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Subject: Economics

  • MSMEs need funds for tech upgrades, green transition

    Why in the news? 

    Union Minister for MSMEs Jitan Ram Manjhi outlined six strategic pillars identified to foster the growth of the MSME sector.

    What are the 6 pillars for the growth of the MSME Sector   

    • Formalisation and Access to Credit: Promoting formalization of MSMEs to enhance their credibility and access to formal financial institutions.Improving access to credit through schemes like Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
    • Increased Access to Market and E-commerce Adoption: Facilitating MSMEs’ access to domestic and international markets through initiatives like market linkages and export promotion schemes.
    • Higher Productivity Through Modern Technology: Encouraging MSMEs to adopt modern technologies and digital tools to improve productivity and efficiency.
    • Enhanced Skill Levels and Digitalisation in the Service Sector: Focusing on skill development and training programs to enhance the capabilities of the MSME workforce.
    • Support to Khadi, Village, and Coir Industry for Globalisation: Promoting traditional industries like Khadi and Coir by providing marketing support and international exposure.
    • Empowerment of Women and Artisans Through Enterprise Creation: Encouraging entrepreneurship among women and artisans through skill development and financial support.

    How can Employment be raised?   

    • Promoting MSME Growth: Support MSMEs with policies for credit access, market expansion, tech modernization, and encourage startups for job creation.
    • Skill Development and Training: Invest in industry-aligned skill development, collaborating with educational institutions and industry partners for vocational training.
    • Infrastructure Development: Invest in infrastructure projects for job creation; develop industrial clusters and economic zones for manufacturing jobs.
    • Supporting Employment-intensive Sectors: Promote high-employment sectors like tourism, agriculture, healthcare, renewable energy; prioritize job creation in rural areas.

    Indian Government steps taken for MSME 

    • Prime Minister Employment Generation Programme (PMEGP): It aims to create employment opportunities through the setting up of new micro-enterprises.
    • Credit Guarantee Scheme for Micro & Small Enterprises (CGTMSE): Provides collateral-free loans of up to ₹1 crore to individual Micro and Small Enterprises (MSEs).
    • Financial Support to MSMEs in ZED Certification Scheme: Provides up to 80% subsidy to MSMEs to inculcate Zero Defect and Zero Effect (ZED) practices in manufacturing.
    • A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE): Facilitates innovative business solutions, promotes entrepreneurship, and creates new jobs at the grassroots level.

    Way to Green Transition and R&D (Way forward)

    • Financial Incentives and Soft Funds: Offer MSMEs financial incentives, subsidies, and soft loans for green tech and support R&D with grants and tax incentives.
    • Policy Support and Regulatory Framework: Develop supportive policies and regulatory frameworks that encourage MSMEs to integrate environmental sustainability into their operations.
    • Capacity Building and Technical Assistance: Offer capacity-building programs and technical assistance to MSMEs to enhance their knowledge and capabilities in green technologies.
    • Promotion of Green Products and Market Access:Promote green products via marketing campaigns, certification programs, and platforms for showcasing and selling.

    Mains PYQ: 

    Q Economic growth in the recent past has been led by an increase in labour productivity.” Explain this statement. Suggest the growth pattern that will lead to the creation of more jobs without compromising labour productivity. (UPSC IAS/2022)

  • The shape of the Manufacturing Base in India

    Why in the News? 

    Prime Minister Narendra Modi has formed the government again, now leading a coalition in his third term. The new administration must intensify its focus on economic reforms, especially those related to manufacturing.

    Significance of Manufacturing Base

    • Economic Growth: Enhancing the manufacturing sector is vital for India’s economic growth. Increasing manufacturing output can significantly boost GDP, as evidenced by the government’s initial target to raise manufacturing from 15% to 25% of GDP by 2025.
    • Employment Creation: A robust manufacturing sector can generate substantial low-skilled employment, which is crucial for absorbing the large workforce transitioning from agriculture. This can help mitigate stress on urban governance structures caused by rapid urbanization.
    • Trade Balance: Strengthening manufacturing can help reduce India’s goods trade deficit, particularly by decreasing reliance on imports of manufactured goods such as electronics, which currently contribute to a significant trade imbalance.
    • National Security: A strong manufacturing base can provide the resources needed for national security. By enhancing industrial capacity, India can better support its defense needs and contribute to regional security, aligning with American interests.
    • Supply Chain Resilience: Developing manufacturing capabilities in India can improve the viability of U.S. supply chains by having production bases in friendly countries. This is particularly important in the face of China’s rising economic and geopolitical influence.

    Issues with the “Business Reforms Action Plan (BRAP)” and the States

    • Outdated Rankings: The BRAP rankings, designed to foster competition among states, have not been updated since the COVID-19 pandemic. This has diminished their effectiveness in motivating states to improve their business environments.
    • Self-Reporting Issues: The BRAP rankings rely heavily on states’ self-reporting of their local business practices, which often does not align with actual investor experiences. This discrepancy undermines the credibility of the rankings.
    • Model Industry Laws: The central government’s initiative to create model industry laws for states has been underwhelming. There is a lack of robust and effective frameworks to guide states in implementing these laws.
    • State-Level Control: Many critical factors of production, such as power, water, sanitation, labor regulations, land acquisition rules, and environmental regulations, are controlled by state governments. This decentralization complicates the implementation of cohesive national policies.
    • Need for Transparent Policies: Encouraging states to adopt thoughtful and transparent industrial policies is challenging. The current toolkit of incentives and penalties needs enhancement to motivate states effectively.

    Role of the US in Improving the Business Attractiveness of Indian States

    • Guidance on Economic Governance: The U.S. can expand engagement with Indian states by providing direct guidance on effective economic governance. This can help states create more investor-friendly environments.
    • Investment Pathways: Improving pathways for potential investors to engage with state governments is crucial. The U.S. can facilitate connections between American investors and Indian states, helping to streamline investment processes.
    • Senior Officials’ Engagement: U.S. officials visiting India should go beyond the major economic hubs of Delhi, Mumbai, and Bengaluru. Engaging with a wider set of large states can highlight the importance and opportunities arising from global supply chain shifts.
    • Policy Redirection: The recent national election provides an opportunity for policy assessment and redirection. The U.S. can support India in aligning its policies with the core needs of the manufacturing push — jobs, trade, and security.
    • Encouraging Job-Creating Sectors: The U.S. can emphasize the importance of job-creating manufacturing sectors such as textiles, paper mills, and furniture, rather than focusing solely on capital-intensive sectors like semiconductors and robotics. This approach can help create more employment opportunities in India.

    Way forward: 

    • Establishment of State-level Economic Advisory Councils: Create advisory councils comprising experts from academia, industry, and government to advise state governments on economic policies, including manufacturing incentives and regulatory frameworks.
    • Review and Update of BRAP Rankings: Overhaul the Business Reforms Action Plan (BRAP) to include independent evaluations and audits alongside self-reporting. Ensure transparency and accuracy in ranking states’ business environments to provide credible guidance for investors.

    Mains PYQ: 

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

  • Integrated Tribal Development Programme by NABARD

    Why in the News?

    National Bank for Agriculture and Rural Development (NABARD) is set to launch an integrated tribal development programme in Kulathupuzha grama panchayat, Kollam.

    About Integrated Tribal Development Programme

    • Thanal, an environment organisation, will be the implementing agency of the project that aims to transform livelihoods of tribal families over the next five years.
    • The five-year initiative targets the sustainable livelihood and agricultural enhancement of 413 families residing in eight hamlets.
    • The programme focuses on promoting diverse agricultural crops such as pepper, arecanut, coconut, ginger, Thai ginger, turmeric, and plantain.
    • It encompasses initiatives in goat rearing, poultry, beekeeping, fish farming, and fodder production.
    • The establishment of a Tribal Farmer Producer Company (FPO) is also planned to further economically empower the community.

    Components of the Programme

    • Water Resource Development: Initiatives aimed at enhancing water resources for agricultural purposes.
    • Leadership Training: Training sessions to empower local leaders within the tribal communities.
    • Awareness Creation: Campaigns to raise awareness about sustainable practices and community development.
    • Sanitation and Hygiene Initiatives: Efforts to improve sanitation and hygiene standards among the tribal families.
    • Marketing and Branding Training: Training programmes to enhance marketing skills and brand awareness among participants.
    • Skill Development Workshops: Workshops focused on enhancing both agricultural and non-agricultural skills among the tribal community.

    About NABARD:

    • It was established on July 12, 1982, based on the recommendation of the Sivaraman Committee to promote sustainable rural development and agricultural growth in India.
    • Aim:  To facilitate credit flow for the promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts, and other rural crafts.
    • It operates as a statutory body under the Reserve Bank of India (RBI) Act, 1934, with its headquarters located in Mumbai.
    • It is governed by a Board of Directors appointed by the GoI:
      • Representatives from the RBI;
      • Central and state governments;
      • Experts from various fields related to Rural Development and Finance.

     Functions of NABARD:

    • Refinance Support: NABARD provides refinance facilities to banks and financial institutions for agricultural and rural development activities, including crop loans and rural infrastructure projects.
    • Financial Inclusion: It promotes financial inclusion by expanding banking services in rural areas, supporting SHGs, FPOs, and MFIs, and facilitating access to credit for rural communities.
    • Priority Sector Lending: NABARD plays a crucial role in channelling credit to priority sectors such as agriculture, small-scale industries, and rural infrastructure, in alignment with the Reserve Bank of India’s priority sector lending guidelines.
    • Direct Lending: It extends direct loans to institutions for specific rural development projects, such as agricultural production, rural infrastructure development, and agri-processing units.
    • Scheme Implementation: The organization administers government schemes and funds like Rural Infrastructure Development Fund (RIDF), Watershed Development Fund (WDF) to finance rural infrastructure projects and watershed development activities.
    • Credit Planning: NABARD collaborates with central and state governments, RBI, and other stakeholders to formulate credit policies and plans for agriculture and rural sectors.
    • Research and Training: NABARD promotes research and development in agriculture, supports capacity building and training programs for rural stakeholders, and facilitates technology transfer initiatives.

     

    PYQ:

    [2013] Which of the following grants/grants direct credit assistance to rural households?

    1. Regional Rural Banks
    2. National Bank for Agriculture and Rural Development
    3. Land Development Banks

    Select the correct answer using the codes given below:

    (a) 1 and 2 only

    (b) 2 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

  • [pib] XVI Finance Commission constitutes Advisory Council

    Why in the News?

    The Sixteenth Finance Commission (chaired by Arvind Panagariya, the former Vice-Chairman of NITI Aayog) has constituted an Advisory Council of five members.

    Role and Functions of the Advisory Council

    • To advise the Commission on any of the Terms of Reference (ToR) or related subjects that may be of relevance.
    • To assist in the preparation of papers or research studies and to monitor or assess studies commissioned by the Finance Commission, thereby enhancing the Commission’s understanding of the issues in its ToR.
    • To help broaden the Commission’s ambit and understanding by seeking the best national and international practices on matters pertaining to fiscal devolution and improving the quality, reach, and enforcement of its recommendations.

    About Finance Commission

    • The Finance Commission is a Constitutional body created every five years to transfer financial resources from the centre to states.
    • It is a quasi-judicial body.
    • The origin of the Finance Commission lies in Article 280 of the Constitution.
    • The President of India shall constitute a Finance Commission every five years to give recommendations about the transfer of central revenues (tax) to the states and its allocation among them (states).
    • The recommendations of the Fifteenth Finance Commission are valid up to the financial year 2025-26.

    Composition of the FC:

    • The Finance Commission consists of a chairman and four other members appointed by the President.
    • They hold office for such a period as specified by the president in his order and are eligible for reappointment.

    Qualifications:

    • Parliament determines the qualifications of members of the commission and the manner in which they should be selected.
      • Chairman should be a person having experience in public affairs, and
      • Four other members should be selected from amongst individuals with specialized knowledge of finance, accounts, economics, or administration.

    Terms of Reference for 16th Finance Commission

    • Division of Tax Proceeds, principles for Grants-in-Aid, enhancing State Funds for Local Bodies and evaluation of Disaster Management Financing

    PYQ:

    [2023] Consider the following:

    1. Demographic performance
    2. Forest and ecology
    3. Governance reforms
    4. Stable government
    5. Tax and fiscal efforts

    For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?

    (a) Only two
    (b) Only three
    (c) Only four
    (d) All five

  • How to read India’s Balance of Payments?  

     Why in the news? 

    India’s current account showed a surplus in Q4 of 2023-24. However, current account surpluses are not always beneficial, and deficits are not inherently detrimental.

    Latest Data from the Reserve Bank of India (RBI)

    • Current Account Surplus: India registered a current account surplus during the fourth quarter (Jan-Mar) of the 2023-24 financial year, marking the first surplus in 11 quarters.
    • Quarterly vs. Annual Data: Despite the Q4 surplus, the current account balance for the entire FY2023-24 remained in deficit, indicating underlying economic trends and demands.

    What is Balance of Payments (BoP)?

    • The BoP is a ledger of a country’s transactions with the rest of the world, recording all monetary transactions between residents of a country and the rest of the world.
    • It shows the amount of money flowing into and out of the country, indicating the relative demand for the rupee compared to foreign currencies (usually in dollar terms).

    Constituents of the BoP

    The BoP has two main accounts: the Current Account and the Capital Account.

    • Current Account: It covers the trade in goods (exports and imports), trade in services (transportation, tourism, licensing, etc.), Income (wages, interest, dividends, etc.), and current transfers (remittances, foreign aid, etc.).
      • Trade of Goods (Merchandise Account): Records export and import of physical goods. A trade deficit occurs when imports exceed exports.
      • Invisibles of Trade: Includes services (banking, insurance, IT, tourism), transfers (remittances), and income (earnings from investments). These are transactions not visible like physical goods.
      • Net Balance: The sum of the merchandise trade and invisible trade determines the current account balance. Q4 showed a surplus in the current account due to a surplus in invisible despite a trade deficit.
    • Capital Account: It covers debt forgiveness, migrants’ transfers of financial assets, taxes on gifts and inheritances, and ownership transfers of fixed assets.
      • Investments: Captures transactions related to investments such as Foreign Direct Investment (FDI) and Foreign Institutional Investments (FII).
      • Net Balance: Q4 showed a net surplus of $25 billion in the capital account.

    Impact on the Indian Economy: 

    • Exchange Rate Stability: The current account surplus in Q4 helped stabilize the exchange rate of the rupee. By absorbing excess dollars, the Reserve Bank of India (RBI) prevented excessive appreciation of the rupee, which helps maintain the competitiveness of Indian exports.
    • Improved Sovereign Ratings: A current account surplus can positively impact India’s sovereign credit ratings, as it indicates stronger external financial health and reduces reliance on foreign borrowing.
    • Foreign Exchange Reserves: The surplus contributed to an increase in India’s foreign exchange reserves, enhancing the country’s ability to manage external shocks and providing a buffer against global economic uncertainties.
    • Investment Climate: A surplus in the capital account, driven by Foreign Direct Investment (FDI) and Foreign Institutional Investments (FII), indicates investor confidence in the Indian economy, potentially leading to more robust economic growth and development.
    • Economic Health Indicators: Despite the Q4 surplus, the annual current account deficit suggests robust domestic demand and investment needs. This aligns with a growing economy that requires imports of capital goods to enhance production capacity and future export potential.

    Way forward: 

    • Enhance Export Competitiveness: India should focus on boosting its export sector by diversifying export products and markets, improving product quality, and providing incentives for export-oriented industries.
    • Promote Sustainable Foreign Investment: Encouraging sustainable and long-term foreign investments, particularly in sectors like manufacturing, technology, and renewable energy, can strengthen the capital account. 

    Mains PYQ: 

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

  • The ANRF plan has got off on the wrong foot  

    Why in the News? 

    In 2023, the Anusandhan National Research Foundation (ANRF) Bill was passed by both Houses of Parliament, heralding a significant new initiative aimed at promoting and advancing research in India, particularly within the country’s universities and colleges.

    About 2019 National Research Foundation (NRF) Project Report

    • Objective: The 2019 NRF project report emphasized the goal of seeding, growing, and facilitating research in India, particularly within universities and colleges.
    • Aim: The project aimed to create an environment where research could thrive free from bureaucratic constraints, providing a funding boost and fostering collaboration with industry partners.
    • Scope and Structure: NRF will have five major divisions: Sciences, Technology, Social Sciences, Humanities, and Arts
    • Priority: A top priority mentioned in the report was “growing outstanding research cells already existing at State Universities.”

     

    Lack of Industry Representation in India:

    • Governing Bodies Composition: The ANRF Governing Board and Executive Council lack representation from key organizations, such as Central and State universities or colleges.
    • Current Members: Members primarily include Secretaries from various government science departments, directors of top research institutions, and international figures, but not from Indian industry or local academia.
    • Industry and Academia Input: There is a critical need for representatives who understand the practical challenges and bottlenecks of the current university system and have ground-level experience.
    • Diversity Issues: There is minimal representation from the industry and a lack of diversity, with the sole industry representative being an Indian-American based in Silicon Valley and the only woman representative being the Secretary of the DSIR.

    R&D underfunding:

    • Current Funding Levels: India significantly underfunds research and development, allocating less than 1% of GDP to R&D. There is a pressing need to increase this to at least 4% to make Indian innovation globally competitive.
    • Systemic Overhaul: The current funding system requires a significant overhaul to boost research. This includes implementing a robust grant management system, ensuring timely disbursal of funds, and minimizing bureaucratic hurdles at both the funding body and grantee institutions.
    • Grant and Fellowship Disbursal: Timely disbursal of research grants and student fellowships is crucial. The aim should be a quick turnaround time of less than six months between application and fund disbursal to maintain the momentum of research activities.
    • Flexibility in Spending: Researchers need flexibility in spending research funds. The current system’s stringent general financial rules (GFR) and the requirement to use the Government e-marketplace (GeM) portal can hinder efficient resource utilization.
    • Diverse and Competent Leadership: The ANRF should be staffed with diverse representatives from practising natural and social scientists, young entrepreneurs, and women.

    Other steps taken by the Government: 

    • Atal Innovation Mission (AIM): It is a flagship initiative to promote innovation and entrepreneurship in the country. It aims to create an ecosystem for innovation and provide support to startups through incubators, accelerators, and mentorship programs.
    • Impacting Research Innovation and Technology (IMPRINT) Program: IMPRINT is a joint initiative of the Ministry of Education and the Ministry of Science and Technology to promote translational research.
    • Uchhatar Avishkar Yojana (UAY): UAY is a scheme to promote industry-specific need-based research in premier institutions.

     

    Conclusion: The ANRF should actively involve representatives from both Indian industry and academia in its Governing Board and Executive Council. This inclusion will ensure that decision-making processes are informed by practical insights and ground-level experiences.

    Mains PYQ: 

    Q  Scientific research in Indian universities is declining, because a career in science is not as attractive as are business professions, engineering or administration, and the universities are becoming consumer-oriented. Critically comment. (UPSC IAS/2014)

  • 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.