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

Civilsdaily

Login

GS Paper: Indian Economy

  • [pib] Digital Payment Solution: e-RUPI

    The Prime Minister has launched e-RUPI, a person and purpose-specific digital payment solution.

    What is e-RUPI?

    • e-RUPI is a cashless and contactless instrument for digital payment.
    • It is a QR code or SMS string-based e-Voucher, which is delivered to the mobile of the beneficiaries.
    • The users of this seamless one-time payment mechanism will be able to redeem the voucher without a card, digital payments app, or internet banking access, at the service provider.
    • It has been developed by the National Payments Corporation of India on its UPI platform, in collaboration with the Department of Financial Services, Ministry of Health & Family Welfare, and National Health Authority.

    How does it work?

    • e-RUPI connects the sponsors of the services with the beneficiaries and service providers in a digital manner without any physical interface.
    • It also ensures that the payment to the service provider is made only after the transaction is completed.
    • Being pre-paid in nature, it assures timely payment to the service provider without the involvement of any intermediary.

    Benefits offered

    • It is expected to be a revolutionary initiative in the direction of ensuring a leak-proof delivery of welfare services.
    • Even the private sector can leverage these digital vouchers as part of their employee welfare and corporate social responsibility programs.

    Answer this PYQ in the comment box:

    Q.Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?

    (a) Mobile wallets will not be necessary for online payments.

    (b) Digital currency will totally replace physical currency in about two decades.

    (c) FDI inflows will drastically increase.

    (d) Direct transfer of subsidies to poor people will become very effective

  • First group insolvency proceeding points to larger weakness in IBC

    Context

    National Company Law Appellate Tribunal (NCLAT) stayed the approval granted by the Mumbai bench of the National Company Law Tribunal (NCLT) to the resolution plan for the Videocon Group.

    Concerns with resolution plan

    • Resolution plan submitted by Twinstar Technologies, provided for payment of Rs 2,962 crore — a mere 4.15 per cent of Videocon’s total admitted debt of Rs 64,838 crore.
    • Payment of debt not in fair and equitable manner:  Under the IBC (Section 30(2)(b)), the resolution plan must provide for payment of debts amongst creditors in a “fair and equitable” manner.
    • However, in the plan submitted by Twinstar, unsecured assenting financial creditors and operational creditors are getting a paltry 0.62 per cent and 0.72 per cent of their admitted dues.
    • Even the secured assenting and dissenting financial creditors had to settle for only 4.9 per cent and 4.56 per cent of their respective dues.
    • Confidentiality obligation concerns: Twinstar’s bid of Rs 2,962 crore is close to the liquidation value of the Videocon Group estimated at Rs 2,568 crore, thereby raising legitimate suspicion and concern over the confidentiality of the resolution process.
    • The I&B Regulations, 2016 state that the resolution professional must maintain the confidentiality of the fair market value and liquidation value of the corporate debtor and can only disclose the same to the CoC members after the resolutions plan have been submitted.
    • Time delay: Status-quo ante has been restored until the next date of hearing by which time more than three years would have passed since the Videocon group was admitted into insolvency proceedings.
    • This is way beyond the statutory timeline of 330 days.

    Confidentiality rules need to be revised

    • The CoC members must, on receipt of the information, issue an undertaking of confidentiality.
    • But no such obligation falls on the resolution professional.
    • Further, Section 29(2) of the code provides that the resolution professional must disclose all “relevant information” to the resolution applicant and it is for the resolution applicant to ensure compliance with confidentiality obligations.
    • Again, there is no such duty imposed on the resolution professional.
    • Even under Section 25 of the code, titled “Duties of resolution professional”, the specific duty to maintain confidentiality of sensitive information is absent.
    • Clearly, the current regime does not have much deterrence value so as to ensure solemn adherence to confidentiality.

    Conclusion

    Videocon was one of the first test cases to examine the prospects of insolvency jurisprudence in India and the first one, for group insolvency proceedings.  However, almost four years and a 95 per cent haircut later, the call for an immediate course correction couldn’t be louder.

    Back2Basics: Operational creditor and financial creditors

    • When a corporate defaulter is brought under the resolution process (Corporate Insolvency Resolution Process or CIRP), there can be two types of creditors to whom the corporate should give back money –
    • (1) the entities who gave loans or funds to the corporate.
    • (2) the entities from whom the corporate bought inputs and other services.
    • The financial creditors are basically entities (lenders like banks) that have provided funds to the corporate.
    • Their relationship with the entity is a pure financial contract, such as a loan or debt security.
    • On the other hand, business and other entities that have provided inputs and other materials and services and to whom the defaulted corporate owes a debt are called as operational creditors.
    • Both have claims on the defaulted corporate or the defaulted corporate owe payments to both these categories.
    • Rights for these categories under the resolution process are also different.
    • The IBC gives a clear preference to the claims of the financial creditors over the operational creditors through several procedures.

    Haircut

    • A haircut is the difference between the loan amount and the actual value of the asset used as collateral.
    • It reflects the lender’s perception of the risk of fall in the value of assets.
    • But in the context of loan recoveries, it is the difference between the actual dues from a borrower and the amount he settles with the bank.

  • Unlocking recovery

    Context

    Many developed countries are poised for strong growth. This will compel their respective central banks to begin normalizing the extremely loose monetary policies. This will require a reorientation of India’s stimulus strategy.

    Global growth momentum

    • On the global front, the growth momentum has been strong, particularly in the US and China, although recent data suggest this has peaked or is even stalling.
    • Post the perceived hawkishness of the last US Federal Reserve policy meeting, the traded interest rate of the benchmark US 10-year treasury bond fell to below 1.3 percent.
    • The falling rate reflects disquiet about the durability of the recovery once the fiscal stimulus starts waning.
    • China recently announced a 0.5 percent cut in the required reserves ratio for banks.
    • Europe’s recovery had begun to inch up, but members of the European Central Bank have begun to push back on market expectations of early tapering.
    • However, some smaller global central banks have started normalizing their respective Quantitative Easing programs.

    Growth momentum in India

    • The encouraging aspect of the recovery is the resilience of many mid-and large-turnover companies in the face of the debilitating public health crisis
    • In India, there are signs that the recovery momentum began to strengthen from mid-June, and of demand accelerating, despite capacity utilization in many industries below thresholds needed for the next round of private investments.
    • In line with the market consensus, we think that 2021-22 growth is likely to be in the 9-10 percent range.
    • Tax collections, another indicator of activity, even if a bit skewed, support this view.
    • A revival of retail consumer demand is critical for sustaining the recovery. Reports from industry associations suggest a somewhat mixed picture.
    • Demand emanating from rural geographies is important for sustaining recovery.
    • Demand for work under MGNREGA suggests continuing stress.
    • Monsoons will be a big contributor.
    • The sowing of Kharif crops stalled in late June but is predicted to pick up again in mid-July.
    • Renewed government intervention is required.

    Factors deciding the trajectory of recovery

    • Inflation: Rising inflation could force a monetary policy normalization faster than presently anticipated.
    • Global recovery: Effects global central banks’ policy tightening will only add to the difficulty of balancing a policy-induced increase in interest rates, moderating financial markets volatility, and maintaining growth incentives.
    • Access to credit: Access to credit remains a crucial input in the recovery matrix, particularly for small and micro-enterprises.
    • The Union government’s Emergency Credit Line Guarantee Scheme (ECLGS) has reportedly been very effective in stabilizing the solvency (and cash flows) of micro and small businesses.

    Way forward

    • Expansion of subvention scheme: The expansion of subvention (ECLGS) is probably the most effective template to incentivize credit flows, leveraging on the government’s balance sheet to take on the first loss risks.
    • At the same time, capex proposals of the Centre and states should gradually draw in private sector capex.
    • Policy intervention to create a level field: Corporate health has improved, with lower debt on balance sheets.
    • Adoption of technology is widespread; this will boost productivity and competitiveness.
    • But these factors reinforce trends in consolidation and market power.
    • It will require policy interventions to create a more level playing field for smaller companies, which is crucial for job creation.

    Conclusion

    Policy support will thus need to adapt from the “revive” to the “thrive” phase, to place India on a sustained 7 percent-plus growth path.

  • Revival of Construction sector

    Context

    The latest estimates of the fourth quarter of financial year 2020-21 (January-March) brought some relief, for policymakers.

    Interpreting the construction sector GVA increase

    • The construction sector showed a 15 per cent increase in gross value added (GVA) in the last quarter, which is nearly double the growth experienced by the sector in the previous year (7.7 per cent).
    • Sign of better times: The buoyant growth of this sector has been hailed by policymakers not just as a sign of better times to come,
    • Addressing distress: Growth in the construction sector is also considered as the capacity of the economy to address the distress that households have faced in the past year.
    • Addressing needs of workforce: The Chief Economic Advisor pointed to the high growth rates in construction possibly to indicate that growth would address the needs of the beleaguered workforce.
    • The Union budget 2021 has also allocated a considerable sum towards infrastructure and construction in the hopes of the sector playing a catalysing role.

    Issues with relying on the growth of high-employment sector

    • No strong correlation: While GVA and/or GDP are considered as indicators of economic health, it has been argued in detail how it may not be prudent to rely on these alone as measures of economic welfare.
    • In particular, mere growth in a sector may not necessarily translate into benefits for its workers.
    • In the last quarter of 2019-2020, when construction GVA grew at nearly 8 per cent, employment in the same sector grew by 3 per cent based on our estimates from CMIE-CPHS.
    • Fallback employment option: The fact that employment grew in this sector even during a crisis year is largely because of the fact that the construction sector emerged as a fallback employment option for many displaced workers.
    • During “normal” times, the sector typically employs only about 10-15 per cent of India’s total workforce.
    • Even if this sector were to expand in line with its GVA growth, it will not be able to provide employment beyond a certain level.
    • Employment alone is not enough: Moreover, employment alone is not enough.
    • Earnings for an average daily wage worker in the sector have actually declined this year.
    • Again, the overall economic growth in GVA in the sector has not been passed on to the workers.

    Way forward

    • Any relief effort that relies solely on economic growth as a means to uplift workers will be sorely inadequate as we see from the experience of workers in construction.
    • The need of the hour is to go beyond relying on sectoral growth as a means of delivering relief to workers.
    • Direct transfers of cash and food are also needed, as is livelihood support through employment guarantee programmes.

    Conclusion

    While boosting growth of high-employment sectors is one strategy to adopt, this has its limitations. The capacity of a sector is limited in terms of the number of workers that it can absorb, and the extent to which growth can benefit workers.

    Back2Basics: What is GVA?

    • Gross value added (GVA) is an economic productivity metric that measures the contribution of a corporate subsidiary, company, or municipality to an economy, producer, sector, or region.
    • GVA is essentially a measure of the “net” value of output — deducting the cost of any input that went into its production from its total value.
    • GVA thus adjusts gross domestic product (GDP) by the impact of subsidies and taxes (tariffs) on products.

  • Implications of EU’s new GHG emissions law for Indian industry

    Context

    On July 14, the European Union introduced new legislation, Fit for 55, to cut its GHG emissions by 55 per cent by 2030 and to net-zero by 2050.

    Implications of Fit for 55

    • Legal backing: It turns the EU’s announcement into law, protecting it from the winds of political change.
    • Opportunity for India: It opens new markets for Indian industry, for example for electric vehicles.
    • CBAM: However, it also introduces a potentially adverse policy called the carbon border adjustment mechanism (CBAM).
    • CBAM is meant to discourage consumers from buying carbon-intensive products and encourage producers to invest in cleaner technologies.

    What is CBAM?

    • The EU has had a carbon emission trading system since 2005.
    • With Fit for 55, the EU’s carbon price is likely to go up.
    • High carbon price will make the EU’s domestic products more expensive than imports from countries that do not have such rules.
    • The new CBAM is meant to level the playing field between domestic and imported products.
    • CBAM will require foreign producers to pay for the carbon emitted while manufacturing their products.
    • The adjustment will be applied to energy-intensive products that are widely traded by the EU, such as iron and steel, aluminium, cement, fertiliser, and electricity.

    Why CBAM is a cause for concern for India?

    • India is Europe’s third-largest trading partner, and it does not have its own carbon tax or cap.
    • So, CBAM should be a cause for concern for it.
    • A UNCTAD study predicts that India will lose $1-1.7 billion in exports of energy-intensive products such as steel and aluminium.
    • India’s goods trade with the EU was $74 billion in 2020.

    Way forward for Indian Industry

    • Clean technology partnerships: Indian Industry should enter clean technology partnerships with European industry.
    • Invest in renewables:  Indian companies should invest in more renewable electricity and energy efficiency.
    • Incentivise low-carbon choices: They can adopt science-based targets for emission reduction and internal carbon pricing to incentivise low-carbon choices.
    • Schemes and Government financing: The government can extend the perform-achieve-trade scheme to more industries and provide finance to MSMEs to upgrade to clean technologies.
    • WRI India’s analysis shows that carbon dioxide emissions from the iron and steel industry can be reduced from 900 million tonnes to 500 million tonnes in 2035 through greater electrification, green hydrogen, energy efficiency, and material efficiency.
    • Diversify export: India can try to diversify its exports to other markets and products.

    Consider the question “What is carbon border adjustment mechanism (CBAM) introduced by the EU? What are its implications for Indian industry?” 

    Conclusion

    At present, the CBAM may seem obstructionist. But over the long-term, it can provide regulatory certainty to industry by harmonising carbon prices, and Indian industry can position itself as a strong player in the trade landscape of the future.

    Back2Basics: UNCTAD

    • UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964.
    • Its headquarters are located in Geneva, Switzerland, and have offices in New York and Addis Ababa.
    • UNCTAD is part of the UN Secretariat.
    • IT report to the UN General Assembly and the Economic and Social Council but have own membership, leadership, and budget.
    • It is also part of the United Nations Development Group.

  • India’s FAANG moment has arrived

    Context

    In the US, the Big Tech FAANG five are Facebook, Apple, Amazon, Netflix and Google (now Alphabet).  Today, in India, Zomato’s stock market debut is a big occasion for India that could pave the path for other online successes.

    Significance for economy

    • It is the first among a host of domestic unicorns to have taken the IPO road, heralding a watershed moment.
    • Boost for startups: It is also also a big leap for our country as a whole, which today boasts of the third largest start-up ecosystem in the world.
    • Creation of online ecosystem: The response to Zomato’s initial public offer (IPO) gave us interesting insights into the robustness of the online economy in a pandemic-stricken world.
    • Help creation of tech-giants: It could alter the composition as well as perception of markets, giving Indian investors a feel of new-generation, tech-heavy, assets-light and agile entrepreneurial growth stories, woven around the consumer internet ecosystem in India.
    • Attracting FDI: With global liquidity at unprecedented levels and tech being the toast of the season, we could be looking at FDI inflows in unforeseen proportion in days to come.
    • The ascent of new-age enterprises like Zomato and Paytm on the Stock Market, followed by likes of Oyo, Ola, Swiggy, Byju’s and even Flipkart could signal the emergence of India’s own FAANG family.

    What sets the tech startups apart?

    • Their reliance on big data and leveraging of ever-evolving technology, while sustaining a two-way connection with clients set them apart.
    • The ‘stickiness’ and the ‘connect’ built over the years through carefully fabricated social layers puts them in the league of giant social media influencers.
    • During the last few decades, two distinctive traits that have the potential to push the boundaries of limitations are the creation of a large talent pool and India’s prowess in software and data (including AI/ML) technology, both on a global scale.

    Conclusion

    As we celebrate 30 years of economic reforms, today’s debut, at least for the markets and the economy, may well be called India’s re-tryst with destiny.

  • Challenges in withdrawing stimulus measures

    Context

    Economic-policy discussions increasingly revolve around the question of when and how quickly central banks should pull back the uber-stimulus measures implemented last year in response to the pandemic.

    Why withdrawal is challenging?

    • Uncertainties: Both parts of the question (when and how) call for finely balanced judgment to account for uncertainties that are in play.
    • Policy changes by major central banks can have far-reaching implications for economic and financial well-being, affecting not just those directly involved but also the many nations.
    • To answer the question, an assessment of three current issues is required:
    • The labor market.
    • The surge in inflation.
    • The risk of not being able to recover quickly in the event of a policy mistake.

    Let’s look into these three issues

    1) Labour market puzzle

    • Despite massive demand, the labor market is unable to match unemployed workers to jobs.
    • The situation is particularly stark in the US.
    • Job data for April show that there are a record number of job openings in the US—more than nine million—labor-force participation remains stubbornly low, and unemployment high, compared to pre-pandemic levels.
    • The labor market’s persistent malfunctioning—particularly employers’ struggle to find employees—is likely to lead to higher wage growth, a possibility that fuels concern about the second issue-inflation.

    2) Inflation: Is it transitory or long-lasting?

    • There is a view that the current uptick in inflation will sharply reverse itself.
    • As the year progresses, it is expected that the base effect will wash out together with the supply and demand mismatches.
    • However, there is a possibility of supply bottlenecks, changes in supply chains, and lasting inventory management challenges.

    3) Policy challenges: To act or not to act

    • Policymakers must be mindful of the risks associated with any given course of action—including inaction.
    • In the face of such uncertainty, it is wise to ask not just what could go wrong but also what the consequences of a policy mistake would be.
    • Under the current conditions, a wrong move could have far-reaching, lasting effects.
    • Those favoring a continuation of loose monetary policies argue that central bankers still have tools to overcome inflation should it persist.
    • But as the opponents are quick to point out, those tools have become increasingly ineffective and difficult to calibrate.
    • The risk of inaction (or inertia) in this case may be larger than that of acting early.

    Options with systemically important central banks

    • In the case of the US, economic growth is buoyant, fiscal policy is also extremely expansionary, and businesses and households alike have significant accumulated savings that they will now be spending down.
    • The conditions are now ripe for the Fed to start reducing—gradually and carefully—its bond-buying program from its current rate of $120 billion per month.
    • The European Central Bank, however, is in a different position.
    • While eurozone growth is picking up, the level of financial support is not as strong as in the US, and the private-sector recovery is not as advanced.
    • The hardest case to call in the UK.
    • With growth, fiscal support, and the private sector’s prospects more finely balanced.
    • Other central bankers around the world also have an important role to play.
    • Central bankers elsewhere should be running their own scenario analyses and formulating appropriate response plans.

    Conclusion

    There is nothing wrong with hoping that three systemically important central banks will get to their destination smoothly. But the journey is far from over, and the risk of someone slipping is not negligible.

    Back2Basics: Labour force participation rate

    • The labor force participation rate is a measure of an economy’s active workforce.
    • The formula for the number is the sum of all workers who are employed or actively seeking employment divided by the total noninstitutionalized, civilian working-age population.
    • Used in conjunction with the unemployment numbers, it offers some perspective into the state of the economy.

    Source:

    https://www.financialexpress.com/opinion/withdrawal-symptoms-central-banking-fast-and-slow/2295940/

  • RBI working towards ‘phased introduction’ of Digital Rupee

    The Reserve Bank of India (RBI) is working toward a “phased implementation strategy” of a Central Bank Digital Currency (CBDC).

    Do you know?

    China’s digital RMB was the first digital currency to be issued by a major economy.

    Central Bank Digital Currency (CBDC)

    • The phrase CBDC has been used to refer to various proposals involving digital currency issued by a central bank.
    • They are also called digital fiat currencies or digital base money.
    • The present concept of CBDCs was directly inspired by Bitcoin, but a CBDC is different from virtual currency and cryptocurrency.
    • Cryptocurrencies are not issued by a state and lack the legal tender status declared by the government.

    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.

    Features of CBDC

    • High-security instrument: CBDC is a high-security digital instrument; like paper banknotes, it is a means of payment, a unit of account, and a store of value.
    • Uniquely identifiable: And like paper currency, each unit is uniquely identifiable to prevent counterfeit.
    • Liability of central bank: It is a liability of the central bank just as physical currency is.
    • Transferability: It’s a digital bearer instrument that can be stored, transferred, and transmitted by all kinds of digital payment systems and services.

    Various benefits offered

    • It is efficient than printing notes (cost of printing, transporting, and storing paper currency)
    • It reduces the risk of transactions
    • It makes tax collection transparent
    • Prevents money laundering

  • Open Network for Digital Commerce could disrupt India’s e-commerce space

    Context

    The Department for Promotion of Industry and Internal Trade (DPIIT) recently issued orders appointing an advisory committee for its Open Network for Digital Commerce (ONDC) project.

    About ONDC project

    • The Open Network for Digital Commerce (ONDC) project aims to make e-commerce processes open-source.
    • In simple terms, it aims at creating a platform that can be utilised by all online retailers.
    • This is another effort by the government to facilitate the creation of shared digital infrastructure, as it has previously done for identity (Aadhaar) and payments (Unified Payments Interface).
    • It will digitise e-commerce value chains, standardise operations, promote inclusion of suppliers, and derive efficiencies in logistics.

    What are its advantages?

    • Level playing field: When done well, this approach can level the playing field and create value for users. 
    • Curb monopoly: The market is dominated by a few players who are facing investigations for unfair trade practices in many countries.
    • Prevent market failure: The sector is characterised by many small players who individually do not have the muscle to have an equitable bargain with e-commerce companies.
    • Economists call this a “market failure”, and it presents a legitimate case for intervention.

    The three layers of an open digital ecosystem and their conceptual framework for adoption and safeguards

    1) Tech layer

    • The “tech layer” should be designed for minimalism and decentralisation.
    • The government should restrict its role to facilitating standards and protocols that provide open access, and in getting them adopted organically.
    • Building an entire tech platform should happen only if a standards-based approach doesn’t suffice.
    • If built, the platform should be built on “privacy by design” principles.
    • It should collect minimal amounts of data (especially personal data) and store it in a decentralised manner.
    • Tools like blockchain could be used to build technical safeguards that cannot be overridden without active consent.

    2) Governance layer

    • Avoid excessive government intervention: The “governance layer” around this should allay business fears of excessive state intervention in e-commerce.
    • Legal provision: Any deployment of standards or tech should be accompanied by law or regulation that lays out the scope of the project.
    • Independent regulator for personal data: If collection of any personal data is required, passing the data protection bill and creating an independent regulator should be a precondition.
    • Handling by independent society: To assure the industry of fairness, the government could hand over the stewardship of the standards or platform to an independent society or non-profit.

    3) Community layer

    • A community layer can foster a truly inclusive and participatory process.
    • This may be achieved by making civil society and the public active contributors and seeking wide feedback on drafts of the proposal.
    • Once the framework is implemented, ensuring quick and time-bound redressal of grievances will help build trust in the system.

    Concerns with government creating shared digital infrastructure

    • This approach also comes with risks and we should tread with caution.
    • In general, governments should intervene in markets only when there is a clearly identifiable market failure or massive societal benefits from creating shared infrastructure.

    Way forward

    • The government’s championing of open-source technology for digital commerce is commendable.
    • It should also push the envelope on the other principles of the open-source movement — transparency, collaboration, release early and often, inclusive meritocracy, and community.
    • Even if we do all things right, an infrastructure-led approach may not be sufficient.
    • Therefore, we need to supplement infrastructure with tightly-tailored regulation.
    • We need to explore the concept of interoperability, that is, mandating that private digital platforms like e-commerce firms enable their users and suppliers to solicit business on other platforms.
    • To drive the adoption of an open e-commerce platform in a sector with entrenched incumbents we need to create “reference applications”, and financial or non-financial incentives.
    • Useful learnings can be drawn from the adoption of UPI: The government supported the rollout of BHIM as a reference app, and offered incentives.

    Consider the question “How the Open Network for Digital Commerce project can help deal with the issues with the e-commerce sector? Suggest the approach the project should adopt to make it a success.”

    Conclusion

    It is timely that India is exploring innovative ways to bridge the gaps in e-commerce markets. But the boldness of this vision must be matched by the thoughtfulness of the approach.

    Back2Basics: What is ‘Privacy by Design?

    • Privacy by design is a concept that integrates privacy into the creation and operation of new devices, IT systems, networked infrastructure, and even corporate policies.
    • Developing and integrating privacy solutions in the early phases of a project identifies any potential problems at an early stage to prevent them in the long run.

  • For Cairns dispute, international arbitration is not the way forward

    Context

    The recent move by Cairn to seize India’s sovereign assets in order to enforce its arbitration award has brought into focus the dispute and the related issues.

    Utility of Bilateral Investment Treaties (BIT)

    • After the World Wars, as more countries gained sovereignty, they tended to look at foreign investments as a form of neo-colonialism.
    • Bilateral investment treaties became the primary tool to forge relationships between developed and developing countries.
    • The BITs help to adopt standards for prompt, adequate and effective compensation in case of expropriation.
    • With the advent of globalisation, BITs became the means for foreign investment in developing countries.
    • Although the impact of investment agreements on foreign investments remains highly contextualised and inconclusive, these came to govern international investment relations.
    • The BITs retained the old-world construct that allowed international arbitration.
    • However, many developing countries view arbitration of tax matters as a breach of their sovereign right to tax.

    The Cairn Energy case

    • In 2012, explanations were added to the Income Tax Act 1961 — these provisions were deemed as having a retrospective effect.
    • This was more in response to the Supreme Court’s decision in the Vodafone case which denied the income tax department’s assertion of tax claims arising from the offshore transfer of interest that substantially derived their value from India.
    • The 2012 explanations to the IT Act indeed sought to fix tax avoidance. 
    • Looking into the details of the Cairn case, one can see the series of reorganisations that tip-toed around tax laws of multiple jurisdictions, resulting in the non-payment of tax. 
    • Taxing offshore indirect transfers — a structuring device to gain tax advantage from the indirect sale of assets — is not unique to India (336 tax treaties contain such an article).
    • It is also possible to see that the underlying assets of the subsidiaries were immovable assets in India.
    • The UK-India tax treaty allowed for taxation of capital gains as per Indian law.
    • India challenged the admissibility of the case before the arbitration tribunal.
    • However, the case rests on a distinction between tax and tax-related investment.
    • Surely, all investments have tax implications and the acceptance of such a distinction could create problems even where tax is explicitly carved out from the bilateral investment treaties.
    • The option of arbitration upon an unsuccessful Mutual Agreement Procedure (MAP) resolution is not available in India.
    •  For this reason, over the years, there has been a rising trend in tax disputes involving BITs.
    • The Cairn case is one such instance where arbitration was invoked especially since MAP was not an option.

    Way forward

    • The case raises many questions that administrators must address through reform.
    • India’s model BIT introduced in 2016 rectifies the issue of the distinction between tax dispute and investment-related taxation dispute through the specific exclusion of taxation.
    •  The recognition of a tax-related investment dispute, distinct from a tax dispute, should not undermine such a carve-out.

    Conclusion

    It is also important to note even if the award is enforced, the matter of tax avoidance stands pending before the High Court. Given the complexity, the only reasonable solution would be a negotiated settlement. Even if there’s a resolution in the Cairns case, questions of law would remain.