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Subject: Economics

  • Tax Collection at Source (TCS) on Foreign Credit Card Payments: Understanding the Intent and Impact is VItal

    TCS

    Central Idea

    • The recent announcement regarding the applicability of tax collection at source (TCS) on foreign payments made through credit cards has sparked a range of emotive reactions and sweeping remarks. However, it is crucial to understand the concept and consequences of this measure and avoid unnecessary panic.

    What is Tax Collection at Source (TCS) on Credit Card Payments?

    • TCS on credit card payments refers to the application of tax collection at source (TCS) on foreign payments made through credit cards.
    • When individuals use their credit cards for foreign transactions, a certain percentage of the transaction amount is collected as tax by the government at the time of payment.
    • This tax amount is then adjustable against the individual’s advance tax and final tax liabilities during the filing of their tax returns.
    • The purpose of TCS on credit card payments is to track foreign spending and ensure that individuals report their income accurately while encouraging tax compliance.
    • Applicability: TCS is applied when individuals use their credit cards for making payments in foreign currencies.
    • Tax Collection: A specific percentage of the payment amount is collected as tax by the government. This tax is collected directly by the credit card company or the payment processor.
    • Adjustable Tax: The tax amount collected through TCS is adjustable against the individual’s tax liabilities during the filing of their income tax returns. It is not an additional tax burden, but a prepayment of tax that can be adjusted against the final tax payable.
    • Purpose: TCS on credit card payments helps the government track foreign spending and ensure that individuals accurately report their income from foreign transactions.
    • Rates and Thresholds: The tax percentage and thresholds may vary based on government regulations. These rates and thresholds are subject to change from time to time.
    • Exclusions: Certain categories, such as education and medical expenses, may have lower tax rates or exemptions from TCS. Payments made using international debit or credit cards within a specified limit may also be excluded from TCS.

    TCS

    What is the Need for Changes in TCS?

    • Anomaly in Remittances: The Liberalised Remittance Scheme (LRS) allows individuals to remit a certain amount of money abroad without requiring prior approval from authorities. However, payments made through credit cards were not subject to the LRS limit, leading to an anomaly where significant foreign payments were being made without any restrictions.
    • Disproportionate Spending: The initial introduction of TCS on LRS remittances aimed to track foreign spending disproportionate to the reported income of individuals. It was an effort to ensure that individuals accurately disclose their foreign transactions and pay appropriate taxes on their foreign income.
    • Circumvention of the System: Despite the initial implementation of TCS, there were instances of individuals circumventing the tax collection process. This was done through various means such as splitting payments among multiple individuals, including minors and household staff, or absorbing the 5% tax as a cost without claiming it through tax returns.
    • Encouraging Tax Compliance: The intention behind TCS on credit card payments was also to encourage individuals to come forward and file tax returns. By imposing a tax collection mechanism, individuals are nudged to report their foreign income and fulfill their tax obligations.

    TCS

    Concerns over TCS on credit card payments

    • Increased Financial Burden: The higher TCS rate of 20% on certain categories, such as investments, gifts, donations, and overseas travel, has led to an increased financial burden for individuals making such payments. The higher tax rate may impact individuals’ disposable income and affect their spending patterns.
    • Impact on Foreign Travel: With the application of TCS on credit card payments for foreign travel, individuals may face additional costs and may need to adjust their travel budgets accordingly. This could discourage some individuals from undertaking foreign travel or limit their spending while abroad.
    • Administrative Challenges: The implementation of TCS on credit card payments poses administrative challenges for credit card companies, payment processors, and individuals. It requires proper mechanisms to collect and remit the tax, as well as ensure accurate reporting and compliance. Compliance with these requirements may add complexity to the payment process.
    • Concerns of Double Taxation: Some individuals express concerns about potential double taxation. They argue that since they are already paying taxes on their income, applying TCS on credit card payments can be seen as an additional tax burden on the same income.
    • Impact on Economic Growth: Critics argue that the higher TCS rate and additional tax burden on certain payments may hinder economic growth. It is feared that this could discourage investments, limit foreign spending, and affect sectors such as tourism and hospitality.
    • Perception of Tax Terrorism: The introduction of TCS on credit card payments has led to criticism of the overall tax system, with terms like “tax terrorism” being used. Critics argue that the tax collection measures may be seen as excessive and could create an atmosphere of fear and uncertainty among taxpayers.

    Facts for prelims: Concept box from Civilsdaily

    What is mean by Tax Terrorism?

    • Tax terrorism refers to a situation where taxpayers feel harassed, intimidated, or unfairly treated by tax authorities, leading to a perception of aggressive or punitive actions.
    • In simple words, it describes instances where taxpayers believe that the tax system or tax authorities are causing undue stress, fear, or anxiety.

    Illustration: Understand tax terrorism this way

    • Let’s say an individual receives a notice from the tax authority demanding extensive documentation and explanations for every financial transaction they have made over the past five years. The individual feels overwhelmed and stressed due to the complexity and scope of the request.
    • Despite providing the necessary information and cooperating fully, they face repeated audits, additional scrutiny, and prolonged delays in the resolution of their tax matters.
    • This experience leaves the individual feeling unfairly targeted and harassed by the tax authority, leading to a perception of tax terrorism.

    Way forward

    • Transparent Communication: The government should engage in transparent communication to clarify the rationale behind the implementation of TCS on credit card payments. Clear and accessible information about the purpose, impact, and benefits of the policy can help alleviate concerns and misconceptions among taxpayers.
    • Stakeholder Consultation: The government should actively engage with stakeholders, including taxpayers, industry associations, and experts, to understand their concerns and gather feedback. This can help in refining the policy and addressing any unintended consequences.
    • Review and Revision: Regular reviews of the TCS policy should be conducted to assess its impact on individuals, sectors, and the economy. Based on the findings, necessary revisions can be made to strike a balance between tax collection objectives and the concerns of taxpayers.
    • Simplification of Tax Regulations: Efforts should be made to simplify tax regulations and compliance procedures to reduce the burden on taxpayers. Clear and user-friendly guidelines can help individuals understand and fulfill their tax obligations more easily.
    • Taxpayer Education and Assistance: Providing adequate taxpayer education and assistance is crucial to ensure compliance and address concerns. The government should invest in educational campaigns, workshops, and online resources to enhance taxpayer awareness and understanding of tax laws and procedures.
    • Efficient Dispute Resolution: Establishing efficient and timely dispute resolution mechanisms can help address grievances and concerns raised by taxpayers. Timely resolution of tax disputes and appeals can foster trust in the tax system and alleviate the perception of tax terrorism.
    • Balance between Tax Collection and Economic Growth: The government should strike a balance between tax collection objectives and promoting economic growth. Careful consideration should be given to the potential impact of TCS on sectors such as tourism and investments to ensure that the measures do not hamper economic development.
    • Continual Monitoring and Evaluation: Regular monitoring and evaluation of the TCS policy, along with its impact on tax compliance, economic growth, and taxpayer sentiment, should be conducted. This will enable the government to make informed decisions and adjustments as needed.

    Conclusion

    • Misinterpretation of the recent announcement on TCS for credit card payments has led to unwarranted panic and exaggerated reactions. While concerns should be addressed constructively, it is essential to acknowledge the government’s efforts in simplifying the tax system, leveraging technology, reducing processing times, and resolving disputes. Collaboration between the government and taxpayers is crucial to fostering a fair, easy, and compliant taxation environment in the country.

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    Also read:

    Levying the Wealth tax to reduce income inequality

     

  • RBI to pull out ₹2000 notes from active circulation

    2000

    Central Idea

    • The Reserve Bank of India (RBI) has decided to withdraw ₹2000 denomination banknotes from circulation as part of its “Clean Note Policy.”
    • The withdrawal is similar to a previous withdrawal of notes in 2013-2014 (and not the demonetization).

    Legal Tender Status of ₹2,000 Banknotes

    • ₹2000 banknotes will continue to maintain their legal tender status.
    • People can use ₹2000 banknotes for transactions and accept them as payment.
    • However, the RBI encourages depositing or exchanging the notes by September 30, 2023.

    About the ₹2000 Notes

    • The ₹2000 denomination banknote was introduced in November 2016 under Section 24(1) of RBI Act, 1934.
    • It primarily aimed to meet the currency requirement of the economy in an expeditious manner after withdrawal of the legal tender status of all ₹500 and ₹1000 banknotes in circulation at that time.

    Reasons for withdrawal

    • Demonetization purpose served: Printing of ₹2000 notes was stopped in 2018-19 as other denominations became available in adequate quantities.
    • Clean Note Policy: This aims to provide good-quality currency notes with enhanced security features and withdraw soiled notes from circulation.
    • Ending timespan: Majority of the ₹2000 notes were issued prior to March 2017 and have reached their estimated lifespan of 4-5 years.
    • Disappeared from circulation: This denomination is not commonly used for transactions, and there is sufficient stock of banknotes in other denominations to meet public requirements.

    Withdrawal process

    • People can deposit ₹2,000 notes into their bank accounts or exchange them for banknotes of other denominations at any bank branch.
    • The usual deposit process without restrictions and subject to applicable statutory provisions applies.
    • Banks have been directed to provide deposit and exchange facilities for ₹2,000 notes until September 30, 2023.
    • The facility for exchange up to ₹20,000 at a time will be available at banks and RBI’s Regional Offices from May 23, 2023.
    • Banks are instructed to stop issuing ₹2,000 notes immediately.

    Impact and financial analysis

    • Deposit accretion of banks may improve in the short term, similar to the demonetization period.
    • Improved deposit rates may reduce pressure on interest rate hikes and lead to moderation in short-term interest rates.

    Clean Note Policy

    Previously, banknotes issued before 2005 were withdrawn due to fewer security features.

    Notes issued before 2005 are still legal tender but no longer in circulation to maintain consistency with international practices.

    Key issues

    • Individuals can seek multiple exchanges in packets of ₹20,000, but this may attract attention from enforcement agencies and the Income-tax Department.
    • Large sums of money in ₹2,000 notes may be difficult to exchange.
    • It is likely to witness chaos and long queues in bank branches.

    FAQs: Exchanging and depositing ₹2,000 Banknotes

    • Individuals should approach bank branches for depositing or exchanging ₹2,000 banknotes.
    • Deposit and exchange facilities will be available at banks until September 30, 2023.
    • Exchange facilities will also be available at 19 RBI Regional Offices.
    • There is a limit of ₹20,000 for each exchange transaction.
    • Account holders can exchange up to ₹4,000 per day through business correspondents.
    • Deposits into bank accounts have no restrictions, but compliance with KYC norms and other regulatory requirements is necessary.
    • From May 23, 2023, people can approach bank branches or RBI Regional Offices to exchange their ₹2,000 notes.

     

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  • What are Global Depository Receipts (GDRs)?

    Central Idea: Tata Consumer Products has announced its decision to delist its global depository receipts (GDRs) from the London Stock Exchange and Luxembourg Stock Exchange.

    What are GDRs?

    • GDRs are financial instruments used by companies to raise capital from international investors.
    • They represent a bundle of shares in the company and are typically listed and traded on international stock exchanges.
    • GDRs provide a way for companies to access global capital markets and attract investments from foreign investors without directly listing their shares on multiple stock exchanges around the world.

    GDR Regulation in India

    • In India, GDRs can be issued by Indian companies that meet the eligibility criteria set by the SEBI.
    • SEBI sets guidelines and regulations for companies wishing to issue GDRs typically include the following:
    1. Listing: The company must be listed on a recognized stock exchange in India.
    2. Track Record: The company should have a track record of profitability for a certain period as specified by SEBI.
    3. Good Corporate Governance: The company must comply with corporate governance norms and disclose relevant financial and non-financial information.
    4. Regulatory Compliance: The company must comply with all applicable laws and regulations, including those related to securities and foreign exchange.
    5. Approval from Regulatory Authorities: The company needs to obtain necessary approvals from SEBI and other relevant authorities for the issuance of GDRs.

    Need for GDR

    • Capital Raising: GDRs offer a means for companies to raise capital from international investors, helping them finance investments, expansion projects, acquisitions, or debt repayment.
    • Global Investor Base: GDRs allow companies to access a diverse range of international investors, including institutional investors, hedge funds, and retail investors, thereby expanding their shareholder base.
    • Cost Efficiency: GDRs can be a cost-effective alternative to traditional methods of listing shares on multiple exchanges, as they enable companies to tap into global capital markets without the need for separate listings in different countries.
    • Simplified Trading and Settlement: GDRs facilitate easy trading and settlement for international investors, as they eliminate the need to navigate local market regulations and procedures.
    • Risk Mitigation: GDRs can provide a degree of risk mitigation for companies by reducing their exposure to local market fluctuations and volatility, as they offer access to a more diversified investor base.
    • Arbitrage Opportunities: GDRs can create arbitrage opportunities for investors who can exploit price discrepancies between the GDRs and the underlying shares listed on the domestic stock exchange.

    Benefits offered

    • Access to Global Capital: GDRs enable Indian companies to access a larger pool of international capital and diversify their funding sources beyond domestic markets.
    • Increased Liquidity: Listing GDRs on international exchanges provides Indian companies with broader exposure and enhances the liquidity of their shares, as they become accessible to a wider range of investors.
    • Enhanced Global Visibility: GDRs help raise the profile of Indian companies on a global scale, increasing their visibility and attracting the attention of international investors and analysts.
    • Currency Diversification: GDRs can also provide an opportunity for Indian companies to diversify their exposure to foreign currencies, as GDRs are often denominated in a currency other than the company’s home currency.

     

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  • Credit cards put under Liberalised Remittance Scheme (LRS)

    Central Idea: The Centre has amended rules under Foreign Exchange Management Act (FEMA) Rules, bringing international credit card spends under the Liberalised Remittance Scheme (LRS).

    Changes introduced

    • Credit card spends outside India now fall under the LRS, allowing for the application of a higher TCS rate.
    • The amendment removes the exclusion of credit card transactions from the LRS, which was previously covered under Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.
    • The changes do not apply to payments for the purchase of foreign goods/services from India.

    What is Liberalised Remittance Scheme (LRS)?

    • LRS is a facility provided by the Reserve Bank of India (RBI) to resident individuals to remit funds abroad for permitted current or capital account transactions or a combination of both.
    • The scheme was introduced in 2004 and has been periodically reviewed and revised by the RBI.
    • Under the scheme, resident individuals can remit up to a certain amount in a financial year for permissible transactions including education, travel, medical treatment, gifts, and investments in equity and debt securities, among others.
    • The limit for LRS is currently set at USD 250,000 per financial year.

    Eligibility for LRS

    • LRS is open to everyone including non-residents, NRIs, persons of Indian origin (PIOs), foreign citizens with PIO status and foreign nationals of Indian origin.
    • The Scheme is NOT available to corporations, partnership firms, Hindu Undivided Family (HUF), Trusts etc.

    Benefits provided by LRS

    • LRS is an easy process that anyone can use to transfer money between two countries.
    • It’s especially useful for businesses because they can use it to transfer funds to India, and investors can receive their investments back home.
    • LRS also has some added benefits, like fast transfer timing and no issues with exchange rates.

    Concerns with credit card spends

    • The amendment aims to achieve parity between the usage of credit and debit cards, which were already covered under the LRS.
    • Instances of disproportionately high LRS payments compared to disclose incomes prompted the amendment.
    • Business visits of employees, where costs are borne by the employer, are not covered under the LRS.
    • The data collected from major money remitters under the LRS indicated that international credit cards were being issued with limits exceeding the prescribed norm.

    Exclusions and impact of the Scheme

    • The government assured that the LRS scheme would not cover genuine business visits abroad by employees.
    • The imposition of a 20% tax collection on source (TCS) for foreign remittances would primarily affect tour travel packages, gifts to non-residents, and domestic high net-worth individuals investing in assets like real estate, bonds, and stocks outside India.
    • The Ministry emphasized that the 5% TCS levied on medical or education expenses abroad, allowed up to ₹7 lakh per year, and would remain unchanged.

  • RBI regulations on Green Deposits

    Central Idea: The Reserve Bank of India (RBI) has introduced a regulatory framework to govern the acceptance of green deposits by banks, ensuring transparency and accountability in their investments.

    What are Green Deposits?

    • Green deposits are financial products offered by banks that are similar to regular deposits, but the money received is specifically earmarked for environmentally friendly projects.
    • These deposits support projects aimed at combating climate change, such as renewable energy initiatives, while avoiding investments in activities that harm the environment, like fossil fuel projects.
    • They are part of a broader range of financial products, including green bonds and green shares that enable investors to contribute to environmentally sustainable projects.

    Regulatory framework for accepting Green Deposits

    • The RBI’s framework mandates that banks establish a set of rules or policies, approved by their respective Boards, to guide the investment of green deposits.
    • These rules must be made public on the banks’ websites, ensuring transparency and enabling customers to make informed decisions.
    • Banks are required to disclose information on the amount of green deposits received, how these funds are allocated to different green projects, and the environmental impact of such investments.
    • To verify the banks’ claims and the sustainability credentials of the projects, a third-party is appointed to conduct independent verification.

    Sectors eligible for green deposits

    • The RBI has identified a list of sectors classified as sustainable, which are eligible to receive green deposits.
    • These sectors include renewable energy, waste management, clean transportation, energy efficiency, and afforestation.
    • Banks are prohibited from investing green deposits in sectors considered detrimental to the environment, such as fossil fuels, nuclear power, tobacco, gambling, palm oil, and hydropower generation.

    Addressing greenwashing

    • Greenwashing refers to the practice of making misleading claims about the positive environmental impact of an activity or investment.
    • The RBI’s regulatory framework aims to prevent greenwashing in the banking sector by ensuring that the actual impact of green deposits is accurately represented.
    • By requiring transparency, disclosure, and third-party verification, the framework aims to protect customers from deceptive practices and ensure genuine environmental benefits.

    Impact and controversies

    • Depositors who prioritize environmental concerns may find satisfaction in investing their money in environmentally sustainable products like green deposits.
    • However, some critics argue that green investment products may primarily serve to make investors feel good without generating significant environmental benefits.
    • Additionally, the range of projects available for investment through green deposits may be limited, posing challenges in achieving broad environmental impact.

    Key challenge: Assessing environmental sustainability

    • Evaluating the true environmental sustainability of a project can be challenging in a complex world with interconnected systems and second-order effects that are difficult to anticipate.
    • It is essential to consider the indirect consequences and long-term effects of actions to determine if a project genuinely contributes to environmental sustainability.
    • Uncertainty surrounding the actual environmental impact of green projects highlights the need for rigorous evaluation and ongoing monitoring to ensure the desired outcomes are achieved.

     

     

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  • India’s Pension Reforms: Ensuring Pension Security

    Pension

    Central Idea

    • The issue of government employees’ pension has emerged as a critical political concern, leading several states to consider reverting from the New Pension Scheme (NPS) to the defined-benefit (DB) Old Pension Scheme (OPS). Acknowledging the significance of this matter, the Government of India has established a committee to enhance the NPS.

    What is pension?

    • A pension is a retirement plan that provides a stream of income to individuals after they retire from their job or profession. It can be funded by employers, government agencies, or unions and is designed to ensure a steady income during retirement.

    What is Old Pension Scheme (OPS)?

    • The OPS, also known as the Defined Benefit Pension System, is a pension plan provided by the government for its employees in India.
    • Under the OPS, retired government employees receive a fixed monthly pension based on their last drawn salary and years of service.
    • This pension is funded by the government and paid out of its current revenues, leading to increased pension liabilities.

    What is NPS?

    • NPS is a market-linked, defined contribution pension system introduced in India in 2004 as a replacement for the Old Pension Scheme (OPS).
    • NPS is designed to provide retirement income to all Indian citizens, including government employees, private sector workers, and self-employed individuals

    Pension

    Facts for prelims: Key differences between the two pension schemes

    Parameters The Old Pension Scheme(OPS) The New Pension Scheme (NPS)
    Nature of the schemes OPS offer pensions to government employees on the basis of their last drawn salary NPS pays the employees for their investments in the NPS Scheme during their employment.
    Amount of pension derived 50 per cent of the last drawn salary 60% lump sum after retirement and 40% to be invested in annuities for getting a monthly pension
    Benefits in taxes No tax benefits The employee can claim tax deductions of 1.5 lakh under Section 80C of income tax and up to 50,000 on other investments under 80CCD (1b)
    Tax on pension No tax on pension 60% of the NPS Corpus is tax-free while the remaining 40% is taxable
    Option of Investment No option Two choices: Active and Automatic
    Who can avail? Only government employees Any Indian Citizen between 18-65 years.
    Switching Schemes OPS scheme can be switched to NPS NPS scheme cannot be switched back to OPS in general, but central government employees can switch back to OPS  in case of death and disablement of the employee.

    Reasons behind the growing demand for reverting to OPS

    • Stability and Predictability: One of the primary motivations for the demand to return to OPS is the desire for stability and predictability in pension benefits. Under the OPS, employees receive a fixed pension based on their last drawn salary, which is increased periodically to account for inflation. This offers a sense of security and certainty about post-retirement income, ensuring a stable financial future.
    • Market Risk and Annuity Payouts: The NPS, being a market-linked pension scheme, exposes pensioners to market risks. The returns on the pension fund are subject to market fluctuations, which can impact the overall corpus and subsequently affect annuity payouts. This volatility raises concerns among employees who seek a more secure and reliable pension arrangement.
    • Lower Annuity Prospects: With the NPS, pensioners bear the market risk and face the possibility of lower-than-expected annuity amounts. This uncertainty about future pension prospects prompts many employees to advocate for a return to OPS, which offers a predetermined pension amount.
    • Comparisons with Other Pension Systems: Employees often compare the OPS with pension systems in other countries, particularly those in the Organisation for Economic Co-operation and Development (OECD) economies. These comparisons reveal that OPS provides higher pension replacement rates, lower retirement ages, and covers the entire family. Such favorable aspects of OPS generate a perception of better benefits and incentivize employees to demand its reinstatement.
    • Perception of Unsustainability: While the NPS was introduced to address fiscal strains associated with the unfunded OPS, there are concerns about its long-term sustainability. Some argue that OPS can be sustained through effective fiscal management and reform, rather than completely abandoning it. The perception of unsustainability drives the demand for reverting to OPS as a viable alternative.

    Challenges involved in reverting back to OPS

    • Fiscal Sustainability: The OPS operates on a pay-as-you-go (PAYG) system, where present workers finance the retired. With declining birth rates and increased life expectancy, the burden on the future workforce to fund pensions will intensify. The OPS, being an unfunded scheme, poses challenges in maintaining fiscal sustainability in the long run.
    • Demographic Shifts: The dependency ratio is expected to increase substantially, with fewer workers supporting a larger number of retirees. This demographic shift adds to the challenges of sustaining the OPS, as it puts additional strain on the funding mechanism and the ability to meet pension obligations.
    • Inflationary Pressures: The OPS guarantees periodic increases in pension payouts through dearness allowance (DA) adjustments to account for inflation. However, relying on fixed increments tied to DA can pose challenges during periods of high inflation. Ensuring that pension payments keep pace with inflation without compromising fiscal stability can be a complex task for policymakers.
    • Budgetary Constraints: The financial burden of reverting to OPS can put a significant strain on the government’s budget. Pension liabilities already account for a substantial portion of states’ revenue receipts and own revenues. Increasing pension obligations may lead to a reduction in development expenditure or necessitate additional borrowing, potentially exacerbating the issue of public debt.
    • Inter-generational Equity: Maintaining inter-generational equity is a crucial consideration in pension reforms. Reverting to OPS might fulfill the aspirations of current employees, but it can impose a heavy burden on future generations. Striking a balance between providing reasonable pension security for present employees and ensuring the sustainability of the pension system for future generations is a key challenge that needs to be addressed.
    • Economic Factors: The economic environment, including interest rates and investment returns, can impact the financial viability of OPS. Changes in economic conditions, such as low interest rates or inadequate returns on pension fund investments, can strain the financial resources needed to sustain OPS and meet pension obligations.

    Pension

    Way ahead: Building sustainable and inclusive pension systems

    • Comprehensive Reform: Governments should undertake comprehensive reforms which may involve revisiting the pension architecture, introducing alternative pension models, and exploring hybrid schemes that combine elements of defined-benefit and defined-contribution systems. Reforms should be guided by a thorough analysis of demographic trends, fiscal constraints, and economic conditions.
    • Adequate Funding Mechanisms: Pension systems must establish robust funding mechanisms to ensure that pension obligations can be met. This may involve setting up dedicated pension funds, implementing sound investment strategies, and establishing appropriate contribution rates for both employees and employers.
    • Strengthening Pension Governance: Effective governance is crucial for the success of pension systems. Governments should strengthen the regulatory framework, improve transparency, and enhance accountability in the management of pension funds. Establishing independent oversight bodies and adopting international best practices can help ensure the integrity and efficiency of pension governance.
    • Promoting Financial Literacy: Financial literacy programs should be implemented to educate individuals about the importance of retirement planning, investment strategies, and the risks and benefits associated with different pension options. Empowering individuals with financial knowledge will enable them to make informed decisions and take an active role in securing their retirement income.
    • Encouraging Voluntary Savings: Governments should encourage voluntary retirement savings programs to complement the mandatory pension schemes. Providing incentives, such as tax benefits or matching contributions, can incentivize individuals to save for retirement beyond the mandatory contributions. Voluntary savings options, such as individual retirement accounts or employer-sponsored plans, can offer individuals greater flexibility and control over their retirement savings.
    • Flexibility and Portability: Pension systems should adapt to the changing nature of work and support individuals with diverse employment patterns. Portable pension accounts that allow individuals to carry their accumulated benefits across jobs can ensure continuity of retirement savings. Flexibility in pension payout options, such as lump sum withdrawals or phased withdrawals, can accommodate different financial needs and preferences of retirees.
    • Social Safety Nets: To address the needs of vulnerable populations, social safety nets should be incorporated into pension systems. These safety nets can provide minimum income guarantees or targeted assistance for individuals with limited or interrupted work histories, low-income earners, and those facing economic hardships in retirement.

    Conclusion

    • Amidst the debate between NPS and OPS, it is crucial to devise a pension system that ensures security without compromising fiscal sustainability and inter-generational equity.

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    Must read:

    Contributory Guaranteed Pension Scheme (CGPS): A Considerable Alternative

     

  • Cabinet nod for ₹1.08 lakh crore kharif Fertilizer Subsidy

    Central Idea

    • The Union Cabinet has approved a fertilizer subsidy of ₹1.08 lakh crore for the ongoing kharif or monsoon season.
    • ₹38,000 crore will be allocated for Nitrogen, phosphatic and potassic (NPK) fertilizers, while ₹70,000 crore will go towards the urea subsidy.

    Fertilizer consumption and subsidies

    • The country’s total consumption of urea is approximately 325 to 350 lakh metric tonnes (LMT).
    • Other fertilizers sold in the country include 100 to 125 LMT of DAP, 100 to 125 LMT of NPK, and 50 to 60 LMT of Muriate of Potash (MoP).
    • The fertilizer subsidy per hectare of land is about ₹8,909, and each farmer receives a subsidy of ₹21,223.
    1. DAP: The actual price of a bag of DAP is ₹4,000, but farmers receive it at a subsidized rate of ₹1,350 per bag, with a subsidy of ₹2,461 per bag.
    2. NPK: This subsidy is ₹1,639 per bag, and the MoP subsidy amounts to ₹734 per bag.
    3. Urea: The Centre spends ₹2,196 per bag of urea.

    Fertilizer Subsidy in India

    • Subsidy as a concept originated during the Green Revolution of the 1970s-80s.
    • Fertiliser subsidy is purchasing by the farmer at a price below MRP (Maximum Retail Price), that is, below the usual demand-and-supply-rate, or regular production and import cost.
    • The rate of subsidy is based on the average price of imported fertilizer in the last six months.

    How is the subsidy paid and who gets it?

    • The subsidy goes to fertiliser companies, although its ultimate beneficiary is the farmer who pays MRPs less than the market-determined rates.
    • From March 2018, a new so-called direct benefit transfer (DBT) system was introduced, wherein subsidy payment to the companies would happen only after actual sales to farmers by retailers.
    • With the DBT system, each retailer — there is over 2.3 lakh of them across India — now has a point-of-sale (PoS) machine linked to the Department of Fertilizers’ e-Urvarak DBT portal.

    How does this system work?

    • A popular example of how this system works is that of the neem-coated urea fertiliser.
    • Its MRP is fixed by the government at Rs. 5922.22 per tonne.
    • The average cost of domestic production is at Rs 17,000 per tonne. The difference is footed by the centre in the form of subsidy.

    What about non-urea fertilizers?

    • The non-urea fertiliser is decontrolled or fixed by the companies.
    • The non- urea fertilizers are further divided into two parts, DAP (Diammonium Phosphate) and MOP (Muriate of Phosphate).
    • The government pays a flat per tonne subsidy to maintain the nutrition content of the soil, and ensure other fertilizers are economical to use.

    Issues with such subsidies

    • Low NUE: Indian soil has low Nitrogen use efficiency, which is the main constituent of Urea.
    • Groundwater pollution: Consequently, excess usage contaminates groundwater.
    • Overuse beyond prescription: The bulk of urea applied to the soil is lost as NH3 (Ammonia) and Nitrogen Oxides. The WHO has prescribed limits been breached by Punjab, Haryana and Rajasthan.
    • Health hazards: For human beings, “blue baby syndrome” is a common side ailment caused by Nitrate contaminated water.

     

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  • India’s export of Russian oil to West

    oil

    Central Idea

    • The article discusses India’s increased imports of Russian oil and the potential circumvention of sanctions imposed on Russian oil products.

    Why in news?

    • An EU parliamentarian accused India of profiting from cheaply bought Russian oil and indirectly supporting the Russian economy.
    • India justified its purchase by emphasizing its energy demands and the challenges of higher prices due to its reliance on energy imports and significant poverty levels.

    Reasons: Sanctions against Russian Oil

    • After Russia’s invasion of Ukraine, Western countries and Europe aimed to reduce their dependency on Russian energy imports to weaken the Russian economy.
    • Measures were taken, such as Germany suspending the launch of the Nord Stream natural gas pipeline and Canada and the US banning the import of Russian crude oil.
    • Stricter sanctions were imposed on Russia, including a “price cap” from trading Russian oil above $60 per barrel.
    • The price cap aimed to cripple Moscow’s economy and limit its ability to fund the war in Ukraine.
    • However, Russia increased its oil exports to India and China as a response.

    India’s role in meeting West’s energy demand

    • India, exempt from the sanctions on Russian oil, has seen a significant increase in fuel imports from Russia, which is then refined and supplied to Europe and the US.
    • The refined oil from Russian crude, once processed in India, is not considered of Russian origin.
    • India’s oil imports have helped it meet its own energy demands and also assist Western nations facing energy crises due to the Russia-Ukraine conflict.
    • India has become a net exporter of refined petroleum products, supplying the West to alleviate current energy shortages.

    Impact of Indian imports on Western markets

    • Indian refiners have ramped up exports of refined petroleum products, including diesel and vacuum gas oil (VGO), to Europe and the US.
    • VGO is a feedstock in the refining process that can be further processed to produce gasoline, diesel, and other fuel products.
    • Diesel exports to Europe from India have increased by 12-16% in the last fiscal year.
    • The US has become a major recipient of Indian VGO shipments, receiving 11,000-12,000 barrels per day (bpd) or 65-81% of India’s VGO exports.
    • These exports from India have helped ease the energy tightness and supply constraints in Western markets.

     

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  • Govt doubles outlay on PLI for IT hardware

    Central Idea

    PLI Scheme for IT Hardware

    • The PLI scheme for IT hardware was initially introduced in March 2021.
    • It provides incentives of over 4% for incremental investment in domestic manufacturing for eligible companies, such as Dell and Flextronics.
    • The scheme aims to boost domestic manufacturing, increase exports, and make India a prominent player in the IT hardware sector.
    • The scheme will have a tenure of six years, providing a long-term incentive for eligible companies to invest in domestic IT hardware manufacturing.

    Growth in indigenous IT hardware

    • The government highlighted the growth of electronics manufacturing in India.
    • There is a 17% compound annual growth rate over the past 8 years and a production benchmark of $105 billion, including $11 billion in mobile phone exports.

    New changes introduced

    • The budgetary outlay for the PLI scheme for IT hardware manufacturing has been set at ₹17,000 crore.
    • The incentive rate has been increased to 5%, offering a higher benefit to companies investing in domestic manufacturing.
    • An additional optional incentive has been introduced for using domestically produced components, although the specific rates of these incentives are not specified.
    • If the optional incentives are utilized as intended, the total incentive under the scheme could amount to 8-9%.

    Achievements in Telecom hardware manufacturing

    • Telecom hardware manufacturing has surpassed the projected ₹900 crore and reached ₹1,600 crore.
    • Some Indian companies have become significant exporters of complex radio equipment worldwide.

     

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  • A Social Security Board for Gig Workers: Rajasthan’s Pioneering Step

    Gig Workers

    Central Idea

    • The Chief Minister of Rajasthan recently announced the establishment of India’s first welfare fund, the Rajasthan Platform-Based Gig Workers Social Security and Welfare Fund. This landmark move comes as a significant regulatory step to address the vulnerabilities faced by gig and platform workers since the passage of the Code on Social Security in 2020.

    All you need to know about Platform-Based Gig Workers Social Security and Welfare Fund

    • Social security and welfare benefits to gig workers: It is the country’s first welfare fund specifically designed to address the social security needs of gig and platform workers established by the government of Rajasthan. The fund aims to provide social security benefits and welfare measures to gig workers who operate in the platform economy.
    • Set up in accordance with the Code on Social Security 2020: Code on Social Security recognizes the vulnerabilities faced by gig and platform workers and emphasizes the need for social security measures to protect their rights and well-being. The creation of the welfare fund aligns with the code’s objective of extending social security coverage to workers in the informal sector.
    • Operates as a tripartite institution: The Platform-Based Gig Workers Social Security and Welfare Fund operates as a tripartite institution, comprising representatives from the bureaucracy, employers or clients, and workers’ unions or associations. This structure enables the fund to effectively address the concerns and interests of all stakeholders involved.
    • Funding through revenue-sharing model: The Code on Social Security mandates that platform companies contribute 1%-2% of their revenue towards the fund, ensuring that the financial responsibility is shared between the platforms and the government.

    Who are known as Gig Workers?

    • Gig workers are individuals who engage in temporary, flexible, and on-demand work arrangements, often facilitated through digital platforms or apps.
    • They are part of the gig economy, which is characterized by short-term and project-based work engagements rather than traditional long-term employment contracts.
    • Gig workers encompass a wide range of occupations and industries. They may include freelance writers, drivers for ride-hailing services, delivery personnel, online marketplace sellers, virtual assistants, graphic designers, and many others.
    • These workers typically operate as independent contractors, offering their services or completing tasks on a project-by-project basis.

    Potential challenges in program implementation

    • Lack of Clarity in Definitions: The classification and definition of gig workers can vary, making it challenging to accurately identify and include all eligible individuals in the programs. Determining the scope and coverage of the programs can be complex, especially considering the diverse nature of gig work.
    • Funding Constraints: Allocating sufficient funds for the implementation of social security programs for gig workers can be a significant challenge. Adequate resources need to be allocated to ensure the sustainability of the programs and the provision of comprehensive benefits. Identifying the appropriate funding mechanisms, such as revenue-sharing models or contributions from platforms, can be complex and require careful consideration.
    • Limited Awareness and Outreach: Many gig workers may be unaware of their rights or the existence of social security programs available to them. Effective outreach and awareness campaigns are crucial to ensure that gig workers understand the benefits and are encouraged to participate. Language barriers, digital literacy issues, and the dispersed nature of gig workers can further complicate outreach efforts.
    • Adapting to Technological Platforms: Implementing social security programs within the digital platforms that facilitate gig work can pose technical challenges. Integration with existing platform systems, ensuring secure data management, and addressing potential privacy concerns require careful planning and coordination between government agencies and platform operators.
    • Addressing Cross-Jurisdictional Issues: Gig workers often operate across multiple jurisdictions, which can create complexities in program implementation. Coordination among different states or countries may be required to ensure seamless coverage and avoid gaps or duplications in benefits.
    • Establishing Fair Evaluation Criteria: Determining eligibility criteria and evaluating gig workers’ contributions or income can be challenging. Traditional methods of assessing employment status or income may not align with the dynamic and variable nature of gig work. Developing fair and transparent evaluation mechanisms is crucial to ensure that deserving gig workers receive the appropriate benefits.
    • Balancing Flexibility and Protection: Gig work is characterized by its flexibility, allowing workers to choose when and how much they work. Designing social security programs that provide necessary protections while still accommodating the flexible nature of gig work can be a delicate balance. Ensuring that gig workers can access benefits without compromising their work arrangements is essential.

    Measures to overcome operational challenges

    • Comprehensive Outreach and Awareness Campaigns: Launch targeted and extensive awareness campaigns to inform gig workers about the available social security programs, their benefits, and the application process. Utilize multiple communication channels, including online platforms, mobile apps, social media, and community networks, to reach a wide range of gig workers.
    • Simplified Registration and Enrollment Processes: Streamline the registration and enrollment processes to make them user-friendly and accessible to gig workers. Utilize digital platforms and mobile applications to enable easy and convenient enrollment, reducing paperwork and administrative burdens.
    • Partnerships with Platforms: Collaborate with platform operators to facilitate program implementation. Platforms can play a crucial role in sharing information, reaching out to gig workers, and integrating social security features directly into their platforms. Establish clear guidelines and expectations for platform operators to ensure compliance and seamless integration of social security measures.
    • Tailored Benefit Packages: Design benefit packages that cater to the specific needs of gig workers. Consider their income volatility, irregular work schedules, and diverse occupational risks when determining the types of benefits to offer. Flexibility and customization in benefit packages can help address the unique challenges faced by gig workers.
    • Digital Solutions and Technology Integration: Leverage digital solutions and emerging technologies to streamline processes, enhance efficiency, and improve service delivery. Utilize digital platforms for benefits management, payment systems, and claims processing to ensure a seamless and user-friendly experience for gig workers.
    • Collaborative Governance: Establish tripartite partnerships involving government authorities, gig worker representatives, and platform operators to foster effective governance and decision-making. This collaborative approach ensures that the perspectives and interests of all stakeholders are taken into account and promotes transparency and accountability.
    • Continuous Monitoring and Evaluation: Implement robust monitoring and evaluation mechanisms to assess the effectiveness and impact of social security programs for gig workers. Regularly collect feedback from gig workers, platform operators, and other stakeholders to identify areas for improvement and make necessary adjustments to the programs.
    • International Collaboration and Knowledge Sharing: Engage in international collaboration and knowledge sharing to learn from best practices and experiences of other countries implementing social security measures for gig workers. Exchange ideas, strategies, and lessons learned to enhance program implementation and overcome operational challenges.

    Facts for prelims

    New classification by NITI Aayog: Platform vs. Non-platform Workers

    • The NITI Aayog report broadly classifies gig workers into platform and non-platform-based workers.
    • The consequent platformisation of work has given rise to a new classification of labour — platform labour — falling outside of the purview of the traditional dichotomy of formal and informal labour.
    • While platform workers are those whose work is based on online software applications or digital platforms.
    • Non-platform gig workers are generally casual wage workers and own-account workers in the conventional sectors, working part-time or full time.

     Conclusion

    • The establishment of the Rajasthan Platform-Based Gig Workers Welfare Board represents a significant victory for platform workers and unions who have long advocated for their rights. While many states are yet to take action, Rajasthan sets an example by prioritizing the welfare of these workers, especially with assembly elections looming next year.