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Subject: Economics

  • CSIR scientists identify Rare-Earth deposits in AP

    rare

    Scientists at the National Geophysical Research Institute (NGRI) in Hyderabad have discovered the presence of rare-earth elements (REEs) in Anantapur district, Andhra Pradesh.

    What are Rare-Earth Elements?

    • Rare-earth elements (REEs) are a group of 17 elements, including lanthanum, cerium, praseodymium, neodymium, yttrium, hafnium, tantalum, niobium, zirconium, and scandium.
    • These elements are widely used in modern electronics, such as smartphones, computers, jet aircraft, and other products, due to their unique magnetic, optical, and catalytic properties.
    • These elements are crucial components in various electronic devices and have industrial applications in sectors like imaging, aerospace, and defense.

    SHORE Project and discovery of REEs

    • The discovery was part of a study funded by the Council of Scientific and Industrial Research (CSIR) under a project called ‘Shallow subsurface imaging Of India for Resource Exploration’ (SHORE).
    • NGRI scientists found enriched quantities of REEs in “whole rock analyses”.
    • Drilling for at least a kilometer deep will help ascertain the consistency of the elements’ presence underground.

    Significance of the discovery

    • The discovery of REEs in Anantapur district is significant as these elements are in high demand worldwide, and their supply is limited.
    • REEs have become a subject of geopolitical concern due to their increasing demand and limited supply.
    • China is currently the world’s largest producer and exporter of rare-earth elements (REEs), accounting for more than 80% of global production.
    • The country has significant reserves of REEs and has invested heavily in mining and processing infrastructure.

  • Poverty Estimates: Issues With PLFS Data

    Central Idea

    • The claim of poverty reduction in India during the pandemic year of 2020-21 is contested due to discrepancies in data and survey design. The PLFS data is used to make this claim, and there are recent papers that have come up with divergent claims on trends in poverty, showing both a rapid decline in poverty as well as a sharp increase.

    Use of Comparable Estimates

    • Poverty estimates in India have always been based on consumption estimates from the NSO, particularly based on the consumption expenditure surveys (CES).
    • The last official poverty estimates were for 2011-12, even though a comparable consumption survey was conducted in 2017-18.

    What is Periodic Labour Force Survey (PLFS)?

    • PLFS is a large-scale household survey conducted by the National Statistical Office (NSO) of India.
    • It collects data on various aspects of the labour force in India, including employment, unemployment, and labour force participation rates. In addition to these labour force indicators, the PLFS also collects data on consumption expenditure, which can be used to estimate poverty levels.

    Issue with PLFS Data

    • Estimates are not comparable: The PLFS estimates of poverty are not comparable with those from the CES, as the PLFS estimates are based on a single question.
    • Consumption estimates: The issue of sensitivity of consumption estimates to survey design, the level of aggregation and details has been extensively written about and was at the heart of the Great Indian Poverty Debate of the early 2000s.
    • Details about consumption expenditure is not just relevant: The sensitivity to the details of questions asked to collect consumption expenditure is not just relevant across different surveys but also across different rounds of the PLFS.

    Poverty Trends

    • The first set of conclusions can be drawn for the period between 2011-12 and 2017-18.
    • Using the CES based full schedule and the leaked report for 2017-18, a rise in poverty can be seen.
    • For a similar time period, the single question asked in the earlier rounds of PLFS can be compared with the 2014-15 (72nd round) NSO survey on services and durable goods expenditure which had exactly the same question in the same block with the same instructions making them comparable to estimates from the PLFS from 2017-18 to 2019-20.
    • These suggest that the poverty headcount ratio was 27 per cent in 2014-15 and rose to 36 per cent in 2017-18, declining to 32 per cent in 2018-19 and remaining at that level in 2019-20.
    • Unfortunately, for the period during the pandemic (2019-20 to 2020-21) that the PM paper tries to address, it is difficult to say what happened based on available consumption data because of the questionnaire changes mentioned above.

    Impact on Policy

    • The absence of official estimates on poverty is also a reflection of the lack of political priority of the government on such a crucial indicator.
    • Currently, a survey on consumption expenditure is being canvassed by the NSO which again follows a completely new methodology and schedule. While it may provide another set of estimates of consumption expenditure, it is unlikely to help resolve the poverty debate.

    Conclusion

    • The issue of what happened to poverty after 2011-12 is crucial for policy. However, frequent interference in the statistical system through changes in survey and questionnaire design, suppression of data, and delaying the release of crucial data are making it difficult to have a correct assessment of reality. The absence of official estimates on poverty is a reflection of the lack of political priority of the government on such a crucial indicator.

  • RBI’s Pause On Repo Rate Hike: Concerns Over Inflation And Global Pressures Remain

    RBI

    Central Idea

    • The RBI has decided to not increase the repo rate amid continuing hikes by important central banks such as the US Federal Reserve (Fed) and European Central Bank (ECB), and domestic inflation concerns. However, if incoming data point to rising inflation risks, this decision could prove to be only a pause in the rate hiking cycle.

    The RBI’s decision to pause on rate hikes

    • The RBI feels that money market rates have effectively risen more than the 250-basis-point yank in the repo rate since May 2022, and hence it decided to pause and assess the impact of rate hikes.
    • The key reason behind the MPC decision is the expectation of a decline in inflation to 5.2% in the current fiscal, driven by a healthy rabi crop, normal monsoon, moderating international commodity prices, and the impact of rate hikes.
    • The RBI acknowledges the upside risks and stated its readiness to fight any unexpected rise in inflation.

    Impact on GDP growth

    • The RBI expects GDP growth to slow to 6% from 7% this fiscal as slowing global growth, domestic interest rates, and messy geopolitics bite.
    • Slowing global growth will be net negative for India’s exports, and the growing dependence on commodity exports makes India more vulnerable to global growth volatility.
    • Fiscal 2024 will, therefore, test the resilience of India’s domestic demand amid rising interest rates.

    Reasons for the expected cooling of consumer inflation

    • Fuel inflation expected to reduce: Fuel inflation is expected to reduce to 3% from a high of over 10% in the current fiscal because some easing of crude oil prices is likely as global growth slows down.
    • Decline in core inflation: Slowing domestic growth will ease core inflation from very sticky levels of over 6% last fiscal to 5.5% in the current one. However, the decline in core inflation will be limited as input cost pressures have not dissipated. To protect their margins, firms will continue to pass on input costs to end-consumer. Services inflation will also continue to exert pressure as the rotation of consumption demand from goods to services continues.
    • Moderate food inflation: Food inflation, which has a high weightage in the Consumer Price Index and has driven headline inflation in the past, is projected to moderate to slightly below 5%, assuming a normal monsoon. However, food inflation has always been volatile and carries upside risks largely because of climate-related factors affecting agriculture output and prices.

    How slowing global growth will have a negative impact on India’s exports?

    • The impact of the growth slowdown in the US and Europe is deeper than the recovery in China: The US and Europe have a combined GDP that is twice that of China. Therefore, the impact of the growth slowdown in the US and Europe will be deeper than the recovery in China. This will have a negative impact on India’s exports to the US and Europe.
    • India’s exports to the US and Europe are more than to China by a factor of six: India exports more to the US and Europe than to China by a factor of six. Therefore, the negative impact of the growth slowdown in the US and Europe will be felt more by India than by China.
    • India’s growing dependence on commodity exports makes it more vulnerable to global growth volatility: India’s exports of petroleum products and steel are growing, and this makes India more vulnerable to global growth volatility. As global growth slows down, demand for commodities is likely to decline, which will have a negative impact on India’s exports.

    External vulnerabilities

    • India’s external vulnerability is expected to decline with a narrower current account deficit (CAD) and modest short-term external debt.
    • The CAD is expected to narrow to 2% of GDP this fiscal from an estimated 2.5% last fiscal.

    Conclusion

    • The RBI’s decision to pause on rate hikes is driven by expectations of a decline in inflation. However, inflation risks remain, and the impact of rate hikes on GDP growth is expected to be significant. India’s external vulnerabilities are expected to decline, but the banking turmoil playing out amid interest rate hikes by important central banks and elevated debt levels remains a risk. The RBI’s decision to pause on rate hikes will be closely watched, and further rate hikes may be necessary if inflation risks persist.

    Mains Question

    Q. Enumerate the factors that led RBI to pause on rate hikes, and discuss the potential risks and impacts on the Indian economy?

  • Coastal Aquaculture Authority (Amendment) Bill, 2023

    aqua

    The Coastal Aquaculture Authority (Amendment) Bill 2023 was introduced in the Lok Sabha.

    What is Aquaculture?

    • Aquaculture essentially means, breeding, raising, and harvesting fish, shellfish, and aquatic plants.
    • In a nutshell, it’s farming in water.
    • Saline water along the coast has been found to be suitable for practising aquaculture which produces shrimp, majorly.
    • If aquaculture is not practised on this land, it will be left idle and uncultivated as it is not suitable for the cultivation of crops.
    • Aquaculture can be practised on about 12 lakh hectares in the country along the coast, of which only 14% has been utilized so far.

    Key highlights of the amendment

    • Decriminalisation of certain offences: The Bill aims to decriminalize the offences under the Coastal Aquaculture Authority Act.
    • Fine-tuning operational procedures: It seeks to promote ease of doing business and to fine-tune the operational procedures of the authority.
    • Promotion of environment-friendly coastal aquaculture: The Bill also aims to promote newer forms of environment-friendly coastal aquaculture, such as cage culture, seaweed culture, marine ornamental fish culture, and pearl oyster culture.
    • Create employment opportunities: These newer forms of coastal aquaculture have the potential to create additional employment opportunities.
    • Prevention of use of harmful substances in coastal aquaculture: The Bill also includes a provision to prevent the use of antibiotics and pharmacologically active substances that are harmful to human health in coastal aquaculture.

    About the Coastal Aquaculture Act

    • This Act was enacted in the year 2005 for the establishment an authority to regulate activities in this sector.
    • It is a parliamentary act that establishes the Coastal Aquaculture Authority (CAA) for the regulation and registration of coastal aquaculture farms in India.

    Overview

    • The CAA Act, of 2005 mandates the Central Government to take measures to regulate coastal aquaculture and ensure that it does not cause any harm to the coastal environment.
    • The guidelines prescribed by the government aim to promote responsible coastal aquaculture practices that protect the livelihood of various coastal communities.

    Key features

    • The CAA Act, 2005 provides for the establishment of the Coastal Aquaculture Authority to regulate the activities related to coastal aquaculture.
    • The Central Government is responsible for prescribing guidelines to regulate coastal aquaculture activities and ensure responsible practices.
    • The guidelines aim to protect the livelihood of coastal communities and prevent any harm to the coastal environment.
    • The Act also mandates the registration of coastal aquaculture farms to ensure their compliance with the guidelines.
    • The CAA is a strong force in enforcing the regulations and registration of coastal aquaculture farms in India.

    Significance

    • The Coastal Aquaculture Authority Act, of 2005 is significant in promoting responsible coastal aquaculture practices and protecting the livelihood of coastal communities.
    • The act ensures that coastal aquaculture activities are regulated and registered, which helps prevent harm to the coastal environment.

  • What is the Open-Source Seeds Movement?

    seed

    Central idea

    • The article discusses the concept of open-source software and its parallels with open-source seeds.
    • Richard Stallman pioneered the Free Software Movement and developed the General Public License (GPL) to protect users’ rights and prevent code misappropriation.
    • Farmers have been innovating and sharing seeds without intellectual property rights (IPR) claims for centuries.

    Backgrounder: Plant Breeders’ Rights

    • Plant breeders’ rights (PBR) granted exclusive rights to breeders and developers of new varieties.
    • Farmers’ rights were limited under this regime.
    • The TRIPS agreement established a global IPR regime over plant varieties.
    • The consolidation of the seed sector raised concerns about the freedom to innovate.

    Forms of IPR Protection in Agriculture

    • There are now two forms of IPR protection in agriculture: PBR and patents.
    • Together, they restrict farmers’ rights and the freedom to develop new varieties.
    • The use of genetically modified seeds and IP claims triggered many problems, including State intervention on Bt cotton seeds in India.
    • The decline of public sector breeding and the dominance of the private sector in the seed sector increased the need for alternatives.

    What are Open Source Seeds?

    • The success of open-source software inspired a solution for seeds.
    • In 1999, a Canadian plant breeder named T.E. Michaels suggested an approach to seeds based on the principles of open-source software.
    • In 2012, Jack Kloppenburg launched the Open Source Seeds Initiative (OSSI) in Wisconsin.
    • Agrecol launched another initiative in Europe, and similar programs have come up worldwide.

    Open Source Seeds Initiatives in India

    • In India, the Hyderabad-based Centre for Sustainable Agriculture (CSA), part of the Apna Beej Network, developed a model incorporated into an agreement between CSA and the recipient of the seed/germplasm.
    • CSA’s Open Source Seeds Initiative uses a contracts approach similar to Agrecol’s strategy.
    • The number of seed firms using open-source models and the crop varieties and seeds made available thereunder is small but growing.
    • India is yet to test and adopt it widely.

    Potential Applications of Open-Source Seeds

    • Open-source principles can help promote farmer-led participatory plant-breeding exercises.
    • Traditional varieties often lack uniformity and aren’t of excellent quality, but open-source principles can facilitate testing, improvisation, and adoption.
    • Open-source principles can be used in farmer-led seed conservation and distribution systems.
    • The government and other stakeholders can consider adopting this approach to more widely adopt traditional varieties.

  • Foreign Trade Policy 2023: India Needs To Adopt 21st-century Trade Policy Instruments

    Central Idea

    • The Foreign Trade Policy 2023 (FTP 2023) has been recently introduced, but it falls short of addressing the challenges that Indian exporters are likely to face in the global market. India needs to adopt 21st-century trade policy instruments such as product and process standards to improve the quality and efficiency of products.

    Foreign Trade Policy, 2023

    • The policy is dynamic and open-ended to accommodate the emerging needs of the time.
    • It aims to promote India’s overall exports, which has already crossed US$ 750 Billion.
    • The key approach to the policy is based on these 4 pillars:
    1. Incentive to Remission,
    2. Export promotion through collaboration – Exporters, States, Districts, Indian Missions,
    3. Ease of doing business, reduction in transaction cost and e-initiatives and
    4. Emerging Areas – E-Commerce Developing Districts as Export Hubs and streamlining SCOMET (Special Chemicals, Organisms, Materials, Equipment, and Technologies) Policy

    FTP 2023’s inadequate focus on 21st-century trade policy instruments

    • 20th-century mindset: The FTP 2023’s primary focus is on regulating, prohibiting, and restricting trade, which is a 20th-century mindset. In contrast, most countries today rely on improving product quality and production efficiencies by rapidly infusing technology to expand their presence in global markets.
    • Focus on upgrading the current standards: India needs to focus on upgrading institutions, production facilities, and promoting the development and facilitation of trade to meet the current standards.

    Rejigging of export promotion schemes

    • Export promotion schemes: Export promotion schemes were modified after a WTO dispute settlement panel ruled against India in 2019, which found that these schemes provide export subsidies that are not allowed under WTO rules.
    • Remission of Duties: The Remission of Duties or Taxes on Export Products (RoDTEP) Scheme was launched in 2021 to neutralize the effect of taxes and duties included in exported goods. The Rajya Sabha’s Standing Committee on Commerce found several weaknesses in the scheme, and FTP 2023 should have responded to the recommendations.

    Developing districts as export hubs

    • FTP 2023 introduces the novel idea of developing districts as export hubs, which could help achieve the objective of balanced regional development.
    • However, the policy only speaks of setting up export promotion committees at the district and state/UT levels, with no mention of supporting efficient infrastructure.

    E-commerce and India’s readiness to engage in the WTO

    • E-commerce is a focus area of FTP 2023, but India has opposed discussions on extending the rules of the WTO in this area.
    • Moreover, advanced countries have been seeking data portability, which India has refused to accept.
    • It remains unclear whether the mention of e-commerce in FTP 2023 implies that India is ready to engage in the WTO on this matter.

    Conclusion

    • FTP 2023 falls short of addressing the challenges that Indian exporters are likely to face in the global market. It needs to focus on upgrading institutions, production facilities, and promoting the development and facilitation of trade, which requires the Directorate General of Foreign Trade (DGFT) to coordinate with all the standard-setting agencies of the government and relevant institutions in the private sector. Developing districts as export hubs could help achieve the objective of balanced regional development, but supporting efficient infrastructure is critical for the programme’s success.

  • Reversal To Old Pension Scheme (OPS): Potential Impact

    OPS

    Central Idea

    • The New Pension Scheme (NPS) implemented by the NDA government in 2003-04 was a far-sighted reform that moved towards a sustainable contributory pension system. However, some state governments have reversed the pension reform and returned to the financially burdensome and fiscally non-viable Old Pension Scheme (OPS).

    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 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.

    Negative impacts of the reversal to OPS

    • The reversal to OPS would have negative impacts, especially on the poor and vulnerable population, including women and children. Here are some potential impacts:
    • Reallocation of resources: The reversal to OPS would lead to a reallocation of resources away from the state’s development expenditure, which benefits the poor, and towards a much smaller group of people who have benefited from a secured and privileged job throughout their working life. It could worsen inequality and lower economic growth in the states.
    • Reduction in productivity: Going back to OPS would reduce the productivity of the poor, further diminishing their future economic prospects. Economic services such as infrastructure and rural and urban development would be affected more severely than social services.
    • Fiscal burden: The old pension scheme (OPS) was financially burdensome and fiscally non-viable. As public employees’ life expectancy increased, the state’s fiscal burden under the OPS began to rise exponentially, necessitating pension reforms. Reversing to OPS would put the fiscal burden back on the government, which could have negative impacts on the state’s finances.
    • Tradeoff between pensions and development expenditure: Pension reforms were a watershed moment for the states, and reversing to OPS would result in a tradeoff between pension and development expenditure of the states. The pension reforms aimed to finance the increased non-development expenditure related to pensions through taxes or borrowing. However, our analysis revealed that from 1990 to 2004, the states’ revenues did not match the state’s increased expenditure, resulting in a higher fiscal deficit.

    Facts for prelims: NPS vs OPS

    Parameter National Pension System (NPS) Old Pension Scheme (OPS)
    Type of System Defined Contribution System Defined Benefit System
    Funding Contributions from employee and employer Government-funded
    Investment Market-linked investments in various asset classes No direct investment involved
    Returns Subject to market risks Predetermined and not market-linked
    Pension Amount Depends on accumulated corpus and investment returns Based on last drawn salary and years of service
    Annuity & Lump-sum Withdrawal Minimum 40% corpus used to purchase annuity, remaining can be withdrawn as lump-sum Fixed monthly pension, no annuity or lump-sum withdrawal
    Portability Portable across jobs and sectors Limited to government employees
    Flexibility Choice of investment options, fund managers, and asset allocation No flexibility, pension determined by predefined formula

    Conclusion

    • The state governments should not ignore the impact of the OPS on the poor and vulnerable, particularly women and children. The reversal will deprive them of essential services such as health and education and prevent them from participating in growth opportunities. Therefore, state governments should not reverse the far-sighted pension reform and should continue to focus on development expenditure that benefits the poor.

    Mains Question

    Q. What is the New Pension Scheme (NPS) and how does it differ from Old Pension Scheme (OPS) Now states are reversing to OPS as a populist measure, discuss its the negative impacts.

  • Current Paradigm of Economics In India Is Inadequate

    Central Idea

    • The current paradigm of economics in India is inadequate in providing solutions to the three major economic challenges the country is facing. The economists need to break out of their self-referential silo and examine the science of complex self-adaptive systems.

    The Poly-crisis faced by India

    • The Indian government is grappling with three economic challenges at the same time:
    1. Management of inflation,
    2. Trade agreements, and
    3. Employment
    • Economists do not have a systemic solution for this poly-crisis. Consensus among them has broken down even about solutions to its separate parts.

    Lessons from China and Vietnam

    • Foreign investment in China: China and India opened their economies to global trade around the same time, some 35 years ago. Since then, China attracted foreign investment that was many times more than in India, and the incomes of its citizens increased five times faster.
    • Vietnam emerging as more attractive destination: To attract investors, India must compete with other countries. Vietnam is often cited as a country that is proving to be more attractive than India to western and Japanese investors. However, when looking into Vietnam, they rediscover what was learned from China.
    • High levels of human development: When both countries opened to foreign investors China before Vietnam, they had already attained high levels of human development, with universal education and good public health systems.

    The Problem with the Current Paradigm

    • There are some fundamental flaws in the current paradigm of economics.
    • Economists often cite Tinbergen’s theory, which states that the number of policy instruments must equal the number of policy goals. This is a mechanical and linear view of how a complex system works.
    • In complex organic systems, root causes contribute to many outcomes. The behaviour of the system cannot be explained by linear causes and effects. The causes interact with each other, and effects also become causes.

    Facts for prelims: What is Tinbergen’s theory?

    • Tinbergen’s theory states that the number of policy instruments (P) must be equal to the number of policy goals (G), in order to achieve the desired outcome.
    • In other words: P = G
    • This means that for each policy goal, there should be at least one policy instrument to achieve it.
    • For example, if the policy goal is to reduce inflation, then there should be a policy instrument such as interest rate changes to achieve that goal. Similarly, if the policy goal is to promote employment, then there should be a policy instrument such as job creation programs to achieve that goal. Tinbergen’s theory emphasizes the importance of having a clear and consistent policy framework to achieve desired outcomes

    Crises and the Inadequacy of the System

    • Policies that fit one country may not fit the needs of others: Macro-economists search for global solutions, but trade and monetary policies that fit one country may not fit the needs of others. Their needs have emerged from their own histories.
    • Emphasis on data trends: Economists arrive at solutions by comparing data trends of different countries, and in their models, people are numbers. Economists do not listen to real people, whereas politicians try to at least.
    • For instance: The inadequacy of the current paradigm was revealed by several crises in this millennium, the 2008 global financial crisis, inequitable management of the global COVID-19 pandemic, and the looming global climate crisis.

    Conclusion

    • A new economics is required to solve the poly-crisis faced by India. A movement to change the paradigm of economics’ science to bring perspectives from the sciences of complex self-adaptive systems has begun even in the West. India’s economists must step forward and lead the change towards a new economics paradigm based on the sciences of complex self-adaptive systems. India’s policymakers will have to find a way to strengthen the roots of the economic tree while harvesting its fruits at the same time, and the current paradigm of economics cannot provide solutions.

  • What are Performer’s Rights?

    Central idea

    • This article discusses a recent case involving Bollywood actor and producer, in which the Bombay High Court ruled that sales tax cannot be levied on the transfer of copyright.
    • The ruling has implications for the entertainment industry, particularly in terms of taxation and copyright protection as well as performer’s rights.

    What are Performer’s Rights?

    • It refer to the legal rights granted to performing artists or performers in relation to their performances.
    • These rights generally include the right to control and protect their performances from unauthorized use, reproduction, distribution, and public performance.
    • Performer’s rights may include the right to control the following:
    1. Recording: Performers have the right to prevent others from recording their live performances without their consent.
    2. Broadcasting and Communication to the Public: Performers have the right to control the broadcasting, communication, and distribution of their performances to the public, including radio, television, and online streaming platforms.
    3. Reproduction: Performers have the right to control the reproduction of their performances in any media format.
    4. Adaptation: Performers have the right to control the adaptation of their performances into other forms, such as musicals or films.
    5. Attribution: Performers have the right to be identified as the performers of their works, and to prevent others from falsely claiming authorship of their performances.

    Legal protection of performer’s right

    Legal protection of performers’ rights has evolved over time through international treaties and national laws.

    • The Rome Convention in 1961 was the first significant development in the protection of performers’ rights.
    • Performers’ rights are protected under various international treaties such as the Rome Convention and the WIPO Performances and Phonograms Treaty.
    • In 1996, WIPO Performance and Phonogram Treaty (WPPT) recognized the moral rights of performers for the first time in any international treaty.
    • In India, performer rights were recognized under the Copyright Act of 1957 in 1994.
    • The Copyright Act is in conformity with the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT), both concluded in 1996.
    • The protection of performers’ rights in India lasts for 50 years from the end of the year in which the performance was fixed or took place.

  • India and Malaysia to settle trade in INR

    india

    India and Malaysia have agreed to settle their trade in Indian rupees instead of the US dollar.

    What is the move?

    • The Reserve Bank of India (RBI) had allowed the settlement of international trade in the Indian rupee in July 2022.
    • Malaysia was one of the eighteen countries that were permitted to open Special Rupee Vostro Accounts (SRVAs) to settle payments in Indian rupees.

    Volume of bilateral trade

    • India-Malaysia bilateral trade reached $19.4 billion during 2021-22.
    • Malaysia is the third-largest trading partner of India in the ASEAN region, after Singapore and Indonesia, with $30.1 billion and $26.1 billion in bilateral trade with India.

    Facts for prelims: Nostro and Vostro Accounts

    Nostro and vostro accounts are two types of accounts used in international trade and banking to facilitate foreign currency transactions.

    A Nostro account is a foreign currency account held by a domestic bank in a foreign bank. It is used to facilitate international transactions, such as foreign currency payments, and to hold foreign currency deposits. The word “nostro” means “ours” in Italian, and the term reflects the fact that the foreign bank holds the domestic bank’s funds on its behalf.

    A Vostro account, on the other hand, is a domestic currency account held by a foreign bank in a domestic bank. It is used by the foreign bank to hold domestic currency deposits, and to facilitate domestic currency transactions such as payments to local vendors. The word “vostro” means “yours” in Italian, and the term reflects the fact that the domestic bank holds the foreign bank’s funds on its behalf.

     

    What are Special Rupee Vostro Accounts (SRVAs)?

    • SRVAs are a mechanism introduced by the RBI to allow banks from certain countries to open accounts in Indian rupees with Indian banks.
    • These accounts can be used to settle trade transactions between the two countries in Indian rupees, instead of using other currencies.
    • The aim of this initiative is to facilitate the growth of global trade and to support the interests of the global trading community in Indian rupees.
    • The Union Bank of India has become the first bank in India to operationalize this option by opening a SRVA through its corresponding bank in Malaysia – India International Bank of Malaysia.
    • Banks from 18 countries so far are allowed by the RBI to open Special Rupee Vostro Accounts (SRVAs) to settle payments in Indian rupees.

    Significance of the move

    • The move aims to provide better pricing for goods and services traded between the two countries and overcome currency-related obstacles that have affected bilateral trade.
    • This shift away from the US dollar signals India’s de-dollarization efforts.
    • The decision also comes against the backdrop of ongoing official efforts to safeguard Indian trade from the impact of the Ukraine crisis.

    Broader implications

    • The sanction on the Russian economy and the ongoing war in Ukraine have made it increasingly difficult to make payments to Russia in US dollars.
    • Many countries are exploring alternatives to the US dollar as the dominant reserve currency for international trade.

     

    Try this MCQ

    Q. Which of the following is a key difference between Nostro and Vostro accounts?

    A) A Nostro account is held by a bank in a foreign country, while a Vostro account is held by a bank in the home country.

    B) A Vostro account is used for incoming transactions, while a Nostro account is used for outgoing transactions.

    C) A Nostro account is denominated in the local currency of the home country, while a Vostro account is denominated in a foreign currency.

    D) A Vostro account is used for trade financing, while a Nostro account is used for personal banking transactions.

     

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