đŸ’„Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

Subject: Economics

  • RBI’s Proposed Framework to Administer Project Financing | Explained

    Why in the News?

    The RBI has issued draft regulations for a Harmonized Prudential Framework and revised DCCO criteria, to enhance the Regulatory Framework for long-term (infrastructure, non-infrastructure, and commercial real estate sectors) project financing.

    • RBI’s purpose behind this is to regulate and supervise payment and settlement systems in the country, ensuring safe, secure, and efficient mechanisms for financial transactions.

    What is the Date of Commencement of Commercial Operations (DCCO)?

    The DCCO is a critical milestone for project loans, indicating the start of revenue-generating activities for the project.

    Banks maintain the DCCO for project loans for several key reasons:

    • Asset classification: The DCCO is crucial for determining the asset classification of a project loan. If the project fails to commence commercial operations by the stipulated DCCO, the loan may be classified as a Non-performing asset (NPA).
    • Restructuring: The DCCO is used as a reference point for allowing the restructuring of project loans without treating it as an NPA. RBI guidelines permit banks to extend the DCCO by up to 1 year for commercial real estate projects and up to 2 years for infrastructure projects, without downgrading the asset classification, provided certain conditions are met.
    • Viability assessment: When extending the DCCO, banks must satisfy themselves about the viability of the project and the restructuring plan.
    • Provisioning: If a loan remains in the pre-commencement of the commercial operations phase for an extended period, banks may need to make higher provisions, considering the risk involved.
    • Monitoring and control: Maintaining a clear DCCO allows banks to monitor the project’s progress and take timely action if there are delays or cost overruns. This helps in managing the bank’s exposure and mitigating risks.

    Key Highlights of the Proposed New Framework:

    • Income Recognition and Asset Classification: The draft framework outlines guidelines for Income Recognition, Asset Classification, and Provisioning of Advances for Projects Under Implementation (IRACP-PUIMP).
      • It emphasizes the importance of monitoring stress in projects and initiating resolution plans proactively.
      • Increase in general provisioning at the construction stage from 0.4% to 5% on all existing and fresh exposures, phased over three years (2% for FY25, 3.5% for FY26, and 5% for FY27).
    • Restructuring Norms: The RBI has prescribed norms for restructuring exposure in projects due to changes in the DCCO.
      • Lenders are required to have a board-approved policy for resolving stress in projects, triggered by a credit event during the construction phase.
      • Provisioning can be reduced to 2.5% and 1% at the operational phase if certain conditions are met.
    • Consortium Arrangements: In projects financed under consortium arrangements, specific exposure limits have been set based on the aggregate exposure of lenders.
      • Individual lenders must maintain a Minimum Exposure Percentage to ensure a balanced risk-sharing mechanism.
    • Financial Closure and Repayment Structure: The framework mandates that financial closure must be achieved before the disbursement of funds.
      • It discourages moratoriums on repayments beyond the DCCO period and sets guidelines for the repayment tenor not exceeding 85% of the economic life of the project.
      • Projects must demonstrate a positive net operating cash flow to cover all repayment obligations and a reduction in total long-term debt by at least 20%.
    • Net Present Value (NPV) Requirement: A positive NPV is a prerequisite for any project financed by lenders. The RBI stresses the importance of reevaluating the project NPV annually to ensure financial viability and address credit impairment risks.
      • Guidelines for a standby credit facility to fund cost overruns due to delays, with incremental funding of 10% of the original project cost.

    ICRA Observations:

    ICRA set up in 1991 is an independent and professional investment Information and Credit Rating Agency. It observed the proposed new framework could have the following implications:

    • Profitability Impact: Higher provisioning requirements for projects under implementation could impact the profitability of Non-banking Financial Companies and Infrastructure Financing Companies. The impact will be spread over 3 years.
    • Funding Costs: Estimated increase in funding costs by 20-40 basis points as lenders build additional risk premiums.
      • Major banks like SBI, Union Bank of India, and Bank of Baroda do not foresee significant impacts, although the pricing of loans may need adjustments.

    Way Forward:

    • Enhanced Monitoring and Compliance: Implement robust monitoring mechanisms to ensure compliance with the new regulations. Regularly review and update the prudential framework to adapt to evolving market conditions.
    • Capacity Building: Train bank staff and stakeholders on the new regulatory requirements and best practices for project financing.

    Prelims PYQ: 

    Q The Reserve Bank of India regulates the commercial banks in matters of:  (UPSC CSE 2013)

    1. liquidity of assets
    2. branch expansion
    3. merger of banks
    4. winding-up of banks

    Select the correct answer using the codes given below.

    (a) 1 and 4 only

    (b) 2, 3 and 4 only

    (c) 1, 2 and 3 only

    (d) 1, 2, 3 and 4

  • MSMEs have not been defined well — and micro enterprises pay the price for this

    Why in the News?

    A parliamentary panel suggested separating micro-enterprises from the broader MSME category and recommended revising definitions every five years.

    • A government order for timely MSME payments has exposed knowledge gaps and unintentionally marginalized smaller enterprises, highlighting issues in understanding their structure and operations.

    Present Status:

    • According to the National Sample Survey Organisations (NSSO) Unorganised Enterprise Survey 2016, 95% of the enterprises surveyed reported revenues under Rs 50 lakh per annum. Of them, 89% reported an annual revenue of under Rs 12 lakh.
    • In the Annual Survey of Industries (ASI), more than 66% of the enterprises reported an annual revenue of less than Rs 50 lakh, and of them, 45% reported annual revenues of Rs 12 lakh.

    What are the Categories of Micro-Enterprises?

    • Category 1 – Micro: More than 98% of the MSMEs are within this category, with reporting annual revenue of Rs 50 lakh and less.
    • Category 2 – Small: The MSMEs that are reporting annual revenue of Rs 50 lakh to Rs 5 crore.

    Present Ambiguity and structural Gap in defining MSMEs

    • Lack of Clarity and Consistency in defination: In India, the MSMED Act of 2006 categorized MSMEs based on investment in plants and machinery, which led to industries keeping their plants small to maintain MSME advantages.
      • However, the MSMED Amendment Bill, 2018 proposed defining MSMEs solely based on yearly turnover, which has been criticized for under-reporting of qualifying enterprises.
    • Quantitative vs. Qualitative Approaches: There are two main techniques for defining MSMEs: quantitative and qualitative, with MSMEs typically defined using a quantitative approach. Quantitative criteria like number of employees, total assets, and yearly revenue have limitations as they vary by industry and sector.
    • Impact on Micro Enterprises: The ambiguity in defining MSMEs negatively impacts micro-enterprises, leading to issues like delayed payments and limited access to benefits and support schemes.
      • Moreover, the unregistered micro-enterprises have been worse hit by the COVID-19 pandemic than small and medium enterprises, with micro-enterprises accounting for more than two-thirds of all MSMEs and having a higher rate of informality.

    Way forward:

    • Enhanced Data Collection: Conduct regular and comprehensive surveys to gather detailed data on MSMEs, particularly focusing on micro-enterprises.
    • Further Classification within Micro-Enterprises: Establish sub-categories within the micro-enterprise category based on revenue thresholds (e.g., below Rs 10 lakh, Rs 10-25 lakh, Rs 25-50 lakh).
    • Revenue Diversity: Significant variation in revenue among micro-enterprises necessitates further classification.
    • Targeted Policies: Addressing classification gaps can enhance policy effectiveness, supporting micro-enterprise growth and sustainability.

    BACK2BASICS
    Program and Policies Explanation
    MSME Development Act, 2006 Provides the legal framework for defining MSMEs and their classification into micro, small, and medium enterprises.
    Credit Guarantee Fund Scheme for Micro and Small Enterprises Provides credit guarantee cover of up to 75% of the credit to micro and small enterprises.
    Udyog Aadhaar A simple online process for MSME registration, requiring only the Aadhaar number and a self-declaration.
    MSME Samadhaan Mechanism to facilitate the promotion and development of MSMEs, including Khadi, Village, and Coir Industries.
    Mudra Yojana Provides loans up to 10 lakh to non-corporate, non-farm small/micro enterprises.
    ZED Scheme Aims to enhance the manufacturing capabilities and competitiveness of MSMEs through Zero Defect Zero Effect (ZED) certification.
    Stand-Up India Facilitates bank loans between 10 lakh and 1 crore to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one woman borrower per bank branch

     

    Make in India: Focuses on making India a global manufacturing hub, with MSMEs playing a crucial role.

    Stand-Up India: Facilitates bank loans between 10 lakh and 1 crore to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one woman borrower per bank branch

    Mains PYQ:

    Q Account for the failure of manufacturing sector in achieving the goal of labour-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports. (UPSC IAS/2017)

  • Why worker housing is the key to unlocking India’s manufacturing ambitions

    Why in the News?

    The emphasis on workers’ accommodation in the manufacturing sector is gaining traction in the news due to its potential to address key challenges and unlock India’s manufacturing ambitions.

    About  India’s goal to $10 trillion by 2035

    India aims to grow its economy to $10 trillion by 2035, with a specific focus on transforming the manufacturing sector to increase its GDP share from 15% to 25%. This ambitious goal involves a four-fold growth in manufacturing to enhance employment elasticity.

     

    Present Challenges:

    • Inadequate Infrastructure: Many factories currently lack the necessary infrastructure to support large-scale manufacturing, particularly in terms of workers’ accommodation.
    • Land Regulation: Existing industrial land allocation regulations do not typically account for worker housing, necessitating regulatory changes at the state level.
    • Commute and Productivity: Workers often face long commutes, with studies showing travel times of up to two hours each way, leading to exhaustion and reduced productivity.
    • Living Conditions: Many workers live in ad hoc accommodations, which are not ideal for maintaining a stable and productive workforce.
    • Skill Gaps: There is a need for more targeted skill development programs to enhance worker productivity and adaptability to new manufacturing processes and technologies.
    • Lack of Coordinated Policy: There is a need for a more coordinated approach between state and central governments to provide the necessary fiscal and policy support.

    Economic Factors that will steer Enlightened Self-Interest:

    • Transportation Savings: By providing on-premises or factory-adjacent accommodation, companies can significantly reduce transportation costs, estimated at over Rs 5,000 per worker per month.
    • Increased Productivity: Reduced commute times and better living conditions can lead to increased worker productivity.
    • Reduced Attrition: Better living conditions and reduced commuting stress can decrease workforce attrition, ensuring a more stable and experienced workforce.
    • Better Training Facilities: On-site accommodation can facilitate better training programs, enhancing workers’ skills and productivity.
    • Lower Carbon Footprint: Reducing the need for long commutes can lower the overall carbon footprint of manufacturing operations.

    Way forward:

    • Tax and Fiscal Incentives: The Union government can catalyze investment in workers’ accommodation through tax incentives, GST reductions, and other fiscal benefits.
    • Priority Sector Tagging: Tagging workers’ accommodation as a priority sector for construction finance can attract more investment.
    • Collaborative Financing: Leveraging vehicles like the National Investment and Infrastructure Fund (NIIF) to finance credible worker housing projects can boost infrastructure development.

    Mains PYQ:

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

  • Indian manufacturing needs more sophistication: Finance Minister

    Why in the News?

    In a recent statement, the Finance Minister highlighted the pressing need for sophistication in India’s manufacturing sector to drive economic growth and competitiveness.

    • The sophisticated manufacturing sector provides a conducive environment to enhance the efficiency of producing goods and services.

    What is the current state of Indian Manufacturing?

    • India’s manufacturing sector’s Gross Value Added (GVA) as a percentage of GDP has shown an upward trend (since 2014), currently hovering around 18%. There is a consensus that to compete on a global scale, Indian manufacturing needs to evolve and embrace sophistication in its processes, technologies, and products.
    • India’s Dependency Ratio: The dependency ratio is a measure that compares the number of dependents (people who are either too young or too old to work) to the working-age population.
      • According to the Economic Survey 2018-19, India’s Demographic Dividend will peak around 2041, when the share of working-age,i.e. 20-59 years, population is expected to hit 59%.

    Importance of Sophistication in Manufacturing:

    • Leveraging the Demographic Dividend: India’s young population and low dependency ratio offer a significant advantage in terms of labor force and consumption. To capitalize on this demographic dividend, there is a strong focus on ramping up skills in the Indian workforce through initiatives like the Pradhan Mantri Kaushal Vikas Yojana (PMKVY).
    • Enhancing Productivity and Quality: Embracing sophistication is crucial for enhancing productivity, quality, and competitiveness in the global market. By investing in technology, automation, and research and development, manufacturers can improve efficiency and deliver high-quality products.
    • Increasing Share in Global Value Chains: To increase India’s share in global manufacturing and value chains, the government is considering providing policy support. This will help reduce dependence on imports and make India more Self-reliant (Atmanirbhar).
    • Attracting Investments: Sophistication in manufacturing can attract significant investments from global companies looking to reduce their dependence on China. According to a Capgemini Research Institute report, 65% of senior executives in the U.S. and Europe plan to increase manufacturing investments significantly in India.
    • Unlocking Opportunities in Specific Sectors: Sophistication in manufacturing can help unlock opportunities in sectors such as food spending, financial services, and consumer markets. By 2031, India’s consumer market is projected to double, presenting a $2.9 trillion opportunity.

    What are the Challenges hindering the growth of the Sophisticated Manufacturing sector?

    • Inadequate infrastructure: Lack of reliable power supply, poor connectivity, and limited access to advanced technologies. Difficulty in obtaining credit, especially for small and medium enterprises (SMEs), to invest in technology upgradation.
    • Skill gaps: Shortage of skilled workers trained in modern manufacturing techniques and technologies
    • Weak Intellectual Property Rights: Insufficient protection of patents, trademarks, and copyrights, discouraging innovation
    • Regulatory hurdles: Complex bureaucratic processes, lack of clarity in policies, and inconsistent implementation

     Government Initiatives and Support

    • Make in India Initiative: Launched in 2014, the program aims to transform India into a global manufacturing hub by facilitating investment, fostering innovation, building best-in-class infrastructure, and making doing business easier. It focuses on 25 sectors, including automobiles, aviation, chemicals, and pharmaceuticals.
    • National Manufacturing Policy: Introduced in 2011, it aims to increase the share of manufacturing in GDP to 25% and create 100 million jobs by 2022. It focuses on enhancing skill development, promoting innovation, and creating a favorable business environment.
    • Production Linked Incentive (PLI) Scheme: It provides financial incentives to boost domestic manufacturing and attract investments in key sectors such as electronics, pharmaceuticals, automobiles, and telecom. It has helped reduce import dependence and increase exports in sectors like telecom and mobile manufacturing

    Way Forward:

    • Role of Financial Institutions: By providing access to capital, facilitating technology adoption, and offering financial expertise, they can empower manufacturers to invest in sophistication and drive growth.
    • Enhanced Strategies: Manufacturers need to prioritize investments in technology, automation, research and development, and skill development to enhance sophistication. Collaborating with financial institutions for tailored financial solutions can help accelerate this transformation.
    • Competitive Outlook: As Indian manufacturing embraces sophistication, it is poised to unlock new opportunities, improve competitiveness, and contribute significantly to the country’s economic growth. By aligning with the Finance Minister’s vision, the sector can chart a path towards sustainable success in the global market.

    Conclusion: The Finance Minister’s call for sophistication in Indian manufacturing underscores the need for a strategic shift towards innovation, efficiency, and quality. With concerted efforts from stakeholders, including the government, financial institutions, and manufacturers, India can elevate its manufacturing sector to new heights of success and competitiveness.

    Mains PYQ:

    Q Demographic Dividend in India will remain only theoretical unless our manpower becomes more educated, aware, skilled and creative.” What measures have been taken by the government to enhance the capacity of our population to be more productive and employable? (UPSC IAS/2016)

  • RBI flags supervisory concerns over ARCs functioning

    Why in the News?

    • After the allegations of ‘unethical practices’ by ARCs, including aiding defaulting promoters, the RBI intervened, with the Deputy Governor urging integrity and ethical conduct in their operations.

    The new guidelines laid out by the RBI:

    • Enhanced Capital Requirements:
      • Minimum Capital Requirement Increase: ARCs are now mandated to maintain a minimum capital requirement of Rs 300 crore, a significant increase from the previous Rs 100 crore stipulation established on October 11, 2022.
      • Transition Period for Compliance: Existing ARCs are granted a transition period to reach the revised Net Owned Fund (NOF) threshold of Rs 300 crore by March 31, 2026.
      • Interim Requirement: However, by March 31, 2024, ARCs must possess a minimum capital of Rs 200 crore to comply with the new directives.
    • Supervisory Actions for Non-Compliance:
      • ARCs failing to meet the prescribed capital thresholds will face supervisory action, potentially including restrictions on undertaking additional business until compliance is achieved.
    • Expanded Role for Well-Capitalized ARCs:
      • Empowerment of Well-Capitalized ARCs: ARCs with a minimum NOF of Rs 1000 crore are empowered to act as resolution applicants in distressed asset scenarios.
      • Investment Opportunities: These ARCs are permitted to deploy funds in government securities, scheduled commercial bank deposits, and institutions like SIDBI and NABARD, subject to RBI specifications. Additionally, they can invest in short-term instruments such as money market mutual funds, certificates of deposit, and corporate bonds commercial papers.
      • Investment Cap: Investments in short-term instruments are capped at 10% of the NOF to mitigate risk exposure.

    About Asset Reconstruction Company (ARC):

    Description
    About ARC is a special financial institution that acquires debtors from banks at a mutually agreed value and attempts to recover the debts or associated securities.
    Regulation
    • ARCs are registered under the RBI.
    • Regulated under the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act).

    (Note: For reading more details on SARFAESI Act you can visit on our article named “RBI asks for SARFAESI Act Compliance” of Sept 2023)
    Objective ARCs take over a portion of the bank’s non-performing assets (NPAs) and engage in asset reconstruction or securitization, aiming to recover the debts.
    Functions
    • Asset Reconstruction: Acquisition of bank loans or other credit facilities for realization.
    • Securitization: Acquisition of financial assets by issuing security receipts.
    Foreign Investment 100% FDI allowed in ARCs under the automatic route.
    Limitiations
    • ARCs are prohibited from undertaking lending activities.
    • They can only engage in securitization and reconstruction activities.
    Working
    • Bank with NPA agrees to sell it to ARC at a mutually agreed value.
    • ARC transfers assets to trusts under SARFAESI Act.
    • Upfront payment made to bank, rest through Security Receipts.
    • Recovery proceeds shared between ARC and bank.
    Security Receipts Issued to Qualified Institutional Buyers (QIBs) for raising funds to acquire financial assets.
    Significance
    • Banks can clean up their balance sheets and focus on core banking activities.
    • Provides a mechanism for resolution of NPAs and debt recovery

    PYQ:

    [2018] With reference to the governance of public sector banking in India, consider the following statements:

    1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
    2. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

  • How Punjab and Haryana remain key to National Food Security?

    Why in the News? 

    The recent drop in agricultural production due to El-Nino has highlighted once more the critical role Punjab and Haryana play in ensuring India’s food security.

    Role of Punjab and Haryana for the Food Security of India:

    • Punjab and Haryana are crucial in years with bad monsoons or climate shocks.
    • The average per hectare wheat and paddy yields in these states are 4.8 tonnes and 6.5 tonnes, respectively, significantly higher than the all-India averages of 3.5 tonnes and 4.1 tonnes.

    Wheat Production:    

    • Traditional procurement: Until the mid-2000s, Punjab and Haryana supplied over 90% of the wheat for India’s public distribution system (PDS) and other government programs.
    • Impact of the Green Revolution: The spread of high-yielding varieties to other states and the establishment of infrastructure for buying grain at minimum support prices (MSP) reduced Punjab and Haryana’s share to around 65% by the early 2010s.
      • In 2019-20 and 2020-21, total wheat procurement reached record levels (39-43.3 million tons), with Punjab and Haryana’s share falling to just over 50%. Madhya Pradesh became the top wheat procurer in 2019-20, surpassing Punjab.
    • Climate Shocks: The last three years have seen production setbacks due to climate shocks, including: An unseasonal temperature surge in March 2022. Heavy rain in March 2023 during the grain formation stage.

    Recent Climate Impact: 

    In 2023-24, unusually warm temperatures in November-December impacted wheat yields, especially in central India. The delayed winter, attributed to El Nino, led to premature flowering and shortened the vegetative growth phase.

    Regional Impact:

    • Madhya Pradesh’s wheat procurement dropped significantly from 12.8-12.9 million tons in 2019-20 and 2020-21 to about 4.6 million tons.
    • Uttar Pradesh and Rajasthan also saw significant declines from their 2020-21 highs.
    • Punjab and Haryana have been less affected due to longer winters and later sowing (early to mid-November).
    • Uttar Pradesh and Bihar reported good production due to near-normal March temperatures, but much of their produce was sold to private traders at prices above the MSP.

    Rice production in the states:

    • Traditional Procurement: Government rice procurement was historically concentrated in Punjab, Haryana, and the Godavari-Krishna and Kaveri delta regions of Andhra Pradesh (AP) and Tamil Nadu (TN).
    • Diversification: There has been a diversification in rice procurement, with new states like Telangana, Chhattisgarh, Odisha, and Uttar Pradesh (UP) becoming significant contributors to the Central pool.
    • Change in Procurement Shares: The combined share of Punjab and Haryana in total rice procurement decreased from 43-44% in the early 2000s to an average of 28.8% in the four years ending 2022-23. In the current crop year, this share has risen to around 32.9%, with some procurements still pending in Telangana, AP, and TN.

    Impact of Irrigation:

    • Farmers in Punjab and Haryana, with assured access to irrigation, did not suffer production losses from last year’s patchy monsoon attributed to El Niño.
    • In contrast, states like Telangana saw reduced rabi paddy planting and struggled with irrigation due to depleted groundwater levels.

    Policy implications

    • NFSA Entitlements: Under the NFSA, about 813.5 million people are entitled to receive 5 kg of wheat or rice per month through the Public Distribution System (PDS) at highly subsidized prices.
    • Current Government Policy: Since January 2023, the current government has been providing this grain to all NFSA beneficiaries free of cost.

    Way Forward:

    • Adoption of Climate-Resilient Varieties: Develop and promote high-yield, climate-resilient wheat varieties that are tolerant to heat, drought, and diseases.
    • Efficient Irrigation Systems: Invest in modern irrigation systems such as drip and sprinkler irrigation to ensure efficient water use.
    • Invest in Agricultural Research: Increase funding for agricultural research institutions to develop new wheat varieties and innovative farming techniques.

    Mains PYQ:

    Q Why did the Green Revolution in India virtually by-pass the eastern region despite fertile soil and good availability of water? (UPSC IAS/2014)

  • Regulatory Challenges in Alternative Investment Funds (AIFs)

    Why in the News?

    In response to tightening regulations impacting operations, the RBI has recommended that investments exceeding 50% of Alternative Investment Funds (AIFs) units by a person resident outside India be treated as Indirect Foreign Investment.

    BACK2BASICS:

    What are Alternative Investment Funds (AIFs)?

    • An Alternative Investment Fund or AIF is any fund established or incorporated in India that is a privately pooled investment vehicle that collects funds from sophisticated investors, for investing by a defined investment policy for the benefit of its investors.
    • AIFs are regulated by the SEBI (Securities and Exchange Board of India).
    • As per the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF can be set up as a trust, a company, a limited liability partnership, or a corporate body.

    Who can invest in an AIF?

    • Indian Residents, NRIs (Non-Resident of India), and foreign nationals are eligible to invest in these funds.
    • Joint investors can also invest in AIF. They can be spouse, parents, or children of investors.
    • The minimum investment amount for investors is Rs1 crore for investors. For directors, employees, and fund managers, this limit is Rs 25 lakh.
    • Most AIFs come with a minimum lock-in period of three years.
    • The maximum number of investors in every scheme is capped at 1,000. However, in the case of angel fund, the cap is 49.

    Categories of an applicant who can seek registration as an AIF:

    • Category I and II AIFs are required to be close-ended and have a minimum tenure of three years. Category III AIFs may be open-ended or close-ended.

    Note: Investment by an Indian company (which is owned or controlled by foreigners) into another Indian entity is considered as Indirect Foreign Investment (IFI). It is also known as downstream investment.

    Present Regulatory Landscape:

    • Regulatory Ambiguity: Recent regulatory notes have instilled mistrust in the industry, particularly regarding Foreign Direct Investment (FDI) policy surrounding AIFs, spooking investors and prompting reconsideration of fund deployment strategies.
    • Changing Stance: The regulatory stance has evolved, with amendments in 2015-16 allowing AIFs to attract foreign capital through the automatic route, promoting onshore management and incentivizing Indian fund managers to relocate to India.

    Offshore Alternatives:

    • Reason for Offshoring: Offshore funds benefit from a more stable regulatory environment, with considerations for tax implications necessitating careful structuring.
    • Attractive Destination: Gujarat International Finance Tec-City (GIFT City) has emerged as an attractive alternative for managers due to regulatory stability, tax incentives, and proximity to India.

    PYQ:

    [2020] With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

    (a) It is the investment through capital instruments essentially in a listed company.

    (b) It is a largely non-debt-creating capital flow.

    (c) It is the investment which involves debt-servicing.

    (d) It is the investment foreign institutional investors make in Government securities.

  • Spices Board discussing the setting of ETO Limits with CODEX

    Why in the News?

    • The Spices Board has proactively engaged with CODEX, the international food standards authority, to address the pressing issue of ethylene oxide (ETO) contamination in spices.
      • This initiative follows recent recalls of certain branded spices exported from India to Hong Kong and Singapore due to concerns regarding ETO contamination.
      • Concerns over spice quality have also been raised by countries like the US, New Zealand, and Australia, prompting ongoing evaluations of Indian Spice Imports.

    Back2Basics:  Spices Board of India

    • The merger of the erstwhile Cardamom Board and Spices Export Promotion Council on 26th February 1987, under the Spices Board Act 1986 led to the formation of the Spice Board of India.
    • The Board functions as an International link between the Indian exporters and the importers abroad with a Nodal Ministry of Commerce & Industry.
    • Headquartered in Kochi, it has regional laboratories in Mumbai, Chennai, Delhi, Tuticorin, Kandla and Guntur.
    • Main Functions:
      • It promotes organic production, processing, and certification of spices.
      • Responsible for the overall development of Cardamom.
      • Focuses on post-harvest improvement programs for improving the quality of the 52 scheduled spices for export.
      • These programs are included under the head ‘Export Oriented Production’.

    About CODEX

      • The Codex Alimentarius Commission (CAC) is an inter-governmental food standards body established jointly by the Food and Agriculture Organization (FAO) and the World Health Organization (WHO) in May 1963.
        • Objective: Protecting consumer’s health and ensuring fair practices in food trade.
      • The Agreement on Application of Sanitary and Phytosanitary Measures (SPS) of the World Trade Organization (WTO) recognizes Codex standards, guidelines, and recommendations as reference standards.
    • Members:
    • Currently, the CAC has 189 Codex Members made up of 188 Member Countries and the EU.
      • India became a member in 1964.

    CODEX Committee on Spices and Culinary Herbs

      • CODEX committee (CCSCH) was formed in 2013 with the support of more than a hundred countries with India as the host country and the Spices Board as the Secretariat for organizing the committee sessions.
    • Objectives:
      • To consult with other International Organisations for the standards development process in the spice market.
      • To develop and expand worldwide standards.
    • Since its inception, the CODEX Committee has been on a positive path in developing harmonized global standards for worldly herbs and spices.

    India’s push for Permissible ETO Limits

    • Advocacy for Limits: India has advocated for the establishment of limits for ETO usage, recognizing the variance in regulations across different countries.
      • CODEX, thus far, has not prescribed any limit for ETO usage, and India has submitted a proposal for standardizing ETO testing protocols.
    • Focus on Safety: While acknowledging the carcinogenic nature of ETO when used excessively, efforts to prevent contamination have been intensified.
      • Notably, India’s sample failure rate in spices exports is less than 1% in major markets, underscoring the industry’s commitment to quality and safety standards.

    Spice Market of India:

    • Production:
      • Major producing states: Madhya Pradesh, Rajasthan, Gujarat, Andhra Pradesh, Telangana, Karnataka, Maharashtra, Assam, Orissa, Uttar Pradesh, West Bengal, Tamil Nadu and Kerala.
      • The production of different spices has been growing rapidly over the last few years. During 2022-23, the export of spices from India stood at US$ 3.73 billion from US$ 3.46 billion in 2021-22.
      • India produces about 75 of the 109 varieties which are listed by the International Organization for Standardization (ISO).
    • Major Produced and Exported Spices by India: Pepper, cardamom, chili, ginger, turmeric, coriander, cumin, celery, fennel, fenugreek, garlic, nutmeg & mace, curry powder, spice oils, and oleoresins.
      • Out of these spices, chili, cumin, turmeric, ginger, and coriander make up about 76% of the total production.
    • Export: In 2023-24, India’s spice exports totaled $4.25 billion, accounting for a 12% share of the global spice exports. (till February 2024 data).
      • India exported spices and spice products to 159 destinations worldwide as of 2023-24. The top destinations among them were China, the USA, Bangladesh, the UAE, Thailand, Malaysia, Indonesia, the UK, and Sri Lanka. (which comprises more than 70% of the total exports).

     

    PYQ:

    [2019] Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?

    (a) Spices

    (b) Fresh fruits

    (c) Pulses

    (d) Vegetable oils

  • [pib] IMEX 2024, Frankfurt 

    Why in the News?

    The Union Ministry of Tourism is actively engaging in IMEX, Frankfurt to position India as a premier MICE destination on the International stage.

    Back2Basics: IMEX

    • IMEX is an international trade show for the meetings, events, and incentive travel industry.
    • It stands for “International Meeting Exchange” and is held annually in Frankfurt, Germany.
    • It was established in the year 2001.
    • IMEX provides a platform for professionals in the global events industry to network, conduct business, and gain insights into the latest trends and innovations in event planning and management.
    • IMEX hosts two major annual events:
    1. IMEX America in Las Vegas and
    2. IMEX in Frankfurt, Germany.
    • These events are significant for facilitating connections within the industry, offering extensive educational opportunities, and showcasing industry innovations.

    What is MICE Tourism?

    • MICE Tourism refers to “Meetings, Incentives, Conferences, and Exhibitions,” representing a sector of the travel industry specializing in the planning and booking of logistics for large and small-scale corporate events.
      • Meetings: Involves small to large gatherings where business topics and are organized to discuss and exchange information.
      • Incentives: Involves company-organized trips as rewards or incentives to employees or partners to motivate them or reward them for their performance.
      • Conferences: These are large gatherings focused on particular topics, where participants discuss issues of mutual interest.
      • Exhibitions: Also known as expos, these events are where businesses showcase and demonstrate their new products and services.
    • This sector is highly valued for its contribution to the economic development of a region by bringing in significant numbers of visitors, who then utilize various services such as hotels, restaurants, and other amenities.

    India’s Focus on MICE Tourism:

    • Addressing Seasonality: The Ministry of Tourism has identified MICE tourism as a niche sector to mitigate the issue of seasonality and promote India as a year-round destination for international travelers.
    • Meet in India Initiative: Under the umbrella of the ‘Incredible India’ campaign, the Ministry has launched the ‘Meet in India’ sub-brand, aimed at showcasing India’s robust MICE infrastructure, connectivity, and diverse tourist attractions to a global audience.

    Success Stories and Global Recognition:

    • G20 Presidency Impact: India’s G20 Presidency witnessed over 200 meetings in 56 cities nationwide, showcasing the country’s strong MICE infrastructure and cultural heritage to the world.
    • Enhanced Global Visibility: Through these initiatives, India has gained prominence as a premier global hub for MICE activities, attracting increased tourism and business opportunities both domestically and internationally.
    • ICCA Ranking: India’s efforts have been recognized internationally, positioning the country at the 9th rank in the ICCA (International Congress and Convention Association) ranking of countries in the Asia Pacific region in 2022.

     

    PYQ:

    [2017] The term ‘Digital Single Market Strategy’ seen in the news refers to-

    (a) ASEAN

    (b) BRICS

    (c) EU

    (d) G20

  • Declining Poverty Ratio: A Continuing Trend

    Why in the News? 

    The National Sample Survey Organization’s and Household Consumption Expenditure Survey (2022-23) prompted researchers to estimate Poverty and Inequality trends, highlighting data comparability and measurement issues.

    Present trends of Poverty and Inequality in Indian Society: 

    1. Poverty Declined:

    • Poverty ratios declined from 29.5% in 2011-12 to 10% in 2022-23 (1.77% points per year) based on the Rangarajan Committee’s poverty lines.
    • Poverty ratios declined from 21.9% in 2011-12 to 3% in 2022-23 (1.72% points per year) based on the Tendulkar Committee’s poverty lines. Earlier period estimates showed a decline from 37.2% in 2004-05 to 21.9% in 2011-12 (2.18 percentage points per year).

    2. Inequality Declined :

    • Subramanian’s estimates indicate the Gini coefficient declined from 0.278 to 0.269 for rural areas and from 0.358 to 0.318 for urban areas between 2011-12 and 2022-23.
      • The Gini coefficient measures the inequality among the values of a frequency distribution, such as levels of income.
    • Bansal et al show similar trends: Gini coefficient for rural areas declined from 0.284 to 0.266, and for urban areas from 0.363 to 0.315 over the same period. (significant decline in urban inequality compared to rural areas between 2011-12 and 2022-23)

    Back2Basics:

    Lakdawala Committee (1993):

    • It disaggregated poverty lines into state-specific poverty lines.
    • Poverty lines: same as Alagh’s committee of 1979. (2400 kcal per capita per day for rural areas and 2100 kcal per capita per day in urban areas.)
    • Poverty lines were updated using the Consumer Price Index of Industrial Workers (CPI-IW) in urban areas and the Consumer Price Index of Agricultural Labour (CPI-AL) in rural areas rather than using National Accounts Statistics.
    • Estimates of poverty: 54.9% (All India)

    Tendulkar Committee (2009):

    • Constituted: In 2005
    • Submitted report: 2009.
    • Recommendations:
      • Firstly, the incorporation of private expenditure on health and education while estimating poverty.
      • Secondly, to shift away from two separate poverty line baskets (PLBs) (for rural and Urban) towards a uniform all-India PLB.
      • Thirdly, to shift away from Uniform Reference Period (URP) based estimates towards Mixed Reference Period (MRP) based estimates.
      • Fourthly, A change in the price adjustment procedure to correct spatial (across regions) and temporal (across time) issues with price adjustment.
    • It concluded that India’s poverty line was Rs. 446.68 per capita per month in rural areas and Rs. 578.80 per capita per month in urban areas in 2004-05.
    • Estimates of poverty: 37.2 % (All India)

    C. Rangarajan Committee (2014):

    • Constituted: 2012
    • Submitted report: 2014.
    • Used a method of calculating urban and rural poverty separately (similar to the Lakdawala committee).
    • Took into account both food and non-food items of expenditure.
    • Used the MMRP method instead of MRP.
    • Poverty was estimated on monthly expenditure of a family of five (and not individual as in case of the Tendulkar committee). All three, i.e., Calorie + protein + Fat intake values were taken into account to estimate poverty.
    • Estimates of poverty: 29.5%
    • Poverty lines: Rural- Rs. 32; Urban- Rs.47

     

    Methods to Estimate Absolute Poverty by NSSO:

    Poverty estimation in India is now carried out by NITI Aayog’s task force through the calculation of poverty line based on the data captured by the NSSO under the Ministry of Statistics and Programme Implementation (MOSPI). It uses the following 3 methods:

    • Uniform Recall (reference) Period (URP): Under URP, consumption data for all items are collected for a 30-day recall period. When URP is applied, the households are surveyed about their consumption in the last 30 days preceding the date of the survey.
      • Until 1993-94, the poverty line estimated by NSSO was based on URP.
    • Mixed Recall (reference) Period (MRP): MRP takes into account consumption expenditure for five non-food items (clothing, footwear, durable goods, education, and institutional medical expenses) for a 365-day recall period, and consumption data for the remaining items are collected for a 30-day recall period.
    • Modified mixed reference period (MMRP): The Rangarajan Committee in its 2014 report recommended MMRP as a more suitable method to measure poverty as compared to URP and MRP methods. The World Bank in 2015 also supported the idea of shifting from MRP to MMRP. Under MMRP there are 3 reference periods as follows:
      • The 365-day recall period is used for clothing, footwear, education, institutional medical care, and durable goods.
      • The 7-day recall period for edible oil, egg, fish and meat, vegetables, fruits, spices, beverages, refreshments, processed food, paan, tobacco and intoxicants and
      • The 30-day recall period for the remaining food items, fuel, and light, miscellaneous
        good and services including non-institutional medical, rents, and taxes.

    Measurement issues regarding Poverty Lines and Consumption Expenditure:

    • Shift Away from Calorie Norm-based Poverty Line: The Tendulkar Committee recognized the inadequacy of a calorie norm-based poverty line. Instead, the Tendulkar Committee indirectly utilized calorie norms by adopting the urban poverty line based on the Lakdawala Committee’s methodology, which included calorie norms.
    • Need for new Consumption Basket: The Rangarajan Group emphasized the need for a new consumption basket that addresses both adequate nourishment and essential non-food items, alongside behaviorally determined non-food expenditure.
      • Estimating this new poverty basket required a fresh approach rather than simply updating an old basket with new prices.
    • Incomplete Capture of Public Expenditure: Despite efforts to impute values for public expenditure items, the imputation process captured only a fraction of the total public expenditure on subsidized or free items.
    • Complexity in Poverty Measurement: There is no universally agreed-upon method for measuring poverty, leading to variability in estimates.

    Constitutional provisions related to eliminating inequalities:

    i. [Article 38 (2) ]: Obligation of the State ‘to endeavour to eliminate inequalities in status, facilities and opportunities’ amongst individuals and groups of people residing in different areas or engaged in different vocations.
    ii. [Article 46]: Obligation of State ‘to promote with special care’ the educational and economic interests of ‘the weaker sections of the people’ (besides Scheduled Castes and Scheduled Tribes).

    Conclusion: Given the inadequacy of calorie norm-based poverty lines, as recognized by the Tendulkar Committee, there is a need to adopt more effective and real-time approaches that will consider evolving consumption patterns.

    Mains PYQ:

    Q “The incidence and intensity of poverty are more important in determining poverty based on income alone”. In this context analyse the latest United Nations Multidimensional Poverty Index Report.(UPSC IAS/2020)