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Subject: Economics

  • Looking at 2025, The Economy: Some positives, some concerns

    Why in the News?

    The Finance Minister describes the slowdown in Q2 growth as a “temporary blip,” while the RBI has revised its GDP growth forecast for 2024-25 downward, from 7.2% to 6.6%.

    Why RBI has revised its GDP growth forecast for 2024-2025 downward, from 7.2% to 6.6%?

    • Economic Slowdown: The RBI’s downgrade reflects concerns over a cyclical downturn, with GDP growth in Q2 FY25 at 5.4%, indicating fundamental challenges hindering growth prospects.
      • Fundamental challenges: Declining corporate investments, sliding consumption growth, and “softness” in urban demand have weakened the investment climate, prompting a downward revision in growth expectations.
    • Inflationary Pressures: Persistent inflation near double digits complicates monetary policy, forcing the RBI to consider prolonged high interest rates, which could further suppress growth and investments.

    What are the expected growth rates for major economies in 2025?

    • India: Projected to achieve a growth rate of 6.5% over the next five years, maintaining its status as the fastest-growing major economy globally, despite a recent dip in economic output in 2024.
    • China: Growth is expected to stabilize around 4-5%, lower than its historical rates due to structural challenges like demographic shifts and a cooling property sector.
    • United States: Growth is projected at 1.5-2%, as the Federal Reserve maintains a tight monetary policy to counter inflation.
    • Eurozone: Growth is forecasted at around 1%, reflecting a sluggish recovery from the energy crisis and geopolitical uncertainties.
    • Japan: Expected growth rate of 1-1.5%, supported by fiscal stimulus but constrained by aging demographics.
    • Emerging Markets (excluding China and India): Growth is expected to range from 3-4%, depending on commodity prices and fiscal discipline.

    How will inflation and monetary policy evolve?

    • Inflation Persistence: Inflation in India remains at the upper end of the permissible range, with food prices nearing double digits. This persistent inflation strengthens the argument for maintaining high interest rates, complicating the Reserve Bank of India’s (RBI) monetary policy decisions as they balance growth with inflation control.
    • Monetary Policy Adjustments: The RBI may need to reconsider its previous projections of GDP growth, which could lead to adjustments in interest rates. If inflation continues to be a concern, the RBI might maintain or even increase rates longer than necessary which impacts investment and economic activity.
    • Investment and Economic Recovery: A slowdown in corporate investments and a decline in household financial savings have been observed, which could hinder economic recovery.
      • The RBI’s ability to stimulate growth through monetary policy will depend on addressing these investment challenges and ensuring that fiscal measures effectively support economic activity without exacerbating inflation.

    What are the key risks and uncertainties facing the global economy?

    • Investment Slowdown: A significant challenge is the sluggish performance of corporate investments, exacerbated by high food inflation and muted urban demand. This trend poses risks for growth and job creation.
    • Savings-Investment Gap: A decline in household financial savings down to 5.3% of GDP from 7.3% coupled with rising household debt (5.8% of GDP) presents a risk to economic stability1.
    • Credit Growth Decline: Falling credit growth, particularly in household borrowing for home purchases and limited industrial appetite for new projects, indicates a tightening economic environment.
    • Fiscal Challenges: Increased state expenditures on subsidies may strain fiscal resources, potentially affecting overall economic sustainability and growth prospects.

    What should be done by the government? (Way forward)

    • Balanced Fiscal and Monetary Coordination: Governments should prioritize targeted fiscal measures to stimulate investment and demand while ensuring fiscal discipline, complemented by a flexible monetary policy that carefully balances inflation control with growth stimulation.
    • Boosting Household Savings and Investments: Implement policies to encourage higher household financial savings and incentivize corporate investments through tax reforms, reduced regulatory barriers, and support for credit access in productive sectors.

    Mains PYQ:

    Q The nature of economic growth in India in recent times is often described as jobless growth. Do you agree with this view? Give arguments in favour of your answer. (UPSC IAS/2015)

  • India’s First Bio-Bitumen National Highway Inaugurated

    Why in the News?

    India’s first bio-bitumen-based National Highway stretch was inaugurated on NH-44 in Mansar, Nagpur, Maharashtra by Union Minister Nitin Gadkari.

    About Bio-Bitumen

    • Bio-bitumen is a bio-based binder derived from renewable, sustainable sources such as: Vegetable oils, Crop stubble, Algae, Lignin (a component of wood), Animal manure.
    • It serves as an alternative to traditional bitumen, which is primarily derived from the distillation of crude oil.
    • The production of bio-bitumen reduces dependence on petroleum and is a step toward sustainable road construction and infrastructure development.

    Significance and Features of Bio-Bitumen:

    • Bio-bitumen reduces the carbon footprint associated with the traditional bitumen production process.
    • By using renewable sources such as lignin (a byproduct of wood), it helps mitigate environmental concerns like stubble burning and contributes to lower greenhouse gas emissions, potentially by as much as 70% compared to fossil-based bitumen.
    • India, which heavily imports traditional bitumen, can reduce its import dependency by switching to bio-bitumen made from locally available materials.
    • The use of bio-bitumen stimulates bio-refineries, creating opportunities for revenue generation and providing economic benefits to farmers and the bio-refining industry.

    India’s Bitumen Scenario:

    • India imports around 50% of its total annual bitumen requirements, which amounted to 3.21 million tonnes in FY 2023-24.
    • The country produced 5.24 million tonnes of bitumen in the same period.
    • India’s bitumen consumption has been steadily increasing, averaging 7.7 million tonnes annually over the past five years.
    • In 2023-24, India constructed around 12,300 km of national highways, averaging nearly 34 km per day.

     

  • On Kisan Diwas: Why terms of trade have improved more for farm workers than farmers

    Why in the News?

    Crop prices have lagged behind the rising production costs, while agricultural wages have grown faster than inflation over the past two decades.

    What is ‘Terms of Trade’?

    • Terms of Trade (ToT) refers to the relative prices of goods and services that a country exports compared to the prices of goods and services it imports. In the context of agriculture, it specifically relates to the prices received by farmers for their produce versus the prices they pay for inputs (like seeds, fertilizers, and equipment).
    • A favourable ToT means that farmers are receiving higher prices for their products relative to their costs, which enhances their profitability.

    What factors have contributed to the improved terms of trade for farm workers compared to farmers?

    • Wage Growth: Agricultural labourers have experienced significant increases in wages, with their Index of Prices Received (IPR) rising more than threefold from 49.1 to 151.4 between 2004-05 and 2013-14, while their Index of Prices Paid (IPP) increased only modestly from 76.4 to 129.3 during the same period. This resulted in a substantial improvement in their ToT from 64.2% to 117.1%.
    • Stagnation of Farmer Incomes: In contrast, farmers’ IPR rose by only 56.3% from 2013-14 to 2022-23, while their IPP increased by 58.4%. This led to a decline in their ToT from 98.6% to 97.2%, indicating that farmers are facing a cost squeeze as input prices rise faster than the prices they receive for their produce.
    • Economic Diversification: The expansion of employment opportunities outside agriculture has allowed agricultural labourers to seek better-paying jobs in sectors like construction and services, increasing their bargaining power and wage rates.

    How do government policies impact the economic conditions (of farmers versus farm workers)?

    • Employment Schemes: Government initiatives such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) have provided rural labourers with guaranteed employment, improving their income stability and negotiating power against employers.
    • Income Support Programs: Various states have implemented income support schemes targeting women, which have further tightened the labour market and increased wage demands among agricultural workers. For example, Mukhya Mantri Mahila Kisan Sashaktikaran Yojana (MMKSY).
    • Subsidies and Minimum Support Prices: While subsidies on inputs like fertilizers and electricity have provided some relief to farmers, they have not sufficiently offset the rising costs or improved farmers’ ToT significantly, leading to ongoing economic distress among this group.

    What are the broader implications of these changes for the agricultural sector and rural economy?

    • Shift in Economic Power: The improved ToT for agricultural labourers relative to farmers reflects a shift in economic power dynamics within rural areas, potentially leading to greater social mobility for labourers but also highlighting the vulnerabilities faced by farmers.
    • Increased Demand for Labor: As agricultural labourers gain better wages and conditions, there may be a reduction in available labour for farming activities, leading to challenges for farmers who may struggle to find enough workers willing to accept lower wages or demand better working conditions.
    • Social Tensions: The disparities between the economic conditions of farmers and agricultural labourers can lead to social tensions, especially as farmers express dissatisfaction over stagnant incomes while labourers experience wage growth. This situation may exacerbate calls for policy reforms aimed at addressing these inequities.

    Way forward: 

    • Enhance Farmer Profitability: Introduce policies to ensure fair pricing for crops, reduce input costs through targeted subsidies, and promote crop diversification and value addition to improve farmers’ income and Terms of Trade (ToT).
    • Strengthen Rural Employment: Expand employment opportunities in rural non-farm sectors and align government schemes like MGNREGA with skill development programs to sustain wage growth for agricultural labourers while addressing labour shortages in farming.

    Mains PYQ:

    Q What are the main constraints in the transport and marketing of agricultural produce in India? (UPSC IAS/2020)

  • A Study of Budgets of 2024-25 (Fiscal Reforms by States) Report released by RBI

    Why in the News?

    • According to the RBI report on state finances, India’s fiscal deficit has increased from 2.8% of GDP in FY22 to a projected 3.2% in FY24, signaling that fiscal consolidation is being side-lined in favor of increasing expenditure.
      • Capital expenditure (capex) has risen from 2.2% of GDP in FY23 to a budgeted 3.2% in FY24, indicating increased investment in assets for future growth.

    Fiscal position of the States as per the Report

    • Fiscal Deficit:
      • The Gross Fiscal Deficit (GFD) of states is projected to rise from 2.7% of GDP in FY2022-23 to 2.9% of GDP in FY2023-24.
      • This rise indicates that fiscal consolidation has been put on hold, with states continuing to spend more than their revenues.
      • Many states have budgeted for fiscal deficits above the 3% of GSDP mark, including Andhra Pradesh, Himachal Pradesh, Madhya Pradesh, and West Bengal, among others.
    • Revenue Expenditure:
      • Revenue Expenditure is expected to increase to 14.6% of GDP in FY2025, up from 13.5% in FY2024, indicating a rise in the current expenditure of states.
    • Capital Expenditure (Capex):
      • States have ramped up their capital expenditure (spending on creating assets), which has increased from 2.2% of GDP in FY2023 to 3.2% of GDP in FY2024.
      • This increase is in line with the government’s focus on infrastructure and long-term growth.
    • State Revenue:
      • State revenues are projected to increase from 13.3% of GDP in FY2024 to 14.3% in FY2025, driven by improved tax collections.
      • There has been a marked improvement in own tax revenue buoyancy compared to the pre-Covid period.
    • Debt-to-GDP Ratio:
      • The debt-to-GDP ratio for states has increased slightly to 28.8% in FY2024, from 28.5% in FY2023.
      • States with high fiscal deficits tend to have debt-to-GDP ratios above the national average, which suggests they have been sustaining deficits for a longer time.
    • Borrowing Trends:
      • States have shifted significantly towards market borrowings.
      • The share of market borrowings in financing the fiscal deficit has increased from 17% in 2005-06 to 79% in FY2024-25.
    • Recommendations:
      • The report suggests prudent management of subsidies, rationalization of centrally sponsored schemes, debt consolidation, and the adoption of climate and outcome budgeting to improve state fiscal health.

    PYQ:

    [2018] Consider the following statements:

    1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
    2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.
    3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

    Which of the statements given above is/are correct?

    (a) 1 only
    (b) 2 and 3 only
    (c) 1 and 3 only
    (d) 1, 2 and 3

  • Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM-AASHA)

    Why in the News?

    Since its launch, PM-AASHA has significantly benefitted farmers, contributing to the procurement of 195.39 lakh metric tonnes (LMT) of agricultural commodities, valued at ₹1,07,433.73 crore, from over 99 lakh farmers.

    Procurement Details:

    • In the Rabi 2023-24 season, 6.41 LMT of pulses, valued at ₹4,820 crore, were procured from 2.75 lakh farmers. This included:
      • 2.49 LMT of Masoor
      • 43,000 metric tonnes of Chana
      • LMT of Moong
    • In addition, 12.19 LMT of oilseeds, valued at ₹6,900 crore, were procured from 5.29 lakh farmers.
    • In the ongoing Kharif season, the government has procured 5.62 LMT of Soyabean, valued at ₹2,700 crore, benefiting 2.42 lakh farmers.

    About the PM-AASHA Scheme

    Details Launched in 2018, PM-AASHA is an umbrella scheme encompassing various components to ensure farmers receive fair prices for their produce.
    Aims and Objectives
    • Ensuring fair prices for farmers by providing price support when market prices fall below the Minimum Support Price (MSP).
    • Stabilize the prices of essential commodities, benefiting both farmers and consumers.
    • Addressing price fluctuations and ensuring sustainable agricultural practices for crops like pulses, oilseeds, and copra.
    Structural Mandate and Implementation
    • Type: Central Sector Scheme (Fully funded by the Centre).
    • Nodal Ministry: Ministry of Agriculture & Farmers Welfare.
    • Fund Allocation: Rs. 35,000 crore during the 15th Finance Commission Cycle (up to 2025-26).
    • Central Nodal Agencies (CNA):
      • Guarantees to lender banks for extending cash credit facilities to agencies like NAFED (National Agricultural Co-operative Marketing Federation of India Limited) and NCCF (National Co-operative Consumer’s Federation of India Limited) for MSP procurement.
      • Department of Consumer Affairs (DoCA) will procure pulses at market price from pre-registered farmers on eSamridhi Portal of NAFED and eSamyukti Portal of NCCF when prices exceed MSP.

    Key Components:

    • Price Support Scheme (PSS):
    • The PSS is the core component of PM-AASHA, operating through state governments to procure notified commodities at the Minimum Support Price (MSP) levels.
    • It provides financial relief to farmers when market prices fall below MSP, offering remunerative prices and promoting investment in agriculture.
    • The government fixes the MSP for 24 crops at 1.5 times the Cost of Production (CoP) to ensure a fair income for farmers.
    • Price Deficiency Payment Scheme (PDPS):
    • Under PDPS, farmers are provided direct payments if the market prices of oilseeds fall below the MSP.
    • It helps bridge the gap between MSP and market prices, ensuring that farmers still get a fair return.
    • Market Intervention Scheme (MIS):
    • The MIS provides financial assistance to states for price stabilization of perishable agricultural commodities like Tomato, Onion, and Potato, which are not covered under MSP.
    • This scheme helps manage price volatility and benefits both farmers and consumers by stabilizing prices.

     

    PYQ:

    [2020] In India, the term “Public Key Infrastructure” is used in the context of:

    (a) Digital security infrastructure

    (b) Food security infrastructure

    (c) Health care and education infrastructure

    (d) Telecommunication and transportation infrastructure

  • [pib] Comprehensive Telecom Development Plan

    Why in the News?

    The Comprehensive Telecom Development Plan for North Eastern Region (NER) funded from Digital Bharat Nidhi (DBN) aims to provide mobile coverage to uncovered villages and National Highways.

    About the Comprehensive Telecom Development Plan (CTDP):

    Overview
    • CTDP aims to enhance telecommunications infrastructure in India’s North Eastern Region (NER) by improving mobile and broadband access.
    • The plan is funded by the Digital Bharat Nidhi (DBN) programme.
    Digital Bharat Nidhi (DBN):

    • Established under the Telecommunications Act, 2023.
    • Replaces the Universal Service Obligation Fund (USOF).
    • USOF was created to provide telecom services in remote and rural areas at affordable prices.
    • Funded by a 5% Universal Service Levy on the Adjusted Gross Revenue (AGR) of telecom operators.
    • Aimed to expand telecom networks in low-profit remote and rural areas.
    • Statutory Status: Granted in December 2003 through amendments to the Indian Telegraph Act (now superseded by the Telecom Act, 2023).
    Salient Features
    • Mobile Coverage Expansion: Extend mobile coverage to previously uncovered villages and National Highways in NER.
    • Enhanced Connectivity: Installation of 2,619 mobile towers, covering 3,223 villages and 286 highway locations.
    • 4G Saturation: Providing 4G connectivity to remote villages.
    • Support for Socio-Economic Development: Empower citizens through ICTs for development.
    • Digital Inclusion: Help bridge the digital divide in NER.
    Structural Mandate and Implementation
    • Funding: Primarily funded by the Digital Bharat Nidhi (DBN) programme.
    • Implementation: Coordinated through DBN-funded schemes focusing on mobile towers, 4G coverage, and broadband development.
    • Agencies Involved:
      • Ministry of Communication: Oversees implementation, ensures spectrum and policy approvals.
      • DBN: Provides funding and operational support.
      • Telecom Service Providers: Deploy infrastructure like towers and 4G networks.
      • State Governments of NER: Facilitate local implementation.
      • Project Management Agencies: Involved in setting up towers and maintenance.

     

    PYQ:

    [2018] Which of the following is/are the aims/aims of the “Digital India” Plan of the Government of India?

    1. Formation of India’s own Internet companies like China did.
    2. Establish a policy framework to encourage overseas multinational corporations that collect Big Data to build their large data centres within our national geographical boundaries.
    3. Connect many of our villages to the Internet and bring Wi-Fi to many of our schools, public places and major tourist centres.

    Select the correct answer using the code given below:

    (a) 1 and 2 only

    (b) 3 only

    (c) 2 and 3 only

    (d) 1, 2 and 3

  • Why the government could discontinue the sovereign gold scheme?

    Why in the News?

    Sovereign gold bonds provide a safer and more cost-effective alternative to holding physical gold, as they reduce risks and storage expenses. However, the central government is considering discontinuing the SGB scheme.

    What is the Sovereign Gold Bond scheme?

    About GOI launched it on October 30, 2015.
    Structural Mandate Nodal Agency: Ministry of Finance;
    Issued by RBI on behalf of the GOI.
    Aims and Objectives To reduce dependence on gold imports and shift savings from physical gold to paper form.
    Targeted Beneficiaries Residents of India, including individuals, HUFs, trusts, universities, and charitable institutions.
    Funding Mechanism
    • The Sovereign Gold Bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. This ensures a sovereign guarantee for both the principal and interest payments.
    • The bonds are made available for subscription in tranches. The RBI notifies the terms and conditions for each tranche, including the subscription dates and issue price, which is based on the average closing price of gold of 999 purity published by the India Bullion and Jewellers Association (IBJA).
    • SGBs are sold through various channels, including scheduled commercial banks (excluding small finance banks), designated post offices, Stock Holding Corporation of India Limited (SHCIL), and recognized stock exchanges like NSE and BSE.
    Features
    • Sovereign gold Bonds are issued in 1-gram denominations with an 8-year tenure and early exit from the 5th year.
    • The minimum investment is 1 gram, a maximum 4 kg for individuals, and 20 kg for trusts.
    • Benefits include security, interest, and loan collateral.

    What are the concerns regarding sovereign gold bonds?

    • High Cost of Financing: The government perceives the cost of financing its fiscal deficit through SGBs as disproportionately high compared to the benefits provided to investors. This perception has led to a significant reduction in the issuance of SGBs, dropping from ten tranches annually to just two.
    • Limited Issuance in Current Financial Year: In the financial year 2024-25, no new sovereign gold bonds have been issued so far, and net borrowing through these bonds has been significantly reduced from previous estimates.
    • Market Competition from Physical Gold: The recent reduction in customs duty on gold from 15% to 6% has led to a surge in demand for physical gold. Investors may prefer holding physical gold over waiting for returns from debt securities like SGBs, which require maturity periods before realizing gains.

    What are the challenges due to the import of Gold?

    • Impact on Trade Deficit: Gold imports are a major contributor to India’s trade deficit, with a record $14.8 billion spent in November 2024, which weakened the rupee. Between 2016 and 2020, gold imports made up 86% of the country’s gold supply, leading to significant foreign exchange outflows and economic instability.
    • Encouragement of Smuggling: High import duties on gold have driven a rise in smuggling, with 65% to 75% of smuggled gold entering India through air routes. This illegal trade undermines government revenue and complicates market regulation.

    Way forward: 

    • Increase Liquidity and Accessibility: Similar to gold-backed ETFs in the U.S. and Gold Bullion Securities in Australia, India can enhance the liquidity of SGBs by allowing them to be traded on stock exchanges, providing easy access and better market engagement for investors.
    • Encourage Regular Investments: Drawing inspiration from Germany’s gold savings plans, India can introduce flexible investment options such as monthly or quarterly contributions, enabling dollar-cost averaging and attracting retail investors over time.

    Mains PYQ:

    Q Craze for gold in Indian has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme. (UPSC IAS/2015)

  • US Bitcoin Strategic Reserve

    Why in the News?

    Bitcoin surged to a record high of over $107,000 after President-elect Donald Trump reaffirmed plans to create a US bitcoin reserve, boosting investor excitement.

    Do you know?

    • The legal status of cryptocurrency in India is uncertain.
      • RBI has warned against cryptocurrencies, citing risks to investors and confirming they are not legal tender. 
    • In 2018, the Supreme Court overturned an RBI ban on financial institutions dealing with cryptocurrencies.
    • In the 2022-23 Union Budget, the Government of India announced a 30% tax on cryptocurrency transfers.
    • Additionally, a panel has been formed to explore blockchain technology and the potential for a Central Bank Digital Currency (CBDC).

    What is a Strategic Reserve?

    Details
    • A strategic reserve is a stockpile of critical resources, used in times of crisis or disruptions in supply.
    • Examples:
      • US Strategic Petroleum Reserve: Largest global emergency oil stockpile, created in 1975 after the 1973-74 oil embargo.
      • Canada’s Maple Syrup Reserve: The only global strategic reserve for maple syrup.
      • China’s Reserves: Includes resources like metals, grains, and pork.
    How Would a U.S. Strategic Bitcoin Reserve Work?
    • Establishing the Reserve: Unclear if it would require executive powers or Congress approval. Some suggest an executive order to manage bitcoin through the U.S. Treasury’s Exchange Stabilization Fund.
    • Content of the Reserve: Includes seized bitcoin (200,000 tokens, worth approx. $21 billion).
    • Additional Purchases: Possible purchase of more bitcoin from the open market.
    Benefits and Risks of a Bitcoin Reserve Benefits:

    • Global Market Dominance: Could enhance U.S. control over the global bitcoin market, especially against competitors like China.
    • Economic Advantages: Could reduce U.S. fiscal deficit and strengthen the U.S. dollar.

    Risks:

    • Volatility: Bitcoin’s value is uncertain due to volatility and lack of intrinsic use.
    • Security: Vulnerability to cyber-attacks and market fluctuations.

  • [17th December 2024] The Hindu Op-ed: Levy a higher GST rate on tobacco, sugared beverages

    PYQ Relevance:

    Q) “Besides being a moral imperative of a Welfare State, primary health structure is a necessary precondition for sustainable development.” Analyse. (UPSC CSE 2021)

    Mentor’s Comment: UPSC mains have always focused on major issues like the Conflict of interest in the public sector (2017) and Life Expectancy (2022).

    Tobacco is responsible for approximately 1 million deaths annually in India, accounting for about 17.8% of total deaths in the country. This includes deaths from both direct tobacco use and secondhand smoke exposure.

    The proposal to levy a higher Goods and Services Tax (GST) rate on tobacco products and sugared beverages has sparked significant discussion in India. This editorial explores the implications of such a move, the current tax structure, and the anticipated outcomes of the proposed changes.

    _

    Let’s learn!

    Why in the News?

    The proposal to levy a higher Goods and Services Tax (GST) rate on tobacco products and sugared beverages has sparked significant discussion in India.

    What is National Calamity Contingent Duty (NCCD)?

    • It is a type of excise duty imposed by the Indian government on specific manufactured goods, particularly those considered harmful to public health, such as tobacco products and certain beverages.
    • Established under Section 136 of the Finance Act, 2001, NCCD is intended to generate revenue that can be utilized for disaster relief and other national calamity responses.
    • In the Union Budget for 2023-24, the government proposed increasing NCCD rates by approximately 16% for specified cigarettes, reflecting ongoing efforts to regulate tobacco consumption through higher taxation.

    Background of the news:

    • Over the past seven years since the Goods and Services Tax (GST) was introduced in India, there have been a few significant increases in GST rates for harmful products like tobacco and sugar-sweetened beverages.
    • Apart from two small hikes in the National Calamity Contingent Duties (NCCD) on tobacco, the tax rates have largely remained unchanged. This lack of increase has made these products more affordable, which undermines efforts to reduce their consumption.
    • In this context, the recent proposal by the Group of Ministers (GoM) to raise the highest GST rate on tobacco and sugar-sweetened beverages from 28% to 35% is a positive development. This increase could help discourage the consumption of these harmful products.
    • However, it is important to note that additional tax reforms are necessary to effectively address the public health issues and fiscal challenges associated with tobacco and sugary drinks.

    What is the current GST structure?

    • Under the existing GST framework, tobacco products and aerated beverages are taxed at a base rate of 28%, with additional cess rates that can range significantly.
    • For tobacco, these cesses can be as high as 290%, making it one of the most heavily taxed sectors in India.
    • Aerated beverages also face a 12% compensation cess on top of the standard GST rate, leading to a total tax burden that is among the highest globally.

    What is the Rationale behind the recent Proposal?

    • Public Health Concerns: Higher taxes on tobacco and sugary drinks are often justified by their negative health impacts. Increasing GST rates could deter consumption and promote healthier choices among consumers.
    • Revenue Generation: The Indian government is looking for ways to bolster its revenue streams, especially in light of potential shortfalls from other sectors. By raising taxes on these “sin products,” it aims to offset losses from reductions in taxes on essential goods and services, such as health insurance premiums.
    • Alignment with Global Practices: Many countries impose high taxes on tobacco and sugary beverages as part of public health strategies. By following suit, India could align itself with global best practices aimed at reducing the consumption of harmful products.

    What were the Market reactions to the potential GST Increase? 

    • Stock Price Impact: Following the news, ITC’s shares fell by about 3%, while Varun Beverages dropped by 5%. This decline reflects investor concerns over how higher taxes might affect profitability.
    • Historical Performance: Both companies had previously enjoyed strong stock performance, with ITC’s stock rising 110% and Varun Beverages increasing by 424% in recent years.
      • However, the prospect of increased taxation has caused a correction, with both stocks down around 12% from their recent highs.
    • Analyst Insights: Analysts believe that while higher taxes could reduce sales volumes, they might also boost government revenues if managed well. 

    Way Forward:

    • Engage with Stakeholders: Regular consultations with industry stakeholders, including manufacturers and health experts, can provide valuable insights into the potential impacts of tax changes and help create balanced policies that consider both public health and economic factors.
    • Consider Broader Tax Reforms: The government could explore broader tax reforms that align with health objectives, such as revising tax structures for other products or services that impact public health, ensuring a comprehensive approach to taxation.
    • Implement the Proposed GST Increase: The government should proceed with the Group of Ministers (GoM) recommendation to raise the GST on tobacco and aerated beverages from 28% to 35%. This move aims to discourage the consumption of these harmful products while increasing government revenue.
    • Enhance Public Awareness Campaigns: Alongside tax increases, the government can launch public health campaigns to educate citizens about the dangers of tobacco and excessive sugar consumption. This could further support efforts to reduce demand for these products.
    https://www.thehindu.com/opinion/op-ed/levy-a-higher-gst-rate-on-tobacco-sugared-beverages/article68992871.ece

  • India’s wage challenge has shifted from chronic to immediate

    Why in the news? 

    India’s Rural low wages pose a significant challenge, but adopting a ground-level perspective on employers’ daily realities highlights policy measures to increase the number of high-productivity employers.

    What are the root causes of the current wage stagnation in India?

    • Economic Structure: The shift from agriculture to non-farm jobs has not been accompanied by a corresponding increase in productivity. Despite significant government spending, the flow of jobs since 1991 has not reduced farm employment, leading to wage stagnation in rural areas.
    • Skill Mismatch: There is a disparity between the skills available in the labour market and those demanded by employers. Many workers remain under-skilled for the higher-paying jobs that are available, perpetuating low wages.
    • Economic growth vs wage stagnation: Despite India’s GDP growing at a strong rate, averaging 7.8% in recent years, this growth has not led to substantial wage increases for rural workers. In fact, real wages, when adjusted for inflation, have either remained stagnant or decreased. This disparity underscores a crucial issue: the underlying nature of economic growth.
    • Shift to Capital-Intensive Growth: India’s recent economic growth is driven by capital-intensive sectors, which create fewer jobs, limiting the demand for rural labour and keeping wages low.
    • Inflation vs. Wage Growth: While nominal wages have risen, inflation has outpaced wage growth, reducing the real purchasing power of rural workers. For example, rural wages grew by 5.2% nominally, but real wage growth was negative at -0.4%.
    • Increased Labour Supply: Government schemes like Ujjwala and Har Ghar Jal have increased rural women’s workforce participation, intensifying competition for jobs and putting downward pressure on wages.
    • Agricultural Wage Stagnation: Despite steady agricultural growth (4.2% and 3.6% in recent years), wages in agriculture have not increased proportionally, limiting overall wage growth in rural areas.

    How can India effectively implement a living wage system?

    A living wage system ensures workers earn enough to meet basic needs like food, housing, healthcare, and education, enabling a decent standard of living beyond mere subsistence wages.

    • Policy Framework: Establishing a clear definition of what constitutes a living wage based on local cost of living metrics is essential. This framework should be adaptable to different regions and sectors.
    • Incentives for Employers: Providing tax breaks or subsidies for businesses that pay living wages can encourage compliance and support workers’ livelihoods.
    • Strengthening Labor Rights: Ensuring robust enforcement of labor laws that protect workers’ rights to fair wages and safe working conditions is crucial for implementing a living wage system effectively.
    • Public Awareness Campaigns: Educating both employers and employees about the benefits of a living wage can help shift perceptions and practices within the workforce.

    What are the wage disparities in India?

    • Gender Wage Gap: According to the Global Gender Gap Index 2024, Indian women earn only ₹40 for every ₹100 earned by men, highlighting a significant gender pay disparity.
      • The economic gender parity level in India is recorded at 39.8%, indicating that while some progress has been made, substantial gaps remain in economic participation and remuneration between genders.
    • Regional Wage Disparities: The average daily wage for casual workers in rural areas is approximately ₹104, significantly lower than the national average of ₹247 per day for all workers.
    • Wage Inequality Metrics: The Gini coefficient for wages in India stands at 0.49, indicating a high level of wage inequality. The D9/D1 wage ratio, which compares the earnings of the top 10% to the bottom 10%, is 6.7, underscoring the stark contrast in earnings across different segments of the workforce.

    Note: The D9/D1 wage ratio is a measure of income inequality that compares the earnings of the top 10% of wage earners (D9) to the earnings of the bottom 10% (D1) within a given population

    What policy measures can be taken to address wage disparities and ensure fair compensation? (Way forward)

    • Rationalisation of Regulations: Streamlining regulatory frameworks to reduce bureaucratic hurdles can encourage entrepreneurship and job creation. This includes removing unnecessary jail provisions that deter business operations.
    • Investing in Human Capital: Prioritizing skill development programs aligned with market demands can boost employability and empower workers to secure higher-paying jobs.
    • Encouraging Non-Farm Employment: Policies should focus on fostering private, productive non-farm jobs through digitisation and formalization, paving the way for better wages.
    • Strengthening Redistribution Mechanisms: Adopting progressive taxation on higher profits can fund social programs designed to uplift wage levels across different sectors.
    • Fostering Long-Term Economic Planning: Crafting a comprehensive economic strategy aligned with labour market needs is essential for ensuring sustainable wage growth and effectively addressing disparities.

    Mains PYQ: 

    Q Can the strategy of regional-resource-based manufacturing help in promoting employment in India? (UPSC IAS/2019)