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Subject: Economics

  • What are AT-1 Bonds?

    Central Idea

    • Subscription Disappointment: State Bank of India (SBI)’s additional tier-1 (AT-1) bond issue saw a very low response from investors, raising ₹3,101 crore against an issue size of ₹10,000 crore.
    • Market Sentiment Impact: The lackluster response is expected to dampen market sentiment and make fundraising more challenging for other PSU banks, potentially leading to delays in their fundraising plans.

    What are AT1 Bonds?

    • Definition: AT-1 bonds, or Additional Tier-1 bonds, are unsecured, perpetual bonds issued by banks to strengthen their core capital base in compliance with Basel-III norms.
    • Complex Hybrid Instruments: AT-1 bonds are complex instruments suited for institutions and knowledgeable investors who can analyze their terms and determine if the higher rates compensate for the higher risks involved.
    • Face Value: Each AT-1 bond typically carries a face value of ₹10 lakh.
    • Acquisition Routes: Retail investors can acquire these bonds through initial private placement offers by banks or by purchasing already-traded AT-1 bonds in the secondary market based on broker recommendations.

    Key Features and Importance of AT1 Bonds

    • Perpetual Nature: AT-1 bonds do not have a maturity date. Instead, they include call options that allow banks to redeem them after a specific period, usually five or ten years. Banks can choose to pay only interest indefinitely without redeeming the bonds.
    • Flexibility in Interest Payments: Banks issuing AT-1 bonds can skip interest payouts or even reduce the bonds’ face value if their capital ratios fall below certain thresholds specified in the offer terms.
    • Regulatory Intervention: If a bank faces financial distress, the RBI has the authority to ask the bank to cancel its outstanding AT-1 bonds without consulting the investors.

    Back2Basics: Basel Norms

    • Basel is a city in Switzerland and the headquarters of the Bureau of International Settlement (BIS).
    • The BIS fosters cooperation among central banks to achieve financial stability and common standards of banking regulations.
    • Basel guidelines are broad supervisory standards formulated by the Basel Committee on Banking Supervision (BCBS).
    • The Basel accord is a set of agreements by the BCBS that primarily focuses on risks to banks and the financial system.
    • The purpose of the Basel accord is to ensure that financial institutions maintain sufficient capital to meet obligations and absorb unexpected losses.
    • India has accepted the Basel accords for its banking system.

     

    Basel I Basel II Basel III
    Year Introduced 1988 2004 2010
    Focus Credit Risk Credit, Market, Operational Risks Capital, Leverage, Funding, Liquidity
    Capital Requirement Fixed at 8% of Risk-Weighted Assets (RWA) Minimum Capital Adequacy Requirement of 8% of Risk Assets Strengthening capital requirements
    Pillars – 1. Capital Adequacy Requirements 2. Supervisory Review 3. Market Discipline –
    Objective Define capital and risk weights for banks Encourage better risk management and disclosure Promote a more resilient banking system
    Implementation in India Adopted in 1999 Yet to be fully implemented March 2019 (postponed to March 2020 due to COVID-19)
    Key Parameters – – Capital: 12.9% capital adequacy ratio, Tier 1 and Tier 2 capital ratios, capital conservation buffer, and counter-cyclical buffer; Leverage: minimum 3% leverage rate; Funding and Liquidity: LCR and NSFR ratios

     

  • Why normative recommendations of finance commissions remain on paper

    finance

    What is the news?

    • This article critically examines the historical outcomes of the 13th FC and underscores the need for realistic expectations regarding the forthcoming 16th FC

    Central idea

    • The Finance Commissions (FC) in India play a crucial role in determining the fiscal framework for resource allocation between the Union and state governments. Established under Article 280 of the Constitution, the FCs provide recommendations on vertical devolution, horizontal distribution, and grants-in-aid. However, the effectiveness of these recommendations in achieving their intended objectives remains a matter of contention

    Purpose and Scope of Finance Commissions

    • Finance Commissions are constituted under Article 280 of the Constitution and their recommendations encompass three key areas: vertical devolution, horizontal distribution, and grant-in-aid.
    • Vertical devolution focuses on Union to state transfers
    • Horizontal distribution involves the allocation of resources between states based on a specific formula.
    • Grant-in-aid, covered under Article 275, provides financial assistance to states deemed in need.
    • It is important to note the distinction between grants and grant-in-aid, as the latter operates at arm’s length and offers more flexibility in terms of control.

    Recommendations of the previous Finance Commission

    13th Finance Commission Recommendations:

    • Increase the number of court working hours using existing infrastructure.
    • Enhance support to Lok Adalats.
    • Provide additional funding to State Legal Services Authorities to enhance legal aid for the marginalized.
    • Promote the use of Alternative Dispute Resolution (ADR) mechanisms.
    • Enhance the capacity of judicial officers and public prosecutors through training programs.
    • Support the creation of a judicial academy in every state for training purposes.
    • Allocate funds for the setting up of specialized courts.

    15th Finance Commission Recommendations:

    • Gather quantifiable data on the level of various services available in different states.
    • Collect corresponding unit cost data to estimate cost disabilities among states.
    • Fill gaps in statistical data through the efforts of the Ministry of Statistics.

    Challenges encountered in the implementation of Finance Commission recommendations

    • Lack of Implementation of Homilies: The recommendations made by Finance Commissions, both at the Union and state levels, are often ignored as mere pious intentions. This indicates a lack of commitment and follow-through in translating the recommendations into concrete actions.
    • Conditionalities and Expenditure Restrictions: The objections raised by some states in the article indicate challenges related to conditionalities attached to grants. Conditionalities may restrict the expenditure options of states, creating obstacles in implementing the recommended reforms.
    • Inadequate Resource Allocation: The allocated funds for specific reforms may not be sufficient, leading to inadequate implementation. Financial constraints and competing budgetary priorities can limit the availability of resources needed to effectively execute the recommended measures.
    • Lack of Coordination: The implementation of Finance Commission recommendations requires cooperation between the Union and state governments. Any lack of coordination or disagreements between these entities can hinder the execution of reforms

    Way forward: Need for realistic expectations regarding the forthcoming 16th FC

    • Acknowledging Implementation Challenges: Recognize the challenges and complexities involved in implementing Finance Commission recommendations, such as coordination issues, administrative capacity, and resistance to change. This understanding will help shape realistic expectations and strategies for addressing these challenges.
    • Strengthening Implementation Mechanisms: Focus on improving the implementation mechanisms and processes. This includes enhancing coordination and cooperation between the Union and state governments, strengthening administrative capacity at all levels, and streamlining the implementation of conditionalities to facilitate smoother execution.
    • Robust Monitoring and Evaluation: Establish effective monitoring and evaluation mechanisms to track the progress and outcomes of implemented reforms. Regular assessment will help identify implementation gaps and provide opportunities for course correction and improvement.
    • Building Stakeholder Consensus: Foster stakeholder engagement and consensus-building to ensure the buy-in and ownership of recommended reforms. Engage relevant stakeholders, including government departments, civil society organizations, and local communities, to create a shared vision and collective commitment towards implementation.
    • Learning from Past Experiences: Analyze past experiences and identify the reasons behind the limited implementation of previous recommendations. This will help inform future strategies, learning from the challenges faced and replicating successful implementation models.
    • Advocacy and Public Awareness: Create awareness among the public about the importance of Finance Commission recommendations and their impact on governance and development. Foster advocacy efforts to generate public support and hold governments accountable for implementing the recommended reforms.

    Conclusion

    • Finance Commissions in India fulfill a critical role in determining fiscal transfers between the Union and state governments. However, the implementation of their recommendations often falls short of expectations due to various challenges and limitations. By critically analyzing the past experiences of Finance Commissions, it becomes evident that a more pragmatic approach is necessary to align expectations with the actual outcomes.

    Also read:

    Finance Commission and the Challenges of Fiscal Federalism

  • Supreme Court seeks SEBI’s explanation FPI Amendments

    sebi

    Central Idea

    • The Supreme Court has asked the Securities and Exchange Board of India (SEBI) to clarify why amendments were made in 2018 to the Foreign Portfolio Investors (FPI) Regulations.
    • These amendments had eliminated crucial clauses aimed at preventing opacity in FPI ownership structures.

    Why discuss this?

    • A judicial inquiry report has stated that SEBI’s investigation into allegations against the Adani Group by Hindenburg Research had been hindered by FPI ownership amendments.
    • The report highlighted the challenges faced by SEBI in determining the “ownership” of 13 overseas entities, including the FPIs mentioned in the Hindenburg report, due to the lack of clarity in their ownership chain.

    What are FPIs?

    • Foreign Portfolio Investments (FPI) refer to investments made by foreign individuals, institutional investors, pension funds, sovereign wealth funds, and other entities in financial instruments of a foreign country.
    • These investments typically involve the purchase of securities such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other tradable financial assets.

    Key characteristics of foreign portfolio investments include:

    • Indirect Ownership: FPIs involve indirect ownership of financial instruments rather than direct ownership of physical assets or businesses. Investors hold portfolios of securities issued by companies, governments, or other entities in the target country.
    • Diversification: FPIs allow investors to diversify their investment portfolios internationally. By investing in different countries and asset classes, investors can reduce risks associated with a concentration in a single market or asset type.
    • Liquidity: FPIs offer high liquidity as they involve trading in financial instruments that can be easily bought or sold in the secondary market. Investors have the flexibility to enter or exit their positions quickly based on market conditions or investment objectives.
    • Market Access: FPIs provide foreign investors with access to the securities markets of other countries. This enables them to participate in the economic growth and potential returns of different markets and take advantage of investment opportunities that may not be available domestically.
    • Regulatory Framework: FPIs are subject to regulations and guidelines set by the regulatory authorities of the target country. These regulations may include registration requirements, investment limits, disclosure obligations, and compliance norms to ensure market integrity and investor protection.
    • Market Impact: Large FPI flows can have a significant impact on the target country’s financial markets. They can influence stock prices, bond yields, exchange rates, and overall market sentiment. As a result, FPIs are closely monitored by regulatory bodies and policymakers.

    Key Issue: FPI Regulations Amendment

    The Foreign Portfolio Investors (FPI) Regulations were first introduced in 2014 by the Securities and Exchange Board of India (SEBI).

    • Removal of “opaque structure” provision: The 2018 amendments eliminated provisions in the FPI Regulations that addressed opaque structures and required FPIs to disclose every ultimate natural person in the ownership chain.
    • Justice Sapre panel’s observations: The expert committee report stated that the removal of these provisions had put SEBI in a “chicken-and-egg situation” in its investigation of the 13 overseas entities suspected of having opaque structures.
    • Need for information on ultimate economic ownership: The report emphasized that SEBI’s investigation required information about the ultimate economic ownership, rather than just beneficial owners, of the entities under scrutiny.

    Supreme Court’s Query and SEBI’s Response

    • Court’s inquiry on the amendments: The Chief Justice asked SEBI to explain the circumstances and reasons behind the changes made to the provisions dealing with opaque structures.
    • SEBI’s assertion on ongoing investigation: The Solicitor General, representing SEBI, stated that the investigation was progressing at full speed and that the agency was working diligently to meet the extended deadline set by the court.
    • Petitioners’ arguments on fatal impact: The petitioners argued that the amendments made in 2018 had rendered SEBI’s current investigation ineffective, as the definition of opaque structure was removed. They claimed that these amendments were intended to prevent fraud exposure.

    Court’s Concerns and Request for Explanation

    • Court’s curiosity about the amendments: The Chief Justice expressed the court’s interest in understanding the reasons behind the changes made by SEBI in 2018.
    • Potential impact on the investigation: The court acknowledged the argument that the amendments might restrict SEBI from delving into the layers of transactions, potentially hindering the investigation.

    Conclusion

    • The court seeks clarification on the circumstances surrounding these changes and their impact on SEBI’s investigation into the Adani Group.
    • The court’s concern lies in understanding the potential limitations these amendments may have imposed on SEBI’s ability to explore the ownership chain and layers of transactions.

  • In news: GST Council Decisions

    Central Idea

    • The Goods and Services Tax (GST) Council convened its 50th meeting on July 11, announcing significant revisions and clarifications to tax rates.
    • Additionally, the council discussed the establishment of GST Appellate Tribunals.
    • It sought to address the concerns surrounding inclusion of the GST Network under the Prevention of Money Laundering Act (PMLA).

    What is GST Council?

    • The Goods and Services Tax (GST) Council is a crucial body established under the 101st Constitutional Amendment in 2016 to oversee the implementation of the GST regime in India.
    • Comprised of representatives from the central government and the states, the Council plays a pivotal role in making recommendations and decisions related to GST.

    Composition of the GST Council

    • Joint forum: The GST Council is a joint forum consisting of members from the Centre (Union Finance Minister and Union Minister of State for Finance) and representatives from the states.
    • State representation: Each state nominates a minister in charge of finance, taxation, or any other relevant minister to be a member of the Council.

    Objectives of the GST Council

    • Recommendation-making authority: The Council is responsible for making recommendations to the Union and the states on important GST-related issues. This includes suggestions on the goods and services that should be subjected to or exempted from GST, as well as the formulation of model GST laws.
    • Decision-making on tax rates: The Council determines the various rate slabs under the GST regime. It has the authority to decide the applicable tax rates for different goods and services.

    Recent Tax Rate Changes proposals

    • Uncooked and unfried snack pellets and fish soluble paste: The tax rate on these items was reduced from 18% to 5%.
    • Imitation zari threads or yarn: The GST rate on these items was reduced from 12% to 5%.
    • Food and beverages consumed inside cinema halls: The GST rate for these items was reduced to 5% without any input tax credits, compared to the previous 18% levied on cinema services.
    • Special utility vehicles (SUVs): The tax treatment for SUVs was clarified, ensuring that the higher GST compensation cess does not affect sedans. The conditions for classifying a vehicle as an SUV were revised to exclude the requirement of being popularly seen as an SUV. The ground clearance of 170 mm should now be for an unladen vehicle.
    • Exemption for satellite launch services: The Council offered an exemption on GST for satellite launch services provided by private organizations.

    Other recommendations: GST Appellate Tribunals

    • Proposal for setting up GST Appellate Tribunals: States’ proposals to establish 50 Benches of GST Appellate Tribunals were examined. These tribunals will play a crucial role in resolving GST disputes.
    • Operational timeline: The government aims to make the tribunals operational within four to six months, starting with the establishment of Benches in State capitals and places where High Courts have Benches.
    • Appointment and service conditions: The Council cleared the appointment and service conditions for tribunal members and the president, which will come into effect from August 1.

    Inclusion of GST Network under PMLA

    • Concerns raised by non-BJP ruled states: Representatives from states not governed by the BJP criticized the decision to bring the GST Network under the purview of the Prevention of Money Laundering Act (PMLA) administered by the Enforcement Directorate (ED).
    • Tamil Nadu’s opposition: Tamil Nadu expressed opposition to the move, stating that it is against the interests of taxpayers and goes against the objective of decriminalizing offenses under the GST law.
    • Explanation and clarification: Revenue Secretary presented an explanation of the provision, stating that it is a requirement of the Financial Action Task Force (FATF) and not directly related to the GST law.
    • Information sharing: The GSTN will not share information about private businesses with other law enforcement agencies. The ED will neither receive nor provide information, but the director of the Financial Intelligence Unit may provide information to the GSTN to empower tax authorities in combating tax evasion and money laundering.

     

  • Why Indian manufacturing’s productivity growth is plummeting and what can be done?

    What is the news?

    • According to a recent study Productivity growth in Indian manufacturing has been slowing since the 1990s, with a more pronounced decline in the years leading up to the Covid-19 pandemic. Exploring the causes behind this decline is crucial to develop effective strategies for revitalizing the sector.

    Central idea

    • India’s manufacturing sector has long been a matter of concern for policymakers and the subject of extensive academic research. The government has consistently aimed to increase the share of manufacturing in the country’s GDP. However, despite efforts to promote manufacturing, the sector’s contribution and overall employment has remained stagnant.

    Key Facts about Manufacturing Productivity in India

    • Slowing Growth: Productivity growth in India’s manufacturing sector has been declining since the 1990s, with a significant acceleration in the mid-2010s and leading up to the Covid-19 pandemic.
    • Gap with the United States: India’s manufacturing productivity per worker is considerably lower compared to the United States. In 2020, it was only around a fifth of the productivity level in the US.
    • Regional Disparities: There are wide variations in manufacturing productivity across Indian states. Western and Central Indian states tend to have higher average productivity, while Southern and Eastern states have lower productivity levels. This contrasts with the GDP per capita rankings, where Southern states generally have higher incomes than their Western and Central counterparts.

    Potential reasons behind the decline in manufacturing productivity

    • Slow Manufacturing Sector Growth: The overall growth rate of India’s manufacturing sector has been decreasing, particularly since around 2015. This sluggish growth can limit the opportunities for productivity improvement and hinder overall sector performance.
    • Insufficient Investments: Inadequate investments in technology, infrastructure, and research and development (R&D) can hamper productivity growth. Limited capital expenditure by firms may result in outdated machinery, inefficient processes, and lower productivity levels.
    • Skill Mismatch: The manufacturing sector requires a specific skill set, and a mismatch between the skills possessed by the labor force and the skills demanded by the industry can impede productivity. The lack of trained and skilled workers in areas such as advanced manufacturing techniques, automation, and specialized operations may contribute to lower productivity levels.
    • Informality and Informal Labor Market: The prevalence of informal employment in the manufacturing sector can hinder productivity growth. Informal workers often lack access to training, social security benefits, and stable employment conditions, which can lead to lower productivity levels compared to formal employment arrangements.
    • Regulatory Challenges: Cumbersome regulatory processes, including complex labor laws, bureaucratic red tape, and regulatory compliance burdens, can hamper productivity growth. These challenges may discourage investment and hinder the adoption of efficient production practices.
    • Infrastructure Deficiencies: Inadequate infrastructure, such as poor transportation networks, unreliable power supply, and limited access to technology and connectivity, can negatively impact manufacturing productivity. Insufficient infrastructure can increase costs, disrupt supply chains, and hinder efficiency in production processes.
    • Inefficient Supply Chains: Weak linkages and coordination within supply chains can contribute to lower productivity in manufacturing. Challenges such as fragmented value chains, inefficient logistics, and inadequate coordination between suppliers, manufacturers, and distributors can result in delays, increased costs, and reduced overall productivity.
    • Lack of Innovation and Technology Adoption: Limited emphasis on innovation, research, and development, as well as a slower adoption of advanced technologies, can constrain productivity growth in the manufacturing sector. Insufficient investment in technological upgrades and a reluctance to adopt new manufacturing techniques can lead to lower productivity compared to global standards.

    Implications of Declining manufacturing productivity 

    • Economic Growth: Declining manufacturing productivity can hinder overall economic growth.
    • Reduced Competitiveness: Declining productivity in manufacturing can erode a country’s competitiveness in the global market. This can lead to a decline in exports and an increase in imports, negatively impacting the trade balance and potentially affecting the overall economic stability of a nation.
    • Employment and Labor Market Challenges: Lower productivity can result in reduced job creation within the manufacturing sector, leading to unemployment or underemployment.
    • Technological Progression: When productivity declines, the incentives for firms to invest in research and development or adopt new technologies may diminish, leading to a slower pace of technological advancement within the manufacturing sector.
    • Industrial Development and Diversification: A decline in productivity can hinder the growth and diversification of the manufacturing sector, limiting its ability to contribute to overall industrial development.
    • Investment and Innovation: Declining productivity in manufacturing can discourage investment and innovation within the sector.
    • Sectoral Shifts: Declining manufacturing productivity may result in a shift towards other sectors of the economy. If manufacturing becomes less competitive and less productive, resources and investments may be redirected to other sectors such as services.

    What can be done? 

    • Boost Investments: Encouraging both domestic and foreign investments in the manufacturing sector can help upgrade infrastructure, improve technology adoption, and enhance productivity. This can be achieved through attractive investment policies, tax incentives, and easing of regulatory procedures.
    • Skill Development and Training: Focusing on skill development programs tailored to the manufacturing sector can address the skill mismatch and enhance the capabilities of the workforce. Collaborating with educational institutions and industry associations to design training programs and apprenticeships can ensure a skilled labor force.
    • Infrastructure Development: Prioritizing infrastructure development, including transportation networks, power supply, logistics, and digital connectivity, is essential for improving productivity. Investment in infrastructure projects can create an enabling environment for manufacturing activities and reduce operational inefficiencies.
    • Regulatory Reforms: Streamlining regulatory processes, reducing bureaucratic complexities, and simplifying labor laws can create a business-friendly environment. Establishing a favorable regulatory framework can attract investments, foster innovation, and enhance productivity in the manufacturing sector.
    • Research and Development (R&D): Encouraging R&D activities and innovation in the manufacturing sector can lead to technological advancements and productivity gains. Collaborations between industry, research institutions, and academia can facilitate knowledge transfer and promote innovation-driven manufacturing.
    • Entrepreneurship and Start-up Ecosystem: Supporting entrepreneurship and nurturing a vibrant start-up ecosystem in manufacturing can bring fresh ideas, innovation, and competitiveness. Providing access to finance, mentorship programs, and incubation support can encourage entrepreneurial growth and drive productivity.
    • International Collaborations: Strengthening international collaborations and partnerships can facilitate knowledge exchange, technology transfer, and best practice sharing. Engaging with global manufacturing networks can help Indian manufacturers learn from successful models and adapt to global standards.

    Conclusion

    • The findings of this study underscore the urgent need for policy interventions to address the challenges faced by India’s manufacturing sector. Encouraging investments in workers, improving labor market conditions, and promoting a conducive business environment are crucial steps that can help revitalize India’s manufacturing sector, enhance productivity, and lift millions out of poverty.

    Also read:

    Revisiting India’s Manufacturing Dilemma: A Call for Comprehensive Ecosystem Development

  • Foxconn withdraws Chip Manufacturing Deal   

    foxcon chip

    Central Idea

    • Taiwan-based Hon Hai Technology Group, commonly known as Foxconn, has announced its withdrawal from a $19.5 billion semiconductor joint venture with the Vedanta Group.
    • The decision comes as Foxconn aims to explore alternative development opportunities.

    Background and JV Details

    • The joint venture aimed to establish a semiconductor fabrication plant in Gujarat, India.
    • The plant was intended to produce 28 nanometer semiconductors.
    • The partnership was expected to boost India’s semiconductor manufacturing capabilities.

    Foxconn’s Decision to Withdraw

    • Fulfilling Technology Transfer and Investment Requirements: Reports suggested that the firms were unable to meet the government’s demands for increased technology transfer and investment from European firm STMicroelectronics.
    • Financial Constraints: Vedanta’s heavy debt burden and its ability to finance the acquisition of chipmaking technology are believed to have played a significant role in Foxconn’s decision to pull out of the joint venture.
    • Differences and Lack of Progress: Senior government officials confirm that the joint venture encountered difficulties and differences, leading to the realization several months ago that Foxconn would withdraw.
    • Diverse Development Opportunities: Foxconn cited the need to explore a wider range of development opportunities as the reason for its withdrawal from the joint venture.

    Vedanta’s response

    • Commitment from Vedanta: Vedanta stated that it will continue to pursue other partnerships and highlighted its possession of a license for production-grade technology for 40nm chips from a prominent Integrated Device Manufacturer (IDM).
    • Importance of India in Semiconductor Supply Chains: Vedanta reiterated the significance of India in global semiconductor supply chain repositioning efforts.
    • Independence and New Partners: Vedanta intends to remove the Foxconn name from the fully-owned entity and pursue partnerships with other companies to establish India’s first foundry.
    • Production Licenses: Vedanta highlights its possession of a license for production-grade technology for 40 nm chips and the forthcoming acquisition of a license for production-grade 28 nm chips.
    • Government Evaluation: The government will evaluate Vedanta’s proposal, but the absence of Foxconn may affect the progress of the application.

    Government’s position

    • Commitment to India’s Semiconductor Mission: Electronics and Information Technology Minister assured that both Foxconn and Vedanta remain dedicated to India’s semiconductor mission and the Make in India program.
    • Continuation of Semiconductor Growth: The government aims to continue developing India’s semiconductor industry and attract further investments.

    Uncertainty Surrounding Other Proposals

    • ISMC Proposal: ISMC, backed by Next Orbit and Tower Semiconductor, has requested that its proposal not be considered due to the pending merger between Intel and Tower Semiconductor. The proposal for a $3 billion semiconductor fab in Karnataka is expected to remain on hold until the merger is finalized.
    • IGSS Venture Proposal: The proposal by Singapore-based IGSS Venture did not meet the standards set by the government’s advisory committee and is currently on hold.

    Importance of Chipmaking for India

    • Strategic Sector: India has identified electronics manufacturing, including chipmaking, as a critical sector for domestic production and export growth.
    • Domestic Supply Chain: Chip manufacturing plays a crucial role in developing a domestic electronics supply chain, reducing reliance on imports, particularly from China.
    • Opportunity for India: As companies seek to diversify their manufacturing bases away from China, India has the potential to emerge as a reliable destination for semiconductor manufacturing.
    • Global Context: The US has passed the CHIPS Act, providing significant subsidies for chip manufacturing domestically, while imposing restrictions and sanctions on China’s semiconductor industry.

    Conclusion

    • Foxconn’s withdrawal and uncertainties surrounding other proposals highlight challenges in India’s semiconductor manufacturing plans.
    • Financial constraints faced by Vedanta and the need for technology acquisition pose hurdles to realizing India’s chipmaking ambitions.
    • Nonetheless, India’s focus on chip manufacturing remains a strategic priority to develop a domestic electronics supply chain and reduce dependence on imports.

  • Bad loans at record low, but write-offs still in the mix

    What is the news?

    • The latest financial stability report released by the Reserve Bank of India (RBI) shows a continuous decline in both Gross Non-performing assets (GNPAs) and Net NPAs, reaching their lowest levels since 2015.

    Central Idea

    • In recent years, the Indian banking sector has witnessed a remarkable turnaround in its non-performing assets (NPA) ratio, marking a significant improvement in its overall health. Just four years ago, Indian banks grappled with the highest NPA ratio among emerging economies.

    What are Bad loans/ Non-Performing Assets (NPA’s)?

    • Bad loans refer to loans that are classified as non-performing assets
    • NPA is a term used to classify loans or advances that are in default. It indicates the inability of borrowers to fulfill their repayment obligations to the lender.
    • In general, a loan is classified as an NPA when the borrower fails to make payments for a specified period, typically 90 days or more.

    There are two key classifications related to NPAs:

    • Gross Non-Performing Assets (GNPA): This refers to the total amount of loans or advances that have been defaulted by borrowers.
    • Net Non-Performing Assets (NNPA): NNPA is derived by deducting the provision amount from the GNPA. Provision refers to the amount set aside by banks or financial institutions as a precautionary measure to cover potential losses arising from NPAs.

    Background and Current Situation

    • During the second quarter of 2019, the NPA ratio in Indian banks stood at a worrisome 9.2%, signifying that nearly one in ten loans had become bad.
    • The severity of the problem was unveiled when the RBI conducted an expansive Asset Quality Review in 2016, exposing the true extent of bad loans.
    • From 2016 to 2019, the NPA ratio remained high, causing apprehension among stakeholders.
    • However, subsequent years witnessed a decline in the NPA ratio, a trend that persisted even during the challenging times of the COVID-19 pandemic.

    Factors contributing to the decline in NPAs

    • Insolvency and Bankruptcy Code (IBC): The implementation of the Insolvency and Bankruptcy Code in 2016 played a crucial role in the recovery of sick loans. It provided a structured and time-bound framework for resolving distressed assets, leading to improved NPA management and recovery.
    • Shift towards personal loans: Banks shifted their lending focus from industries to personal loans. This strategic move reduced the exposure to sectors heavily impacted by the pandemic, potentially mitigating the risks of loan defaults and lowering the NPA ratio.
    • Impact of COVID-19-related moratoriums: There were concerns about the potential increase in NPAs resulting from the COVID-19-related moratoriums. However, the data indicated that the moratoriums did not lead to a significant bump in NPAs, as initially expected. This suggests that the measures implemented to support borrowers during the pandemic were effective in preventing a major NPA crisis.
    • Write-offs: The reduction in NPAs, particularly in FY20, can be attributed to the practice of writing off bad loans. Banks voluntarily wrote off NPAs to maintain healthy balance sheets, which had a positive impact on the overall NPA ratio. However, the continued reliance on write-offs raises concerns about the sustainability of this approach in the long run.

    What are Write-Offs?

    • Write-offs refer to the practice of removing non-performing assets (NPAs) from a bank’s balance sheet. When a loan becomes irrecoverable and the borrower is unable to repay, the bank may decide to write off the loan as a loss.
    • This means that the bank no longer considers the loan as an asset and removes it from its books.
    • Write-offs are typically done to maintain accurate financial records and reflect the true value of the bank’s assets

    Concerns highlighted regarding write-offs

    • Sustainability of NPA Reduction: Write-offs may artificially lower NPAs, but heavy reliance raises doubts about sustainable NPA reduction without effective recovery measures.
    • Adequacy of Provisioning: Insufficient provisions to cover losses due to write-offs can weaken a bank’s financial position and ability to absorb future shocks.
    • Transparency and Accountability: Ensuring transparent and accountable write-off processes is crucial to prevent misuse and maintain trust in the banking system.
    • Impact on Lending Capacity: Write-offs reduce available capital, limiting a bank’s ability to lend and support economic growth. Inadequate replenishment may further constrain lending.

    Decline in NPAs: Implications for the banks

    • Improved Asset Quality: A decrease in NPAs indicates an improvement in the asset quality of banks. It suggests that a lower proportion of loans are in default or arrears, reflecting healthier lending practices and reduced credit risk. Banks with lower NPAs are better positioned to maintain stability and profitability in their loan portfolios.
    • Enhanced Financial Health: Declining NPAs contribute to the overall financial health of banks. As the burden of bad loans decreases, banks can allocate resources more efficiently and utilize capital for productive purposes. This improves the banks’ ability to generate profits and strengthens their financial position.
    • Increased Profitability: Lower NPAs positively impact banks’ profitability. When the proportion of bad loans decreases, banks experience fewer loan write-offs and provisioning requirements. This results in lower expenses associated with NPA resolution and provisioning, thereby enhancing profitability and improving the bottom line.
    • Strengthened Capital Position: A decline in NPAs can lead to a strengthened capital position for banks. As they recover or resolve NPAs, banks can allocate capital more effectively and build buffers against potential losses. A stronger capital position provides resilience and stability to the banks, ensuring they can absorb shocks and maintain sustainable lending practices.
    • Improved Investor Confidence: Decreasing NPAs can boost investor confidence in the banking sector. It demonstrates efficient risk management and sound lending practices, attracting investors and potentially leading to increased investments in banks. Enhanced investor confidence can contribute to the stability and growth of the banking sector.
    • Enhanced Lending Capacity: With lower NPAs, banks can allocate more funds towards fresh lending and credit expansion. As the burden of bad loans reduces, banks have more capital available to extend credit to productive sectors of the economy, supporting economic growth and development

    Conclusion

    • Indian banks have made remarkable progress in reducing NPAs, as evident from the declining NPA ratios and improved profitability. However, the reliance on write-offs raises concerns about the sustainability of this trend. To ensure long-term stability, banks must prioritize prudent lending practices and effective risk management.

    Also read:

    Sansad TV Perspective: Health of India’s Banking System

  • FinMin pushes for reforms to spur FDI inflows

    fdi

    Central Idea

    • The Finance Ministry of India emphasized the need to address challenges faced by global investors to facilitate Foreign Direct Investment (FDI) flows.
    • In this article, we delve into the factors affecting FDI inflows and propose measures to attract and sustain FDI in India.

    What is Foreign Direct Investment (FDI)?

    • FDI refers to the investment made by individuals, companies, or governments from one country into business interests located in another country.
    • It involves the direct ownership or control of assets in the foreign country, typically in the form of establishing new ventures, acquiring existing businesses, or creating strategic partnerships.

    Understanding FDI

    Imagine you have a successful toy manufacturing company based in Country A. You have been experiencing steady growth and want to expand your business operations to a new market in Country B. However, entering a foreign market can be challenging due to unfamiliarity with the local business environment, regulations, and market dynamics.

    To overcome these challenges, you decide to make a Foreign Direct Investment (FDI) in Country B. Instead of exporting toys from Country A to Country B, you establish a new manufacturing plant or acquire an existing toy company in Country B. By doing so, you gain direct ownership and control over the assets and operations in Country B.

     

    India’s FDI feats

    • In terms of investor countries of FDI Equity inflow, Singapore is at the top with 27%, followed by the US with 18% and Mauritius with 16% for the FY 2021-22.
    • ‘Computer Software & Hardware’ has emerged as the top recipient sector of FDI Equity inflow during this period with around 25% share followed by Services Sector and Automobile Industry with 12% each.
    • With 53 % Karnataka has received the majority share of FDI equity in the `Computer Software & Hardware’ sector.

    FDI in India

    • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
    • Economic liberalisation started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country.
    • India, today is a part of top 100-club on Ease of Doing Business (EoDB) and globally ranks number 1 in the Greenfield FDI ranking.

    There are two routes by which India gets FDI.

    1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

    2) Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of FDI application under Approval Route.

    • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
    • In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.

    Sectors that come under the ‘100% Automatic Route’ category are

    • Agriculture & Animal Husbandry, Air-Transport Services (non-scheduled and other services under civil aviation sector)
    • Airports (Greenfield + Brownfield),
    • Asset Reconstruction Companies,
    • Auto-components, Automobiles,
    • Biotechnology (Greenfield),
    • Broadcast Content Services (Up-linking & down-linking of TV channels, Broadcasting Carriage Services,
    • Capital Goods, Cash & Carry Wholesale Trading (including sourcing from MSEs), Chemicals, Coal & Lignite, Construction Development,
    • Construction of Hospitals,
    • E-commerce Activities, Electronic Systems,
    • Food Processing, Gems & Jewellery, Healthcare, Industrial Parks, IT & BPM, Leather, Manufacturing, Mining & Exploration of metals & non-metal ores, Other Financial Services,
    • Pharmaceuticals, Plantation sector
    • Ports & Shipping, Railway Infrastructure, Renewable Energy, Roads & Highways,
    • Single Brand Retail Trading, Textiles & Garments,
    • Thermal Power,
    • Tourism & Hospitality and
    • White Label ATM Operations.

    Sectors that come under up to 100% Automatic Route’ category are–

    • Infrastructure Company in the Securities Market: 49%
    • Insurance: up to 49%
    • Medical Devices: up to 100%
    • Pension: 49%
    • Petroleum Refining (By PSUs): 49%
    • Power Exchanges: 49%

    Sectors that come under the ‘up to 100% Government Route’ category are–

    • Banking & Public sector: 20%
    • Broadcasting Content Services: 49%
    • Core Investment Company: 100%
    • Food Products Retail Trading: 100%
    • Mining & Minerals separations of titanium bearing minerals and ores: 100%
    • Multi-Brand Retail Trading: 51%
    • Print Media (publications/ printing of scientific and technical magazines/ specialty journals/ periodicals and facsimile edition of foreign newspapers): 100%
    • Print Media (publishing of newspaper, periodicals and Indian editions of foreign magazines dealing with news & current affairs): 26%
    • Satellite (Establishment and operations): 100%

    Prohibited Sectors

    There are a few industries where FDI is strictly prohibited under any route. These industries are

    • Atomic Energy Generation
    • Any Gambling or Betting businesses
    • Lotteries (online, private, government, etc.)
    • Investment in Chit Funds
    • Nidhi Company
    • Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc.)
    • Housing and Real Estate (except townships, commercial projects, etc.)
    • Trading in TDR’s
    • Cigars, Cigarettes, or any related tobacco industry

    Benefits offered by FDI

    • Employment generation: FDI boosts the manufacturing and services sector which results in the creation of jobs and helps to reduce unemployment rates in the country.
    • Economic growth: Increased employment translates to higher incomes and equips the population with more buying powers, boosting the overall economy of a country.
    • Human capital development: Skills that employees gain through training and experience can boost the education and human capital of a specific country. Through a ripple effect, it can train human resources in other sectors and companies.
    • Technology boost: The introduction of newer and enhanced technologies results in company’s distribution into the local economy, resulting in enhanced efficiency and effectiveness of the industry.
    • Increase in exports: Many goods produced by FDI have global markets, not solely domestic consumption. The creation of 100% export oriented units help to assist FDI investors in boosting exports from other countries.
    • Exchange rate stability: The flow of FDI into a country translates into a continuous flow of foreign exchange, helping a country’s Central Bank maintain a prosperous reserve of foreign exchange which results in stable exchange rates.
    • Improved Capital Flow: Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.
    • Creation of a Competitive Market: By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies.
    • Climate mitigation: The United Nations has also promoted the use of FDI around the globe to help combat climate change

    Factors Affecting recent FDI inflows

    (1) Inflationary Pressures and Tighter Monetary Policies

    • The dip in FDI inflows in 2022-23 can be attributed to inflationary pressures and tighter monetary policies.
    • Policymakers should address these factors to encourage a favorable investment climate.

    (2) Geopolitics vs. Geography

    • The Ministry highlights the influence of “political distance more than geographical distance” on FDI flows.
    • Geopolitical factors have dominated over traditional geographical considerations.

    (3) Global FDI Trends

    • Gross FDI flows declined by 16% in 2022, compared to the record high of $84.8 billion in 2021-22.
    • Net inflows experienced a sharper decline of 27.4%.
    • Similar trends were observed in emerging market economies, where net FDI inflows declined by 36% in 2022.

    Challenges for India’s Growth Outlook

    (1) External Sector Challenges:

    • The review identifies the external sector as a potential challenge for India’s growth in 2023-24.
    • Factors such as geopolitical stress, volatility in global financial systems, price corrections in global stock markets, El-Nino impact, and weak global demand could constrain growth.
    • Policymakers must closely monitor FDI data and undertake measures to facilitate FDI inflows.

    (2) Fragmentation of FDI Flows:

    • The Ministry highlights the phenomenon of “friend shoring,” wherein FDI is directed towards geopolitically aligned countries.
    • This has led to a fragmentation of FDI flows globally, as per research from the International Monetary Fund (IMF).
    • Additionally, inflows from foreign portfolio investors (FPIs) into Indian markets have become less volatile.

    Conclusion

    • To attract and sustain FDI inflows, India needs to address challenges related to inflation, monetary policies, geopolitical factors, and last-mile infrastructure.
    • Additionally, mitigating trade risks and fostering inclusive growth through job creation will contribute to a favorable investment climate.

  • Internationalising the rupee without the ‘coin tossing’

    Central Idea

    • The recent announcement by the Indian government regarding a long-term road map for the internationalization of the rupee holds immense potential for the country’s economic growth. This move aims to revive the rupee’s historical prominence as a widely accepted currency in the Gulf region and strengthen its position in the global foreign exchange market.

    *Relevance of the topic*

    The Indian government has been consistently focused on promoting the internationalization of the rupee.

    India has been exploring the use of the rupee for bilateral trade settlements with its trading partners, for instance amidst Russian oil ban, India explored Rupee-Rubel settlement for oil imports.

    China, Russia and a few other countries have become more vocal in questioning the US dollar-dominated global currency system

    Historical Context

    • Indian Rupee as Legal Tender in the Gulf Region: In the 1950s, the Indian rupee held the status of legal tender in several Gulf countries, including the United Arab Emirates, Kuwait, Bahrain, Oman, and Qatar. It was widely used for various transactions, and these Gulf monarchies purchased rupees using the pound sterling.
    • Introduction of the Gulf Rupee: To tackle challenges related to gold smuggling, the Reserve Bank of India (Amendment) Act was enacted in 1959. This legislation led to the creation of the Gulf Rupee, which was intended for circulation only in the West Asian region. The central bank issued notes specific to the Gulf region, and individuals holding Indian currency were given a six-week window to exchange their rupees for the new Gulf rupee.
    • Devaluation of Indian Rupee and Transition to Local Currencies: In 1966, India devalued its currency, which eventually had repercussions on the acceptance of the Gulf rupee. The devaluation eroded confidence in the stability of the Indian rupee, prompting some West Asian countries to replace the Gulf rupee with their own sovereign currencies. The introduction of sovereign currencies in the region was driven by both economic factors and concerns about the Indian rupee’s stability.
    • Impact of Demonetisation: In 2016, the Indian government implemented a demonetisation exercise, which involved invalidating high-value currency notes, including the ₹1,000 and ₹500 denominations. This move aimed to curb black money, corruption, and counterfeit currency. However, it also had an impact on the confidence in the Indian rupee, both domestically and among neighboring countries such as Bhutan and Nepal.
    • Withdrawal of ₹2,000 Note: In recent times, the decision to withdraw the ₹2,000 note from circulation has further affected confidence in the rupee. This move has led to concerns and uncertainties among the public and businesses, particularly regarding the stability and continuity of currency denominations.

    What does it mean by Internationalizing the Indian Rupee?

    • Internationalizing the Indian Rupee refers to the process of increasing the acceptance, use, and recognition of the Indian rupee as a global currency. It involves making the rupee more widely used and traded in international markets, increasing its convertibility, and promoting its adoption for cross-border transactions, trade settlements, and investment activities

    Advantages of internationalization of the rupee

    • Enhanced Trade and Investment: Internationalization of the rupee can facilitate smoother trade transactions between India and other countries. This can lead to increased bilateral trade, attract foreign investment, and boost economic growth.
    • Reduced Exchange Rate Risks: Internationalisation reduces exchange rate risks associated with fluctuations in major global currencies. When the rupee becomes more widely accepted and used in international transactions, it reduces the vulnerability of the Indian economy to external currency volatility.
    • Lower Transaction Costs: Greater international acceptance of the rupee can reduce transaction costs for businesses and individuals engaged in cross-border trade and remittances.
    • Strengthening Financial Markets: A more internationalized rupee would lead to the development of deeper and more liquid rupee-denominated financial markets. This includes rupee bond markets and derivatives markets. It helps diversify funding sources and provide greater stability and opportunities for investors and businesses.
    • Reserve Currency Status: The internationalisation of the rupee can potentially lead to its recognition as a reserve currency. Reserve currency status enhances a country’s monetary and financial influence globally and promotes stability in international financial systems.
    • Boosting India’s Global Standing: Internationalisation of the rupee signals the country’s economic strength, reforms, and openness to international trade and investment. It can improve India’s reputation as an attractive investment destination and strengthen its role in regional and global economic decision-making forums.

    The Challenge of International Demand for the rupee

    • Low Daily Average Share: The daily average share of the rupee in the global foreign exchange market is approximately 1.6%. This indicates that the rupee is not extensively traded or widely used for international transactions compared to currencies like the US dollar or the euro.
    • Limited International Transactions: Although India has taken steps to promote the internationalisation of the rupee, such as enabling external commercial borrowings in rupees and encouraging trade in rupees with select countries, the volume of such transactions is still limited. For instance, India continues to purchase oil from Russia in dollars, and efforts to settle trade in rupees with Russia have faced challenges.
    • Capital Account Convertibility Constraints: India imposes significant constraints on capital account convertibility, which refers to the movement of local financial investments into foreign assets and vice versa. These restrictions are in place to mitigate risks of capital flight and exchange rate volatility, given India’s current and capital account deficits. However, they limit the ease of converting rupees into other currencies, reducing international demand.
    • Lack of Reserve Currency Status: For a currency to be considered a reserve currency, it needs to be fully convertible, readily usable, and available in sufficient quantities. The rupee does not currently enjoy reserve currency status, and its limited convertibility and usage hinder its attractiveness for central banks and international institutions to hold significant amounts of rupees as part of their foreign exchange reserves.

    Learning from China’s Experience

    • Phased Approach: China adopted a phased approach to internationalise the Renminbi (RMB). It initially allowed the use of RMB outside China for current account transactions, such as commercial trade and interest payments, and gradually expanded it to select investment transactions. This gradual approach helped in managing risks and ensuring a smooth transition.
    • Offshore Markets and Clearing Banks: China established offshore markets, such as the “Dim Sum” bond and offshore RMB bond market, which allowed financial institutions in Hong Kong to issue RMB-denominated bonds. Additionally, China permitted central banks, offshore clearing banks, and offshore participating banks to invest excess RMB in debt securities. These measures enhanced the RMB’s liquidity and facilitated its usage in international transactions.
    • Currency Swap Agreements: China entered into currency swap agreements with several countries, including Brazil, the United Kingdom, Uzbekistan, and Thailand. These agreements enabled the exchange of equivalent amounts of money in different currencies, facilitating trade and investment transactions in RMB and reducing reliance on other currencies.
    • Free Trade Zones: China launched the Shanghai Free Trade Zone, which facilitated free trading between non-resident onshore and offshore accounts. This zone provided a platform for international businesses to transact in RMB and boosted the currency’s international usage.
    • Reserve Currency Status: China’s efforts towards internationalisation of the RMB led to its recognition as a reserve currency. By the second quarter of 2022, the RMB’s share of international reserves reached approximately 2.88%. This status further solidified the RMB’s acceptance and usage in global financial markets.

    Way forward: Reforms for Rupee Internationalisation

    • Full Convertibility: The rupee should be made more freely convertible, with a goal of achieving full convertibility by 2060. This would involve allowing financial investments to move freely between India and abroad, removing significant restrictions on currency exchange and capital flows.
    • Deeper and More Liquid Rupee Bond Market: The Reserve Bank of India (RBI) should focus on developing a deeper and more liquid rupee bond market. This would enable foreign investors and Indian trade partners to have more investment options in rupees, enhancing the attractiveness and usage of the currency.
    • Trade Settlement in Rupees: Indian exporters and importers should be encouraged to invoice their transactions in rupees. Optimising the trade settlement formalities for rupee import/export transactions would facilitate greater usage of the rupee in international trade, reducing reliance on foreign currencies.
    • Currency Swap Agreements: India can establish additional currency swap agreements with trading partners. These agreements would allow India to settle trade and investment transactions in rupees, eliminating the need for reliance on reserve currencies like the US dollar.
    • Tax Incentives for Foreign Businesses: The government can provide tax incentives to foreign businesses operating in India, encouraging them to utilize the rupee in their operations. This would boost the demand for the rupee and promote its usage in international transactions.
    • Currency Management Stability: The RBI and the Ministry of Finance should ensure consistent and predictable issuance and retrieval of notes and coins, promoting currency management stability. This stability is crucial for building confidence in the rupee’s value and maintaining trust among market participants.
    • Exchange Rate Regime Improvement: Improving the exchange rate regime by adopting transparent and market-based mechanisms can enhance the stability and credibility of the rupee’s exchange rate. This would instill confidence among investors and businesses dealing in rupee-denominated transactions.
    • Higher Profile in International Organizations: Efforts should be made to push for making the rupee an official currency in international organizations. This would raise the profile and acceptability of the rupee globally, contributing to its internationalisation.
    • Pursuing Expert Committee Recommendations: Recommendations from expert committees, such as the Tarapore Committees, should be pursued. These recommendations include reducing fiscal deficits, lowering gross inflation rates, and addressing banking non-performing assets. Implementing these measures would enhance macroeconomic stability and strengthen the rupee’s attractiveness.

    Conclusion

    • The government’s road map for the internationalisation of the rupee holds immense potential for Indian businesses, financial stability, and the government’s ability to finance deficits. With predictable currency management policies and a phased approach, the rupee’s journey towards internationalisation can contribute to India’s economic growth and strengthen its position in the global economy.

    Also read:

    Using a rupee route to get around a dominating dollar

  • How India can leverage its biggest strength?

    India

    Central Idea

    • India’s greatest strength lies in its vast manpower. In the coming 25 years, the country has the potential to experience a golden era, provided it effectively utilizes its favorable demographic composition.

    Relevance of the topic

    The current population of India is 1,420,681,800, based on Worldometer elaboration of the latest United Nations data.

    The growth is driven by India’s large, dynamic and young population, with 65% of Indians being under 35 years old.

    However, one of the greatest challenges facing young India’s is unemployment. This raises core question is this an opportunity or demographic disaster

    There is a need to create opportunities for the existing labour force and the new entrants into the labour market by improving their productivity.

    India’s Demographic Advantage

    • Young Workforce: India’s average age of 29 years, compared to countries like the US (38), China (38), France (42), Germany (45), and Japan (48), highlights its advantage of having a younger population, which can contribute to economic growth and productivity.
    • Favorable Dependency Ratio: The projected old-age dependency ratios indicate India’s advantage in terms of a smaller proportion of the population requiring support from the working-age population. For instance, while India’s projected old-age dependency ratio is 37% in 2075, France is projected to have 55.8%, Japan 75.3%, the US 49.3%, the UK 53%, and Germany 63.1%.
    • Rising Working-Age Population: India is currently in a phase where its working-age population is increasing, presenting a potential workforce that can drive economic growth and development for several decades.
    • Potential for Labor Supply: With its large population and a growing workforce, India has the potential to become a significant source of labor supply for the rest of the world. This can attract investment and outsourcing opportunities, further boosting economic growth.
    • Abundant Human Capital: India possesses a vast pool of educated and skilled individuals, which contributes to its human capital advantage. This workforce can drive innovation, productivity, and economic competitiveness across various sectors.
    • Consumer Market: India’s large population provides a substantial domestic consumer market, offering significant opportunities for businesses to cater to the needs and demands of a vast consumer base, driving economic activity.
    • Innovation and Entrepreneurship: The young and dynamic population in India fosters a culture of innovation and entrepreneurship, contributing to the development of new industries, technologies, and solutions, creating employment opportunities and driving economic progress.
    • Potential for Economic Growth: By effectively utilizing its demographic advantage, India has the potential to achieve higher rates of economic growth and improve its standard of living.
    • Global Competitiveness: A young and skilled labor force enhances India’s competitiveness in the global market, attracting foreign investment, promoting export-oriented industries, and positioning India as a preferred business and investment destination.
    • Demographic Dividend: India’s favorable demographic composition presents the opportunity to unlock the demographic dividend, leading to accelerated economic growth and development through investments in education, skill development, healthcare, and employment opportunities.

    Lessons learned from Asian success stories accordingly

    • Harnessing the Demographic Dividend: Asian countries like China, Japan, South Korea, Malaysia, and Singapore have effectively utilized their favorable demographics to drive economic growth and development. India, with its young workforce, can learn from these examples and focus on maximizing the potential of its demographic dividend.
    • Focus on Labor-Intensive Manufacturing: Asian success stories have demonstrated the importance of capitalizing on labor-intensive manufacturing sectors to create employment opportunities. India can prioritize these sectors, such as textiles, toys, footwear, auto components, and agricultural processing, to leverage its abundant labor force.
    • Structural Transformations: Asian nations have undergone structural transformations by transitioning from labor-intensive industries to more advanced sectors. India can learn from these examples and emphasize technological advancements, innovation, and high-value manufacturing to sustain economic growth and enhance competitiveness.
    • Investment in Infrastructure: Developing robust infrastructure is crucial for economic growth. Asian countries have recognized the significance of infrastructure development in reducing trade and transaction costs, improving connectivity, and attracting investments. India should focus on infrastructure development to support its economic growth objectives.
    • Trade and Investment Facilitation: Asian success stories have implemented trade facilitation measures and pursued policies to attract foreign direct investment. India can learn from these experiences by adopting measures to facilitate trade, improve ease of doing business, and create a favorable investment climate.
    • Support for MSMEs: Micro, Small, and Medium Enterprises (MSMEs) play a pivotal role in the manufacturing sector. Asian countries have provided support to MSMEs to enhance their competitiveness, scale, and integration into global supply chains. India can prioritize support for MSMEs to drive manufacturing growth and job creation.
    • Emphasis on Skill Development: Asian success stories have recognized the importance of skill development in enhancing labor force productivity. India should invest in skilling initiatives, re-skilling, and up-skilling programs to improve employability and align the workforce with evolving industry demands.
    • Quality Education and Healthcare: Asian nations have prioritized investments in quality education and healthcare. India can learn from these examples by focusing on improving access to quality education and healthcare services, which will contribute to a skilled workforce and a healthy labor force.
    • Government Reforms and Policies: Asian success stories have been supported by proactive government reforms and policies. India should implement favorable policies related to labor laws, taxation, ease of doing business, and intellectual property rights to create an enabling environment for economic growth and entrepreneurship.
    • Long-term Vision and Implementation: Asian countries that have achieved sustained success have demonstrated long-term vision and commitment to implementing policies and reforms. India should adopt a similar approach by formulating long-term strategies and ensuring consistent implementation to drive sustainable economic growth.

    What India needs to capitalize on its demographic dividend?

    • Skilling and Education: India needs to focus on skill development programs such as the Jan Shikshan Sansthan, the Pradhan Mantri Kaushal Vikas Yojana, and the National Apprenticeship Promotion Scheme. These programs have shown success in increasing human resource supply in various sectors. However, efforts should be made to upscale and improve the skills of the labor force, especially in the unorganized sector where underpaid jobs prevail.
    • Job Creation and Employment Opportunities: India should prioritize sectors with high labor intensity, such as textiles, toys, footwear, auto components, sports goods, agricultural processing, restaurants, hotels, mining, construction, healthcare, and caregiving services. These sectors have significant potential for employment generation. Additionally, the focus should be on infrastructure development to reduce trade and transaction costs and create an environment conducive to doing business.
    • Industry and Infrastructure Development: India should accelerate infrastructure development to support economic growth and enhance competitiveness. This includes investment in transportation, energy, digital connectivity, and other critical infrastructure sectors.
    • Ease of Doing Business: To attract investments and promote entrepreneurship, India should continue its efforts to improve the ease of doing business by simplifying regulatory processes, reducing bureaucratic hurdles, and enhancing transparency.
    • Social Security and Healthcare: India should work towards improving access to quality healthcare services and implementing robust social security programs. Measures like the Ayushman Bharat and Pradhan Mantri Bhartiya Janaushadhi Pariyojana mentioned in the article can help in achieving these goals.
    • Government Reforms and Policies: Implementing favorable labor laws, rationalizing taxation systems, and providing policy stability are essential for creating an enabling environment for economic growth. There is importance of reforms such as the National Education Policy 2020, which aims to update knowledge and ensure productive employment opportunities.

    Way Forward: Priority areas

    1. Improving Education Quality:
    • India should prioritize the implementation of the National Education Policy 2020, which emphasizes knowledge updating and aims to provide inclusive, equitable, and quality education at all levels.
    • Steps should be taken to address challenges such as non-functional schools, resistance to change, and inadequate resources.
    • Providing access to quality education up to higher secondary levels for all is essential to create a productive labor force.
    1. Ensuring Quality Healthcare:
    • The government should continue implementing initiatives like Ayushman Bharat and the Pradhan Mantri Bhartiya Janaushadhi Pariyojana to improve healthcare equity.
    • Efforts should be made to make drug prices affordable and accessible, and steps should be taken to ensure financial medical protection, such as universal insurance and adequate medical infrastructure.
    • Quality health infrastructure for all will contribute to a healthy and productive labor force.
    1. Accelerating Reforms for Future Success:
    • India should accelerate the implementation of reforms and flagship programs to unlock its demographic dividend and drive economic growth.
    • Streamlining bureaucratic processes, improving ease of doing business, and creating an investor-friendly environment are essential to attract investments and foster entrepreneurship.
    • Additionally, continued infrastructure development, trade facilitation measures, and reforms in labor laws and taxation systems will support the growth of industries and enhance India’s competitiveness in the global market.

    Conclusion

    • India’s demographic dividend offers a unique opportunity for growth and development in the coming years. By prioritizing skill development, creating employment opportunities, enhancing productivity, ensuring access to quality healthcare and education, and implementing crucial reforms, India can fully harness its demographic advantage. The nation has the potential to become a global labor force supplier and secure a prosperous future.

    Also read:

    India’s Population Growth: Dividend or a Disaster?