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GS Paper: GS3

  • InvITs and REITs

     

    Markets regulator SEBI has put in place a framework for the rights issue of units by listed REIT and InvITs.

    What are InvITs and REITs?

    Infrastructure Investment Trusts (InvIT)

    • An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as return.
    • InvITs work like mutual funds or real estate investment trusts (REITs) in features.
    • InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
    • They are similar to REIT but invest in infrastructure projects such as roads or highways which take some time to generate steady cash flows.

    Real Estate Investment Trusts (REIT)

    • A REIT is roughly like a mutual fund that invests in real estate although the similarity doesn’t go much further.
    • The basic deal on REITs is that you own a share of property, and so an appropriate share of the income from it will come to you, after deducting an appropriate share of expenses.
    • Essentially, it’s like a group of people pooling their money together and buying real estate except that it’s on a large scale and is regulated.
    • The obvious pitch for a REIT is that it enables individuals to generate income and capital appreciation with money that is a small fraction of what would be required to buy an entire property.
    • However, the resemblance to either mutual funds or to owning property ends there.
    • According to Indian regulation on REITs, these are meant to primarily own finished and rented out commercial properties –– 80 per cent of the investments must be in such assets. That excludes a real estate that is under development.

    Why need InvITs and REITs?

    • Infrastructure and real estate are the two most critical sectors in any developing economy.
    • A well-developed infrastructural set-up propels the overall development of a country.
    • It also facilitates a steady inflow of private and foreign investments, and thereby augments the capital base available for the growth of key sectors in an economy, as well as its own growth, in a sustained manner.
    • Given the importance of these two sectors in the country, and the paucity of public funds available to stimulate their growth, it is imperative that additional channels of financing are put in place.

    What did SEBI rule?

    • SEBI said the issuer will have to disclose objects of the issue, related-party transactions, valuation, financial details, review of credit rating and grievance redressal mechanism in the placement document.
    • The SEBI had first notified REITs and InvIT Regulations in 2014, allowing setting up and listing of such trusts which are popular in some advanced markets.

  • Corona Virus

     

    Chinese scientists have confirmed can spread between human beings.

    Corona Virus

    • Corona viruses are large family of viruses, which cause illnesses to people and also circulate in animals including camels, cats and bats.
    • They cause illness ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome and Severe Acute Respiratory Syndrome.
    • 2019-nCoV is a new strain that has not been previously identified in humans.
    • Much remains to be understood about the new coronavirus, which was first identified in China earlier this month.
    • Not enough is known about 2019-nCoV to draw definitive conclusions about how it is transmitted, clinical features of disease, or the extent to which it has spread. The source also remains unknown.

    Why is it called the Wuhan Virus?

    • The first cases emerged in Wuhan in central China’s Hubei province.
    • On December 31 last year, authorities confirmed that a large number of patients with unexplained pneumonia were admitted in hospitals in the city.

    Symptoms of infection

    • According to the WHO, common signs include fever, cough, and shortness of breath. Serious infections can lead to pneumonia, kidney failure, and death.
    • Although human-to-human transmission has now been confirmed, the WHO says animals are the outbreak’s likely primary source. It is not known yet which animals are responsible.
    • To prevent the spread of all respiratory infections, the WHO in general asks people to cover their mouths and noses when coughing or sneezing, and to frequently wash their hands.
    • Direct contact with farm or wild animals should be avoided — similar outbreaks in the past, like the Severe Acute Respiratory Syndrome (SARS) emerged from markets where people were in contact with live animals.

    Why is there concern around the world?

    • People see a similarity with the SARS outbreak that infected over 8,000 people and killed around 775 in more than 35 countries worldwide in 2002-03.
    • SARS too, was caused by a mystery coronavirus, and started in China.
    • The source of the virus remained unknown for 15 years, until Chinese scientists in 2017 traced it back to a colony of horseshoe bats living in remote cave in Yunnan province.
    • The virus was carried by civet cats which are sold in markets in China.
    • Fears that SARS could reappear and memories of China misleading the rest of the world on the extent and seriousness of the outbreak have not gone away.

  • [pib] National Startup Advisory Council

    The Union Government has notified the structure of the National Startup Advisory Council to advice on measures needed to build a strong ecosystem for nurturing innovation and startups in the country.

    National Startup Advisory Council

    • The Council will be chaired by Minster for Commerce & Industry.
    • It will consist of the non-official members, to be nominated by Central Government, from various categories like founders of successful startups, veterans and persons capable of representing interests of incubators and accelerators etc.
    • The term of the non-official members of the Startup Advisory Council will be for a period of two years.
    • The nominees of the concerned Ministries/Departments/Organisations, not below the rank of Joint Secretary to the Government of India, will be ex-officio members of the Council.
    • Joint Secretary, Department for Promotion of Industry and Internal Trade will be the Convener of the Council.

    Various functions

    • The Council will suggest measures to foster a culture of innovation amongst citizens and students in particular, promote innovation in all sectors of economy across the country
    • It will also suggest measures to facilitate public organizations to assimilate innovation with a view to improving public service delivery, promote creation, protection and commercialization of intellectual property rights.
    • It would suggest making it easier to start, operate, grow and exit businesses by reducing regulatory compliances and costs, promote ease of access to capital for startups, and incentivize domestic capital for investments into startups.
    • It would also mobilize global capital for investments in Indian startups, keep control of startups with original promoters and provide access to global markets for Indian startups.

  • [op-ed of the day] Delhi-Davos disconnect-India must find ways to take advantage of new opportunities

    Context

    Given its increased heft in the global economic order, India ought to be at the leading edge of the current debate of the future of capitalism.

    The emergence of “stakeholder capitalism”

    • Interests of all shareholder: Klaus Schwab, who founded the World Economic Forum 50 years ago, wants capitalists to look beyond their shareholders and consider the interests of all the stakeholders.
      • Long overdue debate: Some hope that the debate on stakeholder capitalism is a long-overdue recognition of the capitalist excesses of recent decades.
    • Generating value for customers: Last August, the Business Roundtable in the US, which brings together some of the top American corporates, said American companies must now generate value for customers.
      • Invest in their employees.
      • Deal fairly with suppliers and support the communities in which they operate even as they service their shareholders.
    • Scepticism over “interests of all shareholders”: Sceptics say that this is a nice way of saying the right things, repackaging old ideas on corporate social responsibility and creating illusions about reforming capitalism.
      • Cynics insist that it will be business as usual for the world’s capitalists.
      • Reflection of deeper crisis: Beyond this divide between optimists and pessimists, the discourse on “stakeholder capitalism” is a reflection of the deeper crisis afflicting the global economy today.

    Three major challenges according to WEF

    • In its annual survey on global risks, the WEF has identified many challenges. Three of them stand out.
    • First Challenge: Polarised politics
      • In the US Trump is unlikely to be defensive.
      • While the dominant sentiments see Trump as the very embodiment of nationalism and populism that are polarising politics around the world.
      • Others point to the structural conditions that have bred these forces.
      • America’s working-class whose wages haven’t risen in decades, whose jobs are less secure than ever rallied behind Trump.
      • Politics in the US: Much the same happened in the British elections last year.
      • Tory leader Boris Johnson won a sweeping mandate by breaking into the working-class strongholds of the Labour Party.
    • Second Challenge: Trade war
      • Trump had a long record of denouncing free trade.
      • Many had hoped that Trump will moderate his anti-globalist rhetoric once in office.
      • Attack on a core principle of globalisation: Trump has taken a pickaxe to the core principles of the globalised economic order – free trade, open borders and multilateralism.
      • Renegotiating the treaties: The US has renegotiated a 25-year old trade agreement with America’s neighbours, Canada and Mexico.
      • The threat of all-out-trade war with China: Trump’s threat of an all-out trade war with China over the last couple of years has led to an interim agreement.
      • The agreement commits Beijing to reduce its trade surplus with the US by importing more.
      • The trade deficit of the US with EU: At Davos, Trump is expected to turn his ire on the EU, which has a near $200 billion trade surplus with the US.
    • Third challenge: Technology
      • War in technology domain: The trade wars among the world’s major capitalist centres is accentuated by the technological revolution, especially in the digital domain.
      • Need for coordination: The Davos report on global risks argues that the realisation of the full potential of new technologies depends on unprecedented coordination among all stakeholders.
      • Digital fragmentation: What is emerging instead is “digital fragmentation” marked by the extension of geopolitical and geo-economic rivalries into the new domain.
      • Digital issues have come to the front and centre of American arguments with Europe.

    Conclusion

    • India must find ways to take advantage of the new opportunities from the unfolding rearrangement of the global capitalist system.

     

  • [op-ed snap] Redesigning India’s ailing data system

    Context

    As official statistics is a public good, giving information about the state of the economy and success of governance, it needs to be independent to be impartial.

    GDP calculation and its significance

    • What is GDP:
      • Assigning a value to products and services: In effect, it adds apples and oranges, tractors and sickles, trade, transport, storage and communication, real estate, banking and government services through the mechanism of value.
      • GDP covers all productive activity for producing goods and services, without duplication.
      • The System of National Accounting (SNA): It is designed to measure production, consumption, and accumulation of income and wealth for assessing the performance of the economy.
    • What is the significance of GDP data?
      • Influence the market: GDP data influence markets, signalling investment sentiments, the flow of funds and balance of payments.
      • The input-output relations impact productivity and allocation of resources.
      • Demand and supply influences prices, exchange rates, wage rates, employment and standard of living, affecting all walks of life.
    • Issues over the present series of GDP:
      • Nominal GDP: The data on GDP are initially estimated at a current price known as nominal GDP.
      • Real GDP: Nominal GDP minus the inflation effect is real GDP.
      • Price Index: There is a way of adjusting inflation effect through an appropriate price index.
      • Pricing series issue with the service sector: The present series encountered serious problems for the price adjustment, specifically for the services sector contributing about 60% of GDP.
      • Absence of price index: There is an absence of appropriate price indices for most service sectors.
      • What the absence of series means: The deflators used in the new series could not effectively separate out price effect from the current value to arrive at a real volume estimate at a constant price.
      • Methodical issue: Replacing Annual Survey of Industries (ASI) with the Ministry of Corporate Affairs MCA21 posed serious data and methodological issues.

    Need for the change in the approach of data collection

    • The approach for the collection of data remains largely the same for long.
      • Price and production indices are constructed using a fixed base Laspeyres Index.
      • The yield rate for paddy is estimated by crop cutting experiments.
      • The organisation of field surveys for collection of data on employment-unemployment, consumer expenditure, industrial output, assets and liabilities continue.
    • Why data collection for yields need to change?
      • Productivity and remunerative price of output are major concerns for agriculture.
      • Data collection from diverse factors: It is necessary to collect data on factors such as soil conditions, moisture, temperature, water and fertilizer use determining yield, the impact of intermediary and forward trade on farm gate price and so on.
      • Israel collects these data for analysis to support productivity.
      • Need to leverage the e-governance: The initiative under e-governance enabled the capturing of huge data, which need to be collated for their meaningful use for the production of official statistics.

    Data Logistics

    • Need of data from the other areas: Along with GDP, we need data to assess-
      • Inclusive growth.
      • Fourth-generation Industrial Revolution riding on the Internet of things.
      • Robotics-influencing employment and productivity.
      • Environmental protection.
      • Sustainable development and social welfare.
    • How to deal with the data inconsistency
      • We need systems which have the capability to sift through a huge volume of data seamlessly to look for reliability, validity, consistency and coherence.
      • Such a system is possible through a versatile data warehouse as a component of big–data technology.
      • Rangarajan Committee recommendation: Setting up of such system has been wanting as thoughtful and well-meaning key recommendations of the Rangarajan Commission and subsequent recommendations from 2006 onwards by successive National Statistical Commissions.

    Way forward

    • The need for a new system: The present national accounting and analytical framework miss out on many important dimensions of the economy.
      • We need a new framework for analysis for such a complex system and evolutionary process.
      • The system needs to take into account automation, robotisation and other labour-replacing technologies affecting profitability, structural change and general welfare.
    • Need to find alternative avenues for the unemployed and jobs lost: In order to inject efficiency and stability, there is a need to have detailed data on how: markets clear, prices are formed, risks build-up, institutions function and, in turn, influence the lifestyle of various sections of the people.
    • Knowing market microstructure: It is also needed to know in greater detail about market microstructure and optimality therein, the role of technology and advanced research, changing demand on human skills, and enterprise and organising ability.
    • Monopoly must be contained:  The loss caused to the economy through monopoly power, inefficient input-output mix, dumping, obsolete technology and product mix must be contained.
    • Ensure distribution of wealth: The consensus macroeconomic framework of analysis assumes symmetric income distribution and does not get into the depth of structural issues.
      • In the changed situation of availability of microdata, there is a need to build a system to integrate the micro with the macro, maintaining distributional characteristics.

    Conclusion

    Data is the new oil in the modern networked economy in pursuit of socio-economic development. The economics now is deeply rooted in data, measuring and impacting competitiveness, risks, opportunities and social welfare in an integrated manner, going much beyond macroeconomics. There is a need for commitment to producing these statistics transparently.

     

     

  • Steppe Eagle

     

    A lone endangered steppe eagle (Aquila nipalensis) has been sighted by a group of birdwatchers in a paddy field near Vijayawada.

    Steppe Eagle

    • The Steppe Eagle is a migratory raptor which has undergone extremely rapid population declines within all its range.
    • It breeds in Russia, Kazakhstan, and Mongolia during the winter season.
    • Steppe eagle is the second-largest migratory eagle species to India.
    • IUCN Status: It has moved from ‘Least Concern’ to ‘Endangered’

  • Xenobot

    Scientists in the US have created the world’s first “living machines” — tiny robots built from the cells of the African clawed frog that can move around on their own.

    Xenobot

    • Scientists have developed living robots from frogs stem cells.
    • They have named this millimetre-wide robots “xenobots” — after the species of aquatic frog found across sub-Saharan Africa from Nigeria and Sudan to South Africa, Xenopus laevis.
    • Scientists have repurposed living cells scraped from frog embryos and assembled them into entirely new life-forms.
    • The xenobots can move toward a target, perhaps pick up a payload (like a medicine that needs to be carried to a specific place inside a patient) — and heal themselves after being cut.

  • [op-ed snap] Why ‘Make in India’ has failed

    Context

    Five years after its launch its appropriate time to take the stock of the progress made by ‘Make in India’.

    Three major objectives of the initiative

    • First- Manufacturing growth rate at 12-14 %: The first objective is to increase the manufacturing sector’s growth rate to 12-14% per annum in order to increase the sector’s share in the economy.
    • Second-100 million jobs: The second objective is to create 100 million additional manufacturing jobs in the economy by 2022.
    • Third-increase manufacturing’s contribution to GDP to 25%: The third objective is to ensure that the manufacturing sector’s contribution to GDP is increased to 25% by 2022 (revised to 2025) from the current 16%.

    Assessment of the progress made so far

    • As the policy changes were intended to usher growth in three key variables of the manufacturing sector — investments, output, and employment growth.
    • Progress on the investment front:
      • Slow growth: The last five years witnessed slow growth of investment in the economy.
      • This is more so when we consider capital investments in the manufacturing sector.
      • The decline in gross fixed capital formation: Gross fixed capital formation of the private sector declined to 28.6% of GDP in 2017-18 from 31.3% in 2013-14 (Economic Survey 2018-19).
      • Gross Fixed Capital Formation is the measure of aggregate investment.
      • Increase in private sector’s savings decrease in investment: Household savings have declined, while the private corporate sector’s savings have increased.
      • This is a scenario where the private sector’s savings have increased, but investments have decreased, despite policy measures to provide a good investment climate.
    • Progress on the output growth front:
      • Double-digit growth only in two quarters: The monthly index of industrial production (IIP) pertaining to manufacturing has registered double-digit growth rates only on two occasions during the period April 2012 to November 2019.
      • Below 3% for the most part: The data show that for a majority of the months, it was 3% or below and even negative for some months.
      • The negative growth implies a contraction of the sector.
    • Progress on the employment growth front:
      • No progress: The employment, especially industrial employment, has not grown to keep pace with the rate of new entries into the labour market.

    Problems with the policy

    • The initiative had two major lacunae.
    • First- Too much reliance on foreign capital: The bulk of these schemes relied too much on foreign capital for investments and global markets for produce.
      • This created an inbuilt uncertainty, as domestic production had to be planned according to the demand and supply conditions elsewhere.
    • Second-Lack of implementation: The policy implementers need to take into account the implications of implementation deficit in their decisions.
      • The result of such a policy oversight is evident in a large number of stalled projects in India.
      • The spate of policy announcements without having the preparedness to implement them is ‘policy casualness’.
      • ‘Make in India’ has been plagued by a large number of under-prepared initiatives.

    Three reasons why ‘Make in India’ failed to perform

    • Too-much ambitious goals: It set out too ambitious growth rates for the manufacturing sector to achieve.
      • Beyond capacity rate for the sector: An annual growth rate of 12-14% is well beyond the capacity of the industrial sector.
      • Overestimation of implementation capacity: To expect to build capabilities for such a quantum jump is perhaps an enormous overestimation of the implementation capacity of the government.
    • Dealing with too many sectors: The initiative brought in too many sectors into its fold.
      • Lack of policy focus: Bringing in too many sectors under its fold led to a loss of policy focus.
      • Lack of understanding of comparative advantages: Further, it was seen as a policy devoid of any understanding of the comparative advantages of the domestic economy.
    • Ill-timed launch
      • Given the uncertainties of the global economy and ever-rising trade protectionism, the initiative was spectacularly ill-timed.

    Conclusion

    • In order to revive the ‘Make in India’ there is a need to make necessary changes in the policy and root out the causes associated with the policy implementation.

     

     

     

     

     

     

  • [op-ed snap] A farm wish list for the budget

    Context

    As finance minister presents the budget the FM need to ensure transparency and to fully account for the food subsidy.

    The excess buffer stock and need to reform

    • A buffer stock norm and actual stock: A buffer stock norm is at 21.4 million tonnes (mt).
      • Actual stock far exceeds the norm: The actual stocks of grains with the central pool stood at 75.5 mt.
      • Which is 3.5 times what the government needs to hold.
    • The economic cost of the excess stock: At its economic cost, the value of the excess stocks with the government stands at Rs 1.6 lakh crore.
      • Potential for revenue: There is no better place to find revenue for the FM than to liquidate these stocks.
      • Need for the reform in grain management system: Unless the grain management system is reformed, the inefficiency of the grain management system will keep on increasing and the nation will suffer.

    Food subsidy reforms

    • Link food prices to procurement price: It is the time to revise the central issue of price and link it to the procurement price-say at half the procurement price.
      • Limit the population coverage: There is a need to limit this highly subsidised food of Rs 3/kg for rice and Rs 2/kg of wheat to say 40 per cent of the population.
      • Move to DBT: The real fundamental reform would be to move towards direct cash transfers for the intended beneficiaries of food subsidy.

    Fertiliser subsidy reforms

    • Imbalance in the subsidisation: The real problem of this sector is the imbalance in the policy of fertiliser subsidisation.
      • While urea (N) is subsidised to the extent of 75 per cent of its cost, phosphatic (P) and potassic (K) fertilisers are subsidised only to the tune of about 25 per cent of their cost.
    • Consequences of this imbalance: The result is the highly imbalanced use of N, P and K on farmers’ fields. Which results in
      • Giving a very low fertiliser-to-grain response ratio.
      • Degrading the soil.
      • Degrading underground water.
      • Degrading the environment with excessive nitrogen use.
      • Discouragement to natural farming: The current fertiliser subsidy discourages those who want to pursue natural farming as they don’t get subsidy anywhere near the amount chemical-based fertilisers do.
    • Reforms: There are two ways in which the fertiliser subsidy regime can be reformed.
      • Bring nitrogenous fertiliser under NBS: The solution to the imbalance in use is to bring nitrogenous fertilisers under the Nutrient Based Subsidy (NBS) scheme.
      • Cash transfer based on per hectare basis: The second option is to move towards direct cash transfers for fertilisers on a per hectare basis, with some adjustment for irrigated tracts.
      • 50,000 Crore saving: The above-mentioned reforms could result in the saving of Rs. 50,000 crores to the public exchequer.

    Way forward

    • Investing the savings where it matters the most: The savings from the reforms could be invested in-
      • Better water management, especially drip irrigation.
      • Infrastructure for agri-markets.
      • Solar trees: The investments could also be made in setting up the solar trees in the farm to harvest solar power on farmer’s fields with buyback agreements for surplus production.

  • Natural Gas Grid (NGG)

    A study to facilitate the development of a National Gas Grid is to be undertaken soon by a U.S. entity. The Government has last year envisaged developing the NGG.

    National Gas Grid

    • At present about 16,788 Km natural gas pipeline is operational and about 14,239 Km gas pipelines are being developed to increase the availability of natural gas across the country.
    • These pipelines have been authorized by Petroleum and Natural Gas Regulatory Board (PNGRB) and are at various stages of execution viz. Pre-Project activities/laying/testing/commissioning etc.

    Aims and Objective

    • To remove regional imbalance within the country with regard to access of natural gas and provide clean and green fuel throughout the country.
    • To connect gas sources to major demand centres and ensure availability of gas to consumers in various sectors.
    • Development of City Gas Distribution Networks in various cities for supply of CNG and PNG.

    NGG Technical Assistance Program

    • The India NGG Technical Assistance programme stems from an agreement in September between PNGRB and the US Trade Development Agency (USTDA).
    • The study will aim at developing an economic basis for building India’s Natural Gas Grid (NGG).

    Utility of the study

    • It would provide an update on the gas demand analysis, including anchor consumers, industries, city gas distribution (CGD) and emerging demand centres such as CNG and LNG for road transport.
    • The study will take a fresh look at the gas supply analysis too. This includes review of LNG imports, domestic supply, potential transnational gas pipeline imports and virtual pipelines.
    • Share of natural gas in India’s energy basket is 6.2% as against 23.4% globally and is expected to increase.