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GS Paper: GS3

  • India’s economy and the challenge of informality

    Context

    Despite efforts by the government, formalisation of economy still eludes us.

    Prevalence of informality in India

    • Despite witnessing rapid economic growth over the last two decades, 90% of workers in India have remained informally employed, producing about half of GDP. 
    • Combining the International Labour Organization’s widely agreed upon template of definitions with India’s official definition (of formal jobs as those providing at least one social security benefit — such as EPF), the share of formal workers in India stood at 9.7% (47.5 million).
    • The prevalence of informal employment is also widespread in the non-agriculture sector.
    • About half of informal workers are engaged in non-agriculture sectors which spread across urban and rural areas.
    • Industries thriving without paying taxes are only the tip of the informal sector’s iceberg.
    • What remains hidden are the large swathes of low productivity informal establishments working as household and self-employment units which represent “petty production”.
    • To conflate the two distinct segments of the informal sector would be a serious conceptual error.

    Fiscal perspective of formalisation

    • Efforts to encourage formalisation: Currency demonetisation, introduction of the Goods and Services Tax (GST), digitalisation of financial transactions and enrolment of informal sector workers on numerous government Internet portals are all meant to encourage the formalisation of the economy.
    • The formal sector is more productive than the informal sector, and formal workers have access to social security benefits.
    • The above-mentioned efforts are based on the “fiscal perspective” of formalisation.
    • This perspective appears to draw from a strand of thought advanced by some international financial institutions such as the International Monetary Fund, which foregrounds the persistence of the informal sector to excessive state regulation of enterprises and labour which drives genuine economic activity outside the regulatory ambit.
    • Hence, it is believed that simplifying registration processes, easing rules for business conduct, and lowering the standards of protection of formal sector workers will bring informal enterprises and their workers into the fold of formality.

    Issues with fiscal perspective

    •  Early on, in an attempt to promote employment, India protected small enterprises engaged in labour intensive manufacturing by providing them with fiscal concessions and regulating large-scale industry by licensing.
    • Such measures led to many labour-intensive industries getting diffused into the informal/unorganised sectors.
    • Further, they led to the formation of dense output and labour market inter-linkages between the informal and formal sectors via sub-contracting and outsourcing arrangements (quite like in labour abundant Asian economies).
    • While such policy initiatives may have encouraged employment, bringing the enterprises which benefited from the policy into the tax net has been a challenge.
    • Political and economic reasons operating at the regional/local level in a competitive electoral democracy are responsible for this phenomenon, too.

    Role of underdevelopment

    • Global evidence suggests that the view that legal and regulatory hurdles alone are mainly responsible for holding back formalisation does not hold much water.
    • A well-regarded study, ‘Informality and Development’ argues that the persistence of informality is, in fact, a sign of underdevelopment.
    • The finding suggests that informality decreases with economic growth, albeit slowly.
    •  A similar association is also evident across major States in India, based on official PLFS data.
    • Hence, the persistence of a high share of informal employment in total employment seems nothing but a lack of adequate growth or continuation of underdevelopment.

    Impact of pandemic

    • Research by the State Bank of India recently reported the economy formalised rapidly during the pandemic year of 2020-21, with the informal sector’s GDP share shrinking to less than 20%, from about 50% a few years ago — close to the figure for developed countries.
    • These findings of a sharp contraction of the informal sector during the pandemic year (2020-21) do not represent a sustained structural transformation.
    • They are a temporary (and unfortunate) outcome of the pandemic and severe lockdowns imposed in 2020 and 2021.

    Way forward

    • Policy efforts directed at bringing the informal sector into the fold of formality fail to appreciate that the bulk of the informal units and their workers are essentially petty producers eking their subsistence out of minimal resources.
    •  The economy will get formalised when informal enterprises become more productive through greater capital investment and increased education and skills are imparted to its workers.

    Consider the question “What are the reasons for persistent informality in India? Suggest the way to ensure the smooth transition to the formality.”

    Conclusion

    Policy efforts to formalise the economy will have limited results as the bulk of informal units are petty producers.

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  • Bank Frauds in India

    1. Poor banking governance: Most frauds show that banks did not observe due diligence, both before and after disbursing loans. Poor level of checks and balances in the banking system is one of the reason.
    2. Poor monitoring: Lack of technology and fraud monitoring agencies to detect frauds makes the problem more complex. There is an absence of an effective mechanism to monitor the credit flow. Flawed risk-mitigation design, which creates an excessive focus on credit or market risks, but focuses less on operational risks also leading to more breaches.
    3. Technological backwardness: Excessive dependence on manual supervision, at both external and internal levels makes it impossible to manually control and supervise the sheer volume of transactions.
    4. Immoral behaviour: The disintegrating moral fibre of Indian businessmen, bankers and other white-collar professionals, nepotism in internal committees of banks, unnecessary political interventions lead to increased frauds.
    5. Political interference: The political pulls and pressures on investigating agencies, and long-drawn processes of legal system act less as a deterrent.

     

  • What is Anti-Dumping Duty?

    India has initiated an anti-dumping probe against imports of a certain type of tiles, used for covering the floors in residential and commercial buildings, from China, Taiwan and Vietnam following a complaint by domestic players.

    Why in news?

    • Countries start anti-dumping probes to determine whether their domestic industries have been hurt because of a surge in cheap imports.
    • The dumping has caused material injury to the domestic players. If established, the Directorate General of Trade Remedies (DGTR) would recommend an anti-dumping duty on these imports.
    • As a countermeasure, they India would impose these duties under the multilateral regime of the World Trade Organisation (WTO).

    What is Dumping?

    • Dumping is a process wherein a company exports a product at a price that is significantly lower than the price it normally charges in its home (or its domestic) market.
    • This is an unfair trade practice which can have a distortive effect on international trade.
    • Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect.

    What is Anti-Dumping Duty?

    • An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value.
    • In order to protect their respective economy, many countries impose duties on products they believe are being dumped in their national market.
    • In fact, anti-dumping is an instrument for ensuring fair trade and is not a measure of protection per se for the domestic industry.
    • Such ‘dumped’ products have the potential to undercut local businesses and the local economy.
    • Anti-dumping duties provide relief to the domestic industry against the injury caused by dumping.

    Mechanism in India

    • The Department of Commerce recommends the anti-dumping duty, provisional or final.
    • The Department of Revenue in Finance Ministry acts upon the recommendation within three months and imposes such duties.

    WTO and Anti-Dumping Duties

    • The WTO operates a set of international trade rules, including the international regulation of anti-dumping measures.
    • It does NOT intervene in the activities of companies engaged in dumping.
    • Instead, it focuses on how governments can—or cannot—react to the practice of dumping.
    • In general, the WTO agreement permits governments to act against dumping if it causes or threatens material injury to an established domestic industry.

    Issues with such duties

    • Anti-dumping duties have the potential to distort the market.
    • In a free market, governments cannot normally determine what constitutes a fair market price for any good or service.

    Back2Basics:

    Countervailing duty (CVD)

    • Countervailing duty (CVD) is a specific form of duty that the government imposes in order to protect domestic producers by countering the negative impact of import subsidies.
    • CVD is thus an import tax by the importing country on imported products.
    • To make their products cheaper and boost their demand in other countries, foreign governments sometimes provide subsidies to their producers.
    • To avoid flooding of the market in the importing country with these goods, the government of the importing country imposes a countervailing duty, charging a specific amount on import of such goods.

    How does it work?

    • The duty nullifies and eliminates the price advantage (low price) enjoyed by an imported product when it is given subsidies or exempted from domestic taxes in the country where they are manufactured.
    • It raises the price of the imported product, bringing it closer to its true market price.
    • In this way, the government is able to provide a level playing field for domestic products.

     CVD and India

    • The World Trade Organization (WTO) permits the imposition of countervailing duty by its member countries.
    • In India, the CVD is imposed as an additional duty besides customs on imported products when such products are given tax concession in the country of their origin.

    Who imposes countervailing measures in India?

    • The countervailing measures in India are administered by the Directorate General of Anti-dumping and Allied Duties (DGAD), in the commerce and industry ministry’s department of commerce.

     

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  • Small Satellite Launch Vehicle (SSLV)

    The new chairman of the ISRO Dr S Somanath has indicated inauguration of indigenous new launch rockets, called the Small Satellite Launch Vehicle (SSLV).

    What is SSLV?

    • The SSLV is a small-lift launch vehicle being developed by the ISRO with payload capacity to deliver:
    1. 600 kg to Low Earth Orbit (500 km) or
    2. 300 kg to Sun-synchronous Orbit (500 km)
    • It would help launching small satellites, with the capability to support multiple orbital drop-offs.
    • In future a dedicated launch pad in Sriharikota called Small Satellite Launch Complex (SSLC) will be set up.
    • A new spaceport, under development, near Kulasekharapatnam in Tamil Nadu will handle SSLV launches when complete.
    • After entering the operational phase, the vehicle’s production and launch operations will be done by a consortium of Indian firms along with NewSpace India Limited (NSIL).

    Vehicle details

    (A) Dimensions

    • Height: 34 meters
    • Diameter: 2 meters
    • Mass: 120 tonnes

    (B) Propulsion

    • It will be a four stage launching vehicle.
    • The first three stages will use Hydroxyl-terminated polybutadiene (HTPB) based solid propellant, with a fourth terminal stage being a Velocity-Trimming Module (VTM).

    SSLV vs. PSLV: A comparison

    • The SSLV was developed with the aim of launching small satellites commercially at drastically reduced price and higher launch rate as compared to Polar SLV (PSLV).
    • The projected high launch rate relies on largely autonomous launch operation and on overall simple logistics.
    • To compare, a PSLV launch involves 600 officials while SSLV launch operations would be managed by a small team of about six people.
    • The launch readiness period of the SSLV is expected to be less than a week instead of months.
    • The SSLV can carry satellites weighing up to 500 kg to a low earth orbit while the tried and tested PSLV can launch satellites weighing in the range of 1000 kg.
    • The entire job will be done in a very short time and the cost will be only around Rs 30 crore for SSLV.

    Significance of SSLV

    • SSLV is perfectly suited for launching multiple microsatellites at a time and supports multiple orbital drop-offs.
    • The development and manufacture of the SSLV are expected to create greater synergy between the space sector and private Indian industries – a key aim of the space ministry.

    Back2Basics:

  • Unlock India’s food processing potential

    Context

    One of the largest producers of fruits and vegetables in the world to boost processed food in large quantities, India has formulated a unique Production-Linked Incentive Scheme (PLIS) which aims to incentivise incremental sales.

    Progress made so far

    • A sum of ₹10,900 crore has been earmarked for the scheme.
    • Beneficiaries have been obliged to commit a minimum investment while applying for the scheme.
    • Under Category 1, firms are incentivised for incremental sales and branding/marketing initiatives taken abroad.
    • Assuming the committed investment as a fixed ratio of their sales and undertaking execution of at least 75% of the projects, the sector is likely to witness at least ₹6,500 crore worth of investment over the next two years.
    • New alternatives are being explored which have immense potential in replacing the staples of rice and wheat in the form of Nutri-cereals, plant-based proteins, fermented foods, health bars and even fresh fortified foods for pets.
    • By welcoming the new brands in the category, PLIS aims to create an enabling ecosystem for innovation in both food products and processes.

    Way forward

    1] Improve infrastructure

    • A study in the United States concluded that a 1% increase in public infrastructure increased the food manufacturing output by 0.06% in the longer run (https://bit.ly/3rOeE0l).
    • This correlation holds good for India too as a higher investment is being concentrated in States such as Andhra Pradesh, Gujarat, Maharashtra, Tamil Nadu and Uttar Pradesh.
    • These States as reported by the Good Governance Index 2020-21, ranked among the highest in the ‘Public Infrastructure and Utilities’ parameter with ‘Connectivity to Rural Habitations’ showing the highest improvement.

    2] Improve profitability in export

    • For the exports market, it is now established that sales promotion is positively related to increased sales volume, but inversely related to profitability.
    • To bridge this gap, of the 13 key sectors announced under the PLIS, the ‘Food Processing PLIS’ earmarks a dedicated Category 3 for supporting branding and marketing activities in foreign markets. 
    •  This ensures that India’s share of value-added products in the exports basket is improved, and it may leverage on its unique geographical proximity to the untapped markets of Europe, the Middle East/West Asia, Africa, Oceania and Japan.

    3] Access to credit

    •  The access of micro, small, and medium enterprises (MSMEs) to finance is a perennial problem in the country, predominating due to a lack of proper credit history mechanism for MSMEs.
    • Smart financing alternatives such as peer-to-peer (P2P) lending hold potential for micro-food processors.
    • Access to working capital has in theory been addressed by the Trade Receivables Discounting System (TReDS), a platform for facilitating the financing/discounting of trade receivables of MSMEs through multiple financiers.

    Conclusion

    With growing populations, changing food habits and unrestricted use of natural resources, nations must come together and lay out a road map for a common efficient food value chain.

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  • The consequences of an ill-considered green strategy

    Context

    Europe’s push for renewable energy at the cost of conventional fuel may end up causing a global food crisis.

    Consequences of fuel shortage in Western Europe

    • Since August 2021, Western Europe has faced a problem with renewable energy – the wind doesn’t always blow when needed and the sun doesn’t always shine.
    • Commodity markets across the world operate on a balance of demand and supply — even seemingly “small” changes in either side of a few percentage points can push the prices up or down sharply.
    • High energy bills: Higher gas prices have pushed up energy bills for households and are expected to impact household spending and consumption as well.
    • High urea prices: Natural gas is used to produce urea – if gas prices go up, fertiliser also becomes expensive.
    •  Some poor and middle-income countries are already starting to face problems of fertiliser availability — there are reports from several Indian states as well. 
    • High food prices: The impact of expensive fertiliser will be felt some months down the line as expensive fertiliser and reduced harvests push up food prices.
    • India is relatively less affected as the share of natural gas in the country’s energy mix is low but will still face problems due to high food prices.
    • In 2007-08, when oil prices were high, there was a push to use “biofuels” led by the US and Europe.
    •  The effects of the 2008 food price crisis were felt around the world, especially by the poor.

    Lessons for India

    • Cheap and reliable energy sources should not be abandoned until the alternatives have been stringently stress tested.
    • India will be especially hard hit if oil prices spike as it imports close to 1.4 billion barrels of oil annually.

    Consider the question “What are the inherent dangers in rapid transition to the green energy? Suggest the way forward for India.”

    Conclusion

    A blind push to shut down traditional sources of energy and move to less reliable “clean” energy can have second and third order effects.

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  • Specie in news: Spot-billed Pelicans

    A nematode infestation has led to mass mortality of spot-billed pelicans (Pelicanus philippensis) at Telineelapuram Important Bird Area (IBA) in Andhra Pradesh.

    Spot-billed Pelicans

    • The spot-billed pelican (Pelecanus philippensis) or grey pelican is a member of the pelican family.
    • It breeds in southern Asia from southern Iran across India east to Indonesia.
    • It is a bird of large inland and coastal waters, especially large lakes.
    • The breeding population of these pelican species is limited to India, Sri Lanka and Cambodia.
    • In the non-breeding season they are recorded in Nepal, Myanmar, Thailand, Laos and Vietnam.

    Conservation status

    • IUCN status: Near Threatened
    • Wildlife (Protection) Act, 1972: Schedule IV (Hunting prohibited but the penalty for any violation is less compared to the first two schedules)

     

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  • Towards low emissions growth

    Context

    While many developing countries made net-zero pledges at COP26 in Glasgow, they face enormous developmental challenges in their attempts to grow in a climate-constrained world.

    Developmental challenges for India

    • For India, the national context is shaped by high youth unemployment, millions more entering the workforce each year, and a country hungry for substantial investments in hard infrastructure to industrialise and urbanise.
    • Growth with low emission footprint: India’s economic growth in the last three decades, led by growth in the services sector, has come at a significantly lower emissions footprint.
    • But in the coming decades, India will have to move to an investment-led and manufacturing-intensive growth model to create job opportunities and create entirely new cities and infrastructure to accommodate and connect an increasingly urban population.
    •  All of this requires a lot of energy. Can India do all of this with a low emissions footprint?

    What could India do to pursue an industrialization pathway that is climate-compatible?

    • A coherent national transition strategy is important in a global context where industrialised countries are discussing the imposition of carbon border taxes while failing to provide developing countries the necessary carbon space to grow or the finance and technological assistance necessary to decarbonise.
    • What India needs is an overarching green industrialisation strategy that combines laws, policy instruments, and new or reformed implementing institutions to steer its decentralised economic activities to become climate-friendly and resilient.

    Issues with India’s domestic manufacturing of renewable technology components

    • India’s industrial policy efforts to increase the domestic manufacturing of renewable energy technology components have been affected by policy incoherence, poor management of economic rents, and contradictory policy objectives.
    • India managed to create just a third of jobs per megawatt that China has managed to in its efforts to promote solar PV and wind technologies.
    • China has created more jobs in manufacturing solar and wind components for exports than domestic deployment.
    • India could have retained some of those jobs if it were strategic in promoting these technologies.

    Opportunities in decarbonising transport and industry sector

    • Technologies needed to decarbonise the transport and industry sectors provide a significant opportunity for India.
    • However, India’s R&D investments in these emerging green technologies are non-existent.
    • PLI is a step in right direction: The production-linked incentives (PLIs) under ‘Aatmanirbhar Bharat’ are a step in the right direction for localising clean energy manufacturing activities.
    • Focus on R&D: Aligning existing RD&D investments with the technologies needed for green industrialisation is crucial for realising quantum jumps in economic activities.
    • Encourage private entrepreneurship: India also needs to nurture private entrepreneurship and experimentation in clean energy technologies.
    • Besides China, Korea’s green growth strategy provide examples of how India could gain economic and employment rents from green industrialisation without implementing restrictive policies.

    Way forward

    • India should set its pace based on its ability to capitalise on the opportunities to create wealth through green industrialisation.
    • India should follow a path where it can negotiate carbon space to grow, buying time for the hard-to-abate sectors; push against counterproductive WTO trade litigations on decarbonisation technologies; all while making R&D investments in those technologies to ensure that it can gain economic value in the transition.

    Consider the question “What are the challenges India faces as it strives to reach the goal of net-zero emission by 2070. Suggest the strategy India should follow to maximise the developmental gains.”

    Conclusion

    The government should neither succumb to international pressure to decarbonise soon nor should it postpone its investment in decarbonisation technologies and lose its long-term competitiveness in a global low-carbon economy.

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  • Dealing with the macroeconomic uncertainties

    Context

    Macroeconomic uncertainties are mounting.

    Impact of US Fed’s decision

    • Against the backdrop of possible interest rate hikes by the U.S. Federal Reserve and the taper tantrum, there is pressure on the Reserve Bank of India (RBI) to increase its interest rates to prevent capital outflows.
    • The monetary policy corridor is still “accommodative” to support the growth recovery.
    • Globally, central banks have started increasing the interest rates.

    Macroeconomic uncertainties

    1] Inflationary pressure

    •  In India, the wholesale price index (WPI) inflation rose to a record high of 14.32% in November 2021 as per the data released by the Ministry of Commerce and Industry.
    • The consumer price index (CPI) inflation now is 5.03%, though that is still within the comfort zone of the inflation targeting framework envisaged in India’s new monetary framework.
    • The official nominal inflation anchor in India is 4%, with a band of variations of +/- 2. 

    2] Absorbing excess liquidity

    • The RBI Financial Stability Report, published on December 29, 2021, revealed a possible worsening of the gross non-performing asset (GNPA) ratio of scheduled commercial banks — from 6.9% in September 2021 to 9.5% by September 2022.
    • Absorbing the excess liquidity that was injected to stimulate growth as part of the pandemic response is crucial to reversing trends in non performing assets (NPAs).
    • Absorption of excess liquidity was attempted by increasing the cut-off yield rate of variable rate reverse repo (VRRR) to 3.99%, and curtailing the government securities acquisition programme.

    3] Interest rate structure and implications for government borrowing

    •  The call money market rates are below the repo rate.
    • The bond yields are increasing ahead of the Union Budget 2022-23.
    • The rise in bond yields will result in higher borrowing costs for the Government.

    Way forward for fiscal policy

    • Maintain accommodative policy stance: Given these macroeconomic uncertainties, maintaining an accommodative fiscal policy stance in the upcoming Union Budget for FY23 is crucial for a sustainable recovery.
    • Don’t focus on fiscal consolidation: Any attempt at fiscal consolidation at this juncture employing capital expenditure compression rather than a tax buoyancy path can adversely affect economic growth. 
    •  Public investment — infrastructure investment in particular — is a major growth driver through “crowding-in” of private corporate investment.
    • Strengthening investments in the health-care sector is crucial at this juncture as a prolonged lockdown can accentuate the current humanitarian crisis and deepen economic disruptions.
    • When credit-linked economic stimulus has an uneven impact on growth recovery, the significance of fiscal dominance cannot be undermined.
    • Address unemployment: Rising unemployment needs to be addressed through an urgent policy response that strengthens job guarantee programmes.

    Conclusion

    The upcoming Union Budget for 2022-23 should maintain an accommodative fiscal stance in order to support the sustainability of the economic growth process and also for financing human development.

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  • What is a K-shaped Economic Recovery?

    Former RBI Governor Raghuram Rajan has said that the government needed to do more to prevent a K-shaped recovery of the economy hit by the coronavirus pandemic.

    K-Shaped Recovery

    • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
    • This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
    • A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
    • This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

    Try these PYQ:

     

    Q.Economic growth in country X will necessarily have to occur if-

     

    (a) There is technical progress in the world economy

    (b) There is population growth in X

    (c) There is capital formation in X

    (d) The volume of trade grows in the world economy

    Implications of a K-Shaped Recovery

    • Households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts; this will be a recurring drag on demand, if the labour market does not heal faster.
    • To the extent that Covid has triggered an effective income transfer from the poor to the rich, this will be demand-impeding because the poor tend to spend-instead of saving.
    • If Covid-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.

    Also read:

    Shapes of Economic Recovery

     

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