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GS Paper: GS3

  • Why India’s pro-rich, anti-poor taxation policies must change

    Context

    To develop their renewable energy capacities poor countries may well have to help themselves to make the transition that society urgently needs. One source of funding could well be the well-off citizens of India, who are getting richer and richer.

    Growing inequality in India

    • A 2018 Oxfam report revealed that 10 per cent of the richest Indians garnered 77.4 per cent of the nation’s wealth.
    •  In fact, according to the report, 58 per cent of India’s wealth was in the hands of one per cent of the country’s population.
    • The combined income of this handful of people in 2017 was almost as much as India’s budget that year.
    • In 2017, the fortune of India’s 100 richest tycoons leaped by 26 per cent.
    •  According to CrĂ©dit Suisse, the number of dollar millionaires in India has jumped from 34,000 in 2000 to 7,59,000 in 2019 — in other words, the country has one of “the world’s fastest-growing population of millionaires”.
    • The average wealth of these millionaires has increased by 74 per cent over this period.

    Issues with taxation policies

    • The taxation policy of the government, instead of making the exchequer benefit from this trend, has actively strengthened the trend of growing millionaires.
    • Replacing wealth tax by increasing income tax: The government replaced the wealth tax by an income tax increase of two per cent for households that earned more than 10 million rupees annually.
    • Corporate tax was reduced: The corporate tax was lowered, for existing companies from 30 per cent to 22 per cent, and for manufacturing firms incorporated after October 1, 2019 that started operations before March 31, 2023, from 25 to 15 per cent — the biggest reduction in 28 years.
    • Increase in income tax exemptions: In the 2019-20 budget, the income tax exemption limit jumped from Rs 2,00,000 to 2,50,000 and the tax rate for incomes up to Rs 5 lakh was reduced from 10 to 5 per cent.

    Impact of pro-rich taxation policy

    • Deprives the state of resources: This taxation policy deprived the state of important resources.
    • Increase in indirect taxes: To (partly) compensate for the decline of direct taxes, the government has increased indirect taxes, unfairly so, because they affect all Indians irrespective of their income.
    • The share of indirect taxes in the state’s fiscal resources has increased to reach 50 per cent of total taxes in 2018.
    • Taxes on petroleum products are a case in point.

    High taxes on petroleum products

    • About two-thirds of the cost of a litre of petrol now goes towards taxes.
    • The tax collected on petrol and diesel has increased by 459 per cent in the past seven years — from Rs 52,537 crore in 2013 to Rs 2.13 lakh crore in 2019-2020.
    • Given that petrol is a less elastic good, people are bound to consume it even at higher prices.
    • This also explains why the government sees fuel sale in India as a safe “revenue collection” medium.
    • In 2018-19, excise duty on petroleum products alone accounted for roughly 24 per cent of the indirect tax revenue.

    Consider the question “India’s taxation policies are criticised for being pro-rich. In the context of this, discuss the issues with the taxation system and suggest the measure to deal with these issues.”

    Conclusion

    The government’s taxation policy will probably continue to prevail depriving the exchequer of some of the resources it needs for dealing with issues as important as climate change.

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  • Economic, political implications of repeal of farm laws

    Context

    In a surprise move, Prime Minister Narendra Modi announced that the government will repeal the farm laws in the Winter Session of Parliament.

    Economic impact

    • Agri-growth rate to remain constant: The agri-GDP growth has been 3.5 per cent per annum in the last seven years.
    • One expects this trend to continue — there might be minor changes in the agri-GDP depending on rainfall patterns.
    • Cropping pattern to remain skewed: Cropping patterns will remain skewed in favour of rice and wheat, with the granaries of the Food Corporation of India bulging with stocks of grain.
    • Increase in food subsidy: The food subsidy will keep bloating and there will be large leakages.
    • Environmental impact: The groundwater table in the north-western states will keep receding and methane and nitrous oxide will keep polluting the environment.

    Suggestion on increasing farmers income

    • Average agri-household income: The latest Situation Assessment Survey of the NSO reveals that the income of an average agri-household in India was only Rs 10,218 per month in 2018-19.
    • This is not a very happy situation and all out measures need to be taken to increase rural incomes in a sustained manner.
    • How to increase farmers income: Given that the average holding size stands at just 0.9 ha (2018-19), and has been shrinking over the years.
    • Efficient functioning value chain: Unless one goes for high-value agriculture — and, that’s where one needs efficient functioning value chains from farm to fork by the infusion of private investments in logistics, storage, processing, e-commerce, and digital technologies — the incomes of farmers cannot be increased significantly.
    • Reforms: This sector needs reforms, both in the marketing of outputs as well as inputs, including land lease markets and direct benefit transfer of all input subsidies — fertilisers, power, credit and farm machinery.

    Implications

    • Demand for legal status to MSP could strengthen: Farmer leaders are already asking for the legal guarantee of MSPs for 23 agri-commodities.
    • Their demand could increase to include a larger basket of commodities.
    • Demand for privatisation: There could be demands to block the privatisation reforms of public sector enterprises — Air India, for instance — or to scuttle any other reform for that matter.
    • The net result is likely to be slowing down the economic reforms that are desperately needed to propel growth.

    Consider the question “The latest Situation Assessment Survey of the NSO reveal the low average agri-household income in India. All out measures need to be taken to increase rural incomes in a sustained manner. In the context of this, suggest the measures to increase the farmers’ income and challenges in it.

    Conclusion

    The most important lesson from the repeal of the farm laws is that the process of economic reforms has to be more consultative, more transparent and better communicated to the potential beneficiaries. It is this inclusiveness that lies at the heart of democratic functioning of India.

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  • PM announces repeal of three Farm Laws

    The Prime Minister has announced the withdrawal of the contentious farm laws.

    Daniel Q. Gillion, author of The Political Power of Protest, and a sociologist at the University of Pennsylvania, says to be successful, a protest must be impossible to ignore.

    What were the farm laws that have been repealed?

    1. Farmers Produce Trade and Commerce (Promotion and Facilitation) Act, 2020: It was aimed at allowing trade in agricultural produce outside the existing APMC mandis
    2. Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020: It seeks to provide a framework for contract farming;
    3. Essential Commodities (Amendment) Act, 2020: It was aimed at removing commodities such as cereals, pulses, oilseeds, edible oils, onion and potato from the list of essential commodities.

    Why were these reforms sought?

    • APMC reforms: There has been a long-pending demand for reforms in agricultural marketing, a subject that comes under the purview of state governments.
    • Long pending stagnation: It was in this backdrop that the present government went for reforms in the sector by passing these laws.

    In what circumstances were the laws passed?

    • Ordinance route: The government initially cleared them as ordinances in June 2020, there were token protests with the country’s attention gripped by the first wave of Covid-19.
    • Without consultation and haste: In Parliament, there was no thorough scrutiny of the Bills by a parliamentary panel. The government dismissed these demands and pushed the legislation through.
    • Opposition disregard: The Opposition benches were suspended for a week for their “disorderly conduct” while protesting against the rushed passage of the laws.

    Beginning of the protests

    The protests gained momentum when the Centre pushed the Bills in Parliament in the Monsoon Session.

    • Fear over private mandis: Farmers feared that the existing APMC mandis where they sell their products would be shut down once private players started trading in agri-produce outside the mandi premises.
    • Non-guarantee over MSP: Once the APMC mandi system became redundant, procurement based on minimum support prices (MSP) too would come to an end.

    After sporadic protests against the farm laws, including a nationwide road blockade, the farmers’ unions in Punjab and Haryana gave a call for a ‘Delhi Chalo’ movement.

    How protests could sustain for so long?

    • Unity: The leaders of farmers’ unions were very strategic in their approach to the protest and decided to work together very early in the agitation.
    • Finances: The protest sites at the Delhi border needed a steady injection of resources to keep going. Aware of this need, the unions had begun making monthly collections.
    • People: The unions behind the farm stir are well-organized machinery with committees at the level of villages, blocks, and districts.
    • Communication: Social media has been central to the scale of this agitation.
    • Engagement: The unions kept the stakeholders engaged by ensuring that there was never a dull moment in this agitation.

    In practical terms, what was the status of the three laws until the repeal?

    • The farm laws were in force for only 221 days — June 5, 2020, when the ordinances were promulgated to January 12, 2021, when the Supreme Court stayed their implementation.
    • The Supreme Court stayed the implementation of the three laws on January 12 this year.
    • Since the stay, the laws have been suspended.
    • The government has used old provisions of the Essential Commodities Act, 1955 to impose stock limits, having amended the Act through one of the three farm laws.

    Reasons for the repeal

    There are contrasting suggestions about the timing of the decision to announce the repeal.

    • Forthcoming elections: There are crucial Assembly elections early next year in five states, including Uttar Pradesh and Punjab.
    • Public appeasement: The PM sought to announce this on Guru Nanak Jayanti probably in a move to appease a community, to which a significant segment of protesting farmers from Punjab belongs.
    • Rising anxiety among Public: There was a risk that anxiety among the protesters could lead to tensions as there had been many deaths since the protests began.
    • Fury over year-long protests: The protest had created a ruckus on the streets of capital due to continuous blockades even after the intervention of Supreme Court.
    • Rising political differences: Given that it took the government a year to realise the socio-political costs, the repeal also signals a weakened political feedback mechanism within the party.

    Significance of the repeal

    • Restores faith in the govt: In the immediate term, the repeal exposes the government to charges of being on the wrong path and against popular sentiments, notwithstanding its claims to the contrary.
    • Dedication over farmers’ cause: The govt moves were increasingly perceived as being not in tune with the needs of rural farming communities.
    • Political stewardship: The PM was clearly balancing his political posture that has thrived on the image of strong and decisive leadership.

    Implications of the repeal

    • CAA standpoint: Although the anti-CAA protests were called off, almost two years on, the Home Ministry has not yet framed the rules for implementation of the CAA.
    • Statehood for J&K: There is no such unanimity over Article 370. Most of these parties have largely been united for the restoration of statehood to J&K, and early elections.

    An analysis of the enactment-repeal conundrum

    (1) Reforms are must

    • There may be some deficiencies in the exact design and mechanism of the reforms proposed in the three farm laws.
    • However, most advocates of agricultural reform would agree that they were in the right direction.

    (2) Reforms don’t occur overnight

    • These laws could be a great example for passionate reforms. However, Legislative tapasya (penance) is all about listening to outer world (i.e the farmers), not inner self.
    • It requires listening to those for whose benefit laws and policies are crafted. It can’t be a meditation in isolation and implementation as a divine ordeal.

    (3) Answerability and consultation matters

    • That the government chose to push these reforms through its own set of consultations left many stakeholders feeling left out, and created a backlash.
    • The repeal underlines that any future attempts to reform the rural agricultural economy would require a much wider consultation.

    (4) Success lies in the acceptance of reforms

    • The better design of reforms ensures wider acceptance.
    • The repeal would leave the government hesitant about pursuing these reforms in stealth mode again.

     

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  • The heavy lifting on climate action must begin

    Context

    Glasgow’s success was that it finished building the scaffolding for climate action initiated through the Paris Agreement. But true success depends on whether countries are receptive to these nudges.

    What were the Glasgow climate meeting’s (COP26) successes and failures?

    • Strengthened Paris Agreement mechanism: Glasgow strengthened the Paris Agreement mechanism of eliciting pledges from countries and ratcheting them up over time.
    • It requested countries to update and strengthen 2030 emission targets in their NDCs by the end of 2022, earlier than previously expected.
    • Success at Glasgow was explicitly defined around ‘keeping 1.5 degrees alive’ through such pledges.
    • There are two problems with this interpretation.
    • First, the Paris, and Glasgow, approach focusing on target-setting gives insufficient importance to the challenge of implementing those targets.
    • A focus on shorter term targets and their implementation — which India to its credit has been highlighting — will be important.
    • Second, by calling on countries to strengthen targets to align with the Paris Agreement objectives without explicitly considering that countries have different roles and responsibilities in doing so risks side-stepping, again, the long-standing issue of climate equity.

    Phase-down clause for thermal power and implications for India

    • Phasing down coal power: A specific high profile clause calls for the ‘phase down of unabated coal power and phase out of inefficient fossil fuel subsidies’.
    • It was the Indian Minister who read out an amendment modifying ‘phase-out’ to ‘phase-down’ for coal.
    • India’s concerns: India’s real concerns included not precluding subsidies for social purposes, such as for cooking gas; querying whether from an equity point of view, all countries should be asked to limit coal use at the same time; and noting the lack of mention of oil and gas.
    • A positive for all from environmental point of view: From an environmental point of view, more explicit discussion of coal, but ideally all fossil fuels, is a positive, including for India.
    • Concerns on developmental view: From a developmental view, however, India is concerned that explicit mention of coal constrains us in our choice of fuel.
    • Way out for India: A possible way out is for India to explicitly seek global support for an accelerated transition away from coal, an approach taken by South Africa.

    Challenges and achievements at COP26

    [A] Measures for adaptations

    • Adaptation has long been neglected in global negotiations, reflecting a global power imbalance that places less weight on the concerns of vulnerable nations.
    • In this context, it was a partial win that Glasgow set up an explicit two year work programme for a ‘global goal’ on adaptation.
    • No development on agenda of loss and damage: The important complementary agenda of ‘loss and damage’ – compensating for unavoidable impacts that go beyond adaptation — received at most lip service.
    • Even though there was discussion of a specific mechanism, backed by funding, to the dismay of small, vulnerable nations, only a ‘dialogue’ was established.

    [B] Climate finance commitment issue not addressed

    • Commitment on climate finance not met: Climate finance promised to be the central issue of COP26, with considerable frustration from developing countries that the decade-long commitment of $100 billion had not been met.
    • Glasgow did no more than establish a work programme on post-2025 financing and continue tracking progress on the $100 billion.
    • The exception was a call to double adaptation finance by 2025.
    • Mobilising private finance: Former Bank of England Governor Mark Carney indicated that companies committed to net zero initiatives could marshal a scarcely believable $130 trillion, suggesting growing efforts to mobilise private finance.
    • Developing countries have long insisted that publicly funded climate finance is a right devolving from the ‘polluter pays’ principle rather than aid.

    [C] Paris rulebook

    • Completion of two elements of Paris Rulebook: There were two particularly important elements of what is called the ‘Paris Rulebook’ that were completed in Glasgow.
    • Transparency framework: First, the transparency framework was completed, which includes reporting rules and formats for emissions, progress on pledges and finance contributions.
    • Rules for carbon market: The second key was completion of agreed rules for carbon markets, the complexities of which had stymied agreement for four years.
    • Rules were put in place to limit the scope for ‘double-counting’ of credits by more than one country.

    Way forward for India

    • The real determinant of success or failure rests on national politics and popular support for climate change within countries — how countries use the scaffolding.
    • For India, these politics are complex because they revolve around simultaneously balancing concerns over whether our policy space will be limited by inequities embedded in the global mitigation efforts, and our own interests as a vulnerable country in enhancing and accelerating climate action.
    • A balanced view requires consideration of both objectives.

    Consider the question “Why climate finance continues to be a contentious issue in the negotiations over climate change? Suggest the way to balance the concerns over development with the efforts at climate action.”

    Conclusion

    The meeting hit many, but not all, of its procedural benchmarks by building scaffolding for the future. But the real determinant of success or failure rests on national politics and popular support for climate change within countries.

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  • Cryptocurrencies

    With cryptocurrencies such as Bitcoin gaining popularity among citizens, the Centre has been compelled to take a stance on the legal status of cryptocurrencies.

    Background

    • The Union Government is said to be considering a proposal to tax cryptocurrency transactions in the country.
    • The move would bring cryptocurrency trading, which has till date happened outside the ambit of the law, into the formal economy.

    Defying RBI ban

    • RBI has been vehemently opposed to the idea of legalizing cryptocurrencies.
    • It had banned financial institutions such as banks from facilitating transactions involving cryptocurrencies back in 2018.
    • The RBI’s order was overturned by the Supreme Court in 2020, and this led to a tremendous surge in cryptocurrency transactions through exchanges.

    Why did RBI propose a ban?

    • Financial stability: The RBI has characterized private cryptocurrencies as a threat to financial stability.
    • Threat to the sovereignty of Rupee: It perceives cryptocurrencies rise as a threat to the sovereignty of the rupee.
    • Beyond regulatory scope: The widespread acceptance of cryptocurrencies could interfere with the ability of the RBI to conduct monetary policy effectively.
    • Digital currency in the pipeline: It should be noted that RBI and other central banks are also looking to come up with digital versions of their own currencies.
    • Competition of currencies: The rupee or central bank digital currencies may not be able to outcompete cryptocurrencies just because they are digital.

    Legislative opinion on Cryptocurrencies

    • Not in favour of ban: This week, a Parliamentary Standing Committee recommended that cryptocurrencies be regulated rather than banned.
    • Making a legal framework: The Government is also expected to table a bill that clarifies its position on cryptocurrencies in Parliament next year.
    • Taxing cryptocurrencies: There is a proposal to classify cryptocurrency exchanges as e-commerce platforms and tax them under the GST framework comes.

    Why has the Government chosen to regulate rather than ban cryptocurrencies?

    • Popularity amongst Public: The growing popularity of cryptocurrencies among citizens may have played a role in the Government opting for regulation over an outright ban.
    • Lack of evident threat: There is no clear evidence of the misuse of cryptocurrencies and their risks.
    • Boosting with policy: The Union govt may also not want to kill the nascent cryptocurrency industry which many believe can be a hub for financial innovation.
    • Revenue generation: Fiscal revenues can be adversely impacted by the increased tax evasion opportunities that crypto-currencies can facilitate.
    • Capitalizing the market: The govt wants to capitalise on the recent surge in the usage of cryptocurrencies to tax them and shore up its revenues.
    • Financial innovation: Blockchain technology has multiple uses beyond just facilitating cryptocurrency transactions.

    Issues with the ban

    • Brain-Drain: Ban of cryptocurrencies is most likely to result in an exodus of both talent and business from India, similar to what happened after the RBI’s 2018 ban.
    • Capital inflows will be restricted: If cryptos begin to get mined onshore, they will induce capital inflows.
    • Killing financial innovation: A ban will deprive India, its entrepreneurs and citizens of a transformative technology that is being rapidly adopted across the world.

    Other generic concerns:

    • Safety (cyber-attacks and fraud)
    • Financial integrity (money laundering and evasion of capital controls)
    • Energy usage (outsized energy needs to mine cryptos)

    Way forward

    • Thus it can be inferred that cryptocurrency is better classified as an asset rather than as a currency, in order to gain acceptance and avoid a ban.

    Conclusion

    • There is no doubt that the acceptance of cryptocurrencies by the Government is likely to be limited.
    • While cryptocurrencies may be accepted as speculative assets, it is highly unlikely that they will be accepted as full-fledged currencies competing against the rupee.

     

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  • RBI panel brings law to regulate Digital Lending

    A Reserve Bank of India (RBI) Working Group (WG) on digital lending has recommended separate legislation to oversee such lending as well as a nodal agency to vet the Digital Lending Apps.

    Digital Lending

    • Digital lending is the process of availing credit online.
    • Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility, and speedy online transactions.

    Significance of Digital Lending

    India has a huge growth potential when it comes to the Digital Lending landscape:

    • Alternate source of finance: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
    • Lender of the last resort: Digital lending is mostly preferred by those who are generally not able to avail any credit through the formal sources of finance, like banks.
    • Financial inclusion: Digital lending is a powerful tool that can be used for financial inclusion.
    • Cost-efficient lending: With new innovations underway, digital lending offers much better products to the masses at a much faster rate which is even more cost-efficient.
    • Exception for red-tapism: Online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting.
    • Preference by MSMEs: The online lending platforms have gained massive popularity among MSMEs post-Covid as they were unable to secure finance through traditional lending.
    • Easy onboarding: The quick turnaround time and onboarding, easy KYC, as well as disbursement within minutes have attracted the cash-crunched MSMEs towards these digital routes to secure credit.

    Issues with Digital Lending

    • No business model: There are many gaps that are existent in this model of digital lending like any new business operation.
    • High interest: Unauthorised lenders provided credit to customers without any collateral and at exorbitant rates coupled with unachievable deadlines to pay off these humongous debts.
    • Coercing and harassment for recovery: Resultantly, borrowers were coerced by the lenders to recollect when they were unable to pay off these debts. We see many cases of suicides due to such harassment.

    Key recommendations by RBI

    • Self-Regulation: RBI has mooted a Self-Regulatory Organisation for participants in the digital lending ecosystem.
    • Developing a Baseline Technology: Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
    • Direct loan disbursement: Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
    • Data collection: With the prior and explicit consent of borrowers with verifiable audit trails.
    • Standardized code of conduct: for recovery to be framed by the proposed SRO in consultation with RBI.

    Way forward

    • There is a growing need for regulation in this space or unauthorized players like pointed out above will keep popping up.
    • Stringent provisions must be formulated which can be enforceable legally.
    • Regulation must be enforced in this industry soon to ensure consumer trust remains unfettered.

     

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  • Shale and its potential in India

    Cairn Oil & Gas has announced that it is partnering US-based Halliburton to start shale exploration in the Lower Barmer Hill formation, Western Rajasthan.

    What is Shale oil?

    • Shale oil is an unconventional oil produced from oil shale rock fragments by pyrolysis, hydrogenation, or thermal dissolution.
    • These processes convert the organic matter within the rock (kerogen) into synthetic oil and gas.
    • The refined products can be used for the same purposes as those derived from crude oil.

     How does it differ from conventional crude oil?

    • The key difference between shale oil and conventional crude is that the former, also called ‘tight oil’, is found in smaller batches, and deeper than conventional crude deposits.
    • Its extraction requires creation of fractures in oil and gas rich shale to release hydrocarbons through a process called hydraulic fracking.

    What is fracking?

    • Fracking is the process of drilling down into the earth before a high-pressure water mixture is directed at the rock to release the gas inside.
    • Water, sand and chemicals are injected into the rock at high pressure which allows the gas to flow out to the head of the well.
    • The process can be carried out vertically or, more commonly, by drilling horizontally to the rock layer, which can create new pathways to release gas or used to extend existing channels.
    • The term fracking refers to how the rock is fractured apart by the high-pressure mixture.

    Shale production in the world

    • Russia and the US are among the largest shale oil producers in the world.
    • With a surge in shale oil production in the US, it has played a key role in turning the country from an importer of crude to a net exporter in 2019.

    Shale reserves in India

    • As per the US EIA 2015 report, India has got technically recoverable shale gas of 96 trillion cubic feet.
    • The recoverable reserves are identified in Cambay, Krishna – Godavari, Cauvery, Damodar Valley, Upper Assam, Pranahita – Godavari, Rajasthan and Vindhya Basins.
    • The ONGC has drilled the first exploratory shale gas well in Jambusar near Vadodara, Gujarat, in Cambay basin during October 2013.

    What are the prospects of shale oil exploration in India?

    • Currently, there is no large-scale commercial production of shale oil and gas in India.
    • Shale oil and gas exploration faces several challenges other than environmental concerns around massive water requirements for fracking and potential for ground water contamination.
    • State-owned ONGC had, in 2013, started exploration and, by the end of FY21, assessed shale oil and gas potential in 25 nomination blocks.
    • But it has reduced investments over the past few years after only getting limited success in shale exploration efforts.

     

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  • What is Cartelization?

    The Competition Commission of India (CCI) has slapped certain penalties on paper manufacturing companies from agricultural waste and recycled wastepaper against Cartelization.

    What is a Cartel?

    • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
    • The International Competition Network, which is a global body dedicated to enforcing competition law, has a simpler definition.
    • The three common components of a cartel are:
    1. an agreement
    2. between competitors
    3. to restrict competition

    What is Cartelization?

    • Cartelization is when enterprises collude to fix prices, indulge in bid rigging, or share customers, etc.
    • But when prices are controlled by the government under a law, that is not cartelization.
    • The Competition Act contains strong provisions against cartels.
    • It also has the leniency provision to incentivise a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
    • This has proved a highly effective tool against cartels worldwide.
    • Cartels almost invariably involve secret conspiracies.

    How do they work?

    • According to ICN, four categories of conduct are commonly identified across jurisdictions (countries). These are:
    1. price-fixing
    2. output restrictions
    3. market allocation and
    4. bid-rigging
    • In sum, participants in hard-core cartels agree to insulate themselves from the rigours of a competitive marketplace, substituting cooperation for competition.

    How do cartels hurt?

    • While it may be difficult to accurately quantify the ill-effects of cartels, they not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
    • A successful cartel raises the price above the competitive level and reduces output.
    • Consumers choose either not to pay the higher price for some or all of the cartelized product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

    Are there provisions in the Competition Act against monopolistic prices?

    • There are provisions in the Competition Act against abuse of dominance.
    • One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in purchase or sale of goods or services.
    • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as an abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
    • However, it should be understood that where pricing is a result of normal supply and demand, the Competition Commission may have no role.

    How might cartels be worse than monopolies?

    • It is generally well understood that monopolies are bad for both individual consumer interest as well as the society at large.
    • That’s because a monopolist completely dominates the concerned market and, more often than not, abuses this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

    How to stop the spread of cartelization?

    • Cartels are not easy to detect and identify.
    • As such, experts often suggest providing a strong deterrence to those cartels that are found guilty of being one.
    • Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel.
    • However, it must also be pointed out that it is not always easy to ascertain the exact gains from cartelization.
    • In fact, the threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

    Back2Basics: Competition Commission of India (CCI)

    • The CCI is the chief national competition regulator in India.
    • It is a statutory body within the Ministry of Corporate Affairs.
    • It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

     

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  • Formal sector and fine print

    Context

    A recent study by SBI has reported that the Indian economy witnessed accelerated formalisation under the distressed conditions of the pandemic and the lockdown last year. The study estimates that the share of the informal economy has fallen to a mere one-fifth of GDP — a figure comparable to many advanced economies.

    Understanding informality

    • ILO definition: The ILO’s globally accepted framework for definitions is as follows: Informal sector enterprises are defined as private unincorporated enterprises owned by individuals (or households) that are not constituted as separate legal entities independently of their owners.
    • They are not registered under specific national legislation (such as Factories’ or Commercial Acts).
    • Definition of a formal worker in India: Formal workers in India, on the other hand, are defined as those having access to at least one social security benefit such as a provident fund or healthcare benefits.

    What explains the decline of informal sector in GDP

    • Significance of informal sector: In 2017-18, as per the latest official statistics, India’s informal sector accounted for approximately 52 per cent of its GDP, employing 82 per cent of the total workforce.
    • These ratios have broadly remained unchanged over the last decade.
    • Most affected due to pandemic: As the informal (unorganised) sector bore much of the brunt of the economic contraction during 2020-21, a decline in its share in GDP is unsurprising.
    • Lack of financial strength: The sector had neither the financial strength nor the technical wherewithal to face the Covid shock.
    • Inadequate policy support: Additionally, policy support, mostly supply-side measures, was mainly focused on firms in the formal sector, with the informal sector left to fend for itself.

    Issues with decline

    • Undeniably, the informal sector’s share in GDP is likely to have shrunk due to the Covid shock.
    • However, alarmingly, the purported decline in the informal sector’s share in GDP has not been accompanied by an expected reduction in its employment share. 
    • Data from the official annual Period Labour Force Survey (PLFS) 2017-18 and 2019-20, where the latter includes the period of the Covid shock from April to June 2020, shows that the employment share in non-agricultural informal enterprises has increased from 68 per cent in 2017-18 to 69.5 per cent in 2019-20.
    • These figures do not include the agricultural sector, where employment is almost entirely in the informal sector.
    • The increasing share of the formal sector in terms of GDP but declining share in employment only widens the schism (or dualism) between the two sectors.
    • The increasing share of the formal sector in terms of GDP but declining share in employment only widens the schism (or dualism) between the two sectors.

    Implications

    • Impact on investment and growth: The lack of remunerative jobs for the vast majority of Indian consumers implies that eventually the lack of growth in demand will adversely impact investment and economic growth.
    • After all, a mere 17-18 per cent of the workforce in the organised sector cannot sustain growth of the economy in the long run.
    •  Squeezing out informal enterprises: The increase in the formal sector’s share in GDP due to Covid-19 is a result of large, formal enterprises squeezing out informal enterprises.
    • It is important to note here that the increase in formalisation is not a consequence of micro and small informal firms transitioning to formality.

    Increasing productivity: A way forward to formalisation

    • Promoting formalisation: Over the last five years, the economy has officially witnessed a significant drive towards formalisation.
    • Multiple reasons for avoiding formalisation: It is crucial to recognise that firms exist in the informal sector for various reasons and not simply to evade regulations and taxation.
    • Significance of productivity: Many own account enterprises and MSMEs cannot afford to survive in the formal sector due to their low productivity.
    • It is essential to view the process of formalisation as a development strategy that requires stepping up investment in physical and human capital to boost productivity and the extension of social security benefits for all workers, not just a registration strategy on myriad portals.

    Consider the question “Informal sector has been affected disproportionately in the wake of the pandemic. What are the implications of this for the economy? Suggest the way forward for the formalisation.”

    Conclusion

    The informal sector will come back to life as much of it represents the survival efforts of the working poor. Celebrating formalisation based on the misery and devastation of poor informal workers (and their meagre productive assets) is not just misplaced but also callous.

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  • Universal Service Obligation Fund (USOF)

    The Union Cabinet has approved the provisioning of mobile services in over 7,000 uncovered villages through the Universal Service Obligation Fund (USOF).

    What do you mean by Universal Service?

    • In the modern world, universal service refers to having a phone and affordable phone service in every home.
    • It means, providing telecommunication service with access to a defined minimum service of specified quality to all users everywhere at an affordable price.
    • In 1837, the concept was rolled on by Rowland Hill, a British educator and tax reformer, which included uniform rates across the UK and prepayment by sender via postage stamps.

    What is USOF?

    • The Universal Service Obligation Fund (USOF) was formed by an Act of Parliament, was established in April 2002 under the Indian Telegraph (Amendment) Act 2003.
    • It aims to provide financial support for the provision of telecom services in commercially unviable rural and remote areas of the country.
    • It is an attached office of the Department of Telecom, and is headed by the administrator, who is appointed by the central government.

    Scope of the USOF

    • Initially, the USOF was established with the fundamental objective of providing access to ‘basic’ telecom services to people in rural and remote areas at affordable and reasonable prices.
    • Subsequently, the scope was widened.
    • Now it aims to provide subsidy support for enabling access to all types of telecom services, including mobile services, broadband connectivity and the creation of infrastructure in rural and remote areas.

    Funding of the USOF

    • The resources for the implementation of USO are raised by way of collecting a Universal Service Levy (USL), which is 5 percent of the Adjusted Gross Revenue (AGR) of Telecom Service Providers.

    Nature of the fund

    • USOF is a non-lapsable Fund.
    • The Levy amount is credited to the Consolidated Fund of India.
    • The fund is made available to USOF after due appropriation by the Parliament.

     

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