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Subject: Economics

  • [28 May 2024] The Hindu Op-ed: Playing to the gallery can be injurious to Rail safety

    [28 May 2024] The Hindu Op-ed: Playing to the gallery can be injurious to Rail safety

    PYQ Relevance:
    Mains: 
    Q) The setting up of a Rail Tariff Authority to regulate fares will subject the cash-strapped Indian Railways to demand subsidy for obligation to operate non-profitable routes and services. Taking into account the experience in the power sector, discuss if the proposed reform is expected to benefit the consumers, the Indian Railways or the private container operators. (UPSC CSE 2014)
    Q) One of the intended objectives of Union-Budget 15-18 is to ‘transform, energize and clean India’. Analyze the measures proposed in the Budget 15-18 to achieve the objective. (UPSC CSE 2017)

    Prelims:

    With reference to bio-toilets used by the Indian Railways, consider the following statements:
    1) The decomposition of human waste in the bio-toilets is initiated by a fungal inoculum.
    2) Ammonia and water vapour are the only end products in this decomposition which are released into the atmosphere.
    Which of the statements given above is/are correct?  (UPSC CSE 2015)
    (a) 1 only
    (b) 2 only
    (c) Both 1 and 2
    (d) Neither 1 nor 2

    Note4Students: 

    Prelims: Government Initiatives for Indian Railways;

    Mains: Indian Railways;

    Mentor comment: More than 160 years ago, railways were introduced in the Indian subcontinent and were first initiated in 1853. The British Governor-General Lord Dalhousie played the most important part in introducing railways in India. Today, India has the 4th largest railway system in the world (after the US, Russia, and China). The railways operate 13,523 passenger trains and 9,146 freight trains daily. As of Feb 2024, 61,813 km length of the Broad-Gauge network has been electrified. With this, Indian Railways is rapidly progressing towards its target of 100% electrification and becoming the largest green railway network in the world. Indian Railways (IR) is rapidly progressing to accomplish its Mission. However, India during recent times due to the increase in population demand, is unable to cope with priority clauses of maintaining safety and standards.

    Let’s learn.

    –

    Why in the News?

    A railway pilot (driver) faced disciplinary action for following safety rules and not speeding to minimize delays to passenger trains after his locomotive failed, highlighting an attitude of prioritizing punctuality over safety in the Indian Railways.

    According to the Performance Audit on Derailment in Indian Railways, nearly 3/4th of 217 consequential train accidents across the country between 2017-18 and 2020-21 were caused by derailments.

    Major challenges of Indian Railway Runways:

    • Unmanned level crossings (UMLCs): UMLCs are places where railway tracks are crossed without any barriers or signals to regulate traffic.
      • UMLCs accounted for 16% of all train accidents in India (2018-19). Although Indian Railways have eliminated all the UMLCs on broad gauge routes, there are still many Manned Level Crossings (MLCs) that pose a risk of accidents.
      • In February 2024, a train consisting of two diesel locomotives (both unmanned), and 53 wagons, with no brakes, rolled out of Kathua station. 
    • Signal Failures:  Signaling failures can lead to trains running on the wrong track, colliding with other trains or stationary objects, or overshooting stations.
      • The recent Visakhapatnam-Rayagada train accident was reportedly caused by non-communication and the lack of audio recording of conversations between station masters and loco pilots.
      • The media analyzed the accident and highlighted the broader issues with railway safety, such as inadequate signaling and telecommunications infrastructure, and the need for accountability and technological improvements. (In fact, the Right to Information (RTI) Act 2005 denies giving this information)
    • Human Errors: According to the Final Report of the CRS (Minister for Railways), railway staff are prone to human errors due to fatigue, negligence, corruption, or disregard for safety rules and procedures.
      • It can result in wrong signaling, miscommunication, distraction, overspeeding, or overlooking defects or hazards that affect their performance and coordination.

    What are other troubling questions?

    • Lack of Professionalism in Railway Accident Investigations: Railway authorities are majorly exposed for unprofessional handling of serious accident investigations. Blaming reckless crew diverts attention from the administration’s role in improper training and ineffective monitoring.
    • Issues Concerning Loco Pilots: Nearly 10% of vacancies in the loco pilot cadre, are leading to regular breach of duty hour rules. Continuous night shifts, and inadequate rest, point to the need for focused attention on loco pilots’ issues.

    What did the CAG Recommended? (Way Forward)

    • Develop a strong monitoring mechanism to ensure timely implementation of maintenance activities, adopting fully mechanized methods and improved technologies.
    • Railway administration must follow the guiding principles for the deployment of RRSK (Rashtriya Rail Sanraksha Kosh) funds.
    • Indian Railways should prepare a Detailed Outcome Framework for each item of safety work.
    • Ensure strict adherence to scheduled timelines for conducting and finalizing accident inquiries.

    Reference:

    https://www.thehindu.com/opinion/lead/playing-to-the-gallery-can-be-injurious-to-rail-safety/article68222396.ece

  • China’s share in India’s industrial goods imports jump to 30% from 21% in last 15 years: GTRI

    Why in the News?

    India’s imports from China crossed $101 billion in 2023-24 from about $70 billion in 2018-19, and the country’s share of India’s industrial goods imports has risen from 21% to 30% over 15 years, according to a report by the Global Trade Research Initiative (GTRI).

    • The data shows, it’s resulting in a cumulative trade deficit exceeding $387 Billion in the last 5 years, which is an alarming situation for the Indian government.

    What is meant by Trade Deficit?

    • A trade deficit refers to a situation where the country’s imports exceed the receipts from its exports. A trade deficit arises in the course of international trade when the payments for imports exceed the receipts from export trade.
    • A trade deficit is also referred to as a negative balance of trade.
    • The concerns arising due to this deficit include pressure on external payments and on the currency value of a country. Countries often alter import and export policies, curbing imports or increasing import duties on certain goods due to this.
    • They also encourage exports and consumption of indigenous goods.

    India’s Industrial Imports from China:

    • Electronics and Telecom Sector: During April-January 2023-24, India’s import value for electronics, telecom, and electrical products was $67.8 billion, with China contributing $26.1 billion. (38.4% of the total imports)
    • Machinery Sector: China contributed 39.6% of India’s imports in this category. This highlights China’s essential role as a supplier of machinery to India.
    • Chemical and Pharmaceutical Sector: India’s chemical and pharmaceutical imports were $54.1 billion, with $15.8 billion coming from China (29.2% of the total).
    • MSMEs sector: Products like mobiles and data processing units, are imported by Indian MSMEs. These imports could potentially be produced domestically, highlighting gaps in India’s industrial capabilities.

    Current Trade Observations concerning China and other countries:

    • Rising Trade Deficit with China: India’s exports to China have stagnated at around $16 billion annually (from 2019 to 2024), while imports from China surged from $70.3 billion in 2018-19 to over $101 billion in 2023-24.
    • Growth Rate of Imports: China’s share in India’s industrial product imports increased from 21% to 30% over the last 15 years. China’s exports to India grew 2.3 times faster than India’s total imports from all other countries.
    • Diverse Product Imports: Chinese firms are increasingly entering the Indian market, which is expected to accelerate the import of industrial products from China. India’s imports span high to low-technology items, like smartphones, electronics, electric vehicles, and solar energy.
    • Strategic Concerns: The growing trade deficit and dependence on China have profound strategic implications, affecting both economic and national security dimensions.

    Way Forward:

    • Supply chain diversification: India must focus on diversifying its supply chains and reducing dependency on single-country imports, especially from geopolitical competitors like China.
    • Boosting R&D: Increase investment in research and development for electronics, semiconductors, and machinery to foster innovation and improve domestic production capabilities.
    • Incentivizing Production: Provide tax incentives, subsidies, and grants to local manufacturers of electronics, data processing units, and semiconductor devices to encourage production and reduce import dependency.

    Mains PYQ:

    Q China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia’, In the light of this statement, discuss its impact on India as her neighbor. (UPSC IAS/2017)

  • GAIL inaugurates 10 MW Green Hydrogen Plant in Madhya Pradesh

    Why in the news?

    GAIL (India) Ltd has commissioned its first green hydrogen plant at Vijaipur in Madhya Pradesh, marking a significant step for the nation’s largest natural gas transmission and distribution firm into new and alternate energy sources.

    About Vijaipur Green Hydrogen Plant

    • The plant aligns with the National Green Hydrogen Mission‘s objective of achieving 5 million tons of annual green hydrogen production capacity by 2030.
    • The plant features a 10-megawatt proton exchange membrane electrolyser imported from Canada.
    • It will produce approximately 4.3 tonnes of green hydrogen per day with a purity of about 99.999% by volume.
    • The production process utilises electricity from renewable sources, such as solar energy, to split water and produce green hydrogen.

    Major Objective: Hydrogen Blending

    • GAIL is currently conducting experimental blending of hydrogen with natural gas.
    • Current regulations permit blending up to 5% hydrogen with natural gas, with ongoing studies to explore higher blending ratios.

    What is Green Hydrogen?

    • Green hydrogen is produced through electrolysis, where electricity derived from renewable sources, such as solar or wind power, is used to split water molecules into hydrogen and oxygen.
    • Since it relies on renewable energy, green hydrogen production has no direct emissions of CO2 or other greenhouse gases.

    What is the Green Hydrogen Standard?

    • Definition of Green Hydrogen: It has defined green hydrogen as having a well-to-gate emission – including water treatment, electrolysis, gas purification, drying and compression of hydrogen – of not more than 2 kg CO2 equivalent per kg of hydrogen produced.
    • Nodal Agency:  The Bureau of Energy Efficiency, Ministry of Power, will be the nodal authority for green hydrogen production projects.

    Back2Basics: National Green Hydrogen Mission, 2023

    Details
    Ministry Ministry of New and Renewable Energy
    Purpose To incentivise the commercial production of green hydrogen and make India a net exporter of the fuel.
    Key Activities Facilitates demand creation, production, utilisation, and export of green hydrogen.
    Sub-Schemes
    1. Strategic Interventions for the Green Hydrogen Transition Programme (SIGHT): To fund the domestic manufacturing of electrolysers and the production of green hydrogen.
    2. Green Hydrogen Hubs: Identify and develop states and regions capable of supporting large-scale production and/or utilisation of hydrogen as Green Hydrogen Hubs.
    Green Hydrogen Hubs Details Identifies and develops regions capable of large-scale hydrogen production and utilisation as Green Hydrogen Hubs.
    Objectives
    • Develop 5 MMT per annum of green hydrogen production by 2030.
    • Add 125 GW of renewable energy capacity by 2030.
    • Entail over Rs 8 lakh crore investments and generate six lakh jobs.
    • Reduce fossil fuel imports by over Rs 1 lakh crore and abate 50 MT of greenhouse gases annually.

    Significance of Hydrogen Energy 

    • Hydrogen is an important source of energy since it has zero carbon content and is a non-polluting source of energy in contrast to hydrocarbons that have net carbon content in the range of 75–85 per cent.
    • Hydrogen energy is expected to reduce carbon emissions that are set to jump by 1.5 billion tons in 2021.
    • It has the highest energy content by weight and lowest energy content by volume.
    • As per the International Renewable Energy Agency (IRENA), Hydrogen shall make up 6 per cent of total energy consumption by 2050.
    • Hydrogen energy is currently at a nascent stage of development but has considerable potential for aiding the process of energy transition from hydrocarbons to renewable.

    Types of Hydrogen

    Hydrogen extraction methods are classified into three types based on their processes: Grey, Blue, and Green etc.

    1. Green Hydrogen:  Discussed above.
    2. Grey Hydrogen: This type of hydrogen is obtained through coal or lignite gasification (black or brown), or by steam methane reformation (SMR) of natural gas or methane (grey). These processes are typically carbon-intensive.
    3. Blue Hydrogen: It is derived from natural gas or coal gasification, coupled with carbon capture storage (CCS) or carbon capture use (CCU) technologies to mitigate carbon emissions.
    4. Turquoise hydrogen: It refers to hydrogen produced from methane pyrolysis, while yellow hydrogen is produced from biomass.

     

    PYQ:

    [2023] Consider the following heavy industries:

    1. Fertilizer plants
    2. Oil refineries
    3. Steel plants

    Green hydrogen is expected to play a significant role in decarbonizing how many of the above industries?

    (a) Only one
    (b) Only two
    (c) All three
    (d) None

    [2023]  With reference to green hydrogen, consider the following statements:

    1. It can be used directly as a fuel for internal combustion.
    2. It can be blended with natural gas and used as fuel for heat or power generation.
    3. It can be used in the hydrogen fuel cell to run vehicles.

    How many of the above statements are correct?

    (a) Only one
    (b) Only two
    (c) All three
    (d) None

  • Cost Inflation Index (CII) for FY25 to compute Capital Gains

    Why in the News?

    • The Income Tax Department has notified the cost inflation index (CII) for the current fiscal to calculate long-term capital gains arising from the sale of immovable property, securities and jewellery.
      • The CII is used by a taxpayer to compute gains arising out of the sale of capital assets after adjusting for inflation.

    CII Values:

    • For FY 2024-25, the CII is set at 363.
    • Previous years’ CII values were 348 for FY 2023-24 and 331 for FY 2022-23.

    What is Cost Inflation Index (CII)?

    • CII is a measure used by the Income Tax Department of India to account for inflation when calculating the capital gains on the sale of long-term capital assets.
    • It helps to adjust the purchase price of assets to reflect the effect of inflation.
      • CII adjusts the cost of acquisition of assets to the price level inflation at the time of sale.
      • This ensures that taxpayers pay taxes on the real gains rather than on the inflationary component of the price rise.
    • It is defined under Section 48 of the Income-tax Act, 1961.
    • The index is revised annually to keep up with inflation, with the base year being periodically reset (currently the base year is 2001-02 in India).

    Application of CII

    • CII is used to compute the indexed cost of acquisition of a capital asset that has been held for more than 36 months (considered as long-term capital assets).
    • Different holding periods apply for certain types of assets like immovable property and listed securities.

    Tax Calculation:

    • The formula used is:

    • This formula helps determine the adjusted cost basis from which any sale proceeds are subtracted to calculate capital gains.

    Back2Basics: Long Term Capital Gains

    • In India, long-term capital gains (LTCG) refer to the profit earned from the sale of a capital asset held for a specific period, qualifying it as “long-term” based on the duration of holding.
    • The tax implications and treatment of these gains are distinct from those of short-term capital gains.

    Definition of Long-Term Capital Assets

    • Equity or Preference Shares, Listed Securities, Units of UTI, etc.: These are considered long-term if held for more than 12 months before sale.
    • Immovable Property (e.g., Land, Building): Considered long-term if held for more than 24 months.
    • Other Assets (e.g., Jewellery, Debt-oriented Mutual Funds, etc.): These need to be held for more than 36 months to be considered long-term.

    Taxation of Long-Term Capital Gains

    • Equity Investments:
      • LTCG from the sale of listed shares or equity-oriented mutual funds over ₹1 lakh is taxed at 10% without the benefit of indexation, provided the securities transaction tax (STT) was paid at the time of sale.
    • Non-Equity Investments:
      • LTCG from assets like debt mutual funds, real estate, gold, etc., is taxed at 20% with the benefit of indexation.
    • Indexation Benefit:
      • For non-equity assets, the Cost Inflation Index (CII) is used to adjust the purchase price of the asset to reflect inflation. This reduces the taxable gain by increasing the acquisition cost.

    Calculation of Long-Term Capital Gains

    The general formula for calculating LTCG is:


    Where:

    Full Value of Consideration is the sale price of the asset.

    Indexed Cost of Acquisition is the purchase price adjusted by the CII.

    Indexed Cost of Improvement refers to the cost of any improvements made to the asset, adjusted by the CII.

    Cost of Transfer includes expenses directly related to the sale or transfer of the asset.

    Exemptions and Deductions

    • Section 54: Exemption on LTCG from the sale of a residential property if the proceeds are reinvested in another residential property in India.
    • Section 54EC: Exemption by investing LTCG in bonds issued by NHAI or REC within 6 months of the asset sale, subject to a cap of ₹50 lakhs.

     

    PYQ:

    [2015]  Which reference to inflation in India, which of the following statements is correct?

    (a) Controlling the inflation in India is the responsibility of the Government of India only

    (b) The Reserve Bank of India has no role in controlling the inflation

    (c) Decreased money circulation helps in controlling the inflation

    (d) Increased money circulation helps in controlling the inflation

  • India rises to 39th position in WEF Index for travel, tourism development

    Why in the News? 

    • India has moved up to the 39th position in the World Economic Forum’s latest “Travel & Tourism Development Index (TTDI) 2024, a significant climb from 54th in 2021.
      • The United States tops the index, followed by Spain, Japan, France, and Australia.
      • Pakistan is ranked 101st.

    India’s Performance and Ranking

    • Price Competitiveness: India is ranked 18th in terms of price competitiveness.
    • Transport Infrastructure: It stands at 26th for air transport and 25th for ground and port infrastructure.
    • Resource Ranking: India is 6th in natural resources, 9th in cultural resources, and 9th in non-leisure resources.
    • TTDI Score Change: India’s overall TTDI score decreased by 2.1% compared to its 2019 level.
    • Decline in Sustainability Performance: India has seen a decline in sustainability performance relative to 2019 but still performs well due to the prevalence of sustainable long stays among inbound visitors.

    About Travel & Tourism Development Index (TTDI)

    • The TTDI was compiled in collaboration with the World Economic Forum (WEF) and the University of Surrey in the United Kingdom (UK).
    • TTDI 2024 is the second edition, evolved from the Travel & Tourism Competitiveness Index (TTCI) series, a flagship index of WEF that has been in production since 2007.
    • TTDI 2024 covered 119 countries’ travel and tourism sectors across various factors and policies.

    Back2Basics: World Economic Forum (WEF)

    Description
    Establishment Founded in 1971 by Swiss-German economist Klaus Schwab in Geneva, Switzerland.
    Purpose To bring together public and private sector leaders to address global political, social, and economic issues.
    Membership Introduced in 1975, membership includes the world’s top 1,000 companies.
    Scope Expansion Initially focused on European firms catching up with US management practices, expanded to encompass broader economic and social issues.
    Birth of the G20 The concept of the G20, focusing on global finance and comprising 20 countries, emerged from discussions at the WEF in 1998.
    Key Reports Published
    • Global Competitiveness Report
    • Global Risks Report
    • Global Gender Gap Report
    • Global Human Capital Report
    • Global Information Technology Report
    • Future of Jobs Report
    • Global Enabling Trade Report

    Trick: Reports beginning with the name ‘Global’.

    World level recovery in travel and tourism:

    • Sector Recovery: International tourist arrivals and the sector’s contribution to global GDP are expected to return to pre-pandemic levels in 2024.
    • Regional Recovery: West Asia exceeded its 2019 tourist arrival levels by 20%, while Europe, Africa, and the Americas are recovering robustly, each reaching about 90% of their 2019 levels.

    PYQ:

    [2019] The Global Competitiveness Report is published by the:

    (a) International Monetary Fund

    (b) United Nations Conference on Trade and Development

    (c) World Economic Forum

    (d) World Bank

    Practice MCQ:

    The Travel & Tourism Development Index (TTDI) is released by:

    1. International Air Transport Association (IATA)
    2. World Tourism Foundation (WTF)
    3. World Economic Forum
    4. World Bank

  • A vegetable triumvirate, inflation, and the takeaway

    Why in the News?

    The price fluctuations and Inflation trends in recent market underscore the necessity for Targeted Policy Interventions and a comprehensive grasp of Agricultural Supply Chains.

    The Significance of Vegetable Triumvirate (trio):

    • Tomato, Onion, and Potato (TOP) aren’t just statistical entities but essential ingredients in Indian cuisine, forming the backbone of many dishes.
    • These vegetables represent more than just a portion of the CPI basket; they embody cultural and dietary preferences deeply ingrained in Indian culinary traditions.

    Volatility and its role in shaping Inflation trends by TOP vegetables:

    Vegetable prices in India rose by approximately 15% year-on-year, indicating significant inflation in this category.

    • Highly Volatile: There was notable volatility in vegetable prices, with a sharp decrease of 0.7% in June followed by a substantial increase of 37.4% in July.
    • High Contribution to Inflation: Despite vegetables weighing only 6% in the total CPI basket, their contribution to inflation was about 30% in Feb/March 2024.
      • For example, Tomatoes having a weight of only 0.6% in the CPI basket, prices soared by 202% in July 2023, contributing to 18.1% of the total headline inflation.
      • The contribution of vegetables to headline inflation was 31.9%, with TOP (tomato, onion, and potato) contributing 17.2%, further highlighting their substantial impact on inflation trends.

    Navigating Culinary and Economic Realities (Challenges):

    • Policy Challenges: The volatility in TOP prices underscores the need for effective policy interventions, including agricultural value chain reforms and improved storage facilities to stabilize prices and support farmers.
    • Farmers’ Plight: Farmers, who are often net buyers of these crops, bear the brunt of price fluctuations, necessitating measures like Minimum Support Prices to ensure their livelihoods are protected.
    • Government Response: Despite protests and demands from farmers, policy responses have been inconsistent, relying on short-term measures like export bans rather than addressing underlying structural issues in the agricultural sector.

    Way forward:

    • Need for Value Chain Reforms: Implement reforms aimed at improving the efficiency and resilience of agricultural value chains for TOP vegetables.
    • Need Price Stabilization Mechanisms: Introduce mechanisms to stabilize prices of TOP vegetables, such as market interventions, buffer stocks, or price ceilings during periods of extreme volatility. This can help mitigate the impact of price fluctuations on consumers and farmers alike.
    • Minimum Support Prices (MSPs): Establish MSPs for TOP vegetables to provide farmers with a guaranteed floor price for their produce.

    Mains PYQ:

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

  • 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)