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Subject: Economics

  • What does the Karnataka Bill promise gig workers?    

    Why in the News?

    The Karnataka government released the draft of the Karnataka Platform-based Gig Workers (Social Security and Welfare) Bill, becoming the second Indian state to take such an initiative, following Rajasthan.

    Who are the Gig workers?

    Gig workers are independent contractors, freelancers, or temporary workers who are hired for specific projects or tasks, often through online platforms, rather than being employed in traditional long-term employer-employee relationships.

    Key highlight of the Bill proposed for the welfare of gig workers:

    • Social Security and Welfare Fund: Establishment of a welfare boards, social security and welfare fund for gig workers, funded by a welfare fee on transactions or company turnover, and contributions from the Union and State governments.
    • Grievance Redressal Mechanism: Introduction of a two-level grievance redressal mechanism to address workers’ complaints and ensure transparency in the automated monitoring and decision-making systems used by platforms.
    • Fair Termination Procedures: Requirement for contracts to list exhaustive grounds for termination, with a 14-day prior notice and valid reasons in writing needed before terminating a worker.
    • Payment and Deductions: Mandate weekly payments to workers, with clear communication regarding any payment deductions, and the right for workers to refuse a specified number of gigs per week without adverse consequences.
    • Safe Working Conditions and Contract Transparency: Obligation for aggregators to provide reasonable and safe working conditions, registration of all gig workers, and contracts to be written in simple language with a 14-day notice for any changes, allowing workers to terminate the contract without losing existing entitlements.

    What are the impacts of the labour market in a larger domain, and why are safeguards necessary? 

    • Lack of Basic Rights and Social Security: Gig workers are often classified as “partners” rather than employees, leaving them security outside the purview of labour protection laws and without access to basic rights and social benefits.
    • Arbitrary Terminations and Lack of Grievance Redressal: Instances of arbitrary terminations, blacklisting, and dismissals without hearing the worker’s side are common in the absence of regulatory laws. Automated monitoring and decision-making systems often make these decisions, leaving no room for grievance redressal.
    • Reduced Payments and Exploitation: Over the years, gig workers have faced reduced payments, arbitrary deductions, and exploitation due to the lack of regulatory laws governing the gig economy.
      • The wide gap between the purchasing power of these workers and the affluent consumers they serve raises questions about the long-term sustainability of this model.
    • Need for Transparency and Fair Contracts: The absence of transparency in automated monitoring systems and decision-making by platforms, as well as the lack of fair contracts, has led to the exploitation of gig workers.
      • There is a need for the state to review contract templates and ensure fair contracts with gig workers.
    • Lack of Access to Credit and Skill Development: Gig workers often lack access to credit and skill development opportunities, hindering their growth and formalization.
      • There is a need for enabling platforms to provide these benefits to gig workers.

    State-level and National level Initiatives taken previously: 

    • Code on Social Security, 2020: At the national level, the Code on Social Security, 2020 recognized those who freelance or work under short-term contracts. It mandated employers to provide benefits similar to those of regular employees to gig workers.
    • Rajasthan Platform-Based Gig Workers (Registration and Welfare) Act: Rajasthan became the first state to introduce a bill for the welfare of gig workers in 2023.
      • The bill, which became an Act in September 2023, sought to establish a welfare board and fund for gig workers.
      • However, the Act has gone into cold storage after the changed government in November 2023.
    • Haryana Gig Workers Welfare Board Bill: The bill aims to establish a state-level board dedicated to the social and economic security of gig workers involved in delivering goods, services, and food at doorsteps.

    Case study: 

    • In California (USA), the Proposition 22 ballot measure allows app-based transportation and delivery companies to classify drivers as independent contractors while providing them with some benefits like a health insurance subsidy and minimum earnings guarantee.
    • New York City (USA)  has passed legislation requiring food delivery apps to provide workers with benefits like paid sick leave and minimum pay.

    Way forward: 

    • Unified Legislation: Introduce a comprehensive national-level legal framework specifically addressing the rights and welfare of gig workers. This legislation should encompass social security, fair wages, occupational safety, and grievance redressal mechanisms.
    • Strict Enforcement: Ensure robust enforcement of these laws through dedicated government bodies and regular audits of gig economy platforms. Penalties for non-compliance should be substantial enough to deter exploitative practices.

    Mains PYQ: 

    Q Examine the role of ‘Gig Economy’ in the process of empowerment of women in India. (UPSC IAS/2021)

  • Surge in Silver Imports from UAE through Gift City

    Why in the News?

    • India’s majority of silver imports are now handled by few private players from Dubai through the India International Bullion Exchange (IIBX), Gift City.
      • This trend, aimed at reducing import duties by the traders, poses potential long-term revenue losses for India.

    India’s Silver Imports

    • India imported a record 4,172 metric tons of silver in the first four months of 2024, far exceeding the total of 3,625 tons imported in all of 2023.
      • In February 2024 alone, India imported a record 2,295 metric tons of silver, up from 637 tons in January. This represents a 260% increase.
    • The surge in imports has been driven by increasing demand from the Solar panel industry as well as a rise in Speculative Investment, with investors betting on silver outperforming gold.
    • Nearly half of India’s silver imports in 2024 so far have come from the United Arab Emirates (UAE) due to a lower import duty under the India-UAE Comprehensive Economic Partnership Agreement (CEPA).
      • India generally imposes a 15% import duty on silver.
      • However, because of the CEPA signed between India and the UAE in 2022, allows private traders to import silver through the India International Bullion Exchange (IIBX) paying 9% duty, and an extra 3% in value-added tax.
    • The government is now concerned about the 647-fold spike in silver imports from the UAE and plans to discuss the issue with Abu Dhabi.
      • The Gift City exchange, while clearing imports from Dubai since December 2023, is under scrutiny for potential violations of these rules compared to imports from other ports.

    About India International Bullion Exchange (IIBX)

    • Bullion refers to physical gold and silver of high purity that is often kept in the form of bars, ingots, or coins.
    • The IIBX was announced during the 2020 budget speech by the Finance Minister.
    • It is set up at the International Financial Services Center (IFSC) located in GIFT City, Gandhinagar.
    • It is India’s first bullion exchange, launched on 29 July 2022 in Gujarat.
    • It is the 3rd exchange of its kind in the globe.

    Regulations and Setup:

    • The International Financial Services Centres Authority (Bullion Exchange) Regulations, 2020, were notified in December 2020 specifically for the trading of precious metals, including gold and silver.
    • These regulations encompass the operations of the bullion exchange, Clearing Corporation, depository, and vaults associated with IIBX.

    Operational Framework

    • Previously, India had liberalized gold imports through nominated banks and agencies in the 1990s.
      • With IIBX, eligible qualified jewellers in India can directly import gold.
    • Jewellers need to become trading partners or clients of an existing trading member to participate in the exchange.

    Comparison with Previous Practices

    • Previously, bullion in India was imported under a consignment model by nominated banks and agencies approved by the RBI, which added handling fees and premiums.
    • The introduction of IIBX aims to streamline the supply chain by allowing direct imports through the exchange, potentially reducing costs for traders and consumers alike.

    Recommendations for Addressing Challenges

    • Renegotiation of CEPA Terms: The Global Trade Research Initiative (GTRI) advocates for revising CEPA terms to curb duty arbitrage and enforce stricter checks on value addition claims by Gift City exchange.
    • Enhanced Regulatory Oversight: GTRI proposes limiting silver imports to RBI/DGFT-nominated agencies to mitigate risks associated with mis-declared imports and ensure compliance with CEPA conditions.
    • Investigation and Oversight: There is a call for a thorough investigation into relationships between export and import firms to identify and mitigate conflicts of interest or familial ties that could influence import practices.

    PYQ:

    [2016] What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

    1. To bring the idle gold lying with Indian households into the economy.
    2. To promote FDI in the gold and jewellery sector.
    3. To reduce India’s dependence on gold imports.

    Select the correct answer using the code given below:

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

  • India’s Fintech funding plummets amid global slowdown, shows report    

    Why in the news? 

    Despite achieving a significant milestone in H1 2024, the fintech sector has encountered notable funding difficulties.

    What is the Fintech Sector?

    • The fintech sector encompasses technologies and innovations that aim to compete with traditional financial methods in the delivery of financial services. This includes a wide range of applications like mobile banking, online payments, digital lending, and blockchain technology.

    Present Report Insights

    • Funding Decline: The Indian fintech sector recorded $795 million in funding in H1 2024, a decrease of 11% from H2 2023 and 59% from H1 2023.
    • Global Ranking: Despite the decline, the Indian fintech ecosystem ranked among the top three globally funded sectors alongside the US and UK in H1 2024.
    • Major Transactions: Only two funding rounds exceeded $100 million in 2024, with Perfios becoming the only unicorn. Bengaluru led the funding, followed by Mumbai and Pune.
    • Segment Performance: Alternative Lending, RegTech, and BankingTech were the top-performing segments, with Alternative Lending securing $646 million, making up 81% of the total funding.
    • Acquisitions and IPOs: There were six acquisitions and five IPOs in H1 2024, marking significant activity despite the overall funding challenges.

    Significance of Fintech Sector

    • Financial Inclusion: Fintech innovations enhance financial inclusion by providing access to financial services to unbanked and underbanked populations.
    • Economic Growth: The sector contributes significantly to economic growth by fostering innovation, creating jobs, and boosting consumer spending.
    • Efficiency and Transparency: Fintech solutions improve efficiency and transparency in financial transactions, reducing costs and fraud.
    • Support for Startups: The sector offers numerous opportunities for startups, driving entrepreneurship and competition.

    Challenges 

    • Data Security: Fintech companies must implement strong security measures to protect sensitive customer data from cyber-attacks and data breaches. For example, Acko, a leading Indian fintech startup, has faced issues with data breaches in the past, highlighting the importance of robust data security protocols in the industry.
    • Regulatory Compliance: The fintech industry is highly regulated, requiring companies to stay updated on the latest government policies and ensure compliance to avoid penalties. For example, the Reserve Bank of India (RBI) has issued guidelines to protect consumers from predatory lending practices by digital lenders, underscoring the need for fintech firms to navigate the evolving regulatory landscape.
    • Customer Acquisition and Retention: Attracting and retaining customers is critical for fintech firms. For example, BharatPe, a prominent Indian fintech company, has faced challenges in customer retention due to its focus on merchant acquisition.
    • Funding and Investment: Securing adequate funding and investments remains a challenge for many fintech startups.  For example, Paytm, one of India’s largest fintech companies, has faced scrutiny from investors due to its inability to achieve profitability

    How India Can Improve Its Fintech Sector

    • Supportive Regulatory Environment: Create a regulatory framework that encourages innovation while ensuring consumer protection and systemic stability, facilitating a balanced growth of the fintech ecosystem.
    • Infrastructure Development: Invest in digital infrastructure, such as high-speed internet and mobile connectivity, to support the widespread adoption and efficient functioning of fintech applications across the country.
    • Focus on Cybersecurity: Ensure robust cybersecurity measures to protect against fraud and cyber-attacks, building trust among users and maintaining the integrity of fintech services.
    Steps taken by the government: 

    • Regulatory Sandbox: The Securities and Exchange Board of India (SEBI) introduced a framework for regulatory sandbox in 2020 to allow fintech companies to experiment with new products and services in a controlled environment.
    • Digital Personal Data Protection Bill: Introduced in 2022, this bill aims to create a framework for the protection of personal data collected by fintech companies.
    • Guidelines on Digital Lending: In 2022, the Reserve Bank of India (RBI) issued guidelines to protect consumers from predatory lending practices by digital lenders.
    • Promoting Financial Inclusion: The Pradhan Mantri Jan Dhan Yojana (PMJDY) has helped in enrolling over 523.9 million beneficiaries for new bank accounts, enabling fintech startups to reach a large consumer base.
    • Aadhar and UPI: The unique biometric identification system Aadhar and the Unified Payments Interface (UPI) have improved transparency and delivery of financial service

    Conclusion: Fintech companies in India face challenges including data security, regulatory compliance, customer acquisition, and securing investments. Addressing these ensures sustainable growth and trust in a competitive market environment.

    Mains PYQ: 

    Q Has digital illiteracy, particularly in rural areas, coupled with a lack of Information and Communication Technology (ICT) accessibility hindered socio-economic development? Examine with justification. (UPSC IAS/2021)

  • Women get only 7% MSME credit: RBI ED  

    Why in the News?

    • The RBI has highlighted that low labour force participation among women is a significant barrier to financial inclusion and broader economic growth.
      • It pointed out that only 7% of the outstanding loans to micro, small, and medium enterprises (MSMEs) are to women-led businesses.

    Barriers to Financial Inclusion

    • Economic Participation: RBI emphasized that greater participation of women in economic activities is essential for financial inclusion and economic growth.
    • Participation Disparity: Official data shows female labor force participation at 32.8% in FY22, compared to over 77% for men.
    • Credit Disparity: Women-led businesses constitute nearly a fifth of MSMEs, yet they receive only 7% of the outstanding credit to this sector, highlighting a significant disparity.

    Efforts and Challenges in Financial Inclusion

    • Successes: RBI expressed satisfaction with access to financial services, citing the success of the Pradhan Mantri Jan-Dhan Yojana (PMJDY) scheme and social security transfers.
    • Addressing Demand-side Issues: While supply-side challenges have been addressed, demand-side issues still need attention.
    • Structural Barriers: Structural issues such as low levels of capital, labour participation, societal norms restricting women from inheriting property, and limited access to education and training impede women’s financial inclusion.

    Stereotyping and Behavioral Issues

    • Higher Risk Perception: Nigam noted that women borrowers often face stereotyping by financiers, being considered higher risks, leading to higher interest rates, greater insistence on collateral, or outright loan rejections.
    • Behavioural Challenges: He also mentioned behavioural issues among women borrowers, such as being more risk-averse, less confident in negotiating loan terms, and less likely to apply for new loans due to fear of rejection.

    Policy Moves: Priority Sector Lending and Financial Literacy Initiatives

    • Priority Sector Lending (PSL): The PSL mandate has become a viable business model for banks and micro-lenders, but demand-side constraints persist.
    • RBI Initiatives: To address these challenges, the RBI has initiated financial inclusion efforts, including opening 2,400 financial literacy centres at the block level in partnership with nonprofits and requiring lead banks to have a literacy centre in each district.

    Government Schemes:

    Stand Up India Scheme Mudra Yojana Scheme Annapurna Scheme
    Launched April 2016 April 2015 (under PMMY) –
    Objective To promote entrepreneurship among women and SC/ST To provide financial support to non-corporate, non-farm small/micro enterprises To support women entrepreneurs in the food catering business
    Eligibility Women entrepreneurs and SC/ST entrepreneurs above 18 years of age All non-farm enterprises, including women-owned businesses Women entrepreneurs planning to start or expand their food catering business
    Loan Amount INR 10 lakh to INR 1 crore Up to INR 10 lakh, categorized into three types:            

    1. Shishu: Up to INR 50,000           
    2. Kishor: INR 50,001 to INR 5 lakh            
    3. Tarun: INR 5,00,001 to INR 10 lakh
    		 Up to INR 50,000
    Purpose For setting up a greenfield enterprise in manufacturing, services, or trading sectors For business activities in manufacturing, processing, trading, or service sectors For starting or expanding the food catering business
    Repayment Period Up to 7 years with a maximum moratorium period of 18 months – 36 months, including a grace period of 1 month

    About SEHER Program (In News)

    • The Women Entrepreneurship Platform (WEP) and TransUnion CIBIL have launched SEHER, a pioneering credit education program aimed at empowering women entrepreneurs in India.
    • SEHER aims to facilitate their access to financial tools crucial for business growth and employment creation.

  • Indian Government Bonds in JP Morgan index: how much funds could flow into India?   

    Why in the news?

    JP Morgan is including Indian Government Bonds in its emerging markets bond indices starting June 28. This move is expected to attract significant foreign investment, boosting India’s bond market and economic stability.

    What would be India’s weight in the index?

    • India is poised to achieve a maximum weighting of 10% in the GBI-EM Global Diversified Index. This increased allocation is anticipated to attract greater investment from global investors into Indian debt, with analysts projecting monthly inflows of $2-3 billion.

    Benefits of Higher Inflows from the Inclusion of Indian Government Bonds in JP Morgan’s Emerging Markets Bond Indices

    • Increase in Foreign Exchange Reserves: The inflows from foreign investments will directly boost India’s foreign exchange reserves, providing a stronger buffer against external economic shocks.
    • Strengthening the Rupee: The surge in foreign investment will enhance demand for the rupee, leading to its appreciation and contributing to a more stable and robust currency.
    • Enhanced External Financial Management: With increased foreign exchange reserves, India will have greater flexibility and resilience in managing its external financial obligations and mitigating balance of payment issues.
    • Reduction in Borrowing Costs: Higher reserves and a stronger rupee can lead to improved credit ratings and reduced risk premiums, lowering borrowing costs for the government and corporates.
    • Promotion of Economic Confidence: The inflows signify international investor confidence in India’s economic prospects, boosting overall economic sentiment and encouraging further investments.

    What about the impact on inflation as RBI mops up the dollars and releases an equivalent amount in rupees?

    • Liquidity Injection: When the RBI mops up dollars from the market, it releases an equivalent amount of rupees into the financial system. This injection of liquidity can potentially increase the supply of money circulating in the economy.
    • Demand-Pull Inflation: Increased liquidity can stimulate demand for goods and services, potentially leading to demand-pull inflation if the production capacity of the economy does not keep pace with the increased demand.
    • Asset Price Inflation: The influx of liquidity can also inflate asset prices such as real estate and stocks, impacting affordability and potentially creating asset price inflation.
    • Exchange Rate Stability: On the flip side, mopping up dollars can help stabilize the exchange rate by reducing downward pressure on the rupee due to excessive inflows.
    • RBI’s Policy Response: The RBI has various monetary policy tools, such as open market operations, repo rates, and reserve requirements, to manage liquidity and inflationary pressures arising from such inflows. It may use these tools to absorb excess liquidity and stabilize inflation.

    Way forward: 

    • Prudent Monetary Policy Management: The RBI should continue to employ effective monetary policy measures, such as open market operations and repo rate adjustments, to carefully manage liquidity and inflationary pressures stemming from increased foreign inflows.
    • Enhanced Economic Diversification: India should use the influx of foreign investment to diversify its economy further, focusing on infrastructure development, technological advancements, and sustainable growth initiatives to bolster long-term economic resilience and stability.

  • Why has SEBI accused Hindenburg of breaking Indian law?  

    Why in the news? 

    Hindenburg Research received a SEBI show cause notice for short-selling Adani Enterprises Ltd stock before and after their report accusing Adani of fraud.

    What is the Hindenburg Report on Adani?

    • On January 24, 2023, the New York-based Hindenburg Research accused the Adani Group of “brazen stock manipulation and accounting fraud scheme over the course of decades.”
    • The report led to a significant drop in the shares of Adani companies and the calling off of Adani Enterprises Ltd’s Rs 20,000-crore follow-on Public Offer (FPO). Adani Group denied all allegations, claiming the report was a “calculated attack on India.”

    What is SEBI’s show cause notice about?

    • Hindenburg received a show-cause notice from SEBI on June 27, 2024.SEBI alleged that Hindenburg colluded with certain entities to use non-public information to short-sell Adani Enterprises Ltd (AEL) stock before and after the release of its report, making profits.
    • The notice named Hindenburg, its founder Nathan Anderson, investor Mark Kingdon, and related entities, accusing them of sharing the report draft and building short positions in AEL futures.

    How has Hindenburg responded to the show cause notice?

    • Hindenburg dismissed the notice as an attempt to silence those exposing corruption. They stated their investment stance was legal and disclosed, and criticized SEBI for targeting them instead of investigating the Adani Group’s alleged malpractices.
    • Accusations: Hindenburg accused SEBI of pressuring brokers to close short positions in Adani stocks to protect the stock prices.

    Where does Kotak come into this picture?

    • Involvement of Kotak: SEBI’s notice did not name Kotak Bank, which Hindenburg claims created the offshore fund structure used for shorting Adani stocks.
    • Response: Kotak Mahindra Bank stated that Hindenburg has never been a client and that their KYC procedures were followed with regard to clients, with investments made by Kingdon as a principal.

    How much profit did Hindenburg earn by short selling Adani stocks?

    • Revenue: Hindenburg earned approximately $4.1 million in gross revenue through gains related to Adani shorts from its investor relationship.
    • Own Short Position: Hindenburg made about $31,000 from their short of Adani US bonds.After legal and research expenses, Hindenburg indicated they might only slightly come out ahead of break-even on their Adani short.

    Way forward: 

    • Conduct Investigation: SEBI should initiate an independent, comprehensive investigation into the allegations against both Adani Group and Hindenburg Research. This investigation should be conducted by a neutral third party to ensure impartiality and transparency.
    • Policy Review: SEBI could review and possibly update its regulations on short-selling and market manipulation to prevent similar incidents in the future. This could include stricter disclosure requirements for short sellers and enhanced monitoring of market activities.

    Mains PYQ: 

    Q The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.(UPSC IAS/2013)

  • ICEA calls for reduction in Import Duties to Boost Mobile Phone Sector

    Why in the News?

    • The Indian Cellular & Electronics Association (ICEA), representing domestic electronics manufacturers, called for a reduction of import duties in the upcoming Union budget.
      • ICEA highlighted that the growth of the mobile phone sector now depends on demand in the global market rather than domestic demand, facilitated by supportive policies like the Production Linked Incentive (PLI) scheme.

    About India Cellular and Electronics Association (ICEA) 

    • The ICEA is the apex industry body representing the interests of the mobile and electronics sector in India.
    • It was established in 2017.
    • It plays a crucial role in shaping policies and promoting the growth of the industry through advocacy, policy formulation, and strategic initiatives.
    • Membership:
      • ICEA comprises leading mobile handset manufacturers, electronics companies, and industry stakeholders.
      • This includes both Indian and global companies operating in the electronics sector.
    • Collaborations:
      • ICEA works closely with government bodies, regulatory authorities, and other industry associations to align its initiatives with national economic goals.

    ICEA’s Key Demands

    • Reduction of Import Duties: ICEA is calling for a reduction in import duties on manufacturing inputs for electronics, particularly in the mobile phone sector.
      • Current high tariffs are increasing manufacturing costs in India by 7-7.5% on the bill of materials.
    • Alignment with Global Standards: The demand includes aligning tariffs with those of countries like China and Vietnam, which have lower tariffs on fewer components.
    • Improvement of Customs Procedures: ICEA is urging for streamlined customs procedures to prevent delays in the shipment of key components.

    Significance of ICEA’s Demands

    • Reducing import duties enhances competitiveness, boosts exports, stimulates investment and job creation, reduces trade deficit, and fosters long-term growth in India’s electronics and mobile phone manufacturing sectors.

    Key Initiatives and Programs by ICEA

    • Electronics Manufacturing Clusters: ICEA promotes the development of electronics manufacturing clusters to create a robust supply chain and manufacturing base in India.
    • Skill Development: The association emphasizes the need for skill development in the electronics sector to ensure a skilled workforce capable of supporting industry growth.
    • R&D and Innovation: ICEA encourages research and development (R&D) and innovation within the sector to maintain competitiveness and technological advancement.

    Boost in Mobile Phone Exports from India

    • ICEA Report: According to ICEA, mobile phone exports from India have doubled to surpass Rs 90,000 crore (about USD 11.12 billion) in FY 2022-23 from Rs 45,000 crore in FY22.
    • Government Targets: The government has set a target of USD 10 billion worth of mobile phone exports, with an ambitious goal of achieving USD 300 billion worth of electronics manufacturing by 2025-26, of which USD 120 billion is expected from exports.

    Major Contributors to Export Growth:

    • Apple’s Contribution: Apple is estimated to have a 50% share of mobile phone exports from India, contributing USD 5.5 billion (about Rs 45,000 crore).
    • Samsung’s Contribution: Samsung accounts for approximately 40% of exports, worth Rs 36,000 crore.
    • Third-Party Exports: Third-party exports contributed around USD 1.1 billion to the total export, comprising phones of various brands made in India.

    Future Projections:

    • Export Contribution: Mobile phones are anticipated to contribute more than USD 50 billion worth of exports by 2025-26.
    • Overall Contribution: Mobile phone exports now account for 46% of the overall electronic goods exports, according to ICEA.

     

    PYQ:

    [2016] Recently, India’s first ‘National Investment and Manufacturing Zone’ was proposed to be set up in:

    (a) Andhra Pradesh

    (b) Gujarat

    (c) Maharashtra

    (d) Uttar Pradesh

  • RBI proposes rationalising regulations on Export-Import Transactions

    Why in the News?

    Reserve Bank of India (RBI) has proposed to rationalise regulations governing export and import transactions. The aim is to promote ease of doing business and empower banks to provide more efficient service to their foreign exchange customers.

    RBI Proposal and Directions

    • The RBI issued ‘Regulation of Foreign Trade under Foreign Exchange Management Act (FEMA), 1999 – Draft Regulations and Directions.’
    • Key propositions include:
      • Repatriation Timeline: The full export value of goods and services must be realised and repatriated to India within 9 months from the date of shipment for goods and the date of invoice for services.
      • Caution Listing: Exporters who fail to realise the full value within the specified time may be caution-listed by the authorised dealer.
      • Caution-Listed Exporters: Caution-listed exporters can undertake exports only against receipt of advance payment in full or an irrecoverable letter of credit, to the satisfaction of the authorised dealer.
      • Advance Remittance Restrictions: No advance remittance for the import of gold and silver is permitted unless specifically approved by the RBI.

    Expected Benefits 

    • Ease of Doing Business: The proposed regulations are intended to promote ease of doing business, especially for small exporters and importers.
    • Empowerment of Banks: The regulations aim to empower authorised dealer banks to provide quicker and more efficient service to their foreign exchange customers.

    About Foreign Exchange Management Act (FEMA), 1999

    • The FEMA, 1999, regulates foreign exchange and trade in India.
    • FEMA replaced the older Foreign Exchange Regulation Act (FERA), 1973.

    How does FEMA regulate EXIM Transaction?

    Regulation under FEMA
    Resident Indian Criteria Defined in Section 2(v) of FEMA;

    A person residing in India for more than 182 days during the course of the preceding financial year.
    Current Account Transactions Permitted freely for EXIM activities, including trade payments and remittances.
    Capital Account Transactions Regulated by RBI, includes FDI in export-oriented units and overseas investments by Indian entities.
    Documentation and Declarations Exporters and importers must furnish declarations to RBI to ensure compliance and monitor foreign exchange.
    Export Declarations Declare the value of goods/services exported, expected earnings, and timeframe for realization.
    Import Declarations Provide details of goods/services imported, and foreign exchange spent, and ensure payments through authorized channels.
    Authorized Dealers Only RBI-approved dealers (banks/financial institutions) can handle foreign exchange transactions for EXIM.
    Import Payment Regulations Payments must be made through authorized channels within prescribed time limits, complying with DGFT terms.
    Foreign Currency Accounts Entities can maintain foreign currency accounts for efficient handling of foreign exchange for EXIM activities.

    Significance of FEMA in Regulating EXIM Transactions

    • Facilitates Trade: By providing a clear regulatory framework, FEMA facilitates smoother and more efficient EXIM transactions, contributing to the growth of international trade.
    • Economic Stability: Ensures that foreign exchange earnings and expenditures are monitored and regulated, maintaining economic stability and preventing illegal outflows.
    • Investor Confidence: A transparent and regulated foreign exchange environment boosts investor confidence, attracting more foreign investment.
    • Liberalization: Replaces the stringent controls of FERA with a more liberal approach, encouraging businesses to engage in global trade.

    PYQ:

    [2013] Which of the following constitutes Capital Account?

    1. Foreign Loans

    2. Foreign Direct Investment

    3. Private Remittances

    4. Portfolio Investment

    Select the correct answer using the codes given below.

    (a) 1, 2 and 3

    (b) 1, 2 and 4

    (c) 2, 3 and 4

    (d) 1, 3 and 4

  • What is on the agenda for the 16th Finance Commission?  

    Why in the news? 

    The 16th Finance Commission, under Article 280, focuses on devolving funds. Amendments like 73rd and 74th mandate it to bolster state funds for panchayats and municipalities.

    About 16th Finance Commission

    • The 16th Finance Commission of India was constituted on December 31, 2023, with Dr. Arvind Panagariya as its Chairman.
    • The President of India appointed the Commission in pursuance of Article 280(1) of the Constitution

    How do other countries devolve funds to their local governments?

    • International Comparison: Countries like South Africa, Mexico, the Philippines, and Brazil allocate significantly higher percentages of their GDP (1.6% to 5.1%) to urban local bodies compared to India’s 0.5%.
    • Importance of Intergovernmental Transfers (IGTs): IGTs make up about 40% of Urban Local Bodies (ULBs) revenue in India but suffer from unpredictability, lack of earmarking for vulnerable groups, and horizontal equity.
    • Financial Health of ULBs: Despite efforts by multiple Finance Commissions, financial devolution to cities in India remains inadequate, affecting city productivity and quality of life.

    Why is the Census significant?

    • Data Dependence: The absence of the 2021 Census data makes it challenging to accurately assess urban growth and demographic changes crucial for evidence-based fiscal devolution.
    • Urban Dynamics: India has approximately 4,000 statutory towns, an equal number of Census towns, and a large number of effectively urban villages, which need accurate enumeration for effective planning and resource allocation.
    • Migration Impact: The Census data is essential to capture the significant migration to Tier-2 and Tier-3 cities, impacting their infrastructure and service needs.

    What about cities and the Taxation system?

    • Impact of GST: The introduction of GST has reduced ULBs’ tax revenue (excluding property tax) significantly, impacting their financial autonomy.
    • Low IGTs: Intergovernmental transfers from States to ULBs in India are minimal (around 0.5% of GDP), much lower than other developing nations, exacerbating fiscal challenges.
    • Constitutional Provisions: Despite the 74th constitutional amendment aimed at empowering ULBs, progress has been limited over three decades, hampering urban development.
    • Parallel Agencies: The growth of parallel agencies and schemes like MP/MLA Local Area Development Schemes distort the federal structure and weaken ULBs’ financial and operational autonomy.

    Way forward: 

    • Enhanced Intergovernmental Transfers (IGTs): Increase IGTs from States to Urban Local Bodies (ULBs) to at least 2% of GDP, ensuring predictability and earmarking for vulnerable groups.
    • Reform in Urban Governance and Fiscal Autonomy: Strengthen constitutional provisions to empower ULBs further, reducing dependence on parallel agencies like MP/MLA Local Area Development Schemes.

    Mains PYQ: 

    Q How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss. (UPSC IAS/2018)

  • What is Project Nexus that RBI has signed up for?

    Why in the news? 

    The Reserve Bank of India (RBI) has become a part of Project Nexus, a global initiative aimed at facilitating instant cross-border retail payments by connecting domestic Fast Payments Systems (FPSs).

    What is Project Nexus?

    • Project Nexus is conceptualized by the Innovation Hub of the Bank for International Settlements (BIS).
    • It is the first BIS Innovation Hub project in the payments area moving towards live implementation.
    • Aim: To enhance cross-border payments by connecting multiple domestic instant payment systems (IPS) globally.
    • The Reserve Bank of India (RBI) has joined Project Nexus, aiming to interlink India’s Unified Payments Interface (UPI) with the Fast Payments Systems (FPSs) of Malaysia, the Philippines, Singapore, and Thailand.
    • The platform is designed to be extended to more countries in the future.

    About Fast Payments Systems (FPSs):

    Fast payment systems (FPSs) are real-time payment systems that enable the immediate transfer of funds between accounts. Some key points about FPSs:

    • FPSs allow for the fast, secure, and low-cost processing of retail transactions, ensuring funds are immediately available to the recipient.
    • FPSs are becoming increasingly popular globally, with over 100 jurisdictions now having access to fast payment systems. They foster competition among payment service providers and serve as a gateway to additional financial services.
    • The design of FPSs is important, as they have public good characteristics. Factors that contribute to greater adoption of FPSs include central bank involvement, inclusion of non-bank providers, more use cases, and more cross-border connections.
    • The Payment and Settlement Systems Act, of 2007 regulates and supervises payment systems in India. It designates the Reserve Bank of India has the authority for that purpose and all related matters.

    What are the benefits of the platform?

    • Standardization: Project Nexus standardizes the way IPS connect to each other, simplifying the process.
    • Single Connection: Payment system operators can connect to the Nexus platform once, allowing them to reach all other countries on the network without building custom connections for each.
    • Instant Payments: Enables cross-border payments from sender to recipient within 60 seconds in most cases.
    • Cost Efficiency: Provides near-zero cost for sending and receiving payments.
    • Growth Acceleration: Significantly accelerates the growth of instant cross-border payments by leveraging existing instant payment systems.

    Way forward: 

    • Expand Membership: Actively encourage more countries to join Project Nexus, thereby increasing the global reach and impact of the platform. (Indonesia is joining in the near future)
    • Enhance Technological Infrastructure: Invest in robust and scalable technological infrastructure to support seamless integration and interoperability among different FPSs.

    Mains PYQ:

    Q What is Cryptocurrency? How does it affect global society? Has it been affecting Indian society also? (UPSC IAS/2021)