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Subject: Economics

  • GI in news: Kalanamak Rice

    kalanamak

    Kalanamak, a traditional variety of paddy is all set to get a new look and name.

    Kalanamak Rice

    • Kalanamak rice is a paddy with black husk and strong fragrance, which is considered a gift from Lord Buddha to the people of Sravasti when he visited the region after enlightenment,
    • It is grown in 11 districts of the Terai region of northeastern Uttar Pradesh and in Nepal.
    • The traditional Kalanamak rice is protected under the Geographical Indication (GI) tag
    • It’s recorded in the GI application that Lord Budhha gifted Kalanamak paddy to the people of Sravasti so that they remembered him by its fragrance.

    What is the upgrade?

    • The traditional paddy has been prone to ‘lodging’, a reason for its low yield.
    • Lodging is a condition in which the top of the plant becomes heavy because of grain formation, the stem becomes weak, and the plant falls on the ground.
    • Addressing the problem, the Indian Agriculture Research Institute (IARI) has successfully developed two dwarf varieties of Kalanamak rice.
    • They have been named Pusa Narendra Kalanamak 1638 and Pusa Narendra Kalanamak 1652.

    Back2Basics:  Geographical Indication

    • A GI is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
    • Nodal Agency: Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry
    • India, as a member of the World Trade Organization (WTO), enacted the Geographical Indications of Goods (Registration and Protection) Act, 1999 w.e.f. September 2003.
    • GIs have been defined under Article 22 (1) of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.
    • GI is granted for a term of 10 years in India. As of today, more than 300 GI tags has been allocated so far in India (*Wikipedia).
    • The tag stands valid for 10 years.

     

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  • Road to Net Zero Goes Via Green Financing

    financing

    Context

    • Climate finance, or Green Money, remains a critical bottleneck for India in its journey towards the Net Zero 2070 objective and to create a resilient system through climate adaptation and mitigation. The challenge is daunting to make a climate transition for a nation of 1.4 billion people with increasing aggregate national income and individual wealth inequality.

    What is the Present arrangement of external financing for climate change

    • Estimated cost: Finances for climate change were to be channelized through multi-tiered systems in the form of national, regional, and international bodies. It has been estimated that India will need $15 trillion to finance its Net Zero journey.
    • Concessional loans: In most cases, small amounts flowing now into the developing component of the G20 nations are actually in the form of concessional loans rather than grants.
    • Technological support from developed countries: There is no doubt that India will need international financial commitments and technological support from developed countries, who have been erratic with their promised deliveries so far.

    What is green financing?

    • Green finance is a phenomenon that combines the world of finance and business with environment friendly behavior. It may be led by financial incentives, a desire to preserve the planet, or a combination of both.
    • In addition to demonstrating proactive, environment friendly behavior, such as promoting of any business or activity that could be damaging to the environment now or for future generations.

    Green financing through domestic market

    • Status of Green Bonds: As for domestic financial sources, according to an RBI Bulletin from January 2021, green finance in India is still at the nascent stage. Green bonds constituted only 0.7% of all the bonds issued in India since 2018, and bank lending to the non-conventional energy constituted about 7.9% of outstanding bank credit to the power sector as of March 2020.
    • Provision of Green loans: The report also mentioned that the development of green financing and funding of environment-friendly sustainable development is not without challenges, which may include false compliance claims, misuse of green loans, and, most importantly, maturity mismatches between long-term green investments and relatively short-term interests of investors.

    financing

    What are the challenges to green financing?

    • No assessment of climate finance risk: Research report indicates that banks in India, like in many parts of the world, are not prepared to adapt to climate change; and have not yet factored in any climate-related financial risks into their day-to-day decision-making. Some of the criteria used to assess the banks include a commitment to phase out investments in coal, disclosing and verifying direct and indirect emissions, issuing green loans, financing climate mitigation, and Net Zero targets for different types of emissions and their implementation plans.
    • Lack of enthusiasm among bankers: The report is also critical that none of the 34 banks have tested the resilience of their portfolios in the face of climate change. Yet, the bankers’ noise around the green finance topic is euphorically loud, without action.
    • No standard definition of green financing: These banks and financial institutions are also not geared up for financing green transition. India faces the big challenge of “how to define green”, as there is no uniform green definition and green taxonomy.
    • Poor debt market for green finance: The green money is generated through largely debt-based products (green bonds, climate policy performance bonds, debt for climate swaps, etc.), while the fund deployment occurs through debt-based, equity-based, and often, insurance-based instruments, apart from grants and loans. However, the Indian market lacks the depth of its debt markets or the heft of the bond markets.
    • Lack of green data governance: There is an inherent problem with “green data governance” that entails tracking the entire data-chain of a green financing initiative.
    • Unviable green projects: Like many other private sectors funding, the banks look at rates of return that do not really often make financing “public goods” as viable investments. They are even apprehensive about financing projects with long gestation periods with uncertain returns.

    financing

    What is way forward for green financing?

    • Considering social cost of carbon: An economic return alone might not be sufficient to induce green financing. A more holistic rate of return, considering the social cost of carbon, will be appropriate.
    • Return on green investment should include social returns: A longer time horizon will be needed for the cost-benefit analysis and the estimation of the return on investment. This is because, for climate-related projects, the returns increase over time. The extent to which the particular project could result in CO2 reduction and, eventually reduction in the social cost of carbon need to be assessed. As an example, India intends to reduce 1 billion Tonnes of CO2. The present social cost of CO2 (SCC) is $86/tonne. Therefore, the sheer economic gain is to the tune of $86 billion, or 2.1% of the current Indian GDP. Social cost saving is a public good and is enjoyed by all businesses, including the financial institutions.
    • Applying the green taxation: Hence, for a stronger business case for climate finance, experts propose to include in its Return-on-investment calculations the cost-benefit returns of the project through NPVSCC20 the Net Present Value of Social Cost of Carbon over 25 years of the project, a time period that compares well with tenor of infra and sovereign bonds. As an incentive, the government could introduce taxation sops for using NPVSCC25.

    financing

    You may want to know about Net Zero

    • Net zero means cutting greenhouse gas emissions to as close to zero as possible, with remaining emissions re-absorbed by oceans/ forests.
    • China, US, EU and India contribute 75% of total GHG emissions
    • However, per capita GHG emissions for US, EU and China are7,3 and 3 times of India
    • India has set target to achieve net zero emissions by 2070.

    Conclusion

    • The way India finances its journey to Net Zero 2070 could very well be a framework for other nations, for it would need to have contours of social inclusion, economic flexibility, and sustainable financing, while keeping in mind the political compulsions, as well as serving the demographic requirements of creating and sustaining livelihood in decades to come.

    Mains Question

    Q. Green financing is the most crucial part of achieving Net zero target. Comment. What are the India’s efforts to finance its climate action goals?

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  • Revitalizing India’s Spectrum Policy

    Spectrum

    Context

    • It is widely acknowledged that spectrum policy in India has had ups and downs, regretfully more downs than ups. Despite the recognized failure, India hosts 800 million internet users and host the second-largest telecommunications network in the world. We wonder what might have been achieved with a more reasonable and transparent spectrum policy.

    Background

    • On September 22, the government released the draft Indian Telecommunication Bill, 2022 seeking to replace the colonial era Indian Telegraph Act, 1885.
    • The draft bill compares spectrum to aatma: “In a way, spectrum is similar to aatma, like aatma, spectrum too does not have any physical form, yet it is omnipresent.” And yet there is one immutable difference in this material world. While the value of aatma is inestimable, spectrum has always had a banal price tag associated with it.

    Spectrum

    What is Draft Indian Telecommunication Bill, 2022?

    • The draft Indian Telecommunication Bill, 2022 is an attempt by the Department of Telecommunications (DoT) to consolidate various legislations presently governing the telecommunication landscape in India.
    • The Bill seeks to replace three laws, the Indian Telegraph Act, 1885, the Indian Wireless Telegraphy Act, 1933 and the Telegraph Wires (Unlawful Possession) Act, 1950.
    • The new regulatory framework is to bring the law at par with technological advancements and remove obsolete provisions from the colonial era laws.

    What is mean by Spectrum?

    • In physics, it’s a word that describes the distribution of something, like energy or atomic particles
    • Spectrum refers to the invisible radio frequencies that wireless signals travel over. Devices such as cell phones and wireline telephones require signals to connect from one end to another.
    • These signals are carried on airwaves, which must be sent at designated frequencies to avoid any kind of interference. The frequencies we use for wireless are only a portion of what is called the electromagnetic spectrum.
    • The Union government owns all the publicly available assets within the geographical boundaries of the country, which also include airwaves.
    • With the expansion in the number of cell phones, wireline telephone and internet users, the need to provide more space for the signals arise from time to time.

    The status of Spectrum policy in India?

    • Host the second largest telecommunications network despite of failures:
    • It is widely acknowledged that spectrum policy in India has had ups and downs, it has for the most part failed to capitalize on the ubiquity of the electromagnetic spectrum to provide meaningful connectivity to all citizens.
    • Despite the recognized failure, we boast of a billion plus mobile subscribers, 800 million internet users and host the second-largest telecommunications network in the world.
    • Ineffective access widening space of digital divide:
    • The intent of the draft bill is to correct past sins so that the benefits of spectrum and technology are better shared, and the quality of access improved for everybody.
    • In other words, since effective access to spectrum has remained a significant barrier to facilitating meaningful connectivity for Indians.
    • Spectrum’s potential is huge but with technical limitations:
    • The draft bill rightly refers to the spectrum as having the characteristics of a public good. It is also an inexhaustible resource. But while spectrum per se is not depletable, there are technical limitations to its optimum utilization at a given point in time.
    • Consequently, it is viewed as a scarce natural resource and what’s more, expensive auctions have made the spectrum dear and arguably exclusionary.
    • High cost of spectrum acquisition:
    • Since 2010, the government has consistently used auctions for spectrum allocation and in only one of the seven auctions held since then, the government was successful in selling 100 per cent of the available spectrum. One reason for this lukewarm response, barring the 2010 auction, is the high cost of spectrum acquisition.
    • High cost of auctions leading to revenue loss for the government:
    • Due to the high reserve price, the most recent auction witnessed spectrum being sold at the reserve price, effectively rendering the basis of an auction moot.
    • If almost all spectrum was sold at its reserve price, and a significant amount goes unsold, it implies that the price was too high, to begin with. It also implies a loss of revenue for the government for spectrum unsold is spectrum squandered.
    • Finally, it results in areas being underserved or unserved affecting quality and quantity.
    • High network charges by operators impacts compromising equal distribution and quality:
    • According to one estimate, at 7.6 per cent of their aggregate revenue, spectrum cost in India is amongst the most expensive in the world.
    • Since network operators incur a significantly higher cost for spectrum compared to other emerging markets, the ability to invest in network upgradation and infrastructure is severely impacted, resulting in uneven distribution of service and poor quality to boot.

    Spectrum

    What Could be the fresh approach?

    • Acknowledging and addressing the issues:
    • It must be recognized that the spectrum needs to be combined with other infrastructure to enable service delivery.
    • The cost of deploying other infrastructure in remote areas is nearly twice as much, while revenue opportunities are far lower, damaging if not destroying the prospects of rural businesses. Plugging the digital divide, therefore, needs a fresh approach.
    • Correcting the cost of spectrum and boosting investment:
    • Since licences and spectrum are typically assigned for service areas that are, for the most part, identified by state boundaries.
    • Since operators predominantly cater to urban markets, the spectrum in remote areas remains under- or in places un-utilized due to a lack of investment in allied infrastructure.
    • Reviving the old and executing the fresh provisions enshrined in draft bill for equitable sharing:
    • The draft bill incorporates practical provisions on the spectrum such as use it, share it, or lose it – an awaited policy that, however, needs innovative support to be successful. The idea of “niche operators” providing services including to telecom operators and manufacturers, introduced in 2005, needs revival in this regard.
    • If licensed operators are unable to utilise the assigned spectrum, the same could be given to local entrepreneurs who understand the needs of rural customers and are better placed to develop a more effective business case more quickly than the larger telcos. Active promotion of the idea of niche operators might just jolt operators out of their lethargy towards rural services.
    • Adopting innovative methods:
    • Alternatively, the government may explore innovative methods of spectrum access such as a non-competitive licensing framework for certain specific use cases.
    • Canada, for instance, has initiated consultations on a non-competitive local licensing framework in the 3900-3980 MHz Band and portions of the 26, 28 and 38 GHz bands to inter alia facilitate broadband connectivity in rural areas.
    • Emphasizing on Transparency and enhancing healthy competition:
    • The government should build an ecosystem that inspires trust so that transparency in assignment can be secured at a reasonable price for operators with strict service obligations without the phantasm of auctions.
    • At the same time, there should be no unsold spectrum. Niche operators should be invoked to engender competition, and government could yet collect revenue for itself.

    Spectrum

    Conclusion

    • The telecom is no longer an end in itself. It exists for user industries much more than ever before. The spill over benefits are far greater than what the sector commands within. Thus, to state the obvious, the vision that is “Digital India” can never be realized if affordable broadband connectivity remains only within the reach of a few.

  • MSP: Must be Effective

    msp

    Context

    • The CACP recommendations on Minimum Support Prices (MSP) for the mandated six Rabi crops wheat, barley, gram, lentil, rapeseed and mustard, and safflower are arrived by considering several factors.

    What is MSP?

    • MSP is a part of India’s Agriculture Price Policy. The MSP for various crops is announced by the central government at the beginning of every crop season on the recommendation of CACP.
    • MSP is price at which the government purchases crops from the farmers. It is the guaranteed ‘minimum floor price’ that farmer must get from the government in case the market price of the crops falls below the MSP.
    • The Rationale behind MSP is to support the farmer from excess fall in the crop prices, it is like an insurance policy for the farmers to save them from price falls.
    • The most important aim of the MSP policy is to save the Indian farmer from making distress sales. In the event of glut and bumper harvest, when market prices fall below the announced MSP, the government through its agencies buys the entire stock offered by the farmers at the MSP.

    What are the factors included in MSP calculation?

    • Factors taken into consideration are as follows:
    1. Cost of production,
    2. Supply and demand situation of various crops in domestic and global markets,
    3. Domestic and world prices along with trade opportunities,
    4. Terms of trade between agriculture and non-agriculture sector,
    5. Optimal utilization of land, water and other production resources,
    6. A minimum of 50 per cent mark-up over the cost of production.

    msp

    Why the relook at MSP calculation is necessary?

    • Though on the surface the list looks comprehensive, there are two missing concerns given the present-day challenges, necessitating a change in the MSP formula.
    1. Acreage
    2. Water usage
    • Rising MSP leads to water conflict: There is ample data-based evidence to show the causal relation between acreage and MSP movements. Rising MSPs of water-intensive crops has resulted in some of the water conflicts over river basins as shown by recent studies in the Cauvery and the Teesta River basins.
    • MSP for rice and wheat: This is also because MSP for rice and wheat, where government agencies like Food Corporation of India play a role in procurement, has created a reference for market prices. Ever since the MSP was introduced in the late 1970s, it became the “floor” price-setter for rice and wheat.
    • Higher MSP for water consuming cereals: Between 1980 and 2000, the MSPs of rice and wheat increased at a much faster rate than those of the “coarse” cereals (like jowar, bajra and ragi) which eventually led to movement of the terms-of-trade (defined as ratio of prices of competing crops, e.g., rice and millets) in Favour of the water-consuming cereals.
    • Shifting of High acreage to High MSP crop: This led to acreages moving largely in Favour of water consuming staples, whose crop-water requirements are many times of that of the drier millets. In the case of Cauvery and Teesta, the introduction of dry season paddy and its expansion created reliance on irrigation thereby Fuelling demand for water.
    • Non promotion of rabi millets: Though the MSP formula claims to take into account land and water use, it needs to be noted here that there is a need for Rabi millets (e.g., ragi) to be promoted through MSPs. This is because the millets are less water-consuming as compared to many other alternatives including wheat. However, there does not seem to be any MSP announced for Rabi millets.
    • Higher MSP for less water consuming crop is needed: In the process, it will be crucial to take into consideration the estimates of irrigation water need for specific crops, redefine the Rabi basket by including millets, and declare a higher MSP for less water-consuming crops vis-Ă -vis the high-water consuming crops.

    msp

    Nutritional security in MSP calculation

    • Nutritional security is not included in MSP calculation: The other consideration that is missing from the MSP formula is the consideration of the nutritional security. Ideally, the MSP regime should remunerate those crops that have a higher nutritional value per unit of resource use.
    • Rabi crops are more water efficient: Ragi is the most efficient water user in producing calories. Bajra followed by wheat and ragi are the better performers in terms of water efficiency in producing iron. For the case of fiber, ragi is the most water efficient crop followed by barley and maize demonstrating the same water efficiency.
    • Rabi crops are nutrition rich: Maize is the most efficient water user in producing carbohydrates with ragi being second and wheat third. With reference to fat production, bajra takes the first position followed by ragi and wheat. Ragi is the best performer in the case of calcium production. Wheat and ragi do equally well with phosphorus production per unit of water at the margin.
    • Missing MSP estimate: However, so far, the MSP formula has not taken into consideration the health and the nutritional aspect. Irrespective of the season, the nutritional aspect needs to be figured into the MSP recommendations, and more nutritional crops should command higher support prices.

    Conclusion

    • Present MSP regime is biased in Favor of rice and wheat. MSP can be utilized as great tool to achieve crop diversification by incentivizing cultivation of water efficient and nutrition rich millets. India can achieve the regional as well as financial balance in distribution of MSP by proper estimation of MSP and promotion accordingly.

    Mains Question

    How is MSP calculated? Analyse the linkages of MSP and water conflict and suggest the solution to overcome the water inefficiency by MSP.

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  • Why Private Investment is Lagging in India?

    Private

    Context

    • Last month, Finance Minister asked captains of industry what was holding them back from investing in manufacturing. She likened industry to Lord Hanuman from the Ramayana by stating that industry did not realize its own strength and that it should forge ahead with confidence. She said, “This is the time for India, we cannot miss the bus”.

    What is present situation of private investment?

    • Tax cut rate of domestic companies: In the hope of revitalizing private investment, the government had in September 2019 cut the tax rate for domestic companies from 30% to 22% if they stopped availing of any other tax SOP (standard operating procedure).
    • Weak private investment: Expert says that Indian private sector investment has been weak for almost a decade now. If we look at drivers of economic growth right now, there are amber lights flashing. The export story will be under threat because of the global slowdown, the government’s ability to support domestic demand would also be limited as the fiscal deficit comes down.
    • Impact of k-shaped recovery: Because of the K-shaped recovery, private consumption is only concentrated in some parts of the income pyramid.

    Private

    Analyzing the investment scenario

    • Investment to GDP ratio: As in the June edition of the Ministry of Finance’s Monthly Economic Review, the fixed investment to GDP ratio was 32% in 2021-22. However, there is need for caution in reading the most recent data, as they are subject to revision.
    • The National Accounts Statistics: It provides disaggregation of gross capital formation (GCF) by sectors, type of assets and modes of financing; over 90% of GCF consists of fixed investments.
    • No change in investment distribution: The investment distribution has hardly changed over the last decade, with the public sector’s share remaining 20%.
    • Fall in share of agriculture and industry: Between 2014-15 and 2019-20, the shares of agriculture and industry in fixed capital formation/GDP fell from 7.7% and 33.7% to 6.4% and 32.5%, respectively.
    • Rise in service sectors: Services’ share rose to 52.3% in 2019-20 compared to 49% in 2014-15.The rise in the services sector is almost entirely on transport and communications. The share of transport has doubled from 6.1% to 12.9% during the same period. Within transportation, it is mostly roads.
    • Decline in the share of investment: Its share in the investment ratio (column 2.1) fell from 19.2% in 2011-12 to 16.5% in 2019-20. This indicates that ‘Make in India’ failed to take off, import dependence went up, and India became deindustrialised. Import dependence on China is alarming for critical materials such as fertilizers, bulk drugs (active pharmaceutical ingredients or APIs) and capital goods. Instead of boosting investment and domestic technological capabilities, the ‘Make in India’ campaign frittered away time and resources to raise India’s rank in the World Bank’s Ease of Doing Business Index.
    • Decline in foreign capital in GFC: The contribution of foreign capital to financing GCF fell to 2.5% in 2019-20 from 3.8% in 2014-15 (or 11.1% in 2011-12). With declining investment share, industrial output growth rate fell from 13.1% in 2015-16 to a negative 2.4% in 2019-20, as per the National Accounts Statistics.

    Private

    What is Consumer’s demand situation?

    • Average Consumer sentiment index: Private companies invest when they are able to estimate profits, and that comes from demand. The Centre for Monitoring Indian Economy’s (CMIE) consumer sentiment index is still below pre-pandemic levels but is far higher than what was seen 12-18 months ago.
    • Buoyant Aggregate demand: RBI’s Monetary policy report dated September 30 says, Data for Q2 (ended Sept) indicate that aggregate demand remained buoyant, supported by the ongoing recovery in private consumption and investment demand. It shows that seasonally adjusted capacity utilization rose to 74.3% in Q1 the highest in the last three years.
    • High household savings: Along with household savings intentions remaining high, might hold the key to the investment cycle kicking in.

    Private

    Conclusion

    • Both public and private investment is necessary for sustainable growth trajectory of any economy. Global uncertainty, Ukraine war, oil prices have added to the skepticism of private investors. However, India’s macroeconomic performance is much better than those of developed and developing economies. Private investors must take these into account before holding back their investment.

    Mains Question

    Q. What role private investment plays in Indian economy? Analyse the post-pandemic private investment situation in India?

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  • EV firms divided over Battery-Swapping Policy

    battery

    Battery Swapping could only be leveraged up to a certain limit and was not a complete solution to push electric vehicle (EV) adoption says some auto industry.

    What is Battery Swapping?

    • Battery swapping is a mechanism that involves exchanging discharged batteries for charged ones.
    • This provides the flexibility to charge these batteries separately by de-linking charging and battery usage, and keeps the vehicle in operational mode with negligible downtime.
    • Battery swapping is generally used for smaller vehicles such as two-wheelers and three-wheelers with smaller batteries that are easier to swap, compared to four-wheelers and e-buses, although solutions are emerging for these larger segments as well.

    What is BaaS?

    • Battery-as-a-service (BaaS) is seen as a viable charging alternative.
    • Manufacturers can sell EVs in two forms: Vehicles with fixed or removable batteries and vehicles with batteries on lease.
    • If you buy an electric scooter with battery leasing, you do not pay for the cost of the battery—that makes the initial acquisition almost 40% cheaper.
    • Users can swap drained batteries for a fully charged one at a swap station. The depleted batteries are then charged on or off-site.
    • The advantages of swapping include low downtimes for commercial fleets, reduced space requirements, and lower upfront costs.
    • It is also a viable solution for those who don’t have parking spots at home.

    Draft Battery Swapping Policy 2021: Key Proposals

    • Rationalizing taxes on battery: The draft policy has suggested that the GST Council consider reducing the differential across the tax rates on Lithium-ion batteries and electric vehicle supply equipment. Currently, the tax rate on the former is 18 per cent, and 5 per cent on the latter.
    • Incentivization for swapping enabled vehicles: The policy also proposes to offer the same incentives available to electric vehicles that come pre-equipped with a fixed battery to electric vehicles with swappable batteries. The size of the incentive could be determined based on the kWh (kilowatt hour) rating of the battery and compatible EV.
    • Terms of contracts for battery providers: The government will specify a minimum contract duration for a contract to be signed between EV users and battery providers to ensure they continue to provide battery swapping services after receiving the subsidy.
    • Public battery charging stations: The policy also requires state governments to ensure public battery charging stations are eligible for EV power connections with concessional tariffs. It also proposes to install battery swapping stations at several locations like retail fuel outlets, public parking areas, malls, kirana shops and general stores etc.
    • Tariff rationalization: It also proposes to bring such stations under existing or future time-of-day (ToD) tariff regimes, so that the swappable batteries can be charged during off-peak periods when electricity tariffs are low.
    • Registration ease: Transport Departments and State Transport Authorities will be responsible for easing registration processes for vehicles sold without batteries or for vehicles with battery swapping functionality.
    • Unique identification number (UIN): The policy also proposes to assign a UIN to swappable batteries at the manufacturing stage to help track and monitor them. Similarly, a UIN number will be assigned to each battery swapping station.
    • Locations: The NITI Aayog has proposed that all metropolitan cities with a population of more than 40 lakh will be prioritized for the development of battery swapping networks under the first phase, which is within 1-2 years of the draft policy getting finalized.

    Why hasn’t BaaS taken off yet?

    • Hefty taxes: There are economic and operational constraints. Energy service providers offering swapping solutions have to charge 18% goods and services tax (GST) for swapping, compared to 5% GST on the purchase of an EV.
    • No incentives yet: Additionally, the government’s FAME-II incentives are not offered to vehicles sold with BaaS or swap station operators.
    • Lack of interoperability infrastructure: While these are economic disadvantages compared to direct charging solutions, the lack of a dense and interoperable battery swap infrastructure has also hindered the roll-out.

    Issues highlighted by industry

    • Swapping will require a great deal of battery standardisation which may reduce innovation and would curb investments.
    • Other concerns include accountability for a sub-optimal battery brought in to a swapping station or if it caught fire.
    • Battery swapping has reduced initial investments by EV owners.

    Issues with BaaS

    • Standardization of specifications: There is a need for standardization of safety specifications as well as the battery.
    • Safety hazard: Swapping in the various permutations and combinations of batteries at a station where they have not been tested for compatibility could lead to safety hazards.
    • Non-competitive nature: Also, mandating only one type of battery to  be eligible for  concessions  would be  disadvantageous  to  many  players.

    Significance of battery swapping

    • High Cost of EVs: An EV, by industry standards, is 1.5-2x costlier than IC Engine counterpart and at least half the cost is from the battery pack.
    • Cost reduction: Many manufacturers are offering batteries separately from a vehicle, reducing the cost. In that case, a fleet owner can buy vehicles without battery and utilize battery swapping.
    • Range Anxiety: Another major reason stopping people from buying EVs is range anxiety, or in simple terms, the fear of battery getting empty without finding a charging station.
    • Inadequate charging infrastructure: Unlike petrol pumps, EV charging stations are rare to spot and that further increases the range anxiety exponentially, especially while going on a road trip.
    • Hazard management: In case of a Swapping Station, one can simply locate a station, go and replace the empty battery with a new one.

     

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  • Oil and Dollar, Rising Prices and Impact on India

    dollar

    Context

    • The two major irritants for India this year have been oil and the dollar. The two are a heady cocktail that has distorted all economic forecasts creating volatility that has never been witnessed earlier. Their impact is being felt across bond and stock markets, affecting the entire system. As a result, the RBI and the government have had to work overtime to mitigate the adverse effects on the economy.

    dollar

    What is the current oil prices situation?

    • Unpredictable Prices: When the Ukraine war broke out, oil crossed the $120 mark (in April and again in June). It was expected that $150 was not far off. However, the range of $100-110 was restored and soon enough the price was back to the Nineties as all global commodity prices cooled off, even as the Ukraine war continued.
    • Rising requirement of Europe: With the winter months approaching and Europe dependent on natural gas for heating, which now appears to be in jeopardy due to Russia turning off the taps, oil has received a boost even though the continent is looking more at coal.
    • Reduction in production by OPEC: Add to this the fact that OPEC and its allies have decided to lower production by 2 million barrels a day and there is panic again. This shock is external over which neither the government nor RBI have any control.
    • Growing Import Bills: High oil prices mean many things. Crude has a share of 30-33 per cent in total imports and any hike in prices increases the import bill. With exports declining due to the slowdown in global growth and imports increasing due to oil, the trade deficit and current account deficit will widen further. The trade deficit for the first half is $150 billion and can touch $300 billion this year at this strike rate.
    • Possibility of Balance of Payment: This creates a problem for the current account deficit with components like software and remittances slowing down due to the recession in the west. Therefore, a balance of payments problem will surface. Ultimately it depends on how high oil will go. The RBI has assumed a $100/barrel. This looks reasonable at this point, but anything higher can create problems on the currency front.
    • Increasing Inflation: Inflation per se will be an issue when prices are left to the market like ATF or LPG. But in the case of petrol and diesel, it will be a conundrum for the government. If the status quo prevails on price transmission, then oil marketing companies will have to bear the losses. If the government allows the market to correct, inflation will increase as it will also feed into intermediary costs such as freight.
    • Higher input cost: User industries of oil like chemicals, plastics and fertilizers will face a problem again. Higher input costs will put pressure on profit margins and any pass through will be inflationary.
    • Windfall tax may increase: The government would probably once again revisit the windfall tax on crude (as has been recently done) to examine if there is any additional revenue to be garnered. Such an environment always tends to spook markets.
    • Rising bond yields: Bond yields move up every time oil prices rise while stock markets turn volatile normally in the downward direction.

    dollar

    How rising dollar prices affects India?

    • Rupee is weakening: There is the dollar conundrum which should be seen in conjunction with the oil. The dollar has been strengthening against all currencies. As the Fed tightens rates, which will carry on through 2023, the dollar will become stronger. Other countries are already in a weak economic zone and are tightening rates with a lag. The rupee is bearing the brunt of this development. There is no escape as the RBI intervention in any form can only temporarily support the decline in the rupee. In the last month or so, since the rupee crossed the 80 mark and gone past 83.
    • Negative sentiment of market: Another factor that will complicate matters is expectations. The recent news, for example, of global players deciding not to include Indian bonds in global indices might add to the negative sentiment in the market and exert pressure on the rupee.
    • Imported inflation: The rupee depreciation also leads to importing inflation. All goods imported will come in at a higher rupee cost which will in turn push the RBI to act further.
    • Less possibility of high export: The weak rupee may not quite help exports because the competitive advantage that normally comes along with such depreciation would be low given that other currencies are also declining.
    • Trade deficit will rise: Imports are unlikely to slow down as a growing economy requires inputs and raw materials. This will mean further pressure on the trade deficit. The government will gain at the margin as customs collections increase.
    • Volatile investors: The critical reaction will be that of investors. If foreign portfolio investors withdraw then there will be further pressure on the rupee while inflows would help to cushion the rupee.
    • Centre may lose on revenue: State governments will be better off as their VAT collections would increase automatically. However, the Centre may not gain as the excise duty is a fixed rate.

    Conclusion

    • One can never tell as almost all forecasters have been proved wrong this year. The theory that RBI can intervene and protect certain levels of currency has its limitations. These travails have to be responded to as they cannot be controlled.

    Mains Question

    Q. How rising dollar and oil prices affects the macroeconomic stability in India? What are the steps taken by RBI and GOI to manage the macroeconomic stability?

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  • What is FCRA and its recent amendments?

    Recently, the Ministry of Home Affairs amended certain provisions of the Foreign Contribution (Regulation) Act (FCRA).

    • The Ministry had made the FCRA rules tougher in November 2020, making it clear that NGOs (Non-Government Organizations) which may not be directly linked to a political party but engage in political action like bandhs, strike or road blockades will be considered of political nature if they participate in active politics or party politics. According to the law, all NGOs receiving funds have to registered under the FCRA.
    • The move comes after the government enhanced the import duty on gold import from 7.5 % to 12.5 % in a bid to discourage import of gold that leads to increase in trade deficit and puts pressure on the currency and forex reserves.
      • An increase in import duty on gold will lead to increase in cost of import and discourage its import and consumption.

    What is the FCRA?

    • About:
      • The FCRA was enacted during the Emergency in 1976 in an atmosphere of apprehension that foreign powers were interfering in India’s affairs by pumping in funds through independent organisations.
        • These concerns had been expressed in Parliament as early as in 1969.
      • The law sought to regulate foreign donations to individuals and associations so that they functioned “in a manner consistent with the values of a sovereign democratic republic”.
    • Objectives:
      • It requires every person or NGO wishing to receive foreign donations to be registered under the Act, to open a bank account for the receipt of the foreign funds and to utilise those funds only for the purpose for which they have been received and as stipulated in the Act.
      • The Act prohibits receipt of foreign funds by candidates for elections, journalists or newspaper and media broadcast companies, judges and government servants, members of legislature and political parties or their office-bearers, and organisations of a political nature.
    • Amendments:
      • It was amended in 2010 to “consolidate the law” on utilisation of foreign funds, and “to prohibit” their use for “any activities detrimental to national interest”
      • The law was amended again by the current government in 2020, giving the government tighter control and scrutiny over the receipt and utilisation of foreign funds by NGOs.

    What are the Key Changes?

    • It allows Indians to receive up to Rs 10 lakh annually from their relatives abroad under FCRA.
      • The limit earlier was Rs 1 lakh.
      • If the amount exceeds, the individuals will now have 90 days to inform the government instead of 30 days earlier.
    • It has given individuals and organisations or NGOs 45 days for the application of obtaining ‘registration’ or ‘prior permission‘ under the FCRA to receive funds.
      • Earlier it was 30 days.
    • Organisations receiving foreign funds will not be able to use more than 20 % of such funds for administrative purposes.
      • This limit was 50 % before 2020.
    • Made five more offences under the FCRA “compoundable”, making 12, instead of directly prosecuting the organisations or individuals.
      • Earlier, only seven offences under the FCRA were compoundable.

    What are Compoundable Offences?

    • Compoundable offences are those offences where, the complainant (one who has filed the case, i.e., the victim), enter into a compromise, and agrees to have the charges dropped against the accused. However, such a compromise should be a “Bonafide,” and not for any consideration to which the complainant is not entitled to.
    • The FCRA violations which have become compoundable now include failure to intimate about receipt of foreign funds, opening of bank accounts, failure to place information on website, etc.

    What is the Significance of the Move?

    • Enhances Remittances:
      • It will curb the outflow of funds and on the other hand enhancing inward Remittances.
    • Stabilise forex Reserves:
      • It will lead to an increase in inflow of funds into India which will stabilise the forex reserves and also the currency.
      • Similarly, an increase in import duty on gold from 7.5 % to 12.5 % will discourage gold import as it will result in an increase in the price of gold in India.
    • Reduces Trade Deficit:
      • An increase in inflow of funds and reduction in outflow of funds on account of gold imports will help reduce the trade deficit.
        • The trade deficit in the month of April and May 2022 stood at a high of USD 20.1 billion and USD 24.6 billion respectively making an aggregate of USD 44.7 billion in two months.
        • By comparison the trade deficit in April and May 2021 stood at USD 21.8 billion.

  • Why freight trains are switching to aluminium wagons?

    aluminium

    The Union Railway Minister has recently flagged off the country’s first freight train with an all-aluminium wagon rake.

    What is the news?

    • This move is a part of the country’s ambitious plan to modernize rail transportation and facilitate large carbon savings.

    Aluminium-bodied trains

    • Indian Railways proposes to shift its passenger and freight operations gradually to aluminium-bodied trains.
    • A blueprint for its production and introduction was finalized even before the onset of the covid-19 pandemic.
    • The Modern Coach Factory (MCF) at Rae Bareli has signed a transfer of technology contract with South Korea’s Dawonsys for such passenger coaches in early 2020.
    • The execution of the project was held back because of the pandemic and its fallout.
    • These coaches will be rolled out now.

    What is the plan for their introduction?

    • At present, India’s high-speed trains, including the Rajdhanis and the Shatabdis, use Linke Hofmann Busch (LHB) coaches that are made of stainless steel.
    • Only the interiors use aluminium, which makes them lighter as compared to conventional rakes.
    • The Indian Railways plans to procure 400 new generation Vande Bharat train sets with better energy efficiency and passenger riding experience.
    • The use of aluminium body coaches in these new generation trains will be considered.

    Will aluminium trains reduce carbon footprint?

    • Aluminium trains consume less energy.
    • Besides, the metal is recyclable.
    • It is estimated that switching to aluminium will save 1,500 tonnes of carbon emissions a year.
    • With the Railways planning to deploy over 100,000 wagons in the coming years, the potential annual CO2 reduction could be to the tune of over 5 million tonnes with a 15-20% shift to aluminium wagons.

    Material advantages of aluminium

    • These coaches, being lighter than stainless steel ones, are preferred for higher speed systems.
    • They are lighter by up to 30% compared to stainless steel coaches.
    • They offer low haulage cost and higher payload, better fuel efficiency and lower pollution levels.
    • Also, aluminium trains take less time to manufacture and thus can help speed up capacity for production.
    • The new metal trains will help the Railways hike its share in overall freight transportation from the current 18%.

    What about the cost of building?

    • An all-aluminium passenger coach and wagon system would raise the cost of manufacturing rolling stocks by about 35% since the price of aluminium, globally, is far higher than that of steel.
    • However, the advantages of the metal outscore its high price. It is estimated that as the metal is recyclable, the new coaches would have up to 80% resale value.
    • The recyclability will also help in times of global volatility in metal prices.
    • This is why aluminium trains command a lion’s share in the US, Europe and Japan.

     

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  • When does RBI step in to monitor a Bank?

    The Reserve Bank of India (RBI) has placed a private bank under tight monitoring and greater public scrutiny.

    What is the news?

    • The XYZ Bank’s capital to risk weighted assets ratio (CRAR) dropped to around 13% at the end of March this year from 14.5% a year ago.
    • This has dropped below the Basel III in the past and it has even been placed under the prompt corrective action framework (PCA) by the RBI to deal with serious deteriorations in its financial position.
    • Under Basel-III norms banks are supposed to maintain their CRAR at 9% or above.

    What is Capital Adequacy Ratio (CAR)?

    • Capital adequacy ratio is an indicator of the ability of a bank to survive as a going business entity in case it suffers significant losses on its loan book.
    • The CRAR is a ratio that compares the value of a bank’s capital (or net worth) against the value of its various assets weighted according to how risky each asset is.
    • It is used to gauge the risk of insolvency faced by a bank.

    How do it affects bank functioning?

    • A bank cannot continue to operate if the total value of its assets drops below the total value of its liabilities as it would wipe out its capital (or net worth) and render the bank insolvent.
    • So, banking regulations such as the Basel-III norms try to closely monitor changes in the capital adequacy of banks in order to prevent major bank failures which could have a severe impact on the wider economy.
    • The capital position of a bank should not be confused with cash held by a bank in its vaults to make good on its commitment to depositors.

    Alternatives for bank

    • The said Bank has been trying to issue additional shares in the open market through a rights issue in order to deal with its capital adequacy woes.
    • Through a rights issue, the bank will be able to raise more equity capital from existing shareholders.
    • This is in contrast to an initial public offering where shares are issued to new shareholders.

    Back2Basics: Basel Norms

    • Basel is a city in Switzerland. It is the headquarters of the Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
    • Basel guidelines refer to broad supervisory standards formulated by this group of central banks – called the Basel Committee on Banking Supervision (BCBS).
    • The set of the agreement by the BCBS, which mainly focuses on risks to banks and the financial system is called Basel accord.
    • The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
    • India has accepted Basel accords for the banking system.

    Basel I

    • In 1988, BCBS introduced a capital measurement system called Basel capital accord, also called as Basel 1.
    • It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks.
    • The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).
    • RWA means assets with different risk profiles.
    • For example, an asset-backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1999.

    Basel II

    • In June ’04, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.
    • The guidelines were based on three parameters, which the committee calls it as pillars:
    • Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
    • Supervisory Review: According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks.
    • Market Discipline: This needs increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.

    Basel III

    • In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.
    • A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding.
    • Also, the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk.
    • Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
    • The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

     

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