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GS Paper: GS3

  • Is RBI raising systemic risks by pushing retail credit?

    Context

    Credit driven growth may not lead to sustainable growth.

    Credit driven economic boom

    • RBI and govt. acting in line: Both the government and Reserve Bank of India (RBI) have acted in line with their stated commitment towards the defined fiscal and monetary stability framework.
      • Given the pressures of a dwindling growth rate and limited fiscal and monetary elbow room, this is commendable.
    • Growth without increasing systemic risk: It is critical that the decisions taken to revive growth have a high likelihood of success without increasing systemic risk in the medium to long run.
      • Recent push may add to systemic risk: In this context, it may be argued that RBI’s recent push for retail credit growth would add to systemic risk, while the benefits for India’s gross domestic product growth (GDP) may be limited.
      • Credit-driven economic booms always end in economic misery.
    • Credit is a necessary evil: To pump-prime an economy, very few tools exist other than credit.
      • Thus there is all the more reason to handle it with care. In current economic growth frameworks, economic growth requires
      • Quite often, credit creation is the ultimate source of capital.
      • If the government spends by increasing its fiscal deficit, government debt increases. If the private sector borrows to invest and kick-start growth, its leverage increases.
      • What could be the best source of credit? The best use of credit is when it is used to finance real assets in the economy.
      • Creation of financial asset: When credit does not create real assets, it inevitably creates financial assets such as bonds held by investors, loans held by banks, or accounts receivables held by firms.
      • The precursor to a crisis: An overabundance of financial assets created by credit is a precursor to a crisis.

    How types of loans matters for growth and risk of the system

    • How money is used matters for reviving sustainable growth: Taking a consumer loan to splurge on a vacation or celebratory dinner does very little to support long-term growth. It creates economic activity only in the immediate period.
      • Which sector should be pushed to ramp up credit and how that money is used become important if reviving sustainable growth is the objective.
    • In a paper titled Who Gets The Credit And Does It Matter, Thorsten Beck et al studied the growth dynamics of 45 countries for the period from 1994 to 2005.
      • Only loans to firms contribute to growth: The paper concluded that only loans to firms are linked to GDP growth, the argument being that firms use credit to increase their capital stock, and thus, real assets.
      • Loans to households do not add substantially to growth: Loans to households, while having desirable social outcomes in terms of boosting consumption and allowing households to tide over short-term cash flow mismatches, do not add to sustainable GDP growth.
      • It is debatable whether consumer loans need a push at all.
    • Retail and household debt growth
      • Retail loan growth, while currently below its 2016 peak of 20%, has been managing to grow at around 15%.
      • Household debt: In December 2019, RBI cautioned lenders on household debt levels and the associated risk on retail loans.
      • Relation with banking crisis: Higher growth in household debt is associated with higher chances of a banking crisis (Household Debt And Monetary Stability, IMF, 2017).
    • Consumer loans not always add to capital stocks: Another kind of consumer loan, the home loan, need not always add to incremental capital stock. Given how slowly the supply of homes responds to demand in the short term, excess credit supply is known to add to the risk.
      • Of course, consumer loans such as education loans, which upgrade human resources, are a notable exception.
      • In fact, mortgage booms have played key roles in most credit blow-ups.
    • Surprising steps by the RBI
      • Risk weight of consumer loans lowered: Surprisingly, RBI reduced the risk weight for consumer loans other than credit card debt from 125% to 100% in September 2019.
      • Waiver to CRR requirement: Recently, RBI decided to waive lenders’ cash reserve requirement against new exposure to home, auto and Micro, Small and Medium Enterprises (MSME) loans.
    • Futile attempts to revive commercial lending:
      • Home loan growth was hovering around 15% for the last two years.
      • Commercial credit growth falling: Growth of commercial credit (loans to industry and services as per RBI), which last exhibited 20%-plus growth in June 2012, has been falling.
      • Since 2016, its annual growth averaged around 6%, with a strong downward trend observed since March 2019.
      • Efforts to revive commercial lending have not borne fruit.
      • Misplaced belief needs to be relooked: This misplaced belief—“if not commercial, let retail loans revive the economy”—needs to be re-looked.
      • The simplistic understanding that any credit uptick can revive the economy needs to change.
    • What retails at best can achieve? India’s retail credit push, if successful, may at best check the downward trend in GDP growth.
      • The argument that it will revive growth is based on optimism.
      • The assumption here being that consumption will drive the current capacity utilization of 69% to somewhere above 85%, which will trigger capital expenditure.
      • This assumes that the consumer loan boom, already a decade old, will continue for another 3-4 years.
    • Chances of household balance sheet weakening: In an environment of low job growth, it is difficult to see how household leverage will not increase.
      • If capacity utilization does not pick up sufficiently to revive growth, then along with banking and corporate balance sheets, household balance sheets will also be weakened.
      • Over the next 3-5 years, the downside of RBI’s retail push appears at least as significant as the upside.

    Conclusion

    • Polity stability needed: The government and RBI must make more determined efforts to revive corporate activity. Policy stability and confidence in the business environment may push commercial credit better than mere interest rate cuts.
    • Need to increase government spending: Among the options available, using good old government spending to stimulate infrastructure spending, and eventually, the economy, appears to be a wiser option.

     

  • No gains for taxpayers

    Context

    Loss expected from lower tax rates may be countered by gains from the settlement of cases, higher dividend taxes on top incomes, and the wider scope for taxing international incomes.

    Simplification and providing ease to the taxpayers

    • Fiscal constraints leaving no room for a lower rate: Ahead of The Union budget, taxpayers had anticipated a wide range of measures that they hoped would stoke demand.
      • These ranged from lower tax rates to a more even tax structure on income from various sources.
      • As the former was less feasible given the fiscal constraints, the budget proposals focused on simplification and providing ease to the taxpayer.
    • Simplification in personal tax: The recalibration of personal income tax slabs was suggested as a step towards simplification.
      • However, its uptake is contingent on the preference for new slabs.
      • Who will not opt for a new slab? Switching over to the new slab rates is not beneficial to-
      • An individual currently claiming full exemptions.
      • An individual with incomes comprising largely of capital gains.
      • It is possible, however, that individuals do not claim such exemptions or deductions.
    • How switching to new slab impact revenue? An analysis of data published by the Central Board of Direct Taxes suggests that for the assessment year 2018-19, it suggest improvement in the collection.
      • 1% improvement: If individuals do switch over to the new regime, it may translate to a 1 per cent improvement in tax collections, rather than a loss.
    • Limited takers of the new slab: It can be inferred that this option may be exercised by few individuals, if at all, since the potential gains from foregoing exemptions and the intended simplification is expected to be limited.

    Tax disputes

    • The new scheme proposed: A common concern among taxpayers is protracted disputes. To reduce litigation, a new scheme has been proposed.
    • Importance of precedence in disputes: 39 per cent of the cases made a reference to a similar case in the previous year. This underscores the importance of precedence.
    • In such cases, the settlement is not a superior option as the waiver of the penalty and interest does not offer any advantage against a decision that would impact future assessment.
    • Success rates of disputes: The success rate of the tax department is 27 per cent at the Income Tax Appellate Tribunal (ITAT) and the Supreme Court and 12 per cent in appeals filed in high courts.
      • Given the odds of success, an assessee may thus be tempted to pursue litigation.
    • Incentivising the settlement: Taxpayers may choose to settle for the waiver of interest and penalty in cases where it is one time and does not set a precedent for future transactions.

    Dividend Distribution Tax (DDT)

    • What is DDT?  It is one of the significant change is in the taxation of dividends.
      • The dividend distribution tax is a unique levy on distributed profits and is payable by the distributing company.
      • What is the shortcoming in DDT? The shortcoming of such tax is that foreign investors can’t claim the credit.
      • Additional 10 % of DDT: In an effort to make the tax progressive, an additional dividend tax of 10 per cent was introduced for domestic investors receiving dividend in excess of Rs 10 lakh.
    • Dividend pay-out decreased after DDT: Changes in DDT were accompanied by a decline in dividend pay-out – the proportion of profits paid as dividends declined from 30 per cent in early 2000s to 22 per cent in 2019 (BSE 500 companies).
      • Chance of improvement in pay-outs: It is expected that the reversion to the classical system may improve dividends pay-outs.
      • However, this will benefit individual taxpayers with incomes below Rs 5 lakh as the slab rate applicable is less than the existing rate.

    Taxing cross-border income

    • In the international arena, India is determined to tax cross-border incomes.
    • Taxing digital companies: The addition of explanation 3A to the Income Tax Act reinforces India’s commitment to taxing digital companies.
    • What comprises the business with nexus to India: The proposed amendment clarifies that incomes related to the advertisement, sale of data of a person residing in India and sale of goods and services based on the data of a person residing in India, may be attributed to a business with nexus in India.
    • Taxing citizen not taxable anywhere: To tax Indian citizens that are not taxable in any other jurisdiction, the Act will now deem such individuals as resident taxable in India.
      • While the application of the law may be challenged giving rise to disputes, it is a step forward.

    The proposal of Citizen’s charter

    • Charter on rights and obligations: The finance minister also referred to introducing a citizen’s charter that incorporates taxpayer’s rights and obligations.
      • Limits of charters: International experience shows that charters have limited enforceability unless adopted in primary legislation.
    • Supporting charters with legislation: Introducing charter to the statutes may, therefore, prove to be a positive initiative.
      • Faith can be built through enforcement of the charter.
      • However, the penal provisions must be well-thought-out so as to avoid adding another contentious element.

    Conclusion

    • Lack of uniformity: The budget proposals aimed to provide simplicity, yet much remains to be done, given the lack of uniformity in the taxation of incomes such as capital gains.
    • Limited revenue implications: The success of schemes proposed is contingent on the traction they gain. As for the revenue implications, the impact of these measures may, in fact, be limited.
    • Countering loss through gains from settlements: Loss expected from lower tax rates may be countered by gains from the settlement of cases, higher dividend taxes on top incomes, and the wider scope for taxing international incomes.

  • 2020 CD3: A mini-moon

     

     

    Astronomers have observed a small object orbiting Earth, which they have dubbed a “mini-moon” or the planet’s “second moon”.

    2020 CD3

    • The mini-moon was discovered by some astronomers at NASA-funded Catalina Sky Survey (CSS) in Arizona.
    • It is actually an asteroid, about the size of a car; its diameter is about 1.9-3.5 m.
    • And unlike our permanent Moon, the mini-moon is temporary; it will eventually break free of Earth’s orbit and go off on its own way.
    • Orbit integrations indicate that this object is temporarily bound to the Earth.
    • 2020 CD3 was captured into Earth’s orbit over three years ago.
    • For CSS, it is only the second such discovery. It previously discovered 2006 RH120, which orbited Earth for some time that year, before it escaped in 2007.

    Where do such moons come from?

    • When an asteroid’s orbit crosses Earth’s orbit, it can sometimes be captured into the latter orbit. This is what happened with 2020 CD3.
    • It is now orbiting at a distance farther from Earth. Such an asteroid is called a Temporarily Captured Object (TCO).
    • The orbit of such objects is unstable. They have to contend with the gravitational influence of our permanent Moon as well as that of the Sun.
    • Once caught in Earth’s orbit, such objects usually remain for a few years before they break free and go into independent orbit around the Sun.

  • Enhanced Access and Service Excellence (EASE) 3.0

     

     

    Union Finance minister has released Enhanced Access and Service Excellence (EASE) 3.0, the new reform agenda for tech-enabled banking.

    EASE 3.0

    • EASE 3.0 aims at providing smart, tech-enabled public sector banking experience for aspiring India, by establishing paperless and digitally-enabled banking at places where people visit the most such as malls, stations etc.
    • With EASE 3.0, the government is trying to enhance the customer experience with the introduction of features like Dial-a-loan, credit at a click, alternate-data-based lending or other analytics-based credit offers.

    Various features

    • Palm Banking for “End-to-end digital delivery of financial service
    • “Banking on Go” via EASE banking outlets at frequently visited spots like malls, stations, complexes, and campuses
    • Digitalizing the experience at public sector bank branches

  • Market Intelligence and Early Warning System (MIEWS)

     

     

    The Union Food Processing Ministry has launched a new Market Intelligence and Early Warning System (MIEWS) portal to monitor the prices of TOP crops – Tomato, Onion and Potato.

    About MIEWS

    • MIEWS portal is the first-of-its-kind platform for ‘real-time monitoring’ of prices of tomato, onion and potato.
    • The system has been designed to provide advisories to farmers to avoid cyclical production and issue early warnings in situations of gluts.
    • It will simultaneously generate alerts for price intervention under the terms of Operation Greens (OG) scheme.
    • It will generate early alerts in case there is going to be a major change in the prices of these crops.
    • This will help in planning and timely intervention for price stabilization. The portal can be accessed at this link- http://miews.nafed-india.com.

    Utility of MIEWS

    The MIEWS would:

    • Monitor the supply situation for timely market intervention,
    • Assist in rapid response during times of glut to move the produce from glut regions to regions with deficit supply.
    • Provide inputs for export/import decision making.

    Back2Basics

    Operation Greens

    • In the budget speech of Union Budget 2018-19, a new Scheme “Operation Greens” was announced on the line of “Operation Flood” to promote Farmer Producers Organizations (FPOs #), agri-logistics, processing facilities and professional management.
    • Accordingly, the Ministry has formulated a scheme for integrated development of Tomato, Onion and Potato (TOP) value chain.
    • Under the OG Scheme, during a glut situation, the evacuation of surplus production from producing areas to consumption centres will be undertaken in the following cases:
    1. When the price falls below the average market price at the time of harvest in the preceding 3 years.
    2. When the price falls more than 50 percent in comparison to the previous year’s market price at the time of harvest.
    3. When the price falls below the benchmark, if any, fixed by either the state or central government for a stipulated period.

    For additional readings, navigate to:

    https://mofpi.nic.in/Schemes/operation-greens

  • [pib] ‘1000 Springs’ Initiative

     

     

    Union Tribal Affairs Ministry has launched “1000 Spring Initiatives” and an online portal on GIS-based Spring Atlas with hydrological and chemical properties of the Springs on the occasion.

    ‘1000 Springs’ Initiative

    • The ‘1000 Springs Initiative’ aims at improving access to safe and adequate water for the tribal communities living in a difficult and inaccessible part of rural areas in the country.
    • It is an integrated solution around natural springs.
    • It includes the provision of infrastructure for piped water supply for drinking; provision of water for irrigation; community-led total sanitation initiatives; and provision for water for backyard nutrition gardens, generating sustainable livelihood opportunities for the tribal people.
    • It will help in harnessing the potential of perennial springs’ water to address the natural scarcity of water in tribal areas.

    Spring Atlas

    • Springs are natural sources of groundwater discharge and have been used extensively in the mountainous regions across the world, including India.
    • However, in the central and eastern Indian belt with more than 75% tribal population, it remains largely unrecognized and under-utilized.
    • An online portal on GIS-based Spring Atlas has been developed to make these data easily accessible from an online platform.
    • Presently, data of more than 170 springs have been uploaded on the Spring Atlas.

  • [pib] Responsible AI for Social Empowerment (RAISE) 2020

     

     

    The Govt. has announced the mega event, RAISE 2020- ‘Responsible AI for Social Empowerment 2020,’ to be held in April in New Delhi.

    RAISE 2020

    • RAISE 2020 is a first of its kind, a global meeting of minds on Artificial Intelligence to drive India’s vision and roadmap for social empowerment, inclusion and transformation through responsible AI.
    • It is India’s first Artificial Intelligence summit to be organized by the Government in partnership with Industry & Academia.
    • The summit will be a global meeting of minds to exchange ideas and charter a course to use AI for social empowerment, inclusion and transformation in key areas like Healthcare, Agriculture, Education and Smart Mobility amongst other sectors.
    • It will facilitate an exchange of ideas to further create a mass awareness about the need to ethically develop and practice AI in the digital era.

  • Species in news: Henneguya Salminicola

     

     

    Researchers at Tel Aviv University have discovered a non-oxygen breathing animal, which significantly changes one of science’s assumptions about the animal world — that all animals use aerobic respiration and therefore, oxygen.

    Henneguya Salminicola

    • The organism is Henneguya salminicola, a fewer-than-10-celled microscopic parasite that lives in salmon muscle.
    • It relies on anaerobic respiration (through which cells extract energy without using oxygen).
    • In the case of this non-oxygen breathing organism, evolution turned it into a simpler organism that shed “unnecessary genes” responsible for aerobic respiration.
    • Other organisms such as fungi and amoebas that are found in anaerobic environments lost the ability to breathe over time.
    • The new study shows that the same can happen in the case of animals, too.

    What is Aerobic respiration?

    • Animals, including humans, need energy to perform the various tasks that are essential for survival.
    • Aerobic respiration is one such chemical reaction through which organisms take in oxygen and release carbon dioxide into the atmosphere.
    • Through this mechanism, energy is transferred to cells, which can use it for multiple purposes — for instance, to burn food.
    • Mitochondria is the “powerhouse” of the cell, which captures oxygen to make energy — its absence in the H. salminicola genome indicates that the parasite does not breathe oxygen.

  • NASA’s InSight Mission

     

    It’s now more than a year since NASA’s InSight lander mission touched down on Mars on November 26, 2018. This week, NASA published a report regarding findings on the Mars.

    About InSight Mission

    • The Interior Exploration using Seismic Investigations, Geodesy and Heat Transport mission is a robotic lander designed to study the deep interior of the planet Mars.
    • It is the first mission dedicated to looking deep beneath the Martian surface.
    • Among its science tools are a seismometer for detecting quakes, sensors for gauging wind and air pressure, a magnetometer, and a heat flow probe designed to take the planet’s temperature.
    • The InSight mission is part of NASA’s Discovery Program.
    • It is being supported by a number of European partners, which include France’s Centre National d’Études Spatiales (CNES), the German Aerospace Center (DLR) and the United Kingdom Space Agency (UKSA).

    Key findings of the Mission

    Underground: rumbles

    • Mars trembles more often than expected, but also more mildly.
    • This emerged from readings of the ultra-sensitive seismometer, called the Seismic Experiment for Interior Structure (SEIS).
    • The instrument enables scientists to “hear” multiple trembling events from hundreds to thousands of miles away.
    • Mars doesn’t have tectonic plates like Earth, but it does have volcanically active regions that can cause rumbles.

    The surface: Magnetism

    • Billions of years ago, Mars had a magnetic field.
    • Although it is no longer present, it left behind what NASA describes as “ghosts” – magnetized rocks that are now between 61 m to several km below ground.
    • InSight is equipped with a magnetometer, which has detected magnetic signals.
    • At a Martian site called Homestead hollow, the magnetic signals are 10 times stronger than what was predicted earlier (based on data from orbiting spacecraft).

    In the wind: dust devils

    • InSight measures wind speed, direction and air pressure nearly continuously.
    • Weather sensors have detected thousands of passing whirlwinds, which are called dust devils when they pick up grit and become visible.
    • The site has more whirlwinds than any other place where a landing has been made on Mars while carrying weather sensors.
    • Despite all that activity in the wind and frequent imaging, InSight’s cameras have yet to see dust devils. But SEIS can feel these whirlwinds pulling on the surface.

    The core: still to come

    • InSight has two radios. One is for regularly sending and receiving data. The other radio, which is more powerful, is designed to measure the “wobble” of Mars as it spins.
    • This X-band radio, also known as the Rotation and Interior Structure Experiment (RISE), can eventually reveal whether the planet’s core is solid or liquid.
    • A solid core would cause Mars to wobble less than a liquid one would.
    • This first year of data is just a start, NASA said in the statement. When it is two years on Earth, Mars will have completed one year.

  • ‘MH-60R and AH-64E Apache’ Choppers

     

    During his speech in Ahmedabad, Mr. Trump announced: deals to sell over $3 billion state-of-the-art military helicopters and other equipment to the Indian Armed Forces.

    MH-60 Romeo helicopters

    • The incoming 24 multirole MH-60 Romeo helicopters are expected to boost the Indian Navy’s efforts to expand its role in the Indian Ocean Region.
    • The MH-60 Romeo Seahawk, made by defence giant Lockheed Martin, is one of the most advanced naval helicopters in the world, used by the US Navy among others.
    • It is the most capable and mature Anti-Submarine Warfare (ASW) Anti-Surface Warfare (ASuW) multi-mission helicopter available in the world today, the makers say.
    • MH-60 Romeo Seahawks have equipped with anti-submarine Mark 54 torpedoes and Hellfire air-to-surface missiles, along with precision-kill rockets.
    • It also has an advanced system for passive detection, location, and identification of emitters. It can not only track and hunt ships but is also used by the US Navy as an anti-submarine weapon.

    Apache helicopters

    • Indian Army will receive six more Apache helicopters in addition to the 22.
    • The Apaches can operate at high altitudes and will be deployed along the Pakistan border. The Army is likely to get the helicopters armed with Stinger air-to-air missiles and Hellfire Longbow air-to-ground missiles.
    • Among the Apache’s modern capabilities are the ability to shoot fire-and-forget anti-tank missiles, air-to-air missiles, rockets, and other munitions.
    • It also has modern electronic warfare capabilities to provide versatility in network-centric aerial warfare.
    • The choppers are all-weather capable and have high agility and survivability against battle damage.
    • They can be easily maintained in field conditions as well as during operations in the tropical and desert regions.