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

Civilsdaily

Login

GS Paper: Indian Economy

  • The Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021

    Context

    The Lok Sabha has approved a Bill to amend the Chartered Accountants Act, 1949, the law that governs the Institute of Chartered Accountants of India (ICAI).

    What are the changes proposed in the Bill?

    • Introduced in the Lok Sabha on December 17, 2021, and titled the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021.
    • The key changes it proposes are in the area of discipline and governance and administration.
    • 1] Discipline: The ICAI’s disciplinary committee and board of discipline will be chaired by non-chartered accountants (CA),
    • Its elected council members will no longer be in a majority in them.
    • 2] Governance and administration: The term of the ICAI’s Council will be raised from three to four years, the maximum number of consecutive terms for its elected members will be reduced to two from the current three;
    • The ICAI’s Secretary will replace the ICAI’s president as its chief executive and perform the functions to be specified;
    • The ICAI will appoint its auditor from the Comptroller and Auditor-General of India’s panel of CA firms;
    • The Government will form a coordination committee for the ICAI and the Institutes of Cost Accountants and Company Secretaries of India.
    • The Parliamentary Standing Committee on Finance has endorsed these changes and has further recommended an end to the ICAI’s monopoly in certification.

    Challenges facing Chartered Accountancy and ICAI

    1] Lacking critical thinking and analytical ability

    • Senior industry managers say that many CAs do not have what it takes to succeed in the corporate world, i.e., analytical ability, critical thinking, appreciation of the business context, grasp of technology, and communication and presentation skills.
    • CA students do not have in-class interaction.
    • Also, the coaching is focused on cracking examinations rather than facilitating understanding and application.

    2] Poor record in disciplining members

    • The ICAI’s record in disciplining its members is even more problematic.
    • There have been persistent complaints that the ICAI is lax in acting against errant members.
    •  In 2018, the Government had set up the National Financial Reporting Authority as India’s first independent regulator of accounting and audit.
    • The proposed changes in the composition of the ICAI’s disciplinary arms will further limit its role.
    • As a result, the ICAI will be effectively reduced to an examination board.

    3] ICAI failed to keep pace with changes

    • The ICAI was set up in 1949, largely as the Indian version of the U.K. institute
    •  Much of the work that CAs do and clamour for is a remnant of the licence raj.
    • Many businesses and professions have changed beyond recognition as a result of the economic reforms initiated in 1991.
    •  The demutualised and technology-driven National Stock Exchange of India has transformed stock-broking.
    • Indian IT and pharma companies now compete successfully with the best in the world.
    • In contrast, CA has not kept pace with the changes in India’s dynamic economy and changing society.
    • Overseas accountancy qualifications such as the Association of Chartered Certified Accountants (ACCA) and Chartered Institute of Management Accountants (CIMA) are gaining popularity in India, perhaps because they are recognised worldwide, are more relevant to current and future needs, and are accepted even in India by global companies and global accounting firms.

    4] Challenges posed by technology such as AI/ML

    • Accounting and auditing are more amenable to the replacement of humans by technology.
    • AI, robotics, and other technological advances are likely to reduce the need for human intervention in accounting.
    • Also, recent administrative reforms aimed at enabling ease of doing business and ease of living, such as faceless tax assessment, easy filing of tax returns, prompt refunds, rising threshold for tax audit, and abolition of Goods and Services Tax audit have greatly reduced the availability of captive, government-mandated, make-work business for CAs.

    Way forward

    • Setting IIAs: The Parliamentary Committee’s suggestion to set up a string of Indian Institutes of Accounting (IIAs) on the lines of the Indian Institutes of Technology (IIT) and the Indian Institutes of Management (IIM) is innovative.
    • At one level, they will end the ICAI’s statutory monopoly over certification.
    • More competition should result in better quality and higher standards of conduct.

    Conclusion

    The Bill and the Parliamentary Committee’s report can be seen as efforts to drag the ICAI to the contemporary world. It would be wise to read the proposed changes as a warning and respond maturely.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • RBI cannot ignore inflation

    Context

    Despite being legally mandated to keep inflation in check, RBI has persisted with easy monetary policy, even as inflationary pressures have increased. We need to understand why, and what could be the repercussions.

    Inflation problem in India

    • For most of the past two years, CPI (consumer price index) inflation has been hovering close to the 6 per cent upper threshold of the RBI’s target band.
    • Inflation averaged 6.1 per cent during the pandemic period (April 2020 to June 2021), despite a massive collapse in aggregate demand.
    • Then in January 2022, as food prices recovered, headline inflation once again crossed the upper threshold of the inflation targeting band.
    • Inflationary pressures do not seem to be diminishing either. Instead, they continue to build up.
    • The standard measure of inflation “in the pipeline” is WPI (wholesale price index) inflation, since price increases at the wholesale level tend to translate into retail inflation in due course.
    •  Russia’s invasion of Ukraine has resulted in a sharp increase in global commodity prices, including prices of crude oil, edible oils, and fertilisers.
    • Indian firms are already adapting to this situation, passing on commodity price increase to retail prices.

    Issues with RBI’s stance

    • Standard economics gives us a guide for how central banks should react in a situation like this.
    • Two conditions: It says that monetary policy should accommodate the first round of commodity price increase, but only under certain conditions, notably that inflation is initially on target, and expectations are firmly anchored.
    • But neither condition holds at present. Inflation is already too high, and so are expectations.
    • An argument is nonetheless being made that monetary policy should not be tightened when inflation is driven by supply-side factors, as it can adversely impact growth.
    • This is fallacious. When there are supply constraints, using easy monetary policy to boost demand is not going to boost output.
    • And if firms are expecting high inflation, this will send things into a vicious spiral, as they will increase their prices even more in advance of any input price pressures.
    • Surely the RBI is aware of all of this. So why is it still not acting on it?

    Why RBI is ignoring inflationary pressure?

    • Growth concerns: The problem seems to be that governments all over the world are worried about growth.
    • The US Federal Reserve has been slow to raise rates even as inflation has reached a four-decade high. The European Central Bank has been even slower to react.
    • Fiscal dominance in India: In India, monetary policy also suffers from a strong fiscal dominance.
    • As a result, not only is the RBI expected to support growth, it is also expected to keep the government’s borrowing costs in check, which is in direct conflict with its inflation targeting objective.

    Implications of RBI ignoring inflationary pressure

    • Aggressive reduction in interest rates: A decade ago, we were in a similar situation when RBI delayed its response because it was focusing on growth.
    • When inflation subsequently took off, it reached double digits and the RBI had to raise interest rates aggressively to bring it down.
    • That was a very painful adjustment.
    • Impact on credibility of the RBI: In addition, if the RBI does allow inflation to take off, there will be long-lasting repercussions for its credibility.
    • Unachrored expectation:  if the public sees the RBI consistently ignoring inflation, expectations can rapidly get unanchored, and then it becomes very costly to bring it down.

    Conclusion

    To conclude, inflation is best addressed by the central bank using monetary policy, not by the government adjusting taxes. The RBI needs to urgently revisit its inflation forecast and its monetary policy stance in order to avoid potentially painful adjustments down the road.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Sovereign green bond (SGB)

    Context

    The other two major budget announcements pertain to the issuance of sovereign green bonds and a central bank digital currency. While geopolitical turbulence might make the current moment inopportune for experimentation, the government seems firm on both the proposals and they will most probably be rolled out.

    Sovereign green bond (SGB):  how it is different from a traditional bond

    • The sovereign green bond is a novel idea.
    •  It will be a part of the government’s borrowing programme.
    • The gross borrowing programme of the government is pegged at Rs 14.95 lakh crore.
    • The SGB (sovereign green bond) raised will be part of the aggregate borrowing programme and has to be used for projects which are ESG (environment, social and governance) compliant.
    • Hence, if the bond is being used to finance a power project or road, or in case it is used to finance revenue expenditure, it has to be ESG compliant.
    • If they succeed at the central level, green bonds can be replicated by states.

    Challenges for SGB

    • Pricing challenge: As these bonds are different from G-secs (government securities), they may have to provide a better return as all ESG compliant companies have to make special investments that will push up costs.
    • Low-interest rate: Further, given the low-interest rates prevailing today — real returns on deposits are negative — the SGBs can be issued as tax-free bonds, open to the public.
    • This will evince a lot of interest given that these are government-issued bonds.
    • The RBI and the government have been trying to get retail investors to participate in the government’s borrowing programme, and this move will expedite the process.

    Central bank digital currency (CBDC) and challenges

    •  For launching such a currency, the RBI has to address certain fundamental questions.
    • 1] Will it replace currency: Is a CBDC going to replace currency at some point in the future?
    • One must remember that there are several sections in India that are not conversant with technology.
    • 2] How will it be different from digital payments: If it is going to coexist with currency, how different will it be for the public from the digital payments that are being made today?
    • Will people need to choose between a mobile wallet and a CBDC wallet?
    • 3] Security of owner’s information: any issuance of CBDC on a voluntary basis also raises a question on the security of the owner’s information.
    • CBDC has to be clear on the issue of confidentiality as it is bound to be a matter of concern.
    • 4] The future of the banking system: If people have to be incentivised to move voluntarily to the CBDC, the cash exchanged must earn interest or else all money will go to bank accounts where a minimal interest rate can be earned.
    • Will we require savings bank accounts with commercial banks in case all cash goes to the RBI?
    • Will we then require ATMs for cash withdrawal? Will bank tellers become redundant? Will we need logistics companies that handle cash?
    • These finer issues need to be addressed by the RBI as the widespread use of CBDC will progressively lead to lesser need for banks.
    • 5] Issue of security: Any financial system that runs on technology can be hacked.
    • It has to be foolproof and power failure resistant.
    • There is a real danger of cyber fraud increasing as the majority of the population is not tech-savvy.
    • Similarly, there is always downtime for bank servers when banking transactions cannot be carried on.
    • This cannot be allowed to be the case with CBDC as it has to be available on a 24 x 7 basis.

    Consider the question “What are green bonds? How the green bonds can act as a tool to achieve the targets of sustainable development as a means of finance?”

    Conclusion

    The arguments for CBDC are compelling on the grounds of keeping up with the central banks of other countries, and the possibilities of taking advantage of new technologies like blockchain. But before embarking on these measures, it might be useful to keep in mind the issues flagged above.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Make trade deals for Make in India

    Context

    It will be a good idea to look at the intent, reality, and other ramifications of India’s trade agreements, especially in regard to goods.

    Why PTAs matters

    • Amongst the existing Preferential Trade Agreements (PTAs), the most commonly used by exporters and importers, are the agreements with the ASEAN region, South Korea, Japan, and South Asian countries.
    • It is noteworthy that India has significant trade deficits with three of the aforementioned regions.
    • Another factor to note is that three of these regions have significant manufacturing capacity and investment in their own territories.
    • Thus, India’s ongoing initiatives in trade agreements must consider whether such deals strengthen imports into India or incentivize investment.
    • This is all the more important as the Centre has laid out schemes like Phased Manufacturing Programs (PMPs) and Production Linked Incentives (PLIs) to encourage investment in Make in India.

    How existing trade agreements affect Phased Manufacturing Programs(PMP)

    • How does it work? Under the PMP, calibrated reductions in customs duty rates on inputs and intermediate goods have been provided along with higher duty rates on finished products.
    • However, considering that many of the finished products are covered by zero duty rates under existing trade agreements with some regions or countries, manufacturers with existing facilities in such countries may not have a compelling reason to move manufacturing to India.
    • Similar benefits exist under other agreements and may inhibit the uptake of the PMPs by multinational manufacturing entities.

    Production Linked Incentives and trade agreements

    • Under PLIs, based on a threshold level of capital investment and incremental production, subsidies are to be given to approved applicants.
    • Such schemes cover 15 product categories as of now.
    • In some cases, the attraction of incentives could score over the benefits of importing goods under low or nil rates of duty under PTAs.

    Suggestions:

    • The PLIs could become even more attractive if it is combined with certain pre-existing special governmental schemes that reduce costs and conserve cash flow.
    • While the application window for most of the PLI schemes has closed, a few may be extended and depending on the success of current schemes, more could follow.
    • Improving trade governance: PTAs are governed by written agreements between nation states or groups of nation states and domestic laws of the signatories.
    • Contrary to a violation of a multilateral or plurilateral agreement entered into under the aegis of the WTO, enforcement mechanisms external to the parties, do not exist for PTAs.
    • The committed benefits could be allowed or disallowed by customs rules (for example the CAROTAR in India) and customs officials, conditional upon certifications and validations.
    • Mechanisms exist in the FTAs themselves to solve such matters, but in a situation where entities of different sizes and economic power attempt to resolve such issues, the resolutions may not be acceptable to all parties.
    • Better governance mechanisms are needed.

    Conclusion

    It is expected that a holistic view, keeping in mind the government’s schemes on investment and trade governance, would inform future negotiations as well as a review of existing trade agreements of India.

    Source:

    https://www.financialexpress.com/opinion/make-trade-deals-for-make-in-india/2457320/

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

    Back2Basics: CAROTAR 2020

    • CAROTAR 2020 (“Rules”) aims to add to the existing operational certification procedures which are prescribed under different trade agreements such as Free Trade Agreements (FTAs), Preferential Trade Agreement, Comprehensive Economic Cooperation Agreement and Comprehensive Economic Partnership Agreement.
    • The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020), was notified on 21st August 2020 by the Central Board of Indirect Taxes and Customs.

  • National Land Monetisation Corporation (NLMC)

    The Union Cabinet has approved the creation of the National Land Monetisation Corporation (NLMC), the 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).

     What is the NLMC?

    • The NLMC will be 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.
    • It will fall under the administrative jurisdiction of the Ministry of Finance and will be set up with an initial authorised share capital of ₹5,000 crore and a paid-up capital of ₹150 crore.
    • Apart from monetising underutilised or unused land parcels of Central Public Sector Enterprises (CPSEs), the Corporation will also facilitate the monetisation of assets belonging to PSUs that have ceased operations or are in line for a strategic disinvestment.
    • The surplus land and building assets of such enterprises are expected to be transferred to the NLMC, which will then hold, manage and monetise them.

    What will it do?

    • The setting of the NLMC will speed up the closure process of the CPSEs and smoothen the strategic disinvestment process.
    • It will also enable productive utilisation of these under-utilised assets by setting in motion private sector investments.
    • 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.
    • 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.
    • It will help monetising them in an efficient and professional manner, maximising the scope of value realisation.

    What does monetization mean?

    • 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.
    • 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.
    • There are multiple ways to monetise government assets; in the case of land monetisation of certain spaces like offices, it can be done through a Real Estate Investment Trust (REIT).

    What are REITs?

    Ans: REITs a company that owns and operates a land asset and sometimes, funds income-producing real estate. Assets of the government can also be monetised through the Public Private Partnerships (PPP) model.

    Why need monetization?

    • There are different reasons why the government monetises its assets.
    • One of them is to create new sources of revenue.
    • The economy has already been hit due to the coronavirus pandemic and revenues are essential to fulfil the Modi government’s target of achieving a $5 trillion economy.
    • Monetisation is also done to unlock the potential of unused or underused assets by involving institutional investors or private players.
    • Thirdly, 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.

    How will the NLMC function?

    • The firm will hire professionals from the private sector with a merit based approach, similar to other specialised government companies like the National investment and infrastructure Fund (NIIF) and Invest India.
    • This is because asset monetisation of real estate requires expertise in valuation of property, market research, investment banking, land management, legal diligence and other related skill sets.
    • The NLMC will undertake monetisation as an agency function and is expected to act as a directory of best practices in land monetisation.

    How much land is currently available for monetisation?

    • According to the Economic Survey 2021-2022, as of now, CPSEs have put nearly 3,400 acres of land on the table for potential monetisation.
    • They have referred this land to the Department of Investment and Public Asset Management (DIPAM).
    • As per the survey, monetisation of non-core assets of PSUs such as MTNL, BSNL, BPCL, B&R, BEML, HMT Ltd, Instrumentation Ltd etc are at different stages.

    What are the possible challenges for NLMC?

    (a) 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.
    • For example, the Life Insurance Corporation IPO, which was supposed to raise ₹60,000 crore is now shrouded in uncertainty owing to the Russia-Ukraine crisis making stock markets volatile.
    • If the IPO does not hit the markets by the end of March, the government would be missing its disinvestment targets by a wide margin.

    (b) 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.

    (c) 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.
    • It had invited private parties to run 150 trains of the Indian Railways but when bids were thrown open, nine clusters of trains saw no bidders.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Virtual Digital Assets

    The government has clarified that investors won’t be allowed to offset losses in one crypto asset against gains in another, and that crypto mining infrastructure costs will not be included in the cost of acquisition to be claimed as a deduction.

    How are crypto investments taxed?

    • The Union Budget 2022-23 in February proposed that gains from virtual digital assets or crypto assets would be taxed at 30% irrespective of the individual’s income tax slab.
    • In addition, a 1% tax deducted at source or TDS was introduced on the transfer of such assets.
    • The government did not say if crypto assets are to be treated as currency, commodity, or security, and a clarification is expected in due course via separate legislation.
    • Gifting of crypto assets to non-relatives is also taxed in the hands of the recipient if the value exceeds ₹50,000 in a year.

    How does crypto tax differ from others?

    • If listed shares are sold within 12 months of purchase, short-term capital gains (STCG) tax is applied on the gains, while beyond one year, long-term capital gains (LTCG) tax is levied.
    • STCG is levied at 15.6%, including cess, while LTCG for gains over ₹1 lakh is 10.4%, including cess.
    • There is no provision of long-term or short-term crypto assets, while gains are taxed at a flat rate of 30%.
    • Investors in equities can offset the loss in one stock against another, while they can carry forward both short-term and long-term loss for eight assessment years.
    • This has not been allowed in crypto.

    How will crypto tax impact investors?

    • In a fiscal year, if an investor had made gains in bitcoin and losses in ether, he or she will have to pay tax at 30% on gains in bitcoin.
    • Further, the absence of loss set-off provision would cause a double whammy —paying taxes on gains and no offset of losses.
    • Tax experts believe that in certain cases, the effective rate of taxation can even cross 100% on crypto investments.

    How will miners be affected?

    • The government has clarified that mining infrastructure will also not be eligible to be deducted as the cost of acquisition.
    • So far, it was understood by some that crypto generated during the ‘mining’ process is taxable only on the profits, after accounting for mining expenses such as electricity.
    • But with the latest explanation, a 30% tax plus cess and surcharges will be levied on such transactions.
    • Experts believe that crypto mining operations would become non-profitable under the current announcement.

    Will crypto tax trigger an investor exodus?

    • The crypto industry has been unequivocal in criticizing the tax proposals.
    • Thanks to the tearing rally in crypto assets over the past two years, it is estimated by some that more than 20 million Indian investors have poured more than ₹1 trillion into cryptos.
    • However, the industry leaders fear that the lack of provision to offset losses will drive away users from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market, which would defeat the purpose of regulation.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Textile Industry in India

    Context

    South Asia became a major player in the global textiles and clothing market with the onset of the third wave of global production.

    Textile industry in Bangladesh

    • Bangladesh overtook India in exports in the past decade as Indian labour costs resulted in products becoming 20% more expensive.
    • Bangladesh joined the league in the 1980s, owing to the outbreak of the civil war in Sri Lanka.
    • Lower production costs and free trade agreements with western buyers are what favour Bangladesh, which falls third in the line as a global exporter.
    • Bangladesh has been ahead of time in adopting technology.
    • Bangladesh also concentrates on cotton products, specialising in the low-value and mid-market price segment.

    Where does India stand?

    • The progress of India and Pakistan in readymade garments is recent when compared to their established presence in textiles.
    • India holds a 4% share of the U.S.$840 billion global textile and apparel market, and is in fifth position.
    • India has been successful in developing backward links, with the aid of the Technical Upgradation Fund Scheme (TUFS), in the cotton and technical textiles industry.
    • However, India is yet to move into man-made fibres as factories still operate in a seasonal fashion.

    Challenges ahead

    1] Fourth Industrial revolution and robotic automation

    • The Fourth Industrial Revolution (4IR) has been shifting focus from production machinery to integrating technology in the entire production life cycle.
    • The production cycle incorporates all digital information and automation including robotics, artificial intelligence (AI), virtual reality, 3D printing, etc.
    • Robotic automation exemplifies production efficiency, especially in areas such as cutting and colour accuracy.
    • The Asian Development Bank anticipates the challenges of job losses and disruption, inequality and political instability, concentration of market power by global giants and more vulnerability to cyberattacks.
    •  With a 7% unemployment rate, India faces the challenge of job creation in the wake of increased automation.
    • The World Bank expects this trend to accelerate in the post-COVID-19 market.
    • The 4IR may result in unemployment or poor employment generation, primarily affecting a low skill workforce.

    2] Sustainability challenge

    • Sustainability is also an important consideration for foreign buyers.
    • Bangladesh’s readymade garments initiated ‘green manufacturing’ practices to help conserve energy, water, and resources.
    • Textile and apparel effluents account for 17%-20% of all water pollution.
    •  The Indian government is committed to promoting sustainability through project sustainable resolution.

    3] Labour issues

    • Access to affordable labour continues to be an advantage for south Asia.
    •  In addition, a country such as India with a very high number of scientists and engineers could lead, as is evident in the areas of drones, AI and blockchain.
    • India’s potential lies in its resources, infrastructure, technology, demographic dividend and policy framework.
    • The creation of a Centre for the Fourth Industrial Revolution is indicative of India’s intent.

    Way forward

    • Digitalisation and automation in areas such as design, prototyping, and production are key in order to stay abreast, and in controlling production quality and timely delivery.
    • Sustainable practices such as regenerative organic farming (that focuses on soil health, animal welfare, and social fairness), sustainable manufacturing energy (renewable sources of energy are used) and circularity are being adopted.
    • Tax exemptions or reductions in imported technology, accessibility to financial incentives, maintaining political stability and establishing good trade relations are some of the fundamental forms of support the industry needs from governments.
    • The U.S. trade war on China owing to human rights violations along with its economic bottlenecks, opens doors for India and Pakistan as they have strong production bases.
    • Similar to China, India has a big supply — from raw material to garments.
    • Bangladesh has also risen as a top exporter in a cost competitive global market.
    • India’s proposed investments of US$1.4 billion and the establishment of all-in-one textile parks are expected to increase employment and ease of trade.
    • India extended tax rebates in apparel export till 2024, with the twin goals of competitiveness and policy stability.
    • Labour law reforms, additional incentives, income tax relaxations, duty reductions for man-made fibre, etc. are other notable moves.
    •  Newer approaches in the areas of compliance, transparency, occupational safety, sustainable production, etc. are inevitable changes in store for South Asia to sustain and grow business.
    • Finally, there is a need for governments’ proactive support in infrastructure, capital, liquidity and incentivisation.

    Conclusion

    Ensuring government support for financial incentives, upgrading technologies and reskilling labour are key challenges.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Indigenisation in defence technologies, manufacturing will ensure India’s strategic autonomy

    Context

    Given its successive abstentions during votes on Ukraine in the UN Security Council and elsewhere, New Delhi has attracted criticism and even reproach from many quarters. While India’s abstentions may be hard to justify on moral grounds, they are certainly rooted in “realpolitik”.

    Reasons for India’s stance

    • There is irrefutable logic in the argument that safeguarding the source of 60-70 per cent of its military hardware constitutes a prime national interest for India.
    • Any interruption in the supply of Russian arms or spares could have a devastating impact on our defence posture vis-à-vis the China-Pak axis.
    • Even after diversification of sources, India remains trapped in the Russian bear’s jaws, jeopardising the credibility of its “strategic autonomy”. 

    Implications of India’s position

    • The stance adopted by India has placed it amongst a minority of nations, alongside China and Pakistan.
    • Seen widely as pro-Russian, this posture is likely to affect India’s international standing and bears reflection.

    Suggestion

    • The answers to India’s agonising dilemma lie in two drastic imperatives, which must receive the closest attention of decision-makers. They are:
    • The “de-Russification of the armed forces” and the genuine “indigenisation of India’s defence technological and industrial base (DTIB)”.
    • Russia’s military-industrial complex, in oligarch hands, has been struggling against inefficiency, poor quality control and deficient customer support.
    •  It is time to initiate a process of progressive “de-Russification” of Indian armed forces; not to switch sources, but of becoming self-reliant.
    • It may be uplifting to see battle-tanks, warships and jet-fighters held up as examples of self-reliance, but what is never mentioned is that vital sub-systems like engines, guns, missiles, radars, fire-control computers, gear-boxes and transmission are either imported or assembled under foreign licences.
    • Atmanirbhart requires selective identification of vital military technologies in which we are deficient and demands the initiation of well-funded, time-bound, mission-mode projects to develop (or acquire) the “know-how” as well as “know-why” of these technologies.

    Conclusion

    Having failed for 75 years after independence to attain a degree of self-reliance in military hardware that would have undergirded our “strategic autonomy,” it is time for India to zero in on the reasons why we have failed, where peer-nations like China, South Korea, Israel, Taiwan and even Singapore have succeeded spectacularly.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • What is the NPPA’s role in fixing drug prices?

    Consumers may have to pay more for medicines and medical devices if the National Pharmaceutical Pricing Authority (NPPA) allows a price hike of over 10% in the drugs and devices listed under the National List of Essential Medicines (NLEM), this coming month.

    Who regulates Drugs prices?

    • The NPPA was set up in 1997 to fix/revise prices of controlled bulk drugs and formulations and to enforce price and availability of the medicines in the country, under the Drugs (Prices Control) Order, 1995-2013.
    • Its mandate is:
    1. To implement and enforce the provisions of the DPCO in accordance with the powers delegated to it
    2. To deal with all legal matters arising out of the decisions of the NPPA
    3. To monitor the availability of drugs, identify shortages and to take remedial steps
    • The NPPA is also mandated to collect/maintain data on production, exports and imports, market share of individual companies, profitability of companies etc., for bulk drugs and formulations and undertake and/ or sponsor relevant studies in respect of pricing of drugs/ pharmaceuticals.

    How does the pricing mechanism work?

    • Prices of Scheduled Drugs are allowed an increase each year by the drug regulator in line with the Wholesale Price Index (WPI) and the annual change is controlled and rarely crosses 5%.
    • But the pharmaceutical players pointed out that over the past few years, input costs have flared up.
    • The hike has been a long-standing demand by the pharma industry lobby.
    • All medicines under the NLEM are under price regulation.

    Do you know?

    As per the Drugs (Prices) Control Order 2013, scheduled drugs, about 15% of the pharma market, are allowed an increase by the government as per the WPI while the rest 85% are allowed an automatic increase of 10% every year.

    How are the prices determined?

    • The ceiling price of a scheduled drug is determined by first working out the simple average of price to retailer in respect of all branded and generic versions of that particular drug formulation.
    • It should have a market share of more than or equal to 1%, and then adding a notional retailer margin of 16% to it.
    • The ceiling price fixed/revised by the NPPA is notified in the Gazette of India (Extraordinary) from time to time.

    When are the prices revised?

    • Prices are revised when there is a rise in the price of bulk drugs, raw materials, cost of transport, freight rates, utilities like fuel, power, diesel, and changes in taxes and duties.
    • The cost rises for imported medicines with escalation in insurance and freight prices, and depreciation of the rupee.
    • The annual hike in the prices of drugs listed in the NLEM is based on the WPI.
    • The NLEM lists drugs used to treat fever, infection, heart disease, hypertension, anaemia etc and includes commonly used medicines like paracetamol, azithromycin etc.

    Why are inputs costs high?

    • One of the challenges is that 60%-70% of the country’s medicine needs are dependent on China.
    • WPI is dependent on price rise in a basket of a range of goods that are not directly linked with the items that go into the cost of medicines.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Why ‘de-dollarisation’ is imminent

    Context

    The war in Ukraine and the subsequent economic sanctions will trigger central banks to go back to their drawing boards to reassess their dependency on the greenback.

    How sanctions on Russia could lead to de-dollarisation

    • The imposition of sanctions and the exclusion from SWIFT by the US could trigger a faster de-dollarisation. 
    • The “de-dollarisation” by several central banks is imminent, driven by the desire to insulate them from geopolitical risks, where the status of the US dollar as a reserve currency can be used as an offensive weapon.
    • This can also trigger a shift in the overall global forex market framework.
    • The US dollar, which is the world’s reserve currency, can see a steady fall in the current context as leading central banks may look to diversify their reserves away from it to other assets or currencies like the Euro, Renminbi or gold.

    How China and Russia are responding?

    • Efforts are already underway for the possible introduction of a new Russia-China payment system, bypassing SWIFT and combining the Russian SPFS (System for Transfer of Financial Messages) with the Chinese CIPS (Cross-Border Interbank Payment System).
    • Russia had started its three-pronged efforts towards de-dollarisation in 2014 when sanctions were imposed on it for the annexation of Crimea.
    • However, these steps haven’t sufficed to effectively shield “fortress Russia”.
    • China, on the other hand, aims to use trading platforms and its digital currency to promote de-dollarisation.
    • China has established RMB trading centres in Hong Kong, Singapore and Europe.
    • In 2021, the People’s Bank of China submitted a “Global Sovereign Digital Currency Governance” proposal at the Bank for International Settlements to influence global financial rules via its digital currency, the e-Yuan.
    • The IMF has already added Yuan to its SDR (Special Drawing Rights) basket in 2016.
    • In 2017, the European Central Bank exchanged EUR 500 million worth of its forex reserves into Yuan-denominated securities.
    • However, the lack of full RMB convertibility will hinder China’s de-dollarisation ambition.

    Why the dominance of the dollar continues and how the US benefits from its dominance

    • Currently, about 60 per cent of foreign exchange reserves of central banks and about 70 per cent of global trade is conducted using USD.
    • The status of the dollar was enhanced by the collapse of the Bretton Woods system, which essentially eliminated other developed market currencies from competing with the USD.
    • The association of the USD as a “safe-haven” asset also has a psychological angle to it and like old habits, people continue to view the currency as a relatively risk-free asset.
    • This status of the reserve currency allows the US government to refinance its debt at low costs in addition to providing foreign policy leverage.
    •  Additionally, sudden dumping of dollar assets by adversarial central banks will also pose balance sheet risks to them as it will erode the value of their overall dollar-denominated holdings.

    Consider the question “Examine the factors that explain the dominance of the dollar in the global economy? How such dominance benefits the US?”

    Conclusion

    While the frequent use of the US dollar as a potential weapon for achieving foreign policy objectives will no doubt accelerate the process of de-dollarisation, there is still a long road ahead.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

    Back2Basics: What is Special Drawing Rights?

    • The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries.
    • The SDR is not a currency.
    • It is a potential claim on the freely usable currencies of IMF members.
    • As such, SDRs can provide a country with liquidity.
    • A basket of currencies defines the SDR: the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound.