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Subject: Economics

  • National Champions Model for Infrastructure Development: Pros and Cons

    National

    Central Idea

    • Emerging economies struggle to provide functional and efficient infrastructure. Infrastructure has become a national aspiration good, a mechanism for job creation, and a necessity. The two biggest constraints on infrastructure provision are cost and public good component. This national champion’s model aims to incentivize private sector participation in infrastructure investments, but it also has its own set of challenges and limitations.

    Traditional Financing Approaches and their Limitations

    • The traditional approach to financing infrastructure has relied on tax revenues or government borrowing.
    • However, this creates a vicious trap as poorer economies generate less tax revenue, which limits infrastructure investment, leading to a further spinoff that affects the growth of the economy and keeps the country poor.
    • Increasing public borrowing domestically tends to crowd out private investment, exacerbating the problem.

    National

    The Public-Private Partnership Model and its Problems

    • The Indian government tried to incentivize private sector participation in infrastructure investment by introducing the Public-Private-Partnership (PPP) model in the early 2000s.
    • While the PPP model led to the construction of a lot of infrastructure, it ended in an avalanche of non-performing assets with public sector banks, private sector bankruptcies, accusations of widespread corruption, and a change in government in 2014.

    National

    The National Champions Model and its Innovations

    • The present government has modified the PPP approach by assigning the bulk of infrastructure provisioning for roads, ports, airports, energy, and communications to a few chosen industrial houses.
    • This is the national champions model where the government picks a few large conglomerates to implement its development priorities.
    • This model incentivizes national champions to build projects by providing subsidies to cover the costs.
    • New aspects of the National Champions Model:
    1. National champions need control over existing projects with strong cash flows to incentivize investment in projects with low returns and negative cash flows.
    2. Public association of champions with the government’s national development policy generates a competitive advantage for the champions in getting domestic and foreign contracts.
    3. Access to some cash-rich projects allows national champions to borrow from external credit markets by using these entities as collateral, which lowers the cost of finance of other.

    Benefits of National Champions Model

    • Economic growth: National champions can contribute to economic growth by generating revenue, creating jobs, and investing in research and development.
    • Strategic importance: The model can help ensure that the country has a strong presence in strategically important industries, such as defense or energy, which can be critical to national security.
    • Export competitiveness: National champions can become leaders in their respective markets and compete effectively in global markets, which can increase exports and improve the country’s trade balance.
    • Innovation: National champions can invest heavily in research and development, leading to technological advancements that can benefit the broader economy.
    • Access to capital: National champions may be able to access capital more easily than smaller companies, allowing them to make larger investments and pursue growth opportunities.

    The Problems with the National Champions Model

    • Too big to fail: Market and regulatory treatment of conglomerates as too big to fail. This means that these companies are so large and important to the economy that their failure could cause widespread harm to the financial system and the economy as a whole. This opens the door to market hysteria, delayed discovery of problems, and spillovers of sectoral problems into systemic shocks. The recent troubles of the Adani companies in India highlight the potential risks associated with this approach.
    • Encouraging market concentration that can be bad for efficiency and productivity: Concentrated markets reduce competition and can lead to higher prices, lower quality, and reduced innovation. When firms have market power, they have less incentive to improve their products or services, reduce costs, or innovate. This can result in lower overall productivity in the economy.
    • The risk of turning the country into an industrial oligarchy: An industrial oligarchy is where a small group of powerful and influential conglomerates control a large portion of the economy. This can have negative consequences for economic growth, social mobility, and political stability. An oligarchy may be resistant to change and less responsive to the needs and aspirations of the broader population.
    • Uneven playing field: The optics of an uneven playing field in terms of market access and selective regulatory forbearance that can become a significant deterrent for foreign investors.

    National

    Conclusion

    • While infrastructure is a necessary condition for growth, it is not a sufficient one. Effective demand is the problem, as seen in the power sector, where the inability of the power distribution companies to recover payments was the issue. India is at an inflection point in its development path, and the national champions model has its pros and cons that needs to be analyzed before its consideration.

    Mains Question

    Q. What is National Champions Model for Infrastructure development in India? Discuss its advantages and disadvantages.

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  • India’s Foreign Trade Policy set to be revised from April 1

     

    trade

    Central idea: The revision of India’s Foreign Trade Policy, which has been unchanged since 2015 and due for three years, may finally be announced by the end of this month.

    What is a Foreign Trade Policy?

    • India’s Foreign Trade Policy (FTP) is a set of guidelines for goods and services imported and exported.
    • These are developed by the Directorate General of Foreign Trade (DGFT), the Ministry of Commerce and Industry’s regulating body for the promotion and facilitation of exports and imports.
    • FTPs are enforceable under the Foreign Trade Development and Regulation Act 1992.

    What is India’s Foreign Trade Policy?

    • In line with the ‘Make in India,’ ‘Digital India,’ ‘Skill India,’ ‘Startup India,’ and ‘Ease of Doing Business initiatives, the Foreign Trade Policy (2015-20) was launched on April 1, 2015.
    • It provides a framework for increasing exports of goods and services, creating jobs, and increasing value addition in the country.
    • The FTP statement outlines the market and product strategy as well as the steps needed to promote trade, expand infrastructure, and improve the entire trade ecosystem.
    • It aims to help India respond to external problems while staying on top of fast-changing international trading infrastructure and to make trade a major contributor to the country’s economic growth and development.

    Issues with FTP (2015-2020)

    • Acting on Washington’s protest, a WTO dispute settlement panel ruled in 2019 that India’s export subsidy measures are in violation of WTO norms and must be repealed.
    • Tax incentives under the popular Merchandise Exports from India Scheme (MEIS) (now renamed as RODTEP Scheme)and Service Exports from India Scheme (SEIS) programmes were among them.
    • The panel found that because India’s per capita gross national product exceeds $1,000 per year, it may no longer grant subsidies based on export performance.

    Why such a delay in Foreign Trade Policy?

    • Geopolitical uncertainty: The geo-political situation is not suitable for long-term foreign trade policy, said Union Commerce Minister.
    • Global recession: Currently, fears of a recession in major economies like the US and Europe have escalated a panic among investors.
    • Decline in USD inflows: Foreign investors have begun to pull back their money from equities.
    • Rupee depreciation: The US Dollar is at a 22-year high, while the Rupee hit a new all-time low of $81.6.
    • Huge trade deficit: The trade deficit widened by more than 2-folds to $125.22 billion (April – August 2022) compared to $53.78 billion in the same period last year.
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  • NSO’s New Data: India’s GDP Growth

    GDP

    Central Idea

    • The National Statistical Office (NSO) has released a new set of data on India’s annual and quarterly national income, providing a final assessment of the COVID-19 pandemic’s impact on the country’s GDP growth. The latest numbers and sector-wise performance, highlighting areas of growth and contraction.

    Recovery since pre-COVID year

    • Advance estimates: NSO’s second advance estimate (SAE) shows a contraction of (-) 5.7% in 2020-21, lower than its first advance estimate (FAE) at (-) 7.7%.
    • Benefited sectors: Manufacturing, construction, and financial sectors benefited the most in the revised estimate.
    • GDP growth: Real GDP in the COVID-19 year amounted to ₹136.9 lakh crore, higher than the earlier assessment of ₹134.4 lakh crore. GDP grew by 9.1% in 2021-22 and 7% in 2022-23.
    • Negative growth in 2020: The compound annual average growth rate between 2019-20 and 2022-23 was 3.2%. Comparison with other countries, including China, Bangladesh, and Vietnam, shows India’s negative growth rate in 2020.

    Back to basics: Advanced estimates

    • Advance estimates refer to the preliminary projections made by the government regarding the likely economic growth, inflation, or other macroeconomic indicators of a country for a given period. These estimates are usually released a few months before the actual data for the period becomes available.
    • Advance estimates are based on various economic indicators such as industrial production, agricultural output, exports, and consumption expenditure, among others. These indicators are used to extrapolate the economic activity for the full period, based on which the government makes its initial projections.

    GDP

    Sector-wise Performance

    • Overall GVA in 2022-23 is higher by 11.3% compared to 2019-20.
    • Mining and quarrying sector still shows a contraction at (-) 0.3%.
    • Trade, hotels, transport, etc., show weak growth of 4.3%.
    • Construction sector shows higher-than-average growth at 18.6%.
    • Manufacturing sector also shows robust growth at 14.8%.
    • Financial, real estate, etc., grew at 14.3%.
    • Agriculture sector grew at 12%.
    • Government final consumption expenditure (GFCE) grew at 7.4%.
    • Gross fixed capital formation and private final consumption expenditure (PFCE) increased by 17.7% and 13.1%, respectively.

    Investment and Capacity Utilization

    • Gross fixed capital formation to GDP ratio in nominal terms increased to 29.2% in 2022-23 from 28.6% in 2019-20.
    • Real investment rates increased to 34% in 2022-23 from 31.8% in 2019-20.
    • Estimated incremental capital output ratio (ICOR) decreased to 4.9 in 2022-23 from 8.5 in 2019-20.
    • Capacity utilization ratio in the manufacturing sector was only 70.3% in 2019-20, but it increased to 73.5% in the first half of 2022-23.
    • Subdued growth implies lower capacity utilization and higher ICOR.

    Quarterly Growth and Projections

    • Q3 2022-23 saw a decline in real GDP growth to 4.4% from 6.3% in Q2 and 13.2% in Q1.
    • Growth rate in Q3 and expected growth rate in Q4 are quite low.
    • High frequency indicators point towards improved economic activity.
    • PMI manufacturing in January and February 2023 remained above its long-term average.
    • PMI services increased to a near 12-year

    GDP

    Conclusion

    • the NSO’s latest data on India’s GDP growth provides a final assessment of the COVID-19 pandemic’s impact on the country’s economy. The NSO’s data shows that India’s economy is recovering, albeit at a slower pace, from the COVID-19 pandemic.
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  • Rise of the Environmental, Social and Governance (ESG) Regulations

    esg

    Central idea: Regulators and corporations worldwide now measure businesses on ESG criteria. ESG criteria is crucial for investors to assess a company’s risk profile accurately. India is still in the nascent stage of ESG laws and regulations.

    What is ESG?

    • ESG Regulations are a set of standards used by investors to evaluate a company’s environmental and social impact, as well as its corporate governance practices.
    • They require companies to be transparent about their environmental and social performance, as well as their governance structure.
    • ESG factors are increasingly being used by investors to make investment decisions, and ESG ratings are becoming an important metric for companies seeking to attract investment.
    • The ESG regulations differ by country, but many require companies to disclose information on environmental and social issues, as well as on their governance practices.
    • ESG regulations are becoming increasingly important as investors and consumers demand greater transparency and accountability from companies.Top of FormBottom of Form

    Features of ESG Mechanism

    • Environmental factors: These include a company’s impact on climate change, greenhouse gas emissions, pollution, waste management, and natural resource conservation.
    • Social factors: These include a company’s impact on society, such as labor practices, human rights, community relations, customer satisfaction, and product safety.
    • Governance factors: These include a company’s management structure, board diversity, executive compensation, shareholder rights, and business ethics.
    • ESG ratings and metrics: Companies are evaluated based on ESG ratings and metrics, which can help investors assess a company’s overall sustainability and ethical impact.
    • ESG investing: ESG investing refers to investing in companies that meet certain ESG criteria, with the aim of generating financial returns while also having a positive impact on society and the environment.
    • ESG reporting: Many companies are now required to disclose their ESG performance and report on their sustainability practices, in order to meet regulatory requirements and respond to growing investor demand for transparency and accountability.Top of FormBottom of Form

    Corporate Social Responsibility: ESG-like mechanism in India

    • India has a robust corporate social responsibility (CSR) policy that mandates that corporations engage in initiatives that contribute to the welfare of society.
    • This mandate was codified into law with the passage of the 2014 and 2021 amendments to the Companies Act of 2013.

    How ESG differs from CSR?

    • ESG regulations differ from CSR regulations in their process and impact
    • For example, the U.K. Modern Slavery Act requires companies with business in the U.K. and with annual sales of more than £36 million to publish their efforts in identifying and analysing the risks of human trafficking, child labour and debt bondage in their supply chain.
    • It seeks to establish internal accountability procedures, evaluate supplier compliance, and train supply chain managers regarding these issues
    • The EU’s Sustainable Finance Disclosure Regulation requires financial market participants to disclose how they have integrated sustainability risks into their investment decision-making processes
    • There are scores of such regulations at the state, national and transnational level.

    Why is ESG relevant in India?

    Ans. Existing mechanisms serve ESG purpose

    • India has long had a number of laws and bodies regarding environmental, social and governance issues, including the Environment Protection Act of 1986.
    • It has quasi-judicial organisations such as the National Green Tribunal, a range of labour codes and laws governing employee engagement and corporate governance practices.
    • These initiatives established guidelines that emphasise monitoring, quantification and disclosure, akin to ESG requirements found in other parts of the world.

    ESG for Indian companies

    Here are some key considerations for Indian companies in relation to ESG:

    • Compliance with global ESG regulations: Compliance in the US, UK, EU and elsewhere is critical for Indian companies to take full advantage of the growing decoupling from China and play a more prominent role in global supply chains and the global marketplace overall.
    • Due diligence: This will play a key role in ESG risk management, which means going beyond questionnaires and conducting deeper assessments that may include looking at company records, interviewing former employees, and making discreet visits to observe operations to ensure that measures to comply with international ESG standards are in effect.
    • Revamp organizations: ESG due diligence should be supported within the company with detailed procedures for assessing risks and controls for assuring that no corners are cut. Companies that wish to maximise their opportunities in the global economy need to embrace these new requirements and adjust their organisations accordingly.

    Way forward

    • Encouraging and incentivizing companies: To adopt ESG practices voluntarily through education, training and awareness-raising programs.
    • Developing national guidelines and standards for ESG: To promote consistency and comparability of ESG performance data among Indian companies.
    • Tailor-made Policy catering to domestic needs: Implementing ESG regulations that are tailored to the specific needs and challenges of Indian companies, with a focus on promoting transparency, accountability and stakeholder engagement.
    • Facilitating access to capital for companies that demonstrate strong ESG performance: By establishing ESG-focused investment funds and credit facilities.
    • Promoting international collaboration and harmonization of ESG standards: To facilitate global trade and investment while ensuring that ESG risks are appropriately addressed.

    Conclusion

    • Overall, a comprehensive and collaborative approach is needed to ensure that Indian companies can effectively manage ESG risks and opportunities and contribute to sustainable development.

     

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  • India bats for Sovereign Credit Rating upgrade

    credit

    Central idea: India is seeking an upgrade to its sovereign credit rating, currently at the lowest-possible investment grade, as it believes its economic metrics have improved considerably since the pandemic.

    What are Sovereign Credit Ratings?

    • A sovereign credit rating is a measure of a country’s creditworthiness, or its ability to meet its financial obligations.
    • It is an assessment of the credit risk associated with a country’s bonds or other debt securities.
    • The rating is assigned by credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings.

    India’s current ratings

    • S&P and Fitch rate India ‘BBB-‘ and Moody’s ‘Baa3’, all indicative of the lowest-possible investment grade, but with a stable outlook.

    What does BBB mean?

    • A ‘BBB’ rating indicates that expectations of default risk are currently low.
    • The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.

    What is a Rating Agency?

    • Rating agencies assess the creditworthiness or potential of an equity, debt or country.
    • Their reports are read by investors to make an informed decision on whether or not to invest in a particular country or companies in that geography.
    • They assess if a country, equity or debt is financially stable and whether it at a low/high default risk.
    • In simpler terms, these reports help investors gauge if they would get a return on their investment.

    What do they do?

    • The agencies periodically re-evaluate previously assigned ratings after new developments geopolitical events or a significant economic announcement by the concerned entity.
    • Their reports are sold and published in financial and daily newspapers.

    What grading pattern do they follow?

    • The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.
    • Standard & Poor’s accord their highest grade, that is, AAA, to countries, equity or debt with the exceedingly high capacity to meet their financial commitments.
    • Its grading slab includes letters A, B and C with an addition a single or double letter denoting a higher grade.
    • Moody’s separates ratings into short and long-term definitions. Its longer-term grading ranges from Aaa to C, with Aaa being the highest.
    • Fitch, too, rates from AAA to D, with D being the lowest. It follows the same succession scheme as Moody’s and Fitch.

    Significance of such ratings

    • Access to Capital: Higher credit ratings mean that a country can access capital at a lower cost, while lower ratings indicate that borrowing costs will be higher.
    • Investment Decisions: Investors use credit ratings as a tool to evaluate a country’s creditworthiness and assess the level of risk associated with investing in that country.
    • Economic Growth: Higher credit ratings typically lead to increased foreign investment, which can create jobs, boost productivity, and stimulate economic growth.
    • International Trade: Countries with higher credit ratings are viewed as more stable and trustworthy, making them more attractive trading partners for other countries.
    • Reputation: Countries with lower credit ratings may be seen as less reliable or stable, which can negatively impact diplomatic relationships and political influence.

    Criticism of the rating agencies

    • Credibility: Popular ratings agencies publicly reveal their methodology, which is based on macroeconomic data publicly made available by a country, to lend credibility to their inferences.
    • Bias: These agencies were subjected to severe criticism for allegedly spurring the financial crisis in the United States, which began in 2017.
    • Fouled metrics: The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions.
    • Erroneous: They were charged for methodological errors and conflict of interest on multiple counts.

    Why is India seeking upgrade in its credit ratings?

    • Improved creditworthiness: These ratings are used to judge a country’s creditworthiness, often impacting its borrowing costs.
    • Stable indicators: India has series of stable parameters such as economic growth rate, inflation, general government debt and short-term external debt as a percentage of GDP, and political stability, among others.

    Measures taken to improve ratings

    • India aims to cut its fiscal deficit to 5.9% of GDP next fiscal year, from the 6.4% target for the current year that ends March 31, and to further reduce that to 4.5% in the next three years.
    • India’s Economic Survey has forecast growth of 6% to 6.8% for 2023-24, which would make it one of the world’s fastest-growing major economies.
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  • Explained: Silicon Valley Bank (SVB) Crisis

    silicon valley

    Central idea: The shutdown and takeover of Silicon Valley Bank (SVB) by US regulators has raised questions on how it impacts India’s startup industry. It was an important partner for the global startup economy.

    Silicon Valley Bank (SVB)

    • It is a financial institution that provides banking services to the technology industry and venture capital firms.
    • Founded in 1983, it has since become the go-to bank for startups and entrepreneurs in Silicon Valley and beyond.
    • It is unique in that it understands the specific needs and challenges of the tech industry, and provides a range of services that cater to startups, including loans, deposits, and investment management.
    • It has become a critical player in the startup ecosystem, providing funding and financial services to many of the world’s most successful startups, including Tesla, Uber, and LinkedIn.

    What is SVB crisis?

    • SVB Financial Group runs one of the largest American commercial banks – Silicon Valley Bank.
    • Last week, it had announced a $1.75 billion share sale programme to further strengthen its balance sheet.
    • This programme triggered a massive sell-off in the group’s shares.
    • Thereafter, market went severely bearish and bear rampage wiped out over $80 billion of its market value.
    • Alongside, the bond prices of the group collapsed and created a panic in the market.

    Reasons for SVB’s downfall

    • Downturn of tech stocks: The bank was hit hard by the downturn in technology stocks over the past year as well as the Federal Reserve’s aggressive plan to increase interest rates to combat inflation.
    • Lower bond yield due to lower interest rates: SVB bought billions of dollars’ worth of bonds over the past couple of years, using customers’ deposits as a typical bank would normally operate.
    • Mostly startups account holders: SVB’s customers were largely startups and other tech-centric companies that started becoming needier for cash over the past year.
    • Drying VC funding: Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable businesses.
    • Fear over deposit insurance: Since its customers were largely businesses and the wealthy, they likely were more fearful of a bank failure since their deposits were over $250,000, which is the government-imposed limit on deposit insurance.

    Immediate effects of SVB’s failure

    • Startups scramble: Many startups and other companies that relied on the bank’s services were suddenly left without access to their funds, which caused financial strain and uncertainty for these businesses.
    • Ripple effect: They now fear that they might have to pause projects or lay off or furlough employees until they could access their funds.

    Major implications for SVB

    There are two large problems remaining with Silicon Valley Bank-

    • Huge uninsured deposits: The vast majority of these were uninsured due to it’s largely startup and wealthy customer base.
    • No scope for asset reconstruction: There is no potential buyer of Silicon Valley Bank.

    Could this lead to a repeat of what happened in 2008?

    • No probability: At the moment, experts do not expect any issues to spread to the broader banking sector.
    • Diversified customer bases: Other banks are far more diversified across multiple industries, customer bases and geographies.

    Impact on Indian startups

    • Uncertainty over deposits: The failure of SVB is likely to have a ripple effect on Indian startups, many of which have significant amounts of funds deposited with the bank.
    • Hamper the funding: SVB has been a major player in the Indian startup ecosystem, providing banking services and funding to many of the country’s most successful startups, including Flipkart, Ola, and Zomato.
    • Ripple effect: This could lead to a cash crunch for many companies, which may be forced to cut costs, delay projects, or lay off employees.
    • Reduce global footprints: SVB has also been instrumental in helping Indian startups expand into the US market, by providing them with the necessary infrastructure and support to set up operations in Silicon Valley.

    How can Indian startups mitigate the impact of SVB’s failure?

    • Diversify banking relations: Indian startups that have funds deposited with SVB may want to consider diversifying their banking relationships to reduce their exposure to any one bank.
    • Alternative financing: This may involve opening accounts with multiple banks, or exploring alternative banking services such as digital banks or fintech startups.

    Back2Basics: 2008 Financial Crisis

    • The bankruptcy of Lehman Brothers was a key event in the 2008 financial crisis.
    • Lehman Brothers was one of the largest investment banks in the world, with assets of around $600 billion.
    • However, the firm had invested heavily in the US housing market, and when the housing market began to decline in 2007, Lehman’s investments began to lose value.
    • In addition, the firm had taken on a large amount of debt to finance its investments and operations.
    • As the value of Lehman’s assets declined and its debt levels increased, the firm became insolvent and was unable to meet its obligations to creditors.
    • In September 2008, Lehman Brothers filed for bankruptcy, triggering a financial panic and market turmoil.

    Its impact

    • The Lehman crisis had far-reaching consequences, including the collapse of other financial institutions, a global recession, and widespread economic and social hardship.
    • The crisis highlighted the risks of excessive leverage and the interconnectedness of financial institutions, and led to significant reforms in financial regulation and risk management practices.

     

     

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  • Government amends KYC to add non-profit organisations, ‘politically exposed persons’

    political

    Central idea: The Finance Ministry has amended the Prevention of Money Laundering (Maintenance of Records) Rules for widening the scope of Know your Customer (KYC) norms to include Politically Exposed Persons (PEPs), non-profit organisations (NPOs) and those dealing in virtual digital assets (VDA) as reporting entities.

    Who are Politically Exposed Persons (PEP)?

    • According to the modified PML Rules, the Finance Ministry has defined PEPs as-
    1. Individuals who have been entrusted with prominent public functions by a foreign country
    2. Includes heads of states or governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations, and important political party officials.
    • Banks and financial institutions must maintain records of financial transactions of PEPs and share them with the Enforcement Directorate as and when sought.

    Other key changes introduced

    Recording of financial transactions of NPOs/NGOs

    • The financial institutions must register the details of their NGO clients on the Darpan portal of the Niti Aayog.
    • They are required to maintain the record for five years after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later.

    Tightening of the definition of beneficial owners

    • The amendment to the PMLA rules includes the tightening of the definition of beneficial owners under the anti-money laundering law.
    • As per the amendments, any individual or group holding 10 per cent ownership in the client of a ‘reporting entity’ will now be considered a beneficial owner against the ownership threshold of 25 per cent applicable earlier.
    • The reporting entities include banks and financial institutions, firms engaged in real estate and jewellery sectors, intermediaries in casinos and crypto or virtual digital assets.

    Collection of information from clients

    • Reporting entities such as banks and crypto platforms are mandated to collect information from their clients under the anti-money laundering law.
    • So far, these entities were required to maintain KYC details or records of documents evidencing the identity of their clients, as well as account files and business correspondence relating to clients.
    • They will now have to also collect the details of the registered office address and principal place of business of their clients.
    • Additionally, they are required to maintain a record of all transactions, including the record of all cash transactions of more than Rs 10 lakh.

    Why such move?

    • FATF assessment: The amendments assume significance ahead of India’s proposed FATF assessment, which is expected to be undertaken later this year.
    • Risk-management: In one of its 40 recommendations, FATF recommends that financial institutions have risk-management systems to identify domestic and international PEPs.
    • Remove ambiguities: The broader objective is to bring in legal uniformity and remove ambiguities before the FATF assessment.

     

     

  • Boosting India’s Tourism Sector

    Tourism Sector

    Central Idea

    • India’s travel and tourism sector is one of the fastest-emerging tourist destinations in the world, and it is poised to be the key axis of development in the coming years. Budget 2023, which marks the beginning of Amrit Kaal, the period of intense robust growth, has outlined the path to developing tourism in mission mode.

    Vision to develop 50 destinations

    • G20 provided Economic Boost: India’s presidency of the G20 and Prime Minister’s vision to develop 50 tourist destinations across the country have provided a significant boost to the tourism sector.
    • Global ranking: This initiative is expected to improve India’s global ranking on the World Economic Forum’s Travel & Tourism Development Index.
    • Employment opportunities: The development of these destinations will create more employment opportunities and contribute to the overall GDP growth of the country.

    The central government’s push on tourism

    • Various policies and initiatives: The central government is committed to supporting the travel and tourism sector by implementing various policies and initiatives.
    • Six themes for the development in Union budget: The Union budget has identified six themes for the development of the sector, including convergence, public-private participation, creativity, innovation, digitization, and development of destinations.

    Power of collaboration

    • Collaboration is essential: Collaboration between the government, private sector, and local communities is essential for the development and promotion of tourism in India. This collaborative approach stimulates creativity, enhances competitiveness, and achieves visionary results.
    • For example: The Prime Minister has cited examples of successful collaborations, such as Kashi, Kedarnath, the Statue of Unity, and Pavagadh, to demonstrate how a unified approach can boost tourism in a region.

    Role of Technology in Tourism

    • Interdependence: Technology and tourism are becoming increasingly interdependent, and a coordinated approach that adopts technology can boost the tourism sector in India.
    • Employing Augmented and virtual reality: Augmented Reality (AR) and Virtual Reality (VR) can provide travellers with virtual tours and simulations of famous landmarks and cultural experiences.
    • Artificial intelligence: Artificial Intelligence (AI)-powered chatbots and digital assistants can assist travellers in planning their trips and provide real-time assistance while travelling.

    “6P” approach to unlocking India’s tourism potential

    • 6P: Planning, Place, People, Policy, Process, and Promotion
    • Unlocking India’s tourism potential requires a comprehensive strategy that addresses the six key pillars 6Ps.
    • The government’s Budget Session addressed all these 6Ps effectively by covering destination planning and management, infrastructure development, sustainability and safety, development of human capital, policy and process interventions to align the Centre and states as well as promoting the narrative of Indian tourism.

    Tourism: A state subject

    • Tourism is constitutionally a state subject, and the central tourism department has been advocating for it to be moved to the Concurrent List to allow policy-making at both the central and state levels.
    • Granting tourism infrastructure status will provide further impetus to the growth of the sector.
    • The government is also considering the establishment of a National Tourism Board.

    Tourism Sector

    Conclusion

    • With the right policies and initiatives in place, it’s the ideal time for India to turbo-charge efforts to be among the top three travel and tourism economies globally.

    Mains Question

    Q. What are the six themes identified by the Union Budget for the development of India’s travel and tourism sector? How India can boost its economic growth through robust tourism sector? Discuss

     

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  • Gati Shakti: Transforming India’s Logistics

    Logistics

    “Efficient logistics is the backbone of a successful economy, enabling businesses to access markets, reduce costs, and increase productivity, ultimately leading to sustainable economic growth.” – Nitin Gadkari, Minister of Road Transport and Highways.

    Central Idea

    • The Union Budget 2023 has increased the PM Gati Shakti National Master Plan’s budget from ₹5,000 crore to ₹10,000 crore and allocated ₹2.4 lakh crore to the Indian Railways. This plan aims to improve India’s logistics competitiveness by increasing the railways’ share in freight movement from 27% to 45% and addressing infrastructural challenges. However, several challenges such as operational and connectivity issues, infrastructural challenges, and lack of integration need to be addressed to achieve these targets.

    Logistics

    What is PM Gati Shakti National Master Plan?

    • Comprehensive development: It is a comprehensive infrastructure development plan announced by the Government of India in November 2021.
    • Aim: The plan aims to improve economic growth and sustainable development by focusing on infrastructure such as roads, railways, airports, ports, mass transport, waterways, and logistics.
    • Increased Budget: The Union Budget 2023 has increased the budget for the PM Gati Shakti National Master Plan
    • The plan includes the development of five main corridors:
    • East-West Corridor: It will connect the east and west coasts of India, stretching from Silchar in Assam to Porbandar in Gujarat.
    • North-South Corridor: It will connect the northern and southern parts of India, stretching from Srinagar in Jammu and Kashmir to Kanyakumari in Tamil Nadu.
    • North-East Corridor: It will connect the northeastern states to the rest of India, stretching from Imphal in Manipur to Kohima in Nagaland.
    • South-West Corridor: It will connect the southwestern states to the rest of India, stretching from Ratnagiri in Maharashtra to Kanyakumari in Tamil Nadu.
    • East Coast Corridor: It will connect the east coast states to the rest of India, stretching from Kolkata in West Bengal to Kanyakumari in Tamil Nadu.
    • The railways have a pan-India network and offer an efficient and economic mode of logistics movement, making them an essential component of the plan.

    Logistics

    The Freight Movement at Present

    • Freight movement Impact: Currently, 65% of freight movement is done by road transport, leading to congestion, pollution, and increased logistics costs.
    • convenience over cost: Although the cost of rail transportation is less than road transportation, convenience has taken precedence over cost, and the railways have lost their share in freight movement to more flexible modes.
    • For instance: In 2020-21, coal constituted 44% of the total freight movement of 1.2 billion tonnes, followed by iron ore (13%), cement (10%), food grains (5%), fertilizers (4%), iron and steel (4%), etc.
    • Non-bulk commodities: Transportation of non-bulk commodities accounts for a very small share in the rail freight movement
    • Rise in Container Traffic: The convenience of moving non-bulk commodities in containers has led to an increase in containerized traffic. Globally, railway systems are heavily investing in advanced rail infrastructure for quick and low-cost container movement.

    Infrastructural, Operational, and Connectivity Challenges

    • The national transporter faces several challenges, leading to a shift of freight traffic to roads.
    • Infrastructure: Increased transit time by rail, pre-movement and post-movement procedural delays, lack of necessary terminal infrastructure, maintenance of good sheds and warehouses, and uncertain supply of wagons are some of the infrastructural challenges that customers face.
    • Connectivity: The lack of integrated first and last-mile connectivity by rail increases the chances of damage due to multiple handling and also increases the inventory holding cost.

    Strategies to Improve Efficiency in Rail Cargo Movement in India

    • Overall improvement: The Indian Railways need to improve infrastructure and encourage private participation in the operation and management of terminals, containers, and warehouses to efficiently utilize resources.
    • Special Entity Needed: Establishing a special entity under the railways to handle intermodal logistics in partnership with the private sector could address the first and last-mile issue faced by the railways.
    • For instance: An integrated logistics infrastructure with first and last-mile connectivity is essential to make rail movement competitive with roads, and facilitate exports by rail to neighbouring countries such as Nepal and Bangladesh.
    • An Uber like model: An Uber-like model for one of the two cargo wagons, wherein the customer can book the wagon using an online application, could help in increasing the utilization rate of these wagons.

    Way ahead

    • The adoption of railways for cargo movement is crucial to improve India’s logistics competitiveness.
    • The Indian Railways are upgrading their infrastructure with PM Gati Shakti, but a continuous monitoring of existing projects and identification of new priority areas are required to achieve the targets of rail freight movement.

    Logistics

    Conclusion

    • The PM Gati Shakti National Master Plan has the potential to transform India’s logistics infrastructure and increase the railways’ share in freight movement. However, several challenges such as operational and connectivity issues, infrastructural challenges, and lack of integration need to be addressed. The upcoming Dedicated Freight Corridors, multimodal logistics parks, and establishment of a special entity under the railways could address these challenges.

    Mains Question

    Q. Explain the PM Gati Shakti National Master Plan and its significance in improving India’s logistics competitiveness.

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  • Budget For The Education Sector

    Budget

    Central Idea

    • The Union Budget 2023 has made nominal increases in the allocation for education, which will not suffice to improve the education sector’s current situation.

    Government Expenditure on Education

    • As per the Economic Survey 2023, the combined expenditure on education by the Centre and States (as a percentage of GDP), has remained stagnant at 2.9% during 2019-20 to 2022-23 (BE).
    • As a percentage of total government expenditure, it slid from 10.7% in 2019-20 to 9.5% in 2022-23 (BE), while the share of education in social services nosedived from 42.5% to 35.5% during the same period.

    Budgetary allocation for School sector

    • Allocation for School Education increases due to new scheme: The school sector has been allocated ₹68,804.85 crores, as against ₹63,449.37 crore last year, largely due to a fresh allocation of ₹4,000 crore for the PM ScHools for Rising India), or PM-SHRI alone.
    • Existing schools suffer due to allocation for new initiatives: This combined with the newly announced Eklavya model residential schools to be opened in every district of India actually brings down the provisions for already existing schools and their activities, leaving them high and dry to deal with rising prices and the pressure of increasing enrolment in government schools.
    • Majority of Indian students attend government schools: Government and government-aided schools are still where the deprived and have-nots go to. Out of about 15 lakh schools, 10 lakh schools are owned and managed by the government, employing about 97 lakh teachers and catering to over 26 crore students.

    Allocation for Higher Education

    • Allocation for higher education has increased: The allocation for higher education has increased from ₹40,828 crore to ₹44,094 crore, with autonomous bodies receiving an average increase of 13.60%. The central universities have benefitted the most with a 22.39% increase.
    • Reduction in Budgetary Support to Indian Institutes of Management: The budgetary support for Indian Institutes of Management has been drastically reduced with most of the allocation meant for loan repayment. The reduction in funding for IIM was expected due to their increased fees. The impact of this on equity in these institutions is uncertain.
    • No provision for HEFA and reduced allocations: There is no provision for Higher Education Funding Agency (HEFA) in this year’s Budget, which means no new loans for infrastructure development in centrally funded institutions. The allocation for world class universities has also been reduced. The allocation for Prime Minister’s Girls’ hostels has been reduced by half.

    Allocation for Research and Innovation Initiatives

    • Reduction in Startup India and Design Innovation Initiatives: The Startup India initiative for higher educational institutions has been reduced and also provisions for the national initiative for design innovation have been reduced.
    • Drastic Reduction in IMPRINT and SPARC Allocations: The allocations for IMPacting Research, INnovation and Technology (IMPRINT) and the Scheme for Promotion of Academic and Research Collaboration (SPARC) have also been drastically reduced.
    • No Allocation for IMPRESS: The Budget does not provide any allocation for Impactful Policy Research in Social Sciences (IMPRESS).
    • National Research Foundation awaits Cabinet Approval: The proposed National Research Foundation has been allotted ₹2,000 crore through the Department of Science and Technology, but this awaits approval from the Union cabinet.

    Conclusion

    • In today’s time, everyone wants to benefit and improve their lives. However, not investing enough in education could harm the growth and improvement of education. Unfortunately, the 2023 budget doesn’t offer anything new to make the sector ultimately effective. The education sector needs more investment to improve the quality of education and provide equal opportunities for all students.