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Subject: Economics

  • Self-Regulatory Organizations (SROs) in the Fintech Sector

    sro

    Central Idea

    • In the rapidly evolving landscape of the fintech sector, the Reserve Bank of India (RBI) Governor has called upon fintech entities to establish Self-Regulatory Organizations (SROs).

    What is an SRO (Self-Regulatory Organization)?

    • An SRO is a non-governmental entity entrusted with the task of formulating and enforcing rules and standards governing the behaviour of participants within a specific industry.
    • The primary objective of an SRO is to safeguard consumer interests, uphold ethical practices, promote equality, and nurture professionalism within the industry.
    • Typically, SROs collaborate with all industry stakeholders to establish and administer regulations.

    Key Characteristics of an SRO

    • Impartial Governance: SROs maintain impartial mechanisms to oversee self-regulatory processes, ensuring that industry members operate within a disciplined framework and accept penalties when necessary.
    • Beyond Industry Interests: SROs extend their concerns beyond the narrow interests of the industry itself. They aim to protect not only industry players but also workers, customers, and other participants in the ecosystem.
    • Supplement to Existing Regulations: While SROs formulate regulations, standards, and mechanisms for dispute resolution and enforcement, they do not replace applicable laws or government regulations. Instead, they complement existing legal frameworks.

    Functions of an SRO

    • Communication Channel: SROs serve as intermediaries between their members and regulatory authorities like the RBI, facilitating two-way communication.
    • Establishment of Standards: SROs work to establish minimum benchmarks and industry standards, fostering professionalism and healthy market behavior among their members.
    • Training and Awareness: SROs provide training to their members’ staff and conduct awareness programs to promote industry best practices.
    • Grievance Redressal: They establish uniform grievance redressal and dispute management frameworks to resolve issues within the industry.

    Why is an SRO Necessary?

    • As the fintech sector continues to evolve, SROs can play a pivotal role in ensuring the industry’s responsible growth and maintaining ethical standards.
    • They address critical issues such as market integrity, conduct, data privacy, cybersecurity, and risk management.
    • SROs contribute to building trust among consumers, investors, and regulators.

    RBI’s Expectations from Fintech Players

    • The Reserve Bank of India expects fintech companies to:
    1. Evolve industry best practices and privacy/data protection norms in compliance with local laws.
    2. Set standards to prevent mis-selling and promote ethical business practices.
    3. Ensure transparency in pricing.
    • RBI Governor has encouraged fintechs to establish an SRO voluntarily.

    Benefits of an SRO

    • Industry Expertise: SROs possess deep industry knowledge, making them valuable contributors to industry discussions and educational initiatives.
    • Standardized Conduct: SROs promote a standardized code of conduct that encourages ethical business practices, ultimately boosting confidence in the industry.
    • Watchdog Role: SROs act as watchdogs, preventing unprofessional and unethical practices within the industry.

    Conclusion

    • In the dynamic fintech sector, Self-Regulatory Organizations (SROs) emerge as indispensable entities.
    • Their role in shaping industry behaviour, promoting ethical conduct, and safeguarding consumer interests cannot be overstated.

  • Do subsidies and safety nets take focus away from generating jobs?

    What’s the news?

    • India’s impressive economic growth numbers have not translated into a commensurate increase in employment opportunities.

    Central idea

    • Despite India’s impressive economic growth numbers, employment has not seen a commensurate increase. With five states heading to the polls at the end of the year, political parties are making various promises to address concerns about rising essential commodity prices. However, the question arises: Are these promises merely distractions from the systemic issue of jobless growth?

    Promises vs. Solutions: Are Electoral Promises Diverting Attention from Jobless Growth?

    • Unemployment’s Stark Reality: India’s economic growth stands in stark contrast to the persistent issue of unemployment, particularly among educated youth.
    • Varied Electoral Promises: Political parties have introduced a range of electoral promises, including measures like providing cheaper gas cylinders and farm loan waivers. These promises often vary in their impact and effectiveness.
    • State-specific Examples: In states like Chhattisgarh and Madhya Pradesh, where unemployment is a significant concern, electoral promises such as the Old Pension Scheme (OPS) may not effectively address the broader issue.

    Agriculture’s Predicament: Can Supply Chain Vulnerabilities and Non-Remunerative Prices be Effectively Addressed?

    • Critical Supply Chain Resilience: The agriculture sector, India’s largest employer, grapples with issues like supply chain vulnerabilities. These vulnerabilities can be exacerbated by factors such as climate change.
    • Transforming Agricultural Output: To tackle the challenge of non-remunerative prices for produce, technological interventions aimed at converting agricultural output into higher-value products are proposed as long-term solutions.
    • Palliatives Amidst Inflation Concerns: In some states like Chhattisgarh, promises like providing ₹1,500 a month for women in distress are seen as addressing purchasing power issues. However, concerns about potential inflation due to such measures must be taken into account.

    Fiscal Responsibility and Unemployment: Is There a Correlation?

    • The Paradox of Fiscal Responsibility: States like Haryana, which strictly adhere to fiscal responsibility guidelines, continue to face high unemployment rates. This paradox highlights the complex relationship between populist policies and fiscal distress.
    • Emphasis on Revenue Mobilization: To effectively implement populist policies, a focus on revenue mobilization efforts is crucial. It’s necessary to ensure that such policies do not strain state finances in the long run.

    Do subsidies and safety nets take focus away from generating jobs?

    • Immediate Relief vs. Long-term Employment:
    • Subsidies and safety nets offer immediate relief to vulnerable sections of the population, addressing issues like distress and purchasing power.
    • However, there is a concern that an overemphasis on such measures may shift focus away from the more significant task of generating sustainable employment opportunities.
    • Balancing Priorities:
    • Balancing the need for immediate relief with the long-term goal of job creation is a complex challenge.
    • While subsidies and safety nets serve a critical purpose, they must be complemented with policies and strategies that promote job generation, particularly in sectors that can absorb the workforce effectively.
    • Policy Design and Implementation:
    • Effective policymaking should aim to strike a balance between providing immediate support and fostering job growth.
    • It is essential to design policies that not only address the distress of vulnerable populations but also contribute to sustainable economic development by generating employment opportunities.

    Rethinking Economic Growth: Beyond GDP and Toward Employment

    • Shifting the Focus from GDP: A Shift away from the Traditional Obsession with GDP Growth It emphasizes that economic growth should be intertwined with employment generation to make a meaningful impact on the lives of citizens.
    • Exploring New Avenues: Rather than investing heavily in high-tech industries like semiconductor manufacturing, the article suggests exploring sectors such as mining for the energy transition. Mining can create local jobs, particularly benefiting marginalized communities and addressing unemployment.

    Conclusion

    • Addressing jobless growth in India requires a nuanced approach. While populist promises serve as palliatives in the absence of structural solutions, the focus should shift towards inclusive growth, technological interventions, and employment-centric policies that tackle supply chain vulnerabilities and promote sustainable economic development.

  • NPCI Unveils Innovative UPI Features

    upi

    Central Idea

    • The National Payments Corporation of India (NPCI) has introduced a range of groundbreaking features on the popular Unified Payments Interface (UPI) platform.

    Hello! UPI: Voice-Enabled UPI Payments

    • Hello! UPI, a remarkable addition, facilitates voice-enabled UPI payments in Hindi and English.
    • Users can make UPI payments through voice commands via apps, telecom calls, and IoT devices.
    • Future plans include expanding this feature to support several regional languages, further enhancing accessibility.

    Credit Line on UPI:  Streamlined Access to Credit

    • The RBI Governor introduced Credit Line on UPI, an initiative aimed at promoting financial inclusion and innovation.
    • This offering allows users to access pre-sanctioned credit from banks via UPI, simplifying the credit acquisition process.
    • Features include interest-free credit periods, defined charges, and seamless customer engagement channels.
    • The goal is to expedite the credit access process, driving economic growth and digital banking efficiency.

    UPI LITE X:  Offline Money Transfers

    • UPI LITE X introduces offline money transfers, enabling users to send and receive funds even without internet connectivity.
    • This feature empowers transactions in areas with poor network coverage.
    • UPI LITE payments are known for their speed and efficiency, making them a preferred choice for users.

    UPI Tap & Pay:  Convenience Redefined

    • UPI Tap & Pay offers a new way to complete payments at merchant locations.
    • In addition to traditional scan-and-pay, users can now tap Near Field Communication (NFC)-enabled QR codes.
    • This feature enhances convenience, making transactions swift and effortless.

    Conversational Payments:  AI-Enabled Transactions

    • Conversational UPI Payments and Conversational Bill Payments represent a paradigm shift in human-machine interaction.
    • These AI-enabled transactions aim to deepen the adoption of digital payments across India.
    • Users can make voice-enabled UPI payments through UPI Apps, telecom calls, and IoT devices in Hindi, English, and regional languages.
    • NPCI has collaborated with AI4Bharat at IIT Madras to develop language models for Hindi and English payments.

    BillPay Connect:  Simplified Bill Payments

    • BillPay Connect introduces a nationalized number for bill payments across India.
    • Customers can conveniently fetch and pay bills through messaging apps with a simple ‘Hi.’
    • Even users without smartphones or immediate data access can pay bills via a missed call, followed by a verification call.
    • Voice Assisted Bill Payments via smart home devices offer added convenience and instant confirmation.
    • This innovation enhances security and reassurance for both customers and collection centers.

    Conclusion

    • These pioneering features unveiled by NPCI mark a significant leap in India’s digital payment landscape.
    • They not only enhance accessibility but also redefine convenience, making digital transactions more user-friendly.
    • With innovative offerings like voice-enabled payments and streamlined credit access, NPCI continues to play a pivotal role in India’s technological advancement.
    • The journey towards a digitally empowered India takes a giant stride forward with these game-changing UPI features.

  • Unemployment: Measurement Challenges in Developing Economies

    Central Idea

    • The Periodic Labour Force Survey (PLFS) in 2017 revealed India’s highest-ever recorded unemployment rate at 6.1%.
    • The 2021-22 PLFS indicated a reduction to 4.1%, still higher than some developed economies like the U.S., where unemployment rates varied from 3.5% to 3.7% between July 2022 and July 2023.
    • Comparing India and the U.S. unemployment rates is complex due to their vastly different economies.

    unemployment

    About Periodic Labour Force Survey (PLFS)

    Established 2017 (The PLFS was initiated in 2017 as part of the larger National Sample Survey (NSS) program)
    Administered by National Sample Survey Office (NSSO), Ministry of Statistics and Programme Implementation, Government of India
    Objective To collect data on labor force participation, employment, and unemployment in India.
    Key Data Collected – Workforce Participation

    – Employment Types and Sectors

    – Unemployment

    – Demographic and Socioeconomic Characteristics
    Significance Provides vital information for policymaking, research, and analysis related to the labor market in India.
    Frequency Periodic surveys conducted at regular intervals.

     

    Defining Unemployment

    • Unemployment, as per the International Labour Organization (ILO), involves being jobless, available for work, and actively seeking employment.
    • The unemployment rate is the ratio of the unemployed to the labor force, but it can decrease if the economy lacks job creation or people stop job hunting.

    Measuring Unemployment in India

    • In developing economies, like India, social norms can limit job search decisions.
    • The 2009-10 National Sample Survey Organisation (NSSO) survey revealed that many women who engaged in domestic work would work if opportunities were available within their households but are not considered unemployed since they aren’t actively seeking jobs.
    • Measuring unemployment in India is complicated due to the informal job market, where individuals hold various roles throughout the year.

    Different Metrics for Classification

    • The Usual Principal and Subsidiary Status (UPSS) and the Current Weekly Status (CWS) are two major measures for classifying individuals in India.
    1. UPSS considers an individual employed even if they worked for more than 30 days in a subsidiary role.
    2. CWS counts an individual as employed if they worked at least one hour on one day within the past week.
    • UPSS typically yields lower unemployment rates than CWS since finding work over a year is more likely than in a week.

    Impact of Informal Economy

    • The low bar for classifying individuals as employed means that unemployment rates are lower in rural areas than urban regions in agrarian economies.
    • Definitions may ‘underestimate’ unemployment but are designed to capture the informal economy’s nuances.

    The Lockdown Effect

    • The lockdown in March 2020 disrupted the Indian economy, but PLFS unemployment rates did not reflect this immediately.
    • UPSS status may still consider those who lost jobs during the lockdown as employed if they spent most of the previous year working.
    • CWS criteria show higher unemployment rates due to shorter reference periods but may not fully capture the long-term impact of the lockdown when aggregated across different periods.

    Conclusion

    • Unemployment is becoming a significant factor in upcoming elections, making it crucial to understand its definition and measurement complexities in developing economies.

  • VGF Scheme for Battery Infrastructure

    Central Idea

    Viability Gap Funding (VGF) Scheme

    • VGF means a grant to support projects that are economically justified but not financially viable.
    • The VGF scheme was launched in 2004 to support projects that come under Public-Private Partnerships.
    • The scheme is designed as a Plan Scheme to be administered by the Ministry of Finance and amount in the budget are made on a year-to-year basis.
    • Such a grant under VGF is provided as a capital subsidy to attract the private sector players to participate in PPP projects that are otherwise financially unviable.
    • Projects may not be commercially viable because of the long gestation period and small revenue flows in future.

    VGF for Battery Infrastructure

    • This scheme aims to create 4,000 megawatt hours (MWh) of BESS projects by 2030-31, offering financial support of up to 40% of the capital cost in the form of VGF.
    • It is expected to lower battery storage costs, enhancing their practicality.
    • Designed to leverage renewable energy sources like solar and wind power, the scheme aims to provide clean, dependable, and cost-effective electricity to the public.

    How would it work?

    • By offering VGF support, the scheme targets achieving a levelised cost of storage (LCoS) ranging from ₹5.50-6.60 per kilowatt-hour (kWh).
    • It would thus make stored renewable energy a viable option for managing peak power demand across the country.
    • The VGF disbursement will occur in five stages linked to BESS project implementation milestones.

    Benefits to Consumers and Infrastructure

    • To ensure consumer benefits, a minimum of 85% of BESS project capacity will be allocated to distribution companies (Discoms).
    • This strategy enhances renewable energy integration into the electricity grid, minimizes wastage, and optimizes transmission network usage, reducing the need for costly infrastructure upgrades.
    • This approach stimulates healthy competition and encourages BESS ecosystem growth, drawing substantial investments and generating opportunities for related industries.

  • SEBI to introduce One-Hour Trade Settlement

    Central Idea

    • SEBI aims to implement a One-Hour trade Settlement by March 2024.
    • Additionally, an Application Supported by Blocked Amount (ASBA)-like facility for secondary market trading is anticipated to launch in January 2024.

    Do you know?

    India is the first jurisdiction in the globe that has moved to T+1 settlement (trade plus one day).  We are now talking about one-hour settlement and that will be a stepping-stone to instantaneous settlement.

    Understanding Trade Settlement

    • Trade settlement involves the exchange of funds and securities on the settlement date.
    • It is considered complete when purchased securities are delivered to the buyer, and the seller receives the funds.
    • India transitioned to a T+1 settlement cycle earlier this year, facilitating faster fund transfers, share deliveries, and operational efficiency.

    SEBI’s Stance

    • SEBI believes that achieving instantaneous trade settlement will take additional time due to necessary technology development.
    • Therefore, SEBI plans to implement a one-hour trade settlement before the instantaneous settlement.
    • SEBI expects instantaneous trade settlement to be launched by the end of 2024.

    Benefits of One-Hour Trade Settlement

    • In the current T+1 settlement cycle, the seller receives funds in their account the day after a trade.
    • With one-hour settlement, the seller would receive funds within an hour of selling shares, and the buyer would have shares in their demat account within an hour.

    Back2Basics: T+1 Settlement Cycle

    • The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
    • For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
    • This is different from T+2, where they will be settled on Friday.
    • As many as 256 large-cap and top mid-cap stocks, including Nifty and Sensex stocks, come under the T+1 settlement.
    • Until 2001, stock markets had a weekly settlement system.
    • The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003.
    • In 2020, Sebi deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.

  • Strengthening export control measures for Dual-Use Items

    dual-use items

    Central Idea

    • The government has recently announced its commitment to enhancing the control of dual-use items to prevent their misuse by non-state actors and terrorists.
    • Dual-use items refer to goods that can be utilized for both civilian and military purposes.

    Understanding Dual-Use Items

    • Dual-use items are commodities with the potential for application in both civilian and military contexts.
    • They are heavily regulated due to their capacity to be initially intended for civilian use and later repurposed for military or even terrorist activities.
    • Some examples include global positioning satellites, missiles, nuclear technology, chemical and biological weapons, night vision technology, thermal imaging equipment, specific models of drones, precision-engineered aluminium pipes, and certain types of ball bearings.

    Control Mechanisms for Dual-Use Items

    • International Cooperation: Most industrialized nations have established export controls on specific categories of designated dual-use technologies.
    • Multilateral Agreements: Various international treaties and agreements govern the export of these items.
    • India’s Participation: India is a signatory to major multilateral export control regimes like the Missile Technology Control Regime (MTCR), Wassenaar Arrangement (WA), Australia Group (AG), and Nuclear Suppliers Group (NSG). It is also party to key conventions such as the Chemical Weapons Convention (CWC) and Biological and Toxic Weapons Convention (BWC).
    • DGFT’s Role: In India, the Director General of Foreign Trade (DGFT) plays a pivotal role as a facilitator of exports and imports. The DGFT maintains a specialized list known as SCOMET (Specialty Chemicals, Organisms, Materials, Equipment, and Technologies) to regulate dual-use items.

    What is the SCOMET List?

    • SCOMET item is an acronym for Special Chemicals, Organisms, Materials, Equipment, and Technologies.
    • These are dual-use items that can be used for both civilian and military applications. India’s Foreign Trade Policy regulates the export of items on the SCOMET List.
    • Exporting these items and technologies falls under strict regulations. It can either be prohibited or permitted only under a license.
    • The SCOMET control list aligns with the control lists of various multilateral export control regimes and conventions.

    Necessity of Controlling Dual-Use Items

    • India’s Commitment: India is firmly committed to non-proliferation efforts related to dual-use items.
    • Integral Component: Export control over these items forms an integral part of India’s broader export control system.
    • Compliance: It ensures that sensitive and dual-use goods, including those covered by the Missile Technology Control Regime (MTCR), are traded in full compliance with India’s obligations under various international regimes.

    Conclusion

    • The government’s commitment to enhancing export control measures for dual-use items reflects its dedication to global non-proliferation efforts and the responsible trade of sensitive technologies.
    • Collaborative efforts among governments, industries, and stakeholders remain crucial in achieving effective export control of these items.

  • Urban Cooperative Banks (UCBs): Concerns and Considerations

    Central Idea

    • The Reserve Bank of India (RBI) Governor recently addressed the issues and vulnerabilities surrounding Urban Cooperative Banks (UCBs), highlighting the importance of addressing these concerns.

    What are Urban Cooperative Banks (UCBs)?

    • UCBs are primary cooperative banks primarily situated in urban and semi-urban areas, catering to the financial needs of small borrowers and businesses.
    • They are governed by the Banking Regulations Act, 1949, the Banking Laws (Cooperative Societies) Act, 1955, and registered under the Cooperative Societies Act of the respective State.
    • Initially, UCBs were permitted to lend exclusively for non-agricultural purposes; however, they have diversified their size and operations since 1996.
    • Approximately 79% of UCBs are concentrated in five states: Andhra Pradesh, Gujarat, Karnataka, Maharashtra, and Tamil Nadu.

    Types of UCBs

    UCBs are categorized into different tiers by the RBI based on their deposit size:

    • Tier 1: Deposits up to Rs 100 crore.
    • Tier 2: Deposits ranging from Rs 100 to 1,000 crore.
    • Tier 3: Deposits between Rs 1,000 to Rs 10,000 crore.
    • Tier 4: Deposits exceeding Rs 10,000 crore.

    Key concerns/addresses raised by RBI

    (1) Operational Stability

    • UCBs must enhance their financial and operational resilience to contribute to the overall stability of the financial and banking sector.
    • The quality of governance within UCBs plays a pivotal role in ensuring the stability of these individual banks.

    (2) Setting up right priorities

    • Boards and directors of UCBs must prioritize integrity and transparency in financial reporting, refraining from innovative accounting practices that obscure the actual financial position.
    • Proactive management of Asset Liability is essential to manage liquidity risk systematically.
    • Establishing robust IT and cybersecurity infrastructure, along with the availability of necessary skills at the bank level, is crucial.
    • Governance practices, especially those related to Compliance, Risk Management, and Internal Audit, need strengthening.

    (3) Functioning of Boards

    • Ensuring directors possess adequate skills and expertise.
    • Constituting a professional board of management.
    • Considering the diversity and tenure of board members.
    • Promoting transparent and participatory board discussions.
    • Ensuring the effective functioning of board-level Committees.

    (4) Credit Risk Management

    • Upholding risk management through robust underwriting standards.
    • Implementing effective post-sanction monitoring.
    • Timely recognition and mitigation of emerging stress.
    • Pursuing follow-ups with large Non-Performing Asset (NPA) borrowers to facilitate recovery and maintain adequate provisioning.

    Conclusion

    • Addressing the concerns and vulnerabilities in Urban Cooperative Banks is vital for the overall stability and resilience of the banking sector.
    • The RBI’s recommendations highlight the importance of governance, risk management, and transparency in ensuring the health of UCBs.

  • The tax base is growing – government shouldn’t waste the opportunity

    What’s the news?

    • India sees a surge in taxpayer base amidst tax policy challenges; a stable tax-to-GDP ratio raises questions on fiscal maneuverability and economic growth prospects.

    Central idea

    • In the lead-up to each budget, the Union government cites limited tax revenues as a spending constraint. Recent years have seen a surge in direct and indirect tax payers, challenging the idea that only a small segment contributes. This should ideally raise the tax-to-GDP ratio, yet tax rate cuts and pandemic disruptions have limited fiscal gains, hinting at a deliberate shift to a low-tax regime.

    What is meant by fiscal maneuverability?

    • It refers to the government’s ability to adjust its revenue and expenditure policies in response to changing economic conditions, budget constraints, and policy goals.

    What is Tax-to-GDP Ratio?

    • The Tax-to-GDP ratio is a financial indicator that measures the total tax revenue collected by a government as a percentage of its overall GDP for a specific period, typically a fiscal year.
    • This ratio is used to assess the level of taxation relative to the size of the economy.
    • A higher Tax-to-GDP ratio suggests that a larger portion of a nation’s economic output is being collected in the form of taxes.

    What Factors Have Led to the Government’s Limited Fiscal Maneuverability Before Budgets?

    • The common refrain: Historically, the Union government has often cited its limited tax revenues as a significant constraint on its ability to maneuver effectively in the run-up to budgets.
    • Steady increase in tax base: It’s noteworthy that there has been a consistent increase in both direct and indirect tax payers over recent years.
    • Economic context: This expansion in the tax base has occurred during a phase of slower, uneven economic growth.
    • Impact of tax cuts and disruptions: Despite the increase in taxpayers, cuts in both direct and indirect tax rates (including GST) and pandemic-induced economic disruptions have limited the fiscal gains from this surge in taxpayers.

    How Has the Taxpayer Base Evolved in Recent Years?

    • Growth in the taxpayer base: The tax base has shown substantial growth in recent years, challenging the belief that only a small section of society pays taxes.
    • Direct tax base expansion: The number of companies paying tax grew by about 43 percent, from 7.46 lakh to 10.7 lakh, between the assessment years 2014–15 and 2022–23.
    • Individual taxpayers: Individual taxpayers increased by 65 percent over the same period, rising from 5.38 crore to 8.9 crore.
    • Role of small taxpayers: It’s important to note that a significant number of these new tax payers have incomes less than Rs 5 lakh.

    Trends and Factors in the Expansion of the Indirect Tax Base

    • Indirect tax base growth: The number of active GST payers increased from 1.2 crore in 2019 to 1.4 crore by June 2023.
    • Composition: About 80 percent of these taxpayers are proprietorships, with another 10 percent being partnerships.
    • Incentives for registration: Smaller establishments are incentivized to register under GST to avail of the input tax credit.
    • Indirect tax impact: The growth in the indirect tax base may also be influencing the increase in direct tax payers.

    Impact of Tax Rate Reductions

    • Corporate tax rate reduction: In September 2019, the government announced a cut in the corporate tax rate for existing companies from 30 percent to 22 percent.
    • Impact on revenue: As per government figures, the revenue loss on account of this corporate tax reduction was Rs 1.28 lakh crore in 2019–20 and Rs 1 lakh crore in 2020–21.
    • Corporate tax-to-GDP ratio: The corporate tax-to-GDP ratio declined from 3.5 percent in 2018–19 to around 3.1 percent by 2022–23.
    • Personal income tax rebates: In the interim budget of 2019, the government announced that individual taxpayers with taxable income up to Rs 5 lakh would get a full tax rebate.
    • Personal income tax-to-GDP ratio: The personal income tax-to-GDP ratio increased from 2.5 percent in 2018–19 to 3 percent by 2022–23.
    • Increase in zero tax liability: Notably, the number of individuals with zero tax liability also increased from 2.9 crore in 2019–20 to 5.16 crore in 2022–23, which may limit the gains from an expansion in the tax base.

    What are the challenges?

    • Revenue Sustainability: A challenge arises in ensuring that the gains from an expanding tax base translate into sustainable revenue streams. Despite the increase in taxpayers, tax cuts and disruptions may limit the fiscal benefits.
    • Tax Evasion and Avoidance: Addressing tax evasion and avoidance remains a significant challenge. Although the formalization of the economy makes tax evasion more complicated, it requires effective measures to combat tax evasion further.
    • Balancing Tax Cuts: The reduction in tax rates, such as the corporate tax cut, has implications for government revenue. Striking a balance between encouraging economic growth through lower taxes and maintaining adequate fiscal resources is a constant challenge.
    • Targeted Spending: As the government’s fiscal space expands with a growing tax base, it faces the challenge of allocating resources effectively. Prioritizing and targeting spending on key development objectives while avoiding wasteful expenditures is essential.

    Future Prospects

    • Fiscal Sustainability: With an expanding economy and tax base, there is potential for improved fiscal sustainability. If managed effectively, this can provide the government with more resources to meet its long-term financial commitments.
    • Development Opportunities: The growth in the tax base offers opportunities for increased public investment in critical sectors, fostering economic development, and improving the overall quality of life for citizens.
    • Reduced Reliance on Borrowing: An increased tax base can reduce the government’s reliance on borrowing to meet budgetary needs, potentially leading to lower interest payments and debt management challenges.
    • Incentive for Formalization: As more individuals and businesses enter the tax net, there’s a natural incentive for greater formalization of the economy. This can reduce the size of the informal sector and promote economic stability.
    • Policy Flexibility: A broader tax base can provide the government with greater policy flexibility. It can consider adjustments to tax rates, exemptions, and deductions to support specific policy goals, such as promoting investment or addressing income inequality.
    • Enhanced Economic Growth: With appropriate fiscal policies, the increased revenue potential from a growing tax base can contribute to sustained economic growth, job creation, and poverty reduction.

    Conclusion

    • The government’s strategic choices regarding tax rates have influenced the country’s tax landscape, expanded the taxpayer base while maintained stable tax-to-GDP ratios. As India’s economy continues to evolve, these gains should not be squandered through excessive giveaways but rather strategically allocated to promote sustainable development and economic growth.

  • UPI-CBDC Interoperability: Advancing Retail Digital Rupee Adoption

    upi-cbdc

    Central Idea

    • The convergence of Unified Payments Interface (UPI) Quick Response (QR) codes with Central Bank Digital Currency (CBDC) applications is set to revolutionize digital transactions in India.
    • This strategic integration enables users of the retail digital rupee to seamlessly transact using UPI QR codes, making transactions convenient for both customers and merchants.

    Understanding Interoperability

    • Interoperability refers to the technical compatibility that allows different payment systems to function together.
    • It empowers various payment systems to process transactions across platforms, contributing to efficiency, innovation, and adoption for end-users.

    UPI QR Code-CBDC Interoperability: Explained

    The Reserve Bank of India (RBI) is driving this interoperability between UPI and CBDC as part of its ongoing pilot project for the retail digital rupee (e₹-R).

    • Initially, e₹-R users required a specific QR code for transactions.
    • With UPI-CBDC interoperability, any UPI QR code becomes compatible with CBDC apps.
    • The digital rupee, issued by RBI, is a tokenized digital version of the rupee stored in a digital wallet linked to a savings bank account.
    • UPI, directly linked to a user’s account, can now transact seamlessly with CBDC.

    Benefits for Customers and Merchants

    The convergence of UPI and CBDC yields several advantages:

    • Customers can use a single QR code for various transactions, eliminating the need for multiple platforms.
    • Daily essentials like groceries and medicines can be purchased using any UPI QR code.
    • Merchants can accept CBDC payments without creating separate QR codes.
    • Transactions are streamlined and efficient, enhancing the user experience.

    Enhancing CBDC Adoption

    The UPI-CBDC interoperability leverages the widespread use of UPI to boost digital rupee adoption.

    • More than 70 mobile apps and 50 million merchants already accept UPI payments.
    • Integrating UPI with CBDC simplifies transactions, increasing the digital rupee’s utility.
    • Prominent banks like State Bank of India, HDFC Bank, and Axis Bank have introduced UPI interoperability on their digital rupee platforms.
    • This seamless integration is expected to transform the digital currency landscape, driving its acceptance and utilization.

    Conclusion

    • The UPI-CBDC interoperability marks a significant milestone in India’s digital payment ecosystem.
    • By merging the familiarity of UPI with the innovation of CBDC, the retail digital rupee becomes more accessible, user-friendly, and efficient.
    • This strategic integration is poised to accelerate the adoption of digital currencies, reshaping the way transactions are conducted in the country.