other trading partners rather than cutting it with Beijing through a blunt instrument such as trade sanctions.
    • We should take advantage of India’s excellent growth prospects for the next decade and concentrate on growing the economy bigger as fast as possible.
    • Once we are the third largest economy, our sanctions threats are likely to carry greater credibility.

     

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