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

Civilsdaily

Login

GS Paper: Indian Economy

  • Global minimum tax may help India but can cause international disagreements

    The article deals with the issue of global minimum tax proposal floated by the US, challenges it faces and its implications for India.

    The US proposal for global minimum tax

    • In its recent proposal, the U.S. sought to impose a global minimum tax on foreign income earned by U.S. corporations.
    • The proposal is intended to disincentivise American companies from inverting their structures due to the increase in the U.S. corporate tax rate.
    • The U.S. is now discussing a floor of 15% for the minimum tax rate.
    • The proposal is similar to Pillar Two, except for the rate of the effective minimum tax.

    Similarity with Pillar Two Proposal

    • The Pillar Two proposal was the Organisation for Economic Co-operation and Development’s (OECD) plan to plug the remaining Base Erosion and Profit Shifting (BEPS) issues
    • It provide jurisdictions the right to “tax back” where other jurisdictions have either not exercised their primary taxing right or have exercised it at low levels of effective taxation.
    • For instance, if an Indian-headquartered multinational corporation (MNC) has an entity in Singapore or the Netherlands through which global operations are run, and its income from global operations is not taxed at an effective rate of 10% or 15%, then it can be taxed in India.
    • India has been part of the Pillar Two discussions and has not objected in principle to the proposal.

    How Global Minimum Tax would benefit India?

    • The proposal, along with the increased tax bill for U.S. companies, may benefit the Indian revenue department.
    • The State of Tax Justice report of 2020 notes that India loses over $10 billion in tax revenue due to the use of offshore structures, particularly through investments made by Indian residents through Mauritius, Singapore and the Netherlands.
    • This is supported by the overseas direct investment (ODI) data from 2000 to 2021 published by the Reserve Bank of India.
    • Start-ups and large Indian conglomerates commonly use offshore structures for conducting global operations.
    • Revenue from such operations is often retained offshore and not repatriated to India.
    • Tax advantages incentivise such structures, due to which taxes on such income are not paid in India.
    • Once these proposals are implemented, Indian companies would have to pay additional taxes on their offshore structures to the extent that the effective rate of tax is lower than the global minimum tax rate.

    Challenges

    • Lack of consensus: Several countries have taken a different approach to the rate of global minimum tax.
    • While France and Germany have expressed support, the EU has raised concerns regarding the high rate proposed by the United States.
    • Tax sovereignty issue: Countries have stated that the proposal infringes upon their tax sovereignty and that the fight against unfair tax competition should not become a fight against competitive tax systems.

    Consider the question “What are the factors that led to the demand of global minimum corporate tax? What will be its implications for India?” 

    Conclusion

    As economies struggle amid the COVID-19 pandemic, the necessity of encouraging trade and economic activity should be prioritised over disagreements on tax allocations. A tax-related trade war or entrenchment of unilateral levies may further harm both global and national economies.

  • What explains the surge in FDI inflows?

    The article analyses the factors contributing to the claim of 10% rise in total Foreign Direct Investment in 2020-21 and its impact on economy.

    Making sense of increased FDI

    • Total foreign direct investment (FDI) inflow in 2020-21 is $81.7 billion, up 10% over the previous year, reported a recent Ministry of Commerce and Industry press release.
    •  The short press release highlighted industry and State-specific foreign investment figures without detailed statistical information.
    • The Reserve Bank of India (RBI) bulletin, which was released a week earlier, has the details.

    What explains increased gross inflows

    • The gross inflow consists of (i) direct investment to India and (ii) repatriation/disinvestment.
    • The disaggregation shows that direct investment to India has declined by 2.4%.
    • Hence, an increase of 47% in “repatriation/disinvestment” entirely accounts for the rise in the gross inflows.
    • In other words, there is a wide gap between gross FDI inflow and direct investment to India.
    • Similarly, measured on a net basis (that is, “direct investment to India” net of “FDI by India” or, outward FDI from India), direct investment to India has barely risen (0.8%) in 2020-21 over the last year.
    • What then accounts for the impressive headline number of 10% rise in gross inflow?
    • It is almost entirely on account of “Net Portfolio Investment”, shooting up from $1.4 billion in 2019-20 to $36.8 billion in the next year.
    • That is a whopping 2,526% rise.
    • Further, within the net portfolio investment, foreign institutional investment (FIIs) has boomed by an astounding 6,800% to $38 billion in 2020-21, from a mere half a billion dollars in the previous year.
    • This explains the surge in gross FDI inflows which is entirely on account of net foreign portfolio investment.

    How FDI is different from FII

    • FDI inflow, in theory, is supposed to bring in additional capital to augment potential output (taking managerial control/stake).
    • In contrast, foreign portfolio investment, as the name suggests, is short-term investment in domestic capital (equity and debt) markets to realise better financial returns.
    • But the conceptual distinctions have blurred in official reporting, showing an outsized role of FDI and its growth in India.

    How FPI distorted equity markets?

    • The deluge of FII inflow did little to augment the economy’s potential output.
    • It added a lot of froth to the stock prices.
    • When GDP has contracted by 7.3%  in 2020-21 on account of the pandemic and the economic lockdown, the BSE Sensex nearly doubled from about 26,000 points on March 23, 2020 to over 50,000 on March 31, 2021.
    • BSE’s price-earnings (P-E) multiple — defined as share price relative to earnings per share — is among the world’s highest, close behind S&P 500 in the U.S.

    FDI inflow’s contribution to domestic output

    • As Figure below shows, between 2013-14 and 2019-20, the ratio of net FDI to GDP has remained just over 1% (left-hand scale), with no discernible rising trend in it.
    • The proportion of net FDI to gross fixed capital formation (fixed investment) is range-bound between 4% and 6%.
    • These stagnant trends are evident when the economy’s fixed investment rate — gross fixed capital formation to GDP ratio — has plummeted from 31.3% in 2013-14 to 26.9% in 2019-20 (right-hand scale).
    • Thus, FDI inflow’s contribution to domestic output and investment remains modest.

    Conclusion

    The flood of FIIs has boosted stock prices and financial returns. These inflows did little to augment fixed investment and output growth.

  • Growth of farm sector during COVID-19 Pandemic

    2020-21 saw the Indian economy register its worst-ever contraction since Independence and also the first since 1979-80. There has been recording economic contraction, however, the farm sector actually grew by 3.6%.

    Growth in Farm Sector

    There are two main reasons why agriculture didn’t suffer the fate of the rest of the economy last year.

    (1) Better monsoon and yields

    • 2019 and 2020, by contrast, were above-normal monsoon years, with the country receiving an area-weighted rainfall.
    • It led to the filling of reservoirs and recharging of groundwater tables and aquifers, unlike after the deficient monsoons of 2014 and 2015 and the near-deficient one of 2018.
    • Not surprisingly, 2019-20 and 2020-21 produced back-to-back bumper harvests.

    (2) Ease during lockdowns

    • The second reason had to do with agriculture being exempted from the nationwide lockdown that followed the first wave of Covid-19.
    • Lockdown restrictions only spared PDS ration shops and other stores selling food, groceries, fruits & vegetables, milk, meat and fish, animal fodder, seeds and pesticides.
    • But within days, an addendum was issued, extending the lifting of curbs to fertilizer outlets, all field operations by farmers and farmworkers, intra- and inter-state movement of agricultural machinery, sale of produce in wholesale mandis and procurement.

    Inherent resilience of India’s farm sector

    • Simply put, farmers made sure they did not waste a good monsoon, finding ways to even mobilize harvesting and planting labor during peak lockdown.
    • The inherent resilience and adaptability of rural economic actors — meant that the farm sector was relatively insulated from lockdown-imposed supply-side

    What were the issues faced?

    • The problems agriculture encountered due to the lockdown had more to do with the demand
    • The closure of hotels, restaurants, roadside eateries, sweetmeat shops, hostels, and canteens — and no wedding receptions and other public functions — resulted in a collapse of out-of-home consumption.
    • This was demand destruction not from rising prices — “movement along the demand curve”.
    • Instead, it was from forced consumption reduction, translating into lower demand for farm produce even at the same price — “a leftward shift in the demand curve”.

    Various successes

    (1) Success of MSP procurement

    • MSP procurement was effective largely in crops and regions where the institutions undertaking such operations — be it the Food Corporation of India, NAFED, Cotton Corporation of India or even cooperative dairies.
    • These all were active and could stem price declines during the period of demand destruction.
    • Such intervention wasn’t possible in non-mainstream produce (vegetables, fruits, poultry, fish, flowers, spices, etc) and regions (maize in Bihar), where the corresponding institutional mechanisms were non-existent.
    • The demand situation improved, though, with the gradual lifting of lockdown restrictions and also the recovery in global agri-commodity prices.

    (2) MGNREGA

    • While agriculture grew amid an unprecedented economic contraction, 2020-21 was also notable for the record person-days of employment generated under MGNREGA.
    • This flagship employment scheme was yet another source of liquidity infusion and, again, a pre-existing program that the government could deploy to support rural incomes during a crisis.
    • Rural consumption, in turn, provided some cushion to the economy and preventing a bad situation from turning much worse.

    Prospects for this Year

    The one obvious difference between now and last year is Covid-19 cases. Covid’s impact on agriculture per se would depend on the spread, intensity, and duration of the infection.

    • Rural areas were mostly unaffected by the pandemic’s first wave.
    • Farm-related activities could, then, go on relatively unhindered, which government policy, whether to do with lockdown or public procurement, also facilitated.
    • That situation has changed with the second wave and rising share of rural districts in total cases, even without factoring in the higher probability of underreporting in these places.

    What next?

    • While fear of the virus may induce precautionary behavior and economic growth, it is unlikely to affect normal agricultural operations.
    • And if last years’ experience is any guide, the adaptability of farmers and myriad rural economic agents should not be underestimated.

    (1) The first factor to be considered is the monsoon. The good news this time is that there is no El Niño.

    • There are increasing chances of a La Niña — El Niño’s counterpart that is associated with above-normal rains and lower temperatures in India — for the autumn and winter months.
    • El Nino is the abnormal warming of the tropical central and eastern Pacific Ocean surface waters, resulting in increased evaporation and cloud-formation activity around South America and away from Asia.

    (2) Uncertainty is prices

    • Global prices — be it of wheat, maize, soybean, palm oil, sugar, skimmed milk powder or cotton — have scaled multi-year highs in the recent period, helping India’s agri-commodity exports.
    • But export demand alone cannot sustain prices, especially in a scenario where job and income losses, accelerated post the pandemic that has severely dented domestic purchasing power.
    • Diesel prices alone have gone up by over a third in the last year; so have that of most non-urea fertilizers.

    Way forward

    • The real challenge for Indian agriculture and farmers will be on the demand side.
    • That is specifically going to come from declining real incomes and particularly affecting demand for milk, pulses, egg, meat, fruits, vegetables and other protein/micronutrient-rich foods.
    • While rising rural wages and overall incomes is what propelled the demand for these foods in the past — in turn, contributing to dietary and cropping diversification — the ongoing slide presents a frightening proposition.

  • Explained: India’s GDP fall, in perspective

    India’s Gross Domestic Product (GDP) contracted by 7.3% in 2020-21.

    Tap to read more about:

    National Income Determination, GDP, GNP, NDP, NNP, Personal Income

    GDP contraction

    There are two ways to view this contraction:

    1. One is to look at this as an outlier — after all, India, like most other countries, is facing a once-in-a-century pandemic — and wish it away.
    2. The other way would be to look at this contraction in the context of what has been happening to the Indian economy since the regime change.

    Impact of the new regime

    Let’s look at the most important ones.

    (1) Gross Domestic Product

    • Contrary to perception advanced by the Union government, the GDP growth rate has been a point of growing weakness for the last 5 of these 7 years.
    • The GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country.
    • The economy was already struggling with massive bad loans which were further deteriorated by demonetization and the GST regime.

    (2) GDP per capita

    • Often, it helps to look at GDP per capita, which is total GDP divided by the total population, to better understand how well-placed an average person is in an economy.
    • At a level of Rs 99,700, India’s GDP per capita is now what it used to be in 2016-17 — the year when the slide started.
    • As a result, India has been losing out to other countries. A case in point is how even Bangladesh has overtaken India in per-capita-GDP terms.

    (3) Unemployment rate

    • This is the metric on which India has possibly performed the worst.
    • First came the news that India’s unemployment rate, even according to the government’s own surveys, was at a 45-year high in 2017-18 — the year after demonetization and GST.
    • Then in 2019 came the news that between 2012 and 2018, the total number of employed people fell by 9 million — the first such instance of total employment declining in independent India’s history.
    • As against the norm of an unemployment rate of 2%-3%, India started routinely witnessing unemployment rates close to 6%-7% in the years leading up to Covid-19.
    • The pandemic, of course, made matters considerably worse.
    • What makes India’s unemployment even more worrisome is the fact that this is happening even when the labor force participation rate — which maps the proportion of people who even look for a job — has been falling.

    (4) Inflation rate

    • After staying close to the $110-a-barrel mark throughout 2011 to 2014, oil prices (India basket) fell rapidly to just $85 in 2015 and further to below (or around) $50 in 2017 and 2018.
    • On the one hand, the sudden and sharp fall in oil prices allowed the government to completely tame the high retail inflation in the country, while on the other, it allowed the government to collect additional taxes on fuel.
    • But since the last quarter of 2019, India has been facing persistently high retail inflation.
    • Even the demand destruction due to lockdowns induced by Covid-19 in 2020 could not extinguish the inflationary surge.

    (5) Fiscal deficit

    • The fiscal deficit is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.
    • Typically, there are two downsides of excessive borrowing:
    1. One, government borrowings reduce the investible funds available for the private businesses to borrow (this is called “crowding out the private sector”); this also drives up the price (that is, the interest rate) for such loans.
    2. Two, additional borrowings increase the overall debt that the government has to repay. Higher debt levels imply a higher proportion of government taxes going to pay back past loans. For the same reason, higher levels of debt also imply a higher level of taxes.

    On paper, India’s fiscal deficit levels were just a tad more than the norms set, but, in reality, even before Covid-19, it was an open secret that the fiscal deficit was far more than what the government publicly stated.

    (6) Rupee vs dollar

    • The exchange rate of the domestic currency with the US dollar is a robust metric to capture the relative strength of the economy.
    • A US dollar was worth Rs 59 when the government took charge in 2014.
    • Seven years later, it is closer to Rs 73. The relative weakness of the rupee reflects the reduced purchasing power of the Indian currency.

    What’s the outlook on growth?

    • The biggest engine for growth in India is the expenditure by common people in their private capacity.
    • This “demand” for goods accounts for 55% of all GDP.
    • The private consumption expenditure has fallen to levels last seen in 2016-17.

  • Resource crunch in states after Covid second wave

    The article gives the overview of the impact of second Covid wave on the fiscal health of the States.

    Impact of first Covid wave on fiscal health of states

    • The analysis of the fiscal data for all states with the exception of Goa, Manipur, Meghalaya and Sikkim reveal a grim picture.
    • The aggregate revenue deficit for 24 state governments soared to Rs 4 trillion as per the revised estimates (RE) for 2020-21, up from a modest budgeted amount of Rs 353 billion.
    • And, despite a 16 per cent cut in capital spending, the fiscal deficit of these states deteriorated to Rs 8.7 trillion in 2020-21 (RE), up from the budgeted estimate of Rs 6.0 trillion.

    How states had projected ambitious decline in revenue deficit

    • The budgets for the ongoing fiscal year,  had projected an ambitious, decline in the aggregate revenue deficit to Rs 1.2 trillion, lower than the pre-Covid-19 level of Rs 1.3 trillion in 2019-20.
    • This has benefitted from the considerable expansion in their revenue receipts this year, forecasted at 24.7 per cent, compared to a moderate 12.4 per cent increase in their aggregate revenue expenditure.
    • This anticipated shrinking of the revenue deficit has allowed states to plan for a substantial expansion in their capital expenditure and net lending pegged at 34.1 per cent.
    • This anticipated shrinking also allowed the States to attempt a modest correction in their budgeted fiscal deficit, bringing it down to Rs 7.6 trillion in 2021-22 from Rs 8.7 trillion in 2020-21 (RE).

    Fiscal concerns over second Covid wave

    • The second wave of Covid-19 infections and its spread to rural areas has fanned fiscal concerns.
    •  The curtailed consumption of discretionary items and contact-intensive services will dampen the growth of states’ own tax revenues this year.
    • Moreover, lower mobility during the regional lockdowns will constrain tax revenues that states earn on fuels.
    • The data for the generation of GST e-way bills confirms that the staggered imposition of the localised lockdowns has had an adverse impact on economic activity since April.
    • This will result in a sequential slowdown in GST collections that will be reported in the subsequent two months.
    • Nevertheless, the GST collections is likely to nearly double to Rs 1.7 trillion in the first quarter of this year, up from Rs 0.9 trillion over the same period last year, boosted by the record-high collections in April,
    • That reflected healthy economic activity in March.

    The shortfall and way forward

    •  States’ own tax collections is estimated to trail their budget estimates as they were drawn up before the second wave.
    • For this year,  state GST collections would be at Rs 6.1 trillion, falling below their projected revenues of Rs 8.7 trillion.
    • This indicates a GST compensation requirement of Rs 2.65 trillion — only 38 per cent of which may be met through the expected GST compensation cess collections.
    • Following the meeting of the GST Council, the Finance Minister has indicated that a back-to-back loan of Rs 1.58 trillion will be provided to the states.
    • If the tranches of this loan start flowing to the states soon, it will alleviate their anticipated revenue crunch over the next two months.
    • Already, there has been a sharp rise in the size of the upcoming State Development Loan auction to Rs. 19,550 crore, relative to the modest average size of around Rs. 7,400 crore seen so far in the first eight auctions held in FY2022.

    Conclusion

    In any case, the capital spending budgeted by certain state governments this year appears to be optimistic. Moreover, localised restrictions imposed during the last two months are expected to have constrained activity.

  • Cryptocurrency & India

    The article highlights the need for coherent cryptocurrency policy and avoid missing the benefits offered by the technology.

    Growing dominance of cryptocurrencies

    • Created by Satoshi Nakamoto in 2008, Bitcoin is the most popular cryptocurrency.
    • It is a fully decentralised, peer-to-peer electronic cash system that didn’t need the purview of any third-party financial institution.
    • The Bitcoin, which traded at just $ 0.0008 in 2010, commanded a market price of just under $65,000 this April.
    • Many newer coins were introduced since Bitcoin’s launch, and their cumulative market value touched $ 2.5 trillion this May.
    • Within a span of just over a decade, their value has surpassed the size of economies of most modern nations.
    •  The “cryptomarket” grew by over 500 per cent, even while the pandemic unleashed global economic carnage not seen since the Great Depression.
    • China’s recent crackdown on cryptocurrency had far-reaching consequences.
    • An astounding trillion US dollars were wiped out from the global cryptomarket within a span of 24 hours.
    • This kind of  volatility mentioned above has always been a concern for regulators and investors alike.

    India’s approach

    • Law enforcement and taxation agencies have called for a ban, expressing concerns over cryptocurrencies being used as instruments for illicit activities, including money laundering and terror funding.
    • In 2018, the Reserve Bank barred our financial institutions from supporting crypto transactions — but the Supreme Court overturned it in 2020.
    • Yet, Indian banks still block these transactions, and the government has circulated a draft bill outlawing all cryptocurrency activities, which has been under discussion since 2019.
    • The Reserve Bank has announced the launch of a private blockchain-supported official digital currency, similar to the digital Yuan.
    • India is increasingly mimicking China’s paradoxical attempt to centralise a decentralised ecosystem.
    • India is trying to decouple cryptocurrencies from their underlying blockchain technology, and still derive benefit.
    • Unfortunately, this is impractical, and shows a lack of understanding of this disruptive innovation.
    • The funds that have gone into the Indian blockchain start-ups are less than 0.2 per cent of the amount the sector raised globally.
    • The current central government approach makes it near-impossible for entrepreneurs and investors to acquire much economic benefit.

    Need for regulation

    • Regulation is definitely needed to prevent serious problems, to ensure that cryptocurrencies are not misused, and to protect unsuspecting investors from excessive market volatility and possible scams.
    •  However, regulation needs to be clear, transparent, coherent and animated by a vision of what it seeks to achieve.
    • India has not been able to tick these boxes, and we’re in danger of missing out in the global race altogether.

    Way forward

    • Any new regulations made in this sector should prevent the misuse of these digital assets without hindering innovation and investments.
    • Provisions have to be made to route the value extracted from these networks transparently into our financial system.
    • Regulatory uncertainties over India’s position on cryptocurrency highlights the need for clear-headed policy-making.

    Consider the question “India was a late adopter in all the previous phases of the digital revolution be it the semiconductors, the internet or smartphones. Do you think the same is happening again in India’s adoption of cryptocurrencies and blockchain technology?”

    Conclusion

    We are currently on the cusp of the next phase, which would be led by technologies like blockchain. We have the potential to channel our human capital, expertise and resources into this revolution, and emerge as one of the winners of this wave. All we need to do is to get our policymaking right.

     

  • Fundamental problems facing GST regime

    The article highlights the fundamental challenges the GST faces in the form of trust erosion and politicisation of decision making in GST Council.

    Initial issues with GST

    • The multiple rates structure, high tax slabs and the complexity of tax filings as the problems underpinning India’s GST.
    • These were indeed the initial problems in the way GST was implemented, leading to some of its current woes.
    • However, technical fixes such as simplification of GST rates and tax filing systems will not succeed in addressing the fundamental problems with GST.

    Fundamental problems

    1) Politics influence the decision of GST Council

    • The 43rd meeting of the Goods and Services Tax (GST) Council which consists of 31 States and Union Territorie is to be held on May 28.
    • Ideally, political affiliations should not matter in a Council set up to decide indirect taxes.
    • The GST Council was mandated to meet at least once every quarter, but it had not met for two quarters, due to the pandemic.
    • Several of the 14 members of the groups who belong to parties different from the party ruling in the Centre, requested the Finance Minister to convene the GST meeting to help them manage their finances.
    • None of the 17 members of the ruling group deemed it necessary.
    • Even the need for a meeting to determine tax revenues for States is evidently a political decision.

    2) Lack of trust

    • The GST Council is a compact of trust between the States and the Centre, set in the larger context of India’s polity.
    • The tragedy of the GST Council is that it is afflicted with spite and forced to function under the prevailing cloud of politics.
    • If the functioning of the GST Council is subject to the vagaries of elections and consequent vendetta politics, GST will continue to be just a caricature of its initial promise.

    3) Uncertainty after the guarantee of 14% growth ends

    • The States paid a huge price for GST in terms of loss of fiscal autonomy.
    • GST has endured so far primarily because the States were guaranteed a 14% growth in their tax revenues every year.
    • This minimised the risks of this new experiment for the States and compensated for their loss of fiscal sovereignty.
    • This revenue guarantee ends in July 2022.
    • This can lead to a crumbling of the precarious edifice on which GST stands today.

    Consider the question “What are the challenges faced by the States in the GST regime? What would be the impact on States as a guarantee of 14% growth in tax revenue comes to an end in July 2022?” 

    Conclusion

    The end of India’s grand GST experiment seems inevitable unless there is a radical shift in the tone and tenor of India’s federal politics, backed by an extension of revenue guarantee for the States for another five years.

  • COVID & Economic Inequality

    Pandemic hit hard the lives, livelihood and the economy. It has also worsened income inequality. The article deals with the issues of impacts of pandemic and suggests ways to revive growth the deal with income inequality.

    Need to address growth and inequality issue

    • The second wave of the pandemic is spreading to rural areas also.
    • It is known that rural areas have poor health infrastructure.
    • Similar to the first wave, inequalities are also increasing during the second wave.
    • The country has to address the issue of rising inequalities for achieving higher sustainable growth and the well-being of a larger population.
    • According to the State of Working in India 2021 report of the Azim Premji University, the pandemic would push 230 million people into poverty.
    • CMIE data shows a decline in incomes and rising unemployment during the second wave.
    • U-shaped impact: The recent RBI Bulletin says that the impact of the second wave appears to be U-shaped.
    • In the well of the U are the most vulnerable — blue collar groups who have to risk exposure for a living and for rest of society to survive.

    K-shaped recovery and rising inequality

    • The recovery seemed to be K-shaped during the first wave.
    • The share of wages declined as compared to that of profits.
    • A large part of the corporate sector managed the pandemic with many listed companies recording higher profits.
    • On the other hand, the informal workers including daily wage labourers, migrants, MSMEs etc. suffered a lot with loss of incomes and employment.
    • The recovery post the second wave is also likely to be K-shaped with rising inequalities.

    Policies needed for higher growth and reduction in inequality

    1) Vaccination and healthcare facilities

    • An aggressive vaccination programme and improving the healthcare facilities in both rural and urban areas is needed.
    • Reducing the health crisis can lead to an economic revival.
    • Vaccine inequality between urban and rural areas has to be reduced.
    • The crisis can be used as an opportunity to create universal healthcare facilities for all, particularly rural areas.
    • Other states can learn from Kerala on building health infrastructure.

    2) Investment in infrastructure

    • The budget offered some good announcements relating to capital investment in infrastructure.
    • The Development Financial Institution (DFI) for funding long-term infrastructure projects is being established.
    • This can revive employment and reduce inequalities.
    • The government has to fast track infra investment.

    3) Safety net for vulnerable

    • The informal workers and other vulnerable sections including MSMEs have been dealt back-to-back blows due to the first and second waves.
    • A majority of workers have experienced a loss of earnings.
    • Therefore, the government has to provide safety nets in the form of free food grains for six more months, expand work offered under MGNREGA in both rural and urban areas.
    • The government also need to undertake a cash transfer to provide minimum basic income.

    Policies for growth

    • Focus on demand: On economic growth, the RBI Bulletin says that the biggest toll of the second wave is in terms of a demand shock as aggregate supply is less impacted.
    • Investment: In the medium term, the investment rate has to be increased from the present 30 per cent of GDP to 35 per cent and 40 per cent of GDP for higher growth and job creation.
    • Export: It is one of the main engines of growth and employment creation.
    • There is positive news on exports as the global economy is reviving.
    • Protectionist trade policy: In recent years India’s trade policy has become more protectionist and the country has to reduce import tariff rates.
    • Role of fiscal policy: In the near term, fiscal policy has to play a more important role in achieving the objectives of growth, jobs and equity by expanding the fiscal space by restructuring expenditure, widening the tax base and increasing non-tax revenue.

    Consider the question “Two waves of the Covid pandemic have worsened the inequality. India has to address the issue of rising inequalities for achieving higher sustainable growth and the well-being of a larger population. Suggest the policies that India should follow for higher growth and reduction in inequality.”

    Conclusion

    Vaccination, expansion in rural healthcare and cash transfers should be part of the strategy to boost demand and address inequalities.

  • challenges the second Covid wave poses to India’s path to fiscal consolidation.

    The article highlights the challenges the second Covid wave poses to India’s path to fiscal consolidation.

    Recalibration to growth projection due to second Covid wave

    • The growth projections of different national and international agencies and the fiscal projections of Centre’s 2021-22 Budget require recalibration.
    • The International Monetary Fund (IMF) had forecast real GDP growth for 2021-22 at 12.5%.
    • The Reserve Bank of India (RBI) had forecast real GDP growth for 2021-22 at 10.5%.
    • The Ministry of Finance’s Economic Survey had forecast real GDP growth for 2021-22 at 11.0%.

    Growth rate of 8.7% to keep GDP at same level as in 2019-20

    • Moody’s has recently projected India’s GDP growth in 2021-22 at 9.3%.
    • Benchmark growth rate: 9.3% is close to the benchmark growth rate of 8.7% which would keep India’s GDP at 2011-12 prices at the same level as in 2019-20.
    • This level of growth may be achieved based on the assumption that the economy normalises in the second half of the fiscal year.
    • The 2019-20 real GDP was ₹145.7-lakh crore at 2011-12 prices.
    • It fell to ₹134.1-lakh crore in 2020-21, implying a contraction of minus 8.0%.
    •  At 8.7% real growth, the nominal GDP growth would be close to 13.5%, assuming an inflation rate of 4.5%.
    • This would be lower than the nominal growth of 14.4% assumed in the Union Budget.
    • At 13.5% growth, the estimated GDP for 2021-22 is ₹222.4-lakh crore at current prices.
    • Impact: This will lead to a lowering of tax and non-tax revenues and an increase in the fiscal deficit as compared to the budgeted magnitudes.

    How much the gross tax revenue would be impacted?

    • The budgeted gross and net tax revenues for 2021-22 were ₹22.2-lakh crore and ₹15.4-lakh crore, respectively.
    • The assumed buoyancy for the Centre’s gross tax revenues (GTR) was 1.2.
    • If, however, the buoyancy of 1.2 proves optimistic and instead a buoyancy of 0.9, which is the average buoyancy of the five years preceding the COVID-19 year, is applied, the nominal growth of GTR would be 12.2%.
    • This would lead to the Centre’s GTR of about ₹21.3-lakh crore.
    • The corresponding shortfall in the Centre’s net tax revenues is estimated to be about ₹0.6 lakh crore.
    • The budgeted magnitudes for non-tax revenues and non-debt capital receipts at ₹2.4-lakh crore and ₹1.9-lakh crore, respectively, may also prove to be optimistic.
    • In these cases, the budgeted growth rates were 15.4% and 304.3%, respectively.
    •  The excessively high growth for the non-debt capital receipts was premised on implementing an ambitious asset monetisation and disinvestment programme.
    • Together with the tax revenue shortfall of nearly 0.6 lakh crore, the total shortfall on the receipts side may be about ₹2.1-lakh crore.

    Impact on fiscal deficit estimates

    • Two factors will affect the fiscal deficit estimate of 6.76% of GDP in 2021-22.
    • First, there would be a change in the budgeted nominal GDP growth.
    • Second, there would be a shortfall in the receipts from tax, non-tax and non-debt sources.
    • Together, these two factors may lead to a slippage in fiscal deficit which may be close to 7.7% of GDP in 2021-22 if total expenditures are kept at the budgeted levels.
    • This would call for revising the fiscal road map again.
    • Protecting total expenditures at the budgeted level is, however, important given the need to support the economy in these challenging time.

    Vaccination policy and role of Central government

    • Positive externalities: COVID-19 vaccination is characterised by strong inter-State positive externalities, making it primarily the responsibility of the central government.
    • The entire vaccination bill should be borne by the central government.
    • If the central government is the single agency for vaccine procurement, the economies of scale and the Centre’s bargaining power would keep the average vaccine price low.
    • The central government may transfer the vaccines rather than the money that it has budgeted for transfer.
    • Some of the smaller States may find procuring vaccines through a global tender to be quite challenging.

    Conclusion

    Protecting total expenditures at the budgeted level and mass vaccination are important in India’s pandemic situation.

    Back2basics: Tax buoyancy

    • There is a strong connection between the government’s tax revenue earnings and economic growth.
    • Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP.
    • It refers to the responsiveness of tax revenue growth to changes in GDP.
    • When a tax is buoyant, its revenue increases without increasing the tax rate.
    •  In 2007-08, everything was fine for the economy, GDP growth rate was nearly 9 per cent.
    • Tax revenue of the government, especially, that of direct taxes registered a growth rate of 45 per cent in 2007-08.
    • We can say that the tax buoyancy was five (45/9).

    What is tax elasticity?

    • It refers to changes in tax revenue in response to changes in tax rate.
    • For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity.

  • Supreme Court says Personal Guarantors liable for Corporate Debt

    The Supreme Court has upheld a government moves to allow lenders to initiate insolvency proceedings against personal guarantors, who are usually promoters of big business houses, along with the stressed corporate entities for whom they gave a guarantee.

    What is the Judgement?

    • The judgment has allowed creditors, usually financial institutions and banks, to move against personal guarantors under the Indian Bankruptcy and Insolvency Code (IBC) was “legal and valid”.
    • The November 15, 2019 notification was challenged before several High Courts initially.
    • The apex court said there was an “intrinsic connection” between personal guarantors and their corporate debtors.

    What is a personal guarantee? How do promoters use this route to get funds?

    • A personal guarantee is most likely to be furnished by a promoter or promoter entity when the banks demand collateral which equals the risk they are taking by lending to the firm, which may not be doing so well.
    • It is different from the collateral that firms give to banks to take loans, as Indian corporate laws say that individuals such as promoters are different from businesses and the two are very separate entities.
    • A personal guarantee, therefore, is an assurance from the promoters or promoter group that if the lender allows them the fund, they will be able to turn around the loss-making unit and repay the said loan on time.

    Impact of the move

    • The apex court ruling will help banks go after those who have offered guarantees to recover dues in case the resolution amount is short of the claims filed by them in the National Company Law Tribunal.
    • Over the years, many companies have repeatedly defaulted in loan repayment and got banks to restructure the debt, often citing systemic issues.
    • But as part of the clean-up initiated five years ago, the IBC was enacted and banks were told to go after those who were not paying their dues.

    About the Insolvency and Bankruptcy Code, 2016

    • IBC 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 of the code

    (1) 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.

    (2) 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 Reserve Bank of India.

    (3) 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.

    (4) Bankruptcy and Insolvency Adjudicator:

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

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