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Subject: Economics

  • SEBI’s proposed measures to curb F&O speculation    

    Why in the news?

    SEBI has proposed a series of measures to curb speculative trading in the index derivatives segment due to concerns over the exponential increase in trading volumes in futures and options, especially among individual investors.

    What are the different types of derivatives?  

    Note: Derivatives are financial contracts deriving their value from an underlying asset such as stocks, commodities, or currencies.
    • Futures: 
        • Futures are standardized contracts obligating the buyer to purchase an underlying asset (such as stocks, commodities, or currencies) at a predetermined price on a specified future date. They are traded on exchanges, with daily settlements based on market price changes.
        • Futures contracts have margin requirements and are marked to market daily, ensuring liquidity and reducing credit risk.
    • Options: 
        • Options give the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price within a specified time frame. Unlike futures, options are not obligatory; the buyer can choose whether to exercise the option.
        • Options can be traded on exchanges or over-the-counter (OTC) and require the payment of a premium by the buyer.
    • Forwards: 
        • Forward contracts are similar to futures but are privately negotiated agreements between two parties to buy or sell an asset at a future date and price. They are customizable and traded over the counter, which allows for flexibility but introduces counterparty risk.
        • Settlement occurs at the maturity date, and forward contracts do not have standardization like futures.
    • Swaps: 
      • Swaps involve the exchange of cash flows or financial instruments between two parties, often based on interest rates or currencies. Common types include interest rate swaps and currency swaps, which allow participants to manage exposure to interest rate fluctuations or gain access to different currencies.
      • Swaps are typically traded over the counter and can be tailored to meet the specific needs of the parties involved.

    What measures have the SEBI proposed?

    • Increase in minimum contract size for index derivatives from Rs 5-10 lakh to Rs 15-20 lakh, which can be further increased to Rs 20-30 lakh after six months.
    • Upfront collection of option premiums by brokers from clients.
    • Intraday monitoring of position limits for index derivative contracts by Market Infrastructure Institutions (MIIs).
    • Providing only one weekly options contract on a single benchmark index of an exchange.
    • Removal of calendar spread benefits on the expiry day for positions involving any of the contracts expiring on the same day.
    • Rationalisation of options strikes, with a uniform interval up to a fixed coverage of 4% near the prevailing index price and an increased interval as the strikes move away from the prevailing price.
    • Increasing margins on the expiry day and the previous day to address the issue of high implicit leverage in options contracts near expiry.

    Why have these measures been proposed?

    • The measures aim to enhance investor protection and promote market stability in the derivative markets, amidst concerns about an exponential rise in the volume of trade in the futures and options (F&O) segment, particularly by individual investors.
    • In the Union Budget 2024-25, the Securities Transaction Tax (STT) on F&O of securities was doubled to 0.02% and 0.1%, respectively, effective October 1, 2024.
    • Data shows that in FY 2023-24, 92.50 lakh unique individuals and proprietorship firms traded in the NSE index derivatives segment and cumulatively incurred a trading loss of Rs 51,689 crore, with only 14.22 lakh investors (about 15%) making a net profit.

    Way forward: 

    • Enhancing Investor Education and Awareness: To mitigate the risks associated with speculative trading in index derivatives, it is essential to implement comprehensive investor education programs.
    • Strengthening Regulatory Oversight and Compliance: SEBI should enhance its regulatory framework by implementing robust monitoring systems that ensure compliance with the proposed measures.
  • [30th July 2024] The Hindu Op-ed: The problem with India’s blocking of the Chinese

    [30th July 2024] The Hindu Op-ed: The problem with India’s blocking of the Chinese

    PYQ Relevance:

    Mains:

    Q1 China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia’, In the light of this statement, discuss its impact on India as her neighbour. (UPSC IAS/2021) 

    Q2 With respect to the South China sea, maritime territorial disputes and rising tension affaire the need for safeguarding maritime security to ensure freedom of navigation and ever flight throughout the region. In this context, discuss the bilateral issues between India and China. (UPSC IAS/2014) 

    Prelims: 

    Q ‘Belt and Road Initiative’ is sometimes mentioned in the news in the context of the affairs of (2016)
    (a) African Union 
    (b) Brazil 
    (c) European 
    (d) Union China

    Note4Students: 

    Prelims: Bordering countries with China;

    Mains: Dependency on Chinese technician;

    Mentor comments:  Chinese technicians are vital for the Indian economy as they help bridge significant skill gaps in various industries, including manufacturing and technology. Their expertise is crucial for effectively operating Chinese machinery, which many Indian businesses have acquired but cannot utilize efficiently without skilled personnel. This dependency is highlighted by the urgent need for faster visa approvals for Chinese experts, as delays have led to substantial production losses, estimated at $15 billion over recent years. Integrating their knowledge is essential for enhancing productivity and achieving India’s manufacturing ambitions.

    Let’s learn!

    __

    Why in the News? 

    Indian authorities plan to increase visas for Chinese technicians, acknowledging a significant skill gap between them and Indian workers, which is crucial for enhancing productivity in various industries.

    Dependency on Chinese Technicians

    • Skill Gaps: Indian businesses are facing a substantial skill deficit compared to their Chinese counterparts, which hampers productivity and the effective use of advanced machinery.  
    • Declining Visa Issuance: The number of visas issued to Chinese nationals has drastically decreased from approximately 200,000 in 2019 to just 2,000 in 2024, largely due to geopolitical tensions following border clashes in 2020. 
      • This reduction has created a bottleneck in the manufacturing sector, leading to estimated production losses of around $15 billion over the past four years.
    • Government Response: In light of these challenges, Indian authorities are working to expedite the visa process for Chinese technicians, aiming to reduce processing times from several months to about 30 days. 

    Importance of Foreign Knowledge Integration:

    • Role of Foreign Knowledge in Development: Foreign knowledge is crucial for economic development but is most effective when combined with a well-educated domestic workforce. This integration enhances the ability to utilize foreign expertise effectively.
    • Korea’s Successful Model: In the 1980s, South Korea leveraged foreign technology by purchasing machines to dismantle and reverse engineer them.
      • This was possible due to a strong educational foundation that had been established over three decades, allowing minimal reliance on foreign assistance.
    • China’s Strategic Approach: China began its rapid economic growth in the early 1980s, despite having a weaker educational base than Korea. However, the quality of primary education during the Communist era prepared China for development.
      • Deng Xiaoping’s initiatives, including sending policymakers on international study tours and attracting foreign investors, facilitated the absorption of global knowledge.
    • India’s Educational Challenges: India has focused on building school infrastructure and increasing enrollment, but the quality of education remains low.
      • Only about 15% of Indian students possess the basic skills necessary for participation in the global economy, compared to 85% of Chinese students.
    • Global Competitiveness: China’s performance in international assessments, such as the Programme for International Student Assessment (PISA), has consistently improved, with Chinese students outperforming their peers globally.
      • In contrast, India’s participation in PISA ended after a poor showing in 2009, highlighting a significant gap in educational outcomes.

    Red Queen Race: 

    • Fundamental lesson from the Red Queen: The phrase “You must run twice as fast as you can to stay in the same place” illustrates the necessity for continuous improvement and adaptation in the face of competition, especially in the context of global technological advancements.
    • China’s educational advancements: Chinese universities are now among the world’s best, particularly in fields like computer science and mathematics, reflecting a strong emphasis on integrating foreign knowledge with domestic education.
    • Scientific progress: Chinese scientists are making significant strides in applied sciences relevant to industrial progress, positioning China as a leader in electric vehicles, solar technology, and artificial intelligence.
    • Western response to competition: Instead of addressing deficiencies in their education systems, Western leaders are resorting to protectionist measures against Chinese imports, which may not effectively resolve underlying issues in their own educational frameworks.
    • India’s educational challenges: Indian elites appear to overlook the lessons from China, with economists suggesting a shift towards technology-enhanced service exports while ignoring the need for a robust base of high-quality education to support such initiatives.

    Way forward: 

    • Streamline Visa Approval Processes: India should expedite the visa application process for Chinese technicians by implementing a fast-track system that reduces approval times to less than a month.  
    • Enhance Domestic Education and Training: To complement foreign expertise, India must invest in improving its educational system, focusing on vocational training and technical skills.  

  • Should India focus on natural farming?    

    Why in the news?

    In the 2024-25 Budget proposals, Union Finance Minister Nirmala Sitharaman declared that over the next two years, one crore farmers nationwide will be introduced to natural farming, with support provided through certification and branding.

    National Mission on Natural Farming (NMNF):

    • The National Mission on Natural Farming (NMNF) aims to encourage farmers to adopt chemical-free farming practices and willingly shift to natural farming based on the merits of the system.
    • The government believes the success of NMNF hinges on changing farmers’ behaviour to transition from chemical-based inputs to cow-based, locally-produced inputs, supported by a financial outlay of ₹4,645.69 crore over six years (2019-20 to 2024-25) under the ‘Bharatiya Prakritik Krishi Paddhati’ scheme.

    What is natural farming?

    • Natural farming avoids the use of chemical fertilizers and pesticides, instead promoting traditional indigenous practices. 
    • It focuses on recycling on-farm biomass, employing biomass mulching, and utilizing formulations made from cow dung and urine.
    • Pests are managed through diverse farming practices and on-farm botanical mixtures, strictly excluding all synthetic chemical inputs.

    What are the concerns related to Yield?

    • Yield Reduction: Agricultural experts are concerned that a large-scale transition to natural farming could result in reduced crop yields. Studies have shown significant declines in yield for staples like wheat (59%) and basmati rice (32%) compared to integrated crop management systems.
    • Food Security: Lower yields from natural farming could threaten food security in a populous country like India, potentially only being able to feed around one-third of the population with staples like wheat and rice.

    Findings on the Ground:

    • Mixed outcomes: Field experiments have shown mixed results. Some studies indicate improved yields and incomes with lower costs due to biological inputs, while others show a decline in productivity.
    • Good Results in Andra Pradesh: In Andhra Pradesh, adopting natural farming methods has shown promising results, leading to better crop yields and enhanced farmers’ incomes.
    • Concerns about sustainability and productivity: Agro-scientists from the Indian Council of Agricultural Research (ICAR) and the Indian Institute of Farming Systems Research (IIFSR) have raised concerns about the sustainability and productivity of natural farming methods.

    Differences in Studies:

    • CESS Study: The Centre for Economic and Social Studies (CESS) and Institute for Development Studies Andhra Pradesh found that natural farming practices led to improved yields and incomes for farmers, thereby enhancing food and nutritional security.
    • ICAR-IIFSR Study: The study by ICAR-IIFSR reported a significant decline in yields of key crops like wheat and basmati rice when compared to conventional farming practices, suggesting a negative impact on food supply.

    Case study of Sri Lanka:

    • Policy Shift: Sri Lanka’s decision to completely switch to organic farming and ban chemical fertilizers led to economic and political turmoil.
    • Yield Decline: Farmers struggled to obtain natural fertilizers, resulting in reduced yields of key crops, including rice.
    • Food Security Risk: The shift put the country’s food security at risk, causing sharp price escalations and widespread protests and unrest.

    Way forward: 

    • Localized Implementation and Scientific Validation: Need to conduct rigorous scientific studies and extensive field trials to validate the productivity and viability of natural farming methods before scaling them up nationwide.
    • Hybrid Approach and Support for Farmers: Govt. should adopt a hybrid approach that combines the best practices of both natural and conventional farming to ensure food security.  

  • What is Indexation in calculating LTCG tax?

    Why in the News?

    The withdrawal of the indexation benefit from the long-term capital gains (LTCG) tax regime has emerged as a contentious decision in the Union Budget for 2024-25.

    What is Indexation?

    • Indexation is a method used to adjust the purchase price of an asset to account for inflation over the period it was held.
    • This reduces the taxable capital gain, as it reflects the increase in the asset’s value due to inflation.
    • Purpose: To ensure that the taxpayers are taxed only on the real gains and not on the inflationary increase in the value of the asset.

    Changes in the LTCG Regime

    • The new LTCG regime removes the indexation benefit for property, gold, and other unlisted assets.
    • The LTCG tax rate is reduced from 20% to 12.5%.
    • For assets purchased before 2001, the fair market value as of April 1, 2001, is considered the cost of acquisition.

    Implications of the Changes

    • The government claims the changes simplify the capital gains tax structure without causing a loss to most taxpayers.
    • The uniform tax rate for various asset classes is intended to benefit both taxpayers and tax authorities.

    Concerns for Taxpayers

    • There was significant concern, particularly in the residential real estate sector, about increased LTCG tax liabilities.
    • The government clarified that the new regime would be beneficial in most cases, as real estate returns typically outpace inflation.
    • The Income Tax Department explained that:
    1. For properties held for 5 years, the new regime is beneficial if the value has appreciated 1.7 times or more, and
    2. For 10 years, if the value has increased to 2.4 times or more.

    Back2Basics: Capital Gains Tax Overview

    Details
    Definition Tax on profit from the sale of a capital asset.
    Launch Introduced in 1956, as part of the Income Tax Act, 1961.
    Types Short-Term Capital Gains (STCG): Held for ≤36 months (≤12 months for specified assets).

    Long-Term Capital Gains (LTCG): Held for >36 months (>12 months for specified assets).
    Tax Rates (STCG) With STT: 15%

    Without STT: Applicable income tax slab rates.
    Tax Rates (LTCG) Listed Equity Shares & Equity-Oriented Funds: 10% on gains >₹1 lakh without indexation.

    Other Assets: 20% with indexation (proposed 12.5% without indexation from FY 24-25).
    Indexation Adjusts purchase price for inflation using Cost Inflation Index (CII).
    Purpose of Indexation To tax only the real gains, accounting for inflation.
    Formula (Indexation) Indexed Cost of Acquisition: (Cost of Acquisition × CII of sale year) / CII of purchase year

    Indexed Cost of Improvement: (Cost of Improvement × CII of sale year) / CII of improvement year

     

    PYQ:

    [2012] Under which of the following circumstances may ‘capital gains’ arise?

    1. When there is an increase in the sales of a product

    2. When there is a natural increase in the value of the property owned

    3. When you purchase a painting and there is a growth in its value due to increase in its popularity

    Select the correct answer using the codes given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 2 only

    (d) 1, 2 and 3

  • India’s illegal coal mining problem      

    Why in the News?

    On July 13, three workers died of asphyxiation inside an illegal coal mine in Gujarat’s Surendranagar district.

    How Prevalent is Illegal Coal Mining in India?

    • Illegal coal mining has led to multiple fatalities, including recent incidents in Gujarat, Jharkhand, and West Bengal, highlighting its prevalence and dangers.
    • There are 10 workers who have died in illegal mining incidents in Gujarat alone this year, showcasing the ongoing risks associated with this activity.
    • Illegal mining is often conducted in abandoned mines or shallow coal seams, particularly in remote areas, where monitoring and enforcement of regulations are weak.

    What are the Legal Frameworks Governing Coal Mining in India?

    • Coal Mines (Nationalisation) Act, 1973: This act nationalized coal mining in India, regulating who can mine coal and under what conditions.
    • Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act): This central legislation governs the mining sector, detailing processes for acquiring mining licenses and regulating mining activities. It empowers state governments to frame rules to prevent illegal mining.
      • While the MMDR Act provides a framework, the enforcement and regulation of illegal mining fall under state jurisdiction.

    Why is the Responsibility for Addressing Illegal Mining Placed on State Governments?

    • Law and Order Issue: Illegal mining is categorized as a law and order problem, which is a subject under the State List of the Constitution, making it the responsibility of state governments to address.
    • Limited Central Authority: The Union government often shifts the responsibility to state authorities, citing the decentralized nature of governance in matters of local enforcement and regulation.

    What Factors Contribute to the Persistence of Illegal Coal Mining?

    • High Demand for Coal: With coal accounting for 55% of India’s energy needs, the high demand often exceeds legal supply leading to illegal mining activities.
    • Poverty and Unemployment: Many coal-rich areas are home to impoverished populations who resort to illegal mining as a source of livelihood due to limited job opportunities.
    • Weak Regulatory Enforcement: Inadequate monitoring and enforcement of mining regulations in remote areas allow illegal mining operations to flourish.
    • Political Patronage: Allegations of political leaders’ involvement in illegal mining operations complicate efforts to curb these activities, as seen in various states.

    What Safety Risks Do Workers Face?

    • Lack of Safety Equipment: Workers often operate without helmets, masks, or other protective gear, significantly increasing their risk of injury or death.
    • Hazardous Working Conditions: Illegal mines are typically unregulated, lacking proper structural support, making them vulnerable to cave-ins, landslides, and explosions.
    • Toxic Gas Exposure: Miners are at risk of asphyxiation from inhaling toxic gases like carbon monoxide, as evidenced by recent fatalities in Gujarat.
      • Continuous exposure to coal dust and hazardous substances can lead to respiratory issues and chronic health conditions, further endangering workers’ health.

    Conclusion: Need to implement advanced surveillance technologies, such as drones and satellite imaging, to monitor and detect illegal mining activities in real-time. This can improve the efficiency of enforcement agencies in identifying and responding to illegal operations swiftly.

  • A big step towards the transformation of various sectors  

    Why in the news?

    The 2024-25 Budget is a progressive proposal featuring several commendable initiatives aimed at boosting India’s economic growth and advancing social progress.

    Prioritized areas in the recent Budget 2024-25

    • Job Creation and Skilling: The budget allocates ₹1.48 lakh crore towards job creation, employment, and skilling, emphasizing the importance of developing a skilled workforce to support India’s service sector. This shift from a focus on manufacturing to skilling reflects a strategic move towards building a service-oriented economy.
    • Energy Transformation: There is significant investments are directed towards energy transformation initiatives, including solar panel manufacturing and nuclear energy development. The budget allocates ₹89,287 crore to crucial sectors, indicating a commitment to sustainable energy solutions.
    • Healthcare Initiatives: The budget includes measures to enhance healthcare access, such as customs duty exemptions on life-saving cancer medications and components for advanced medical equipment.
    • Technology and Innovation: A framework with nine priorities is introduced to leverage advanced technology and foster collaboration between the government and private sector, promoting growth and innovation across various sectors.
      • For example: The budget allocates ₹1 lakh crore specifically for research and innovation, accompanied by a 50-year interest-free loan.

    What does the budget say on Accessibility and Affordability?    

    • Customs Duty Exemptions on drugs: The budget exempts customs duties on three essential cancer medications, making them more affordable and accessible to patients. This move addresses the high costs associated with cancer treatments, which often pose significant barriers to access.
    • Support for Medical Equipment: Customs duties are also waived for components of X-ray tubes and digital detectors, which are crucial for advanced medical technologies.
    • Alignment with Domestic Capacity: The budget emphasizes aligning customs duties with domestic capacity under the phased manufacturing program, fostering a conducive environment for startups and encouraging local manufacturing.

    On Prioritizing Inclusivity and Fiscal Prudence

    • Women’s Workforce Participation: The budget focuses on boosting women’s participation in the economy through targeted initiatives such as hostels, creches, and skilling programs.
      • According to a report by McKinsey, India can increase its 2025 GDP, estimated at $4.83 trillion, by 16%-60% simply by enabling women to participate in the economy on par with men
    • Research and Development: With India spending only 0.7% of its GDP on research, the budget encourages private sector collaboration with the government to increase investments in R&D. This collaboration is vital for fostering innovation and ensuring sustainable economic growth.
    • Public-Private Partnerships: The budget promotes public-private partnerships to enhance healthcare delivery and infrastructure, reflecting a commitment to inclusivity and collaboration in achieving economic and social goals.

    Conclusion: The government should expand the scope of skilling programs to cover a wider range of sectors and skill levels while ensuring the workforce is equipped to meet the evolving demands of the service-oriented economy.

  • Key takeaways from the 2023-24 Economic Survey   

    Why in the News?

    The 2023-24 Economic Survey highlights realistic challenges for India’s growth, projecting GDP growth at 6.5%-7% for FY 2024-25 despite 8% growth in FY 2023-24.

    What are the major five issues with the Indian Economy?  

    • Weak Demand: In India, an unfavourable environment for FDI growth is due to high interest rates in developed countries, which increases the cost and opportunity cost of investment in India.
    • Dependence on China: Due to over-reliance on China for imports, particularly in key sectors like renewable energy, limits India’s manufacturing capabilities and increases vulnerability to geopolitical tensions.
    • Tepid Private Investment: Despite tax cuts aimed at stimulating capital formation, the corporate sector has not significantly increased investment, leading to a lack of job creation and economic dynamism.
    • Employment Challenges: The need to generate approximately 78.5 lakh jobs annually in the non-farm sector until 2030 to accommodate the growing workforce, coupled with insufficient data on job creation, complicates labour market analysis.
    • Infrastructure Deficiencies: Inadequate infrastructure, such as roads, railways, and sanitation, continues to hinder economic development and efficiency, requiring substantial investment and reform to improve productivity.

    What are the suggestions given in the Economic Survey? 

    • Private Sector’s Role in Job Creation: The corporate sector should take responsibility for creating jobs, as it is in their enlightened self-interest.
    • Embracing Healthy Lifestyle: Indian businesses should learn from India’s traditional lifestyle, food, and recipes to live healthily and in harmony with nature.
    • Focusing on Agriculture: The farm sector can generate higher value addition, boost farmers’ income, create opportunities for food processing and exports, and make the sector attractive to urban youth.
    • Removing Regulatory Bottlenecks: Licensing, inspection, and compliance requirements imposed by various levels of government are an onerous burden on businesses, especially MSMEs.
    • Improving Data Quality: The lack of availability of timely data on the absolute number of jobs created in various sectors precludes an objective analysis of the labour market situation.

    Way forward: 

    • Enhance Infrastructure Development: Need to prioritize investments in essential infrastructure such as roads, railways, and sanitation to boost economic efficiency and productivity.
    • Strengthen Data Collection and Analysis: The government should develop robust mechanisms for timely and accurate data collection on employment and other key economic indicators.

    Mains PYQ: 

    Q Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)

  • What is Angel Tax that was scrapped in Budget 2024?

    Why in the News?

    Finance Minister announced the abolition of the angel tax, aiming to strengthen the startup ecosystem and support innovation in India.

    What is Angel Investment?

    • An angel investor is an individual who provides financial backing to early-stage startups or entrepreneurs, typically in exchange for equity in the company.
    • Angel investors are typically high-net-worth individuals who invest their own personal funds, rather than investing on behalf of a firm or institution.
    • Features of Angel Investing: Early-stage funding, equity investment, high-risk, high-reward, active involvement,personal investment,f lexible terms and shorter investment horizon.

    What is Angel Tax? 

    • Referred to as Angel Tax, this rule is described in Section 56(2)(vii)(b) of the Income Tax Act, 1961.
    • Essentially it’s a tax on capital receipts, unique to India in the global context.
    • This clause was inserted by the Finance Act in 2012 to prevent laundering of black money, round-tripping via investments with a large premium into unlisted companies.
    • The tax covers investment in any private business entity, but only in 2016 was it applied to startups.

    Why was angel tax introduced?

    • The complicated nature of VC fundraising with offshore entities, multiple limited partners and blind pools is contentious.
    • There has been some element of money laundering or round-tripping under guise.

    Details of its levy

    • The Angel Tax is being levied on startups at 9% on net investments in excess of the fair market value.
    • For angel investors, the amount of investment that exceeds the fair market value can be claimed for a 100% tax exemption.
    • However, the investor must have a net worth of ₹2 crores or an income of more than ₹25 Lakh in the past 3 fiscal years.

    Key Issues with Angel Tax

    • Share Valuation: The tax impacted the valuation of shares, causing complications for startups in raising funds.
    • Discounted Cash Flow (DCF) Method: Issues arose with the treatment of estimated figures in the DCF method, leading to disputes.
    • Scrutiny of Funding Sources: The scrutiny of funding sources and investor credibility added another layer of complexity for startups.
    • Retrospective Application: The retrospective application of the tax and its effect on the conversion of convertible instruments into equity were also significant points of dispute.

    Significance for the Startup Community

    • Startups has long advocated for a more supportive and less restrictive environment for fundraising.
    • With this change, the government aims to create a more favourable atmosphere for innovation and investment in India.
    PYQ:

    [2014] What does venture capital mean?

    (a) A short-term capital provided to industries.

    (b) A long-term start-up capital provided to new entrepreneurs.

    (c) Funds provided to industries at times of incurring losses.

    (d) Funds provided for replacement and renovation of industries.

  • India’s economy projected to grow at 6.5% to 7% in FY ending March 2025.

    Why in the News?

    • India’s economy is projected to grow at 6.5% to 7% in the fiscal year ending March 2025.
      • The Economic Survey for 2023-24 highlights the need to address inequality and unemployment as policy priorities.

    Policy Recommendations by Chief Economic Adviser (CEA)

    • Regulatory Burdens: CEA V. Anantha Nageswaran advocates for Central and State governments to reduce regulatory burdens on businesses.
    • Corporate Responsibility: He urges the corporate sector to create productive jobs, emphasizing their responsibility in generating employment.

    Various Challenges discussed

    (1) Challenges in the IT Sector:

    • Slowdown in Hiring: The CEA notes a significant slowdown in IT sector hiring over the last two years.
    • AI and Labor: He encourages the industry to use AI to augment labor rather than replace workers.

    (2) Skilling Initiatives

    • Addressing Inequality: The Economic Survey suggests steps to tackle inequality, improve health, and bridge the education-employment gap.
    • Skilling Reboot: A reboot of India’s skilling initiatives is proposed to provide the industry with people having the right attitude and skills.

    (3) Corporate Sector and Economic Growth

    • Demand and Employment: The Survey emphasizes the benefits for corporates from higher demand generated by employment and income growth.
    • Warning against Short-Termism: It warns against “short-termism” which can weaken economic linkages.

    (4) State Capacity and Consensus Building:

    • Enhancing State Capacity: Enhancing state capacity is critical for the strategy to work.
    • Need for Consensus: The CEA stresses the need for consensus between governments, businesses, and the social sectors for effective transformation.

    (5) Land Acquisition and Investment Concerns:

    • Land Use Norms: While the Survey does not mention land acquisition reform, it highlights the need to deregulate land use norms and consolidate farmland holdings.
    • Investment Cautions: The Survey cautions about private capital formation being cautious due to fears of cheaper imports, indirectly referencing China.

    (6) Foreign Direct Investment (FDI) Challenges:

    • Attracting FDI: Attracting FDI will be challenging due to higher interest rates and developed countries encouraging domestic investments through subsidies.
    • Addressing Uncertainties: Despite progress, uncertainties related to transfer pricing, taxes, and import duties need to be addressed.

    Structural Reforms

    • Existing Reforms: Structural reforms such as GST and the Insolvency and Bankruptcy Code are delivering expected results.
    • Next-Gen Reforms: The Survey calls for “next-gen reforms” that are bottom-up in nature to achieve sustainable, balanced, and inclusive growth.

    Strategic Directions for Growth

    • Six-Pronged Strategy: The Survey outlines a six-pronged strategy for growth, emphasizing private sector investments and a fair share of income for workers.
    • Focus Areas: Other focus areas include financing the green transition, removing barriers for MSMEs, and implementing intelligent farmer-friendly policies.

    Conclusion

    • Sustained Growth Potential: The economy can grow at over 7% on a sustained basis in the medium term by building on past reforms.
    • Tripartite Compact: Achieving this growth requires a tripartite compact between the Centre, States, and the private sector.

    PYQ:

    [2013] Economic growth in country X will necessarily have to occur if:

    (a) There is technical progress in the world economy.

    (b) There is population growth in X.

    (c) There is capital formation in X.

    (d) The volume of trade grows in the world economy.

  • New Asset Class proposed by SEBI

    Why in the News?

    • The markets regulator, SEBI, has proposed a new asset class designed to offer investment products positioned between mutual funds (MFs) and portfolio management services (PMS).
      • This new category aims to fill an opportunity gap for investors and offer greater flexibility in portfolio construction.

    Note:

    • PMS provides customized investment solutions to high net-worth individuals (HNIs) with a minimum investment limit of Rs 50 lakh.
    • MFs, on the other hand, have a much lower minimum investment limit of just Rs 100, managed by a professional fund manager.

    About the New Asset Class

    • The new asset class aims to provide an intermediate option with more flexibility in portfolio construction, helping investors avoid unregistered and unauthorized schemes.
    • It will have a risk-return profile between MFs and PMS, targeting investors with higher risk tolerance and larger investment amounts than those typical of MFs but lower than PMS.
    • The current range of investment products includes:
    1. MF schemes: Focused on retail investors,
    2. PMS: For HNIs, and
    3. Alternative investment funds (AIF): For sophisticated investors.

    How will investments in the new asset class work?

    • The new asset class will be introduced under the MF structure with necessary relaxations in prudential norms.
    • The minimum investment amount is proposed to be Rs 10 lakh per investor within the asset management company (AMC)/MF.
    • This high threshold is intended to deter retail investors while attracting those with investible funds between Rs 10 lakh and Rs 50 lakh.

    Significance of the New Asset Class:

    • SEBI noted that the gap between investment opportunities in MFs and PMS has led some investors towards unauthorized investment avenues.
    • The new asset class will help curb the proliferation of unregistered investment products and provide a structured and regulated option for investors.
    • SEBI emphasized that the new asset class would offer a regulated and structured investment suited to investors looking for opportunities between MFs and PMS.

    Investment Strategies:

    • Like MF schemes, the new asset class will provide options for Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP).
    • AMCs can offer ‘investment strategies’ under a pooled fund structure with tailored redemption frequencies (daily, weekly, monthly, etc.).

    PYQ:

    [2021] Indian Government Bond Yields are influenced by which of the following?

    1. Actions of the United States Federal Reserve
    2. Actions of the Reserve Bank of India
    3. Inflation and short-term interest rates

    Select the correct answer using the code given below.

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