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  • Coronavirus – Economic Issues

    Who is afraid of monetisation of deficit?

    op-ed snap | Economics | Mains Paper 3: Indian Economy

    Rating agencies influence the decisions of investors. So, when any economy is downgraded by them, it’s certainly a cause for concern. But to restart the economic engines, governments need to spend more by borrowing. This article suggests the way to achieve both: avoiding downgrade and increasing spending. How? Read to know…

    To worry or not to worry: Issue of downgrading by rating agencies

    • Some economists urged the government amid covid pandemic to go out and spend without worrying about the increase in public debt.
    • They said the rating agencies would understand that these are unusual times.
    • If they did not and chose to downgrade India, we should not worry too much about it.
    • Well, the decision of the rating agency, Moody’s, to downgrade India from Baa2 to Baa3 should come as a rude awakening.
    • The present rating is just one notch above the ‘junk’ category.
    • Moody’s has also retained its negative outlook on India, which suggests that a further downgrade is more likely than an upgrade.
    •  The downgrade, Moody’s says, has not factored in the economic impact of the pandemic.
    • Any further deterioration in the fundamentals from now on will push India into ‘junk’ status.

    Here is why we should be worried about a downgrade

    •  Whatever the failings of the agencies, in the imperfect world of global finance that we live in, their ratings do carry weight.
    • Institutional investors are largely bound by covenants that require them to exit an economy that falls below investment grade.
    • If India is downgraded to junk status, foreign institutional investors, or FIIs, will flee in droves.
    • The stock and bond markets will take a severe beating.
    • The rupee will depreciate hugely and the central bank will have its hands full trying to stave off a foreign exchange crisis.
    • That is the last thing we need at the moment.

    So, what is the way out? Try for an upgrade!

    • We have to put our best foot forward now to prevent a downgrade and bring about an upgrade instead.
    • To do so, we need to note the key concerns that Moody’s has cited in effecting the present downgrade to our rating: slowing growth, rising debt and financial sector weakness.
    • These concerns are legitimate.

    Bleak prospects

    • Many economists as also the Reserve Bank of India (RBI) expect India’s economy to shrink in FY 2020-21.
    • The combined fiscal deficit of the Centre and the States is expected to be in the region of 12% of GDP.
    • Moody’s expects India’s public debt to GDP ratio to rise from 72% of GDP to 84% of GDP in 2020-21.
    • The banking sector had non-performing assets of over 9% of advances before the onset of the pandemic.
    • Weak growth and rising bankruptcies will increase stress in the banking sector.

    Fiscal deficit and growth: two concerns of rating agencies

    • The government’s focus thus far has been on reassuring the financial markets that the fisc will not spin out of control.
    • It has kept the ‘discretionary fiscal stimulus’ down to 1% of GDP.
    • That 1%  figure is most modest in relation to that of many other economies, especially developed economies.
    • ‘Discretionary fiscal stimulus’ refers to an increase in the fiscal deficit caused by government policy as distinct from an increase caused by slowing growth, the latter being called an ‘automatic stabiliser’.
    • Keeping the fiscal deficit on a leash addresses the concerns of rating agencies about a rise in the public debt to GDP ratio.
    • But it does little to address their concerns about growth.
    • The debt to GDP ratio will worsen and financial stress will accentuate if growth fails to recover quickly enough.
    • The government’s stimulus package relies heavily on the banking system to shore up growth.
    • But there is only so much banks can do.
    • More government spending is required, especially for infrastructure.

    So, government need to increase fiscal stimulus without increasing public debt

    • We need to increase the discretionary fiscal stimulus without increasing public debt.
    • The answer is monetisation of the deficit, that is, the central bank providing funds to the government.
    • These fears are based on misconceptions about monetisation of the deficit and its effects.

    What monetisation of debt mean?

    • A common misconception is that it involves ‘printing notes’.
    • But that is not how central banks fund the government.
    • The central bank typically funds the government by buying Treasury bills.
    • As proponents of what is called Modern Monetary Theory point out, even that is not required.
    • The central bank could simply credit the Treasury’s account with itself through an electronic accounting entry.
    • What is base money? When the government spends the extra funds that have come into its account, there is an increase in ‘Base money’, that is, currency plus banks’ reserves.
    • So, yes, monetisation results in an expansion of money supply.
    • But that is not the same as printing currency notes.

    But expansion of money supply leads to inflation, what about that?

    • It could be that the expansion is inflationary.
    • This objection has little substance in a situation where aggregate demand has fallen sharply and there is an increase in unemployment.
    • In such a situation, monetisation of the deficit is more likely to raise actual output closer to potential output without any great increase in inflation.

    No difference in borrowing from banks or RBI directly:MMT

    • Exponents of the Modern Monetary Theory (MMT) make a more striking point.
    • They say there is nothing particularly virtuous about the government incurring expenditure and issuing bonds to banks instead of issuing these to the central bank.
    • The expansion in base money and hence in money supply is the same in either route.
    • The preference for private debt is voluntary.
    • MMT exponents say it has more to do with an ideological preference for limiting government expenditure.
    • Central banks worldwide have resorted to massive purchases of government bonds in the secondary market in recent years, with the RBI joining the party of late.
    • These are carried out under Open Market Operations (OMO).
    • The impact on money supply is the same whether the central bank acquires government bonds in the secondary market or directly from the Treasury.

    So why the shrill clamour against monetisation of public debt?

    • OMO is said to be a lesser evil than direct monetisation because the former is a ‘temporary’ expansion in the central bank’s balance sheet whereas the latter is ‘permanent’.
    • But we know that even so-called ‘temporary’ expansions can last for long periods with identical effects on inflation.
    • What matters, therefore, is not whether the central bank’s balance sheet expansion is temporary or permanent but how it impacts inflation.
    • As long as inflation is kept under control, it is hard to argue against monetisation of the deficit in a situation such as the one we are now confronted with.

    Way forward

    • We now have a way out of the constraints imposed by sovereign ratings.
    • The government must confine itself to the additional borrowing of ₹4.2 trillion which it has announced.
    • Further discretionary fiscal stimulus must happen through monetisation of the deficit.
    • That way, the debt to GDP ratio can be kept under control while also addressing concerns about growth.

    Consider the question “Examine the issues involved in the direct monetisation of the debt by the government to fund the spending in  the wake of covid pandemic.”

    Conclusion

    The rating agencies should be worrying not about monetisation per se but about its impact on inflation. As long as inflation is kept under control, they should not have concerns — and we need not lose sleep over a possible downgrade.

    Back2Basics: Automatic stabiliser

    • Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle.
    • Automatic stabilisers will influence the size of government borrowing.

    Discretionary fiscal policy

    • Keynesian Perspective: Keynes noted that in a recession, confidence falls and the private sector cut back on spending and investment.
    • Therefore, we see a rise in private savings and a fall in aggregate demand. This can worsen the recession.
    • This is why Keynes advocated government borrowing – to make use of these surplus savings.
    • Keynes argued that automatic stabilisers may not be enough, and the government should specifically find public sector projects to inject money into the circular flow.
    • This is known as discretionary fiscal policy.

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  • Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

    India’s rising Forex Reserves

    | Economics | Mains Paper 3: Indian Economy

    India’s foreign exchange reserves are rising and are slated to hit the $500 billion mark soon. In the last month, it jumped by $12.4 billion to an all-time high of $493.48 billion.

    Aspirants must make a note here:

    1.Authority managing FOREX in India

    2.Components of FOREX

    3.IMF’s SDRs

    4.Emergency use of FOREX

    Rising above the 1991 crisis

    • Unlike in 1991, when India had to pledge its gold reserves to stave off a major financial crisis, the country can now depend on its soaring Forex reserves to tackle any crisis on the economic front.
    • The level of Forex reserves has steadily increased by 8,400 per cent from $5.8 billion as of March 1991 to the current level.

    What are Forex Reserves?

    • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
    • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
    • The Forex reserves of India consist of below four categories:
    1. Foreign Currency Assets
    2. Gold
    3. Special Drawing Rights (SDRs)
    4. Reserve Tranche Position
    • The IMF says official Forex reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
    • It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

    Why is Forex rising despite the slowdown in the economy?

    1.Rise in  FPIand  FII

    • The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs).
    • Foreign investors had acquired stakes in several Indian companies in the last two months.
    • Forex inflows are set to rise further and cross the $500 billion as Reliance Industries subsidiary, Jio Platforms, has witnessed a series of foreign investments totalling Rs 97,000 crore.

    2.Crash in oil prices

    • On the other hand, the fall in crude oil prices has brought down the oil import bill, saving the precious foreign exchange.

    3.Fall in overseas remittances and foreign travel

    • Similarly, overseas remittances and foreign travels have fallen steeply – down 61 per cent in April from $12.87 billion.

    What’s the significance of rising forex reserves?

    • The rising forex reserves give a lot of comfort to the government and the RBI in managing India’s external and internal financial issues at a time when the economic growth is set to contract by 1.5 per cent in 2020-21.
    • Provides Cushion: It’s a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year.
    • Appreciation of Rupees: The rising reserves have also helped the rupee to strengthen against the dollar.
    • The forex reserves to GDP ratio is around 15 per cent.
    • Provides confidence to Market: Reserves will provide a level of confidence to markets that a country can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its US dollar needs and external debt obligations and maintain a reserve for national disasters or emergencies.

    What does the RBI do with the forex reserves?

    • The RBI functions as the custodian and manager of forex reserves and operates within the overall policy framework agreed upon with the government.
    • The RBI allocates the dollars for specific purposes. For example, under the Liberalized Remittances Scheme, individuals are allowed to remit up to $250,000 every year.
    • The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens.

    Where are India’s forex reserves kept?

    • The RBI Act, 1934 provides the overarching legal framework for the deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counterparties.
    • As much as 64 per cent of the foreign currency reserves is held in the securities like Treasury bills of foreign countries, mainly the US.
    • 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad.
    • In value terms, the share of gold in the total foreign exchange reserves increased from about 6.14 per cent as at end-September 2019 to about 6.40 per cent as at end-March 2020.

    Is there a cost involved in maintaining forex reserves?

    • The return on India’s forex reserves kept in foreign central banks and commercial banks is negligible.
    • While the RBI has not divulged the return on forex investment, analysts say it could be around one per cent, or even less than that, considering the fall in interest rates in the US and Eurozone.
    • There was a demand from some quarters that forex reserves should be used for infrastructure development in the country. However, the RBI had opposed the plan.
    • Several analysts argue for giving greater weightage to return on forex assets than on liquidity thus reducing net costs if any, of holding reserves.
    • Another issue is the high ratio of volatile flows (portfolio flows and short-term debt) to reserves which are around 80 per cent. This money can exit at a fast pace.

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  • Gairsain to be Uttarakhand new Summer Capital

    Prelims Only | Polity | Mains Paper 2: Federalism

    The Uttarakhand Governor has given her assent for declaration of Bhararisen (Gairsain) in Chamoli district as its summer capital.

    Practice question:

    Q. Discuss the feasibility of having multiple administrative capitals for some states in India.

    Gairsain

    • Gairsain is situated at the eastern edge of the vast Dudhatoli mountain range, located almost at the centre of the state, at a distance of approximately 250 kilometres from Dehradun.
    • It is easily accessible from both the Garhwal and the Kumaon divisions, and in a way, acts as the bridge between the two regions.
    • The state Assembly is located in Dehradun, but sessions are held in Gairsain as well.

    Why Gairsain is held as summer capital?

    • Gairsain was best suited to be the capital of the mountainous state as it was a hilly region falling on the border of Kumaon and Garhwal regions.
    • Even when Uttarakhand was carved out as a separate state from UP on November 9, 2000, statehood activists had contended that Gairsain was best suited to be the capital.
    • But it was Dehradun in the plains that were named the temporary capital. The issue is largely political.

    What are the other examples of multiple capital cities?

    • Several countries in the world have implemented the concept.
    • In Sri Lanka, Sri Jayawardenepura Kotte is the official capital and seat of the national legislature, while Colombo is the de facto seat of the national executive and judicial bodies.
    • Malaysia has its official and royal capital and seat of the national legislature at Kuala Lumpur, and Putrajaya is the administrative centre and seat of the national judiciary.
    • Among Indian states, Maharashtra has two capitals– Mumbai and Nagpur (which holds the winter session of the state assembly).
    • Himachal Pradesh has capitals at Shimla and Dharamshala (winter).
    • The former state of Jammu & Kashmir had Srinagar and Jammu (winter) as capitals (remember Darbar Move).

    Also read:

    https://www.civilsdaily.com/news/concept-of-three-capitals-in-andhra-pradesh/

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  • Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

    Shapes of Economic Recovery

    | Economics | Mains Paper 3: Indian Economy

    Predicting recovery graphs, economists have added cool shapes for our information.

    The types of graphs mentioned here are the possible indicators of macro-economic recovery. They are the potential hotspots for a prelim question. UPSC can puzzle you with the type of graphs and associated macroeconomic situation.

    Try to mirror! How would our economy grow?!

    Types of graphs

    The shape of economic recovery is determined by both the speed and direction of GDP prints. This depends on multiple factors including fiscal and monetary measures, consumer incomes and sentiment.

    • The best scenario is a V-shaped recovery in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
    • A pipe graph is a V graph with a longer tail — the recovery isn’t one that happens quickly over one quarter but over two-three quarters.
    • The pipe is different from the Swoosh because in the latter the economy bears the pain for longer.
    • A Z–shaped recovery is when a post-lockdown spending surge is so fierce that growth is lifted above the trendline and then after a party settles down to trend. The Z-shaped recovery is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash.
    • A U-shaped recovery — resembling a bathtub — is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.
    • A W-shaped recovery is a dangerous creature — growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart. The double-dip depicted by a W-shaped recovery is what some economists are predicting if the second wave of COVID comes along and the initial rebound flatters to deceive.
    • The L-shaped recovery is the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.
    • Then, there is the J-shaped recovery, a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.
    • There is also the Swoosh shaped recovery, similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.
    • Finally, say hello to the Inverted square root shaped In this, there could a rebound from the bottom, the growth slows and settles a step-down.

    Why is it important for India?

    • The Indian economy was slowing down even before COVID hit, and the trouble has now been amplified manifold because of the lockdowns.
    • Experts predict a fall of up to 5 per cent in the GDP in FY-21.
    • This is clearly a crisis situation, and our getting out of the hole will depend a great deal on the shape of the economic recovery that will hopefully follow.
    • A Z- or at least V-shaped recovery would be the most preferable. If not, we should at least have a U-shaped recovery or a Swoosh to get back on our feet in a couple of years.
    • A W-shape will bring in much pain before the eventual gain, while an L-shape or the Inverted-square root will make a wreck of the growth train.

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  • Port Infrastructure and Shipping Industry – Sagarmala Project, SDC, CEZ, etc.

    International Convention for the Prevention of Pollution from Ships (MARPOL)

    PIB | Enviro & Biodiversity | Mains Paper 3: Infrastructure: Energy, Ports, Roads, Airports, Railways Etc.

    The Ministry of Shipping has informed about the steps taken for prevention and control of pollution arising from ships in the sea and in the inland waterways under the MARPOL Convention.

    Aspirants must note the following things:

    1. If the convention is a subsidiary to the United Nations/IMO,

    2. Whether it is Legally binding?

    3. If India is a signatory or not …..

    MARPOL Convention

    • MARPOL is the main international convention aimed at the prevention of pollution from ships caused by operational or accidental causes.
    • The Protocol of 1978 was adopted in response to a number of tanker accidents in 1976–1977.
    • It is one of the most important international marine environmental conventions.
    • It was developed by the IMO with an objective to minimize pollution of the oceans and seas, including dumping, oil and air pollution.
    • The Convention includes regulations aimed at preventing and minimizing pollution from ships – both accidental pollution and that from routine operations – and currently includes six technical Annexes.
    • India is a signatory to MARPOL.
    • It has six annexes (I to VI) and it deals with prevention of (1) Pollution from ships by Oil, (2) Noxious liquid substances, (3) Dangerous goods in packaged form, (4) Sewage, (5) Garbage and (6) Air pollution from ships respectively.

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  • Bharat Emission Standards

    Green colour band for BS-VI 4W vehicles

    | Enviro & Biodiversity | Mains Paper 3: Conservation, Environmental Pollution & Degradation, Eia

    The Ministry of Road Transport and Highways (MoRTH) has issued an order mandating a coloured strip to identify four-wheeled BSVI vehicle.

    Note important PM levels allowed under BS VI norms. Note how it is different from the earlier BS IV norm.

    Details of the colour band

    • MoRTH has mandated a strip of green colour of 1 cm width on top of the existing sticker carrying details of registration for BS-VI.
    • Vehicles of any fuel type will carry the green strip irrespective of their original stickers i.e. for petrol or CNG which have a light blue colour sticker and a diesel vehicle which is of orange colour.
    • These stickers will now have a green strip of 1 cm on top for BS-VI, as mandated.

    Back2Basics:  Bharat Stage Norms

    Standard Reference Date of Implementation
    Bharat Stage II Euro 2 1 April 2005
    Bharat Stage III Euro 3 1 April 2010
    Bharat Stage IV Euro 4 1 April 2017
    Bharat Stage VI Euro 6 April 2020 with a mandate (proposed)

    Minutes of BS-VI

    • Carmakers would have to put three pieces of equipment — a DPF (diesel particulate filter), an SCR (selective catalytic reduction) system, and an LNT (Lean NOx trap) — to meet stringent BS-VI norms, all at the same time.
    • This is vital to curb both PM (particulate matter) and NOx (nitrogen oxides) emissions as mandated under the BS-VI norms.

    How is BS-VI Different from BS-IV?

    • The major difference between the existing BS-IV and forthcoming BS-VI norms is the presence of sulphur in the fuel.
    • While the BS-IV fuels contain 50 parts per million (ppm) sulphur, the BS-VI grade fuel only has 10 ppm sulphur content.
    • Also, the harmful NOx (nitrogen oxides) from diesel cars can be brought down by nearly 70%.
    • In the petrol cars, they can be reduced by 25%.
    • However, when we talk about air pollution, particulate matter like PM 2.5 and PM 10 are the most harmful components and the BS-VI will bring the cancer-causing particulate matter in diesel cars by a phenomenal 80%.

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  • Innovations in Sciences, IT, Computers, Robotics and Nanotechnology

    Airborne Rescue Pod for Isolated Transportation (ARPIT)

    Prelims Only | Science Tech | Mains Paper 3: Awareness in various sc and tech fields

    The Indian Air Force has developed and inducted an Airborne Rescue Pod for Isolated Transportation (ARPIT).

    This rescue pod ARPIT can be used as an example of self-sufficiency under the ambitious Atmanirbhar Abhiyan.

    What is ARPIT?

    • ARPIT is a lightweight isolation system made from aviation certified material.
    • It has a transparent and durable cast Perspex for enhanced patient visibility which is larger, higher and wider than the existing models.
    • The isolation system caters for the suitable number of air exchanges, integration of medical monitoring instruments, and ventilation to an intubated patient.
    • In addition, it generates high constant negative pressure in the isolation chamber for prevention of infection risk to aircrew, ground crew and health care workers involved in air transportation.
    • It utilizes High-Efficiency Particulate Air (HEPA) H-13 class filters and supports invasive ventilation using Transport Ventilator.

    It’s utility

    • This pod will be utilized for the evacuation of critical patients with infectious diseases including COVID-19 from high altitude area, isolated and remote places.

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  • Tax Reforms

    Tax Avoidance: case study on Flipkart deal

    | Economics | Mains Paper 3: Indian Economy

    Through this story, we will explore how investment fund companies exploit the tax agreements between the two countries. This story involves the famous case of investment by Walmart in Flipkart. So, let’s see what was involved in the case and what argument was made by the investment fund involved in the case.

    Tax avoidance

    Tax avoidance is the use of legal methods to minimize the amount of income tax owed by an individual or a business. This is generally accomplished by claiming as many deductions and credits as is allowable. It may also be achieved by prioritizing investments that have tax advantages, such as buying municipal bonds.

    First, let’s understand why Mauritius is favourite among investors?

    • Mauritius and India do have a tax treaty to start with.
    • Suppose an investment company based out of (why not based in?) Mauritius made a lot of money selling shares of an Indian company.
    • Now, Indian authorities won’t tax the gains you made via the transaction.
    • Instead, you’ll be taxed in Mauritius.
    • But since Mauritius does not tax capital gains, you get away without paying capital gain tax.
    • So you got the answer to why Mauritius.
    • Obviously, foreign corporations lapped up this opportunity until 2016 — when the government finally decided to plug the gaps.
    • They made amendments to the treaty.

    The story of Tiger Global’s investment into Flipkart

    • Tiger Global was one of the earliest investors in Flipkart.
    • They held 22% of the company until 2018 when they sold about 17% to Walmart’s Luxembourg entity FIT Holdings.
    • This transaction was valued at over INR 14,500 Cr.
    • But Tiger Global had made its investments through funds based out of Mauritius.
    • Since Tiger Global had made most of its investments during the first half of the decade (obviously before 2016).
    • So the amendment to the treaty wasn’t really applicable to them.
    • So when they made all that money selling their stake in Flipkart, they figured they wouldn’t have to pay any tax.
    • And at first sight, this argument seems legit.

    Let’s dig deeper into the case by going through 3 arguments

    • The funds were operating out of Mauritius.
    • The directors were discharging their duties in Mauritius.
    • All in all, everything was firmly placed in Mauritius.
    • But if you peel back the layers, you’ll see that these funds are ultimately owned by Tiger Global Management LLC, USA — albeit through a maze of holding companies.
    • So, the tax authorities argued that Tiger Global had in fact set up the Mauritius based entity for the sole purpose of avoiding taxes.
    • And therefore contested that they shouldn’t be exempt from paying tax on gains they made through the Flipkart Transaction.
    • Tiger Global, miffed with the taxmen, took the matter to a quasi-judicial body — The Authority for Advance Rulings (AAR).

    And the case begins.

    Let’s look into three arguments.

    1. Focus on transaction, not on the entity that involved in the transaction

    • Tiger Global investment fund counsel had the following argument to make:
    • “It must be proven that the transaction [the final sale of shares] itself was designed to avoid taxes.”
    • And proving that the structure of the entity undertaking the transaction was designed for the avoidance of income-tax should not be necessary here.
    • So, the Revenue (the Income Tax Department) had failed to discharge its burden of proof. But AAR didn’t agree with this argument.

    2. So, what’s AAR’s argument?

    • AAR said that you don’t just compute taxes by looking at the final transaction.
    • Instead, you look at the transaction as a whole —When were the shares bought? What was the purchase price? What happened in between? Who’s the primary executioner? What’s the appreciation in value? You look at everything.
    • More importantly, the “head and brains” executing the transaction resided elsewhere.
    • Tax authorities had shown rather conclusively that a certain Mr. Charles P. Coleman (operating out of a U.S based entity) was the beneficial owner of the fund.
    • And that “he” was primarily responsible for most management decisions.
    • So the AAR hit back with the following observation:

    In our opinion, it is not the holding structure only that would be relevant. The holding structure coupled with prima facie management and control of the holding structure, including the management and control of the applicants, would be relevant factors for determining the design for avoidance of tax. The applicant companies were only a “see-through entity” to avail the benefits of India-Mauritius DTAA [Double Taxation Avoidance Agreements]

    But wait… what about the past judgements?

    • Tiger Global had another weapon in its arsenal — Past judgements on the matter.
    • Specifically, a particular ruling in the case of Moody’s Analytics Inc.
    • AAR in this case conceded that capital gains accruing to a Mauritius based entity from the transfer of shares of an Indian company shouldn’t ideally be taxed.

    3. Flipkart is a Singaporean company. So, pay the taxes!

    • The AAR said that “In this particular case, gains were made by transferring shares of a Singaporean company. Not an Indian company.”
    • That’s right. Flipkart is based out of Singapore.
    • Flipkart Singapore is the strategic shareholder of Flipkart India.
    • Flipkart India is the entity that owns most of the capital assets.
    • The shares that were sold to Walmart — that’s Flipkart Singapore, not Flipkart India.
    • But the India-Mauritius tax treaty agreement is only applicable to the transfer of shares of Indian companies.

    Is Flipkart Indian?

    Consider the question “Examine the basis used by the Authority for Advance Rulings (AAR) that led it to rule in favour of tax authorities.”

    Conclusion

    AAR concluded that there was no doubt that Tiger Global had set up the Mauritius based entity to avoid paying taxes and therefore should be liable to pay what the Income Tax authorities deem fit.

    Back2Basics: Vodafone tax

    Can India tax the gains made by selling the shares of Singaporean company?

    • According to Section 9(1)(i), (popularly known as the Vodafone tax), any income accruing or arising, whether directly or indirectly (through multiple layers), inter-alia, through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.”
    • So Indian tax laws are pretty clear about where the gains ought to be taxed.
    • But the India-Mauritius treaty doesn’t say anything about this matter.
    • That’s why the AAR ruled the way it did.

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  • Pharma Sector – Drug Pricing, NPPA, FDC, Generics, etc.

    Fund for pharmaceutical innovators

    | Economics | Mains Paper 3: Investment Models

    Pricing of the drugs in a contentious issue across the world. In some countries like the U.S. price of the drug at 100000%  of the production cost is not atypical. In India, prices are much lower. This article suggests the novel of Health Impact Fund which could strike the balance between affordability and R&D.

    Medicines: Humanities greatest achievements

    • They have helped attain dramatic improvements in health and longevity as well as huge cost savings through reduced sick days and hospitalizations.
    • The global market for pharmaceuticals is currently worth ₹110 lakh crore annually, 1.7% of the gross world product (IPFPA 2017, 5).
    • Roughly 55% of this global pharmaceutical spending, ₹60 lakh crore, is for brand-name products, which are typically under patent.

    Issue of high drug prices

    • Commercial pharmaceutical research and development (R&D) efforts are encouraged and rewarded through the earnings that innovators derive from sales of their branded products.
    • These earnings largely depend on the 20-year product patents they are entitled to obtain in WTO member states.
    • Such patents give them a temporary monopoly, enabling them to sell their new products without competition at a price far above manufacture and distribution costs, while still maintaining a substantial sales volume.
    • In the United States, thousandfold (100000%) markups over production costs are not atypical.
    • In India, the profit-maximising monopoly price of a new medicine is much lower, but similarly unaffordable for most citizens.

    Covering large R&D costs: before we think about a solution

    • To be sure, before such huge markups can yield any profits, commercial pharmaceutical innovators must first cover their large R&D costs.
    • Currently, this cost is  ₹14 lakh crore a year (Mikulic 2020).
    • This includes the cost of clinical trials needed to demonstrate safety and efficacy, the cost of capital tied up during the long development process, and the cost of any research efforts that failed somewhere along the way.

    Three concerns with R&D

    1. Neglect of the diseases suffered by the poor

    • Innovators motivated by the prospect of large markups tend to neglect diseases suffered mainly by poor people, who cannot afford expensive medicines.
    • The 20 WHO-listed neglected tropical diseases together afflict over one billion people (WHO n.d.) but attract only 0.35% of the pharmaceutical industry’s R&D (IFPMA 2017, 15 and 21).
    • Merely 0.12% of this R&D spending is devoted to tuberculosis and malaria, which kill 1.7 million people each year.

    2. High prices of new medicines

    • Thanks to a large number of affluent or well-insured patients, the profit-maximising price of a new medicine tends to be quite high.
    • Consequently, most people around the world cannot afford advanced medicines that are still under patent.
    • This is especially vexing because manufacturing costs are generally quite low.

    3. Rewards are poorly correlated to the therapeutic value of drugs

    • Firms earn billions by developing duplicative drugs that add little to our pharmaceutical toolbox — and billions more by cleverly marketing their drugs for patients who won’t benefit.
    • These large R&D investments would be much better spent on developing new life-saving treatments for deadly diseases plaguing the world’s poor.

    Health Impact Fund: Solution to the above problems

    • The Health Impact Fund as an alternative track on which pharmaceutical innovators may choose to be rewarded.
    • The basic idea behind it:
    • Any new medicine registered with the Health Impact Fund would have to be sold at or below the variable cost of manufacture and distribution.
    • But would earn ten annual reward payments based on the health gains achieved with it.

    How health impact fund would work?

    • The Health Impact Fund could start with as little as ₹20000 crore per annum and might then attract some 10-12 medicines, with one entering and one exiting in a typical year.
    • Registered products would then earn some ₹17000-₹20000 crore, on average, during their first ten years.
    • Of course, some would earn more than others – by having greater therapeutic value or by benefiting more people.
    • Long-term funding for the Health Impact Fund might come from willing governments.
    • Those countries would contribute in proportion to their gross national incomes — or from an international tax, perhaps on greenhouse gas emissions or speculative financial transactions.
    • Non-contributing affluent countries would forgo the benefits: the pricing constraint on registered products would not apply to them.
    • This gives innovators more reason to register as they can still sell their product at high prices in some affluent countries and affluent countries reason to join.

    The fund will have the following 5 major benefits

    1. Help the Neglected areas of research

    • The Health Impact Fund would get pharmaceutical firms interested in certain R&D projects that are unprofitable under the current regime – especially ones expected to produce large health gains among mostly poor people.
    • With the Health Impact Fund in place, there can be more research on diseases like Tuberculosis or Malaria, even Covid.
    • We can develop rich arsenal of effective interventions and greater capacities for targeted responses quickly.

    2. Rewarding health outcomes and not sales

    • The Health Impact Fund will focus on performance of drugs and not make it a marketing stunt.
    • Like in its model, firms would earn annual reward payments based on the health gains achieved with by the medicine.
    • Present scenario: firms seek to influence hospitals, insurers, doctors and patients to use their patented drug and to favour it over other more effective medicines.

    3. Sustainable research and marketing system

    • A reward mechanism oriented towards health gains rather than high-markup sales would lead to a sustainable research-and-marketing system.
    • How? Simple for health gains, innovators will have to ensure:
    • They will have to think holistically about how their drug can work in the context of many other factors relevant to treatment outcomes.
    • They will need to think about therapies and diagnostics together, in order to identify and reach the patients who can benefit most.
    • They will need to monitor results in real time to recognize and address possible impediments to therapeutic success.
    • Finally, they will have need to ensure that patients have affordable access to the drug and are properly instructed and motivated to make optimal use of it with the drug still in prime condition.
    • Such a system would obviously make research more streamlined and sustainable.

    4. No fear of compulsory licence clause

    • Participation of commercial pharmaceutical firms is crucial for tackling global pandemics.
    • At present such firms have issues with use of compulsory licences by governments as it divest them of their monopoly rewards.
    • Health Impact Fund registration would remove this risk as states would have no reason to interfere with innovators whose profit lies in giving real and rapid at-cost access to their new product to all who may need it.

    5. Holistic approach

    • Multinational firms can collaborate with national health systems, international agencies and NGOs, to build a strong public-health strategy around its product.
    • The highest goal here would be complete eradication of many communicable diseases(Example: Malaria) which we are fighting right now.

    Can we apply the above to Covid-19?

    • Applying it to a new disease like COVID-19 is complicated by the fact that we lack here a well-established baseline representing the harm the disease would have done in the absence of the new medicine to be assessed.
    • For malaria, such a baseline can be established on the basis of a stable disease trajectory observable over many years.
    • In the case of a new epidemic, one must rely on a modelling exercise that estimates the baseline trajectory on the basis of obtainable data about the spread of the disease and its impact on infected patients.
    • This surely is a challenging undertaking which cannot yield precise or uncontroversial results about what damage the epidemic would truly have done if the vaccine or medication in question had not appeared.

    Consider the question “Drug pricing has always plagued the authorities and policymakers. Cap it and you tend to lose on innovation. Deregulate it, and high prices make it unaffordable. In light of this, examine the issues with the R&D in the pharmaceutical sector and suggest the ways to strike the balance between lives and innovation.”

     Conclusion

    The Health Impact Fund would give innovators the right incentives. It would guide them to ask not: how can we develop an effective product and then achieve high sales at high markups? But rather: how can we develop an effective product and then deploy it so as to help reduce the overall disease burden as effectively as possible?

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  • Foreign Policy Watch: India-Middle East

    Cooperative security in Persian Gulf littoral and Implications for India

    op-ed snap | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India,Effect Of Policies & Politics Of World On India’S Interests

    This article analyses the security environment in the Gulf countries. Their common characteristic as being the oil producers and similarity in their social and security problems are also explained in detail in this article. And all this has implications for India. So, what are the implications? Read to know…

    Let’s look at the importance of countries surrounding Persian Gulf

    • The United Nations defines this body of water as the Persian Gulf.
    • The lands around it are shared by eight countries: Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
    • All are the members of the UN.
    • There is a commonality of interest among them in being major producers of crude oil and natural gas.
    • And thereby contribute critically to the global economy and to their own prosperity.
    • This has added to their geopolitical significance.
    • At the same time, turbulence has often characterised their inter se political relations.
    Arab Countries surrounding Persian Gulf

    Power play and security of the region

    • For eight decades prior to 1970, this body of water was a closely guarded British lake, administered in good measure by imperial civil servants from India.
    • When that era ended, regional players sought to assert themselves.
    • Imperatives of rivalry and cooperation became evident and, as a United States State Department report put it in 1973, ‘The upshot of all these cross currents is that the logic of Saudi-Iranian cooperation is being undercut by psychological, nationalistic, and prestige factors, which are likely to persist for a long time.’
    • The Nixon and the Carter Doctrines were the logical outcomes to ensure American hegemony.
    • An early effort for collective security, attempted in a conference in Muscat in 1975, was thwarted by Baathist Iraq.
    • The Iranian Revolution put an end to the Twin Pillar approach and disturbed the strategic balance.
    • The Iraq-Iran War enhanced U.S. interests and role.
    • Many moons and much bloodshed later, it was left to the Security Council through Resolution 598 (1987) to explore ‘measures to enhance the security and stability in the region’.

    Gulf regional security framework: Some questions

    • Any framework for stability and security thus needs to answer a set of questions:
    • Security for whom, by whom, against whom, for what purpose?
    • Is the requirement in local, regional or global terms?
    • Does it require an extra-regional agency?
    • Given the historical context, one recalls a Saudi scholar’s remark in the 1990s that ‘Gulf regional security was an external issue long before it was an issue among the Gulf States themselves.’

    What should be the ingredients of a  regional security framework?

    • The essential ingredients of such a framework would thus be to ensure: 1) conditions of peace and stability in individual littoral states; 2) freedom to all states of the Gulf littoral to exploit their hydrocarbon and other natural resources and export them; 3) freedom of commercial shipping in international waters of the Persian Gulf 4)freedom of access to, and outlet from, Gulf waters through the Strait of Hormuz; 5) prevention of conflict that may impinge on the freedom of trade and shipping and 6)prevention of emergence of conditions that may impinge on any of these considerations.
    • Could such a framework be self-sustaining or require external guarantees for its operational success?
    • If the latter, what should its parameters be?

    Misunderstanding the role great powers can play

    • Statesmen often confuse great power with total power and great responsibility with total responsibility.
    • The war in Iraq and its aftermath testify to it.
    • The U.S. effort to ‘contain’ the Iranian revolutionary forces, supplemented by the effort of the Arab states of the littoral (except Iraq)  GCC initially met with success in some functional fields and a lack of it in its wider objectives.

    The turbulent nature of US-Iran relations

    • In the meantime, geopolitical factors and conflicts elsewhere in the West Asian region — Yemen, Syria, Libya — aggravated global and regional relationships.
    • And it hampered a modus vivendi in U.S.-Iran relations that was to be premised on the multilateral agreement on Iran’s nuclear programme agreed to by western powers and the Obama Administration.
    • But it was disowned by U.S. President Donald Trump whose strident policies have taken the region to the brink of armed conflict.

    Perception of declining U.S. commitment to sub-regional security

    • Perceptions of declining U.S. commitment to sub-regional security have been articulated in recent months amid hints of changing priorities.
    • This is reported to have caused disquiet in some, perhaps all, members of the GCC, the hub of whose security concern remains pivoted on an Iranian threat (political and ideological rather than territorial).
    • And American insurance to deter it based on a convergence of interests in which oil, trade, arms purchases, etc have a role along with wider U.S. regional and global determinants.
    • It is evident that a common GCC threat perception has not evolved over time.
    • It has been hampered by the emergence of conflicting tactical and strategic interests and subjective considerations.
    • The current divisions within the organisation are therefore here to stay.
    • These have been aggravated by 1)the global economic crisis, 2) the immediate and longer term impact of COVID-19 on regional economies, 3) the problems in the Organization of the Petroleum Exporting Countries (OPEC), 4) and the decline in oil prices.

    Let’s look at the emerging trends in the region

    • One credible assessment suggests that in the emerging shape of the region.
    • 1) Saudi Arabia is a fading power.
    • 2) UAE, Qatar and Iran are emerging as the new regional leaders.
    • 3) Oman and Iraq will have to struggle to retain their sovereign identities.
    • 4)The GCC is effectively ended, and OPEC is becoming irrelevant as oil policy moves to a tripartite global condominium.
    • None of this will necessarily happen overnight and external intervention could interfere in unexpected ways.
    • But it is fair to say that the Persian Gulf as we have known for at least three generations is in the midst of a fundamental transformation.

    Improvement relations between Arab states and Iran

    • With the Arab League entombed and the GCC on life-support system, the Arab states of this sub-region are left to individual devices to explore working arrangements with Iraq and Iran.
    • The imperatives for these are different but movement on both is discernible.
    • With Iran in particular and notwithstanding the animosities of the past, pragmatic approaches of recent months seem to bear fruit.
    • Oman has always kept its lines of communication with Iran open.
    • Kuwait and Qatar had done likewise but in a quieter vein.
    • And now the UAE has initiated pragmatic arrangements.
    • These could set the stage for a wider dialogue.
    • Both Iran and the GCC states would benefit from a formal commitment to an arrangement incorporating the six points listed above.
    • So would every outside nation that has trading and economic interests in the Gulf. This could be sanctified by a global convention.
    • Record shows that the alternative of exclusive security arrangements promotes armament drives, enhances insecurity and aggravates regional tensions.
    • It unavoidably opens the door for Great Power interference.

    Ties with India and impact on its strategic interests

    • Locating the Persian Gulf littoral with reference to India is an exercise in geography and history.
    • The distance from Mumbai to Basra is 1,526 nautical miles and Bander Abbas and Dubai are in a radius of 1,000 nautical miles.
    • The bilateral relationship, economic and political, with the GCC has blossomed in recent years.
    • The governments are India-friendly and Indian-friendly and appreciate the benefits of a wide-ranging relationship.
    • This is well reflected in the bilateral trade of around $121 billion and remittances of $49 billion from a workforce of over nine million.
    • GCC suppliers account for around 34% of our crude imports and national oil companies in Saudi Arabia and Abu Dhabi are partners in a $44 billion investment in the giant Ratnagiri oil refinery.
    • In addition, Saudi Aramco is reported to take a 20% stake in Reliance oil-to-chemicals business.
    • The current adverse impact of the pandemic on our economic relations with the GCC countries has now become a matter of concern.

    India’s relationship with Iran

    • The relationship with Iran, the complex at all times and more so recently on account of overt American pressure, has economic potential and geopolitical relevance on account of its actual or alleged role in Pakistan and Afghanistan.
    • Iran also neighbours Turkey and some countries of Central Asia, the Caucasus and the Caspian Sea region.
    • Its size, politico-technological potential and economic resources, cannot be wished away, regionally and globally, but can be harnessed for wider good.

    Consider the question “Stability and security of the Persian Gulf region has wider consequences for Indians strategic concerns. Comment.”

    Conclusion

    Indian interests would be best served if this stability is ensured through cooperative security since the alternative — of competitive security options — cannot ensure durable peace.

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