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GS Paper: GS3

  • Indian MNCs are absent from discussions on digital policy

    Context

    Hyperactivity in the digital regulatory space in India in the form of policies, rules and guidelines signals the accelerated growth of the digital ecosystem which needs regulatory nurturing.

    Recent policy measures related to digital ecosystem

    • The Ministry of Electronics and Information Technology (MeitY) has announced the draft amendment to the IT Rules 2021 (June 2022).
    • The draft India Data Accessibility and Use Policy (February 2022),
    • National Data Governance Framework Policy (May 2022) and the new cyber security directions (April 2022).
    • Besides these, the most awaited and critical e-commerce policy and the Data Protection Bill, both of which have been in the making for at least a few years now, are likely to be announced soon.
    • This hyperactivity signals the accelerated growth of the digital ecosystem which needs regulatory nurturing.
    • The government has recently invited stakeholders to an open house discussion on the proposed changes to the IT Rules.

    Participation of Big Tech platforms  and other stakeholders in policy discussions

    • Various aspects of digital economy: Governments have been pushed to respond to myriad aspects of the digital economy — from financial sector regulation to anti-trust to data privacy.
    • With so much at stake, Big Tech platforms have upped their advocacy by hiring qualified professionals and funding empirical research, not only in India but also across the world.
    • Google, Amazon, Facebook, Twitter and the likes are all actively engaged in policy discussions, either directly or through third parties to put forth a point of view.
    • Similarly, start-ups, think tanks, civil society organisations and academics invested in the issues of the digital economy either as users or as observers contribute to the policy discourse.

    Who is missing?

    • Indian origin multinational corporations — the Tatas, Reliance, Aditya Birla Group, Godrej, ITC, Bajaj, and Hero — have collectively contributed to the country’s development.
    • While these may not be quintessential digital companies, except for Reliance Jio, many are working towards adopting digital technologies for manufacturing, distribution, and client service.
    • Many companies now have online distribution channels that retail through intermediary platforms or their own websites.
    • The Tatas have taken the plunge into e-commerce, first with Tata Cliq and recently with Neu.
    •  Despite this, these Indian MNCs are distant from conversations on these landmark policies that will determine the future of Indian commerce.

    Government relations and outreach functions of MNCs

    • Government relations and outreach functions have always been important to big businesses.
    • At what point and in what manner MNCs interact with the government will of course vary.
    • Using a sector-specific example, all telecom companies in India committedly participate in TRAI’s open houses, industry deliberations and written submissions so that they can nudge policymakers toward industry-friendly decision-making that sits well with overall growth objectives.
    • On general concerns such as infrastructure and the ease of doing business, intervention from the industry is much more indirect and often an ex-post phenomenon, that is, after the policy has been announced.
    • The practice of multi-stakeholderism in policy formulation is present in letter, if not always in spirit.

    Policy formulation in digital economy

    • The case of the digital economy is different.
    • There are multiple opportunities and avenues for participating in dialogue.
    • Striking balance between business viability and government objectives: The policy teams of Big Tech make the most use of these channels to present their point of view and hope for reconciliation on issues, with the final policy document attempting to strike a balance between business viability and government objectives.
    • Over the last few years of active debate on critical digital policies including those on data governance, privacy, anti-trust, and intermediary liability, there has been an overwhelming presence of the Big Tech Indian start-ups competing in this space, as well as their affiliated associations.
    • Indian MNCs, for reasons unclear, has been mostly absent.

    Conclusion

    Absence of Indian MNCs resulted in is a disproportionate policy focus on keeping Big Tech in check as against creating an enabling, secure and trusted digital ecosystem in India. As many issues highlighted by Big Tech are likely to be pain points for Indian businesses as well, participation of Indian MNCs could break the “us versus them” problem plaguing policy making in India today.

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  • Private Sector Boost in India’s Space Industry

    Principal Scientific Adviser stated earlier this month that the government would soon come up with a new space policy that could initiate the rise of India’s own “SpaceX-like Ventures”.

    Prospects of the proposed Space Policy

    • The final version of the policy would soon be referred to the Empowered Technology Group for further examination.
    • The proposed move would increase private sector participation in the industry.
    • The policy document recognizes that India has not tapped into its complete potential in space sector.

    Why is development in the space sector important?

    Ans. Address wide range of problems

    (1) Climate Change

    • Satellites provide more accurate information on weather forecasts and assess (and record) long-term trends in the climate and habitability of a region.
    • By monitoring the long-term impact of climate change at regional, territorial, and national scales, governments would be able to devise more pragmatic and combative plans of action for farmers and dependent industries.
    • Additionally, they can also serve as real-time monitoring and early-warning solutions against natural disasters such as earthquakes, tsunamis, floods, wildfires, mining etc.
    • Real-time tracking can also serve multiple purposes in defence.

    (2)  Connectivity

    • In this light, it must be noted that satellite communications, which are used to facilitate telecommunication services, are among the major categories for investment in the space technology sector.
    • Satellite communication can reach more remote areas where conventional networks would require a heavy complimenting infrastructure.
    • Additionally, as to reliability, the World Economic Forum had stated that satellite communication can help connect 49% of the world’s unconnected population.
    • Other prominent categories include spacecraft and equipment manufacturing.
    • What essentially needs to be remembered is that the strategic space avenue is an integration of the aerospace, IT hardware and telecom sectors.

    Where does India stand in the global space market?

    • As per SpaceTech Analytics, India is the sixth-largest player in the industry internationally having 3.6% of the world’s space-tech companies (as of 2021).
    • US holds the leader’s spot housing 56.4% of all companies in the space-tech ecosystem.
    • Other major players include UK (6.5%), Canada (5.3%), China (4.7%) and Germany (4.1%).
    • The Indian Space Industry was valued at $7 billion in 2019 and aspires to grow to $50 billion by 2024.

    Why does India matter in the global space-tech market?

    • The country’s standout feature is its cost-effectiveness.
    • India holds the distinction of being the first country to have reached the Mars’ orbit in its first attempt and at $75 million — way cheaper than Western standards.

    Future prospects of India’s private ‘Space’

    Ans. India may lead in space junk management

    • Almost 60-odd start-ups had registered with the Indian Space Research Organisation (ISRO) this year.
    • A majority of them were dealing in projects related to space debris management.
    • As space becomes more congested with satellites, the technology would thus help in managing ‘space junk’ (debris of old spacecraft and satellites).

    Where does India lack?

    Ans. Undisputedly, it is the finances

    • The US and Canada were the highest receivers of space-related investment in 2021.
    • The US’s space budget was $41 billion in 2021, $23.3 billion of which was focused on NASA.
    • India’s total budgetary allocation for FY2022-23 towards the Department of Space was ₹13,700 crore ($172 million).
    • Further, as per Tracxn data, funding into the sector’s start-ups (in India) nearly tripled to $67.2 million on a year-over-year basis in 2021.

    How is the private sector’s involvement regulated in India?

    • In June 2020, the Union government announced reforms in the space sector enabling more private players to provide end-to-end services.
    • The central idea was to bring forth a predictable policy and regulatory environment for them and additionally provide access to ISRO facilities and assets to improve their capacities.

    (1) Establishment of IN-SPACe

    • An announcement for the establishment of the Indian National Space Promotion and Authorisation Centre (IN-SPACe) was made.
    • It was mandated the task of promoting, authorising and licensing private players to carry out space activities.
    • As an oversight and regulatory body, it is responsible for devising mechanisms to offer sharing of technology, expertise, and facilities free of cost to promote non-government private entities (NGPEs).
    • IN-SPACe’s Monitoring and Promotion Directorate oversees NGPE’s activities as per prescribed regulations and reports back in case any corrective actions or resolutions are required.
    • ISRO shares its expertise in matters pertaining to quality and reliability protocols, documentation, and testing procedure through IN-SPACe’s ‘interface mechanism’.

    (2) Establishment of NSIL

    • Additionally, constituted in March 2019, New Space India Ltd (NSIL), is mandated to transfer the matured technologies developed by the ISRO to Indian industries.
    • All of them are under the purview of the Ministry of Defence.
    • Private sector’s involvement in the long term, as with other commercial sectors, is believed to help spur investment and expertise in the realm which is capital-intensive and demands high technology.

     

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  • NITI Aayog’s plan for rollout of Digital Banks

    Last week, federal think tank NITI Aayog released a report on digital banks, offering a template for their licensing in India. It said India already has a technology stack to facilitate digital banks.

    What are the planned Digital Banks?

    • Digital Banks or DBs are full-scale banks to be licensed under the Banking Regulation Act.
    • Unlike traditional banks, which require brick-and-mortar infrastructure or physical access points, digital banks simply leverage technology to provide banking services through mobile applications and internet-based platforms.
    • DBs behave like any other scheduled commercial bank, accepting deposits, giving loans etc.
    • They will follow prudential and liquidity norms at par with the commercial banks.
    • Globally, terms like “digital banks”, “neobanks”, “challenger banks”, and “virtual banks” are often used interchangeably.

    What about digital banking units then?

    • The Union budget for FY23 proposed to establish digital banking units (DBUs) of scheduled commercial banks in 75 districts.
    • The objective is to ensure that the benefits of digital payments, banking and fintech innovations reach the grass-roots.
    • DBUs are treated as banking outlets, equivalent to a branch.
    • These units do not have a legal personality and are not licensed under the Banking Regulation Act.
    • Only existing commercial banks may establish DBUs. In contrast, digital banks will be licensed.
    • These banks are expected to ensure credit penetration to underserved MSMEs and retail customers.

    What purpose will digital banks serve?

    • Digital banks are expected to further innovation and support the underserved segments.
    • However, some believe that it will only cater to customers with some level of comfort with digital transactions.
    • According to them, RBI too is not comfortable with this model as the central bank believes that cash handling and credit decisions require physical branches.

    What does NITI Aayog suggest for DBs?

    • In the first phase, a restricted digital bank licence may be given, with limits in terms of volume/value of customers. In the second stage, the licensee will be put in a regulatory sandbox.
    • Finally, a ‘full-scale’ licence may be granted contingent on satisfactory performance.
    • A digital bank will be required to have initial capital of ₹20 crore while in the regulatory sandbox.
    • Upon progression from the sandbox, a full-stack digital business/consumer bank will be required to bring in ₹200 crore capital.

    What has been the global experience?

    • The UK has led the pack in terms of digital banks, with new entrants in the form of Monzo and Starling Bank.
    • Several jurisdictions in the South East Asian region have witnessed the rise of digital banks.
    • Hong Kong has issued separate licences for virtual banks.
    • As of May 2020, the Hong Kong Monetary Authority has licensed 8 entities out of 33 applications.
    • In South Korea, Kakao Bank and K Bank operate as internet banks licensed under the Banking Act.
    • The Philippines has approved six licenses for digital banks.

     

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  • Weighing in on India’s investment-led revival

    Context

    The Finance Minister, Nirmala Sitharaman, said recently that India’s long-term growth prospects are embedded in public capital expenditure programmes. She added that an increase in public investment would crowd in (or pull in) private investment, thus reviving the economy.

    Significance of public investment-led economic growth

    • Public investment-led economic growth forms a credible strand of explanation for India’s post-Independence economic growth. 
    • Revival after Asian financial crisis: When it was faced with a slow-down after the Asian financial crisis of 1997, the  government initiated public road building projects.
    • In the form of the Golden Quadrilateral and the Pradhan Mantri Gram Sadak Yojana, these initiatives sowed the seeds of economic revival, culminating in an investment and export-led boom in the 2000s; GDP grew at 8%-9% annually.
    • In comparison, the investment record during the 2010s has been dismal.
    • However, a recent uptick is evident in the real gross fixed capital formation (GFCF) rate — the fixed investment to GDP ratio (net of inflation).
    • The ratio recovered to 32.5% in 2019-20 from a low of 30.7% in 2015-16.

    Analysing the Investment distribution

    • As in the June edition of the Ministry of Finance’s Monthly Economic Review, the fixed investment to GDP ratio was 32% in 2021-22.
    • However, there is need for caution in reading the most recent data, as they are subject to revision.
    • Moreover, the budgetary definition of investment refers to financial investments (which include purchase of existing financial assets, or loans offered to States) and not just capital formation representing an expansion of the productive potential.
    • The National Accounts Statistics provides disaggregation of gross capital formation (GCF) by sectors, type of assets and modes of financing; over 90% of GCF consists of fixed investments.
    • No change in investment distribution: The investment distribution has hardly changed over the last decade, with the public sector’s share remaining 20%.
    • Fall in share of agriculture and industry: Between 2014-15 and 2019-20, the shares of agriculture and industry in fixed capital formation/GDP fell from 7.7% and 33.7% to 6.4% and 32.5%, respectively.
    • Services’ share rose to 52.3% in 2019-20 compared to 49% in 2014-15.
    • The rise in the services sector is almost entirely on transport and communications.
    • The share of transport has doubled from 6.1% to 12.9% during the same period.
    • Within transportation, it is mostly roads.
    • Decline in the share of investment: Its share in the investment ratio (column 2.1) fell from 19.2% in 2011-12 to 16.5% in 2019-20.
    • This indicates that ‘Make in India’ failed to take off, import dependence went up, and India became deindustrialised.
    • Import dependence on China is alarming for critical materials such as fertilizers, bulk drugs (active pharmaceutical ingredients or APIs) and capital goods.
    • Instead of boosting investment and domestic technological capabilities, the ‘Make in India’ campaign frittered away time and resources to raise India’s rank in the World Bank’s Ease of Doing Business Index.
    • Decline in foreign capital in GFC: The contribution of foreign capital to financing GCF fell to 2.5% in 2019-20 from 3.8% in 2014-15 (or 11.1% in 2011-12).
    • With declining investment share, industrial output growth rate fell from 13.1% in 2015-16 to a negative 2.4% in 2019-20, as per the National Accounts Statistics.

    Way forward

    • Need for balance: As roads and communications are classic public goods, investment in them is welcome.
    • However, for healthy domestic output growth, there is a need for balance between “directly productive investments” (in farms and factories) and infrastructure investments.
    • And this balance was missed.
    • The recent upturn in the aggregate fixed capital formation to GDP ratio is positive, though the rate is still lower than its mark in the early 2010s.

    Conclusion

    The claim that the investment revival is public sector driven is not borne out by facts. The budgetary figures refer to financial investment, not estimates of capital formation, indicating expansion of the economy’s productive capacity.

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    Back2Basics: Gross fixes capital formation

    • Gross fixed capital formation (GFCF), also called “investment”, is defined as the acquisition of produced assets (including purchases of second-hand assets), including the production of such assets by producers for their own use, minus disposals.
    • The relevant assets relate to assets that are intended for use in the production of other goods and services for a period of more than a year.
    • The term “produced assets” means that only those assets that come into existence as a result of a production process are included.
    • It therefore does not include, for example, the purchase of land and natural resources.
    • This indicator is available in different measures: GFCF at current prices and current PPPs in US dollars, and annual growth rates of GFCF at constant prices, as well as quarterly data for percentage change over previous period and percentage change over same period last year.
    • The indicator at current prices and current PPPs is less suited for comparisons over time, as developments are not only caused by real growth, but also by changes in prices and PPPs.

  • 53 years of Bank Nationalization

    Last week, on July 19 was the 53rd anniversary of then Prime Minister Indira Gandhi nationalizing 14 banks.

    Bank Nationalization: A Backgrounder

    • In 1955 Imperial Bank of India was nationalized as RBI with State Bank of India to act as the principal agent  for extensive banking facilities on a large scale, especially in rural and semi-urban areas.
    • The other banks of the princely states were acquired by SBI much earlier.
    • However, the nationalization of banks in 1969 and later in 1980 was of a completely different scale.
    • In 1969, the move covered 14 (followed by six in 1980) of the largest private sector banks—putting 85% of the deposit base into the hands of the government.
    • This brought 80% of the banking segment in India under Government ownership.

    Why Nationalization of Banks?

    • After independence, the Government of India (GOI) adopted planned economic development for the country.
    • Nationalization was in accordance with the national policy of adopting the socialistic pattern of society.
    • The actual course came at the end of a troubled decade when India had suffered many economic as well as political shocks.

    Other reasons

    • Social welfare
    • Controlling private monopolies
    • Expansion of banking to rural areas
    • Reducing regional imbalance to curb the urban-rural divide
    • Priority Sector Lending
    • Mobilization of savings

    Immediate causes

    • There were two wars with China in 1962 and Pakistan in 1965 that put immense pressure on public finances.
    • Banks were failing largely due to speculative financial activities when Indira Gandhi became the prime minister in 1967.
    • Two successive years of drought had not only led to food shortages but also compromised national security because of the dependence on American food shipments.
    • Subsequently, a three-year plan holiday affected aggregate demand as public investment was reduced.
    • Agriculture needed a capital infusion, with the initiation of the Green Revolution in India which aimed to make the country self-sufficient in food security.
    • The collapse of banks was causing distress among people, who were losing their hard-earned money in the absence of a strong government support and legislative protection to their money.

    Post-nationalization challenges

    • Having ownership and operational control of the banks was a challenging task for the government.
    • The banks were constantly challenged on their profitability parameters—particularly RRBs which had both geographical and portfolio concentration risks.

    Establishing regional balance

    • The objective of social control was about making banking sector accessible in areas where these services were not accessible.
    • The state established 196 Regional Rural Banks (RRBs) between two nationalizations.
    • While nationalization, branch licensing policy and priority sector lending targets helped the banks to go to rural areas and certain sectors, it did not achieve regional balance.
    • Of the 20 banks that were nationalized, seven were concentrated in south India, six in west India, four in north India and three in east India.
    • The expanded rural branch network followed the extant regional concentration, bringing more intensive banking in southern and western regions.

    How was regional balance achieved then?

    • This skew was partially set right by two initiatives. The first was an institutional intervention of opening 196 RRBs which had focused area of operation.
    • The RRBs contributed significantly to reduce the regional imbalance with their expanding branch network in the 1980s.
    • RRBs also had a greater proportion of their loans flowing to priority sector in general and agriculture in particular.
    • The second was the policy on lead bank scheme where one bank was assigned as a lead for each district.
    • The lead bank was responsible for the growth and penetration of banking in districts and had to achieve it in coordination with other banks and the state machinery.
    • A “district credit” plan (euphemism for a banking plan), dovetailed with the government schemes, was to be prepared and monitored by the lead bank.
    1. Regional Rural Banks
    • RRBs are a shade better when it comes to rural lending.
    • While they have deployed 72% of the rural and semi-urban deposits as credit in those areas, the figure for urban understandably is very low, and most of these funds have gone into investments.
    1. Small Finance Banks
    • The new small finance banks (SFBs) give an entirely different picture—a large number of them are MFIs that converted into banks.
    • These institutions are trying to collect deposits from the middle and upper middle class and deploy those resources towards the poor.
    • From a paradigm point of view, possibly SFBs are the most interesting institutions that have turned the tables and are trying to achieve from the private sector the objectives set out in the bank nationalization.

    Public versus Private Banks

    • A look at the broad performance ratios for 2017-18 shows that private sector banks score better on efficiency and profitability parameters.
    • They have better return on assets, return on equity, net interest margin and a higher proportion of low-cost deposits.
    • On the other hand, public sector banks (PSBs) have a better impact on priority sector lending achievement, and paid higher wages.
    • Of the new Pradhan Mantri Jan Dhan Yojana accounts 77% were opened by state-owned banks, 20% by RRBs, and a mere 3.4% accounts were opened by private banks.
    • From this perspective bank nationalization was indeed a good move at that time.

    What benefits do we reap today?

    • Banking under government ownership gave the public implicit faith and immense confidence about the sustainability of the banks.
    • Banks were no longer confined to only metropolitan or cosmopolitan in India. In fact, the Indian banking system has reached even to the remote corners of the country.
    • The present government has reached out to people through banks.
    • Assistance for constructing toilets under Swachh Bharat programme, DBT, Crop insurance schemes etc was given through banks.
    • The dispensing of Mudra loans to about 20 crore individuals, benefits under PM Kisan scheme for providing cash assistance to close to 15 crore farmers annually are only possible through this banks.
    • Thus banks became the government’s dispenser of goodies due to the decision which was taken 50 years ago.

    What about Financial Inclusion?

    • The All India Debt and Investment Survey reports indicate that the formal sector has been losing ground to the informal sector in the rural indebtedness pie since 2001 onwards.
    • This is worrying and indicates that the inclusion agenda is far from achieved.
    • Some examples in the public sector banking system—particularly SBI—have shown that it is possible to achieve the double bottom line of being in the commercial market while continuing to achieve significant targets in inclusion, sectoral, spatial and geographical.

    Way Forward

    • From the larger perspective of efficiency and better utilization of capital, it may be a good idea to move state-owned banks towards more market-based framework.
    • However, that call should be taken to achieve the residual task of inclusion.
    • Making state-owned banks more autonomous and accountable to the market may be the first significant step that can be taken for now.

    Also read:

    [Burning Issue] Privatization of PSBs

     

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  • A new global standard for AI ethics

    Context

    Artificial intelligence (AI) is more present in our lives than ever. From predicting what we want to see as we scroll through social media to helping us understand weather patterns to manage agriculture, AI is ubiquitous.

    Issues with AI  and it why it matters to India

    • Bias and discrimination: The data used to feed into AI often aren’t representative of the diversity of our societies, producing outcomes that can be said to be biased or discriminatory.
    • Errors in facial recognition: There are problems emerging in facial recognition technologies, which are used to access our phones, bank accounts and apartments, and are increasingly employed by law-enforcement authorities, in identifying women and darker-skinned people.
    • For three such programs released by major technology companies, the error rate was 1% for light-skinned men, but 19% for dark-skinned men, and up to 35% for dark-skinned women.
    • Biases in facial recognition technologies have led to wrongful arrests.
    •  Indeed, if the business model of how these technologies are developed does not change to place human interests first, inequalities will grow to a magnitude never before experienced in history; access to the raw material that is data is key.
    • These issues are of particular importance to India, which is one of the world’s largest markets for AI-related technologies, valued at over $7.8 billion in 2021.
    •  The National Strategy on Artificial Intelligence released by NITI Aayog in 2018 highlights the massive potential of AI in solving complex social challenges faced by Indian citizens across areas such as agriculture, health, and education, in addition to the significant economic returns that AI-related technologies are already creating.

    UNESCO agreement

    • To ensure that the full potential of these technologies is reached, the right incentives for ethical AI governance need to be established in national and sub-national policy.
    • India has made great strides in the development of responsible and ethical AI governance, starting with NITI Aayog’s #AIForAll campaign to the many corporate strategies that have been adopted to ensure that AI is developed with common, humanistic values at its core.
    • UNESCO’s recommendations: Last November 193 countries reached a groundbreaking agreement at UNESCO on how AI should be designed and used by governments and tech companies.
    • UNESCO’s Recommendation on the Ethics of Artificial Intelligence took two years to put together and involved thousands of online consultations with people from a diverse range of social groups.
    •  It aims to fundamentally shift the balance of power between people, and the businesses and governments developing AI.
    • Countries which are members of UNESCO have agreed to implement this recommendation by enacting actions to regulate the entire AI system life cycle, ranging from research, design and development to deployment and use.
    • This means they must use affirmative action to make sure that women and minority groups are fairly represented on AI design teams.
    • The Recommendation also underscores the importance of the proper management of data, privacy and access to information.
    •  It establishes the need to keep control over data in the hands of users, allowing them to access and delete information as needed.
    • It also calls on member states to ensure that appropriate safeguards schemes are devised for the processing of sensitive data and effective accountability, and redress mechanisms are provided in the event of harm.
    • Socio-cultural impact: The broader socio-cultural impacts of AI-related technologies are also addressed, with the Recommendation taking a strong stance that-
    • 1] AI systems should not be used for social scoring or mass surveillance purposes;
    • 2] That particular attention must be paid to the psychological and cognitive impact that these systems can have on children and young people;
    • 3] Member states should invest in and promote not only digital, media and information literacy skills, but also socio-emotional and AI ethics skills to strengthen critical thinking and competencies in the digital era.
    • In a number of countries, the principles of the Recommendation are already being used in AI regulation and policy.
    • Finland provides an example of good practice of this regard, with its 2017 AI Strategy.

    Conclusion

    The new agreement is broad and ambitious. It is a recognition that AI-related technologies cannot continue to operate without a common rulebook. Over the coming months and years, the Recommendation will serve as a compass to guide governments and companies, to voluntarily develop and deploy AI technologies that conform with the commonly agreed principles it establishes.

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  • What is the Controversy over GST levies on Food?

    From July 18, a 5% Goods and Services Tax (GST) has been levied on several food items and grains that are sold in a pre-packed, labelled form even if they are not branded.

    What is the news?

    • So far, these items, which include curd, lassi, buttermilk, puffed rice, wheat, pulses, oats, maize and flour, were exempted from the GST net.
    • The fresh tax levies have attracted an outcry from traders as well as consumers.

    What is GST?

    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
    • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

    What are GST Slabs?

    • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
    • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
    • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
    • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
    • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

    How did the rate hikes come about?

    • The 5% tax on unbranded packed food items was approved by the GST Council.
    • Some of the other items to have lost their tax-exempt status include bank cheques, maps and atlases, hotel rooms that cost up to ₹1,000 a night, and hospital room rents of over ₹5,000 a day.
    • The pre-packed items weighing over 25 kg would not attract GST.

    Why such move?

    • This move was part of a broader set of changes in the GST structure to do away with tax exemptions as well as concessional tax rates.
    • The Centre and States had discussed the need to raise revenues from the GST, which at the time of its launch five years ago, was premised on levying a ‘revenue-neutral’ rate of 15.5%.
    • All affected food items, including wheat, pulses, rice, curd and lassi, will be exempt from GST when sold loose.

    What has the government said on the issue?

    • FM has hit out at misconceptions about the GST levies on food items and dismissed suggestions that they were imposed unilaterally by the Centre.
    • The 5% levy, she said, was critical to curb tax leakages and was not taken by ‘one member’ of the GST Council alone as all States had agreed to the move.
    • When GST was rolled out, a GST rate of 5% was made applicable on branded cereals, pulses, flour.
    • This was later amended to tax only such items which were sold under a registered brand or brands on which enforceable right was not foregone by the suppliers.
    • This tax exemption triggered ‘rampant misuse’ by reputed manufacturers and brand owners leading to a gradual drop in revenues.

     

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  • Why is Karnataka opposing Centre’s draft Eco-Sensitive Area norms for Western Ghats?

    The Union Environment Ministry’s latest draft notification on Ecologically Sensitive Areas (ESA) in the Western Ghats is facing stiff opposition in Karnataka.

    What is the news?

    • The MoEFCC had issued a draft notification that demarcated large parts of Karnataka, Tamil Nadu, Gujarat and Maharashtra as eco-sensitive areas.
    • Among these states, Karnataka contains the largest geographical share of the notified areas in the Western Ghats, at 20,668 sq km.

    ESA in Western Ghats

    • In 2013, the Kasturirangan committee had submitted a report which recommended that 37% of the Western Ghats, covering an area of 59,940 sq km be classified as ESA.
    • On the basis of this, several drafts were introduced which were subsequently rejected by the surrounding states, including Karnataka.

    What is ESA?

    • Eco-Sensitive Zones (ESZs) or Ecologically Fragile Areas (EFAs) are areas notified by the MoEFCC around Protected Areas, National Parks and Wildlife Sanctuaries.
    • The purpose of declaring ESZs is to create some kind of “shock absorbers” to the protected areas by regulating and managing the activities around such areas.
    • They also act as a transition zone from areas of high protection to areas involving lesser protection.

    How are they demarcated?

    • The Environment (Protection) Act, 1986 does NOT mention the word “Eco-Sensitive Zones”.
    • However, Section 3(2)(v) of the Act, says that Central Government can restrict areas in which any industries, operations or processes or class of industries, operations or processes shall be carried out or shall not, subject to certain safeguards.
    • Besides Rule 5(1) of the Environment (Protection) Rules, 1986 states that central government can prohibit or restrict the location of industries and carrying on certain operations or processes on the basis of certain considerations.
    • The same criteria have been used by the government to declare No Development Zones (NDZs).

    Defining its boundaries

    • An ESZ could go up to 10 kilometres around a protected area as provided in the Wildlife Conservation Strategy, 2002.
    • Moreover, in the case where sensitive corridors, connectivity and ecologically important patches, crucial for landscape linkage, are beyond 10 km width, these should be included in the ESZs.
    • Further, even in the context of a particular Protected Area, the distribution of an area of ESZ and the extent of regulation may not be uniform all around and it could be of variable width and extent.

    Activities Permitted and Prohibited

    • Permitted: Ongoing agricultural or horticultural practices, rainwater harvesting, organic farming, use of renewable energy sources, and adoption of green technology for all activities.
    • Prohibited: Commercial mining, saw mills, industries causing pollution (air, water, soil, noise etc.), the establishment of major hydroelectric projects (HEP), commercial use of wood, Tourism activities like hot-air balloons over the National Park, discharge of effluents or any solid waste or production of hazardous substances.
    • Under regulation: Felling of trees, the establishment of hotels and resorts, commercial use of natural water, erection of electrical cables, drastic change of agriculture system, e.g. adoption of heavy technology, pesticides etc, widening of roads.

    What does the new draft notification for the Western Ghats say?

    • The draft notification demarcates 46,832 sq km in the five states Gujarat, Maharashtra, Karnataka, Goa and Tamil Nadu as ESA in the Western Ghats.
    • Kerala is excluded from the draft notification and it had earlier undertaken the exercise of demarcating ESA in the state by physical verification.
    • Among the five states, 20,668 sq km of the ESA lies in Karnataka, 1,461 sq km in Goa, 17,340 sq km in Maharashtra, 6,914 sq km in Tamil Nadu and 449 sq km in Gujarat.
    • According to the notification, the concerned state governments are responsible for monitoring and enforcing the provisions of the notification.

    What are the curbs that the state governments will have to implement?

    • The draft notification states there shall be a complete ban on mining, quarrying and sand mining in the ESA.
    • All existing mines are to be phased out within five years from the date of issue of the final notification or on the expiry of the existing mining lease.
    • It also bars setting up of new thermal power projects and expansion of existing plants in the sensitive area, and the banning of all new ‘Red’ category industries.
    • The construction of new townships and area development projects will also be prohibited in the areas.
    • ‘Orange’ category industries, with a pollution index score of 41-59, such as jute processing and ‘White’ industries that are considered non-polluting will also be allowed with strict compliance.

    What were the suggestions by the Kasturirangan panel?

    • The panel, formed in 2012, was tasked with the mandate of taking a “holistic view of the issue, and to bring synergy”.
    • It aimed to protecting the environment and biodiversity, while maintaining the needs and aspirations of the local and indigenous people, of sustainable development and environmental integrity of the region.
    • The report had recommended a blanket ban on mining, quarrying, red category industries and thermal power projects.
    • It also stated that the impact study of infrastructural projects on the forest and wildlife should be conducted before permission is given.

    What is Karnataka’s stand on the matter?

    • The Karnataka government has been firm in rejecting the implementation of the guidelines.
    • It has staunchly opposed to the Kasturirangan committee report on Western Ghats.
    • It urged that declaring Western Ghats as ESA would adversely affect the livelihood of people in the region.
    • Environmental experts consider the state government’s decision to be disastrous for the biodiversity of the Western Ghats.

     

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  • Despite pressures, the Indian rupee’s remarkable resilience

    Context

    The Indian rupee has depreciated by around 7% against the U.S. dollar, since the start of the year, in response to various domestic and global factors.

    What are the factors responsible for decline?

    • A widening current account deficit, persistent risk-off sentiment as a result of geopolitical tensions, ‘a strengthening dollar index, and continuous sell-off by foreign portfolio investors have all put pressure on the rupee’.
    • Reversal of monetary policy in the US: The runaway inflation levels since last year, which have seen consumer price index (CPI) inflation in the United States reaching a multi-decade high of 9.1% in June 2022, have prompted the reversal in the monetary policy stance of the US Federal Reserve.
    • With inflation rising unabated, the Fed is widely expected to continue raising interest rates.
    • Higher risk-free return in the US: As a result of higher risk-free returns being available in the U.S., there have been persistent outflows of foreign portfolio capital since October 2021, which, on a cumulative basis, stands at $30 billion this year.

    Comparison with the depreciation in the past

    • Even as the rupee has fallen sharply against the dollar, the depreciation has been relatively lower compared with past crises.
    • During the global financial crisis of 2008, the rupee had weakened by over 20% between December 2007-June 2009 and during the Taper Tantrum of 2013 for seven months from the start of the crisis in May 2013, the rupee had depreciated by over 11%.
    • Reduced external vulnerability: The relative lower depreciation this time is attributed to the lowering of India’s external vulnerability measured in terms of a relatively high import cover and low short-term external debt.
    • During the Taper Tantrum, India’s import cover stood at over seven months as compared to around 12 months in the current period.

    Decline in foreign exchange reserves

    • The Reserve Bank of India (RBI) has stepped in to arrest a large depreciation in the currency, with interventions in the spot and forward foreign exchange markets.
    • Consequently, India’s foreign exchange reserves have moderated by almost $55 billion from a high of $635 billion seen this year.
    • Elevated global crude oil prices have impinged on India’s oil import bill, in turn widening the trade deficit, thus increasing the demand for U.S. dollars, and affecting forex reserves further.

    Effects of weak rupee

    • Export to become competitive: Among the benefits is the premise that the rupee’s weakening should aid exporters in becoming more competitive.
    • However, the concomitant depreciation of currencies of some of India’s competitors such as South Korea, Malaysia and Bangladesh against the dollar, alongwith a high import intensity of some of its key export segments (petroleum, gems and jewellery and electronics), is likely to have blunted the ameliorative impact on India’s exports.
    • Increase in the price of imported commodities: a weaker rupee is driving up prices of key import commodities such as coal, oil, edible oil, gold, thus impacting the imported component of inflation.
    • Impact on the borrowers: The unhedged component of corporate debt denominated in dollars is also likely to bear the brunt of a weaker rupee.
    • Impact on investment: Most importantly, a continuously sliding exchange rate discourages foreign investors from making fresh investments, which keep losing value in dollar terms.
    • For this reason, it is ideal to provide confidence to investors by arresting a continuous slide in the exchange rate.

    Measure by the RBI to arrest the weakening of rupee

    • Apart from intervening in the forex market to arrest the fall in the rupee’s value, the RBI announced a slew of measures recently to liberalise foreign inflows into the country and make them more attractive.
    • Measures such include:
    • Promoting trade settlements between India and other countries in rupee terms.
    • Offering higher interest rates on fresh Foreign Currency Non-Resident (Bank) and Non-Resident External deposits.
    • A widening of investible universe of government and corporate debt, a relaxation of the interest rate.
    • Amount ceiling for External Commercial Borrowing loans, among others, have contributed to arresting the rupee’s slide against the greenback.

    Way forward

    • Inclusion of companies in glabal indices: The Government could encourage some of the large market cap companies (private and public sectors) to be included in the major global indices such as MSCI and FTSE.
    • This will help increase the weight of Indian equities in these indices, compensating for foreign portfolio outflows to some extent as investors are unlikely to be underweight on India.
    • India’s entry into bond indices: The Government could also expedite India’s entry into bond indices such as J.P. Morgan’s Emerging-Market Bond Index and Barclays Global Bond Index.
    • This will not only lead to forex inflows but also have a benign impact on interest rates.
    • Such measures will keep the forex war chest of the RBI at a comfortable level, providing the central bank the requisite ammunition in case there is further weakness.
    • The maintenance of the U.S.-India interest rate differential along with timely forex market interventions by the central bank to manage volatility will prove to be salutary in preserving the rupee value against the greenback.

    Conclusion

    Even as the rupee is expected to remain under pressure in the near term because of global uncertainty, high commodity prices and rising U.S. interest rates, mitigating measures have to be taken to partly arrest the slide.

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    Back2Basics: What is taper tantrum?

    • Taper tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) program.
    • The Fed announced that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it was feeding into the economy.
    • The ensuing rise in bond yields in reaction to the announcement was referred to as a taper tantrum in financial media.

  • What is Transition Tax Credit?

    Taxpayers who had missed out on getting the benefit of transitional tax credits during India’s switchover to the Goods and Services Tax (GST) regime five years ago, will now get a fresh window to avail them.

    What is Transitional Tax Credit?

    • A tax credit is a component of a company’s tax payment that can be applied to offset a subsequent tax obligation.
    • When India moved to the GST regime in 2017, companies had to transition the credit sitting on their books.
    • So, the closing balance in the old tax regime would become the opening credit balance under GST.
    • When India moved from the old indirect tax regime to GST, a one-time transition of credit was allowed.
    • That is, companies could set off part of the taxes paid during the old tax regime against future GST liabilities.
    • Many companies claimed that they had simply forgotten to claim the transitional credit.

    Why in news?

    • The Supreme Court has directed the revenue authorities to facilitate such credits.
    • The move is likely to benefit hundreds of GST assessees who had hitherto not been able to avail such credits.
    • They will be given two-month window to claim during September and October.

     

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