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

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

The MSME sector holds the key to an Indian economic recovery

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Issues faced by MSMEs and dealing with them

The article highlights the importance of MSMEs for the economy and issues faced by the sector.

Context

  • The economy may have recovered from the trough of April but is yet to show signs of a sustained recovery on an annual basis.
  • The number of establishments registered with the Employees’ Provident Fund Organisation declined by more than 30,800 in October, compared to September.

Incentives for MSMEs

  • The above-cited numbers are indicator of the vulnerability of the employment situation, but also as a performance indicator of micro, small and medium enterprises (MSMEs).
  • The MSME sector is vital for employment generation, as also for an economic recovery to sustain.
  • Under Atmanirbhar Rozgar Yojana the government will bear the entire provident fund contributions for two years of all new employees hired.
  • However, similar announcements earlier failed to enthuse the MSME sector.
  • Along with the employment incentive, the MSME sector has also been provided collateral free credit.
  • But the offtake from the scheme has not been impressive, pointing to deeper issues.

Why the incentives failed

  • Part of the reason these incentives failed lies in the very nature of the MSME sector and its heterogeneity, which is inherent in its definition as a residual sector once large enterprises are excluded.
  • A 2015-16 survey of the National Statistical Office shows that almost 94% of these enterprises are tiny, with less than four workers.
  • Only 31% are registered under various acts, but these face regulatory hurdles, some of them related to compliance with the goods and service tax (GST).

Problems faced by MSMEs

  • In 2015-16 survey of the National Statistical Office two most important problems mentioned were a lack of demand and unpaid dues.
  • On both, the situation after 2015-16 has worsened, with the economy slowing down and the government responsible for the largest unpaid dues.
  • With the finances of state governments also strained due to pandemic, the fiscal situation has added to the problem of unpaid dues.
  • The sector is also affected by the political economy of state intervention, which seems biased in favour of large corporations.
  • Unlike the ₹1.5 trillion tax bonanza that large companies received as part of a pre-pandemic stimulus, there was no such bounty for the MSME sector.
  • With most state governments relaxing labour regulations for large companies, even the low-wage advantage that this sector enjoyed has got diminished.
  • Policy changes have not only reduced the compliance burden of labour laws, but have also helped large enterprises reduce wage costs.
  • Consequently, the MSME sector has to now compete with a corporate sector that has easy access to capital, cheap and unregulated labour and a lower tax burden than before.

Way forward

  • Apart from the fiscal stimulus, the sector requires a political-economy approach that prioritizes MSME interests.
  • India needs to ease the regulatory burden of small units and aid their survival through fiscal support.
  • Above all, they need a level-playing field vis-à-vis big businesses.

Consider the question “Despite several incentives by the government MSME sector fails to play the role expected of it. What are the issues faced by the sector and suggest the measure to deal with the issues.” 

Conclusion

Given the important role played by the sector in the economy, issues faced by it must be addressed on ani urgent basis to revive the economy battered by the pandemic.

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

PLI scheme will help India nurture manufacturing giants

Note4Students

From UPSC perspective, the following things are important :

Prelims level : PLI Scheme

Mains level : Paper 3- Analysing the importance of PLI Scheme

Manufacturing holds key to the economic prosperity of the country. The article examines the significance of Production Linked Incentive Scheme to boost manufacturing in India.

Need for increasing manufacturing capabilities

  • The world of manufacturing is now more interconnected than ever before with all major industries—automobile, electronics, pharmaceuticals, textiles, etc—operating as a global value-chain.
  • In order to integrate India as a pivotal part of this modern economy, there is a strong need to step up our manufacturing capabilities in sectors of high growth, including the cutting edge technology sectors.
  • A strong and dynamic manufacturing sector will fuel India’s economic growth by allowing companies producing in India to penetrate effectively into the global supply chains across various sectors.
  • Apart from enhancing exports, it will also reduce our import dependencies and spur domestic consumption.
  • ‘Atmanirbhar Bharat’ has brought manufacturing to the centre stage and emphasised its significance in driving India’s growth.

Factors favouring India

  • India offers an attractive domestic market, with a large population in the educated and earning segment.
  • It also has a strong institutional framework which allows for a smooth functioning of the industry.
  • A concerted effort towards attracting substantial investments for the creation of large manufacturing facilities, combined efficiency and economies of scale, can help Indian companies globally competitive and integrate with the global markets.

How Production Linked Scheme (PLI) will help achieve these objectives

  • The Production Linked Incentive (PLI) Scheme is designed to incentivise incremental production for a limited number of eligible anchor entities in each of the selected sectors.
  • These selected entities will invest in technology, plant & machinery, as well as in R&D.
  • The scheme will also have beneficial spillover effects by the creation of a widespread supplier base for the anchor units established under the scheme.
  • Along with the anchor unit, these supplier units will also help to generate massive primary and secondary employment opportunities.
  • The sectors for PLI have been shortlisted on the basis of their potential for economic growth, extent of benefit to the rural economy, revenue and employment generation.
  • A key benefit of the PLI Scheme is that it can be implemented in a very targeted manner to attract investments in areas of strength and to strategically enter certain segments of global value chains (GVCs).
  • This will help bring scale and size in key sectors and create and nurture global champions.
  • The scheme incentivises upcoming technologies that represent the biggest economic opportunities of the 21st century.
  • The scheme intends to generate large-scale employment by incentivising the development of traditional, labour intensive sectors like Food Processing and Textiles.
  • The current basket of Indian manufacturing constitutes of large volume of low-value products.
  • The scheme aims to correct this by encouraging large manufacturers to bring technology and to build capabilities for high-value output thereby providing higher returns to the upstream producers.
  • It will also enable an increase in exports.
  • The scheme envisages globally-integrated manufacturing in sectors such as automobile and auto components, pharmaceuticals, telecommunications, white goods and steel.
  • These are crucial sectors in terms of their strategic importance, contribution to the GDP and employment-generation potential.

Conclusion

Given the scale of incentives, which is around Rs 1,96,000 crore, the manufacturing sector of the country is set to transform in the next few years. Its contribution to the GDP will significantly improve, leading to unprecedented investment and job creation.


Source:-

https://www.financialexpress.com/opinion/pli-scheme-will-help-india-nurture-manufacturing-giants/2128992/

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

[pib] PLI Scheme extended to 10 key Sectors

Note4Students

From UPSC perspective, the following things are important :

Prelims level : PLI scheme and various sectors

Mains level : Moves for Atmanirbhar Bharat

The Union Cabinet has unveiled the Production-Linked Incentive (PLI) Scheme to encourage domestic manufacturing investments in ten key sectors.

PLI Scheme

  • The PLI scheme aims to boost domestic manufacturing and cut down on imports by providing cash incentives on incremental sales from products manufactured in the country.
  • Besides inviting foreign companies to set shop in India, the scheme aims to encourage local companies to set up or expand, existing manufacturing units.

UPSC can directly as the sectors included in the PLI scheme. Earlier it was only meant for Electronics manufacturing (particulary mobile phones).

What was the earlier PLI Scheme?

  • As a part of the National Policy on Electronics, the IT ministry had notified the PLI scheme on April 1 this year.
  • The scheme will, on one hand, attract big foreign investment in the sector, while also encouraging domestic mobile phone makers to expand their units and presence in India.
  • It would give incentives of 4-6 per cent to electronics companies which manufacture mobile phones and other electronic components.
  • A/c to the scheme, companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 per cent on incremental sales of all such mobile phones made in India.
  • In the same category, companies which are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.

10 new sectors added

The ten sectors have been identified on the basis of their potential to create jobs and make India self-reliant, include:

  1. Food processing
  2. Telecom
  3. Electronics
  4. Textiles
  5. Speciality steel
  6. Automobiles and auto components
  7. Solar photo-voltaic modules and
  8. White goods such as air conditioners and LEDs

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

Economic lessons from Vietnam and Bangladesh

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Lessons from Bangladesh and Vietnam for Indian economy

The article examines the emergence of Bangladesh and Vietnam as the major export hubs in the world and explains the lessons India could draw from it.

Context

  • Bangladesh has become the second-largest apparel exporter after China.
  • Vietnam’s exports have grown by about 240% in the past eight years.

Analysing Vietnam’s success

  • An open trade policy, a less inexpensive workforce, and generous incentives to foreign firms contributed to Vietnam’s success.
  • Vietnam’s open trade policy through Free Trade Agreements (FTAs) means trading partners do not charge import duties on products made in Vietnam.
  • Vietnam’s domestic market is open to the partners’ products.
  • Vietnam has agreed to change its domestic laws to make the country attractive to investors.
  • Over a decade or so, large brands such as Samsung, Canon, Foxconn, H&M, Nike, Adidas, and IKEA have flocked to Vietnam to manufacture their products.

What explains Bangladesh’s success?

  • In Bangladesh, large export of apparels to the EU and the U.S. make the most of the country’s export story.
  • The EU allows the import of apparel and other products from least developed countries (LDCs) like Bangladesh duty-free.
  • India, as a good neighbour, accepts all Bangladesh products duty-free (except alcohol and tobacco).
  • Bangladesh may not have this facility in four to seven years as its per capita income rises and it loses the LDC status.
  • Bangladesh is working smartly to diversify its export basket.

Lessons for India

  • The key learning from Bangladesh is the need to support large firms for a quick turnover.
  • Yet, most of Vietnam’s exports happen in five sectors, in contrast, India’s exports are more diversified.
  • The Economic Complexity Index (ECI), which ranks a country based on how diversified and complex its manufacturing export basket is, illustrates this point.
  • The ECI rank for China is 32, India 43, Vietnam 79, and Bangladesh 127.
  • India, unlike Vietnam, has a developed domestic and capital market.
  • To further promote manufacturing and investment, India could set up sectoral industrial zones with pre-approved factory spaces.
  • There should be no need to search for land or obtain many approvals.

India should pursue organic growth

  • Most of Vietnam’s electronics exports are just the final assembly of goods produced elsewhere.
  • In such cases, national exports look large, but the net dollar gain is small. China also faces this issue.
  • Country’s Export to GDP ratio (EGR) indicates its export capacity.
  • Vietnam’s EGR is 107%, such high dependence on exports brings dollars but also makes a country vulnerable to global economic uncertainty. 
  • The U.S.’s EGR is 11.7%, Japan’s is 18.5%, India’s is 18.7%. Even for China, with all its trade problems, the EGR is 18.4%.
  • Most such countries, including India, follow an open trade policy, sign balanced FTAs, restrict unfair imports, and have a healthy mix of domestic champions and MNCs.
  • While export remains a priority, it is not pursued at the expense of other sectors of the economy.
  • The focus is on organic economic growth through innovation and competitiveness.

Consider the question “While export is essential for the growth of the country, over-dependence on it and its promotion at the expense of the other sectors could do more harm to the economy than good. Comment.” 

Conclusion

With reforms promoting innovation and lowering the cost of doing business, India is poised to attract the best investments and integrate further with the global economy without increasing its dependence on export.

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

What is the Purchasing Managers’ Index (PMI)?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : PMI

Mains level : Not Much

The services sector has PMI has signalled first expansion since February this year.

Try this PYQ:

Q.Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers?

(a) The Reserve Bank of India

(b) The Department of Economic Affairs

(c) The Labour Bureau

(d) The Department of Personnel and Training

Purchasing Managers’ Index

  • PMI is an indicator of business activity — both in the manufacturing and services sectors.
  • It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
  • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.

How is the PMI derived?

  • The PMI is derived from a series of qualitative questions.
  • Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.

How does one read the PMI?

  • A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
  • Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
  • If the figure is higher than the previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.

What are its implications for the economy?

  • The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available.
  • It is, therefore, considered a good leading indicator of economic activity.
  • Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later.
  • Central banks of many countries also use the index to help make decisions on interest rates.

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

Index of Eight Core Sector Industries

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Core Sector Industries

Mains level : Core sector industries and their impacts

The Office of Economic Advisor within the Department for Promotion of Industry and Internal Trade (DPIIT) has released the Index of Eight Core Industries (ICI) for September 2020.

Try this PYQ:

Q.In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight?

(a) Coal production

(b) Electricity generation

(c) Fertilizer production

(d) Steel production

What is the Index of Core Industries?

  • As the title suggests, this is an index of the eight most fundamental industrial sectors of the Indian economy and it maps the volume of production in these industries.
  • It gives the details of these eight sectors — namely Coal, Natural Gas, Crude Oil, Refinery Products (such as Petrol and Diesel), Fertilizers, Steel, Cement and Electricity.
  • Since these eight industries are the essential “basic” and/or “intermediate” ingredient in the functioning of the broader economy, mapping their health provides a fundamental understanding of the state of the economy.
  • In other words, if these eight industries are not growing fast enough, the rest of the economy is unlikely to either.

ICI this year

  • This data is to focus on the trend of ICI growth over the past 6 months — that is, since the start of the Covid-19 pandemic and associated lockdowns.
  • A crucial factor in this regard would be the next wave of Covid-19 infections.
  • If there is a surge in the winter months — as is being witnessed in most Europe and the US — then India’s recovery will be dented yet again.

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

[pib] National Productivity Council (NPC)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Productivity Council (NPC)

Mains level : Not Much

National Productivity Council (NPC) has been granted accreditation conforming to ISO 17020:2012 by National Accreditation Board for Certification Body (NABCB).

National Productivity Council (NPC)

  • NPC is a national level organization to promote productivity culture in India.
  • The NPC comes under the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry.
  • Established in 1958, it is an autonomous, multipartite, non-profit organization and has been registered as a Society under the Societies Registration Act XXI of 1860.
  • NPC is a constituent of the Tokyo-based Asian Productivity Organisation (APO), an Inter-Governmental Body, of which the Government of India is a founder member.

Why ISO status?

  • It has been granted accreditation for undertaking inspection and audit work in the area of Food Safety Audit and Scientific Storage of Agricultural Products.
  • NPC has been conducting inspections/audit for different statutory bodies such as Warehousing Development and Regulatory Authority (WDRA) and FSSAI and is already having high credentials in the area of inspections and audits.

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

Feasibility of Export Driven Growth for India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Export led growth

Mains level : Paper 3- Contribution of export in the growth

To aim for achieving high growth rate by focusing only on the domestic consumption and domestic demand could result in failure. The article argues for the focus on export to achieve the objective of growth.

Domestic-demand led growth and its limitations

  • The debate in India has focused on domestic-demand led growth.
  • But there is no known model of domestic demand/consumption-led growth, anywhere that has delivered quick, sustained, and high rates of economic growth for developing countries.
  • India’s GDP growth of over 6 per cent after 1991 was associated with real export growth of about 11 per cent.
  • Moreover, domestic-demand led growth requires more public spending, tax cuts, private investment, and/or financial sector reforms: which is not feasible in the present context due to pandemic.
  • Consumption growth will be limited by the fact that household debt has grown rapidly in the last few years.
  • Consumption now can grow only if incomes grow.
  • Government spending could be a short run option, but COVID has limited that possibility.

Why India should not follow advanced countries’ fiscal policies

  • India’s interest rates are not at zero and are unlikely to be so because of persistent inflation.
  • India’s borrowing is still considered risky which is reflected in ratings.
  • The favourable interest rate-growth differential that supports expansionary policy in the advanced countries is absent in India.
  • India may well have scope for expansionary fiscal policy in the short run but not as a medium run growth strategy.

Why India should focus on export

  • Given all the above factors, India does not have the luxury of abandoning export orientation because the alternatives are so limited.
  • India’s market is too small to sustain any kind of serious import substitution strategy.
  • Small size of the market makes it difficult to offer investors the domestic market as bait and incentivising them to export.
  • India’s big, unexploited opportunities are in unskilled labour exports.
  • India is vastly under-exporting relative to its labour force.
  • Because China’s wages are rising as it has become richer, it has vacated about $140 billion in exports in unskilled-labour intensive sectors.
  • Post-COVID, the move of investors away from China will probably accelerate to hedge against supply chain disruptions.
  • India did not take advantage of the first China opportunity, now, a second opportunity stemming from geo-politics should be seized by India.
  • As India contemplates atmanirbharta, two deeper advantages of export orientation are always worth remembering.
  • 1) Foreign demand will always be bigger than domestic demand for any country.
  • 2) If domestic producers are competitive internationally, they will be competitive domestically and domestic consumers and firms will also benefit.

Why openness of ecnonomy is important

  • Exploiting this opportunity in unskilled exports requires more not less openness.
  • To be internationally competitive, many parts and components have to be imported from so many different sources.
  • One indicator is the foreign or import contribution to exports.
  • China and Vietnam at the time of their export boom in textiles and clothing suggests that exports were highly dependent on imports (between 40 and 45 per cent).
  • In contrast, India’s import share is about 16 per cent.
  • Achieving Chinese and Vietnamese levels of success will therefore require greater imports and openness.

 Way forward

  • Export success will require genuine easing of costs of trading and doing business in India.
  • In the case of clothing, a key policy change in India will be to eliminate tariffs on all inputs. 
  • It will also require signing free trade agreements with Europe that still impose high duties on India’s clothing export, while Bangladeshi and Vietnamese exports which enjoy preferential access to world markets.

Consider the question “As India contemplates atmanirbharta, we should not forget that export dynamism is essential for the rapid and sustained high economic growth. Comment.”

Conclusion

In sum, resisting the misleading allure of the domestic market, India should zealously boost export performance and deploy all means to achieve that. Pursuing rapid export growth in manufacturing and services should be an obsession with self-evident justification.

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

Production Linked Incentive (PLI) Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Production Linked Incentive Scheme (PLI)

Mains level : Not Much

The Ministry of Electronics and IT had approved some proposals by electronics manufacturers under its Production Linked Incentive (PLI) Scheme.

Try this MCQ:

Q.The Production Linked Incentive (PLI) Scheme often seen in news is related to-

a) Electronics manufacture

b) Khadi and Village Industries

c) MSMEs

d) None of these

What is the PLI scheme?

  • As a part of the National Policy on Electronics, the IT ministry had notified the PLI scheme on April 1 this year.
  • The scheme will, on one hand, attract big foreign investment in the sector, while also encouraging domestic mobile phone makers to expand their units and presence in India.
  • It would give incentives of 4-6 per cent to electronics companies which manufacture mobile phones and other electronic components.
  • A/c to the scheme, companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 per cent on incremental sales of all such mobile phones made in India.
  • In the same category, companies which are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.

Tenure of the scheme

  • The PLI scheme will be active for five years with financial year (FY) 2019-20 considered as the base year for calculation of incentives.
  • This means that all investments and incremental sales registered after FY20 shall be taken into account while computing the incentive to be given to each company.

Which companies and what kind of investments are considered?

  • All electronic manufacturing companies which are either Indian or have a registered unit in India will be eligible to apply for the scheme.
  • These companies can either create a new unit or seek incentives for their existing units from one or more locations in India.
  • Any additional expenditure incurred on the plant, machinery, equipment, research and development and transfer of technology for the manufacture of mobile phones and related electronic items will be eligible for the incentive.
  • However, all investment done by companies on land and buildings for the project will not be considered for any incentives or determine the eligibility of the scheme.

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

Finishing the unfinished task of reform in land and labour markets

Note4Students

From UPSC perspective, the following things are important :

Prelims level : APMC Act, Companies Act, ECA 1955

Mains level : Paper 3- Reforms in various sectors of economy

The article discusses the issues faced by the various sectors of the economy and how the reform measures introduced by the government could help these sectors.

Exploitation of farmers and consumers

  • The Indian farmer has bee treated as captive sources of producing cheap food grain while living at subsistence levels.
  • There was no freedom to choose the point of sale for his produce, he could not decide the price of his product and had no say in selecting the buyer.
  • The end consumer was equally short-changed with frequent cycles of persistent high inflation.
  • The only beneficiaries of this perverse system were middlemen who thrived under political protection.

How reforms will help farmers

  • The stifling nature of the Essential Commodities Act and the APMC Act have both been removed.
  • Contract farming is now nationally enabled, allowing private investment to come in.
  • Private investment will bring in technology, modern equipment, better seeds, know-how for in-between-season crops, improved yields, better logistics and freer access to national and international markets.
  • The Indian farm sector will now finally begin to see the benefits of economies of scale.

Need for the reforms in various sectors

  • There were 44 different labour laws with more than 1,200 sections and clauses that demanded compliance if one even thought of becoming an entrepreneur.
  • Different inspectors and departments administered these laws and this stunted many entrepreneurs.
  • The Companies Act of 2013 completely paralysed risk-taking and quick decision-making among the private wealth creators.
  • There were a large number of organisations that called themselves “banks” but were completely outside the ambit of RBI regulation.
  •  The politicians who controlled these banks were the primary obstacles in introducing any reforms in these sectors.
  • Indian mainstream banks, contrary to international norms, had a peculiar practice of “grossing” their bilateral liabilities rather than “netting”.
  • As per estimates, this locked anywhere between Rs 50,000 to Rs 70,000 crore funds.

Reforms made by the government

  • In place of the 44 central labour laws,  the Parliament has now put in place four labour codes that are much simpler — the Code on Wages, the Industrial Relations Code, the Social Security Code and the Occupational Safety, Health and Working Conditions Code.
  • The bilateral banking netting law has been passed and a large corpus of unproductive capital has been freed to be deployed in the market.
  • Cooperative banks will now be regulated by the RBI and its customers will have the same protections as those of other regular banks.
  • The problematic sections of the Companies Act 2013 have been done away with and the fear of criminal prosecution gone.

Conclusion

The reforms in various sectors of the economy are bound to help the faster recovery of the economy as well as help the farmers realising their full potential.

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

Action plan for the success of Atmanirbhar Bharat project

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Atmanirbhar Bharat Mission

Mains level : Paper 3- Atmanirbhar Bharat Abhiyan and challenges

Atmanirbhar Bharat Abhiyan, well considered plan by the Central government seeks to transform the Indian economy. The article analyses its potential and suggests the ways to achieve the aims.

Vocal for local

  • Prime Minister Narendra Modi gave a call to fellow Indians to be “Vocal for Local” in May.
  • This includes not only to buy and use local products but to also take pride in promoting them.

Challenges

1) Imports from China

  • Serious challenge to Atmanirbhar mission is country’s $65 billion worth of imports from China alone.
  • Most of these imports are of essential items — raw materials, components and intermediates required in producing finished goods.
  • For example, the pharmaceuticals sector imports nearly 70 per cent of its raw material and drug intermediates.
  • It may not be feasible to replace all Chinese imports in the near future.
  • It may also be debatable if the end goal is to replace the entire chain of imports from a country.
  • Nevertheless, experts and industrialists do assert that the ANBA is an excellent initiative and gives India the opportunity to embark on the self-reliance drive.

2) Struggling MSMEs

  • A major part of the Vocal for Local mission rests on the MSMEs, which has been seen as struggling for survival.
  • But the reforms announced as part of the ANBA should put them on a stronger footing.
  • One immediate fallout of these measures will be creation of large scale employment opportunities for both the skilled and unskilled workforce.
  • A stronger manufacturing base will also lead to positive spinoffs related to the supply-purchase of local raw material and capacity building of allied manufacturing units.

Way forward

  • First, an umbrella action plan should be drawn by the Niti Aayog listing all targets under the ANBA and the Vocal for Local Mission.
  • A monitoring agency will review and suggest course correction to ensure that no delay is allowed to build.
  • Second, each state/UT will develop an action plan in consonance with the umbrella plan.
  • A separate organisation created by each state will be responsible for the implementation of the action plan
  • Such organisation should also conduct regular studies to identify local and global market trends and invite competitive solutions to meet market demands.
  • Third, each district (or a group of districts) will work out a more detailed action plan, and charter of responsibilities for ground level officers and departments.

Conclusion

The ANBA is a mission to empower the people of India. It will in all likelihood become a benchmark of how governments and their various organisations can work in a mission mode.

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

[pib] SPICe+ Portal

Note4Students

From UPSC perspective, the following things are important :

Prelims level : SPICe+ Portal

Mains level : Not Much

The Ministry of Corporate Affairs has notified and deployed a web-form namely ‘SPICe+’ as a part of Govt of India’s Ease of Doing Business (EODB) initiatives.

Try this MCQ:

Q.The SPICe+ Portal sometimes seen in news is related to which of the following Ministry?

(a) Ministry of Environment, Forest and Climate Change

(b) Ministry of Commerce and Industry

(c) Ministry of Corporate Affairs

(d) Ministry of Agriculture & Farmers’ Welfare

SPICe+ Portal

  • It offers 10 services by three Central Government Ministries and Departments (Ministry of Corporate Affairs, Ministry of Labour & Department of Revenue in the Ministry of Finance), one State Government (Maharashtra) and various Banks.
  • Thus it saves the procedure, time and cost for Starting a Business in India.
  • These 10 services are:-
  1. Name reservation
  2. Incorporation
  3. DIN allotment
  4. Mandatory issue of PAN
  5. Mandatory issue of TAN
  6. Mandatory issue of EPFO registration
  7. Mandatory issue of ESIC registration
  8. Mandatory issue of Profession Tax registration (Maharashtra)
  9. Mandatory Opening of Bank Account for the Company and
  10. Allotment of GSTIN (if so applied for)

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

[pib] ARISE-ANIC Initiative

Note4Students

From UPSC perspective, the following things are important :

Prelims level : ARISE-ANIC initiaitive

Mains level : Reviving MSME Sector of India thr

Atal Innovation Mission (AIM), NITI Aayog, has launched Aatmanirbhar Bharat ARISE-Atal New India Challenges, to spur applied research and innovation in Indian MSMEs and startups.

The name ARISE typically sounds some social sector or HRD related initiative. This is where one has to be cautious.

ARISE ANIC Initiative

  • The program is a national initiative to promote research & innovation and increase the competitiveness of Indian startups and MSMEs.
  • Its objective is to proactively collaborate with esteemed Ministries and the associated industries to catalyse research, innovation and facilitate innovative solutions to sectoral problems.
  • It also aims to provide a steady stream of innovative products & solutions where the Central Government Ministries / Departments will become the potential first buyers.
  • It is in line with the PM’s mandate of “Make in India”, “Startup India”, and “Aatmanirbhar Bharat” to fast track the growth of the Indian MSME sector.

Its implementation

  • The programme will be driven by ISRO, four ministries—Ministry of Defence; Ministry of Food Processing Industries; Ministry of Health and Family Welfare; and Ministry of Housing and Urban Affairs.
  • It will support deserving applied research-based innovations by providing funding support of up to Rs 50 lakh for speedy development of the proposed technology solution and/or product.

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

State Reforms Action Plan Rankings 2019

Note4Students

From UPSC perspective, the following things are important :

Prelims level : State Reforms Action Plan Rankings 2019

Mains level : Ease of Doing Business

Andhra Pradesh has bagged the first rank among all the states in the country in the state business reforms action plan-2019 (BRAP-2019), representing ease of doing business for Atmanirbhar Bharat.

About the Ranking

  • It is the annual ease of doing business index of states and UTs of India based on the completion percentage scores of action items points of annual Business Reforms Action Plan (BRAP) under the Make in India initiative.
  • This ranking is based on the implementation of the business reform action plan.
  • Some of the key focus areas are access to information and technology, the setting up of a single-window system, construction permit enablers and land administration, according to DPIIT.
  • It based on the progress of states in completing annual reform action plan covering 8 key areas.

The top ten states under the State Reform Action Plan 2019 are:

  1. Andhra Pradesh
  2. Uttar Pradesh
  3. Telangana
  4. Madhya Pradesh
  5. Jharkhand
  6. Chhattisgarh
  7. Himachal Pradesh
  8. Rajasthan
  9. West Bengal
  10. Gujarat

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

Boosting manufacturing

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Manufacturing sector in India

The article analyses the issues of increasing manufacturing in India while dealing with the constraints faced by it. It also suggests the important role States can play.

Why companies are expected to exit China

  • In the aftermath of the pandemic manufacturing companies are expected to exit China due to three primary reasons.
  • 1) Realisation that relying heavily on China for building capacities and sourcing manufacturing goods is not an ideal business strategy due to supply chain disruptions in the country caused by COVID-19.
  • 2) Fear of Chinese dominance over the supply of essential industrial goods.
  • 3) The growing risk and uncertainty involved in operating from or dealing with China in the light of geopolitical and trade conflicts between China and other countries, particularly the U.S.

Where India stands in comparison with China

  • China ranks first in contribution to world manufacturing output, while India ranks sixth.
  • Against India’s target of share of manufacturing in Gross Domestic Product (GDP) to 25% by 2022, its share stood at 15% in 2018, only half of China’s figure.
  • Industry value added grew at an average annual rate of 10.68% since China opened up its economy in 1978, India’s grew at 7% after India opened up its economy.
  • Next to the European Union, China was the largest exporter of manufactured goods in 2018, with an 18% world share.
  • India is not part of the top 10 exporters who accounted for 83% of world manufacturing exports in 2018.

Constraints faced by manufacturing sector in India

India faces numerous constraints in promoting the manufacturing sector.

  • They chiefly include infrastructure constraints, a disadvantageous tax policy environment, restrictive trade policies, a non-conducive regulatory environment, rigid labour laws.
  • Constraints also include high cost of industrial credit, poor quality of the workforce, Low R&D expenditure, delays and constraints in land acquisition, and the inability to attract large-scale foreign direct investment into the manufacturing sector.

What role States can play?

  • They  can  contribute land: Federal government system in India demands the participation of States for the lasting solution to the constraints on the sector.
  • An important requirement for the development of the manufacturing sector is the availability of land area.
  • This could be one of the reasons why manufacturing activity is mainly concentrated in Maharashtra, Gujarat, Tamil Nadu, Karnataka and Uttar Pradesh.
  • However, what is of concern is that some States that also have large land area contribute disproportionately little in manufacturing GSDP.
  • These states include Andhra Pradesh, Bihar, Chhattisgarh, Madhya Pradesh, Odisha, Rajasthan, Telangana, and West Bengal.

Way forward

  • Identify reasons: The reasons for less manufacturing activity in these States have to be carefully examined.
  • State-specific industrialisation strategies: Based on such reasons, State-specific industrialisation strategies need to be devised and implemented in a mission mode with active hand-holding by the Central government.
  • State specific reforms: Policy actions on the part of individual States would improve India’s overall investment climate, thereby boosting investments, jobs, and economic growth.
  • Policy actions of the Centre and the States should  be well coordinated: Strategy Group consisting of representatives from the Central and State governments along with top industry executives to instil teamwork and leverage ideas through sharing the best practices of the Centre and States could be formed.

Consider the question “What are the constraints faced by the manufacturing sector in India? Suggest the ways to deal with these constraints highlighting the important role States can play in boosting manufacturing.”

Conclusion

Both the States and the Central government needs to work in tandem to boost the manufacturing in India and transform the economic landscape of India.

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

The missing large in MSMEs

Note4Students

From UPSC perspective, the following things are important :

Prelims level : MSMEs

Mains level : Paper 3- MSMEs issues and opportunities

MSMEs in India has huge untapped potential. This article suggest the ways to tap it and make the MSMEs major contributor to India’s growth.

What is an issue with MSMEs

  • Despite MSME contributing 20% of the GDP and employing about 110 million workers,  we have failed to make bold policy-moves to make it more productive and competitive.
  •  MSMEs are not becoming ‘larger’ and more dynamic, with 99% of the estimated 60 million being micro-enterprises with limited aspirations.
  • At the core of this lack of competitiveness is a structural issue.

Addressing the structural challenges

Size

  • Consider  India’s largest textile cluster vs Bangladesh’s largest.
  • More than 70% of the units in Tirupur are micro-enterprises with less than 10 employees while only 20% of the units in Narayanganj in Bangladesh have less than 10 employees.
  • This factor makes the cluster in Bangladesh more competitive and helping Bangladesh’s exports grow faster than India’s.
  • Though  Bangladesh has other advantages also, but this structural difference is critical.

Relation between size and productivity

  • Productivity data from manufacturing MSMEs in OECD show that the productivity of medium firms (50-250 people) could be as much as 80-100% higher than that of micro firms (<9 employees).
  • Growth in scale allows them to invest in people to improve skills, in better technology & processes, and in innovation.
  • The most-competitive of them grow from their small beginnings to become world-beaters.
  • This push to grow and improve capabilities and productivity is central to dynamism of any country’s industrial structure.
  • This dynamism of micro-enterprises has been one of the less-reported policy levers behind China’s rise as an industrial powerhouse.

What stops MSMEs in India from growing?

  • Our policy-legacy of highly restrictive asset-based definition which has only recently been relaxed, coupled with a mindset, and, policies, to support the ‘small is beautiful’ narrative.
  • Overly complex regulatory regime doesn’t differentiate enterprises on their scale, other than the really tiny ones, in terms of compliance needs.
  • For example, if a unit has more than six employees, the trade union law becomes applicable, If a unit has more than 10 employees, the Factories Act is applicable.
  • Small enterprises thus face the same multitude of regulatory requirements as larger ones, and end up having compliance costs account for a higher percentage of revenue.
  • For the tiny/micro units, there is simply no incentive to grow and enter the formal economy.

Policy intervention needed

1) Getting MSMEs into formal credit system

  • To do this, we need to adopt an approaches that can help banks and NBFCs move away from asset-backed lending, towards some form of cash-flow-based lending.
  • Small retailers are outside the formal credit system, unable to invest, modernise and grow, given they lack fixed ‘assets’.
  • But, all of them are linked to, and sell, brands of well-known, large companies.
  • If banks and NBFCs work with these companies and use anonymised data on sales and credit-performance to develop credit-scores for lending to them?
  • Similar innovative ways could help cover other micro-unit segments.

2) Simplified tax and regulatory regime

  • The second policy intervention needed is to de-average and implement a simplified tax and regulatory regime for MSMEs.
  • This would also reduce the cost of compliance.

3) Development of digital platform

  • The third intervention, appropriate for digital era, is to develop a comprehensive ‘digital platform’ for the sector.
  • This will call for a mandatory, unique identifier for all.
  • The platform will have to be linked to different relevant databases.

Consider the question “MSMEs in India continues to play an important role in India’s development yet it suffers from structural challenges which hinders it from fueling India’s growth. In light of this, examine the challenges MSMEs faces and suggest the policy interventions.” 

Conclusion

As India launches the Atmanirbhar Bharat Abhiyan to reignite growth of the economy for a post-COVID world, building such a globally-competitive MSME has to become one of the initiative’s core pillars. Only then can our industry improve and sustain its global competitiveness.


Source-

https://www.financialexpress.com/opinion/the-missing-large-in-msmes-a-globally-competitive-indian-mittelstand-is-the-need-of-the-hour/2063155/

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

What are Strategic and Non-strategic Sectors of Industries?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Strategic and non-strategic sectors

Mains level : Disinvestment of CPSEs

The government will soon come out with a policy on strategic sectors and simultaneously kick into motion a process of complete privatization for companies in the non-strategic sectors.

Try this question for mains:

Q. “Privatisation of CPSEs can lead to the conversion of public monopoly to a private monopoly.” Analyse.

What are Strategic and Non-strategic Sectors of India?

  • An industry is considered strategic if it has large innovative spillovers and if it provides a substantial infrastructure for other firms in the same or related industries.
  • Earlier, the strategic sectors were defined on the basis of industrial policy.
  • The government classified Central Public Sector Enterprises (CPSEs) as ‘strategic’ and ‘non-strategic’ on the basis of industrial policy that keeps on changing from time-to-time.

According to this, the Strategic sector PSUs are:

  • Arms & Ammunition of defence equipment
  • Defence aircraft & warships
  • Atomic energy
  • Applications of radiation to agriculture, medicine and non-strategic industry
  • Railways

Banking, insurance, defence, and energy are likely to be part of the strategic sector list. All other PSUs apart from the strategic sectors fall under Non-strategic Sector including Power Discoms.

A change in policy post-Atmanirbhar

  • Under the Self-sufficiency move, the proposed policy would notify the list of strategic sectors requiring the presence of at least one state-owned company along with the private sector.
  • In all other sectors, the government plans to privatize public sector enterprises, depending upon the feasibility.
  • The number of enterprises in strategic sectors will be only one to four, and others would be privatized/merged/brought under a holding company structure.

Will it help privatization?

  • The government has already set in motion privatization plans for large PSU companies BPCL, Air India, Container Corporation of India, and Shipping Corporation of India.
  • Budget 2020-21 had announced plans to sell part of the Centre’s stake in LIC through an initial public offer (IPO), and the sale of equity in IDBI Bank to private, retail and institutional investors.
  • The emphasis on privatization could see companies in chemicals and infrastructure space being privatized, while the government has stated its intent to reduce the number of state-owned banks.
  • This could see some smaller banks being privatized in due course.

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

[pib] ASPIRE Portal

Note4Students

From UPSC perspective, the following things are important :

Prelims level : ASPIRE Portal

Mains level : Not Much

The International Centre for Automotive Technology (ICAT) is developing a technology platform for the automotive industry called ASPIRE – Automotive Solutions Portal for Industry, Research and Education.

Try this MCQ:

Q.The recently launched ASPIRE Portal deals with:

a) Aspirational Districts

b) Primary Education

c) Industrial Clusters

d) Automotive Technology

ASPIRE Portal

  • The key objective of this portal is to facilitate the Indian Automotive Industry to become self-reliant by assisting in innovation and adoption of global technological advancements.
  • It aims to bring together the stakeholders from various associated avenues.
  • This includes bringing together the automotive OEMs, Tier 1 Tier 2 & Tier 3 companies, R&D institutions and academia (colleges & universities) on matters involving technology advancements.
  • The activities would include R&D, Product Technology Development, Technological Innovations, Technical and Quality Problem Resolution for the industry, Manufacturing and Process Technology Development etc.
  • Apart from acting as a solution and resource platform, the portal will also host grand challenges in line with the need of the industry as will be identified from time to time, for development of key automotive technologies.

About ICAT

  • International Centre for Automotive Technology (ICAT) is located at Manesar in Gurugram district of Haryana.
  • It is a govt entity owned by the Ministry of Heavy Industries.
  • It has facilities for vehicle homologation and also testing laboratories for noise, vibration and harshness (NVH) and passive safety.
  • It also includes a powertrain laboratory, engine dynamometers, emission laboratory with Euro-V capability, a fatigue laboratory, passive safety laboratory, and vehicle test tracks.

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

Agreement for Emergency Response Programme for MSME

Note4Students

From UPSC perspective, the following things are important :

Prelims level : International Finance Corporation

Mains level : Paper 3- Credit supply to MSME

The World Bank and the Government of India signed the $750 million agreement for the MSME Emergency Response Programme to support increased flow of finance into the hands of micro, small, and medium enterprises (MSMEs), severely impacted by the COVID-19 crisis.

How will the agreement protect the MSME sector

1. Unlocking liquidity

  • The Government is focused on ensuring that the abundant financial sector liquidity available flow to NBFCs and that banks.
  • Banks and NBFCs have turned extremely risk-averse.
  • This project will support the Government in providing targeted guarantees to incentivize NBFCs.
  • Project will also support banks to continue lending to viable MSMEs to help sustain them through the crisis.
  • It will be achieved by de-risking lending from banks and Non-Banking Financial Companies (NBFCs) to MSMEs.
  • This derisking will be done through a range of instruments, including credit guarantees.

2. Strengthening NBFCs and SFBs

  • Improving the funding capacity of the NBFCs and Small Finance Bank (SFBs), will help them respond to the urgent and varied needs of the MSMEs.
  • This will include supporting government’s refinance facility for NBFCs.
  • In parallel, the IFC is also providing direct support to SFBs through loans and equity.

3. Enabling financial innovation

  • Only about 8 percent of MSMEs are served by formal credit channels.
  • The program will incentivize and mainstream the use of fintech and digital financial services in MSME lending and payments.
  • Digital platforms will play an important role by enabling lenders, suppliers, and buyers to reach firms faster and at a lower cost.
  • The digital platform will be helpful especially to small enterprises who currently may not have access to the formal channels.

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

CHAMPIONS Platform to empower MSMEs

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CHAMPIONS Portal

Mains level : Various moves to boost MSME sector

Recently PM has launched the technology platform CHAMPIONS as a one-stop-shop solution of MSME Ministry.

At the very first sight, the name CHAMPIONS creates a delusion. It looks more of an HRD initiative. Here lies the risk! Please cautiously make a personal note here. Demarcate all such initiatives on an A4 page.

CHAMPIONS Platform

  • CHAMPIONS stand for Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength.
  • The portal is basically for making the smaller units big by solving their grievances, encouraging, supporting, helping and handholding.
  • It is a technology-packed control room-cum-management information system.
  • It is also fully integrated on a real-time basis with GOI’s main grievances portal CPGRAMS and MSME Ministry’s own other web-based mechanisms.
  • This ICT based system is set up to help the MSMEs in a present difficult situation and also to handhold them to become national and international champions.

Detailed objectives

  • Grievance Redressal: To resolve the problems of MSMEs including those of finance, raw materials, labour, regulatory permissions etc particularly in the COVID created a difficult situation;
  • To help them capture new opportunities: including manufacturing of medical equipment and accessories like PPEs, masks, etc and supply them in National and International markets;
  • To identify and encourage the sparks:e. the potential MSMEs who are able to withstand the current situation and can become national and international champions.

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

What are General Financial Rules (GFR)?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : General Financial Rules (GFRs)

Mains level : Various moves to boost MSME sector

The union government has notified amendments to General Financial Rules (GFR) to ensure that goods and services valued less than Rs 200 crore are being procured from domestic firms, a move which will benefit MSMEs.

Possible mains question:

Q. Discuss how the nationwide lockdown to control the coronavirus outbreak has led to the resurfacing of inherent bottlenecks in India’s MSME Sector.

What are the General Financial Rules (GFRs)?

  • The GFRs are a compilation of rules and orders of the Government of India to be followed by all while dealing with matters involving public finances.
  • They are instructions that pertain to financial matters.
  • They lay down the general rules applicable to Ministries / Departments, and detailed instructions relating to the procurement of goods.
  • They are issued by the procuring departments broadly in conformity with the general rules while maintaining the flexibility to deal with varied situations.

Also read:

[Burning Issues] Fiscal Push for MSME Sector of India (Part I)

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

Credit guarantees to MSMEs: What are they and how will they help?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Credit Guarantee Scheme

Mains level : Reviving MSME Sector of India

Finance Minister has announced some details of the Atmanirbhar Bharat Abhiyan economic package. The main thrust of the announcements was a relief to Medium, Small and Micro Enterprises (MSMEs) in the form of a massive increase in credit guarantees to them.

Practice questions:

Q. Discuss the efficacy of various tranches of credit facilities to MSMSEs provided under Atmanirbhar Bharat Abhiyan.

Q. Discuss how the nationwide lockdown to control the coronavirus outbreak has led to the resurfacing of inherent bottlenecks in India’s MSME Sector.

What is the package about?

  • Instead of directly infusing money into the economy or giving it directly to MSMEs in terms of a bailout package, the government has resorted to taking over the credit risk of MSMEs.
  • These credit guarantees should help the formal banking system meet the credit demand of the MSME sector (see Chart 2).

What is the credit guarantee scheme for MSMEs?

  • Loans to MSMEs are mostly given against property (as collateral) because often there isn’t a robust cash flow analysis available.
  • But in times of crisis, like the one currently playing out, property prices fall and this inhibits the ability of MSMEs to seek loans. It also means that banks are less willing to extend loans.
  • A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters.

How does it work?

  • For instance, if the government provides say a 100% credit guarantee up to an amount of Rs 1 crore to a firm, it means that a bank can lend Rs 1 crore to that firm; in case the firm fails to pay back, the government will make good all of Rs 1 crore.
  • If this guarantee was for the first 20% of the loan, then the government would guarantee to pay back only Rs 20 lakh.

Why need credit guarantees?

  • Even before the Covid-19 crisis, Indian government finances were in poor health. This pandemic has meant that government revenues will come under further pressure.
  • For instance, experts are already talking about a GDP contraction of 5% to 10% in the current financial year. It will result in a revenue loss of anywhere between Rs 5 to 7 lakh crore.
  • And yet, this is also the year when employees and firms want the government to help them out financially.
  • Banks, quite justifiably, suspect that any new loans will only add to their growing mountain of non-performing assets (NPAs).
  • So the government was facing an odd problem: Banks had the money but were not willing to lend to the credit-starved sections of the economy, while the government itself did not have enough money to directly help the economy.

  • The solution — credit guarantees — finally chosen by the government is not a new one, because this fiscal conundrum is not a new one either (Chart 3).

Quantum of credit guarantee facilitated by FM

  • There are three proposals but the main one is for standard MSMEs — that is, those MSMEs which were running fine until the COVID-19-induced lockdown disrupted their work.
  • For these, the government has provided a credit guarantee of Rs 3 lakh crore.
  • This is like an emergency credit line, said the Finance Minister, and it is for MSMEs that have an already outstanding loan of Rs 25 crore or those with a turnover less than Rs 100 crore.
  • The loans will have a tenure of 4 years and they will have a moratorium of 12 months (that is, the payback starts only after 12 months).

Why Rs 3 lakh crore?

  • The total outstanding loan to MSMEs by the banking and NBFC sector is around Rs 16 to 18 lakh crore.
  • Assuming that 80% of these loans are working capital loans where there would be a 20% incremental funding needs, that gives an amount of approximately Rs 3 lakh crore.
  • So the government is hoping that this credit guarantee will help those MSMEs take out another loan and recover.
  • The hope is that since these MSMEs were able to pay back before the crisis, there is no reason why they cannot after the crisis, provided they are given some extra money to survive this period.

What were the other measures?

  • There is a subordinate debt scheme, worth Rs 20,000 crore, which will allow loans to MSMEs that were already categorised as “stressed”, or struggling to pay back.
  • In this case, the government’s guarantee is not full, but partial.
  • The third measure is the creation of a fund with a corpus of Rs 50,000 crore to infuse equity into “viable” MSMEs, thus helping them to expand and grow.
  • The government intends to put in Rs 10,000 crore and get others, possibly institutions like LIC and SBI, to fund the remaining amount.
  • Then there is a change in the definition of an MSME that was pending for long. Now MSMEs are judged on turnover and there will be no difference between a manufacturing MSME and services MSME.

How far will these measures help?

  • The Rs 3 lakh crore credit guarantees are the most substantive announcement as it will most likely have a significant impact.
  • It will help MSMEs pay salaries and keep their heads above the water even as the economy slows down.
  • This measure is expected to help as many as 45 lakh MSMEs.

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

[pib] CHAMPIONS Portal for Indian MSMEs

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CHAMPIONS Portal

Mains level : Not Much

In a major initiative, Union Ministry of MSME has launched CHAMPIONS portal for assisting Indian MSMEs march into the big league as National and Global Champions.

MSME sector has been hit badly by COVID. Initiatives like CHAMPIONS portal are crucial for this sector.

CHAMPIONS Portal

  • ‘CHAMPIONS’ is a technology-driven Control Room-Cum-Management Information System.
  • The CHAMPIONS is an acronym for Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength
  • As the name suggests, the portal is basically for making the smaller units big by solving their grievances, encouraging, supporting, helping and handholding.
  • It is a technology-packed control room-cum-management information system.

Three basic objectives of the CHAMPIONS

1) How to help the MSMEs in this difficult situation in terms of finance, raw materials, labour, permissions, etc.

2) How to help them capture new opportunities like manufacturing of medical accessories and products like PPEs, masks, etc.

3) How to identify the sparks, i.e., the bright MSMEs who can not only withstand but can also become national and international champions.

Technology imbibed in the portal

  • In addition to ICT tools including telephone, internet and video conference, the system is enabled by Artificial Intelligence, Data Analytics and Machine Learning.
  • It is also fully integrated on a real-time basis with GOI’s main grievances portal CPGRAMS and MSME Ministry’s own other web-based mechanisms.
  • The entire ICT architecture is created in house with the help of NIC in no cost. Similarly, the physical infrastructure is created in one of the ministry’s dumping rooms in record time.

 A hub and spoke model of network

  • As part of the system, a network of control rooms is created in a Hub & Spoke Model.
  • The Hub is situated in New Delhi in the Secretary MSME’s office.
  • The spokes will be in the States in various offices and institutions of Ministry.
  • As of now, 66 state-level control rooms are created as part of the system.

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

Private: Fiscal Push for MSME Sector of India

COVID-19 and MSMEs

  • The MSMEs were already struggling — in terms of declining revenues and capacity utilization — in the lead-up to the Covid-19 crisis.
  • The total lockdown has raised a question mark on workers payment primarily because these firms mostly transact on cash. That explains the job losses.
  • The problem with most small Indian businesses is that they operate on thin margins and don’t have the deep financial resources to survive a significant dip in cash flows.
  • So, when an unexpected event like a lockdown happens and MSMEs can’t sell/produce their goods or services, it also means for many they can’t meet their monthly expenses – this includes costs like paying salaries to their employees.

Fiscal stimulus package to MSMEs under Atmanirbhar Bharat Abhiyan

Finance Minister has announced the first tranche of the Atmanirbhar Bharat Abhiyan economic package. The main thrust of the announcements was a relief to Medium, Small and Micro Enterprises (MSMEs) in the form of a massive increase in credit guarantees to them.

What is the package about?

Instead of directly infusing money into the economy or giving it directly to MSMEs in terms of a bailout package, the government has resorted to taking over the credit risk of MSMEs.

1) 100% credit guarantee

  • Firstly, it will give a 100% credit guarantee for Rs 3 lakh crore worth of collateral-free loans to MSMEs that were doing fine before the pandemic hit and are now in trouble.
  • This deal will only apply to small businesses that already had an outstanding loan of Rs 25 crore or those with a turnover of less than Rs 100 crore.
  • This doesn’t mean the government is directly infusing Rs 3 lakh crore into India’s MSMEs.
  • Put simply, if an MSME wants to take a loan of Rs 1 crore from a bank now, the Centre is saying that if the business fails to repay that loan, it will step in and make good all of that Rs 1 crore.
  • Thus, banks don’t have to worry about potential NPAs – that headache is transferred to the government.

2) Subordinate debt scheme

  • The second measure is a ‘subordinate debt scheme’ worth Rs 20,000 crore and is mainly for MSMEs who are already struggling with debt and are unlikely to get fresh funding by themselves.
  • This scheme will allow banks and NBCs to give loans to MSMEs which are already deemed as ‘stressed’ and are thus less credit-worthy.
  • For these firms, the government will only provide partial credit guarantee support to banks.

3) Availability of Funds

  • The final step involves the government creating a Rs 50,000-crore fund which will infuse equity into “viable” MSMEs, thus helping them to expand and grow.
  • The Centre will put only Rs 10,000 crore into this and get other PSU institutions like SBI or LIC to help fund the remaining amount.
  • The basic idea behind this is that MSMEs who have been forced into a cash-strapped corner by the national lockdown will be able to apply for some working capital that will keep their businesses afloat until they are able to operate at pre-pandemic levels.
  • By doing this, the government also hopes to protect the employment that MSMEs create and thus save jobs.

4)Other measures

  • There are two other MSME policy announcements – one aimed at bringing more firms into the MSME net, while the other is oriented towards providing a level playing field.
  • The first is defining what the firm gets to be an ‘MSME’ and avail of all the government benefits that are given to that category of business.
  • The criteria have been expanded quite loosely and will mean that companies don’t have to be as small as they were to avail of MSME benefits.
  • Put simply, the government will now subsidize more smaller companies than they used to.
  • Second, there is a change in the definition of an MSME that was pending for long.
  • Now MSMEs will be judged on turnover and there will be no difference between a manufacturing MSME and services MSME.
  • FM also extended the initiation period of fresh insolvency proceedings against MSMEs by six months to up to one year depending upon the COVID situation.

Need for such measures

  • Even before the Covid-19 crisis, Indian government finances were in poor health. This pandemic has meant that government revenues will come under further pressure.
  • For instance, experts are already talking about a GDP contraction of 5% to 10% in the current financial year. It will result in a revenue loss of anywhere between Rs 5 to 7 lakh crore.
  • And yet, this is also the year when employees and firms want the government to help them out financially.
  • Banks, quite justifiably, suspect that any new loans will only add to their growing mountain of non-performing assets (NPAs).
  • So the government was facing an odd problem: Banks had the money but were not willing to lend to the credit-starved sections of the economy, while the government itself did not have enough money to directly help the economy.

  • The solution — credit guarantees — finally chosen by the government is not a new one, because this fiscal conundrum is not a new one either (see chart).

Why Rs 3 lakh crore?

  • The total outstanding loan to MSMEs by the banking and NBFC sector is around Rs 16 to 18 lakh crore.
  • Assuming that 80% of these loans are working capital loans where there would be a 20% incremental funding needs, that gives an amount of approximately Rs 3 lakh crore.
  • So the government is hoping that this credit guarantee will help those MSMEs take out another loan and recover.
  • The hope is that since these MSMEs were able to pay back before the crisis, there is no reason why they cannot after the crisis, provided they are given some extra money to survive this period.

How far will these measures help?

  • The Rs 3 lakh crore credit guarantees are the most substantive announcement as it will most likely have a significant impact.
  • It will help MSMEs pay salaries and keep their heads above the water even as the economy slows down.
  • This measure is expected to help as many as 45 lakh MSMEs.

Issues with the package

1) No banks consulted

  • The scheme for MSMEs has left bankers unhappy as the guarantee is not being offered by the government, but from the credit guarantee trust fund for micro and small enterprises (CGTMSE) instead of being a sovereign guarantee.

2) Criteria of availability

  • The benefits of the package will not be available to businesses which had repayments overdue by more than 30 days as on Feb 29, 2020.
  • Only for the stressed MSMEs and those whose loans have turned bad, a Rs 20,000-crore subordinated debt scheme has been envisaged.

3) Employee’s welfare faintly addressed

  • With the package, the government has mandated MSMEs for paying the wages.
  • The MSMEs are short of revenues to be able to pay the salaries. It has now become a matter of ability to pay.
  • Manpower cost for ancillary suppliers is one of the largest. Not every company has the ability to pay their employees so going forward will be more stressful.

4) Too much of loans

  • The package has offered for taking additional loans, but the MSME sector is already leveraged heavily.
  • At this point, taking additional loans can help with major short term liquidity, but in the longer-term, the companies or the units abilities for repaying these loans is grossly neglected.
  • Also the onus on increasing the competitiveness of MSMEs post the lockdown has been grossly neglected.

Way forward

  • The challenge now is to create a policy environment that will encourage the growth of more MSME that can hold their own in a competitive market.
  • The problems faced by MSMEs need to be considered in a disaggregated manner for successful policy implementation as they produce very diverse products, use different inputs and operate in distinct environments.
  • In general, there is a need for tax provisions and laws that are not only labour-friendly but also entrepreneur-friendly.
  • More importantly, there is a need for skill formation and continuous upgrade both for labour and entrepreneurs.
  • While the government has to strengthen the existing skilling efforts for labour, there is an urgent need for managerial skill development for entrepreneurs running MSMEs — an area that is considerably neglected.
  • Further, the government could consider dedicated television and radio programmes, similar to agriculture, to help educate entrepreneurs running small businesses.

Conclusion

Covid-19 is a crisis with an unforeseeable ending. What is clear though is that the government and businesses—both large and small—will have to work together to ensure the protection of workers, be ready for risk management in terms of phased re-starting of business operations and be prepared and open to structural changes in business activities.

  • Issues related to credit, like adequacy, timely availability, cost and mortgages continue to be a concern for MSME. These enterprises are dependent on self-finance. Profit margins are also low.
  • The government drive for financial inclusion could benefit such entities.
  • The government could consider dedicating specialised financial schemes for addressing difficulties in assessing and providing credit for small enterprises, as also providing a line of credit to firms which are under financial stress.
  • The road ahead remains unclear, but it is likely that the economic damage is already much larger than the measures undertaken so far.
  • A continued focus on reforms and on sustaining India’s growth potential will be critical in preventing macroeconomic instability.

 

 

 

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

Private: Fiscal Push for MSME Sector of India (Part II)

COVID-19 and MSMEs

  • The MSMEs were already struggling — in terms of declining revenues and capacity utilization — in the lead-up to the Covid-19 crisis.
  • The total lockdown has raised a question mark on workers payment primarily because these firms mostly transact on cash. That explains the job losses.
  • The problem with most small Indian businesses is that they operate on thin margins and don’t have the deep financial resources to survive a significant dip in cash flows.
  • So, when an unexpected event like a lockdown happens and MSMEs can’t sell/produce their goods or services, it also means for many they can’t meet their monthly expenses – this includes costs like paying salaries to their employees.

Fiscal stimulus package to MSMEs under Atmanirbhar Bharat Abhiyan

Finance Minister has announced the first tranche of the Atmanirbhar Bharat Abhiyan economic package. The main thrust of the announcements was a relief to Medium, Small and Micro Enterprises (MSMEs) in the form of a massive increase in credit guarantees to them.

What is the package about?

Instead of directly infusing money into the economy or giving it directly to MSMEs in terms of a bailout package, the government has resorted to taking over the credit risk of MSMEs.

1) 100% credit guarantee

  • Firstly, it will give a 100% credit guarantee for Rs 3 lakh crore worth of collateral-free loans to MSMEs that were doing fine before the pandemic hit and are now in trouble.
  • This deal will only apply to small businesses that already had an outstanding loan of Rs 25 crore or those with a turnover of less than Rs 100 crore.
  • This doesn’t mean the government is directly infusing Rs 3 lakh crore into India’s MSMEs.
  • Put simply, if an MSME wants to take a loan of Rs 1 crore from a bank now, the Centre is saying that if the business fails to repay that loan, it will step in and make good all of that Rs 1 crore.
  • Thus, banks don’t have to worry about potential NPAs – that headache is transferred to the government.

2) Subordinate debt scheme

  • The second measure is a ‘subordinate debt scheme’ worth Rs 20,000 crore and is mainly for MSMEs who are already struggling with debt and are unlikely to get fresh funding by themselves.
  • This scheme will allow banks and NBCs to give loans to MSMEs which are already deemed as ‘stressed’ and are thus less credit-worthy.
  • For these firms, the government will only provide partial credit guarantee support to banks.

3) Availability of Funds

  • The final step involves the government creating a Rs 50,000-crore fund which will infuse equity into “viable” MSMEs, thus helping them to expand and grow.
  • The Centre will put only Rs 10,000 crore into this and get other PSU institutions like SBI or LIC to help fund the remaining amount.
  • The basic idea behind this is that MSMEs who have been forced into a cash-strapped corner by the national lockdown will be able to apply for some working capital that will keep their businesses afloat until they are able to operate at pre-pandemic levels.
  • By doing this, the government also hopes to protect the employment that MSMEs create and thus save jobs.

4)Other measures

  • There are two other MSME policy announcements – one aimed at bringing more firms into the MSME net, while the other is oriented towards providing a level playing field.
  • The first is defining what the firm gets to be an ‘MSME’ and avail of all the government benefits that are given to that category of business.
  • The criteria have been expanded quite loosely and will mean that companies don’t have to be as small as they were to avail of MSME benefits.
  • Put simply, the government will now subsidize more smaller companies than they used to.
  • Second, there is a change in the definition of an MSME that was pending for long.
  • Now MSMEs will be judged on turnover and there will be no difference between a manufacturing MSME and services MSME.
  • FM also extended the initiation period of fresh insolvency proceedings against MSMEs by six months to up to one year depending upon the COVID situation.

Need for such measures

  • Even before the Covid-19 crisis, Indian government finances were in poor health. This pandemic has meant that government revenues will come under further pressure.
  • For instance, experts are already talking about a GDP contraction of 5% to 10% in the current financial year. It will result in a revenue loss of anywhere between Rs 5 to 7 lakh crore.
  • And yet, this is also the year when employees and firms want the government to help them out financially.
  • Banks, quite justifiably, suspect that any new loans will only add to their growing mountain of non-performing assets (NPAs).
  • So the government was facing an odd problem: Banks had the money but were not willing to lend to the credit-starved sections of the economy, while the government itself did not have enough money to directly help the economy.

  • The solution — credit guarantees — finally chosen by the government is not a new one, because this fiscal conundrum is not a new one either (see chart).

Why Rs 3 lakh crore?

  • The total outstanding loan to MSMEs by the banking and NBFC sector is around Rs 16 to 18 lakh crore.
  • Assuming that 80% of these loans are working capital loans where there would be a 20% incremental funding needs, that gives an amount of approximately Rs 3 lakh crore.
  • So the government is hoping that this credit guarantee will help those MSMEs take out another loan and recover.
  • The hope is that since these MSMEs were able to pay back before the crisis, there is no reason why they cannot after the crisis, provided they are given some extra money to survive this period.

How far will these measures help?

  • The Rs 3 lakh crore credit guarantees are the most substantive announcement as it will most likely have a significant impact.
  • It will help MSMEs pay salaries and keep their heads above the water even as the economy slows down.
  • This measure is expected to help as many as 45 lakh MSMEs.

Issues with the package

1) No banks consulted

  • The scheme for MSMEs has left bankers unhappy as the guarantee is not being offered by the government, but from the credit guarantee trust fund for micro and small enterprises (CGTMSE) instead of being a sovereign guarantee.

2) Criteria of availability

  • The benefits of the package will not be available to businesses which had repayments overdue by more than 30 days as on Feb 29, 2020.
  • Only for the stressed MSMEs and those whose loans have turned bad, a Rs 20,000-crore subordinated debt scheme has been envisaged.

3) Employee’s welfare faintly addressed

  • With the package, the government has mandated MSMEs for paying the wages.
  • The MSMEs are short of revenues to be able to pay the salaries. It has now become a matter of ability to pay.
  • Manpower cost for ancillary suppliers is one of the largest. Not every company has the ability to pay their employees so going forward will be more stressful.

4) Too much of loans

  • The package has offered for taking additional loans, but the MSME sector is already leveraged heavily.
  • At this point, taking additional loans can help with major short term liquidity, but in the longer-term, the companies or the units abilities for repaying these loans is grossly neglected.
  • Also the onus on increasing the competitiveness of MSMEs post the lockdown has been grossly neglected.

Way forward

  • The challenge now is to create a policy environment that will encourage the growth of more MSME that can hold their own in a competitive market.
  • The problems faced by MSMEs need to be considered in a disaggregated manner for successful policy implementation as they produce very diverse products, use different inputs and operate in distinct environments.
  • In general, there is a need for tax provisions and laws that are not only labour-friendly but also entrepreneur-friendly.
  • More importantly, there is a need for skill formation and continuous upgrade both for labour and entrepreneurs.
  • While the government has to strengthen the existing skilling efforts for labour, there is an urgent need for managerial skill development for entrepreneurs running MSMEs — an area that is considerably neglected.
  • Further, the government could consider dedicated television and radio programmes, similar to agriculture, to help educate entrepreneurs running small businesses.

Conclusion

Covid-19 is a crisis with an unforeseeable ending. What is clear though is that the government and businesses—both large and small—will have to work together to ensure the protection of workers, be ready for risk management in terms of phased re-starting of business operations and be prepared and open to structural changes in business activities.

  • Issues related to credit, like adequacy, timely availability, cost and mortgages continue to be a concern for MSME. These enterprises are dependent on self-finance. Profit margins are also low.
  • The government drive for financial inclusion could benefit such entities.
  • The government could consider dedicating specialised financial schemes for addressing difficulties in assessing and providing credit for small enterprises, as also providing a line of credit to firms which are under financial stress.
  • The road ahead remains unclear, but it is likely that the economic damage is already much larger than the measures undertaken so far.
  • A continued focus on reforms and on sustaining India’s growth potential will be critical in preventing macroeconomic instability.

 

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

What makes MSMEs, most vulnerable to Covid-19 disruptions?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : MSME Sector and its definition

Mains level : MSME sector of India and various inherent issues

  • The Covid-19 pandemic has left its impact on all sectors of the economy but nowhere is the hurt as much as the Medium, Small and Micro Enterprises (MSMEs) of India.
  • All anecdotal evidence available, such as the hundreds of thousands of stranded migrant workers across the country, suggests that MSMEs have been the worst casualty of lockdown.
  • A closer look at the anatomy of the MSME sector explains why MSMEs are so vulnerable to economic stress.

Possible mains question:

Q. Discuss how the nationwide lockdown to control the coronavirus outbreak has led to the resurfacing of inherent bottlenecks in India’s MSME Sector.

What are MSMEs? How are they defined?

  • Formally, MSMEs are defined in terms of investment in plant and machinery.
  • But this criterion for the definition was long criticised because credible and precise details of investments were not easily available by authorities.
  • That is why in February 2018, the Union Cabinet decided to change the criterion to “annual turnover”, which was more in line with the imposition of GST.
  • According to the proposed definition, which is yet to be formally accepted, a micro-enterprise will be one with an annual turnover less than Rs 5 crore; a small enterprise with turnover between Rs 5 crore and Rs 75 crore; and a medium enterprise with turnover less than Rs 250 crore.

How many MSMEs does India have, who owns them, and where are they situated?

  • According to the latest available (2018-19) Annual Report of Department of MSMEs, there are 6.34 crore MSMEs in the country.
  • Around 51 per cent of these are situated in rural India.
  • Together, they employ a little over 11 crore people (Chart 3) but 55 per cent of the employment happens in the urban MSMEs.
  • These numbers suggest that, on average, less than two people are employed per MSME.
  • At one level that gives a picture of how small these really are. But a breakup of all MSMEs into micro, small and medium categories is even more revealing.

Distributions of MSMEs

  • In terms of geographical distribution, seven Indian states alone account for 50 per cent of all MSMEs.
  • These are Uttar Pradesh (14%), West Bengal (14%), Tamil Nadu (8%), Maharashtra (8%), Karnataka (6%), Bihar (5%) and Andhra Pradesh (5%).
  • This breakup provides a sense of where the pain of the MSME crisis would be felt the most.
  • Chart 4 shows, 99.5 per cent of all MSMEs fall in the micro category.
  • The medium and small enterprises — that is, the remaining 0.5% of all MSMEs — employ the remaining 5 crore-odd employees.
  • While micro-enterprises are equally distributed over rural and urban India, small and medium ones are predominantly in urban India.

What kind of problems do MSMEs in India face?

  • No/Low Formal registration: To begin with, most of them are not registered anywhere. A big reason for this is that they are just too small. But, as it is clear in a time of crisis, it also constrains a government’s ability to help them.
  • Away from Tax norms: GST has its threshold and most micro enterprises do not qualify. Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs.
  • Lack of Financial buffer: According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (or about Rs 11 lakh crore) of the credit MSME credit need that it can potentially fund (Chart 5). They don’t have the buffers of the bigger firms or access to cheap capital to help them tide over this period.

  • Bad credit history: The other big issue plaguing the sector is the delays in payments to MSMEs — be it from their buyers or things likes GST refunds etc. A key reason why banks dither from extending loans to MSMEs is the high ratio of bad loans (Chart 6).

How has Covid-19 made things worse?

  • The MSMEs were already struggling — in terms of declining revenues and capacity utilization — in the lead-up to the Covid-19 crisis.
  • The total lockdown has raised a question mark on workers payment primarily because these firms mostly transact on cash. That explains the job losses.
  • According to a recent survey he did for “small and medium” firms in manufacturing, only 7% said they will be able to survive for more than three months with their cash in hand if their business remains closed.
  • A big hurdle to restarting now is the lack of labour availability.

What can be done?

  • The RBI has been trying to pump money into the MSME sector but given the structural constraints, it has had limited impact.
  • There are no easy answers for the MSMEs’ sufferings.
  • However, the government can provide tax relief (GST and corporate tax), give swifter refunds, and provide liquidity to rural India (say, through PM-Kisan) to boost demand for MSME products.

What about credit guarantees?

  • Loans to MSMEs are mostly given against property (as collateral) — because often there isn’t a robust cash flow analysis available — but in times of crisis, property values fall and that inhibits the extension of new loans.
  • A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters.
  • To the extent such defaults happen, credit guarantees are shown as a departmental expense in the Budget.

Urgent attention required

  • Governments across the world have announced various measures ranging from wage support to direct subsidies to help these businesses tide over these difficult times.
  • But, in India, more than a month after the national lockdown was announced; there is still no blueprint of how the government intends to support these businesses during this period.

Way forward

  • There is a strong case for urgent government intervention — the costs of intervening early on will be much less than the price of delayed action.
  • To begin with, all dues owned by governments and public sector undertakings to MSMEs can be immediately cleared. This will help ease their immediate cash flow woes.
  • Second, with banks turning risk-averse, credit flow to MSMEs is likely to be depressed as solvency concerns will dominate.
  • In such a situation, the government could step in. It could set up a credit guarantee fund that backstops loans to MSMEs.

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

From informal to the formal economy: The crooked road

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Share of informal economy in the country's economy.

Mains level : Paper 3- Huge presence of the informal sector in the Indian economy and ways to formalise it.

The article discusses the issues around the informal workforce in the economy. What are the factors responsible for the high informal sector in India? How is this sector responding in times of COVID? Are there some easy solutions to mainstream the informal sector into our formal economy? These are some of the points one should ponder upon while reading this article.

The vulnerability of the informal workforce

  • Developing countries such as India are economically vulnerable to Covid-19 because of the presence of huge informal workforce.

  • Lack of protection: This vast informal workforce, which has no labour, social or health protection, is woefully ill-equipped to cope with the medical and economic shocks of the virus.

The humongous size of the informal economy in India

  • Share of the informal sector: As per Periodic Labour Force Survey, 2017-18, 90.6 per cent of India’s workforce was informally employed.

  • This estimate includes those who are employed in informal enterprises (unincorporated small or unregistered enterprises).

  • It also includes informal workers in the formal sector (workers in the formal sector who are not provided any social security benefits by employers).

  • Take another example: Between 2004-05 and 2017-18, a period when India witnessed rapid economic growth, the share of the informal workforce witnessed only a marginal decline from 93.2 per cent to 90.6 per cent. 

  • Covid effect: Looking ahead, it is likely that informal employment will increase as workers who lose formal jobs during the COVID crisis try to find or create work (by resorting to self-employment) in the informal economy.

  • Also, formal enterprises are likely to continue hiring informal workers as they seek more flexibility and attempt to cut labour costs to cope with the COVID-19 induced economic uncertainty.

Why is the informal more favourable over the formal?

  • The basic reason: necessity to eke out a subsistence living in the absence of alternative employment opportunities.

  • The ‘not so basic’ reasons: Some self-employed persons choose to be in the informal economy voluntarily to avoid registration or taxation.

  • Many are deterred by the costs of formalisation or don’t see much benefit from formalisation.

  • Finally, the phenomenon of informalisation of wage employment in the formal sector is a consequence of formal firms trying to avoid payroll taxes and employer’s contributions to social security or pensions to reduce labour costs.

Some solution to smoothen the crooked road

  • A multi-pronged and comprehensive approach is needed to facilitate the transition.

  • Labour intensive growth: It requires creating more formal jobs through labour-intensive growth so that informal workers can move to these jobs.

  • Registering and taxing informal enterprises: The Indian experience of compelling informal firms to register and become tax compliant through demonetisation and introduction of GST formalised them only in a legal sense.

  • There is a need for increasing productivity of informal enterprises and incomes of the informal workforce by providing them with technical and business skills, infrastructure services, financial services, enterprise support and training to better compete in the markets.

  • Promoting the path to entrepreneurship in the informal economy.

  • Many informal enterprises would welcome efforts to reduce barriers to registration and related transaction costs as they expect to reap the benefits of formalising.

  • Reducing decent work deficit: This requires protecting informal workers by providing them a social protection floor, ensuring a set of basic working conditions (adequate living wages, limits on hours of work and safe and healthy workplaces).

A direct question based on the issue of the informal sector can be asked by the UPSC, for ex- “There is a humongous presence of the informal sector in the Indian economy. What are the factors responsible for this? Suggest ways to transform the informal sector into the formal sector.”

Conclusion

Questions around the role of government and who bears the onus of protecting workers deserve careful consideration in the backdrop of the rising incidence of informal employment in the formal sector and the growth of the gig economy. It is apparent that in our relentless pursuit of economic growth, we have ignored the voices of India’s informal sector for too long.


Back2Basics: What is the informal economy?

  • An informal economy (informal sector or grey economy) is the part of any economy that is neither taxed nor monitored by any form of government.
  • Although the informal sector makes up a significant portion of the economies in developing countries, it is sometimes stigmatized as troublesome and unmanageable.
  • However, the informal sector provides critical economic opportunities for the poor.

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

[pib] Software Technology Parks of India (STPI)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : STPI and thier functioning

Mains level : Role of STPI in facilitating start-ups and IT industries

Government of India has given 4 months’ Rental Waiver to the IT Companies Operating from Software Technology Parks of India (STPI) Centers.

STPI which witness multi-million transactions every day are the most promising workplaces for startups in India. They have gained popularity not among Indians, but also on an international platform for its state of the art infrastructure, world-class working conditions and amenities. We can expect a mains question like “Discuss the role of STPIs in making India a hub of ITeS exports”.

Why this waiver?

  • The rental waiver will provide relief to the industry in this crisis situation emerged due to COVID19 pandemic.
  • Most of these units are either Tech MSMEs or startups.
  • This effort is also in the larger interest of around 3,000 IT/ ITeS employees who are directly supported by these units.

What are STPI?

  • An STPI is a society established in 1991 by the Ministry of Electronics and Information Technology.
  • The objective of an STPI is to encourage, promote and boost the export of software from India.
  • STPI maintains internal engineering resources to provide consulting, training and implementation of IT-enabled services.

STPI Scheme

  • The STP Scheme is a 100 per cent Export Oriented Scheme for the development and export of computer software, including export of professional services using communication links or physical media.
  • This scheme is unique in its nature as it focuses on one product/sector, i.e. computer software.
  • The scheme integrates the government concept of 100 per cent Export Oriented Units (EOU) and Export Processing Zones (EPZ) and the concept of Science Parks / Technology Parks, as operating elsewhere in the world.

Who can get a floor on STPI?

  • An Indian company
  • A subsidiary of a foreign company
  • A branch office of a foreign company

Features of the STPI

  • The STP Scheme provides various benefits to the registered units, including 100% foreign equity, tax incentives, duty-free import, duty-free indigenous procurement, CST reimbursement, DTA entitlement, and deemed exports.
  • STPI centres also provide a variety of services including high-speed data communication, incubation facilities, consultancy, network monitoring, data centres and data hosting.

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

[pib] CCI Green Channel Route

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CCI Green Channel

Mains level : Not Much

The Competition Commission of India (CCI) has received a request for merger of a company following green channel combination route.

What is a Green Channel Route?

  • In a bid to facilitate mergers and acquisitions (combination) in the country, the Competition Commission of India (CCI) has taken inspiration from the customs department and established a ‘green channel’.
  • Every Combination above a certain threshold, seeking to be sanctioned has to necessarily pass the CCI scanner in order to be approved.
  • The CCI characterizes the ‘green channel’ as an automatic system of approval for Combinations wherein the Combination is deemed to be approved upon filing the notice in the format prescribed.
  • The ‘green channel automatic approval upon notification route’ is a right step by CCI towards the propaganda of ease of doing business in India.

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

[pib] GreenCo Rating System

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GreenCo Rating System

Mains level : Not Much

 

 

The Union Ministry of Railways has informed about the applications of Greenco Ratings on Workshops and Production Units of Indian Railways.

GreenCo Ratings

  • GreenCo Rating is the “first of its kind in the World” holistic framework that evaluates companies on the environmental friendliness of their activities using life cycle approach.
  • Implementation of GreenCo rating provides leadership and guidance to companies on how to make products, services and operations greener.
  • It is developed by Confederation of Indian Industry’s (CII) Sohrabji Godrej Green Business Centre.
  • It has been acknowledged in India’s Intended Nationally Determined Contribution (INDC) document, submitted to UNFCCC in 2015.
  • GreenCo rating is applicable to both manufacturing facilities and service sector units.
  • The rating is implemented at unit or facility level. The unit or facility has to be in operation for a minimum period of 3 years. In case of new plants/ facilities minimum 2 years operation is required.

Utility

It helps the industrial units in identifying and implementing various possible measures in terms of energy conservation, material conservation, recycling, utilization of renewable energy, GHG reduction, water conservation, solid and liquid waste management, green cover etc.

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

Explained: Central Consumer Protection Authority (CCPA)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Terms of References for the office of CCPA

Mains level : CCPA, New Consumer Protection Laws, 2019

 

 

Recently the Union Ministry of Consumer Affairs has announced that a Central Consumer Protection Authority (CCPA) will be established by the first week of April.

What is the Central Consumer Protection Authority?

  • The authority is being constituted under Section 10(1) of The Consumer Protection Act, 2019.
  • The Act replaced The Consumer Protection Act, 1986, and seeks to widen its scope in addressing consumer concerns.
  • The CCPA, introduced in the new Act, aims to protect the rights of the consumer by cracking down on unfair trade practices, and false and misleading advertisements that are detrimental to the interests of the public and consumers.

Why need CCPA?

  • The new Act recognizes offences such as providing false information regarding the quality or quantity of a good or service, and misleading advertisements.
  • It also specifies action to be taken if goods and services are found “dangerous, hazardous or unsafe”.
  • The CCPA will have the powers to inquire or investigate into matters relating to violations of consumer rights or unfair trade practices suo motu, or on a complaint received, or on a direction from the central government.

What can the possible structure of CCPA be?

  • The proposed authority will be a lean body with a Chief Commissioner as head, and only two other commissioners as members — one of whom will deal with matters relating to goods while the other will look into cases relating to services.
  • It will be headquartered in the NCR of Delhi but the central government may set up regional offices in other parts of the country.
  • The CCPA will have an Investigation Wing that will be headed by a Director General.
  • District Collectors too, will have the power to investigate complaints of violations of consumer rights, unfair trade practices, and false or misleading advertisements.

What kind of goods and food items in particular, can be classified as “dangerous, hazardous or unsafe”?

  • This is not specified in the notification of the Act.
  • Regarding food, an official said the CCPA will ensure that all standards on packaged food items set by regulators such as the FSSAI are being followed.

What will the CCPA do if any goods or services are found not meeting these standards?

Under Section 20 of The Consumer Protection Act, the proposed authority will have powers to:

  1. recall goods or withdrawal of services that are “dangerous, hazardous or unsafe;
  2. pass an order for refund the prices of goods or services so recalled to purchasers of such goods or services and
  3. discontinuation of practices which are unfair and prejudicial to consumer’s interest

Penalties:

For manufacture, selling, storage, distribution, or import of adulterated products, the penalties are:

  1. If injury is not caused to a consumer, fine up to Rs 1 lakh with imprisonment up to six months;
  2. If injury is caused, fine up to Rs 3 lakh with imprisonment up to one year;
  3. If grievous hurt is caused, fine up to Rs 5 lakh with imprisonment up to 7 years;
  4. In case of death, fine of Rs 10 lakh or more with a minimum imprisonment of 7 years, extendable to imprisonment for life.

How will it deal with false or misleading advertisements?

  • Section 21 of the new Act defines the powers given to the CCPA to crack down on false or misleading advertisements.
  • The CCPA may order investigation that any advertisement is false or misleading and is harmful to the interest of any consumer, or is in contravention of consumer rights.
  • If dissatisfied, the CCPA may issue directions to the trader, manufacturer, endorser, advertiser, or publisher to discontinue such an advertisement, or modify it in a manner specified by the authority, within a given time.

Penalties:

  1. The authority may also impose a penalty up to Rs 10 lakh, with imprisonment up to two years, on the manufacturer or endorser of false and misleading advertisements.
  2. The penalty may go up to Rs 50 lakh, with imprisonment up to five years, for every subsequent offence committed by the same manufacturer or endorser.
  3. CCPA may ban the endorser of a false or misleading advertisement from making endorsement of any products or services in the future, for a period that may extend to one year.
  4. The ban may extend up to three years in every subsequent violation of the Act.

What other powers will the CCPA have?

  • While conducting an investigation after preliminary inquiry, officers of the CCPA’s Investigation Wing will have the powers to enter any premise and search for any document or article, and to seize these.
  • For search and seizure, the CCPA will have similar powers given under the provisions of The Code of Criminal Procedure, 1973.
  • The CCPA can file complaints of violation of consumer rights or unfair trade practices before the District, State, and the National Consumer Disputes Redressal Commission.
  • It will issue safety notices to alert consumers against dangerous or hazardous or unsafe goods or services.

Also read:

Five new rights you get as a consumer

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

Listening to the call of the informal

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Pros and cons of formalising the informal sector, policy changes needed to support the informal sector

Context

Attempt to formalise the informal sector would not necessarily benefit it as two recent papers reveal.

What do the research papers reveal?

  • The first paper-No strong evidence that formalisation improves business outcomes.
    • Published by the National Bureau of Economic Research, economist Seema Jayachandran argues that there is no strong evidence from studies conducted in many developing countries that formalisation improves business outcomes.
  • The second article-Formalisation an evolutionary process:
    • In the second article, a background paper for the International Labour Organisation (ILO), economist Santosh Mehrotra calls formalisation an evolutionary process.
    • During this evolutionary process small, informal enterprises learn the capabilities required to operate in a more formal, global economy.
    • He says they cannot be forced to formalise.

The formalisation trap

  • Why does the state want to formalise?
    • Easy monitoring and taxation: The state finds it easier to monitor and to tax the firms that adopt its version of formality.
    • Reduced last-mile cost for banks: Formality can reduce the last-mile costs for banks also.
  • Problem with the imposed formalisation
    • The added cost outweighs benefits: Ms Jayachandran’s study reveals that most of the formalities imposed from above, add to the costs of the firms that outweigh the benefits of inappropriate formalisation.

How informal sector improves themselves?

  • Association with their peers: Small entrepreneurs gain from forming effective associations with their peers.
  • Mentoring: They also benefit greatly from ‘mentoring’.
  • On job skill development: Skills of small entrepreneurs and their employees are best developed on-the-job.
    • This is because they cannot afford the loss of income by taking time off for training.
  • Soft skills to form associations and manage enterprises, matter as much for the success of the enterprises as ‘hard’ resources of finance and facilities.

Problems with connecting to global supply chains-

  • There is a desire to connect small firms in India more firmly with global supply chains.
    • Search for lover cost source supply: Mehrotra points out that the primary motivation of multinational companies for expanding their global supply chains is to tap into lower-cost sources of supply.
    • Supply chains compete with each other.
    • When wages and costs increase in their source countries, they look for other lower-cost sources.
    • Informal-the lowest labour cost firms: The lowest labour cost firms at the end of supply chains are generally informal.
    • Thus, the push by the state to formalise firms is countered by the supply chain’s drive to lower its costs.

Way forward

  • India’s jobs, incomes, and growth challenges necessitate a reorientation of policies towards the informal sector.
  • First-The government and its policy advisers must stop trying to reduce its size.
    • The development of an economy, from agriculture to the production of more complex products in the industry, is a process of learning.
    • Informal enterprises provide the transition space for people who have insufficient skills and assets to join the formal sector.
  • Second-Policymakers must learn to support informal enterprises on their own terms.
    • Merely making it easy for MNCs and large companies to invest will not increase the growth of the economy.
  • Third-Find ways to speed up the process of learning.
    • Policymakers must learn how to speed up the process of learning within informal enterprises by developing their ‘soft’ skills.
    • Large schemes to provide enterprises with hard resources such as money and buildings, which the government finds easier to organise, are necessary but inadequate for the growth of small enterprises.
  • Fourth-Networks and clusters of small enterprises must be strengthened.
    • They improve the efficiency of small firms by enabling sharing of resources.
    • More clout to negotiate: They give them more clout to improve the terms of trade in their favour within supply chains.
    • Reduced last-mile cost: They reduce the ‘last mile costs’ for agencies and providers of finance and other inputs to reach scattered and tiny enterprises.
  • Fifth-The drumbeat for labour reforms must be changed.
    • The laws should be simplified, and their administration improved. And, their thrust should be to improve the conditions of workers.
  • Finally- The social security framework for all citizens must be strengthened.
    • Health insurance and the availability of health services must be improved.
    • And disability benefits and old-age pensions must be enhanced.
    • The purpose of ‘labour reforms’ must be changed to provide safety nets, rather than make the workers’ lives even more precarious with misdirected attempts to increase flexibility.

 

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

Air India Disinvestment

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Disinvestment processes in India

The government has kicked off the complete disinvestment process of Air India for the second time after it failed to receive a single bid in the first attempt back in 2018.

100% stake sale

  • Most significantly, the government will offload 100% of its stake in Air India, compared with 76% put on the block last time.
  • The government holding even a minor stake in the airline post disinvestment was seen as a huge negative for any potential buyers.
  • The buyer will have to take on Rs 23,286 crore of debt out of a total Rs 60,074 crore.
  • Compared with this, in the last attempt, a potential buyer would have to take on Rs 33,392 crore of debt and current liabilities.
  • The amount of debt being bundled with the airline in this attempt is towards the aircraft that are being sold off along with the carrier as part of the transaction.
  • The working capital and other non-aircraft debt will be retained by the government.

Air India’s assets

  • The new owner will be taking on a fleet of 121 aircraft in Air India’s fleet and 25 planes in Air India Express’ fleet.
  • These exclude the four Boeing 747-400 jumbojet aircraft that the airline plans to transfer to its subsidiary Alliance Air, which is not a part of the current transaction.
  • However, like the last attempt, the properties currently in use by Air India, including the Nariman Point building and the company’s headquarters near Connaught Place in New Delhi will be retained by the government.

Will the new terms attract investors?

  • Air India has a 50.64% market share in international traffic among Indian carriers.
  • The government is hopeful of attracting investors with the new sale criteria, coupled with the main benefits of the airline, which are prime slots in capacity-constrained airports across the world.
  • However, any potential investor is also expected to look at the size of the airline’s operations with reference to what those operations generate.
  • For example, both Air India and Singapore Airlines operate with a fleet of 121 aircraft, but in 2018-19 Air India posted a net loss of Rs 8,556 crore, whereas Singapore Airlines reported a net profit of Singapore $ 779.1 million (approx Rs 4,100 crore).

What will the new investor get?

  • The most attractive proposition in acquiring Air India is the slots and landing rights that it holds at airports such at Delhi, Mumbai, London, New York, Chicago, Paris, etc.
  • These could be helpful both to airlines looking to expand into long-haul international operations, and to entities looking to set up global operations from scratch.
  • Air India currently operates to 56 Indian cities and 42 international destinations.
  • The new investor also gets hold of the ground-handling firm AI-SATS, which offers end-to-end ground handling services such as passenger and baggage handling, ramp handling, aircraft interior cleaning etc. at Bengaluru, Delhi, Hyderabad, Mangaluru and Thiruvananthapuram airports.
  • This would provide the investor with an ancillary services firm with captive use.

Loss makers in AI

  • Several of Air India’s international and domestic routes are profit-generating, while a number of them are loss-making or witness low load factors.
  • This is a legacy problem that the airline comes with for the new promoter.
  • Additionally, while the airline comes with 121 aircraft primed as domestic and international workhorses, 18 of them are grounded for lack of funds to make them airworthy.

How will consumers and employees be impacted?

Consumers

  • If and when Air India is taken over by a private entity or consortium, experts believe the first move could be pruning of operations to ensure the airline inches closer to profitability.
  • This could cause Air India to cease operations on certain loss-making domestic and international routes — leading to a rise in fares.
  • It is believed that Air India’s continuous loss-making operations have skewed the market, wherein private companies have to play ball even when fares are artificially low.
  • Cutting certain routes could also impact consumers in terms of the unique offerings by Air India, such as higher baggage allowance, etc.

Employees of AI

  • Air India’s bloated staff strength was flagged by potential investors in the last disinvestment attempt.
  • The airline has 17,984 employees, of which 9,617 are permanent staff.
  • Whether the employees will be retained by the new investor is unclear.
  • The government is expected to provide more clarity on conditions for retaining staff in the request-for-proposal stage, which will come after expressions of interest are received.

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

Punjab’s new Right to Business Bill

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Right to Business

Mains level : Various mover for the MSME sector

The Punjab Cabinet this week gave its approval to a Punjab Right to Business Bill, 2020, a law aimed at ensuring ease of doing business for the Micro, Small and Medium Enterprises (MSME) sector.

Punjab Right to Business Bill, 2020

  • Under the law, an MSME unit can be set up after ‘In-Principle’ approval from the District Bureau of Enterprise, headed by the Deputy Commissioner, working under the guidance of the State Nodal Agency, headed by the Director, Industries.
  • Approval for units in approved Industrial Parks will be given in three working days.
  • For new enterprises outside approved Industrial Parks, the decision on the Certificate shall be taken by the District Level Nodal Agency within 15 working days, as per the recommendations of the Scrutiny Committee.

What is the timeframe for unit owners to comply?

  • Unit owners will have three and a half years after setting up the unit to obtain seven approvals from three departments: the sanction of building plans; issuance of completion/occupation certificate for buildings; registration of new trade licences.
  • The industries involving hazardous processes will have to obtain a Fire NOC and get approval for the factory building plan before setting up the unit.
  • All units will have to get environmental clearance from the Pollution Control Board beforehand.

Why was a law needed, rather than an executive order?

  • According to the government, the Act will have overriding powers over various Acts of different departments that make approvals necessary before the setting up of small and medium units.
  • This purpose could not have been achieved by an executive order.
  • How the law actually works on the ground remains to be seen, however.

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

[op-ed snap] A state must honor its past commitments

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Ease of Doing Business - Enforcing contracts

Mains level : Contract enforcement for investments

Context

Andhra Pradesh government’s review of the power purchase agreements for renewable energy projects has revived the debate on the sanctity of contracts in India. 

Reason for the move in AP

    • It is pointed out that the deals struck by the previous government have burdened the state’s power distribution companies with high payment obligations.
    • The unit costs of producing electricity from solar and wind farms have declined sharply. 

Impact of the move

    • Climate change – This goes against India’s commitment to renewable energy against climate change.
    • International impact – the money for these projects came in from several global financial capitals.
    • Fiscal – domestic banks are questioning the strength of their guarantees. 

Upholding contracts

    • India’s record in upholding contracts is mixed. Their sanctity is largely intact. 
    • Limited enforcement – Multilateral agencies and foreign governments have flagged their patchy efforts to enforce them. 
    • Reopening deals – There have been occasions when deals have been reopened by successor governments. These have caused considerable economic losses for the states concerned. 
    • Examples – Enron power project in Maharashtra and the Tata Nano car project in West Bengal became rallying points to win elections.

Industry

    • Clusters – Since India started opening up its economy to foreign capital, several industrial clusters offered stable policy regimes to multinational companies.
    • Stability – Some of these regimes are in states where governments have changed frequently without previous deals being disturbed. 
    • Disputes – Disputed taxes, like those imposed on Vodafone, Cairn, and Nokia were taken to international arbitration tribunals.
    • RCEP – India has turned its back on the trans-Asian trade bloc that would have plugged it into global manufacturing value chains.
    • Negative signals – This signals that India is becoming inward-looking. 

Conclusion

The country can do without a spate of international arbitration over renegotiated power purchase agreements. India needs to be seen globally as a country where governments honor their word.

 


Back2Basics

On the Ease of Doing Business Index(rank 63rd), India lags in enforcing contracts (163rd).

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

Harmonized System (HS) Code

Note4Students

From UPSC perspective, the following things are important :

Prelims level : HS code

Mains level : Khadi and cottage industries in India


  • The Ministry of Commerce and Industry allocated a separate Harmonised System (HS) code for Khadi.

HS code

  • The Harmonized System, or simply ‘HS’, is a six-digit identification code developed by the World Customs Organization (WCO).
  • Called the “universal economic language” for goods, it is a multipurpose international product nomenclature.
  • Over 200 countries use the system as a basis for their customs tariffs, gathering international trade statistics, making trade policies, and for monitoring goods.
  • The system helps in harmonizing of customs and trade procedures, thus reducing costs in international trade.

What makes the 6 digit code?

  • A unique six-digit code has numbers arranged in a legal and logical structure, with well-defined rules to achieve uniform classification.
  • Of the six digits, the first two denote the HS Chapter, the next two give the HS heading, and the last two give the HS subheading.
  • The HS code for pineapple, for example, is 0804.30, which means it belongs to Chapter 08 (Edible fruit & nuts, peel of citrus/melons), Heading 04 (Dates, figs, pineapples, avocados, etc. fresh or dried), and Subheading 30 (Pineapples).

Significance of the move

  • Khadi is India’s signature handspun and hand-woven cloth that was made iconic by Mahatma Gandhi during the freedom struggle.
  • The move is expected to boost Khadi exports in the coming years.
  • In 2006, the government had given the MSME-controlled Khadi and Village Industries Commission (KVIC) the Export Promotion Council Status (EPCS).
  • Yet, the absence of a separate HS code hindered Khadi from achieving its full potential, as its exports were difficult to categorise and calculate. The latest move is expected to help resolve this issue.

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

Global Ease of Doing Business Report 2020

Note4Students

From UPSC perspective, the following things are important :

Prelims level : About the index

Mains level : Ease of doing business in India


  • India has improved its score in the World Bank’s global Ease of Doing Business rankings, rising 14 notches to be placed 63rd out of 190 countries on the back of “sustained business reforms”.

About the index

  • The indicator measures the performance of countries across 10 different dimensions in the 12-month period.
  • The DBR ranks countries on the basis of Distance to Frontier (DTF), a score that shows the gap of an economy to the global best practice.
  • The 10 areas of study are: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.
  • Each country is scored and also ranked ( a comparison ).
  • The 0-100 score measures any given country’s performance with respect to the best practice across the entire set of countries. A score of zero signifies worst regulatory performance and 100, the best.
  • The indicator, however, is not necessarily representative of each country.

Important features of India’s performance

  • The World Bank has recognized India as one of the top 10 improvers for the third consecutive year.
  • Recovery rate under resolving insolvency has improved significantly from 26.5% to 71.6%.
  • The time taken for resolving insolvency has also come down significantly from 4.3 years to 1.6 years.
  • India continues to maintain its first position among South Asian countries. It was 6th in 2014.

What helped India improve?

  • For 11 countries, two cities were selected to construct the indicator – Delhi and Mumbai in the case of India.
  • It has further streamlined, in Delhi, the process and reduced the time and cost of obtaining construction permits and improved building quality control by strengthening professional certification requirements.
  • In addition to this, Mumbai’s streamlining of obtaining building permits has made it faster and less expensive to get a construction permit.
  • Its efforts to make it easier to trade across borders and resolve insolvency have also helped improve its ranking.
  • The government’s goal was to be among the top 50 economies by 2020.

What are the problem areas?

  • India still lags in areas like enforcing contracts and registering property.
  • It takes 58 days and costs on average 7.8 per cent of a property’s value to register it, longer and at greater cost than among OECD high-income economies.
  • And it takes 1,445 days for a company to resolve a commercial dispute through a local first-instance court, almost three times the average time in OECD high-income economies.

Global performance

  • The 10 top ranking countries with respect to the indicator were: New Zealand, Singapore, Hong Kong SAR China, Denmark, Korea, USA, Georgia, United Kingdom, Norway, and Sweden.
  • China (rank 31, score 77.9) made it to the top 10 list for the second such year.
  • New Zealand and Somalia retained their 1st and 190th spot respectively.
  • As far as India’s neighbourhood is concerned, Pakistan carried out the most reforms in the South Asia.
  • Bangladesh, Sri Lanka, the Maldives and Afghanistan made zero regulatory changes.
  • South Asian region generally underperforms with regard to enforcing contracts and registering property, as per the Bank.

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

[op-ed snap] Good report card

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Ease of Doing Business

Context

The rise in India’s ranking by 14 places to 63 in the World Bank’s Ease of Doing Business 2020 survey is a positive development. 

EoDB

  • India also figures in the top ten most improved countries in the world for the third consecutive year. 
  • From 142 in 2014 to 63 in 2020, it has been a significant upward journey for the country.
  • The rank list is an important input in the plans of global investors. 

Reasons for improvement

  • IBC implementation – India’s rank improved from 108 to 52 in the “resolving insolvency” category. The overall recovery rate for lenders moved up from 26.5 cents to 71.6 cents to the dollar according to the World Bank. 
  • TFA – signing TFA at WTO resulted in a reduction of trade procedures and paperwork. The country’s ranking in the “Trading across borders” category jumped 12 places from 80 to 68. This shows abatement of paperwork in favor of the electronic filing of documents and single-window customs procedures.
  • Dealing with construction permits – The country’s ranking has improved by 25 places from 52 to 27.

Challenges remain

  • Global competitors – India is still below its competitors for global capital, particularly China. 
  • Other indicators – The country lags in key metrics such as “Starting a business’, “Enforcing contracts” and “Registering property”. 
  • Delhi and Mumbai only – The rankings are based on samples and audits done in Mumbai and Delhi only. Starting, running or shutting down a business may be easier in Delhi and Mumbai compared to Coimbatore or Hyderabad where it is more difficult.
  • Federation – It is not easy to streamline processes across the country due to India’s federal set up where States have a big say in several parameters such as securing building permits, land approvals, electricity connections, registering assets etc. 

Conclusion

The easier part is now done and the rise in the rankings from hereon will depend on how much the Centre is able to convince the States to reform their systems.

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

Explained: Why the govt wants to change the definition of MSMEs

Note4Students

From UPSC perspective, the following things are important :

Prelims level : MSME definition

Mains level : MSME sector reforms

  • It has been reported that the government will soon change the way it defines the micro, small and medium enterprises (MSMEs).

A move for single definition

  • The government would consider shifting to a “single definition” of MSMEs. The change in definition would require an amendment to the MSME Development Act.
  • The Union Cabinet had decided to shift from a criterion of classifying MSMEs based on ‘investment in plant and machinery’ to a criterion based on ‘annual turnover’.

What is the importance of the MSME sector?

  • According to a RBI report, the MSMEs are amongst the strongest drivers of economic development, innovation and employment.
  • Looking back at data since 2000-01, MSME sector growth has almost every year outstripped overall industrial growth in the country.
  • The MSME sector also contributes in a significant way to the growth of the Indian economy with a vast network of about 63.38 million enterprises.
  • The sector contributes about 45% to manufacturing output, more than 40% of exports, over 28% of the GDP while creating employment for about 111 million people, which in terms of volume stands next to agricultural sector.
  • However, the RBI report also noted that at present the sector is “exceedingly heterogeneous in terms of size of the enterprises and variety of products and services, and levels of technology employed” .
  • It has the potential to grow at a much faster rate. One of the key attractions of this sector is that it huge employment generation potential at relatively lower capital investment.

How are MSMEs defined at present?

  • There has been no uniformity over the years about the definition of what exactly one means by “small scale industries” in India.
  • Moreover, the definition also changes from one country to another.
  • In India, for instance, under the Industrial Development and Regulation (IDR) Act, 1951, small industries were conceived in terms of “number of employees”.
  • But it was found that obtaining reliable data on the number of employees was difficult.
  • As such, a proxy was found – and this was to look at the investments in plant and machinery; it was relatively easy to reliably ascertain and verify this data.
  • So at present, the classification of MSMEs is done based on investment in plant & machinery/equipment (see table) in accordance with the provision of Section 7 of the MSMED Act, 2006.

Classification of MSMEs in India at present

How do others define MSMEs?

  • According to the World Bank, a business is classified as an MSME when it meets two of the three following criteria: employee strength, assets size, or annual sales.
  • According to a 2014 report, as many as 267 definitions were used by different institutions in 155 economies.
  • But the most widely used variable for defining an MSME was the number of employees — 92% of the institutions use this.
  • Other definitions were based on turnover as well as the value of assets (49% and 36%, respectively).
  • Around 11% used other variables like loan size, formality, years of experience, type of technology, size of the manufacturing space, and initial investment amount etc.
  • The crucial thing, however, is that most of the countries used only one variable to define MSMEs.

How does a change in definition help?

  • Definitions based on investment limits in plant and machinery/ equipment were decided when the Act was formulated in 2006.
  • But such a definition “does not reflect the current increase in price index of plant and machinery/equipment,” stated the RBI report.
  • Moreover, MSMEs, thanks to their small scale of operations and informal organisation, MSMEs don’t always maintain proper books of accounts. This essentially results in their not being classified as MSMEs.
  • The change of definition is likely to improve the ease of doing business for MSMEs, and in the process, make it easier for them to pay taxes, attract investments and create more jobs.
  • The clear and unambiguous definition – that is also in consonance with global norms and learns from the best practices across countries – is the starting point to reforming this crucial sector of the economy.

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

Index of Industrial Production (IIP)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IIP

Mains level : Significance of IIP as a measure of economic growth

  • The data for the “Quick Estimates of Index of Industrial Production” was recently released by the Ministry of Statistics and Programme Implementation (MoSPI).
  • It stated that India’s industrial sector production contracted by 1.1 per cent in August when compared to the production in the same month in 2018.
  • As far as such year-on-year comparisons go, the last time a reduction in the IIP happened was in June 2017. But this time, the fall was sharper — the index has fallen to an 81-month low.

What is the IIP?

  • As the name suggests, the Index of Industrial Production (IIP) maps the change in the volume of production in Indian industries.
  • More formally, it chooses a basket of industrial products — ranging from the manufacturing sector to mining to energy, creates an index by giving different weight to each sector and then tracks the production every month.
  • Finally, the index value is compared to the value it had in the same month last year to figure out the economy’s industrial health.

Which sectors are lagging in production?

  • There are two ways in which IIP data can be viewed.
  • The first is to look at sectoral performance.
  • In this the whole industrial economy is divided into three sectors; the first is manufacturing with a weight of 77.6 per cent in the index, the second is mining with a weight of 14.4 per cent and third is electricity with a weight of 8 per cent.
  • The second way to look at the same production is to look at the way such industrial products are used; this is called the use-based classification.

Low in trends

  • From a sectoral point of view, it can be seen how the growth rate in the manufacturing production, which has the biggest weight in the index, has been negative.
  • In fact, 15 out of the 23 sub-groups in the manufacturing sector showed negative growth in August 2019.
  • The worst were motor vehicles, trailers and semi-trailers, where production declined by over 23 per cent, and machinery and equipment, where production fell by close to 22 per cent.
  • Electricity production, too, shrank while mining production barely managed to be what it was in August 2018.
  • If one looks at the use-based classification in the same table, one can see the sustained shrinkage in two key groups — capital goods and consumer durables.

What is indicates?

  • This contraction is at the heart of what is wrong with the Indian economy at present.
  • The decline in the production of capital goods, which is the machinery used to produce other goods, shows that there is little desire/demand in the market to invest in existing or new capacity.
  • The decline in consumer durables such a refrigerator or a car shows that existing inventories are not yet being cleared because consumers continue to avoid buying these products.

How useful are monthly IIP figures to draw a conclusion about India’s growth?

  • IIP figures are monthly data and as such it keeps going up and down.
  • In fact, the release calls them “quick estimates” because they tend to get revised after a month or two.
  • As such, it is true that one should not take just one month’s IIP data and project it for the whole year or indeed use it to conclude that the full year’s economic growth will be low.
  • However, a dip in IIP, especially the sustained weakness in manufacturing industries, does not bode well for India’s economic growth in the near term.

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

India’s industrial production shrinks 1.1% in August

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IIP

Mains level : Economic Slowdown

News

India’s Index of Industrial Production (IIP) slid 1.1% in August 2019 amid worrying signs of an economy. This pulled down the overall growth of the index to 2.4%.

Signs of a problem

  • Passenger vehicle sales in the country dropped 24% in September — the 11th month of decline in a row. Car sales are taken to be the benchmark for a market economy’s health.
  • The index for electricity production also slipped by 0.9%. Power output is generally tied to its demand, which signifies economic activity. 
  • The mining index grew only 0.1%.

Agriculture worries

  • Agriculture has been lackluster for quite some time exacerbated by a series of droughts. The monsoon this year was delayed and erratic and there are complaints of droughts in many states.

Manufacturing worries

  • 15 out of 23 industries in the manufacturing sector shrank in August.
  • Manufacture of motor vehicles, trailers and semi-trailers tanked the fell the most – 23%. 
  • Machinery and equipment shrank 21.7% while ‘other manufacturing’ slipped 18%. 
  • Growth was seen in mostly less value-adding industries such as basic metal manufacturing. 
  • Capital goods shrank 21% while infrastructure and construction goods fell 4.5%. 

The government tried to solve

  • The government has cut corporate taxes to boost consumer demand and spending.
  • RBI has been reducing lending rates to increase the availability of funds.

Conclusion

In this situation, shrinking manufacturing can increase job losses and signify that consumer demand remains muted.


Back2Basics

IIP and PMI

A measure of manufacturing

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

Small businesses provide most jobs in underdeveloped, developing nations: ILO

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : MSME & Self Employment - role in Economy

News

More than two-thirds of total employment in under-developed and developing countries is provided by small economic units as per the latest report – Small Matters.

What the report says

  • Policymakers must treat these units as a central part of economic and social development strategies worldwide.
  • It argued that such an approach is a must for low- and middle-income countries where the majority is employed in small economic units.

Link to SDGs

  • Three of the United Nations’ SDGs depend on employment opportunities — eradicate poverty (SDG 1), full and productive employment and decent work for all (SDG 8) and reduce inequality (SDG 10).

Correlation with the country’s development status

  • The report says that there’s a negative correlation between countries’ level of per capita GDP and employment share of the self-employed and micro and small enterprises.
  • The countries in the lowest income level groups have almost 100% self-employment. In these countries, hardly any employment occurs in firms with 50 or more employees.
  • Self-employment is the highest in South Asia (66%) followed by sub-Saharan Africa (50%) and the Middle East and North Africa (44%), found the report. 
  • Around 85% of workers in India are self-employed or do casual work and 73% of non-agricultural workers in Bangladesh were self-employed.

Other findings of the report

  • Countries that have more people working in the service sector, have lower employment in the agriculture sector. For example, Niger and Madagascar see agriculture provide 75% of employment and services only 15%. 
  • In developed countries like Ireland, Netherlands and Denmark, hardly 5% of total employment is in the agriculture sector, while 80% is provided by services.

Employment in the agriculture

  • Most of the employment opportunities fall into the informal category.
  • Around 95% of agricultural sector employment in South Asia and sub-Saharan Africa is informal.

The contrasting case of developed and developing countries

  • Europe and Central Asia have the largest share of agricultural employment in the formal sector more than 30%. 
  • In East Asia and the Pacific, it is more than 20%.
  • In sub-Saharan Africa and South Asia, self-employment alone accounts for more than half of the total agriculture employment.
  • There is an inversely proportional relationship between countries’ economies and the nature of employment opportunities.
  • The share of the self-employed in low-income countries is almost five times the share in high-income countries,.
  • The employment share of micro-enterprises is much higher in low- and lower-middle-income countries than in upper-middle- and high-income countries.
  • But, the employment in small enterprises (10-49 employees) is more in high-income countries and the employment share of small enterprises is just 3% in low-income countries; but it goes up to 25% in high-income countries. 

Conclusion

The report argued that it is important to understand the nature of employment opportunities available in a country to facilitate and improve the quality.

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

[op-ed snap] Let’s not regulate the ease of doing business

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : RBI draft rule on Offshore investments

Context

In a set of FAQs on overseas direct investment published recently, RBI has said that Indian companies are barred from acquiring a stake in any offshore company if that firm has investments in any Indian entity. Still, no formal order or circular to this effect has been issued.

What does the rule say

  • It does not matter how big or small the foreign entity’s holding in an Indian enterprise is. 
  • The ownership of even a single share would put it on the no-go list for Indian investors. 

Objective

  • The aim of this restriction is to check the round-tripping of money. 
  • Criss-cross investments spanning multiple jurisdictions can serve as conduits for dubious funds to be sent abroad and brought back into the country in some legal guise. 
  • It could also be a clamp-on tax evasion done by setting up firms in countries with easier tax regimes to hold assets of Indian companies that make money off the domestic market. 

Problem with the ruling

  • If such practices are rampant, then specific probes need to be ordered, evidence gathered, and cases filed.
  • Banning investments in foreign businesses that have Indian interests amounts to disproportionate action.
  • In this era of globalization, the collateral damage of such moves to the economy could outweigh the gains. 
  • Even legitimate businesses wanting to expand their operations globally could find their plans thwarted. 
  • Not just the future investments, but those already made could also come under the scanner. 
  • Complying with the rule would be difficult for any enterprise with even moderate dealings abroad. An Indian exporter looking for an equity partnership with a foreign distributor would have to check if the latter has made an investment in India and need a special agreement that prevents the offshore entity from investing in a domestic set-up. 
  • In a world where such business decisions are freely made, the clause could be a deal-breaker. 
  • The foreign subsidiary of an Indian company would not be able to directly invest a surplus generated abroad in a domestic venture of its choice, even though such an investment would be above board.
  • For decades after independence, over-regulation was the bane of enterprise in India. 

Way ahead

  • Liberalization offered relief with whole categories of restrictions dumped to encourage greater business freedom. The country has made major gains in global rankings which measure the ease of doing business. 
  • Regulatory over-tightening puts those achievements at risk. 
  • Track down round-trippers and tax evaders.

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

[op-ed snap] Putting the pedal to the metal

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Auto Industry slowdown

CONTEXT

The automobile industry is cyclical. It is also a lead indicator for economic growth. And it has been experiencing signs of a slowdown. The decline began in the last quarter of the calendar year 2018 and intensified with the passage of every month in 2019.

Background

  • Though the industry goes through cycles of ups and downs the current slowdown is something to worry about seriously.
  • The current downturn is like nothing that the industry has seen in a long, time in terms of depth, scale, and character.

The uniqueness of current slowdown

  • Every segment of the auto industry, beginning from two-wheelers to passenger cars, light commercial vehicles and heavy commercial vehicles, and even tractors, has been hit. 
  • A natural, cyclical downturn has been amplified by reforms with good intentions.
  • The policy on electric vehicles has only intensified and prolonged slowdown. 

Commercial vehicles – Revision in axle-load norms

  • In 2018, the government revised axle-load norms (for the first time since 1983) for cargo carriers by between 12% and 25%. It was aimed to legalize overloading and help reduce freight costs for both consignors and consignees.
  • By applying the higher cargo rules to all trucks on the roads, government raised existing carrying capacity and forced per-tonne freight rates down. 
  • This occurred at a time when carrying capacity was increasing due to the introduction of GST. 

BS-VI

  • Vehicle manufacturer’s practice of clogging the pipeline by over-producing vehicles without care for demand, and dumping them on dealers to sell became a painful issue now.
  • Because of the approaching deadline for the transition to BS-VI norms from April 1, 2020, dealers are saddled with the inventory of BS-IV vehicles that they need to clear out before the deadline. 
  • Manufacturers are unable to plan their production schedules for BS-VI vehicles. 

Model fatigue

In the case of cars, it appears to be one of model fatigue. Between Maruti and Hyundai, the two big players that account for two-thirds of the industry, there have been hardly any exciting new launches in the last year. 

Way ahead

The government should reduce GST on automobiles from 28% to 18% as per the demand of the industry, but not for all vehicles. This should only be for BS-IV vehicles with manufacturers and dealers.

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

[op-ed snap] Some tax relief for our corporate sector

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Direct Tax Code; Direct tax reforms

CONTEXT

A panel set up by the government to review the direct tax code (DTC) has submitted its report.

Facts

  1. Its recommendations would supplant the existing Income Tax Act of 1961
  2. There are hints towards the contents of the report:
    1. relief in tax rates for individual taxpayers
    2. simpler assessment procedures 
    3. lower corporate tax rate even for large companies
    4. fewer exemptions 
    5. use of Artificial Intelligence to curb tax evasion
    6. replacement of “assessing officers” with “assessment units” is reported 
    7. mediation process to settle tax disputes

Benefits to corporates

  1. It could reduce the harassment of taxpayers. 
  2. It will be the most effective rationalization of corporate taxation. 
  3. The panel proposes a 25% corporate tax rate to all firms without exception.
  4. 99.3% of all corporate assessees may already be in the 25% bracket. But the division between small and large companies is hard to justify.
  5. The size cutoff is not just arbitrary, it deters firms just under the limit from growing bigger
  6. Large companies in the 30% tax bracket account for the bulk of revenues raised this way burdening corporate India. These are the country’s biggest job providers. They need to be globally competitive.

Problems with 25%

  1. Even at 25%, India Inc. would be paying more money than companies in other parts of the world. The global average corporate tax rate is around 23%. 
  2. Big Indian corporations pay a base rate of 30%, with add-on cesses and surcharges taking the effective rate to 35% or so. 
  3. Firms must compete with others not just on product quality and prices, but also on raising capital. A high rate serves as a handicap.
  4. Policy-imposed constraints on corporate profitability also result in lower investible surpluses, leading to slower growth. 
  5. It hurts their ability to take on global competition and turn into world-beaters.

A lighter tax burden may curtail revenues but could have a positive impact that would more than compensate for this loss in the long term.

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

Explained: Crisis in Automotive Sector

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Decline in vehicle sales in India and thier impact on economy

Context

  • Leading automobile manufacturers announced a sharp decline of up to 50 per cent in their domestic sales in recent months
  • This sector is hard hit by the liquidity crunch for non-banking financial companies (NBFCs) and a dip in consumer sentiment
  • Manufacturers are now going for cuts in production, and the industry that is one of the biggest job creators in the country is staring at a deep-rooted slowdown and job losses across its value chain.

Decline in Sales

  • Vehicle sales numbers in July, the worst in 19 years, have reaffirmed the downturn in the automobile sector. The drop is happening across all segments.
  • If passenger vehicles sales witnessed a fall of 18.4 per cent in the quarter ended June 2019, the commercial vehicle segment witnessed a 16.6 per cent decline.
  • The two-wheeler segment the more affordable form of motorized mobility and an indicator of consumption demand in the hinterland has also seen a slowdown.
  • It saw a drop in sales by 11.7 per cent during the quarter.

Decline in the sales of commercial vehicles and tractors

  • Tractor sales have been further hurt by weak farm sentiment, the slowdown in the rural economy, and fears of a worse than average monsoon this year.
  • This comes amid the third advance estimates of crop production indicating a slide in rabi production. Kharif sowing has remained weak so far.
  • Truck sales have been hurt by changes made by the government in the axle load norms.
  • A significant decline in the sales of commercial vehicles has been visible ever since the increased axle load has become effective.
  • The industry has been calling for a scrappage policy and other policy support measures to revive demand.

A sign of distress

  • Like tractors, the drop in two-wheeler volumes is a key indicator of rural distress.
  • In the two-wheeler segment, motorcycle sales are predominantly dependent on rural India; people in rural areas prefer motorcycles to scooters given their sturdier structure, better performance, and lower operational costs, especially in the economy segments.
  • The continued sluggishness in two-wheeler volumes is worrying, given that India, despite now being the world’s biggest two-wheeler market, still has a very low penetration level of two wheelers.

A cause of concern

  • Such a sales slump is naturally forcing automobile factories to cut production, with July alone witnessing a production decline of around 3 lakh vehicles compared to the same month last year.
  • This, in turn, means a loss of jobs for contract workers initially but if this slowdown deepens, then permanent workers too may be let go.
  • The automobile industry employs close to forty million people.
  • While such a widespread and progressive decline is a cause for concern on its own, the unravelling of India’s famed automobile industry should also send shockwaves across policy makers too.
  • The sector accounts for almost half the manufacturing GDP of India.

Causes for decline in sales

There are several reasons for the famed Indian automobile sector, fourth largest in the world, to experience this unprecedented slowdown.

  • First, the sector was impacted due to impending general elections, where uncertainty over outcome drove people to postpone vehicle purchases.
  • Industry insiders feel that the pressure on NBFCs and the liquidity squeeze in the market is a big factor causing the decline.
  • Say for example a third of the retail sales of a company were funded by NBFCs, and a liquidity crisis for the NBFC sector has led to a drop in sales for lack of funding for customers.
  • The decline in customer confidence is the other factor that is leading to a continuous slide in sales of passenger cars.
  • Customers are also expecting discounts in the coming festive season.
  • Customers are also postponing their purchase decisions due to various considerations, including an expected fall in GST rates, and the hope that the transition from BS-IV to BS-VI may lead to big discounts between January and March 2020.
  • To top it all, the face-off between the industry and the policymakers over a proposed deadline to convert some vehicle categories to electric from the present internal combustion engine (ICE) technology obviously did not help either.
  • The government has been considering a proposal to ban all ICE-driven two-wheelers under 150cc in the next six years and all three-wheelers within four years.

What does this situation indicate?

  • The sharp decline in sales numbers of the leading manufacturer shows the decline in consumer sentiment and indicates an overall slowdown in the economy.
  • The drop in sales over the last one year has led major manufacturers to cut production, and has put pressure on the overall automotive sector, including the automobile ancillaries.
  • Various manufacturing units of renowned brands have been shut in various parts of the country.
  • There have already been job losses across the value chain of the automobile sector, including in the dealerships and ancillaries.
  • The continuing decline in sales is now expected to put pressure on manufacturers to cut down on their costs, and reduce headcounts.

What next?

  • Industry players say the worst is still to come and that of consumer demand and the liquidity crisis — could get prolonged as automakers compulsorily transition to new technologies, rendering their products more expensive.
  • The outlook for the rest of the year will depend on multiple factors, including the progress of the monsoon and the festive season offtake, as well as improvement in the liquidity situation.
  • Meanwhile one may expect some sort of fiscal or monetary stimulus to boost up the sector.

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

Dholera Special Investment Region

Note4Students

From UPSC perspective, the following things are important :

Prelims level : DMIC, SIR

Mains level : Smart Cities in India

  • Niti Aayog CEO Amitabh Kant pushed the idea of Dholera as the first “green city in the world”.

Dholera Special Investment Region

  • The Dholera Special Investment Region is one of the several Greenfield cities that have been planned on the Delhi Mumbai Industrial Corridor (DMIC).
  • Located about 100 kilometres south-west of Ahmedabad, Dholera will be connected to the city by a six-lane Expressway with a metrorail running through its centre.
  • A greenfield international airport is also being developed in the vicinity which will unburden the Sardar Vallabhbhai Patel International airport of some of its traffic.
  • Six of the 24 nodes identified on the DMIC are in Gujarat.
  • The government had set up the Gujarat Industrial Corridor Corporation (GICC), an SPV to oversee development on the DMIC, a decade ago.

What’s so special ?

  • The Dholera Special Investment Region (SIR) is slated to be bigger than Singapore.
  • It covers an estimated 920 square kilometers, encompassing 22 villages of Dholera taluka of Ahmedabad district and is strategically located between Ahmedabad, Vadodara and Bhavnagar.
  • The Dholera SIR entails development of total 9225 hectares of land up to 2040 and will employ an estimated 8 lakh persons and will house 20 lakh inhabitants.
  • Phase-I of the project which entails developing basic infrastructure in 22.5 square kilometres of activation area will cost roughly Rs 4,400 crore.
  • In Phase-I, 52 per cent will be industrial and 28 per cent will be residential.

Back2Basics

Special Investment Region (SIR)

  • Special Investment Region (SIR) is a concept similar to Special Economic Zone.
  • However, this is a unique term applied in the territory of the state of Gujarat.
  • The Gujarat government has enacted a legal framework for the SIR – The Gujarat Special Investment Region Act – 2009(GSIR -2009) which has come into effect from 6th January, 2009.
  • SIR refers to an existing or proposed Investment Region with an area of more than 100 sq. Kms or Industrial Area with an area of 50-100 sq. Kms declared so by the state under Section 3 of the Gujarat Special Investment Region Act – 2009.
  • By giving SIR status, Gujarat govt. proposes to develop the investment region /industrial area as global hubs of economic activity supported by world class infrastructure, premium civic amenities, centers of excellence and proactive policy framework.

Delhi–Mumbai Industrial Corridor Project

  • The DMIC Project is a planned industrial development project between India’s capital, Delhi and its financial hub, Mumbai.
  • It is one of the world’s largest infrastructure projects with an estimated investment of US$90 billion and is planned as a high-tech industrial zone spread across six states as well as Delhi.
  • The investments will be spread across the 1,500 km long Western Dedicated Freight Corridor which will serve as the industrial corridor’s transportation backbone.
  • It includes 24 industrial regions, eight smart cities, two international airports, five power projects, two mass rapid transit systems, and two logistical hubs.

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

[op-ed of the day] Inappropriate template for a legitimate target

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Difference in Reforms in South east Asian Countries and India

Note- Op-ed of the day is the most important editorial of the day. Aspirants should try to cover at least this editorial on a daily basis to have command over most important issues in news. It will help in enhancing and enriching the content in mains answers. Please do not miss at any cost.

CONTEXT

The recently-released Economic Survey either glosses over or ignores many acute challenges faced by the Indian economy — like the severe agrarian crisis; the troubles of loss-making and debt-ridden public sector units; and the issues plaguing public sector banks.

Issue of Private Investment

  • One issue that the Survey rightly underlines is the need for India to revive private investment if it is to achieve the magical $5-trillion economy status by 2024-25.
  • However, what is odd here is that to stress this, the document invokes the age-old comparison between India and East Asian countries.

How the NIEs (newly industrialised economies ) prospered

Here, a question that arises is: Can the East Asian model help revive India’s floundering investment rates? Some crucial reminders are worth underlining.

The East Asian model was largely a story driven by the newly industrialised economies (NIEs) of Singapore, Hong Kong, South Korea and Taiwan, and Japan earlier.

1.Raising gross savings rates –

  • Specifically, the prime goal in various NIEs from 1960s through to the 1990s (prior to the Asian Financial Crisis) was to raise gross savings rates.
  • While the rise in household savings was partly due to the positive demographic dividend, a variety of other factors, including macroeconomic stability, low inflation, lack of social safety nets, inability to leverage (due to a highly regulated banking system) and forced savings (fully-funded Provident Funds) also played a role.
  • State-owned enterprises had to operate with budget constraints.

2.Fiscal discipline – This, coupled with the fiscal discipline practised by the economies, ensured that the public sector did not crowd out private savings and, in some cases, actually added to national savings.

3.Integrating with formal financial system – Another goal was to ensure that the private savings were actually intermediated into the formal financial system, failing which the cost of capital would remain high and the availability of capital for investment would be low.

4.Public sector banking system –

To achieve this, importance was given to the establishment of a safe and secure public sector banking system (usually in the form of postal savings networks) where deposits were guaranteed by the central bank and interest incomes was taxed lightly, if at all.

The state-owned banks were tightly regulated as financial stability was the cornerstone of overall macroeconomic stability.

5.Financial inclusion

  • Financial inclusion was encouraged, though the focus was on actual use of the deposit accounts rather than just their opening.
  • While the manufacturing sector was viewed as a growth engine and open to export competition, the banking sector, in all economies apart from Hong Kong, remained tightly regulated and closed to foreign banks.
  • Even Singapore initially adopted a dual banking structure that sheltered the domestic economy largely from significant short-term bank flows.
  • It resorted to a calibrated policy to allow fully licensed foreign banks only in the late 1990s.

6.Tight financial oversight

  • So, while these economies were generally successful in encouraging savings, the cost of capital was rather high, not unlike the problem in India today.
  • To tackle this, the East Asian economies undertook financial repression — conventionally understood as a ceiling price keeping lending rates lower than market equilibrium.
  • This, in normal circumstances, would have led to disintermediation from the formal financial system, a consequent reduction in the quantity of financing and the creation of a shadow banking system.
  • However, central banks of these economies maintained tight oversight, and selective capital controls ensured that the low-yielding savings did not leave their countries of origin, while limited financial development forestalled the possibility of people looking for savings alternatives.

7.Sophisticated industrial policies

  • Along with these, the governments undertook sophisticated industrial policies to promote domestic investment, much of which was export-led (though not necessarily free-market based).
  • The governments understood that a vertical industrial policy (of ‘picking winners’) would not work without a sound horizontal industrial policy (dealing with labour and land reforms, bringing about basic literacy and raising women’s participation in the labour force).
  • Besides, incentives also had clear guidelines and sunset clauses and mechanisms were in place to phase out support.
  • Thus, winners prospered while losers were allowed to fail.

8.Embedded autonomy

  • In addition, the bureaucracies of these East Asian economies had what Berkeley sociologist Peter Evans referred to as “embedded autonomy”.
  • This allowed the state to be autonomous, yet embedded within the private sector and enabled the two to work together to develop policies or change course if the policies did not work.
  • This made industrial policy operate as a process of self-discovery, as emphasised by Harvard economist Dani Rodrik.
  • It is the lack of this embedded autonomy in the next-tier NIEs of Malaysia, Thailand and Indonesia that has been partly responsible for them being stuck in the ‘middle income trap’.

9.Heterodox policies, reforms

  • Thus, much of the investment and export acceleration in East Asian countries was due to heterodox policies and reforms that were carefully calibrated, well-sequenced and implemented at a time when the external environment was far less hostile than it is today.
  • These measures allowed the nations to benefit from their demographic dividends and transform themselves into developed economies in record time.

Problems with Indian Reforms

In contrast, due to political and other compulsions, India’s reforms since 1991 have been rather haphazard and of a ‘stop-and-go’ nature with perverse consequences, all of which has made it much more challenging for the country to take full advantage of its demographic dividend.

Conclusion

Though measures like reducing policy uncertainty; ensuring that the fiscal expenditures do not crowd out private savings and investment; enhancing the efficiency of financial intermediation; and dealing with land acquisition and environment clearances are all essential to reignite investment, we do not need to invoke the East Asian example to understand the importance of these.

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

[op-ed snap] Don’t pick and choose

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Whether incentives by government work in propelling industries' growth

CONTEXT

Should the government be in the business of “picking winners” — identifying particular industries that it sees as worthy of promotion and offering special incentives targeted at these?

Categorisation of industries

  • The latest Union Budget has sought to do this in respect of certain “sunrise” and “advanced technology” sectors.
  • Thus, it is proposed that global companies will be invited to set up mega-manufacturing plants for semiconductor fabrication, solar photovoltaic cells, lithium storage batteries and computer hardware.
  • Such investments will be allowed income tax exemption against capital expenditures incurred.
  • Electrical vehicles (EV) – Equally significant is the focus on leapfrogging and making India a “global hub” for manufacturing of electrical vehicles (EV).
  • Not only will the goods and services tax rate on EVs be reduced from 12 to 5 per cent, consumers will be provided income tax deduction of up to Rs 2.5 lakh on the interest paid on the loans taken to purchase these vehicles.
  • High import cost – On the face of it, there are persuasive arguments for such industry-specific schemes. In 2018-19, electronic items accounted for $55.47 billion out of India’s total imports of $514.03 billion, next only to petroleum ($140.92 billion).
  • Balance-of-payments – Emphasis on greater domestic manufacture of the former, and giving a fillip to renewable energy and battery-powered vehicles in the case of the latter, certainly makes sense from a balance-of-payments standpoint.
  • Success elsewhere – The East Asian tiger economies, China and Japan, have all used “industrial policy” — via a mix of subsidies, tax breaks, directed bank lending and even import protection — to achieve global leadership in core sectors.
  • Examples – Japan’s steel industry, South Korea’s shipbuilders, Taiwan’s chip foundries and China’s solar panel or telecom equipment makers are products of such targeted government intervention.
  • Phased manufacturing programme (PMP) – India’s auto industry — the country’s exports of vehicles and components/parts added up to $14.28 billion in the last fiscal — is equally the result of a phased manufacturing programme (PMP) that forced the likes of Suzuki to raise local content in their cars by developing a domestic vendor base.

Arguments against it

  • Ineffective Modified Special Incentive Package Scheme – The idea of attracting “mega” investments in electronic manufacturing is old wine: There’s already a Modified Special Incentive Package Scheme from 2012, under which not a single project has taken off the ground.
  • PMP is an exception – The success story of PMP is an exception that only proves the general rule at least in India — about the government’s limited ability to promote select industries through a time-bound programme of incentives, without risking return of protectionism or capture by special interests.

Conclusion

  • The government should stick to providing public goods (education, health, law and order, contract enforcement etc) and extend investment-linked deductions across sectors.
  • The job of “picking winners” is better left to private industry. EVs are now 50-100 per cent costlier than regular vehicles.
  • Continuous technology innovation will ensure they will, like solar power, get cheaper.
  • And consumers will definitely buy when there is reliable charging infrastructure.

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

[op-ed snap] Faint glimmer: On revival in industrial activity

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Data regarding revival in industrial activity

CONTEXT

The tentative revival in industrial activity must be built on through prudent policy support.

Background

Industrial activity in the new financial year appears to have started on a healthier note than the trend witnessed in the last quarter of the previous fiscal, the government’s latest quick estimates show.

  1. Industrial output – Industrial output rose 3.4% in April, buoyed by a generally broad-based revival that saw electricity, mining and even manufacturing post faster growth .

2. Manufacturing output – In fact, manufacturing output growth, which had decelerated sharply from the pace of 8.2% in October to a revised level of less than 0.1% in March, rebounded to a four-month high of 2.8%.

3. Positive growth – A look at the use-based classification reveals that all six segments were in positive territory, with only infrastructure and construction goods marking a slowdown from both the earlier year and March levels and providing cause for some concern.

4. Capital Goods – Hearteningly, capital goods, a sector that serves as a closely tracked proxy for business spending intentions, posted a 2.5% expansion, snapping three straight months of contraction.

To be sure, the growth even in this key area trails the pace of 9.8% that was reported in April 2018 by a wide margin, and it would be premature to celebrate the single reading until a more abiding trend emerges in the coming months.

Hiccups along the way

1.Rise in CPI –

  • Price gains measured by the Consumer Price Index (CPI) quickened to 3.05% in May, from April’s 2.99%, as prices of vegetables and pulses jumped by 23% and 10% respectively in urban areas, contributing to a bump-up in food inflation.
  • The Reserve Bank of India had last week flagged the risks to the inflation trajectory from factors including spikes in vegetable prices and international fuel prices and marginally raised its CPI inflation projection for the fiscal first half to a 3% to 3.1% range.
  • While the inflation reading remains below the RBI’s inflation threshold of 4%, policymakers would need to keep a close watch on price trends, especially as global energy prices continue to remain volatile amid heightened geopolitical tensions in West Asia and uncertainty on the demand outlook owing to the ongoing China-U.S. trade spat.

2. Monsson Dependence – And while the monsoon is forecast to be normal this year, the actual rainfall and its spatial distribution will have a significant bearing on agricultural output and food prices. A fiscally prudent budget, with incentives to support the nascent industrial recovery, would surely tick several boxes at one go.

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

Regulatory Sandbox for fintech testing

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Regulatory Sandbox

Mains level : Read the attached story

  • The SEBI has released a discussion paper on a framework for a ‘regulatory sandbox,’ wherein companies dealing with financial technologies can test new technologies and products in a live market environment.

What is Regulatory Sandbox?

  • A sandbox approach provides a secure environment for fintech firms to experiment with products under supervision of a regulator.
  • The concept of a regulatory sandbox or innovation hub for fintech firms was mooted by a committee headed by then RBI executive director Sudarshan Sen.
  • The panel, which submitted its report in November 2017, had called for a regulatory sandbox to help firms experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
  • If the product appears to have the potential to be successful, it might be authorised and brought to the broader market more quickly.
  • The sandbox will enable fintech companies to conduct live or virtual testing of their new products and services.

Why such move?

  • Fintech or financial technology companies use technology to provide financial services such as payments, peer-to-peer lending and crowdfunding, among others.
  • According to NITI Aayog, India is one of the fastest growing fintech markets globally, and industry research has projected that $1 trillion, or 60% of retail and SME credit, will be digitally disbursed by 2029.
  • The Indian fintech ecosystem is the third largest in the world, attracting nearly $6 billion in investments since 2014, the think tank said.
  • A global survey ranked India, with 1,218 fintech firms, second in terms of fintech adoption, with an adoption rate of 52 per cent.

Issue of Data Privacy

  • The risks for fintech products may arise from cross-border legal and regulatory issues where confidentiality and customer protection are major areas that needed to be addressed.
  • The proposed Personal Data Protection Bill, 2018, had categorised all financial data as “sensitive personal data”, which is not the case for many European countries.

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

Explained: Why an industrial policy is crucial

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Need for an comprehensive industrial policy in India


Background

  • The contribution of manufacturing to GDP in 2017 was only about 16%, a stagnation since the economic reforms began in 1991.
  • In India manufacturing has never been the leading sector in the economy other than during the Second and Third Plan periods.

Manufacturing sector: A prime moving force

  • Manufacturing is an engine of economic growth because it offers economies of scale, embodies technological progress and generates forward and backward linkages that create positive spillover effects in the economy.
  • No major country managed to reduce poverty or sustain growth without manufacturing driving economic growth.
  • This is because productivity levels in industry (and manufacturing) are much higher than in either agriculture or services.

Market Failures urges govt to intervene

  • The specific instances of market failure that require a government-driven industrial policy are:
  1. lack of adequate investments
  2. imperfect information with respect to firm-level investments in learning and training and
  3. lack of information and coordination between technologically interdependent investments
  • These are good reasons why an economy-wide planning mechanism is needed in India.
  • However, the India should steer clear of the “command and control” approach that harks back to pre-1991 days.

Lack of Policy measures in India

  • The United Nations Conference on Trade and Development or UNCTAD finds that over 100 countries have, within the last decade, articulated industrial policies.
  • However, India still has no manufacturing policy.
  • Focussing (as “Make in India” does) on increasing FDI and ease of doing business, important though they may be, does not constitute an industrial policy.

Urgent need for a comprehensive Policy

I. Promoting investments

  • There is the need to coordinate complementary investments when there are significant economies of scale and capital market imperfections.

II. Subsidization and providing stimulus

  • Industrial policies are needed to address learning externalities such as subsidies for industrial training, on which we have done poorly.
  • However, a lack of human capital has been a major constraint upon India historically being able to attract foreign investment (which Southeast Asian economies succeeded in attracting).

III. Govt. role as facilitator

  • The state can play the role of organizer of domestic firms into cartels in their negotiations with foreign firms or governments — a role particularly relevant in the 21st century.
  • It rose after the big business revolution of the 1990s with mega-mergers and acquisitions among transnational corporations.
  • In fact, one objective of China’s industrial policies since the 1990s has been to support the growth of such firms.

IV. Efficient Capacity Management

  • The role of industrial policy is not only to prevent coordination failures (i.e. ensure complementary investments) but also avoid competing investments in a capital-scarce environment.
  • Excess capacity leads to price wars, adversely affecting profits of firms — either leading to bankruptcy of firms or slowing down investment, both happening often in India (witness the aviation sector).
  • Price wars in the telecom sector in India which hampers investment in mobile/internet coverage of rural India where access to mobile phones and broadband Internet, needs rapid expansion.

V. Reservation of products

  • An industrial policy can ensure that the industrial capacity installed is as close to the minimum efficient scale as possible.
  • The missing middle among Indian enterprises is nothing short of a failure of industrial strategy.
  • It includes products exclusively for production in the small-scale and cottage industries (SSI) sector from India’s 1956 Industrial Policy Resolution onwards.
  • By the end of the 1980s, 836 product groups were in the “reserved” category produced only by SSIs (which encouraged informal enterprises).

VI. Preventing structural failures

  • When structural change is needed, industrial policy can facilitate that process.
  • In a fast-changing market, losing firms will block structural changes that are socially beneficial but make their own assets worthless.
  • East Asian governments prevented such firms from undermining structural change, with moves such as orderly capacity-scrapping between competing firms and retraining programmes to limit such resistance.

IT Sector: A self taught lesson for Policy Makers

  • If evidence is still needed that the state’s role will be critical to manufacturing growth in India, the state’s role in the success story of India’s IT industry must be put on record.
  • The government invested in creating high-speed Internet connectivity for IT software parks enabling integration of the Indian IT industry into the U.S. market.
  • The government allowed the IT industry to import duty-free both hardware and software. (In retrospect, this should never have continued after a few years since it undermined the growth of the electronics hardware manufacturing in India.)
  • The IT industry was able to function under the Shops and Establishment Act; hence not subject to the 45 laws relating to labour and the onerous regulatory burden these impose.
  • Finally, the IT sector has the benefit of low-cost, high-value human capital created by public investments earlier in technical education.
  • These offer insights to the potential for industrial policy when a new government takes over soon.

Way Forward

  • The East Asian miracle was very much founded upon export-oriented manufacturing, employ surplus labour released by agriculture, thus raising wages and reducing poverty rapidly.
  • The growing participation of East Asian countries in global value chains (GVCs); manufactured consumer goods to more technology- and skill-intensive manufactures for export, was a natural corollary to the industrial policy.
  • India has been practically left out of GVCs.
  • Increasing export of manufactures will need to be another rationale for an industrial policy, even though India has to focus more on “make for India”.
  • In this quest for increased exports, economies of scale (a proportionate saving in costs gained by an increased level of production) are critical.

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

Services Trade Restrictiveness Index by OECD

Note4Students

From UPSC perspective, the following things are important :

Prelims level : STRI

Mains level : Ease of doing business in India


  • India has found problems with the current method under which the Organisation for Economic Cooperation and Development (OECD) ranks countries based on their services trade policies, indicating the outcomes are biased and counter-intuitive.

Services Trade Restrictiveness Index

  • Launched in 2014, the Services Trade Restrictiveness Index (STRI), computed by the OECD, is now available for 2018 for a total of 45 economies (36 OECD and the rest non-OECD) and 22 sectors.
  • The STRI helps to identify which policy measures restrict trade.
  • It provides policy makers and negotiators with information and measurement tools to improve domestic policy environment, negotiate international agreements and open up international trade in services.
  • It can also help governments identify best practice and then focus their domestic reform efforts on priority sectors and measures.
  • The STRI database is based on regulations currently in force. STRI indices take the value from 0 to 1, where 0 is completely open and 1 is completely closed.
  • The STRI Simulator enables policy makers and experts to explore the impact of a change at a detailed level for each measure, and to compare a specific country with a range of other selected countries in a particular sector.

Issues with the Index

I. Bit of impracticality in the index

  • The index has a large number of problems associated with it, including some significant design issues that render it impractical for use, a study commissioned by the Commerce Ministry found.
  • For example, the index seems to show the Indian services sector as one of the most restrictive, particularly in policy areas like foreign entry..
  • This seems surprising as since 1991, the one area that has seen maximum liberalisation in India is FDI.”

II. Liberalisation of FDI not considered

  • There are both theoretical and empirical inconsistencies in the OECD methodology.
  • For example, change in regulatory measures in one policy area can lead to dramatic changes in the STRI in another policy area which is not very useful for policy purposes.
  • It seems obsolete that India’s foreign entry restrictions are being classified as being the most restrictive derecognizing the 1991 reforms.
  • In addition, the data seems to have been generated by rather arbitrary procedures and reflects a developed country bias.

Way Forward: Building consensus

  • India has approached several developing countries during the recently-concluded WTO talks in New Delhi to try to build consensus around the new method of measuring trade restrictiveness in the services sector.
  • The manufacturing trade has a well-documented system of classification of commodities through which we can tell exactly what the commodity is and also what the applied tariffs and effective tariffs are, and, hence, see how restrictive any country’s policies are.
  • The problem in services is that for a long time there wasn’t any way to know whether a country’s policies were restrictive.

Summary report for India:

Click here to download

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

Technical Textiles

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Technical Textiles

Mains level : Not Much

  • The Ministry of Textiles has prepared two reports on technical textiles, to tap the potential and also how to utilise it at ‘National Conclave on Technical Textiles’.

Technical Textiles

  • Technical Textiles is a high technology sunrise sector which is steadily gaining ground in. India.
  • A technical textile is a textile product manufactured for non-aesthetic purposes, where function is the primary criterion.
  • Technical textiles include textiles for automotive applications, medical textiles (e.g., implants), geotextiles (reinforcement of embankments), agrotextiles (textiles for crop protection), and protective clothing (e.g., heat and radiation protection for fire fighter clothing, molten metal protection for welders, stab protection and bulletproof vests, and spacesuits).
  • They are functional fabrics that have applications across various industries including automobiles, civil engineering and construction, agriculture, healthcare, industrial safety, personal protection etc.

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

[op-ed snap] Beyond the free trade idealism

Note4Students

From UPSC perspective, the following things are important :

Prelims level : WTO

Mains level : Need for policy intervention to boost growth.

CONTEXT

The U.S. has begun trade skirmishes with India. It objects to India increasing import duties on electronic goods and wants India to reduce duties on U.S.-made motorcycles. Meanwhile the World Trade Organisation seems to be in the intensive care unit. It is time to apply fundamental principles to reshape a trade regime that is fair to all.

What is Free Trade?

  • The macro-economic case for free trade is that if each person would do only what he or she does better than everyone else and all would trade with each other, everyone’s welfare will increase.
  • Also, the size of the global economic pie would be larger because there will be no inefficiencies.

Problems emerging

  • The problem is that, at present, many people in the world are doing what others, in other countries, can do better than them.
  • To get to the economists’ ideal state, many people will have to stop doing what they are doing and learn to do something else.

Theory of efficient Production

  • Dani Rodrik has estimated that for every unit of overall increase in global income, six or seven units of incomes will have to be shuffled around within. Moreover, according to this theory, people should not start producing what others are already producing, because they will produce less efficiently until they learn to do it well.
  • According to this theory of free trade, Indians should not have bothered to learn how to produce trucks, buses and two-wheelers when the country became independent.
  • They should have continued to import them from American, European and Japanese companies.
  • Pillars of free trade – Free trade purists say that easy import of products from other countries increases consumer welfare.

Resistance to Free Trade

  • Milton Friedman had observed that, in international trade, exports help companies and imports help citizens.
  • Therefore, resistance to free trade does not come from consumers.
  • It generally comes from companies which cannot compete: companies in less developed countries which are not able to compete until their country’s infrastructure is improved and they have acquired sufficient capabilities, or even from companies in developed countries when producers in developing countries overtake them.

Need for good Jobs

  • However, to benefit from easy imports, citizens need incomes to buy the products and services available.
  • Therefore, they need jobs that will provide them adequate incomes. Any government responsible for the welfare of its citizens has to be concerned about the growth of jobs in the country.
  • Domestic producers can provide jobs.
  • Ergo, a developing country needs a good ‘industrial policy’ to accelerate the growth of domestic production, by building on its competitive advantages; and by developing those capabilities, it can compete with producers in countries that ‘developed’ earlier.

Next Step

1.Not Unsustainable Income Guarantee Schemes –

  • By 2019, it has become clear that India’s policy-makers must find a way for economic growth to produce more income-generating opportunities for Indian citizens.
  • Employment and incomes are the most pressing issues for Indian citizens according to all pre-election surveys of what citizens expect from the next government.
  • All parties are responding in panic with schemes for showering various versions of unearned ‘universal basic incomes’ on people who are not able to earn enough.
  • This approach is unlikely to be economically sustainable. Therefore, an ambitious ‘Employment and Incomes Policy’ must be the highest priority for the next government.

Way Forward

1.More income-generating opportunities

The ‘Employment and Incomes Policy’ should guide the Industrial Policy to where investments are required, and also what is expected from those investments to produce more income-generating opportunities for young Indians.

2.Broaden Industry definition –

  • The scope of ‘industry’ must be broadened to include all sectors that can build on India’s competitive advantages.
  • For example, the tourism and hospitality industry, taking advantage of India’s remarkable diversity of cultures and natural beauty, has the potential to support millions of small enterprises in all parts of the country.
  • By building on India’s competitive advantage of large numbers of trainable youth, and with digital technologies to increase the reach of small enterprises, manufacturing and services can provide many domestic and export opportunities that India has so far not seized.

3.Lessons from Indian History

  • In Automobile – With the government’s insistence in the pre-liberalisation era that production and technology must be indigenised in phased manufacturing programmes, India’s automobile sector was able to provide Indian consumers with good products.
  • It now provides millions of people with employment and incomes in widespread domestic supply chains.
  • Moreover, Indian auto-component producers and commercial vehicle producers export to the world’s most competitive markets.
  • In electronics – In contrast, the Indian electronics sector has languished, while China’s has flourished.
  • India signed the Information Technology Agreement of WTO in 1996 and reduced import duties on IT-related manufactured products to zero.
  • China withheld for some time until its electronic sector was stronger. Now the U.S. and Europe are trying to prevent China’s telecom and electronic goods in their markets.

Conclusion

To conclude, the WTO’s governance needs to be overhauled to promote the welfare of citizens in all countries, especially poorer ones, rather than lowering barriers to exports of companies in rich countries in the guise of free trade idealism.

 

 

 

 

 

 

 

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

[op-ed snap] Slowing down fast: Industrial growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Inflation, Index

Mains level : Industrial slowdown and it's effects

CONTEXT

The downturn in industrial activity and the spike in retail inflation pose a policy challenge.

Background

  • Yet another indicator, worryingly, points to the Indian economy slowing down fast.
  • Industrial growth was just 0.1% in February from the year-earlier period, the slowest pace in 20 months.
  • Industrial output had expanded by 6.9% in February 2018.
  • Industrial growth, as measured by the index of industrial production, has been slowing down considerably in recent months, dropping to just 0.2% year-on-year in November.

Sectorwise Decline

  • Manufacturing – Manufacturing, which has a weight of almost 78% in the index, continues to be the biggest drag, with output contracting by 0.3% as compared with an 8.4% jump in the year-earlier period.
  •  Capital Goods  – The largest contributor to the slowdown in February was the capital goods sector, which shrank by close to 9%, with the contraction widening from the preceding month’s 3.4%.

Overall Scenario

  • That the revision in this closely watched proxy for business spending plans has widened, from the 3.2% contraction reported last month, is striking.
  • GDP grew by just 6.6% in the quarter ended December, the slowest pace in six quarters.
  • Forecast – Various institutions such as the Reserve Bank of India and the International Monetary Fund have been lowering their expectations for India’s growth in the coming quarters.
  • Other Growth Indicators – With other economic indicators such as the purchasing managers’ index and high-frequency data like automobile sales also signalling weakening momentum, the overall scenario, when viewed along with the slowdown in industrial output, suggests that a turnaround in economic growth is not in sight.
  • Inflation – Retail inflation as measured by the consumer price index reached a five-month high of 2.86% in March due to the rise in food and fuel prices.
  • While price gains still remain below the RBI’s stated inflation threshold of 4%, the trajectory is hardly bound to be reassuring.
  • The RBI, which has cut interest rates at two successive policy meetings to help bolster economic growth, is likely to be tempted to opt for more rate reductions.

Implications of such a scenario

  • Need for structural reforms – While monetary easing could be an easy solution to the growth problem, policymakers may also need to look into structural issues behind the slowdown.
  • Credit Market Slowdown – The high levels of troubled debt in not just the banking sector but the wider non-banking financial companies are hurting credit markets, and unless these issues can be resolved, no amount of rate cuts would serve as an effective stimulus.
  • To a large extent, the slowdown is due to investments in sectors that turned sour as the credit cycle tightened.
  • A decline in new proposals – In the fiscal year ended March, new investment proposals fell to a 14-year low, says the Centre for Monitoring Indian Economy.

Conclusion

Easing interest rates without reforms may only help hide investment mistakes instead of fostering a genuine economic recovery.

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

India launches third IT corridor in China

Note4students

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

From UPSC perspective, the following things are important:

Prelims level:  Xuzhou IT Corridor Project

Mains level:  India’s IT Sector


News

  • India has launched its third IT corridor in China that will facilitate partnerships between Indian and Chinese companies.

Xuzhou IT Corridor Project

  • China being a dominant manufacturing country requires software, IT and IT enabled services to transform towards smart manufacturing.
  • The National Association of Software and Services Companies (NASSCOM) entered into a partnership with China’s Xuzhou city from Jiangsu Province in China to help develop the IT corridor.
  • The IT industry body has already launched such corridors at Dalian and Guiyang cities to cash in on the burgeoning Chinese IT industry market.
  • These have already sprung up opportunities to the tune of 24 Million RMB (USD 4.6 million) and 62 Million RMB (USD 8.9 million) respectively, it said.

Benefits

  • The first two corridors have paved the way for cooperation in co-create mode in the emerging technologies such as AI, IoT and Analytics in the Chinese market.
  • Xuzhou is the geographic and economic center of over 20 cities and in China’s regional economic layout, the city has slowly established itself as an industrial powerhouse.
  • Xuzhou is an important comprehensive national transportation hub and its proximity from major industrial and economic hub like Shanghai, Beijing, Hangzhou, Nanjing and Suzhou.
  • This will facilitate match-making between Indian companies wanting to collaborate with companies in Huai Hai economic zone looking.
  • This partnership will help create more jobs in Xuzhou and India and facilitating talent transfer between the two countries.

About NASSCOM

  • The National Association of Software and Services Companies (NASSCOM) is a trade association of Indian Information Technology (IT) and Business Process Outsourcing (BPO) industry.
  • Established in 1988, NASSCOM is a non-profit organisation.

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

Cabinet approves promulgation of Ordinance to amend SEZ Act

Note4students

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

From UPSC perspective, the following things are important:

Prelims level:  SEZ Policy (2005)

Mains level:  Reconsidering the SEZ Policy in India


News

Trusts can set up SEZ

  • Trusts now can approach the government to set up units in special economic zones as the Cabinet has approved the promulgation of an Ordinance for amendment to the SEZ Act, 2005.
  • The definition of “person” as defined in the SEZ Act would now to include trust.
  • The present provisions of the Act do not permit ‘trusts’ to set up units in SEZs.

Benefits

  • The amendment will enable a trust to be considered for grant of permission to set up a unit in SEZs.
  • The amendment would also provide flexibility to the central government to include ‘trusts’ in the definition of a ‘person’, any entity that the central government may notify from time to time.
  • This will facilitate investments in SEZs.

Defining a person for SEZ

  • Currently, the definition of “person” includes an individual, whether resident in India or outside India, a Hindu undivided family, co-operative society, a company, whether incorporated in India or outside India, a firm, proprietary concern, or an association of persons or body of individuals, whether incorporated or not, local authority and any agency, office or branch owned or controlled by such individual.

Back2Basics

SEZs

  • SEZs are major export hubs in the country as the government provides several incentives including tax benefits and single-window clearance system.
  • The developers and units of these zones enjoy certain fiscal and non-fiscal incentives such as no licence requirement for import; full freedom for subcontracting; and no routine examination by customs authorities of export/import cargo.
  • They also enjoy direct and indirect tax benefits.

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

[pib] National Policy on Software Products – 2019

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: National Policy on Software Products – 2019

Mains level: Software industries in India


News

  • The Union Cabinet has approved the National Policy on Software Products – 2019 to develop India as a Software Product Nation.
  • It aims to develop India as the global software product hub, driven by innovation, improved commercialization, sustainable Intellectual Property (IP), promoting technology start­ups and specialized skill sets.

National Policy on Software Products – 2019

  1. The Policy will lead to the formulation of several schemes, initiatives, projects and measures for the development of Software products sector in the country as per the roadmap envisaged therein.
  2. To achieve the vision of NPSP-2019, the Policy has the following Missions:
  • To promote the creation of a sustainable Indian software product industry, driven by intellectual property (IP).
  • To nurture 10,000 technology startups in software product industry and generating direct and in-direct employment for 3.5 million people by 2025.
  • To create a talent pool for software product industry
  • To build a cluster-based innovation driven ecosystem
  • In order to evolve and monitor scheme & programmes for the implementation of this policy, National Software Products Mission will be set up with participation from Government, Academia and Industry.

Impact

  1. The Indian IT Industry has predominantly been a service Industry.
  2. Its software product ecosystem is characterized by innovations, Intellectual Property (IP) creation and large value addition increase in productivity.
  3. It has the potential to significantly boost revenues and exports in the sector, create substantive employment and entrepreneurial opportunities in emerging technologies.
  4. With this policy, it can leverage opportunities available under the Digital India Programme, thus, leading to a boost in inclusive and sustainable growth.

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

National Policy on Electronics 2019

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: NPE 2019

Mains level: India’s ESDM sector


News

  • The Union Cabinet gave its approval to the National Policy on Electronics 2019 (NPE 2019), proposed by the Ministry of Electronics and Information Technology .

National Policy on Electronics 2019

  1. The Policy envisions positioning India as a global hub for Electronics System Design and Manufacturing – by encouraging and driving capabilities in the country.
  2. It facilitates for developing core components, including chipsets, and creating an enabling environment for the industry to compete globally.
  3. The Policy replaces the National Policy of Electronics 2012 (NPE 2012).

Salient Features

  1. Provide incentives and support for manufacturing of core electronic components
  2. Provide special package of incentives for mega projects which entail huge investments, such as semiconductor facilities display fabrication, etc.
  3. Promote Industry-led R&D and innovation in all sub-sectors of electronics, including grass root level innovations and early stage Start-ups in emerging technology
  4. Provide incentives and support for significantly enhancing availability of skilled manpower, including re-skilling
  5. Special thrust on Fabless Chip Design Industry, Medical Electronic Devices Industry, Automotive Electronics Industry and Power Electronics for Mobility and Strategic Electronics Industry
  6. Create Sovereign Patent Fund (SPF) to promote the development and acquisition of IPs in ESDM sector.
  7. Promote trusted electronics value chain initiatives to improve national cyber security profile.

Major Impact

  1. The NPE 2019 when implemented will lead to formulation of several schemes, initiatives, projects, etc. for the development of ESDM sector in the country.
  2. It will enable flow of investment and technology, leading to higher value addition in the domestically manufactured electronic products.
  3. It will lead to increased electronics hardware manufacturing in the country and their export, while generating substantial employment opportunities.

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

Government to continue credit linked capital subsidy scheme

Note4Students

Mains Paper 3: Indian Economy | Planning, mobilization of resources, growth, development and employment

From UPSC perspective, the following things are important:

Prelims level: Various initiatives for supporting MSME Sector

Mains level: Facilitating MSMEs in India


News

  • The Central government will continue the “Credit Linked Capital Subsidy and Technology Upgradation Scheme” for micro, small, and medium enterprises (MSMEs) beyond the 12th Plan period for three years from 2017-18 to 2019-20.

CCLS for Technology

  1. The objective of the Scheme is to facilitate technology up-gradation in MSEs by providing an upfront capital subsidy of 15 per cent (on institutional finance of upto Rs 1 crore availed by them).
  2. This is provided for induction of well-established and improved technology in the specified 51 sub-sectors/products approved.
  3. The major objective is to upgrade their plant & machinery with state-of-the-art technology, with or without expansion.
  4. The Scheme is a demand driven one without any upper limit on overall annual spending on the subsidy disbursal.

Nature of assistance

  • The revised scheme aims at facilitating technology up-gradation by providing 15% up front capital subsidy to MSEs, including tiny, khadi, village and coir industrial units, on institutional finance availed by them.

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

[pib] National Productivity Week

Note4students

Mains Paper 3: Economy | Issues relating to planning, mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Circular Economy, NPC

Mains level: Read the attached story


News

  • National Productivity Council (NPC) is celebrating its 61st Foundation Day on 12th February with the theme “Circular Economy for Productivity & Sustainability”.
  • NPC observes foundation day as Productivity Day and the National Productivity Week.

Circular Economy

  1. A circular economy is an economic system aimed at minimising waste and making the most of resources.
  2. This regenerative approach is in contrast to the traditional linear economy, which has a ‘take, make, dispose’ model of production.
  3. In a circular system resource input and waste, emission, and energy leakage are minimized by slowing, closing, and narrowing energy and material loops.
  4. This can be achieved through long-lasting design, maintenance, repair, reuse, remanufacturing, refurbishing, recycling, and upcycling.
  5. The circular economy follows the principle of preservation and enhancement of natural capital by controlling finite stocks and balancing renewable resource flows.

Why circular economy?

  1. Circular economy has the potential to increase productivity and create jobs, whilst reducing carbon emissions and preserving valuable raw materials.
  2. It works by extending product life span through improved design and servicing and relocating waste from the end of the supply chain to the beginning – in effect, using resources more efficiently by using them over and over.
  3. The challenge lies in building circular economy knowledge and capacity.

About National Productivity Council

  1. National Productivity Council (NPC) is an autonomous registered society under DPIIT, Ministry of Commerce & Industry.
  2. It is national level organization to promote productivity culture in India.
  3. Established by the Ministry of Industry, Government of India in 1958, it is an autonomous, multipartite, non-profit organization with equal representation from employers’ & workers’ organizations and Government.
  4. NPC is a constituent of the Tokyo-based Asian Productivity Organisation (APO), an Inter Governmental Body, of which the Government of India is a founder member.

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

DIPP rechristened to include internal trade

Note4students

Mains Paper 2: Indian Polity | Statutory, regulatory and various quasi-judicial bodies

From UPSC perspective, the following things are important:

Prelims level: DPIIT

Mains level:  Mandate of the restructured DPIIT


News

Department for Promotion of Industry and Internal Trade

  1. The government has notified changing the name of the Department of Industrial Policy & Promotion (DIPP) to the Department for Promotion of Industry and Internal Trade, and has enhanced its role.
  2. These are in addition to the previous responsibilities of the erstwhile DIPP relating to general industrial policy, administration of the Industries (Development and Regulation) Act, 1951, industrial management, productivity in industry, and matters related to e-commerce.

About DIPP

  1. DIPP was established in the year 1995, and was reconstituted in the year 2000 with the merger of Department of Industrial Development.
  2. The department functions under the Ministry of Commerce and Industry.
  3. It is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view the national priorities and socio-economic objectives.
  4. While individual Administrative Ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DIPP is responsible for the overall industrial policy.
  5. It is also responsible for facilitating and increasing the foreign direct investment (FDI) flows to the country.
  6. It is currently working to frame a new industrial policy, to be the third such policy in India since its independence in 1947.

Four new responsibilities added

The notification has also included four new categories of responsibilities the renamed body will be in charge of, including:

  • Promotion of internal trade (including retail trade)
  • Welfare of traders and their employees
  • Matters relating to facilitating Ease of Doing Business
  • Matters relating to start-ups

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

RBI forms expert committee to rejuvenate MSMEs

Note4students

Mains Paper 3: Economy | Changes in industrial policy & their effects on industrial growth

From the UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Measures for revitalizing MSMEs


News

About the Committee

  1. The RBI has constituted an expert committee, which will review the current institutional framework in place to support MSMEs along with examining the factors affecting timely and adequate availability of finance to them.
  2. The new 8-member committee would be chaired by former Securities and Exchange Board of India chairman UK Sinha.

Terms of Reference

  1. The new committee will review the current institutional framework in place to support the MSME along with examining the factors affecting the timely and adequate availability of finance to the sector.
  2. The committee will also study the impact of the recent economic reforms on the sector and identify the structural problems affecting its growth.
  3. It will conduct a study about the best global practices with respect to MSMEs and recommend its adoption in India, wherever appropriate..
  4. Furthermore, the committee would also review the existing MSME focused policies and its impact on the sector and to propose measures for leveraging technology in accelerating the growth of the sector.

Compliment this newscard with:

[op-ed snap] Going beyond the credit requirements of MSMEs

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

Govt. notifies rules for in-flight, maritime mobile phone services

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: Flight and Maritime Connectivity Rules, 2018

Mains level: In-flight and maritime connectivity issues


News

  • People will soon be able to make calls and access internet through their phones during air travel and ship voyage within the Indian Territory as the government has notified rules for providing such services.

Flight and Maritime Connectivity Rules, 2018

  1. Indian and foreign airlines and shipping companies operating in the country can provide in-flight and maritime voice and data services in partnership with a valid Indian telecom licence holder.
  2. The in-flight and maritime connectivity (IFMC) can be provided using telecom networks on ground as well as using satellites.
  3. The services can be provided by a valid telecom licence holder in India through domestic and foreign satellites having permission of the Department of Space.
  4. In case of using satellite system for providing IFMC, the telegraph message shall be passed through the satellite gateway earth station located within India
  5. Such satellite gateway earth stations shall be interconnected with the NLD (national long distance) or access service or ISP licensee’s network for further delivery of service.
  6. The IFMC services will be activated once the aircraft attains a minimum height of 3,000 metres in Indian airspace to avoid interference with terrestrial mobile networks.
  7. The IFMC licences will be granted against annual fee of Re 1 for a period of 10 years and the permit holder will have to pay licence fees and spectrum charges based on revenue earned from providing services.

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

[op-ed snap] Changing the Indian state from bully to ally

Note4students

Mains Paper 3: Economy | Changes in industrial policy & their effects on industrial growth

From the UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The burden of compliances on MSMEs and the need for its reduction


Context

MSMEs overburdened with compliances

  1. Policy imagination and rhetoric often romanticize MSMEs over large employers because it believes that MSMEs are a source of massive job creation, are the salvation of less-skilled job seekers, and embody solid middle-class values
  2. But India’s 63 million micro, small and medium enterprises (MSMEs) can’t hear what policymakers say because of what they do—unleashing a universe of 60,000-plus possible compliances and 3,300-plus possible filings for enterprises
  3. No MSME can possibly keep track of this regulatory cholesterol that is made even more toxic by 5,000-plus changes annually

Using expressivism

  1. much of India’s regulatory cholesterol for employers is not driven by economic justifications—consumer protection, market failures, information asymmetry and externalities—but reflects what economist Cass Sunstein calls expressivism
  2. In this concept, values rather than facts are used to make policy

Three challenges for technocratic policymakers

  • Distribution (hard to identify who bears costs and obtains benefits)
  • Welfare (nobody has a welfare metre and proxies are useful but can produce serious errors)
  • Knowledge (nobody knows enough, and guesswork and unintended consequences are inevitable)

MSMEs need to be protected from this regulation burden

  1. The progress made in Ease of Doing Business (EODB) rankings is real, but it’s time for another exercise that takes a ground-up look at our current regulatory frameworks
  2. India’s next wave of EODB should have three vectors
  • Rationalization (cutting down the number of laws)

Rationalization could start with clustering our 44 labour laws into a single labour code and should include reviewing levels and increasing competition (There can be a competition for mandatory employer payroll deduction monopolies like provident fund and Employee’s State Insurance that offer expensive products and treat customers badly)

  • Simplification (cutting down the number of compliances and filings)

Simplification would include replacing our 25-plus different numbers issued by various government arms to every employer with a unique enterprise number (an Aadhaar for enterprises)

  • Digitization (architecting for true paperless, presence-less and cashless)

We must move away from the current approach to digitization as a website, where you log in with a password and upload files and shift to open architecture-based API frameworks, where multiple players compete in providing services to employers (GST Network is a good template)

Way forward

  1. Changing regulations every three hours makes life miserable for MSMEs and breeds informality (a sense of humour about the rule of law)
  2. The next avatar of our EODB programme must aim to decisively shift the Indian state from being an MSME bully to an MSME ally
  3. The upside could be about 50 million more formal jobs

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

[pib] NPCC is now a Miniratna

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: NPCC

Mains level: Contribution of India’s PSUs


News

  • National Projects Construction Corporation Limited (NPCC) has been conferred with the status of Miniratna: Category –I by the Government of India.

About NPCC

  1. NPCC, a schedule ‘B’ CPSE under the administrative control of Ministry of Water Resources RD & GR, has also been awarded ISO 9001:2015 Certification.
  2. The Corporation, incorporated in 1957, is a premier construction company having mandate with creation of infrastructure to provide impetus for economic development of the country.
  3. The Corporation is making continuous profit since 2009-10,  having positive networth for the last six years and has ambitious business plan with enhanced order book position of Rs. 11833 crore.
  4. The empowerment of Miniratna Status to NPCC will help the company in taking speedy decisions by enhancing the delegation of powers to the Board.

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

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

[op-ed snap] Make it the Indian way: Why the country must adapt to additive technologies

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: 3D printing

Mains level: Prospects of additive manufacturing and how can India leverage it


Context

Upcoming manufacturing revolution in India

  1. We are fortunate to be in a historic moment when the manufacturing sector is about to go through a transformation wrought by disruptive technologies
  2. If ‘Make in India’ is to succeed, it needs to encompass ‘Make it the Indian Way’
  3. It need not emulate mass production technologies, fuelled in Detroit by massive capital investment or in Beijing by cheap labour

Lacunae in traditional manufacturing

  1. Traditional manufacturing of mechanical parts involves making a mould and then stamping out parts by thousands every day
  2. The equipment to make these parts and moulds is expensive, thus the cost of the first hundred units is high
  3. Per unit costs decline only when they are mass produced\
  4. Because of limitations of how this technology works, one typically builds many small parts, which are later on assembled on an assembly line using unskilled labour or robots to build an entire system
  5. Traditional manufacturing leads to high inventory costs of multiple parts that need to be produced and stored before being assembled
  6. This makes the design phase complex and costly, rendering it expensive to redesign to correct initial mistakes or innovate to meet changing consumer needs

Prospects of 3D printing

  1. Industrial 3D printing has begun to transform manufacturing in Western countries
  2. Although it began as a quick and cheap way of developing prototypes, additive manufacturing has now gone mainstream in developed countries and is beginning to replace traditional manufacturing for many different applications
  3. In additive manufacturing, the physical object to be built is first designed in software
  4. This design is fed to computerised machines, which build that object layer by layer
  5. The technology is suitable for building the entire system in one go, with hollow interiors without assembly or interlocked parts
  6. Changing features or tweaking shapes is a simple software change effected in minutes
  7. A retooling of machines is not required and each unit can be customised
  8. By eliminating the need to hold a large inventory of parts, set up an assembly line and purchase costly machines, adaptive manufacturing reduces capital and space requirements as well as the carbon footprint

What does this mean for developing nations?

  1. This technological nirvana carries dangerous implications for developing nations
  2. It decreases reliance on assembly workers and bypasses the global supply chain that has allowed countries like China to become prosperous through export of mass-produced items
  3. This may well lead to the creation of software-based design platforms in the West that distribute work orders to small manufacturing facilities, whether located in developed or developing countries, but ultimately transfer value creation towards software and design and away from physical manufacturing
  4. This would imply that labour-intensive manufacturing exports may be less profitable

India’s strengths

This manufacturing paradigm has several features that play to the strengths of the Indian ecosystem

  • It eliminates large capital outlays
  1. Machines are cheaper, inventories can be small and space requirements are not large
  2. Thus, jump-starting manufacturing does not face the massive hurdle of large capital requirement
  3. The traditional small and medium enterprises can easily be adapted and retooled towards high technology manufacturing
  • The Indian software industry is well-established, and plans to increase connectivity are well underway as part of ‘Digital India’
  1. This would allow for the creation of manufacturing facilities in small towns
  2. It would also foster industrial development outside of major cities
  • It is possible to build products that are better suited for use in harsh environmental conditions
  1. Products that required assembly of fewer parts also implies that they may be better able to withstand dust and moisture prevalent in our tropical environment and be more durable
  • In a country where use-and-throw is an anathema, maintaining old products is far easier because parts can be manufactured as needed and product life-cycles can be expanded
  • Maintaining uniform product quality is far easier because the entire system is built at the same time and assembly is not required

What needs to be done?

  1.  The “Make it the Indian Way” approach we advocate will need public-private partnership and multi-pronged efforts
  2. On the one hand, we need to accelerate research at our premier engineering schools on manufacturing machines and methods and encourage the formation of product design centres so that the products built to suit the Indian environment and consumers
  3. We also would need government support to provide incentives for distributed manufacturing in smaller towns, and for the IT industry to work on creating platforms and marketplaces that connect consumer demands, product designers and manufacturers in a seamless way

Way forward

  1. A combination of science and art, with a pinch of Indian entrepreneurship thrown in, will allow us to develop a manufacturing ecosystem that will not only allow India to compete with global manufacturing, it will also create products that are uniquely suited to Indian conditions
  2. The Industrial revolution somehow bypassed India, but we have a unique opportunity to catch the wave of the manufacturing revolution if we can learn to surf

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

[op-ed snap] The need for strong contract enforcement

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: Doing business report, Economic survey

Mains level: Need of robust contract enforcement regime in India


Context

Lax contract enforcement in India

  1. According to Milton Friedman, the three primary functions of the government are defence, law and order, and contract enforcement
  2. Unlike the former two, the latter has not received adequate importance in India

Why is contract enforcement important?

  1. A sound contract enforcement mechanism is essential for maintaining business confidence, reducing uncertainty and promoting fair play in the economy
  2. An efficient contract enforcement mechanism not only provides remedies to aggrieved parties but also dissuades violation of the contractual obligations because of the fear of legal fees and court fines
  3. Thus, an effective contract enforcement mechanism can, in reality, reduce the flouting of laws and contracts, reducing the need to approach redressal mechanisms
  4. This is the reason for its inclusion as a criterion in World Bank’s Doing Business (DB) report
  5. Though India’s overall ranking in the report this year improved from 100 to 77, when it comes to the contract enforcement metric, it lags behind at 163 out of 190 nations

Costs of poor contract enforcement

  1. The Economic Survey 2017-18 tried to highlight the impact of this problem by drawing attention to the costs of stalled projects and legal fees
  2. However, the true extent of the problem also includes various indirect costs
  3. These are an outcome of the inefficient choices made by economic agents in an inefficient legal system
  4. Two such cases are inefficient risk-taking and skewed firm structure
  5. A business must try to maximize its expected returns
  6. At the same time, healthy risk-taking behaviour in the economy is necessary to ensure growth, rather than just relying on low-return risk-free alternatives
  7. However, poor contract enforcement tends to increase the risk and reduce the returns (increased legal costs), thus affecting the overall risk to return ratio
  8.  As a result, businesses don’t engage in economically and socially beneficially activity such as innovation
  9. Similarly, the failure of legal mechanisms in guaranteeing loan repayment has resulted in banks bearing greater risks
  10. The outcome is that interest rates are higher and banks are reluctant to lend to socially beneficial sectors such as agriculture and infrastructure
  11. Another issue is that poor legal frameworks tend to promote an excessive vertical integration of companies
  12. According to Nobel Laureate Oliver Hart, when contracts are ineffective, businesses prefer to eliminate the need to deal with other companies by resorting to acquisitions and mergers

Shining example: India’s e-commerce sector

  1. Today, the sector is dominated by the likes of Flipkart and Amazon, while companies such as Snapdeal and eBay have failed to make a lasting impression
  2. The main difference is that the former two have a ‘hybrid’ model, while the latter two primarily have a ‘marketplace’ model
  3. The hybrid model entails that the companies themselves sell various products (along with other sellers) by integrating logistics, procurement and delivery
  4. In a marketplace model, the companies just manage a platform to facilitate purchase between various sellers and buyers
  5. The success of an e-commerce company depends on its ability to retain consumers’ trust
  6. For Snapdeal and eBay, this trust has been waning because of frequent reports of fake and poor quality products sold on their websites
  7. A poor contract enforcement system further prevented them from ensuring good quality products from their suppliers
  8. On the other hand, Flipkart and Amazon through their hybrid model have been able to maintain the quality of their own products
  9. To compete with these products, other sellers have also had to improve the quality of their products
  10. Thus, the latter two have succeeded while the others have not been able to
  11. In this context, an effective legal system provides the necessary level playing ground for smaller firms
  12. This ensures that they are given adequate opportunity to grow and prosper

Effects of poor contract enforcement

  1. A poor legal system tends to centralize industries, wherein the firms tend to integrate with backward and forward linkages
  2. This results in the concentration of wealth as consumers prefer capital-intensive large firms over smaller labour-intensive rivals
  3. This reduces employment and perpetuates inequality
  4. Another effect of poor contract enforcement mechanisms is the spurt of informal and often illegal channels of dispute resolution
  5. These make use of local leaders and under-the-table dealings to help settle disputes
  6. Keeping aside the issue of biased and poor quality decisions, this also brings undue power into the hands of middlemen and facilitators
  7. This, in turn, creates problems such as increased corruption and the undermining of the rule of law

Way forward

  1. These direct and indirect problems and the market inefficiency associated with them underline the need to reform the legal system
  2. Though some measures have recently been undertaken, they fail to address the deeper issue of an overburdened and understaffed judiciary
  3. Addressing such deep-rooted problems will only be possible through extensive cooperation between the organs of the government—“cooperative separation of powers”

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

[op-ed snap] Going beyond the credit requirements of MSMEs

Note4students

Mains Paper 3: Economy | Changes in industrial policy & their effects on industrial growth

From the UPSC perspective, the following things are important:

Prelims level: Mint Street Memo, RBI

Mains level: Role of MSME sector in India’s manufacturing sector and interventions required for their growth


Context

Various sops for MSMEs

  1. There was a big announcement of support to micro, small and medium enterprises (MSME) by PM Modi last week
  2. Apart from improving ease of doing business, the most important announcements were regarding access and cost of credit
  3. MSMEs can now get in-principle approval for loans of up to ₹1 crore in 59 minutes
  4. Additionally, goods and services tax (GST)-registered MSMEs will get an interest subvention on fresh or incremental loans
  5. Interest rate rebates have also been announced for exporters

Need for special intervention for MSMEs

  1. Any improvement in the sector’s operating environment will help the Indian economy
  2. The share of MSMEs in the country’s gross value added is estimated to be about 32%
  3. It also contributes about 40% to total exports and 45% to manufacturing output
  4. Availability of credit from formal sources has been a problem for the sector
  5. MSME credit is also one of the reasons behind the ongoing rift between the government and the Reserve Bank of India (RBI)

Liquidity crunch and its effect

  1. The share of credit to MSMEs has declined as a proportion of overall bank credit in recent years
  2. A Mint Street Memo, published by the RBI in August, mapped the flow of credit to the sector
  3. While about 90% of credit from formal sources comes from banks, loans extended by NBFCs to MSMEs have increased in recent years
  4. But since NBFCs are now facing a liquidity crunch, it is likely that the flow of credit would have been affected
  5. Credit flow was affected in the aftermath of demonetization, though it subsequently recovered from February 2017

MSME sector is mostly informal

  1. India has a large number of tiny firms that work in the informal sector and do not scale up
  2. More than 90% of MSMEs operate in the informal sector
  3. These firms largely depend on informal sources of credit at higher interest rates
  4. It is difficult for these firms to get loans from banks because they do not maintain proper documents and records
  5. At a broader level, since most firms are very small, besides non-availability of formal finance, they are also not in a position to adopt technology to improve productivity
  6. Further, most firms in the informal sector are unlikely to attract skilled labour
  7. The sixth economic census showed that enterprises on an average employed only 2.24 people
  8. All this has not only affected growth and output, particularly in the manufacturing sector, but also employment generation

Associated hazards of liberal lending

  1. While incentivizing credit flow will help improve activity in the sector, government intervention and directed lending can affect proper credit appraisal
  2. This could not only result in higher NPAs, but also affect the flow of credit in the future
  3. Public sector banks already have significant NPAs in the MSME sector and a push by the government can increase the risk
  4. The Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI is a growing contingent liability and needs to be examined with urgency

Way forward

  1. What is needed is a simplification of processes so that more firms can access formal finance
  2. Banks should improve their credit appraisal capability to work with firms that are perhaps dealing with a financial institution for the first time
  3. The government should work to improve the overall regulatory architecture that would incentivize smaller firms to scale up

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

[op-ed snap] Clearing the way for an investment uptick

Note4students

Mains Paper 3: Economy | Investment model

From the UPSC perspective, the following things are important:

Prelims level: World Bank Doing Business (DB) rankings

Mains level: India’s performance in DB rankings and its impact on investments in the economy


Context

India’s jump in doing business ranking

  1. India has climbed 23 spots to rank 77th globally in the World Bank Doing Business (DB) rankings for 2019
  2. This is a substantial jump in the rankings for the second year running
  3. Last year, India jumped 30 notches

Efforts undertaken to achieve this feat

  1. India registered improvement in areas like starting a business, dealing with construction permits, getting electricity, getting credit, paying taxes, and trading across borders
  2. The government has undertaken targeted efforts to address shortcomings in these areas—for instance, the National Trade Facilitation Action Plan (NTFAP) 2017-2020 for increasing the efficiency of cross-border trade
  3. Launched last year, it is putting in place the architecture for decreasing border and documentary compliance time, permitting exporters to electronically seal their containers at their own facilities, and reducing physical inspections to up to only 5% of all shipments
  4. Likewise, the implementation of the single-window clearance system for construction permits in Delhi and the online building permit approval system in Mumbai are important
  5. The goods and services tax (GST) is one of the government’s biggest achievements
  6. There has been an improvement in India’s “paying taxes” score

Do DB rankings show a real picture?

  1. The DB rankings have their limitations, as this paper has noted
  2. They are restricted to findings in two cities—Mumbai and Delhi—and reflect the de jure state of affairs
  3. Research in recent years shows that the de facto reality at the enterprise level may be significantly different and vary across states depending on governance quality and state capacity, among other factors
  4. The rankings, however, give investors a yardstick by which to measure government commitment to reforms
  5. Such messaging is important sentiment for investment, particularly foreign direct investment

Signs of an uptick in investments

  1. In its August statement, the Reserve Bank of India’s monetary policy committee said that the persistent output gap had almost closed
  2. There is still excess capacity, certainly, but it has been in steady decline for a while now
  3. According to reports, the Union ministry of finance is likely to sign off on the second round of capital infusion for public sector banks towards the end of November
  4. All of this lays the ground for an uptick in the investment cycle

Way forward

  1. The sluggish rate of resolution of cases that have come under the IBC is becoming a major roadblock in DB ranking
  2. In GST,  the number of hours taken in a year to file taxes rose to 275.4 from 214 last year and delays in GST refunds have constrained working capital for exporters
  3. All such problems need to be addressed to maintain a continuing momentum of climbing up in DB rankings

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

[pib] India at 77 Rank in World Bank’s Doing Business Report, 2018

Note4Students

Mains Paper 3: Indian Economy | Issues relating growth and development.

The following things are important from UPSC perspective:

Prelims: Ease of Doing Business Report 2018

Mains level: Factors leading India to improve its ranking on Ease of Doing Business index and the problems that needs to be solved to further improve its performance.


News

Context

  • The World Bank released its latest Doing Business Report (DBR, 2019) in New Delhi.

India’s Performance

  1. India has recorded a jump of 23 positions against its rank of 100 in 2017.
  2. It is placed now at 77thrank among 190 countries with a leap of 23 ranks.
  3. The DBR ranks countries on the basis of Distance to Frontier (DTF), a score that shows the gap of an economy to the global best practice.
  4. This year, India’s DTF score improved to 67.23 from 60.76 in the previous year.
  5. As a result of continued efforts by the Government, India has improved its rank by 53 positions in last two years and 65positions in last four years.

Doing Business Assessment of India

  1. The Doing Business assessment provides objective measures of business regulations and their enforcement across 190 economies on ten parameters affecting a business through its life cycle.
  2. India has improved its rank in 6 out of 10 indicators and has moved closer to international best practices (Distance to Frontier score) on 7 out of the 10 indicators.
  3. Indicators where India improved its rank are as follows:
S. No. Indicator 2017 2018 Change
1 Construction Permits 181 52 +129
2 Trading Across Borders 146 80 +66
3 Starting a Business 156 137 +19
4 Getting Credit 29 22 +7
5 Getting Electricity 29 24 +5
6 Enforcing Contracts 164 163 +1
Overall rank 100 77 +23

Important features of India’s performance this year are:

  1. The World Bank has recognized India as one of the top improvers for the year.
  2. This is the second consecutive year for which India has been recognized as one of the top improvers.
  3. India is the first BRICS and South Asian country to be recognized as top improvers in consecutive years.
  4. India has recorded the highest improvement in two years by any large country since 2011 in the Doing business assessment by improving its rank by 53 positions.
  5. As a result of continued performance, India is now placed at first position among South Asian countries as against 6th in 2014.

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

[pib] Centre for the Fourth Industrial Revolution in India

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Industry 4.0

Mains level: Scope of 4th Industrial Revolution and its impact on India.


News

Context

  • The World Economic Forum (WEF) announced its new Centre for the Fourth Industrial Revolution in India, which would aim to bring together the government and business leaders to pilot emerging technology policies.

Industry 4.0

  1. The WEF has also entered into partnerships with the Maharashtra and Andhra Pradesh governments for the launch of Industry 4.0.
  2. The centre would be based in Maharashtra and it has selected drones, artificial intelligence and blockchain as the first three project areas.
  3. NITI Aayog will coordinate the partnership on behalf of the government and the work of the centre among multiple ministries.
  4. The new centre will work in collaboration with the government on a national level to co-design new policy frameworks and protocols for emerging technology.
  5. The launch of this Centre is the fourth in the world after San Francisco, Tokyo and Beijing.

Focus of the Initiative

  1. The first project will focus on expanding access to data to accelerate the adoption of artificial intelligence in socio-economic areas like education, healthcare and agriculture.
  2. The second will focus on the application of smart contracts to boost productivity and transparency while reducing inefficiency.
  3. At state level, the Government of Maharashtra in collaboration with the Centre is planning to undertake a drone mapping operation in the agriculture sector.

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

CII and UNEP sign MoU for implementation of sustainable development

Note4students

Mains Paper 2: IR | Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests

From UPSC perspective, the following things are important:

Prelims level: CII, UNEP, #Un-plastic Initiative

Mains level: Sustainable Development


News

Context

  • The Confederation of Indian Industry (CII) and the UN Environment has signed a memorandum of understanding (MoU) for coherent implementation of the environmental dimension of sustainable development.

Highlights of the MoU

  1. The CII will work towards voluntary codes in Indian industry on the issue of plastics, for which there is already a precedent with benefits to firms in terms of credit and shareholder value.
  2. The MoU encompasses ‘coherent implementation of the environmental dimension of sustainable development according to an official statement.
  3. It provides a framework of cooperation and facilitates cooperation in issues of environment, climate change, renewable energy, energy efficiency, resource conservation and management, water sanitation, smart cities and urban infrastructure.
  4. A major activity planned under the MoU, will be the #Un-plastic Initiative of CII and UN Environment, beginning with a Call to Action, including commitments by industry on actions to curb plastic pollution.

Back2Basics

Confederation of Indian Industry (CII)

  1. CII is a non-government, not-for-profit, industry-led and industry-managed organization.
  2. Founded in 1895, it has over 9,000 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 300,000 enterprises from around 265 national and regional sectoral industry bodies.
  3. CII works with the Government on policy issues. It played a very important role during economic liberalisation in 1991 which knocked down the high walls of protection between Indian industry and the rest of the world.
  4. CII serves as a reference point for Indian industry and the international business community.
  5. It has 65 offices, including 9 Centres of Excellence, in India, and 11 overseas offices in Australia, Bahrain, China, Egypt, France, Germany, Iran, Singapore, South Africa, United Kingdom and United States.

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

[pib] Udyam Abhilasha

Note4Students

Mains Paper 3: Indian Economy | Issues relating to planning, mobilization of resources, growth

From UPSC perspective, the following things are important:

Prelims level: Udyam Abhilasha

Mains level: Promoting Startup Ecosystem in India


News

Udyam Abhilasha

  1. Small Industries Development Bank of India (SIDBI), had launched a National Level Entrepreneurship Awareness Campaign, Udyam Abhilasha in 115 Aspirational Districts identified by NITI Aayog.
  2. The campaign would create and strengthen cadre of more than 800 trainers to provide entrepreneurship training to the aspiring youths across these districts.
  3. SIDBI has partnered with CSC e-Governance Services India Limited, a Special Purpose Vehicle, (CSC SPV) set up by the Ministry of Electronics & IT, Govt. of India for implementing the campaign.
  4. SIDBI is also taking-up with stakeholders including Banks, NABARD, NBFCs, SFBs, District Industries Centres, State Govt. etc. to be a part of this campaign and ensure multifold impact.

Objectives of the Campaign

The objectives of the missionary campaign includes:

  • to inspire rural youth in Aspirational districts to be entrepreneurs by assisting them to set up their own enterprise,
  • to impart trainings through digital medium across the country,
  • to create business opportunities for CSC VLEs,
  • to focus on women aspirants in these Aspirational districts to encourage women entrepreneurship and
  • to assist participants to become bankable and avail credit facility from banks to set up their own enterprise.

Role of Village Level entrepreneurs

  1. CSC VLEs would play role of catalyst for these aspiring entrepreneurs.
  2. Apart from training, VLEs would also provide handholding support to the aspirants to establish new units by assisting them in availing loans for their enterprise.
  3. They will help making youth aware about various initiatives of Government of India like Pradhan Mantri Mudra Yojana, SUI etc.

Back2Basics

Small Industries Development Bank of India (SIDBI)

  1. It is the Principal Financial Institution for the Promotion, Financing, Development and Coordination of the Micro, Small and Medium Enterprise (MSME) sector.
  2. SIDBI meets the financial and developmental needs of the MSME sector with a Credit+ approach to make it strong, vibrant and globally competitive.
  3. SIDBI, under its revamped strategy SIDBI 2.0, has adopted the theme of ease of access to MSEs and being Impact Multiplier & Digital Aggregator.

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

[pib] A web portal for approval for MSME loans up to Rs. 1 crore within 59 minutes

Note4Students

From UPSC perspective, the following things are important:

Prelims level: Portal “PSBLoansin59min

Mains level: Various initiatives for MSME developmemt


News

Fastest Credit facility for MSMEs

  1. The Union Minister of Finance and Corporate Affairs has launched a transformative initiative in MSME credit space.
  2. The web portal psbloansin59minutes.com will enable in principle approval for MSME loans up to Rs. 1 crore within 59 minutes from SIDBI and 5 Public Sector Banks (PSBs).
  3. The Portal sets a new benchmark in loan processing and reduces the turnaround time from 20-25 days to 59 minutes.
  4. Subsequent to this in principle approval, the loan will be disbursed in 7-8 working days.

About the Portal “PSBLoansin59min”

  1. It is one of its kind platforms in MSME segment which integrates advanced fintech to ensure seamless loan approval and management.
  2. The loans are undertaken without human intervention till sanction and or disbursement stage.
  3. A User Friendly Platform has been built where MSME borrower is not required to submit any physical document for in-principle approval.
  4. The solution uses sophisticated algorithms to read and analyse data points from various sources such as IT returns, GST data, bank statements, MCA21 etc. in less than an hour while capturing the applicant’s basic details.
  5. The system simplifies the decision making process for a loan officer as the final output provides a summary of credit, valuation and verification on a user-friendly dashboard in real time.

The key features of the contactless platform include:

  1. Majority stake of SIDBI & big 5 PSBs- SBI, Bank of Baroda, PNB, Vijaya and Indian Bank.
  2. A first for MSME borrowers-Connect with multiple banks without visiting the branch.
  3. Only Platform in the market with a Banker Interface which covers the Branch Level integrations (with maker-checker-approver) in tune with current systems of PSBs.
  4. Only Platform that enables Bankers to create Loan Products in line with the Scoring models & assessment methods within their approved credit policy.
  5. Only Platform that has an integrated GST, ITR, Bank Statement Analyzer, Fraud Check and Bureau Check.
  6. Only Platform that has been integrated with CGTMSE for checking the eligibility of Borrowers.

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

[op-ed snap] Outward flow

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Rising footprint of Indian companies in the global market and its advantages for India


Context

Acquisitions by Indian companies

  1. The last few days have seen two big-ticket overseas acquisition announcements by Indian companies
  2. The first is the Aditya Birla Group-promoted Hindalco’s purchase of American aluminium rolled products maker Aleris Corporation and the Shroff family-controlled UPL Ltd’s buyout of the North Carolina-based agrochemicals major, Arysta LifeScience
  3. With Aleris, Hindalco will become a truly value-added aluminium player, as against just a primary metal supplier
  4. The Arysta deal could, likewise, make UPL the fifth biggest global crop protection chemical company

What does this mean for industries in India?

  1. The above acquisitions are significant from the concerned companies’ standpoint
  2. To the extent the strengthened global footprint from these leads to increased sourcing from their Indian manufacturing facilities, there would be some domestic spinoffs as well
  3. It is good that Indian corporates are emboldened to make big investments

Need of the hour

  1. From an overall Indian perspective, this basically represents outward foreign direct investment
  2. What the country really needs today is more investment within the country, whether by domestic or foreign companies

The situation of Indian Economy

  1. The Indian economy is today at a crossroads
  2. The ghosts of demonetisation and GST have been laid to rest, even as the new indirect tax regime has settled down enough to prompt a rationalisation of rates
  3. The “micros”, as far as debt-equity or interest coverage ratios of corporates go, have also improved for many to consider resuming investments
  4. There are two things that are restraining them now:
  • The first is political uncertainty, which may go up in the run-up to next year’s national elections
  • The second is the not-so-great “macros” — global crude prices, rupee, interest rates and fiscal deficits

Way Forward

  1. Adherence to fiscal discipline is what India really needs
  2. It can make a huge difference to investor perception, more so in an uncertain global environment

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

[op-ed snap] Overdue correction: on revisiting the Companies Act

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Companies Act, 2013

Mains level: Changes required in Companies Act, 2013 in order to improve ease of doing business


Context

Panel to review Companies Act

  1. The Centre has announced the constitution of a committee to revisit several provisions of the Companies Act, 2013
  2. This 10-member committee appointed by the Corporate Affairs Ministry has been tasked with checking if certain offences can be ‘de-criminalised’
  3. This is being done as some of the provisions in the law are so tough that even a spelling mistake or typographical error could be construed as a fraud and lead to harsh strictures

Committee’s mandate

  1. The Uday Kotak panel has been tasked to assess whether some of the violations that can attract imprisonment (such as a clerical failure by directors to make adequate disclosures about their interests) may instead be punished with monetary fines
  2. It will also examine if offences punishable with a fine or imprisonment may be re-categorised as ‘acts’ that attract civil liabilities
  3. The committee has also been asked to suggest the broad contours for an adjudicatory mechanism that allows penalties to be levied for minor violations, perhaps in an automated manner, with minimal discretion available to officials

Mindset behind the changes

  1. The government hopes such changes in the regulatory regime would allow trial courts to devote greater attention to serious offences rather than get overloaded with cases as zealous officials blindly pursue prosecutions for even minor violations
  2. Industry captains had red-flagged the impact of such provisions on the ease of doing business, and investor sentiment in general
  3. The rethink is perhaps triggered by the fact that private sector investment is yet to pick up steam and capital still seeks foreign shores to avoid regulatory risks

Way forward

  1. The 2013 law entailed the first massive overhaul of India’s legal regime to govern businesses that had been in place since 1956 and was borne of a long-drawn consultative process
  2. The decision to build in harsh penalties and prison terms for corporate misdemeanours in the 2013 law was influenced by the high-pitched anti-corruption discourse that prevailed in the country at that moment in time
  3. But a trust deficit between industry and government owing to stray incidents of corporate malfeasance should not inhibit normal business operations

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

[pib] President inaugurates Udyam Sangam-2018

Note4Students

From UPSC perspective, the following things are important:

Prelims level: Udyam Sangam, Sampark Portal

Mains level: Various initiatives for MSME developmemt


News

Udyam Sangam-2018

  1. The President of India inaugurated the Udyam Sangam-2018, being organised by the Ministry of Micro, Small & Medium Enterprises (MSME) to celebrate the 2nd United Nations Micro, Small and Medium-sized Enterprises Day (27th June)
  2. On this occasion, he also launched the Solar Charkha and MSME Sampark Portal.
  3. The Udyam Sangam-2018 is an important effort in developing effective eco-systems for MSME sector.
  4. The Sangam will provide representatives of finance, training and educational institutions, industry, media, state governments and NGOs an opportunity to engage in extensive discussions to strengthen the eco-systems in this sector.

Sampark Portal

  1. ‘Sampark Portal’ is a digital platform to connect five lakh job seekers with recruiters
  2. It will be very useful in developing skill-pool and in enabling trained youth to know about different employment opportunities.

India’s MSME Sector

  1. MSME sector is called the backbone of our economy.
  2. This sector is the second largest employment provider after the agricultural sector.
  3. Our demographic dividend shall be most gainfully utilized in this very sector.
  4. This sector generates more employment opportunities at a lower cost of capital.
  5. And the most important thing about this sector is that it creates jobs in rural and backward areas.
  6. This sector could help in achieving the goal of inclusive growth through empowerment of weaker sections and decentralization of development.

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

PM Rojgar Protsahan Yojana: Government adding 5.5 lakh beneficiaries a month under scheme

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: Pradhan Mantri Rojgar Protsahan Yojana (PMRPY), Employees’ Pension Scheme (EPS), Universal Account Number (UAN)

Mains level: Employment opportunities in the organized & unorganized sector and government interventions for it


Positive response from the PMRPY scheme

  1. The government is adding about 5.5 lakh beneficiaries a month under the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY)
  2. In March this year, the Cabinet Committee on Economic Affairs approved enhancing the scope of PMRPY scheme

About the scheme

  1. PMRPY scheme was started to incentivise employers for generation of new employment wherein the Government of India pays the employer’s contribution of Employees’ Pension Scheme (EPS) for the new employment
  2. Under the scheme, the government was paying the employers’ contribution of 8.33 percent of wages to the Employees’ Pension Scheme (EPS) for new employees having a new Universal Account Number (UAN) and who joined on or after April 1, 2016 with salary up to Rs 15,000 per month — for first three years
  3. The PMRPY scheme was started in August 2016
  4.  The scheme is aimed at incentivising increasing the employment base of workers in the establishments and facilitate access to social security benefits of the organised sector

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

Cabinet nods to amend law for speedy disposal of commercial disputes: Law Min

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Ease of doing business

Mains level: Aim of the ordinance.


News

Ordinance on commercial disputes

  1. The government has approved an ordinance to amend a law for faster disposal of commercial disputes
  2. The ordinance will amend the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act

Aim of the ordinance

  1. Government is seeking to improve India’s ranking in the ease of doing business index

What about the pending bill?

  1. The proposed ordinance will replace the pending bill
  2. It would bring down the time taken from the present 1,445 days in resolution of commercial disputes of lesser value

Back2basics

Ease of doing business index

  1. Economies are ranked on their ease of doing business, from 1–190. A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm
  2. The rankings are determined by sorting the aggregate distance to frontier scores on 10 topics, each consisting of several indicators, giving equal weight to each topic
  3. The rankings for all economies are benchmarked to June 2017

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

[op-ed snap] Endgame for garment exports?

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The importance of textiles and apparels industry(in Indian economy) and issues related to it.


News

Contribution of Textiles and Apparels industry in Indian Economy

  1. India has huge $100 billion-plus textiles and apparels industry
  2. It employs more than 45 million people, accounts for almost 14% of exports and over a quarter of foreign exchange earnings
  3. It is the second-largest employment sector after agriculture
  4. Of this, the apparel sector alone accounts for more than 12 million jobs and a chunk of the exports

The textiles and apparels sector as a job creator

  1. The Economic Survey 2016-17 made a strong case for focusing on the textiles and apparels sector as a job creator
  2. According to the survey, apparels are 80 times more labour-intensive than automobiles and create 240-fold more jobs than steel

What is the issue?:  India is quickly losing its place at the top of the table of apparel-exporting nations
Official export data

  1. Apparel exports in February stood at $1.44 billion, a decline of 10.25% compared to the year before
  2. In fiscal 2017-18 (April to February), overall apparel production declined 10.4% , while garment exports fell 4%
  3. Garment exports have fallen for six months in a row now
  4. There are no signs of any immediate turnaround
  5. The sector got hit with a double whammy: demonetisation and the goods and services tax (GST)
  6. Meanwhile, the rupee has also been appreciating, gaining 6.4% against the dollar through 2017
  7. This means that an exporter who quoted, say, Rs. 100 per piece last April and quotes the same rate this April is already 6% more expensive to his buyer
  8. And the industry simply does not have the margin to take this 6% hit and still stay competitive with countries like Bangladesh and Vietnam which are eyeing India’s already shrinking export market

India and other exporting countries: Why is India lagging behind?

  1. Apparel exports from Bangladesh crossed India’s in 2003, while Vietnam passed India in 2011
  2. Both nations enjoy the same advantage that India does — an abundance of cheap, skilled labour
  3. In addition, they also enjoy favoured access through treaties to major markets like the U.S. and the European Union,
  4. while India is under intense pressure from the WTO to phase out subsidies and incentives given to the textiles sector as the sector has already achieved ‘export competitiveness’

The Main Challenge

  1. India’s garments sector is large in the aggregate, it is comprised mostly of tiny units
  2. Almost 90% of India’s garment manufacturing units are in the unregistered sector
  3. About 78% of the firms employ less than 50 workers and only 10% more than 500 workers
  4. This means that individual entrepreneurs have severe limitations on the kind of capital they can invest in capacity and technology

Other challenges

  1. According to the economic survey 2016-2017, the key issues are:
    (1) Logistics
    (2) labour regulations
    (3) tax and tariff policy
    (4) disadvantages emanating from the international trading environment compared to competitor countries

High logistic consts in India

  1. Logistics costs are also high: around $7/km by road transport(in India), while it is just $2.5/km in China and $3/km in Sri Lanka

What should be done?

  1. The tax policy needs to be aligned with global trends
  2. The scale problem needs to be met through aggregation of individual units in large clusters
  3. Technology upgradation needs serious funding, while trade treaties need to be reviewed to ensure that India gets access for its competitive products in major markets
  4. Above all, Indian entrepreneurs need to also focus on creating their own global brands rather than simply producing for other labels

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

[pib] International SME Convention-2018

Note4Students

From UPSC perspective, the following things are important:

Prelims level: International SME conference

Mains level: Schemes for development of SME sector


News:

  • It is the first ever International SME conference organized by The Ministry of MSME.
  • One hundred and fifty participants from 31 countries and 400 entrepreneurs from India will participate in the four day International SME convention being held in New Delhi.
  • The Ministry of MSME has engaged with over 35 International Trade Development organisations to attract and invite able and willing entrepreneurs and encourage people to people contact with select Indian Entrepreneurs from key sectors of the International counterparts.
  • The convention has specific focus on inclusion of MSMEs in the Make in India program & empowering women entrepreneurs.

Background

  • India is home to more than 60 million MSMEs, majority of who are in low-tech areas and serve the local domestic markets.
  • Of these, a small percentage, have the ability and capability to derive access to International Markets, with the vast majority of enterprises working as ancillaries. 
  • Together the MSMEs constitute a single largest employer after the Agriculture sector in India.
  • Highly developed economies have banked on their small and medium enterprises for both GDP Growth as well as higher employment resulting in higher per capita incomes.

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

[pib] Digital platform for MSME Exporters

Note4Students

From UPSC perspective, the following things are important:

Prelims level: FIEO GlobalLinker

Mains level: Schemes for MSME developmemt


News:

  • The minister of commerce and industry Shri Suresh Prabhu launched the FIEO GlobalLinker– a digital platform for MSME exporters to digitise their businesses and join a global community of growing businesses.
  • Federation of Indian Export Organisations (FIEO) has developed this digital platform.
  • FIEO GlobalLinker is setup with a view to make the business growth of SMEs simpler, more profitable and enjoyable.
  • It is a growing global network currently comprising over 140,000 SME firms, who are seeking business collaboration and growth opportunities through the use of their electronic business card and digital profiles created on the platform.
  • FIEO is available free of cost and it offers exporters a range of features and benefits like:
  • Business Opportunities: Exporters will be able to find clients, suppliers and advisors using the search and review facilities. Creating a free e-commerce store for direct sales and improved chain management.
  • Up-to-date Business Knowledge through business articles, industry news and common interest groups.
  • Improved Efficiencies: Platform provides services like company intranet, integrating email, a business calendar.
  • FIEO’s Services: Application for new RCMC/endorsement/renewal/participation in FIEO’s promotional programme and alerts.

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

India slaps anti-dumping duty on import of phosphorus pentoxide from China

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Phosphorus Pentoxide, Anti-dumping duty, Directorate General of Anti-Dumping and Allied Duties

Mains level: Measures taken by the government to promote internal trade and safeguard Indian industry


Anti-dumping duty imposed

  1. The revenue department has imposed an anti-dumping duty on the import of a chemical from China to protect the domestic manufacturers from cheap shipments
  2. Phosphorus Pentoxide is used as a powerful desiccant and dehydrating agent and is a useful building block and reagent in the chemical industry

Probe by DGAD

  1. The Directorate General of Anti-Dumping and Allied Duties (DGAD) had carried out a probe into the imports of the chemical to ascertain if the shipments were causing injury to the domestic manufacturers of the chemical
  2. After the investigation, the DGAD concluded that the chemical was being exported to India below the normal value and that domestic industry suffered a material injury on account of dumped imports
  3. Based on the recommendation of the DGAD, the revenue department imposed the levy on the import of the chemical from China

Back2Basics

Anti-dumping duty

  1. An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value
  2. The Revenue Department in the Finance Ministry imposes anti-dumping duty
  3. It is imposed after following recommendations of Directorate General of Anti-Dumping and Allied Duties (DGAD)
  4. These duties are imposed under the multilateral WTO regime
  5. They are not a measure to restrict imports or cause an unjustified increase in cost of products

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

‘States to compete on new logistics index’

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Logistics index, Global Logistics Summit, FICCI

Mains level: Government initiatives to boost efficiency across various infrastructure sectors


Logistics index for states

  1. The government is working on creating a logistics index that would score States on their performance in the sector
  2. Commerce Minister announced this at the Global Logistics Summit jointly organized by FICCI, Ministry of Commerce, Govt. of India and The World Bank Group

Changes related to the logistics sector

  1. The multi-modal transport issue is now being addressed by the new logistics division under the Commerce Ministry
  2. It is the first time that logistics as a subject is being dealt with at the level of the Government of India
  3. Logistics sector was also granted infrastructure status recently

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

Cabinet approves downsizing of Competition Commission of India

Note4students

Mains Paper 2: Polity | Statutory, regulatory & various quasi-judicial bodies.

From UPSC perspective, the following things are important:

Prelims level: Competition Commission of India (CCI)

Mains level: Various quasi-judicial bodies and their functioning


Going on with “minimum government-maximum governance”

  1. The cabinet has cut the number of members appointed by the central government in Competition Commission of India (CCI)
  2. This move will check government interference in the working of the anti-trust regulator

Change in structure

  1. The government approved rightsizing the CCI from one chairperson and six members (totaling seven) to one chairperson and three members (totaling four)
  2. The move is expected to stimulate the business process of corporates and generate job opportunities by speeding up hearings and approvals

Back2Basics

Competition Commission of India (CCI)

  1. Competition Commission of India is a statutory body of the Government of India
  2. It is responsible for enforcing The Competition Act, 2002 throughout India and to prevent activities that have an appreciable adverse effect on competition in India
  3. The Act prohibits anti-competitive agreements, abuse of dominant position by enterprises and regulates combinations (acquisition, acquiring of control and Merger and acquisition), which causes or likely to cause an appreciable adverse effect on competition within India
  4. It is the duty of the Commission to eliminate practices having an adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade in the markets of India
  5. CCI consists of a Chairperson and 6 Members (now 4) appointed by the Central Government

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

[op-ed snap] Debunking India’s logistics myths

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Sagarmala project, Logistics Performance Index

Mains level: Various issues associated with logistics sector


Context

Logistics an important sector

  1. Logistics—moving goods and connecting producers with consumers—is a critical part of the modern economy
  2. In India, this sector comprises 14% of gross domestic product (GDP), much higher than in the US or Europe, where it is 8-9%

Initiatives for logistics sector by government

  1. Setting up a division in the Union ministry of commerce
  2. Introducing a national goods and services tax
  3. Giving infrastructure status to logistics

Myths associated with logistics sector

  1. The first myth is that direct costs are the key reason for India’s high-priced logistics
  • The reality is that indirect costs are the real culprit
  • Direct logistics costs are those incurred in the process of moving goods, such as transportation, warehousing, and value-added services
  • Indirect (or “hidden”) costs include inventory carrying costs, theft, damages, and losses in transit
  • These account for 40% of India’s total logistics costs
  • Indirect costs are caused by inefficiencies in the supply chain

2. The second myth is that increasing the use of rail can significantly reduce the cost of logistics in India

  • The reality is that given the prevalence of short-haul movement of goods in India, there is limited room for growth
  • India’s railroads carry no more than a third of the country’s freight
  • The great majority of the country’s cargo routes (about 450 out of 500) are less than 800km long
  • The rule of thumb is that rail makes economic sense only on routes longer than that

3. The third myth is that to cut logistics costs, the focus should be on major commodities, such as coal and steel

  • The reality is that streamlining the agricultural value chain matters more
  • Coal and steel account for about 12-16% of India’s total logistics costs while for agriculture this is about 25%
  • Inefficiencies in the agricultural supply chain, such as improper transportation and storage, are rife, leading to wasted food and quality control problems

4. The fourth myth is that the major issue with road transport is the poor quality of roads and trucks

  • The reality is that the quality—and number—of Indian drivers is more important
  • Roads carry more than 60% of India’s cargo and account for the majority of the total logistics costs
  • Many of India’s roads and trucks could be in better condition, of course, but benchmarking studies comparing India to other developing economies have found that the unit economics are not too bad
  • It is the scarcity of skilled drivers that is the bigger problem
  • India’s ministry of road, transport and shipping estimates suggest a 22% shortage in the number of commercial drivers

Possible solutions

  1. An initiative that could help is the government’s Rs8 trillion Sagarmala project, launched in 2015
  2. It goes in an entirely different direction, by investing in ports and coastal areas, with the goal of increasing the use of domestic shipping in moving goods
  3. If Sagarmala works as intended, we believe it could lower the cost of logistics noticeably

India’s current status

  1. The World Bank ranked it 35th (out of 160 countries) in its most recent Logistics Performance Index, which concentrates on trade-related factors, up from 54 in 2014
  2. India was the top performer among lower-middle-income countries
  3. Logistics firms are beginning to address skill development issue by opening driver training schools, boosting wages and benefits, investing in their drivers’ skills, using onboard sensors to monitor driving patterns, and then giving real-time feedback

Way forward

  1. In order to find the right solutions, it’s important to establish what the real problems are
  2. Doing better requires looking at the logistics system from beginning to end, just as companies experience it, and then strengthening each link

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

[op-ed snap] Time to move beyond subsidies

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: WTO, SCM Agreement, Doha negotiations, Gross National Product, Foreign Trade Policy 2015

Mains level: Export promotion policies in India


Context

Contesting India’s subsidies

  1. India’s export promotion schemes face an uncertain future after the United States Trade Representative (USTR) decided to challenge their legality in the World Trade Organisation (WTO)
  2. The complaint of the USTR is that India is violating its commitments under the Agreement on Subsidies and Countervailing Measures (SCM Agreement) using five of the most used export promotion schemes

Why this opposition?

  1. India’s five export promotion schemes violate Articles 3.1(a) and 3.2 of the SCM Agreement, since the two provisions prohibit granting of export subsidies
  2. Until 2015, India had the flexibility to use export subsidies as it is among the 20 developing countries included in Annex VII of the agreement
  3. These countries are allowed to use these subsidies as long as their per capita Gross National Product (GNP) had not crossed $1,000, at constant 1990 dollars, for three consecutive years
  4. This provision applies to the Annex VII countries was an exception to the special provisions provided to the developing countries (the so-called “special and differential treatment”) for phasing out export subsidies
  5. India had crossed the $1,000 GNP per capita threshold in 2015

Amendement sought by India and other countries

  1. In the Doha negotiations, India and several other Annex VII countries sought an amendment of the agreement so as to enable them to get a transition period
  2. In a submission made in 2011, India, along with Bolivia, Egypt, Honduras, Nicaragua and Sri Lanka, argued that the Annex VII countries should be eligible to enjoy the provisions applicable to the other developing countries, namely, those that had GNP per capita above the threshold
  3. The latter set of countries was required to phase out their export subsidies within eight years of joining the WTO

India’s export promotion schemes

  1. Foreign Trade Policy (FTP) unveiled in 2015 did some serious introspection about the future of export promotion schemes
  2. The policymakers recognized that the extant WTO rules and those under negotiation were aimed at eventually phasing out export subsidies
  3. But, contrary to the pronouncements made in the FTP, the government has continued to increase its outlays on export promotion schemes
  4. During this period, the largest export promotion scheme in place currently, the Merchandise Exports from India Scheme (MEIS), was introduced to promote exports by offsetting the infrastructural inefficiencies faced by exports of specified goods and to provide a level playing field

Way forward

  1. Export promotion efforts in the country must make a movement towards more fundamental systemic measures and away from incentives and subsidies
  2. There is a strong case for the government to invest in trade-related infrastructure and trade facilitation measures, which can deliver tangible results on the export front

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

A measure of manufacturing

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Index of Industrial Production, Manufacturing Purchasing Managers’ Index

Mains level: Various indexes related to economic growth


Gauging the level of activity in the manufacturing

  1. There are two key parameters that the government and private sector analysts use to gauge the level of activity in the manufacturing sector
  2. The Index of Industrial Production (IIP) and the Manufacturing Purchasing Managers’ Index (PMI)

Manufacturing Purchasing Managers’ Index (PMI)

There are two main points of difference between the PMI and the IIP

  1. PMI is a private sector survey while the IIP is gauged by the government
  2. The IIP is a measure of output while PMI measures activity at the purchasing or input stage

How is the PMI survey conducted?

  1. The Nikkei India Manufacturing PMI is based on data compiled from monthly survey responses by purchasing managers in more than 400 manufacturing companies
  2. The manufacturing sector is divided into eight broad categories — basic metals, chemicals and plastics, electrical and optical, food and drink, mechanical engineering, textiles and clothing, timber and paper and transport
  3. The survey responses are meant to reflect month-to-month changes based on the data collected mid-month
  4. The Nikkei India Manufacturing PMI is composite index based on five individual indices with their own weightages — new orders (weightage 0.3), output (0.25), employment (0.2), suppliers’ delivery times (0.15), stock of items purchased (0.1) and the delivery times index inverted so that it moves in a comparable direction
  5. Once the overall number for the month is computed, the score is arrived at
  6. A score above 50 denotes expansion while one below 50 signifies contraction

Advantage of PMI over IIP

  1. The manufacturing PMI report for any given month comes out either on the last day of that month or on the first day of the next month
  2. The IIP, however, comes out after considerable delay
  3. The data for a given month comes out almost one and a half months later

Back2Basics

Index of Industrial Production (IIP)

  1. The all India index of Industrial Production (IIP) is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period
  2. It is compiled and published monthly by the Central Statistical Organization (CSO), Ministry of Statistics and Programme Implementation six weeks after the reference month ends
  3. IIP is a short-term indicator of industrial growth till the results from Annual Survey of Industries and National Accounts Statistics are available
  4. IIP is used as core ingredient in the compilation of annual and quarterly national accounts and forecasts of GDP
  5. In India, due to constraints of data availability and other resources, the index is compiled using figures of mining, manufacturing and electricity sectors only

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

[op-ed snap] The formal-informal divide

Note4students

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

From UPSC perspective, the following things are important:

Prelims level:Not much

Mains level: Investment slowdown, specific sectors affected by the slowdown, the divide and what should be done, etc.


News

What is the issue?

  1. It is now well recognised that there is an investment slowdown in India, which is delaying a thorough recovery in the economy
  2. The slowdown started five years ago, and is, as Economic Survey 2018 notes, the most severe in India’s history

The Investment slowdown in various sector
(1) Informal Sector

  1. The private investments slowdown is statistically visible chiefly in the informal segment of the economy

(2) Corporate Sector

  1. The corporate sector is not the source of the decline
  2. Corporate investments have been on the upswing, rising through the five-year slowdown

(3) Public and Private finance companies

  1. There is negligible change in the investment behaviour of public and private finance corporations
  2. Public non-financial corporations reduced investments marginally. The government stepped up its investments, but its share the benefit is small

(4) Household Sector

  1. The sharpest pullback has been by the household sector, its investments are down 6.6 percentage points since the start of the slowdown
  2. Economy-wide investments are down 5.8 percentage points
  3. The slowdown is mainly because of the household sector’s troubles

What is the household sector?

  1. Households can be producing or non-producing, in which case they are consuming households
  2. The 73rd round of the survey by the National Sample Survey Office had found about 6.34 crore unincorporated non-agricultural enterprises in the country
  3. A chunk of private investments is undertaken by these firms that often operate out of homes, with, typically, less than 10 workers

The formal and informal divide

  1. The investments estimates (Gross Fixed Capital Formation) cover physical investments in plants, machinery and equipment, and dwellings and buildings, but not land
  2. The two largest investing segments in the economy, households and private non-financial corporations, correspond roughly to the informal and formal economies
  3. The formal-informal divide shows up also in savings
  4. Corporate savings are rising consistently, while those of the household sector are slowing.

What has made the informal sector more vulnerable than the rest of the economy?

  1. Corporates can access capital in difficult times, but the unincorporated are left without recourse
  2. Corporates can borrow overseas and raised funds from the capital markets
  3. But he informal sector has not had the sophistication or resources required

The way forward

  1. Given the anatomy of the private investments slowdown, a macroeconomic stimulus may not be the best policy choice
  2. Urgent fiscal deficit reduction, quick clean-up of the bad loans mess, and restoration of banks’ health are more likely to revive private investments

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

[op-ed snap] The de-urbanization of India’s manufacturing

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Industrial growth and associated issues


Context

Relation between industrialization and urbanization

  1. Conventional wisdom suggests that industrialization and urbanization go hand in hand
  2. Policymakers often adopt an active “industrial policy” to accelerate growth
  3. They also embrace an active “urban policy”, since industrialization without urbanization gets stalled

Change in this phenomenon

  1. India’s industrialization and urbanization did grow together in the early 1990s
  2. Manufacturing growth was initially concentrated around the megacities
  3. It has dispersed in the last decade
  4. The share of the manufacturing sector has increased in rural areas

Current scenario

  1. Unlike in China and US, the growth drivers in India are still concentrated in megacities
  2. Secondary cities have yet to become engines of growth and job creation in India

Future of India’s economic growth

  1. India’s future economic growth may not be in its megacities
  2. It might be in its secondary cities, where there is substantial untapped potential
  3. Inter-urban competition between tier I and II cities could be India’s big driver of economic transformation and growth
  4. Next phase of urbanization could result in a four-fold increase in per capita income

What can be done to scale up secondary cities?

  1. Building a smart tier II and tier III city calls for scaling up investments in physical and human infrastructure
  2. This would make them more competitive, attract new enterprises, and create more jobs
  3. New technology can play a more dynamic role in urbanization
  4. It can reduce congestion costs, make cities green and sustainable, and increase the efficiency of local government programmes

Way forward

  1. New urbanization should build more bridges with rural areas
  2. India’s renewed emphasis on rural development, and the current trend of the manufacturing sector moving away from densely populated urban areas, opens new doors and provides immense potential for regional and spatial development

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

[op-ed snap] Reducing financial misallocation in India

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Twin balance-sheet problem

Mains level: Financial misallocation and its effects


Context

Concerns about India’s future growth trajectory

  1. The twin balance-sheet problem, of highly leveraged corporate entities and bad loan-ridden banks, has raised concerns about India’s future growth trajectory
  2. If firms are not able to grow, and banks not able to lend, that trajectory will slow down

Financial misallocation in India

  1. Financial misallocation is a bigger problem in the manufacturing sector than in services in India
  2. Growth requires more efficient firms to produce more output and use more factors of production, including greater access to bank loans
  3. But, less efficient firms manage to access more bank loans, leaving less room for growth of more efficient firms
  4. This is India’s financial misallocation problem

Reasons behind misallocation

  1. The underlying cause behind the financial misallocation is distortion in the land market
  2. Access to bank loans is disproportionately tied to access to land, as land and buildings provide strong collateral support for most bank loans
  3. Less efficient firms have been accessing more land and thus more bank loans
  4. This is not a problem for the service industry, which is less land-intensive

Industry distributions of financial misallocation

  1. Most bank loans in the manufacturing sector are taken up by large firms in the organized sector
  2. The small firms in the unorganized sector, which account for nearly 80% of jobs, and about half of the value of land and buildings held in the manufacturing sector, pull in a very small share of bank loans
  3. The value of financial loans reported in the informal sector is barely 2-6% of the value of total bank loans reported in the manufacturing sector

Geographic distributions of financial misallocation

  1. There is a huge spatial diversity in access to bank loans within India
  2. Access to bank finance is significantly higher in the leading states compared to the lagging regions
  3. This is true for manufacturing enterprises in both the organized and the unorganized sector
  4. States like Gujarat, Haryana and Rajasthan have access to financial loans for over 95% of the organized sector plants
  5. Lagging states like Bihar and Uttar Pradesh perform poorly in access to bank loans
  6. The differences in misallocation within India are larger than the differences across countries

Financial misallocation and growth

  1. India is one of the most land-scarce countries in the world
  2. Land and financial misallocation trumps labour misallocation
  3. Financial misallocation has constrained the growth of the manufacturing sector
  4. Rapidly growing firms in asset-intensive sectors require external finance due to their capital growth needs
  5. This is reduced due to financial and land misallocation which explains why India’s manufacturing firms have trouble scaling up
  6. Poorly functioning land and financial markets also explain why India has so few start-ups

Way Forward

  1. India remains one of the fastest growing market economies
  2. Financial misallocation has constrained the growth of the manufacturing sector, a key driver of growth and job creation
  3. Policymakers need to pay more attention to addressing the underlying causes of financial misallocation
  4. This would involve removing land market distortions, better land-use regulations, and more efficient taxation of properties

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

Centre plans to set up more commercial courts

Note4Students

                 Mains Paper 3: Indian Economy | Issues relating to growth and development.

Prelims:  World Bank’s Ease of doing Business

Mains level: This article highlights the steps the government is planning to take to further improve India’s ranking in the World Bank’s Ease of doing Business.


Context

Commercial courts

  1. Days after India jumped 30 positions in the World Bank’s Ease of Doing Business ranking; Law Ministry said the Union government proposed to establish commercial courts in districts to further improve the parameters.
  2. Legal remedy to commercial disputes and enforcement of business contracts are parameters of the World Bank ranking.
  3. In terms of ease of enforcing contracts, India jumped from 172 to 164.
  4. Though the jump in the ranking sounds small, it is substantial given the diversities of laws in our country and the complex demography.

Varying performance

  1. India’s performance has been varied within the legal framework.
  2. For example, the World Bank’s ranking marked court system and proceedings in India 4.5 out of a total of 5, but in management of cases, it was 1.5 out of 6.
  3. India also fared well in alternative dispute redress mechanism and scored 2.5 out of a total of 3 marks.
  4. The government is proposing amendments to facilitate the establishment of commercial courts, at the district level, in places where the High Courts have ordinary original civil jurisdiction.
  5. The specified value of commercial disputes would be brought down so as to expand the scope of commercial adjudication effectively and expeditiously.

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

Suggestions for New National Mineral Policy

Image source

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: New national mineral policy, National Mineral Policy, 2008, District Mineral Foundation, National Mineral Exploration Trust, Compensatory Afforestation, Make in India, Mines and Minerals (Development and Regulation) Amendment Act (MMDRA), 2015, Atomic Minerals Directorate (AMD)

Mains level: Various policies of government that need to be revamped in order to provide ease of doing business


Niti Aayog’s suggested steps to the mines ministry

  1. Mines ministry is currently in the process of formulating a new national mineral policy
  2. Niti Aayog has given following suggestions to ministry regarding policy
  • Revamp the taxation structure applicable to the mining sector in India
  • Reduce the “widespread instances of corruption prevailing in the administration” of mining rules and regulations through “technology-based monitoring approach”
  • Avoid the tendency to incorporate financial conditions while granting the environment clearance
  • Involve mining sector consultants to evaluate mineral blocks before they are put up for auction

Effect of Supreme Court judgment

  1. On August 2, 2017, the Supreme Court had passed a judgment, wherein it directed the Central government to revisit the National Mineral Policy, 2008
  2. It also asked government to announce a “fresh and more effective, meaningful and implementable policy” before the end of this year

High taxation burden

  1. In its comments, the Niti Aayog has listed a number of taxes and charges that miners pay, which ultimately take their taxation burden to around 65 percent of the revenue
  2. The global average taxation applicable for mining is 40 percent
  3. India is constantly adding to the taxation burden for mining industry with royalty, DMF (District Mineral Foundation), NMET (National Mineral Exploration Trust) and host of other statutory levies implemented by the states
  4. Adding to this are the one-time regulatory costs related to ECs (environment clearances) and FCs (forest clearances) mostly on account of NPV (net present value) for forest land, CA (compensatory afforestation) charges, CA land procurement, etc

Ideal tax system desired

  1. According to the Niti Aayog, it is “necessary to define an ideal tax system for the industry to make it more lucrative
  2. This is especially for the foreign investors, under the Make in India initiative of the Central government
  3. Several regulatory payments like DMF, NMET, etc., have not been subsumed into GST (goods and services tax)
  4. The bidding price quoted by the bidder during auction is subject to GST and the interpretation is that the act of auction by the government is a form of service being provided and hence the tax

Mines and Minerals (Development and Regulation) Amendment Act (MMDRA), 2015

  1. According to this new mining law, non-coal mines have to be auctioned by the respective state governments
  2. Under the old mining law, the states had the powers to grant the mining lease to any company as per their discretion
  3. The Niti Aayog has suggested that the mining blocks that are being placed for auction should be evaluated by agencies having expertise in mineral commodity and as per international codes

Exploration of all the rare-earth and nuclear minerals

  1. Currently, China is dominating this sector with over 90 percent of the world market share
  2. Immediate necessary actions should be taken for the exploration of all the rare-earth and nuclear minerals
  3. It should be carried out under the umbrella of the Atomic Minerals Directorate (AMD) under a subset of the MMDRA Act, 2015
  4. This will reduce India’s dependence on external sources that may not be reliable due to socio-political reasons

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

‘All major ports to get LDB services’

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Logistics Data Bank, Indian Ports Association (IPA), Radio Frequency Identification Tag (RFID), ease of doing business, Special Purpose Vehicle, Delhi Mumbai Industrial Corridor (DMIC)

Mains level: Various initiatives that are being undertaken to improve efficiency as well as ease of doing business


The Logistics Data Bank’s (LDB) services to be extended to all major ports in India

  1. Logistics Data Bank was begun to help track containers, reduce transaction costs
  2. Discussions between the Government and the Indian Ports Association (IPA) have begun in this regard

What is LDB project?

  1. As part of the LDB project, each container is attached to a Radio Frequency Identification Tag (RFID) tag and tracked through RFID readers
  2. This, in turn, helps importers and exporters to track their goods in transit
  3. It helps reduce the overall lead time of container movement, besides bringing down transaction costs that consignees and shippers incur
  4. LDB project covers the entire movement through rail or road till the Inland Container Depot and Container Freight Station.

Objective and implementation

  1. The LDB project’s objective is to ensure greater efficiency in the country’s logistics sector through the use of information technology
  2. The LDB project was unveiled in July 2016 as an important ‘ease of doing business’ initiative to boost the country’s foreign trade and bring about greater transparency
  3. The project is implemented through a Special Purpose Vehicle called Delhi Mumbai Industrial Corridor Development Corporation Logistics Data Services Ltd. (DLDSL) — jointly (50:50) owned by the Delhi Mumbai Industrial Corridor (DMIC) Trust and Japanese IT services major NEC Corporation

Also linked to railways

  1. The LDB System has been integrated with the Freight Operations Information System of railways
  2. The move will help users track in-transit rail container movement

Back2Basics

Special Purpose Vehicle

  1. The name SPV is given to an entity which is formed for a single, well-defined and narrow purpose
  2. No SPV can be formed for an unlawful purpose, or for undertaking activities which are contrary to the provisions of law or public policy
  3. An SPV is mainly formed to raise funds by collateralizing future receivables
  4. An SPV is, primarily, a business association of persons or entities eligible to participate in the association
  5. Technically, an SPV is a company. It has to follow the rules of formation of a company laid down in the Companies Act
  6. It has all the attributes of a legal person. It is independent of members subscribing to the shares of the SPV
  7. An SPV can also be a partnership firm

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

[op-ed snap] A new industrial policy for Bharat

Note4Students

Mains Paper 3: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

The following things are important from UPSC perspective:

Prelims: Not much

Mains level: This article talks about the recently released discussion paper on Industrial Policy 2017 by DIPP .It highlights the issues with it and also gives suggestions on how to make it more effective.

 


News

Context

  1. A recent report by Deloitte LLP pointed out that India’s young population will drive its economic growth to overtake China and other Asian tigers in the next few decades.
  2. The potential workforce in India is set to increase to 1.08 billion in the next 20 years and hold above the billion mark for 50 years.
  3. This requires enabling conditions for growth are created and sustained.

About Industrial Policy, 2017

  1. The Department of Industrial Policy and Promotion (DIPP), released the discussion paper on Industrial Policy 2017.
  2. It highlights the progress made in the last 25 years and facilitates discussions for the formulation of new industrial policy aimed at building a globally competitive Indian industry equipped with skill, scale and technology.
  3. It recognizes the need to gainfully employ a growing workforce and lists long-term and medium-term measures and related challenges.

What does Economic Survey 2017 says about the rising workforce?

  1. It points out that the richer peninsular states in India will initially witness a sharp increase in working age populations, followed by a sharp decline.
  2. In contrast, the poorer hinterland states will remain young and dynamic, characterized by a rising working age population for some time, plateauing towards the middle of the century.

What needs to be done to cash upon demographic dividend?

  1. The poorer states in the hinterland are characterized by a substantial rural, informal economy where agriculture and allied non-farm activities are the principal sources of livelihood.
  2. For India to realize its economic potential, it is this population which needs to be tapped and provided opportunities.
  3. Significant migration in search of better sources of livelihood is also being witnessed from such areas towards urban centres, which needs to be carefully managed.

Issues with the discussion paper on Industrial Policy 2017

  1. The policy does not discuss ideas for creating jobs for and in Bharat.
  2. It follows conventional approach that confines the scope of industrial policy to “manufacturing enterprises”, unrelated to agriculture and the services sectors.
  3. This myopic industrial policy can have adverse consequences in the longer term.
  4. It recognizes the importance of competition and strengthening global linkages and value chains. But incentives to select sunrise sector will potentially disincentivize competition and innovation, and curb the growth of other sectors
  5. This sector specific approach might result in policies soon becoming out of sync with dynamic economic developments and with our World Trade Organization (WTO) obligations.
  6. An effective industrial policy cannot be merely a collection of sectoral policies.

Way Forward

  1. It must appreciate its linkages with agriculture, services policies and with trade, competition and sector-specific policies at a broader level.
  2. A systems’ view informed by a whole-of-government approach is needed.
  3. It will treat the economy like a complex human body, composed of many sub-systems, each of which performs a function to enable the entire system to remain healthy and grow.
  4. The Indian economy has suffered from several ill-advised medications in the past, and more recently as well. Such experiments need to be prevented.
  5. It requires different actors and government departments engaged in specific sub-systems to work with each other.
  6. Stakeholders involved in the design of specific policies must interact with each other and optimize the functioning of crucial sub-systems.
  7. A powerful nodal department in the prime minister’s office should be authorized to ensure coherence through coordination with different departments and related stakeholders, and enable swift decision making within predetermined time frames.
  8. A new forward-looking industrial policy for India must have Bharat as its soul.
  9. A long-term view needs to be taken on competition and trade-related issues, and the industrial policy should avoid the temptation of short-term benefits of over-protectionism.

 

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

[op-ed snap] Unease of doing business

Image result for Ease of doing business in India

Image source

Note4students

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

Once you are done reading this op-ed, you will be able to attempt the below.

What are the reasons for India’s low position in World Bank’s “Doing business” ranking? How India should improve to better its rank?

From UPSC perspective, the following things are important:

Prelims level:  World Bank’s Ease of Doing Business Ranking

Mains level: Prepare Ease of doing business in India- problems, government Initiatives, challenges and way forward


News

Context

  1. Last year, World Bank’s Ease of Doing Business Ranking placed India at a lowly 130 out of 150 countries

Niti Aayog Survey finding

  1. Survey by the Niti Aayog and the Mumbai-based think tank, IDFC Institute, reveals that the despite Centre and state government’s efforts to ease the system of permits and clearances, most entrepreneurs still feel hobbled by the country’s regulatory environment.
  2. Most firms do not use the single-window systems for business and regulatory clearances.

Problems

  1. Centre claims that a firm can be incorporated in less than a week
  2. But the survey shows that even in the best performing state, Tamil Nadu, the process takes more than 60 days — on average it takes nearly four months to set up a business in India. 
  3. It is sign of a persistent problem with governance in India: The difficulty of cutting the red tape of the lower bureaucracy. 
  4. The World Bank’s report, last year, highlighted that delays in issuing construction permits affected the ease of doing business in India. 
  5. The report finds that entrepreneurs in these employment-intensive sectors are more likely to face problems and securing construction and other permits, compared to the capital-intensive ones.

The survey should serve as a wake-up call to government and a reminder that over two decades after economic reforms the Indian state is still flailing when it comes to easing the path for entrepreneurs.

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

Suggest ways to improve EoDB ranking: PM

  1. What: PM Modi has urged the states and the central government departments to immediately analyse the World Bank’s latest report on ease of doing business
  2. And within a month, suggest ways to improve India’s ranking
  3. The nodal agency at the Centre for ease of doing business initiatives – Department of Industrial Policy and Promotion (DIPP), has already sent its report

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

Doing Business Index: Centre to hold meeting with 17 ‘laggard’ States/UTs II

  1. There are ten States that have an implementation percentage of 90% or more
  2. Andhra Pradesh and Telengana share the top spot
  3. The 340 reform areas are broadly under categories including construction permit, environmental and labour registration, obtaining electricity connection etc

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

Doing Business Index: Centre to hold meeting with 17 ‘laggard’ States/UTs I

  1. 17 States/Union Territories (UTs) have abysmal performance in effecting reforms for ease of doing business
  2. The Centre will soon hold a special high-level meeting with them
  3. The States include Kerala, those in the entire North-Eastern region and others
  4. They have managed to implement only 25 per cent or below of the 340-point ‘Business Reform Action Plan’ that was circulated in late October 2015

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

India up one position in WB ease of business ranking II

  1. Reforms: Exporting and importing is easier because of the introduction of ICEGATE portal and simplification of border and documentary procedures
  2. It scored well on protecting minority investors
  3. The overhaul of the Companies Act has brought Indian companies in line with global standards
  4. Particularly regarding accountability and corporate governance practices

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

India up one position in WB ease of business ranking I

  1. Ranking: India improved its position to 130 in the World Bank Ease of Doing Business 2017 report
  2. Last year: It was placed at 131 according to the revised rankings for last year
  3. India could not improve its ranking more despite reform measures because other countries around it in the ranking list also did well last year
  4. However, India had made a noticeable improvement in the distance to frontier (DTF) score — an absolute measure of progress towards best practices

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

‘One India’ concept push for ease of business II

  1. Global ranking: India was ranked a lowly 130th out of 189 economies in the World Bank Group’s ‘Doing Business’ 2016 index.
  2. The government aims to ensure that India gets a place in the top 50 soon
  3. Other initiatives: The Centre is already developing an eBiz project that is basically a government-to-business portal
  4. The services offered under the portal are on starting, running and closing down a business
  5. It was introduced in January 2014

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

‘One India’ concept push for ease of business I

  1. Proposal: The Centre, in collaboration with State governments, plans to introduce a ‘One India’ concept
  2. It will be the biggest and the most comprehensive ‘ease of doing business’ initiative so far
  3. Purpose: Under the ‘one-form-one-portal’ model the processes will be simplified to an extent where investors will need to fill only a single e-form for investing and doing business anywhere in India
  4. Currently: Firms are mandated to complete multiple forms at the Central and state-levels
  5. It gets more complicated as each state has different requirements and regulation

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

Justice delay keeps investors away: CJI

  1. Source: Chief Justice T.S. Thakur
  2. He said foreign investors continue to be wary of India’s labyrinthine and delayed justice delivery mechanism
  3. Investors feel that Indian courts would delay justice due to them
  4. According to him, alternative dispute resolution mechanisms like arbitration, mediation and conciliation would become effective only if backed by a robust justice delivery system steered by conventional courts
  5. Civil courts should be able to hear and decide challenges to arbitration awards in a time-bound manner

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

India needs to remove bottlenecks: Singapore PM

  1. Singapore PM: India is not as open for business as investors hope
  2. Why? Land acquisition, over-regulation and legal hassles are among the biggest bottlenecks
  3. For trade to grow, India must make a strategic decision that you want to encourage interdependence and more openness and more trade-based economy
  4. Bilateral trade: India and Singapore have stepped up contacts as a part of the Govt’s ‘Look east, Act east’ policy
  5. However, bilateral trade between India and Singapore has declined year on year, down 11.2% in 2015-2016 to US $15 billion compared to 2014-2015, with Indian exports dropping 21.2% in a year

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

No repeat of 2G, Satyam if laws are sincerely implemented

  1. A sincere implementation of laws including those dealing with insolvency and bankruptcy will ensure that there is no repetition of 2G and Satyam like scams in India
  2. Bankruptcy laws are very strict in the US and Mallya type of instances cannot take place there & if the law is implemented sincerely, it is not going to happen here also
  3. Satyam scam: One of the biggest corporate frauds, which involves financial mis-statements to the tune of about Rs 12,320 crore

Discuss: In the light of the Satyam Scandal (2009), discuss the changes brought in corporate governance to ensure transparency, accountability [UPSC Mains 2015, GS 2]

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

Simplify factory inspections for ease of doing business: CII

  1. Source: Confederation of Indian Industries (CII) white paper- Inspections and Regulatory Enforcements for Micro Small and Medium Enterprises (MSMEs) in India
  2. The factory inspection system needs a complete overhaul to bring India among the top 50 countries in terms of ‘ease of doing business’ in the next two years
  3. India is currently placed at 130 out of 189 countries in the ‘ease of doing business’ rankings
  4. The excessive number of inspections in India weighs down on the competitive advantage and the ‘ease of doing business’ of Indian businesses
  5. It called for an integrated inspection system and highlighted the need for inculcating a risk-based approach in the inspection system
  6. The system should rationalise the number of inspections and weed out the redundancy and duplicity

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

India is keen to be a global arbitration hub: Prasad

  1. Law Minister: The international arbitration system is ad hoc and unpredictable & India is keen to become a global hub for international arbitration
  2. Mumbai is coming as a big hub of dispute resolution & Delhi would also come along in the same way
  3. Background: The comments come at a time when Cairn Energy has initiated international arbitration seeking $5.6 billion in compensation from the Indian government against a retrospective tax demand of Rs.29,047 crore made by tax authorities

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

India slips on business optimism index

  1. News: India slipped to the third position on the scale of global business optimism during Q2 2016 (April-June) Grant Thornton International Business Report (IBR)
  2. India had after remaining on top globally for the two preceding quarters
  3. Concerns: Delays in key reforms like the goods and services tax, non-resolution of tax disputes and the banking sector’s performance

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

Winding up of National Manufacturing Competitiveness Council (NMCC)

  1. News: Cabinet Committee on Economic Affairs has given its approval for winding up of NMCC
  2. About NMCC: established in 2004 as a part of the Common Minimum Programme (CMP) of erstwhile govt
  3. To provide a continuing forum for policy dialogue to energize and sustain the growth of manufacturing industry
  4. Function: NMCC conducted various studies independently in consultation with several Government Ministries and shared these studies with the Ministries

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

Tapan Ray Panel Recommendations

  1. Doing away with any kind of government intervention in managerial remuneration and allowing startups to issue more sweat equity and employee stock options (ESOPs).
  2. Removal of provision under Section 2(87), which prohibited the companies to not have more than two levels of subsidiaries.
  3. Only those frauds which involve Rs 10 lakh or above, or 1% of the company’s turnover, whichever is lower, may be punishable under Section 447.
  4. Section 447 lays down the punishment for any person found guilty of fraud to minimum 6 months imprisonment.
  5. A firm to be called associate company only when the parent firm owns 20 per cent of voting power in it.
  6. Insider trading and forward dealing provisions to be removed from the Act as Sebi regulations already exist.
  7. Institute of Chartered Accountants of India’s regulatory powers to be taken away; National Financial Reporting Authority would be formed.
  8. Private placement process to be simplified, doing away with separate offer letter, making valuation details public.

The panel was constituted to suggest amendments in the Companies Act, 2013, to make it easier for companies to do business.

  1. Doing away with any kind of government intervention in managerial remuneration and allowing startups to issue more sweat equity and employee stock options (ESOPs).
  2. Removal of provision under Section 2(87), which prohibited the companies to not have more than two levels of subsidiaries.
  3. Only those frauds which involve Rs 10 lakh or above, or 1% of the company’s turnover, whichever is lower, may be punishable under Section 447.
  4. Section 447 lays down the punishment for any person found guilty of fraud to minimum 6 months imprisonment.
  5. A firm to be called associate company only when the parent firm owns 20 per cent of voting power in it.
  6. Insider trading and forward dealing provisions to be removed from the Act as Sebi regulations already exist.
  7. Institute of Chartered Accountants of India’s regulatory powers to be taken away; National Financial Reporting Authority would be formed.
  8. Private placement process to be simplified, doing away with separate offer letter, making valuation details public.

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

Companies Law Committee submits report to Government

Suggestions include omitting provisions relating to forward dealing, insider trading.

  1. The Companies Law Committee — constituted in June 2015 to make recommendations on the issues related to implementation of the Companies Act, 2013.
  2. The recommendations including definitions, raising of capital, accounts and audit, corporate governance, managerial remuneration, companies incorporated outside India and offences/ penalties.
  3. Some key changes proposed are regarding managerial remuneration to be approved by shareholders.
  4. The modification of definition of associate company and subsidiary company.
  5. Companies may give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement.
  6. Auditor will report on internal financial controls with regard to financial statements.

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

Government makes it easier to set up companies, do business

  1. These initiatives ensure faster clearances to incorporate companies and improve the ease of doing business.
  2. The Government Process Re-engineering (GPR) involves a 3-pronged approach of further automating some of the approval processes.
  3. By utilising advanced software tools, rationalising and modifying certain rules and engaging professionals to expedite the process of manual scrutiny.
  4. The Central Registration Centre (CRC) will process applications for name availability, submitted online and endeavour to process them by the end of the next working day.

The government has unveiled two initiatives to expedite clearances and ensure greater ease of doing business in the country.

  1. These initiatives ensure faster clearances to incorporate companies and improve the ease of doing business.
  2. The Government Process Re-engineering (GPR) involves a 3-pronged approach of further automating some of the approval processes.
  3. By utilising advanced software tools, rationalising and modifying certain rules and engaging professionals to expedite the process of manual scrutiny.
  4. The Central Registration Centre (CRC) will process applications for name availability, submitted online and endeavour to process them by the end of the next working day.

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

Partnership Summit – Andhra Pradesh

  1. First-ever retail policy by a state in India—that makes it easier for retailers to do business in the state.
  2. It proposes single-desk clearance of business plans, let’s stores stay open longer.
  3. Makes it easier for retailers to acquire land to build warehouses, simplifies labour laws and relaxes stocking limits for essential commodities.
  4. It is aimed at attracting investments worth Rs.5,000 crore and creating 20,000 additional jobs in the sector by 2020.