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  • Digital India Initiatives

    RBI plans to link Credit Cards with UPI

    Prelims Only | Economics | Mains Paper 3: Indian Economy

    The RBI has proposed to allow the linking of credit cards with the Unified Payments Interface (UPI).

    Integrating Credit Cards to UPI

    • The integration will first begin with the indigenous RuPay credit cards.
    • Both the RuPay network and UPI are managed by the same organisation – the National Payments Corporation of India (NPCI).

    What is UPI?

    • UPI is an instant real-time payment system developed by National Payments Corporation of India (NPCI) facilitating inter-bank transactions.
    • The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform.

    Why such move?

    • The linkage of UPI and credit cards could possibly result in credit card usage zooming up in India given UPI’s widespread adoption.
    • The integration also opens up avenues to build credit on UPI through credit cards in India, where in the last few years, a number of startups like Slice, Uni, One etc. have emerged.
    • The move could also be a push to increase adoption by banking on UPI’s large user base.
    • So far, UPI could only be linked to debit cards and bank accounts.
    • This will provide additional convenience to the users and enhance the scope of digital payments.

    What could be the hurdles?

    • There are some regulatory areas that would have to be addressed before the linkage happens.
    • For instance, it is not clear how the Merchant Discount Rate (MDR) will be applied to UPI transactions done through credit cards.
    • UPI and RuPay attract zero-MDR, meaning that no charges are applied to these transactions, which is a key reason behind the prolific adoption of UPI both by users and merchants.
    • The norm has faced pushback from the payments industry.
    • It has argued that it limits the aggregators’ ability to invest in and maintain the financial infrastructure of the payment ecosystem that they have built.
    • Applicability of zero-MDR on UPI could also be a reason why other card networks such as Visa and Mastercard may not have been onboarded to UPI for credit cards yet.

    Note: MDR is a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.

    What is the big picture?

    • UPI has become the most inclusive mode of payment in India with over 26 crore unique users and five crore merchants on the platform.
    • The progress of UPI in recent years has been unparalleled.
    • Many other countries are engaged with us in adopting similar methods in their countries.
    • In May, UPI processed 5.95 billion transactions worth over Rs 10 trillion, a record high since its launch in 2016.
    • NPCI is looking to soon process a billion transactions a day.

     

    Try this PYQ from CSP 2017:

    Q.Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news?

     

    (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank

    (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services

    (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards

    (d) The incentive is given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards

     

    Post your answers here.

     

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  • Child Rights – POSCO, Child Labour Laws, NAPC, etc.

    [pib] Children in Street Situations (CiSS) Application

    Prelims Only | Governance | Mains Paper 2: Governance, Transparency & Accountability, Citizens Charters

    The National Commission for the Protection of Child Rights (NCPCR) has launched a “CiSS application” under the Baal Swaraj portal to help in the rehabilitation process of Children in Street Situations (CiSS).

    CiSS Application

    • The CiSS application is used for receiving data of children in street situations from all the states and union territories, tracking their rescue and rehabilitation process.
    • The initiative is taken under the direction of the Supreme Court of India.
    • The program embodies Article 51 (A) of the Constitution of India, as it provides a platform to the public and organizations catering to the welfare of the children to report any child in need of assistance.
    • The platform serves to collect data and report to the District Child Protection Officer (DCPO) for them to take necessary action.
    • It also provides a platform for professionals and organizations to provide any help that they can to children in need.
    • Help can be provided in the form of open shelters, counselling services, medical services, sponsorships, de-addiction services, education services, legal/paralegal services, volunteering etc.

    Its working framework

    • It categorizes any child under ‘Children in Street Situation’ if the child is living on the streets alone, living on the streets during the day, or living on the streets with the family.
    • The root cause of this phenomenon is the migration of families from rural to urban areas in search of a better standard of living.

    How does it work?

    It follows six stages framework for the rehabilitation of children.

    1. Collection of the child’s details, which is accomplished through the portal.
    2. Social Investigating Report (SIR)e. investigating the child’s background. This is done under the supervision of the District Child Protection Unit (DCPU) by the District Child Protection Officer (DCPO) by conversing and counselling the child.
    3. Formulating an Individual Care Plan (ICP) for the child.
    4. Child Welfare Committee (CWC) based on the SIR submitted to the CWC.
    5. Allocating the schemes and benefits that the beneficiary can avail of.
    6. A checklist is made for the evaluation of the progress i.e. (Follow Ups).

     

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  • Climate Change Impact on India and World – International Reports, Key Observations, etc.

    Environmental Performance Index (EPI), 2022

    Prelims Only | Enviro & Biodiversity | Mains Paper 1: Important Geophysical Phenomena

    India has objected to a report, called the EPI, 2022, that places the country last (along with Nigeria) on a list of 180 countries on managing climate change, environmental health, and ecosystem vitality.

    Environmental Performance Index

    • The report is prepared by researchers at the Yale and Columbia universities.
    • It provides a data-driven summary of the state of sustainability around the world.
    • Using 40 performance indicators across 11 issue categories, the EPI ranks 180 countries on climate change performance, environmental health, and ecosystem vitality.
    • These indicators provide a gauge at a national scale of how close countries are to established environmental policy targets.
    • The EPI offers a scorecard that highlights leaders and laggards in environmental performance and provides practical guidance for countries that aspire to move toward a sustainable future.

    Why the report is inherently biased?

    • The US placed itself at the 20th spot of the 22 wealthy democracies in the global west and 43rd overall.
    • The relatively low ranking has put all blame on the rollback policies during the Trump administration.
    • It goes on to preach that developing countries do not have to sacrifice sustainability for economic security.

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  • Indian Ocean Power Competition

    Challenges in dealing with Indo-Pacific

    | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    Context

    The Indo-Pacific region has been under pressure and East Asia, in particular, has had to weather repeated storms.

    Background

    • Recently, U.S. President Joseph Biden was on his five-day visit to Asia.
    • During this visit, the new conservative South Korean government showed a willingness to expand the presence of a U.S. missile defence system in the country, which had earlier angered China.
    • In Japan, the administration promised him that it was ready to do away with its long-standing 1% GDP ceiling for annual defence spending.
    • Mr. Biden said at a press conference that the U.S. would intervene militarily to defend Taiwan if it came under attack from China.
    • The President and members of his delegation later clarified that there is no change in the substance of American foreign policy, which is still governed by the Taiwan Relations Act.
    • As per the 1979 Congressional law, the U.S. “shall provide Taiwan with arms of a defensive character” so that the region can defend itself.
    • The law says nothing about the U.S. being required to step in militarily to defend Taiwan in the event of an invasion by China.

    China-challenge in Indo-Pacific

    • South Korea and Japan face regular nuclear and missile threats from North Korea.
    • Challenge to international maritime law: China not only challenges international maritime laws in the South China Sea, but also confronts Japan over the Senkaku Islands.
    • Spratly Islands dispute: Six nations, including China and Taiwan, are involved in the dispute over the Spratly Islands, which are supposedly sitting on vast reserves of oil and natural gas.
    • Militarisation of disputed isles: China has vigorously militarised some portions of the disputed isles, islets and coral reefs; and countries like Vietnam and the Philippines are anxious not to be left behind.

    Will IPEF framework help in tackling challenges from China?

    • The US has sought to deal with China by establishing an Indo-Pacific Economic Framework (IPEF) with Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam.
    • Four pillars of IPEF: The IPEF will work on fine-tuning four major pillars: standards and rules for digital trade; resilient supply chains; green energy commitments; and fair trade.
    • Issues of trade and tariffs: However, there is discontent that the framework does not address issues of trade and tariffs. 
    • Lack of trade component: Asian partners really want is trade, they want market access.
    • And the trade component of the IPEF is really lacking.

    Two facets of Indo-Pacific

    • 1] Balance relations with US and China: One is that China’s neighbours would rather balance relations between Washington and Beijing.
    • 2] Extent of resistance: Second is the extent to which countries in the region will want to get on the anti-China bandwagon, economic or strategic.
    • Whether it is in East, Southeast or South Asia, every country has its own unique relationship with Beijing.
    • India may be a part of the Quad, but is quite mindful that it is the only country in the group that shares a land border with China.
    • South Korea and Japan are part of a strong American security/strategic partnership but will be keen on maintaining their economic status with China.
    • This is also true for the Association of South East Asian Nations.

    Conclusion

    Given the complex nature of the threats and the challenges the Indo-Pacific faces, drawing up any strategy remains to be an uphill task.

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

    Monetary tightening and its impact on growth

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

    Context

    A rate hike in the monetary policy committee’s June meeting was a foregone conclusion after the spike in inflation and an off-cycle surprise interest rate hike on May 4.

    Reasons fast forwarding of interest rate hike

    • 1] Broad based inflation: A confluence of factors has pushed inflation higher and made it persistent and broad-based. 
    • 2] Policy rates are still negative: Even with this hike, the repo rate, the signalling tool for bank interest rates, is still below pre-pandemic levels.
    • The real policy rate (repo rate less expected inflation) remains negative and has some distance to cover before it reaches positive territory — where the RBI would like to see it.
    • 3] Lag in effect: Monetary policy impacts growth, and thereafter, inflation with a lag.
    • To control inflation, the RBI needed to act faster by front loading rate hikes.
    • 4] Elevated inflation expectations: The risk of inflation expectations getting unmoored had risen.
    • Household and business inflation expectations remain elevated, as indicated by the RBI’s inflation expectations survey of households.
    • 5] Interest rate hike in the US: The aggressive stance of the US Federal Reserve and ensuing tightening financial conditions.
    • India is better placed today than in 2013 to face the Fed’s actions with a stronger forex shield.

    How US Fed’s actions affect India?

    • India is not insulated.
    • Capital outflow: The headwinds now are stronger than in 2013 and we have seen net capital outflows since October 2021.
    • S&P Global expects the US federal funds rate to be hiked to 3-3.25 per cent in 2023, higher than the pre-pandemic level, and highest since early 2008.
    • Despite a strong forex hoard, the RBI has had to deploy monetary policy to mute the impact of the Fed’s actions.

    Inflation and its impact

    • Upward pressure on food inflation: The pressure on food inflation has increased owing to the impact of the freak heatwave on wheat, tomatoes and mangoes, which is driving prices higher.
    • This is on top of rising input costs for agricultural production, the global surge in food prices and the expected sharper than usual rise in minimum support price.
    • Fuel inflation will remain high, duty cuts notwithstanding, as global crude prices remain volatile at elevated levels.
    • Core inflation, the barometer of demand, is a complex story.
    • Goods (despite only partial pass-through of input costs) are witnessing higher inflation than services.
    • That’s because services faced tighter restrictions during the Covid-19 waves, restricting their consumption and the pricing power of providers as well.
    • Service categories that are mostly regulated, such as public transport, railways, water and education, have over 50 per cent weight in core services.
    • However, prices of discretionary services such as airlines, cinema, lodging and other entertainment are rising.
    • Transportation-related services have seen the sharpest rise in the past six months due to fuel price increases.
    • Impact on the poor: For those at the bottom of the pyramid, high inflation hits harder because energy and food are a big chunk of their consumption basket.

    Growth prospects

    • S&P Global has recently cut the growth outlook for major economies for 2022 — that of the US to 2.4 per cent from 3.2 per cent, for Eurozone to 2.7 per cent from 3.3 per cent earlier, and for China to 4.2 per cent from 4.9 per cent.
    • This will hurt exports which are very sensitive to global demand.

    Monetary policy actions

    • Not all aspects of supply-driven inflation can be addressed via monetary policy.
    • So the authorities are complementing monetary policy actions by using the limited fiscal space to cut duties and extend subsidies to the vulnerable.

    Conclusion

    Monetary tightening impacts growth with a lag of at least 3-4 quarters and the fact that real interest rates are negative and borrowing rates still below pre-pandemic levels, implies monetary policy is unlikely to be growth-restrictive for this year.

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  • Health Sector – UHC, National Health Policy, Family Planning, Health Insurance, etc.

    Healthcare in India is ailing. Here is how to fix it

    op-ed snap | Governance | Mains Paper 2: Health & Education

    Context

    The lesson emerging from the pandemic experience is that if India does not want a repeat of the immeasurable suffering and the social and economic loss, we need to make public health a central focus.

    Need for institutional reforms in the health sector

    • The importance of public health has been known for decades with every expert committee underscoring it.
    • Ideas ranged from instituting a central public health management cadre like the IAS to adopting an institutionalised approach to diverse public health concerns — from healthy cities, enforcing road safety to immunising newborns, treating infectious diseases and promoting wellness.
    • Covid has shifted the policy dialogue from health budgets and medical colleges towards much-needed institutional reform.

    About National Health Mission (NHM)

    • The National Health Mission (NHM) seeks to provide universal access to equitable, affordable and quality health care which is accountable, at the same time responsive, to the needs of the people, reduction of child and maternal deaths as well as population stabilization, gender and demographic balance.
    • The Framework for Implementation of NUHM has been approved by the Cabinet on May 1, 2013.
    • NHM encompasses two Sub-Missions, National Rural Health Mission (NRHM) and National Urban Health Mission (NUHM).
    • The National Rural Health Mission (NRHM) was launched in 2005 with a view to bringing about dramatic improvement in the health system and the health status of the people, especially those who live in the rural areas of the country.

    Learning from the failure of National Health Mission (NHM)

    • The National Health Mission (NHM) has been in existence for about 15 years now and the health budget has trebled— though not as a proportion of the GDP.
    • Despite this less than 10 per cent of the health facilities below the district level can attain the grossly minimal Indian public health standards.
    • Clearly, the three-tier model of subcentres with paramedics, primary health centres with MBBS doctors and community health centres (CHC) with four to six specialists has failed.
    • Lack of accountability framework: The model’s weakness is the absence of an accountability framework.
    • The facilities are designed to be passive — treating those seeking care.

    Suggestions

    • 1] FHT: Instead of passive design of NHM, we need Family Health Teams (FHT) like in Brazil, accountable for the health and wellbeing of a dedicated population, say 2,000 families.
    • The FHTs must consist of a doctor with a diploma in family medicine and a dozen trained personnel to reflect the skill base required for the 12 guaranteed services under the Ayushman Bharat scheme.
    • A baseline survey of these families will provide information about those needing attention.
    • Family as a unit: The team ensures a continuum of care by taking the family as a unit and ensuring its well-being over a period.
    •  Nudging these families to adopt lifestyle changes, following up on referrals for medical interventions and post-operative care through home visits for nursing and physiotherapy services would be their mandate.
    • 2] Health cadre: The implication of and central to the success of such a reset lies in creating appropriate cadres.
    • 3] Clarity to nomenclatures: There is also a need to declutter policy dialogue and provide clarity to the nomenclatures.
    • Currently, public health, family medicine and public health management are used interchangeably.
    • While the family doctor cures one who is sick, the public health expert prevents one from falling sick.
    • The public health management specialist holds specialisation in health economics, procurement systems, inventory control, electronic data analysis and monitoring, motivational skills and team-building capabilities, public communication and time management, besides, coordinating with the various stakeholders in the field.
    • 4] Move beyond doctor-led systems: India needs to move beyond the doctor-led system and paramedicalise several functions.
    • Instead of wasting gynaecologists in CHCs midwives (nurses with a BSc degree and two years of training in midwifery) can provide equally good services except surgical, and can be positioned in all CHCs and PHCs.
    • This will help reduce C Sections, maternal and infant mortality and out of pocket expenses.
    • 5] Counsellors and physiotherapists at PHC: Lay counsellors for mental health, physiotherapists and public health nurses are critically required for addressing the multiple needs of primary health care at the family and community levels.
    • 6] Review of existing system: Bringing such a transformative health system will require a comprehensive review of the existing training institutions, standardising curricula and the qualifying criteria.
    • Increase spending on training: Spending on pre-service and in-service training needs to increase from the current level of about 1 per cent.
    • 7] Redefining of functions: A comprehensive redefinition of functions of all personnel is required to weed out redundancies and redeploy the rewired ones.

    Conclusion

    Resetting the system to current day realities requires strong political leadership to go beyond the inertia of the techno-administrative status quoist structures. We can.

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  • Foreign Policy Watch: India-Pakistan

    India needs a forward-looking strategy on Pakistan

    op-ed snap | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    Context

    India’s approach in dealing with Pakistan today is very different from the framework that emerged at the dawn of the 1990s.

    Terms of engagement with Pakistan

    • From the 1990s, for nearly three decades, it was Pakistan that had the political initiative.
    • The turmoil in Kashmir, the international focus on nuclear proliferation, and the relentless external pressure for a sustained dialogue with Pakistan put Delhi in a difficult situation.
    • If Pakistan was on the political offensive, a series of weak coalition governments in Delhi were forced onto the back foot.
    • At the heart of Pakistan’s ambition was to change the status quo in Jammu and Kashmir.
    • Islamabad also played up to the concerns in Western chancelleries that the conflict in Kashmir might escalate to the nuclear level.
    • The new international consensus that Kashmir is the “world’s most dangerous nuclear flashpoint” aligned well with Pakistan’s strategy.
    • Delhi had no option but to respond, but any move to counter Pakistan would make the situation worse.
    • Under Prime Minister Narendra Modi, India has begun to reset the terms of the engagement agenda.
    • Change in regional and international context: Meanwhile, the regional and international context has also altered in many ways since the early 1990s essentially in India’s favour.

    Reset in engagement

    • India’s transformed relations with the US, the resolution of Delhi’s dispute with the global nuclear order, and getting the West to discard its temptation to mediate on Kashmir enormously improved India’s diplomatic position.
    • But the most consequential change has been in the economic domain.
    • The persistent neglect of economic challenges left Pakistan in an increasingly weaker position in relation to India.
    • If India has inched its way into the top six global economies, Pakistan today is broke.
    • Modi had the opportunity to build on these shifting fortunes of Delhi and Islamabad and develop a three-pronged strategy of his own.
    • 1] India bet that the heavens won’t fall if Delhi stops talking to Islamabad or negotiating with Pakistan-backed militant groups in Kashmir.
    • 2] Delhi has been unafraid of staring at nuclear escalation in responding to Pakistan’s cross-border terrorism.
    • 3] By changing the constitutional status of Kashmir in 2019, India has reduced the scope of India’s future negotiations with Pakistan on Kashmir.

    Way forward

    • Pakistan’s hand today is much weaker than in the 1990s and Delhi’s room for manoeuvring has grown, notwithstanding the challenges it confronts on the China border.
    • That opens some room for new Indian initiatives toward Pakistan.
    • Getting Pakistan’s army and its political class to be more practical in engaging India is certainly a tall order; but Delhi can afford to make a move.

    Conclusion

    While there can be much disagreement on Pakistan’s capacity to respond, Delhi’s new initiatives can reinforce the positive evolution of Indian foreign policy, and expand the space for Indian diplomacy in the region and beyond.

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

    Challenges in global growth recovery

    | Economics | Mains Paper 3: Indian Economy

    Context

    The global economy was well on its path to recovery until the invasion of Ukraine by Russia.

    Uncertainties in global growth prospects

    • Divergent economic recoveries: Economic prospects have worsened since the Ukraine crisis, worsening the divergence between the economic recoveries of advanced economies and those of the developing ones.
    • The prevailing uncertainties in global growth prospects come in the aftermath of frequent disruptions to worldwide supply chains in the last two years.
    • Against this background, two key macroeconomic variables have a persistent effect on growth rebound.
    • 1] Price pressure: There is tenacious price pressure, leading to policy trade-offs especially in developing economies.
    • 2] Capital outflow: There have been capital outflows and a tightening of financial conditions, affecting investment and growth in the medium and long term.

    1] Price pressure

    • Global concern: In some of the advanced economies, inflation has reached its highest level in the last 40 years.
    • The major contributors to high inflation are energy and food prices.
    • A spike in oil and gas prices due to a tight fossil fuel supply and geopolitical uncertainty have led to substantial increases in energy costs worldwide.
    • In developing economies, rising food prices have had cascading effects, culminating in higher overall inflation.
    • This gets intensified if poor weather hits harvests and rising oil prices drive up the cost of producing and transporting fertilizers.
    • In developing economies, higher prices for food impacts different sections of the population differently, depending on the types of food consumed and the share of food expenditure in a household’s consumption basket.
    • Persistent short supply and increases in food and fuel prices could significantly increase the risk of social unrest as the poorer sections are pushed to the edge of heightened deprivation.

    2] Capital outflow

    • Emerging markets suffered their first portfolio outflows in a year in March 2022.
    • The Institute of International Finance (IIF) says “foreign net portfolio outflows for emerging markets came to $9.8 billion in March.
    • Investors have become more selective, as higher risk sensitivity mounts due to tighter monetary conditions and rising inflation.
    • Reasons for capital outflow: Interest rates tightening in the United States is associated with capital flow reversals from emerging markets.
    • Impact on developing economies: For developing economies, the result of sudden large capital outflows is currency depreciation and tighter external sector conditions, leading to growth fluctuations.

    Way forward

    • Monitor the pass-through of international prices: Though the factors contributing to high inflation (global supply shocks) are beyond the control of central banks, they need to carefully monitor the pass-through of rising international prices to domestic inflation to calibrate their responses.
    • Calibrate the pace of policy tightening: The pace of policy tightening needs to be attuned to prevailing economic situations and activity levels.
    • Communicate the importance of inflation targeting: Central banks could also signal a readiness to shift the monetary stance to maintain the credibility of their inflation-targeting frameworks by clearly communicating the importance of inflation stabilisation in their objectives and backing it with policy actions.
    • Foreign exchange interventions: As sudden capital flow reversals can threaten financial stability, foreign exchange interventions could address market imbalances.
    • Fiscal consolidation: There exists an imperative to prune expenditure and get back to the road of fiscal consolidation.
    • However, a push for consolidation should not prevent governments from prioritising spending to protect and help vulnerable populations affected by price increases and the pandemic.
    • Income support policies: In the post-pandemic global economy, there will be a likely cross-sectoral labour reallocation.
    •  These transitions require labour market and income support policies that are designed to provide safety nets for workers without hindering employment growth.

    Conclusion

    The message from the current phase of global growth is clear. Policymakers in the developing economies have to prepare for tighter financial conditions and spillovers from geopolitical volatility.

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  • Goods and Services Tax (GST)

    Implications of GST Council ruling

    op-ed snap | Polity | Mains Paper 2: Federalism

    Context

    The Supreme Court of India recently ruled that “The recommendations of the GST Council are not binding on either the Union or the States…”.

    About GST Council

    • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
    • Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
    • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
    • 1] The Union Finance Minister will be the Chairperson.
    • 2] As a member, the Union Minister of State will be in charge of Revenue of Finance.
    • 3] The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.
    • The Council has to function as a platform to bring the Union and State governments together.
    • As a mark of cooperative federalism, the Council shall, unanimously or through a majority of 75% of weighted votes, decide on all matters pertaining to GST and recommend such decisions to the Union and State governments.
    • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject or exempted from the Goods and Services Tax.
    • Article 246A confers simultaneous or concurrent powers on Parliament and the state legislatures to make laws relating to GST.
    • This article is in sharp contrast to the constitutional scheme that prevailed till 2017.

    Background of the case

    • In Union of India Anr. vs Mohit Minerals Pvt. Ltd., the Supreme Court of India on May 19, 2022 ruled on a petition relating to the levy of Integrated Goods and Services Tax (IGST) on ocean freight paid by the foreign seller to a foreign shipping company.
    • Mohit Minerals had filed a writ petition before the Gujarat High Court challenging notifications levying IGST on the ground that customs duty is levied on the component of ocean freight and the levy of IGST on the freight element in the course of transportation would amount to double taxation.
    • GST is paid by the supplier, but if the shipping line is located in a non-taxable territory, then GST is payable by the importer, the recipient of service.
    • Ocean freight is a method of transport by which goods and cargo is transported by ships through shipping lines.

    Important aspects of the judgement

    • Power to legislate simultaneously: Article 246A gives powers to the Union and State governments simultaneously to legislate on the GST.
    • In other words, the two tiers of the Indian Union can simultaneously legislate on matters of the GST (except the IGST, which is in the legislative domain of the Union government).
    • In this case, the Government of India had argued that “Neither can Article 279A override Article 246A nor can Article 246A be made subject to Article 279A.”
    • However, cooperative federalism is to operate through the GST Council to bring in harmony and alignment in matters pertaining to the GST from both governments.
    • Given this background, the Union government had almost delegated the powers to create laws under the GST Act Section 5(1) to the GST Council.
    • Persuasive value only: The Supreme Court of India adjudicated that the GST Council’s recommendations are non-qualified and the simultaneous legislating powers of the Union and State governments give only persuasive value to the Council’s recommendations.
    • The power of the recommendations rests on the practice of cooperative federalism and collaborative decision-making in the Council.

    Issues with voting rights in GST council

    • Inbalance in voting rights: The Union government holds one-third weight for its votes and all States have two-thirds of the weight for their votes.
    • This gives automatic veto power to the Union government because a resolution can be passed with at least three-fourths of the weighted votes.
    • This imbalance in the voting rights between the Union and State governments, makes democratic decision-making difficult.
    • Equal weight to all states creates political problems: Though all the States are not equal in terms of tax capacity, everyone has equal weight for their votes.
    • This creates another political problem as the smaller States with lesser economic stakes can be easily influenced by interest groups.
    • Debate on political lines: The debates in the GST Council will be on political lines rather than on the economics of taxation.
    •  When the States governed by Opposition parties are vocal on counter-points, the States governed by the same party at the Union government are mute spectators.

    Way forward

    • Work in a harmonised manner: The Supreme Court has recorded, “Since the Constitution does not envisage a repugnance provision to resolve inconsistencies between the Central and State laws on GST, the GST Council must ideally function, as provided by Article 279A(6) in a harmonised manner to reach a workable fiscal model through cooperation and collaboration.”
    • Cooperative federalism: The nuanced understanding of cooperative federalism shows that there is no space for one-upmanship in either of the two tiers of the Indian federal government and particularly for the Union government under a quasi-federal Constitution.

    Conclusion

    Given the lopsided power structure favouring the Union government in the GST Council, it is against the spirit of democracy and federalism that the finances of governments can be left to such bodies.

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  • Capital Markets: Challenges and Developments

    Understanding SEBI Rules on Passive Funds

    Prelims Only | Economics | Mains Paper 3: Investment Models

    The Securities and Exchange Board of India (SEBI) recently issued a circular on passive funds covering matters related to transparency, liquidity and operational aspects of exchange-traded funds (ETFs) and index funds.

    What are Passive Funds?

    • A passive fund is an investment vehicle that tracks a market index, or a specific market segment, to determine what to invest in.
    • Unlike with an active fund, the fund manager does not decide what securities the fund takes on.
    • This normally makes passive funds cheaper to invest in than active funds, which require the fund manager to spend time researching and analysing opportunities to invest in.
    • Tracker funds, such as ETFs (exchange traded funds) and index funds fall under the banner of passive funds.

    What is a passive ELSS scheme?

    • Passive funds mimic an underlying index. By contrast active funds are actively managed by fund managers.
    • The SEBI has now introduced a passive equity-linked saving schemes (ELSS) category, which will give taxpayers another investment option to avail of tax benefits.
    • According to the circular, the passive ELSS scheme will be based on any index comprising equity shares from the top 250 companies in terms of market capitalization.
    • Beginning 1 July, a fund house will be able to either have an active ELSS scheme or a passive ELSS scheme, but not both.

    What are the norms for debt ETFs?

    • Passive debt funds are now divided into three categories:
    1. Corporate debt funds with exposure to corporate bonds
    2. G-Sec funds investing in government securities, and
    3. Hybrid funds where allocation is a combination of corporate bonds and government securities
    • Currently, debt funds in the passive category invest only in AAA-rated instruments.
    • The Sebi circular introduces norms for each debt fund category, including portfolio exposure limits to each sector, the issuer (based on rating) and group.
    • Application of these provisions should help mitigate concentration risk in debt ETFs/ index funds.

    What about tracking error?

    • As per Sebi’s circular, passive funds must disclose ‘tracking error’ and ‘tracking difference’ in their monthly fact sheets.
    • These metrics indicate how different the performance of the fund is compared to its underlying index—an effort to keep investors better informed.
    • The circular specifies limits for tracking error and tracking difference, which passive funds must follow.

    What is the mandate on disclosing NAVs?

    • Because of poor liquidity for ETFs in the secondary market in India, ETF prices could differ widely from the net asset value (NAV) of the fund.
    • The NAV of the fund represents the value of the underlying asset of the ETF.
    • The Sebi circular mandates disclosure of NAV (indicative) on a continuous basis throughout the day on the stock exchange.
    • While the practice is already in existence, Sebi rules institutionalize it.
    • Checking the NAV can help one avoid making a transaction at a significant premium or discount.

    Can one execute ETF transactions directly?

    • Investors can buy or sell units of ETFs only on stock exchanges.
    • But, large buy or sell transactions can also be directly placed with the fund house.
    • Sebi now says orders greater than ₹25 crore alone can be placed for redemption or subscription directly with the asset management company (AMC).

     

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