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Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

[op-ed snap] Barriers to Indian firms achieving high growth

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From the UPSC perspective, the following things are important:

Prelims level: World Bank, OECD, Economic survey statistics

Mains level: The potential of HGFs in India and reforms required for their growth


Context

World Bank report on Indian industries

  1. India’s business landscape poses myriad growth and productivity questions
  2. The dominance of the informal sector and micro and small enterprises mean that much of the economy is off the books
  3. Sectoral and job creation policies must consequently deal with many variables that are difficult to pin down
  4. And then there is the dwarf enterprise syndrome—small companies that do not grow in time but remain stunted
  5. A new World Bank report, High-Growth Firms: Fact, Fiction and Policy Options for Emerging Economies, sheds light on many of these issues

High growth firms in India

  1.  The Organization for Economic Co-operation and Development defines high-growth firms (HGFs) as those that employ more than 10 workers, with employment growing at an average annual rate of 20% or more over at least three consecutive years
  2. This is a fairly high bar in the Indian economic landscape
  3. The sixth economic census, released in 2016, showed that 131.29 million people were employed in 58.5 million enterprises
  4. That means the pool of HGFs is small indeed
  5. The report finds that for the emerging economies it examines, HGFs account for 8-22% of the total number of firms; India falls somewhere near the middle with 14.3%
  6. The interesting—and troubling—aspect is just how heavily disproportionate HGFs’ contribution to output growth is
  7. Across the economies in question, this can range from 49% to a massive 83%
  8. India fares relatively well, coming in at the lower bound of that bracket

Challenges to HGFs

  • First, while HGFs don’t appear to have much horizontal spillover, they do have vertical spillovers
  1. This means they affect upstream and downstream enterprises positively
  2. When small, informal enterprises and large, formal enterprises are able to integrate effectively in supply chains, the barriers that the former face in achieving high productivity growth are lowered
  3.  Given their smaller balance sheets and less scope for accessing credit, micro, small and medium enterprises (MSMEs) depend to a large extent on timely cash payments from the large companies they supply to in order to function effectively
  4. It often doesn’t work out this way
  5. Given their poorer bargaining power and the costs of using the legislation for tackling delayed payments—the MSME Development Act, 2006—micro and small enterprises frequently face inordinate delays in receiving payments
  6. And goods and services tax kinks related to input tax credit are further complicating the picture
  • HGF is something of a misnomer in that firms rarely exhibit such growth across their lifetimes but, rather, exhibit episodes of such growth
  1. Older, more established firms with resources to burn are not more likely to experience such episodes
  2. Quite the reverse; in both manufacturing and services, age has a negative association with firm growth
  3. Thus, a market that enables churn is important
  4. Unfortunately, among other considerations, factor market distortions—specifically, land misallocation, which is the most distortionary—make such churn difficult
  5. Such misallocation has a dual effect. It enables crony capitalism and political subsidies, allowing inefficient firms to rise to the top of the pile
  6. And it contributes to the credit squeeze small enterprises face since land is the primary form of collateral used in business loans
  • The report shows that “the relationship between various measures of innovation and the probability of experiencing a high-growth event is generally positive”
  1. High-growth events in manufacturing and services are driven by persistent rather than occasional R&D (research and development)
  2. This is a problem
  3. According to the Economic Survey 2017-18, India’s R&D spending over the past two decades has been stagnant at around 0.6% to 0.7% of gross domestic product
  4. This is a worrying divergence from the trend of R&D spending increasing sharply as a percentage of GDP seen in East Asian economies as they have grown richer
  5. And unlike many of those economies, in India, the bulk of the R&D spending is done by the government with private investment lagging by a fair distance

Way forward

  1. By highlighting such structural issues and the importance of exports in boosting the chances of experiencing a high-growth episode the report provides useful guidance for crafting appropriate policy mixes

Electoral Reforms In India

[op-ed snap] The post and the person: on strengthening the EC

Note4students

Mains Paper 2: Polity | Appointment to various Constitutional posts, powers, functions & responsibilities of various Constitutional Bodies

From the UPSC perspective, the following things are important:

Prelims level: ECI- functioning, appointments and powers

Mains level: Role of judiciary in electoral reforms in India and the need for more reforms in the functioning of ECI


Context

PIL challenging ECI appointments process

  1. The Constitution Bench of the Supreme Court is examining a public interest litigation (PIL) that could be critical for Indian democracy
  2. The PIL, which seeks the strengthening of the Election Commission of India (ECI), includes a proposal to create an independent mechanism to appoint the Chief Election Commissioner (CEC) and Election Commissioners (ECs) who are, at present, simply appointed by the government of the day, without any defined criteria or processes

How was ECI built?

When the Constituent Assembly debated how free and fair elections should be ensured, three important questions arose

  • The first was whether free and fair elections should be made a part of fundamental rights or an independent institution, outside the executive, should be established to conduct the elections
  1. The Assembly opted for the latter and created the ECI
  2. With legal back up and the resources to develop and enforce a transparent electoral system, the ECI made free and fair elections a reality
  • The second critical decision was to have a single, centralised body for elections to the Lok Sabha and State legislatures
  1. One proposal was that the ECI be confined to federal elections, and separate institutions be set up to conduct elections to State legislatures
  2. However, with increasing tension among communities, the Assembly feared partisan action in the States and opted for a single national institution, the ECI
  3. The implications of this decision were complex
  4. On the one hand, Central institutions have generally been more robust than State institutions
  5. For example, State Election Commissions lack autonomy, are short on manpower and funds and are frequently subject to attempts by State governments to manipulate elections
  6. On the other, this decision could have led to an autocratic institution being established and possibly manipulated by powerful national actors
  7. But this possibility was contained because elections became subject to judicial review
  8. The ECI itself recommended that election petitions be heard by the judiciary instead of tribunals set up by the ECI, and in 1966, the law was changed accordingly
  • The third question concerned ensuring the independence of the ECI
  1. The constituent assembly provided simply for the CEC to be appointed by the President, leaving it to the legislature to enact a suitable law, which never happened
  2. The Constituent Assembly did provide, though, that the CEC could only be removed through impeachment
  3. For the ECs, even this safeguard was not provided, which is also a subject of the above-mentioned PIL
  4. The history of elections shows that this remains a major shortcoming of the ECI

Impact of this provision

  1. From 1967 to 1991, the election process deteriorated as the Congress lost its dominance, political competition intensified, and political actors stepped up violence and electoral malpractices
  2. The ECI could not arrest this deterioration
  3. Several State governments made large-scale transfers on the eve of elections and posted pliable officials in key positions, who sometimes flouted the ECI’s orders

Imprvements in the functioning

  1. This deterioration could have continued. Instead, during the 1996 general election, the ECI restored the credibility of the election process
  2. The CEC, T.N. Seshan, reinterpreted the ECI’s role and powers and provided combative, forceful leadership
  3. He publicly reprimanded politicians for violating the Model Code of Conduct, postponed/ cancelled elections if their credibility was compromised, intensified supervision of elections, and insisted on action against errant officials
  4. Because of constitutional safeguards, he could not be removed
  5. But the ECI got the right leadership accidentally, not by design

Way forward

  1. Though the ECI has since become an institution of some authority, there have been controversies over appointments of ECs, allegations of partisanship, and new problems such as of voter bribery and paid news, which the ECI has not been able to address so far
  2. As history shows, inadequate leadership is the bane of our public institutions
  3. Safeguards to ensure that ethical and capable people head them are crucial

Banking Sector Reforms

[op-ed snap] The RBI concedes a vital principle

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: RBI functioning, reserves of RBI, Basel norms, BIS

Mains level: The tussle between RBI & the government and the need for its early resolution for sending correct signals in the economy


Context

Recent RBI board meeting

  1. The government and some of the current nominee directors on the RBI board have contended that all policy decisions must be deliberated by the board
  2.  The outcomes of the meeting suggest that the RBI has conceded this vital principle
  3. This augurs well for the relationship between the government and the RBI management hereafter. Indeed, it may well constitute a paradigm shift in the functioning of the RBI

The significance of the meeting

  1. Every one of the four decisions taken, including three decisions related to regulation, was ascribed to the board
  2. The note also mentions that the constitution of a committee to examine the economic capital framework of the RBI, which was one of the decisions taken, will be jointly determined by the RBI and the Government of India
  3. These announcements constitute a significant departure from what has appeared to be the position of the RBI thus far: policy decisions, especially those relating to regulation, are the exclusive province of RBI management
  4. Any departure from this position amounts to an infringement of the RBI’s autonomy

Relationship between RBI board & the management not defined

  1. The precise relationship between the RBI board and the RBI management is something of a grey area
  2. Various experts have made the point that the RBI Act vests all powers in the board and, concurrently, it vests those very powers in the RBI Governor
  3. Whether the board can issue directions to the RBI Governor in the event of a difference of opinion between the two is not clear

Arguments for the involvement of RBI board

  1. The RBI board has played an advisory role in the past and should continue to do so
  2. Corporate boards too play an advisory role for the most part even though they enjoy full powers in the running of the corporation but they tend to leave most decisions to management
  3. However, corporate boards do step in and play a more active role where management is found wanting
  4. The RBI board must play a largely advisory role
  5. The RBI management may or may not accept the inputs of the board. But the board must have its say
  6. This is elementary corporate governance

Debate regarding RBI reserves

  1. How much capital the RBI needs has been hotly contested in recent years
  2. The government’s position is that the RBI’s reserves are in excess of reserves typically held by central banks elsewhere
  3. Some commentators have described the government’s position as an attempt to ‘raid the reserves’ of the RBI to fund its fiscal deficit
  4. This is a crude mischaracterization of the position
  5. Reducing reserves enables the government to spend — but not by stealing the RBI’s cash

How do reducing reserves favour the government?

  1. The RBI’s reserves fall into two categories: revaluation reserves (which have mostly to do with the change in the rupee value of the RBI’s holdings of gold and foreign currencies) and contingent reserves (which represent plough back of a portion of the surplus earned by the RBI every year, the remaining portion being transferred to government as dividend)
  2. Contingent reserves are intended for risks related to the RBI’s balance sheet
  3. Let us suppose that these should not be touched. Revaluation reserves are an accounting entry
  4. The RBI can reduce some of the revaluation reserves on the liability side and extinguish an equivalent value of government securities on the asset side
  5. The latter step would lower the stock of debt owed by the government
  6. This would provide headroom for the government to raise debt for meeting its future expenditure (including recapitalisation of public sector banks)

Ensuring credit flow

  1. The other outcomes at the RBI board meeting have to do with increasing the flow of bank credit and easing the problems of borrowers, especially small and medium enterprises (SMEs)
  2. Banks are subject to capital adequacy requirements — that is, they have to hold a minimum of capital against every rupee of loans they make
  3. The RBI’s requirement of capital adequacy is one percentage point higher than that of the internationally accepted Basel norms laid down by the Bank for International Settlements
  4. The government would like to align Indian banks’ requirements with the Basel norms as that would reduce the demands for capital made on it by public sector banks (PSBs)
  5. The RBI did not yield on this point at the recent meeting
  6. However, it has agreed to defer an increase in the capital requirement of banks of 0.625% under another head by one year

Easing PCA framework

  1. The RBI has also agreed to consider the government’s suggestion for easing the norms for Prompt Corrective Action (PCA) for banks
  2. The PCA imposes restrictions of various kinds on banks, including restrictions on lending for the weakest banks
  3. The idea is that banks that are very weak should not create problems for themselves by making more loans
  4. They should focus on getting their balance sheet right by reducing costs, selling some of their non-core assets and the like
  5. A PCA regime has significant negative externalities
  6. If many banks face lending restrictions for a prolonged period, it could create serious problems for the economy
  7. Large corporates could get into distress because of their linkages with distressed SMEs
  8. So can the healthier banks that are exposed to these corporates
  9. A relaxation in PCA norms, by translating into higher credit flows, could relieve stress in the broader economy

NBFC capital requirements

  1. The strident demand to enhance flows to non-banking financial companies (NBFCs), which was heard ahead of the meeting, finds no mention in the press note
  2. It appears that the difficulties in rolling over NBFC debt that followed the collapse of Infrastructure Leasing and Financial Services (IL&FS), a leading NBFC, have abated somewhat
  3. Evidently, the RBI was able to make a persuasive case on this point at the meeting

Way forward

  1. As a public institution whose actions have enormous welfare implications, the RBI management cannot rule by fiat
  2. Its actions must flow from a consultative process
  3. It must explain and justify its actions
  4. It must be seen to be accountable
  5. The RBI board could be an important mechanism for ensuring that these conditions are met

Ministry of External Affairs : Important Updates

E-registration must for jobs in 18 countries

Note4students

Mains Paper 2: IR | Indian Diaspora

From UPSC perspective, the following things are important:

Prelims level: ECR norms

Mains level: Welfare of Indians going abroad


News

Compulsory registration for non-ECR category

  1. Passport holders with non-Emigration Check Required (non-ECR) status will soon have to get themselves registered with the Ministry of External Affairs before taking up jobs abroad.
  2. The rule, which takes effect on January 1, is said to be aimed at the welfare of Indians going abroad.
  3. It applies to jobs in 18 countries, including the six Gulf Cooperation Council nations, which have the largest number of expats.

Category of passengers

  1. The non-ECR category of passengers includes Indians paying income tax and those with educational qualification above matriculation.
  2. As of now only ECR category passport holders were required to get emigration clearance from the office of the Protector of Emigrants to seek employment abroad.
  3. All those seeking employment will have to register online via the website emigrate.gov.in.
  4. Those failing to register at least 24 hours prior to actual departure will be off-loaded at the airports.
  5. For all other visa categories, there is no change in existing procedures.

Why such move?

  1. The objective of the directive is to protect workers with higher educational qualification from not getting into blue collar jobs.
  2. Previously only ECR stamped passport holders had to go through the mandatory e-migrate registration since 2015.
  3. However, not all blue collar workers are in the ECR category as it was evident in the number of people taking up employment in United Arab Emirates, Saudi Arabia, Kuwait, Sultanate of Oman and Qatar.

What data say?

  1. Statistics available with the MEA showed that UAE is one of the five top destination countries for Indians taking up employment.
  2. Nearly 1.5 lakh Indians had taken up employment in that country last year.
  3. This was followed by Saudi Arabia (78,611); Kuwait (56,380); Oman (43,332) and Qatar (24,759).
  4. Incidentally Uttar Pradesh has emerged as the top labour-sending State with 88,450 Indian emigrants registering with the e-migrate system.
  5. This was followed by Bihar (69,426); Tamil Nadu (38,341); West Bengal (36,599) and Rajasthan (32,184).
  6. The other countries where registration is required are Afghanistan, Indonesia, Iraq, Jordan, Lebanon, Libya, Malaysia, Sudan, South Sudan, Syria, Thailand and Yemen.

Minority Issues – SC, ST, Dalits, OBC, Reservations, etc.

Who are the Sentinelese?

Note4students

Mains Paper 2: Governance | Government policies & interventions for development in various sectors & issues arising out of their design & implementation.

From UPSC perspective, the following things are important:

Prelims level: Sentinelese Tribe, PVTGS

Mains level: Issue of extinction of PVTGs in A&N Islands


News

Sentinelese Tribals

  1. The Sentinelese, a negrito tribe who live on the North Sentinel Island of the Andamans, have not faced incursions and remain hostile to outsiders.
  2. The inhabitants are connected to the Jarawa on the basis of physical, as well as linguistic similarities.
  3. Based on carbon dating of kitchen middens by the Anthropological Survey of India, Sentinelese presence was confirmed in the islands to 2,000 years ago.
  4. Genome studies indicate that the Andaman tribes could have been on the islands even 30,000 years ago.

How are they protected?

  1. The Govt. of India issued the Andaman and Nicobar Islands (Protection of Aboriginal Tribes) Regulation, 1956 to declare the traditional areas occupied by the tribes as reserves.
  2. It prohibited entry of all persons except those with authorisation.
  3. Photographing or filming the tribe members is also an offence. The rules were amended later to enhance penalties.
  4. But restricted area permits were relaxed for some islands recently.

Have they made contact?

  1. The Sentinelese have been fiercely hostile to outside contact.
  2. But in 1991 they accepted some coconuts from a team of Indian anthropologists and administrators.
  3. Some researchers argue that the Sentinelese have been mostly left alone even from colonial times, unlike other tribes such as the Onges, Jarawas and Great Andamanese, because the land they occupy has little commercial attraction.

How many are there?

  1. From 1901 to 1921 they were estimated to be 117 people.
  2. In 1931, the number dropped to 50, a figure used for the 1961 Census too.
  3. In 1991 their head count was put at 23. Census 2001 counted 39 inhabitants.

Goods and Services Tax (GST)

GST, a game-changer reform for logistics sector

Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Impact of GST on Logistics Sector


News

Background

  1. Logistics costs have been one of the biggest stumbling blocks for Indian manufacturers eyeing exports.
  2. At about 13-14% of GDP, India’s logistics cost is high, and compares with about 8% in advanced nations that have efficient systems.
  3. This despite the percentage of outsourcing being higher in developed markets.

Positive transition in the Logistics Sector

  1. It has been 15 months since the rollout of what is considered one of India’s biggest tax reforms — the Goods and Services Tax (GST).
  2. As per a recent survey, the Indian logistics sector provides livelihood to 22 million-plus people, which is expected to be over 40 million by 2020.
  3. The high rate of growth in the next couple of years is expected largely due to implementation of GST.
  4. Considering the double-digit growth, the logistics market would exceed $250 billion in the next two years.

GST Impact

  1. GST has replaced at least 7 indirect tax heads and has eliminated the need for warehouse hubs across States.
  2. Further, GST has eliminated check posts across the nation and thereby waiting time, leading to at least 12-15% reduction in the turnaround time of trucks.
  3. Better utilization of assets like vehicles and warehouses has lead to efficiency and increased productivity thus lowering overall cost.
  4. This considerably benefits the supply chain directly and India’s growth indirectly.
  5. The manufacturing and other services sectors have now started planning their supply chains, bearing in mind fleet cost and fast delivery, rather than tax structure and compliance.

Equation has now changed

  1. Pre-GST, the Indian logistics sector was struggling to add value to customers, compared to global peers.
  2. Indian firms were seen as labour contractors or mere transporters, which denied them the benefits of being a part of the supply chain.
  3. Manufacturers are looking to optimize supply chains and are willing to outsource value-added planning to logistics players, who have invested in technology and operate with a focus on quality and compliance.
  4. These logistics players are seeing a positive shift in the mindset of their clients and are gaining momentum.

Recent Improvements

  1. The Centre has made clear its intention to bring down this cost to less than 10%, which would make Indian manufacturers globally relevant.
  2. The Centre created a new division in the Commerce Ministry to deal with the integrated development of logistics and urged all stakeholders to bring to India relevant best practices to enhance efficiency in logistics.
  3. This is a good move as logistics firms used to deal with six different ministries separately and each would require separate paper work and formalities.
  4. It is a big sense of relief to note there will soon be a system where a single document would be accepted for multi-modal logistics within India.
  5. India has moved from the 54th position in 2014 to 44th in 2018 in the World Bank’s Logistics Performance Index.

Infrastructure Status accorded recently

  1. The much-awaited ‘infrastructure’ status to the sector was conferred in November 2017, which is helping the sector avail cheaper finance (2% lower) for its warehousing and cold storage needs.
  2. This will bring in a lot more players with an integrated service approach that would again help Indian manufacturers.
  3. New investments in this sector are good news as it could create a lot more jobs in the near future.

Way Forward

  1. Together, the implementation of GST and other reforms have already started bringing efficiencies into the supply chain of various firms.
  2. The government too has realized that aspirations for economic growth, employment generation, manufacturing and exports are all inextricably linked to efficient management of logistics.

Judicial Reforms

Supreme Court to direct states to implement draft witness protection scheme

Note4students

Mains Paper 2: Governance | Mechanisms, laws, institutions & Bodies constituted for the protection & betterment of these vulnerable sections

From UPSC perspective, the following things are important:

Prelims level: Particulars of the draft scheme

Mains level: Importance of protection for Witness in major trials


News

  • The Supreme Court said that it would direct all the states to implement the draft witness protection scheme framed by the Centre in consultation with the National Legal Services Authority (NALSA).

Background

  1. The issue of witness protection scheme had cropped up earlier when the top court was hearing a public interest litigation (PIL) seeking protection for witnesses in rape cases involving a self-styled preacher.
  2. The court had asked the Centre to a draft scheme for witness protection in the country as specific provisions in this regard were already there in the National Investigation Agency (NIA) Act.
  3. The SC was told that the draft scheme has now been finalised and would be made into a law in due course.
  4. However till then the court should direct the states to start implementing it.

Witness Protection

  1. Witness Protection  may  be  as simple  as  providing  a  police  escort  to  the Courtroom,  offering  temporary  residence  in  a  safe  house  or  using  modern communication   technology  for   recording   of testimony.
  2. In other  more  complex  cases,  where  cooperation  by  a  witness  is critical  to  successful  prosecution  of  a    powerful  criminal  group,  extraordinary measures are required to ensure the witness’s safety viz. anonymity, relocation of  the  witness  under  a  new  identity  in  a  new,  undisclosed  place  of

Draft Witness Protection Scheme

  1. The objective of this Scheme is to ensure that the investigation, prosecution and trial of criminal offences is not prejudiced because witnesses are intimidated or frightened to give evidence without protection from violent or other criminal recrimination.
  2. The schme shall extend to the whole of the India except the State of Jammu & Kashmir.
  3. During the  course  of  investigation  or  trial  of  any  serious  offence,  an application  for  seeking  identity  protection  can  be  filed  in  the  prescribed  form before the Competent Authority.
  4. The scheme has three categories of witnesses based on the threat perception, and the states should start enforcing it:

Category ‘A’

  • Where the threat extends to life of witness or his family members and their normal way of living is affected for a substantial period, during investigation/trial or even thereafter.

Category ‘B’

  • Where the threat extends to safety, reputation or property of the witness or his family members, only during the investigation process or trial.

Category ‘C’

  • Where the threat is moderate and extends to harassment or intimidation of the witness or his family member’s, reputation or property, during the investigation process.

Other Provisions

  1. Witness Protection Fund means the fund created for bearing the expenses incurred during the implementation of Witness Protection Order passed by the Competent Authority under this scheme;
  2. Witness Protection Order means an order passed by the Competent  Authority detailing the steps to be taken for ensuring the safety of witness from threats to his or his family member’s life, reputation or property. It also includes interim order, if any passed, during the pendency of Witness Protection Application;
  3. Witness Protection Cell means a dedicated Cell of State/UT Police or Central Police Agencies assigned the duty to implement the witness protection order. It shall be responsible for the security as per witness protection order

Proposed Rights to be entitled to the Witness

  • Right to give evidence anonymously
  • Right to protection from intimidation and harm
  • Right to be treated with dignity and compassion and respect of privacy
  • Right to information of the status of the investigation and prosecution of the crime
  • Right to secure waiting place while at Court proceedings
  • Right to transportation and lodging arrangements

With inputs from:  NALSA

Innovation Ecosystem in India

[pib] Union HRD Ministry launches Institution’s Innovation Council (IIC)

Note4students

Mains Paper 2: Governance | Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.

From UPSC perspective, the following things are important:

Prelims level: IIC Programme

Mains level: Institutionalizing innovation in India


News

Institution’s Innovation Council (IIC)

  1. Union HRD Ministry has launched the ‘Institution’s Innovation Council (IIC) program under Innovation cell of MHRD in New Delhi.
  2. Aim: To foster the culture of Innovation in all Higher Education Institutions (HEIs) across the country.
  3. It is a significant step in institutionalizing innovation and developing a scientific temperament in the country.
  4. More than 1000 Higher Education Institutions (HEIs) have already formed IICs in their campuses and enrolled for the IIC network managed by MHRD’s Innovation cell.
  5. Indian universities are setting up research centers through ‘Institution’s Innovation Council (IIC) program to improve global innovation ranking in next 2-3 years through this initiative.