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GS Paper: Indian Economy

  • SEBI proposes framework for Gold Exchange

    The Securities & Exchange Board of India (SEBI) has floated a consultation paper on the proposed framework for Gold Exchange in India.

    Why such a move?

    • According to SEBI, the proposed exchange would bring in more transparency in the gold trading market in terms of spot price discovery, quality of the gold and enable greater integration with the financial markets.

    What is a Gold Exchange?

    • As the name suggests, this would offer trading facilities in the precious metal.
    • Entities like retail investors, banks, foreign portfolio investors (FPIs), jewellers and bullion dealers among others would be allowed to trade on the exchange.
    • While there are existing commodity exchanges that offer trading in gold contracts, those are derivative instruments while the proposed gold exchange would allow trading akin to the spot market.
    • This move assumes significance as India is the second-largest consumer of gold – after China – with an annual demand of around 800-900 tonnes.

    Answer this PYQ:

    Q.What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

    1. To bring the idle gold lying with India households into the economy
    2. To promote FDI in the gold and jewellery sector
    3. To reduce India’s dependence on gold imports

    Select the correct answer using the code given below

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

    What are the ways in which one can invest in gold now?

    • For those wanting to buy physical gold, a visit to the neighbourhood jeweller would suffice.
    • Meanwhile, there are online platforms such as Paytm, Kuvera and Indiagold among others that allow an individual to buy gold in digital form.
    • The advantage of buying gold in digital form is that one can put in a very small amount as well with some platforms allowing a minimum investment of just Rs 100.
    • Digital gold products have become quite popular among millennials. Then there are sovereign gold bonds issued by the government.
    • One can even look at Gold ETFs or gold funds by mutual funds.
    • Even gold derivative contracts traded on the exchanges have the option of physical settlement, which means investors can get physical delivery of gold.

    How can one trade on a gold exchange?

    • The SEBI has proposed an instrument called ‘Electronic Gold Receipt’, or EGR.
    • The gold exchange, along with intermediaries like the vault manager and the clearing corporation, would facilitate the creation of EGR and its trading.
    • So, participants can convert their physical gold into EGR, which can then be bought or sold on the exchange like any normal equity share of a listed company.
    • The EGR can even be converted back into physical gold. As part of the draft regulations, SEBI has proposed three denominations of EGR – one kilogram, 100 grams and 50 grams.
    • It has, however, added that EGRs of five grams or 10 grams can also be allowed for trading to increase the liquidity of the market and attract more participants.

    How can one convert physical gold into EGRs?

    • An entity that intends to convert physical gold into EGR will have to go to a ‘Vault Manager’.
    • According to the proposed framework, any entity registered in India and with a net worth of at least Rs 50 crore can apply to become a vault manager.
    • After the receipt of the gold, the vault manager would create an EGR for which the depository will assign an International Securities Identification Number, or ISIN, which is a unique code to identify the specific security.
    • Once the ISIN is issued, the EGR can be traded on the gold exchange just like any other tradable security.

    Can EGRs be again converted into physical gold?

    • To convert an EGR into physical gold, the owner of the EGR will have to surrender the EGR to the vault manager who will deliver the gold and extinguish the electronic receipt.
    • Considering the logistics and delivery challenges, it has been proposed that conversion of an EGR into physical gold should be allowed only if a minimum of 50 grams of gold has been accumulated in electronic form.

    Issues with gold exchange

    • Since the EGRs would be traded on an exchange, Securities Transaction Tax (STT) would be levied. Also, GST would be applicable when EGRs are converted into physical gold for withdrawal.
    • If in case the buyer and seller are from different states then levying state GST could be cumbersome. SEBI is mulling if only IGST or Integrated Goods and Services Tax can be levied to resolve this issue.
    • As far as transactions are concerned, SEBI working groups have suggested that an entire transaction be divided into three tranches.

  • RBI should return to its dharma of taming inflation

    The article highlights the need for the RBI to focus on inflation instead of pursuing elusive growth.

    Is inflation at a level to be concerned about?

    • Due to the devastation caused by the pandemic, MPC kept its stance to ‘look through’ the sustained rise in prices through much of last year.
    • The release of the consumer-price inflation number for April 2021 (4.3%) might seem to validate their decision.
    • But there are many reasons why the MPC should be concerned.
    • To start with, the April print carries little validity since the base for comparison (April 2020) has been rubbished by RBI in the past on the grounds that it relates to the first month of the lockdown.

    Inflation comes down but after causing devastation

    • Through a combination of the base effect (high level of inflation in the previous comparable period), belated but inevitable monetary policy action and a fall in demand that more than offsets the disruption in supply, inflation will come down.
    • However, before inflation comes down, it brings untold misery to the public at large.
    •  In a country where close to 20% of the population lives below the poverty line and food is a major item of their consumption basket, any rise in inflation, especially food inflation, hurts the poor disproportionately.
    • Add to that the distress caused by job losses on account of the pandemic, and this time round, the pain is likely to be magnified many times over.

    What is causing inflation?

    • Monetary policy acts with long and indeterminate lags.
    • Far from spurring credit offtake through low interest rates excess liquidity has spilled over into price pressures in India.
    • Wholesale price inflation at 7.4% (March 2021) was the highest in 8 years, while it would be naïve to take any solace from the latest consumer price index number.
    • The RBI needs to be appreciated for doing its bit to keep the wheels of our economy moving during the pandemic.
    • However, its failure to shift gear in the face of mounting evidence of inflation cannot be neglected.
    • When inflation was breaching the upper end of RBI’s target band for months on end, the message should have been clear.

    US recovery and its impact on Indian economy

    • Globally, commodity prices are already on the rise.
    • Not without reason, it would seem, as borne out by 12 May’s inflation print of 4.2%, America’s highest in 12 years
    • Part of the reason is the excessive easing of US monetary and fiscal policies.
    • Rising US inflation has huge implications for countries like India that are at the receiving end of US policies.
    • As the US economy recovers, the dollar strengthens and US interest rates rise, the rupee is bound to weaken in response, adding to inflationary pressures here.

    Consider the question “What are the factors stoking inflation in the pandemic? How far the monetary policies pursued by the central bank is responsible for it?”

    Conclusion

    When the MPC meets next in early June, it must re-order its priorities. Instead of chasing elusive growth, it must revert to its swadharma, own dharma, and focus instead on inflation.

  • Remittance received by India remain unaffected by pandemic

    What the World Bank report says

    • India received over USD 83 billion in remittances in 2020, according to a World Bank report.
    • In 2019, India had received USD 83.3 billion in remittances.
    • The report said India’s remittances fell by just 0.2 per cent in 2020.
    • Much of the decline was due to a 17 per cent drop in remittances from the United Arab Emirates, which offset resilient flows from the United States and other host countries.
    • The World Bank, in its latest Migration and Development Brief, said despite COVID-19, remittance flows remained resilient in 2020.

    Trend analysis

    • China, which received USD 59.5 billion in remittances in 2020 against USD 68.3 billion the previous year, is a distant second.
    • India and China are followed by Mexico (USD42.8 billion), the Philippines (USD34.9 billion), Egypt (USD29.6 billion), Pakistan (USD26 billion), France (USD24.4 billion) and Bangladesh (USD21 billion).
    • Remittance outflow was the maximum from the United States (USD68 billion), followed by UAE (USD43 billion), Saudi Arabia (USD34.5 billion), Switzerland (USD27.9 billion), Germany (USD22 billion), and China (USD18 billion).
    • The relatively strong performance of remittance flows during the COVID-19 crisis has also highlighted the importance of timely availability of data.
    • Given its growing significance as a source of external financing for low- and middle-income countries, there is a need for better collection of data on remittances, in terms of frequency, timely reporting, and granularity by corridor and channel.

    B2BASICS

    Remittances

    • Remittances are usually understood as financial or in-kind transfers made by migrants to friends and relatives back in communities of origin.
    • These are basically sum of two main components – Personal Transfers in cash or in kind between resident and non-resident households and Compensation of Employees, which refers to the income of workers who work in another country for a limited period of time.
    • Remittances help in stimulating economic development in recipient countries, but this can also make such countries over-reliant on them.

    Remittance and the Indian Economy

    Benefits

    • Increased inward remittance is a boon for the economy at both macro and micro levels.
    • At the macro level, remittances contribute to maintaining stable foreign reserves.
    • Remittances help Indian Rupee hold its value against the US dollar and forms a significant part of the GDP.
    • On a micro level, remittances have shown a positive impact on healthcare, entrepreneurship, education, and overall economic development of the recipient families.

    Issues

    An increase in outward remittances however, raises an alarm. It causes the rupee to weaken against the dollar, which in return impacts the businesses exposed to foreign exchange, and the economy overall.

  • [pib] NITI Aayog and Mastercard Release Report on financial inclusion

    About the report

    • NITI Aayog and Mastercardtoday released a report titled ‘Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’.
    • The report identifies challenges in accelerating digital financial inclusion in India and provides recommendations for making digital services accessible to its 1.3 billion citizens.
    • The report highlights key issues and opportunities, with inferences and recommendations on policy and capacity building across agriculture, small business (MSMEs), urban mobility and cybersecurity.
    • This report looks at some key sectors and areas that need digital disruptions to bring financial services to everyone.

    Key recommendations in the report include:

    • Strengthening the payment infrastructure to promote a level playing field for NBFCs and banks.
    • Digitizing registration and compliance processes and diversifying credit sources to enable growth opportunities for MSMEs.
    • Building information sharing systems, including a ‘fraud repository’, and ensuring that online digital commerce platforms carry warnings to alert consumers to the risk of frauds.
    • Enabling agricultural NBFCs to access low-cost capital and deploy a ‘phygital’ (physical + digital) model for achieving better long-term digital outcomes.
    • Digitizing land records will also provide a major boost to the sector.
    • To make city transit seamlessly accessible to all with minimal crowding and queues, leveraging existing smartphones andcontactless cards, and aim for an inclusive, interoperable, and fully open system such as that of the London ‘Tube’.

  • RBI steps in to ease COVID-19 burden

    Term Liquidity Facility announced

    • Reserve Bank of India stepped in on Wednesday with measures aimed at alleviating any financing constraints for healthcare infrastructure and services reeling under the second Covid wave.
    • RBI Governor announced a Term Liquidity Facility of ₹50,000 crore with tenor of up to three years, at the repo rate, to ease access to credit for providers of emergency health services.
    • Under the scheme, banks will provide fresh lending support to a wide range of entities, including vaccine manufacturers, importers/suppliers of vaccines and priority medical devices, hospitals/dispensaries, pathology labs, manufacturers and suppliers of oxygen and ventilators, and logistics firms. 
    • These loans will continue to be classified under priority sector till repayment or maturity, whichever is earlier.

    Measures for individual and MSME borrowers

    • As part of a “comprehensive targeted policy response”, the RBI also unveiled schemes to provide credit relief to individual and MSME borrowers impacted by the pandemic.
    • RBI unveiled a Resolution Framework 2.0 for COVID-related stressed assets of individuals, small businesses and MSMEs.
    • To provide further support to small business units, micro and small industries, and other unorganised sector entities the RBI decided to conduct special three-year long-term repo operations (SLTRO) of ₹10,000 crore at the repo rate for Small Finance Banks.
    • The SFBs would be able to deploy these funds for fresh lending of up to ₹10 lakh per borrower.
    • In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to ₹500 crore) for onlending to individual borrowers as priority sector lending.

    Measure for States

    • To enable the State governments to better manage their fiscal situation in terms of their cash flows and market borrowings, maximum number of days of overdraft (OD) in a quarter is being increased from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days, the RBI said.

  • Atmanirbhar Bharat & the informal sector

    The article highlights the important role the informal sector can play in the vision of Atmanirbhar Bharat.

    Economic development through Atmanirbhar Bharat

    • The vision of the Atmanirbhar Bharat is rooted in the classical paradigm of economic development, based on demand injection in the economy via two sources, domestic and external.
    • ‘Vocal for local’ exhorts a distinct and decisive shift in consumer preferences towards locally-produced goods and services.
    • ‘Make for the world’ is more ambitious and resembles the export-led growth strategy adopted in East Asia.
    • Thus, the Atmanirbhar Bharat categorically bestows the Indian economy with twin engines of growth.

    Important role informal sector can play

    • The strategy is based on an assumption of lack of adequate demand.
    • So a prognosis of supply side with respect to the ability of domestic producers of goods and services to seize the opportunity at the requisite scale and scope is pertinent.
    • The nature, character, structure and contributions of the informal sector require retrospection.
    • The size of India’s informal sector is massive, it accounts for about 50% of GVA and a major share in the export basket.
    • This position proffers it with growth opportunities emanating from domestic as well as external sources.

    Constraints faced by informal sector

    • Most firms are micro in size and deploy little capital.
    • They have a small scale of production, substandard/unbranded quality of products, and localised scope of procuring raw material and marketing their products.
    • They are vulnerable to business downturns and other market uncertainties, as reflected in high mortality.
    • Their access to cheap, reliable and long-term credit sources is highly restricted.
    • The sector also endures a lack of official identity and recognition of its existence and contribution.

    Three transformations informal sector need to adopt

    • Atmanirbhar Bharat promises enhanced demand for domestically-produced goods and services, but the exposure to stiff global competition, especially for informal sector units, is imminent.
    • In such a scenario, the informal sector must embrace for three tectonic shifts with respect to internal transformation, strategic positioning and labour-market dynamics.

    1)  Internal transformation

    • Enterprises must undergo drastic internal transformation, progressively converging at incremental formalisation through spontaneous and self-propelled transition into economically-viable units.
    • It requires infusion of capital to ensure enhanced labour productivity and higher wages.
    • A systemic disruption, fostering natural growth must be ushered in, which would also curb the birth of new informal enterprises.
    • Moreover, internal consolidation in the sector via merger and acquisitions of units would bring benefits accruing from scale economies.

    2) Strategic positioning

    • Two, because the vision of the Atmanirbhar Bharat exposes the informal sector to global competition, entrepreneurs must embrace the subtle art of strategic positioning in global mega-supply chains.
    • They must pick their products and markets with utmost care, and engrain two mantras of success at the global stage in the DNA of their business strategies.
    • Global mega-supply chains demand ultra-flexibility in production cycle in addition to heightened resilience to withstand headwinds emanating from not just domestic factors but also global.

    3) Labour market dynamics

    • The informal sector employs more than 80% of India’s workforce.
    • The changes in the first two spheres i.e. higher capital intensity-led enhanced labour productivity and ultra-flexibility in production cycles may have severe repercussions on the availability and quality of jobs in India.
    • To alleviate these concerns, the first assumption is that the proportionate increase in expected demand must be more than the enhanced labour productivity to at least retain the currently employed workers.
    • To generate good quality jobs, diversification (both horizontal and vertical) must be encouraged.
    • Vertical diversification entails products not just be partly produced or assembled in India, they must be the end-products of fully indigenised and integrated production and supply chains, from design to made in India.
    • Horizontal diversification involves expansion into newer products and markets, smartly aligning with India’s comparative advantage of surplus labour.

    Consider the question ” India’s vast informal sector is poised to play an instrumental, decisive and intriguing role in the vision of the Atmanirbhar Bharat.  But the sector, in its current form, appears severely constrained to harness the opportunities. In lights of this, examine the constraints faced by the sector and suggest the measures needed to transform the sector.” 

    Conclusion

    The vision of the Atmanirbhar Bharat is an inflexion point for India’s informal sector, which stipulates adroit manoeuvring between contrasting forces of continuity and change.

  • India should go all out in its Westward trade push

    After walking away from the RCEP, India needs to find alternative trading partners that can offer the potential for trade expansion. The article suggests a Westward trade push as an alternative.

    Forging trade deals with the Western countries

    • Our rejection of RCEP, which covers much of the eastern hemisphere, had exposed us to the risk of losing out on cross-border commercial relations in a highly dynamic part of the world.
    • To compensate for the opportunity cost of that decision, it was imperative to strike other alliances.
    •  As a part of this, India adopted a roadmap for the rest of this decade to elevate ties with the UK and also moving to revive free-trade talks with the EU.
    • An India-UK plan unveiled recently will raise our bilateral relationship to a ‘comprehensive strategic partnership in such areas as economic affairs, defence and health.
    • The two countries signed a £1-billion trade investment pact that is expected to generate jobs in both.
    • Separately, India and the EU are reportedly working out how to resume stalled negotiations for a trade deal.

    Issues India may face

    • The signing of pacts would involve mutual tariff reductions and the lowering of other barriers, both of which have proven thorny so far.
    • In general, while the West wants us to lower import duties, our negotiators have been citing India’s sovereign right to protect domestic businesses under World Trade Organization rules.
    • Globally, even before covid knocked the wind out of the sails of cargo ships, commerce across borders had been doing badly under the extended effects of a financial crisis that shook things up in 2008-09.
    • But world trade remains a reliable path to global prosperity and must therefore regain its gusto.
    • For us, deal-making would mean opening up markets to imports in lieu of easier access to foreign ones.

    Way forward

    • Concessions that cause very few job losses in India can easily be made. A broad cost-benefit analysis will have to guide our approach to talks, on complex issues like US visa rules which affect our software exports.
    • Since it is governments that thrash out deals, geopolitical convergences are often sought too.
    • We seem to be in a favourable position on this, given the West’s need to keep China’s rise in check.
    • The UK’s Rolls-Royce has just inked a memorandum with Hindustan Aeronautics Ltd for warship engines, a sign of our strategic ties.
    • Technology could come our way from the US, too.
    • If we can leverage an ability to play a role in Asia’s balance of power to our economic benefit, we should.

    Conclusion

    Mutually assured flexibility on tariff concessions would help India and its Western partners score economic gains and also counterbalance China’s growing dominance of world trade.

    —————————————————//———————————-

    B2B

    [pib] India-UK Virtual Summit

  • Digital Service tax

    • Starting April 2022, overseas entities that don’t have a physical presence in India but derive significant financial benefit from Indian customers will come under the Indian tax net.
    • While the main legal provision was introduced in 2018, the revenue department notified the thresholds for the purposes of significant economic presence (SEP) on May 3.
    • The concept was introduced via Finance Act, 2018, to enlarge the scope of income of non-residents that accrues or arises in India, by establishing a “business connection” of the foreign entities.
    • The idea is to tax profits of those online and offline businesses that don’t have a physical presence in India but derive significant economic value from the country.
    • Only those entities will get impacted by the SEP provisions who come from non-treaty jurisdictions.
    • That’s because the treaties specify non-resident entities will come under the tax net only if they have a permanent establishment in India.
    • India currently has a Double Taxation Avoidance Agreement with 97 countries.

    Thresholds

    • Transaction Threshold: Any non-resident whose revenue exceeds Rs 2 crore for transactions in respect of goods, services or property with any person in India. This will include transactions on the download of data or software.
    • User Threshold: Any entity that systematically and continuously does business with more than 3 lakh users in India.

    ————————————//————————————————-

    BACK2BASICS

    Revision of this topic further:

    What are Digital Services Taxes?

  • RBI to strengthen risk-based supervision (RBS) of banks, NBFCs

    About RBS model

    • The RBI uses the Risk-Based Supervision (RBS) model, including both qualitative and quantitative elements, to supervise banks, urban cooperatives banks, non-banking financial companies and all India financial institutions.

    Decision to review the model

    • The Reserve Bank has decided to review and strengthen the Risk-Based Supervision (RBS) of the banking sector with a view to enable financial sector players to address the emerging challenges.
    • The review process will help make the extant RBS model more robust and capable of addressing emerging challenges, while removing inconsistencies if any.
    •  Annual financial inspection of UCBs and NBFCs is largely based on CAMELS model (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Systems & Control).
    • It is intended to review the existing supervisory rating models under CAMELS approach for improved risk capture in a forward-looking manner and for harmonising the supervisory approach across all Supervised Entities.

    Source:

    https://www.financialexpress.com/industry/banking-finance/rbi-to-strengthen-risk-based-supervision-of-banks-nbfcs/2244259/

  • Growth of ARCs not in line with NPA trends

    Key takeaways from the RBI report

    • The RBI report states that notwithstanding the rise in the number of Asset Reconstruction Companys (ARCs), the growth in their assets under management (AUM) has been largely trendless except for a major spurt in FY14.
    • The growth of the ARC industry has not been consistent over time and not always been synchronous with the trends in non-performing assets (NPAs) of banks and non-banking financial companies (NBFCs).
    • During 2019-20, asset sales by banks to ARCs declined, which could probably be due to banks opting for other resolution channels such as IBC and SARFAESI.
    • The acquisition cost of ARCs as a proportion to the book value of assets declined, suggesting lower realisable value of the assets.

    Overview of ARCs in India

    • The ARC industry began with the establishment of the Asset Reconstruction Company India Ltd (ARCIL) in 2003.
    • Of the total AUM, about 62 per cent and 76 per cent was held by the top-three and top-five ARCs in March 2020, respectively.
    • After remaining subdued in the initial years of their inception, a jump was seen in the number of ARCs in 2008, and then in 2016.
    • Although the number of ARCs has risen over time, their business has remained highly concentrated.

    Role of the government

    • Indian ARCs have been private sector entities registered with the Reserve Bank.
    • Public sector AMCs in other countries have often enjoyed easy access to government funding or government-backed.
    • By contrast, capital constraints have often been highlighted as an area of concern for ARCs in India.

    Scope for new ARC supported by the government

    • The ARC proposed in the Budget will be set up by state-owned and private sector banks, and there will be no equity contribution from the Centre.
    • The RBI report supported the government’s proposal for a new ARC, saying that “such an entity will strengthen the asset resolution mechanism further.”
    • Introduction of a new asset reconstruction company for addressing the NPAs of public sector banks may also shape the operations of the existing ARCs, it added. 
    • The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets, will look to resolve stressed assets of Rs 2-2.5 lakh crore that remain unresolved in around 70 large accounts.