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Subject: Economics

  • Assessing The Impact of Falling Rupee

    Context

    • The Indian rupee has been quite the controversial newsmaker this year. Having fallen more than 11 percent against the US dollar so far in 2022, the rupee breached the much-feared 80-mark in July and went on to set record lows, touching 83 to a dollar late in October.

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    Impact on trade

    • Widening trade deficit: The first phenomenon is one of the biggest worries caused by a falling rupee, a rise in import costs, threatening higher inflation and a widening trade deficit.
    • Advantage for export: However, there also exists a ray of hope, a depreciated currency implies cheaper, more competitive exports and therefore, a possible export-led boost to the domestic economy. The net effect of these opposing forces would determine the impact of a depreciating currency on an economy.
    • Robust Purchasing Manager’s Index (PMI): The import bill has risen not only on the back of a raging dollar and hardening crude prices but has also been spurred by strengthening domestic demand and manufacturing, as evidenced by a robust Purchasing Manager’s Index (PMI) of 55.3 in October.
    • Subdued merchandized export: Although service exports have done fairly well in FY 2022-23, merchandise exports have remained subdued and could soon worsen due to economic downturns in Europe and the US.

    Rupee

    Impact on foreign investment

    • Weak rupee low foreign portfolio investors (FPI): The rupee has a complicated relationship with the moody foreign portfolio investors (FPIs). A weaker rupee can discourage FPIs. In turn, FPI outflows can further push the rupee to depreciate.
    • Falling NRI deposits: With the rupee losing value against the dollar, and interest rates around the world rising, NRI deposit flows also fell in the five-month period from April to August 2022, down to US$1.4 billion from US$2.4 billion a year ago.
    • FDI is Rising: Net FDI flows have remained positive and are set to grow, with April-June 2022 seeing an inflow of US$13.6 billion, higher than the same period last year. Even Indian stock markets have remained resilient, particularly on the back of large net-purchases by domestic institutional and retail investors, offsetting the equity sell-off by foreign investors.
    • Negative foreign investment: Net foreign investment (FII) flows did turn negative for a few months in 2022, and while rebounding FPI and resilient FDI do point to a more optimistic opinion of India among foreign investors, foreign investment is absolutely crucial at this juncture in India’s growth story and must be watched closely.

    Rupee

    Efforts taken by RBI

    • Use of forex reserve: In an effort to defend the rupee, the RBI has intervened and sold off some of its foreign exchange reserves. The reserves stood at US$524.52 billion as of 21 October 2022, witnessing a fall of over US$115 billion since the beginning of the year.
    • according to RBI external situation is better: RBI has stated that most external indicators such as external debt to GDP ratio, net international investment position to GDP ratio and the ratio of short-term debt to reserves reflect India’s relatively comfortable position in meeting its external financing requirements–even in contrast to other emerging economies.
    • Careful intervention: Over-tightening of monetary policy and excessive intervention in the currency market can pose significant risks to the country’s growth prospects and the RBI must be careful to intervene just enough to quell volatility, without expending an inordinate amount of reserves.

    Rupee

    Opportunity in crisis

    • Leveraging the growth rate: India has the chance to leverage its relatively healthy growth rates and rising infrastructure and capital expenditure to attract foreign investment, spurring growth and strengthening the capital account.
    • High investor confidence: Investor confidence has been steady, with the country seeing a record high of annual FDI inflows of US$84.8 billion in FY2021-22 in spite of the pandemic and volatile geopolitical scenario.
    • Stability in growth: This confidence needs to be leveraged and by positioning India on the international stage as a thriving and stable haven for investments, both the country’s growth and forex needs can be met.
    • Sufficient policy support is needed: Although the falling rupee has caused worry for a few economic indicators, with sufficient policy support, the domestic economy could emerge as an outlier in a global downturn.

    Conclusion

    • With the United States (US) on a war path to curtail inflation and the supply side stifled by the conflict in Ukraine, even historically strong currencies like the euro and the British pound have plummeted against the raging dollar, more than the rupee. Government and RBI must stay on course of steady growth of economy.

    Mains Question

    Q. Discuss the impact of falling rupee on Trade and foreign investment in India? How India has unique opportunity for growth amidst the crisis around the world?

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  • Industry urges govt. to establish ‘India Rare Earths Mission’

    To counter India’s reliance on China for imports of critical rare earth minerals, industry has urged the government to establish ‘India Rare Earths Mission’.

    What are Rare Earth Metals?

    • The rare earth elements (REE) are a set of seventeen metallic elements. These include the fifteen lanthanides on the periodic table plus scandium and yttrium.
    • Rare earth elements are an essential part of many high-tech devices.
    • They have a wide range of applications, especially high-tech consumer products, such as cellular telephones, computer hard drives, electric and hybrid vehicles, and flat-screen monitors and televisions.
    • Significant defense applications include electronic displays, guidance systems, lasers, and radar and sonar systems.
    • Rare earth minerals, with names like neodymium, praseodymium, and dysprosium, are crucial to the manufacture of magnets used in industries of the future, such as wind turbines and electric cars.

    Minerals

    Applications of REMs in various fields:

    • Electronics: Television screens, computers, cell phones, silicon chips, monitor displays, long-life rechargeable batteries, camera lenses, light-emitting diodes (LEDs), compact fluorescent lamps (CFLs), baggage scanners, marine propulsion systems.
    • Defense Sector: Rare earth elements play an essential role in our national defense. The military uses night-vision goggles, precision-guided weapons, communications equipment, GPS equipment, batteries, and other defense electronics. These give the United States military an enormous advantage. Rare earth metals are key ingredients for making the very hard alloys used in armored vehicles and projectiles that shatter upon impact.
    • Renewable Energy: Solar panels, Hybrid automobiles, wind turbines, next-generation rechargeable batteries, bio-fuel catalysts.
    • Manufacturing: High strength magnets, metal alloys, stress gauges, ceramic pigments, colorants in glassware, chemical oxidizing agent, polishing powders, plastics creation, as additives for strengthening other metals, automotive catalytic converters
    • Medical Science: Portable x-ray machines, x-ray tubes, magnetic resonance imagery (MRI) contrast agents, nuclear medicine imaging, cancer treatment applications, and for genetic screening tests, medical and dental lasers.
    • Technology: Lasers, optical glass, fiber optics, masers, radar detection devices, nuclear fuel rods, mercury-vapor lamps, highly reflective glass, computer memory, nuclear batteries, high-temperature superconductors.

    DO YOU KNOW?

    Metals such as cadmium, lead are often used in manufacturing plastic and over time can enter coastal waters. These are acutely harmful for coastal wildlife and humans.Different kinds of plastic releases different kinds of metals  that may release when exposed to water and UV lights.

    What are the challenges in accessing Critical minerals?

    • Deposits in geopolitically sensitive regions: Reserves are often concentrated in regions that are geopolitically sensitive or fare poorly from an ease of doing business perspective.
    • Controlled production:  A portion of existing production is controlled by geostrategic competitors. For example, China wields considerable influence in cobalt mining in the Democratic Republic of Congo through direct equity investments and its Belt and Road Initiative.
    • Agreements in advance from outside: Future mine production is often tied up in off take agreements, in advance, by buyers from other countries to cater to upcoming demand.

    MineralsA step taken by Indian government for sourcing strategic minerals

    • For sourcing of strategic minerals, the Indian government established Khanij Bidesh  India Limited (KABIL) in 2019 with the mandate to secure mineral supply for the domestic market.

     India Rare Earths Mission

    • Industries in India have urged to set up a Mission, manned by professionals, like the India Semiconductor Mission and make their exploration a critical component of the Deep Ocean Mission plan of the government.
    • It would seek to encourage private sector mining in the sector and diversify sources of supply for these strategic raw materials.
    • The industry group has mooted making rare earth minerals a part of the ‘Make In India’ campaign, citing China’s ‘Made in China 2025’ initiative that focuses on new materials, including permanent magnets that are made using rare earth minerals.

    Why such move?

    • Though India has 6% of the world’s rare earth reserves, it only produces 1% of global output, and meets most of its requirements of such minerals from China.
    • In 2018-19, for instance, 92% of rare earth metal imports by value and 97% by quantity were sourced from China.

    What lies ahead?

    • There is a need to harness the potential of the country’s own rare earth reserves.
    • This would help build domestic capability and broad-base supply sources for such an important and strategic raw material.

     

  • Darjeeling Tea Industry in Crisis

    tea

    Tea Board officials admitted that Indian tea had not been able to establish itself globally, and that one of its key brands, Darjeeling Tea, was under acute stress.

    About Darjeeling Tea

    • Darjeeling Tea, called the ‘Champagne of Teas’, was the first Indian product to get the GI (Geographical Identification) tag in 2004 for its distinctive aroma and flavour.
    • About 87 gardens in Darjeeling which employ about 55,000 workers produce approximately 7 million kg of tea, most of which is exported.

    Why is it under distress?

    • Garden owners are reeling under higher costs of production and other issues.
    • Inferior quality tea from Nepal is being imported, and then sold and re-exported as premium Darjeeling Tea.
    • Nepal shares similar climatic conditions and terrain, produces tea at a lower price because of less input costs, particularly labour, and fewer quality checks.
    • In 2017, the production of Darjeeling Tea hit a low of 3.21 million kg. Since a substantial market of Darjeeling Tea switched to cheaper varieties of tea, including the imported variety from Nepal.
    • Tea planters and industry experts admit that the tea industry in Darjeeling has not recovered from the damage it incurred in 2017.

    Is climate change impacting production?

    • The decline in production is due to multiple factors, which include climate change, declining yields, and high absenteeism among workers.
    • Because of the hilly terrain of Darjeeling, there is no land left for expansion of tea gardens.
    • The tea bushes are older than other parts of the country.
    • Uprooting and planting them is both time and cost-intensive.

     

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  • States ask Centre to curb its ‘Cess’ habit

    cess

    Several States, including some governed by the Centre urged to rein in its reliance on raising revenues through cesses and surcharges which reduce their share in the divisible pool of taxes.

    What are Cesses and Surcharges?

    The Union government has the authority to collect money through a variety of levies referred to as a tax, fee, cess, and surcharge.

    (A) Cess

    • Cess is charged on the tax amount and is levied for a specific purpose.
    • In India, cess is applicable to all the taxpayers, and it is calculated over, and above the base tax liability of the taxpayer, cess taxes initially go to the consolidated fund of India (CFI) that has to be used for the purpose for which it was collected.
    • Education Cess, Swachh Bharat Cess

    (B) Surcharge

    • The surcharge is levied on the tax payable and not on the total income.
    • It directly goes to the CFI, and after that it can be used for any purpose, just like the normal tax.
    • Surcharge applies to the taxpayer whose income is more than Rs 50 lakh.
    • In simple terms, surcharge is a tax on tax that is not collected for any particular cause, and the union government may use the proceeds of surcharges for any purpose it sees as important.
    • The objective behind the surcharge is to put a high tax burden on people with high incomes.

    Difference between the two

    • The rate of cess under income tax is fixed at 4%, whereas the rate of surcharges varies from 10%, 15%, 25% & 37% based on the taxpayers’ total income.
    • Cess is calculated on total tax and surcharge amount; surcharge is calculated on total tax amount only.
    • In a nutshell, while both are taxes, cess is collected from every taxpayer to meet a certain purpose, and the surcharge is an additional tax collected from the taxpayers who have higher slab income.

    Key difference over which states dispute

    • Major difference is that each can be shared with the state government, the surcharge can be kept with CFI, and it can be utilised for other taxes.
    • However, cess should be utilised for a particular reason. This restricts the states expenditure.
    • Tamil Nadu noted that the share of cesses and surcharges had grown from 10.4% of gross tax revenue in 2011-12 to 26.7% in 2021-22.
    • This has deprived the States of their legitimate share of revenue collected by the Union Government.

     

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  • Rationalization in long-term Capital Gains Tax structure on the anvil

    The Finance Ministry is looking at rationalizing long-term capital gains tax structure by bringing parity between similar asset classes and revising the base year for computing indexation benefits.

    What is Capital Gains Tax?

    • Capital gains tax is levied on the profits made on investments (Base Year: 2001).
    • It covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.
    • Under the Income Tax Act, gains from sale of capital assets — both movable and immovable — are subject to ‘capital gains tax’.

    Types of CGT

    (A) STCG (Short-term capital asset)

    • An asset held for a period of 36 months or less is a short-term capital asset.
    • The criteria is 24 months for immovable properties such as land, building and house property from FY 2017-18.
    • For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as a long-term capital gain, provided that property is sold after 31st March 2017.
    • The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

    Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). These assets are:

    1. Equity or preference shares in a company listed on a recognized stock exchange in India
    2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
    3. Units of UTI, whether quoted or not
    4. Units of equity oriented mutual fund, whether quoted or not
    5. Zero coupon bonds, whether quoted or not

    (B)  LTCG (Long-term capital asset )

    • An asset held for more than 36 months is a long-term capital asset.
    • They will be classified as a long-term capital asset if held for more than 36 months as earlier.
    • Capital assets such as land, building and house property shall be considered as long-term capital asset if the owner holds it for a period of 24 months or more (from FY 2017-18).

    Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as long-term capital asset.

    1. Equity or preference shares in a company listed on a recognized stock exchange in India
    2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
    3. Units of UTI, whether quoted or not
    4. Units of equity oriented mutual fund, whether quoted or not
    5. Zero coupon bonds, whether quoted or not

    Why is it so complicated?

    Capital gains tax is complicated for a few primary reasons.

    • First, the rate changes from asset to asset. LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation.
    • Second, holding period changes from asset to asset. The holding period for LTCG tax is two years in real estate, one year for stocks, and three years for debt mutual funds and gold.
    • Third, exemptions available against it come with their own complex conditions. For instance, buying a house after selling one can get you an exemption, but the new house must be bought in two years or built in three years of the sale.

    Stipulated reforms by Finance Ministry

    • Currently, shares held for more than one year attract a 10% tax on long-term capital gains.
    • Gains arising from sale of immovable property and unlisted shares held for more than 2 years and debt instruments and jewellery held for over 3 years attract 20% long-term capital gains tax.
    • Also, a change in base year for computing inflation-adjusted capital gains is being contemplated.
    • The index year for capital gains tax calculation is revised periodically to make it more relevant. The last revision took place in 2017 when the base year was updated to 2001.
    • Since the prices of assets increase over time, the indexation is used to arrive at the inflation-adjusted purchasing price of assets to compute long-term capital gains for the purpose of taxation.

     

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  • Idea of Urban Agriculture and Use of Technology

    Urban Agriculture

    Context

    • As per the United Nations’ Food and Agricultural Organization, urban and peri-urban agriculture have a significant role in global food and nutritional security, and so it is seeking to encourage such activities through the Urban Food Agenda.

    What is Urban Agriculture?

    • Urban agriculture refers to agricultural practices in urban and peri-urban areas. Peri-urban areas are those transitioning from rural land uses (such as for agriculture or livestock production) to urban ones (such as the built environment, manufacturing, services, and utilities), and are located between the outer limits of urban and regional centres and the rural environment.
    • Cultivating food and non-food product: Urban agricultural practices are geared towards cultivating or growing a wide range of food and non-food products, and include activities such as rearing livestock, aquaculture, beekeeping, and commercial-scale floriculture.

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    Urban Agriculture

    Urban Agriculture and Technology

    • Farming using software: In France, for instance, certain software gives farmers access to cross-referenced information on their smartphones about the weather, spraying dates, seeds, fertilization plans, and regulatory compliance.
    • Use of mobile applications: In India and the US, mobile applications can help connect urban growers and local consumers. Technology also helps food growers in precision farming, which involves mapping and monitoring geological and plant data for a field so that inputs can be adapted to suit ultra-localized needs. Local communities can be helpful in the gathering of such data.
    • Aeroponics: Aero Farms in Newark, US, builds and operates vertical indoor farms to enable local production at scale and increase the availability of safe and nutritious food. The company uses aeroponics to grow leafy greens without sun or soil in a fully controlled environment. The technology enables year-round production with less water consumption and high yields per square metre.
    • Container system: In Paris, a start-up called Agricool grows strawberries in containers across the city. The company retrofits old, unused containers to accommodate LED lights and aeroponics system to grow strawberries year-round. These ‘cooltainers’ are powered by clean energy and use about 90 percent less water than traditional farming activities. This can also create job opportunities for city residents in the agricultural sector.

    Urban Agriculture in Indian Cities: Exploring the Potential

    • Small area large population: India’s total urban area has been estimated at around 222,688 sq. km, or about 6.77 percent of the country’s geographical area. This small area is home to around 35 percent of India’s population, around 500 million Indians.
    • less area to convert into green spaces: If Indian cities were to allocate 10 percent of their geographic space for greens (gardens, playgrounds, public parks and the like), as suggested in the Urban & Regional Development Plans Formulation & Implementation guidelines, this would mean 22,268 sq. km of the total urban area is available to convert into public green spaces.
    • Space constraint hinders the urban agriculture: Even if half of this area (111,34 sq. km) were used for urban agriculture instead of parks, gardens, playgrounds, and horticulture, this is a mere 5 percent of all urban area and 0.56 percent of all land under agriculture in the country. This showcases the space constraints that urban agriculture must tackle.

    Urban Agriculture

    Urban constraints and use of technology

    • Raised bed farming: Raised bed farming is the agricultural technique of building freestanding crop beds above the existing soil level. In certain instances, raised beds are covered with plastic mulch to create a closed planting bed. The method helps reduce soil compaction and allows better control of the soil. The planted area also gets protected in case of excess rainfall. This method affords far greater productivity than regular farming.
    • Container gardening: Container gardening refers to the practice of growing plants in containers instead of planting them on the ground. Containers could include polyethene plastic bags, clay pots, plastic pots, metallic pots, milk jugs, ice cream containers, bushel baskets, barrels, and planter box bottles. Most vegetables grown in backyard gardens can be grown in containers.
    • Aquaponics: A closed-loop aquaponics system is an organic strategy that draws on the strengths of the basic ecological foundations of the nitrogen and carbon cycles. Nutrient-rich fish water is used to fertilise and water plants. This system requires only a few inputs primarily energy and some of the basic plant nutrients.
    • The vertical farming: The vertical farming model essentially aims at increasing the amount of agricultural land by stacking many racks of crops vertically, thereby having many levels on the same space of land.
    • Rooftop Plant Production: Under rooftop plant production (RPP) systems, food crops can be grown using raised beds, row farming, or a hydroponic greenhouse. Hydroponics is the practice of growing plants in a nutrient solution with or without a soilless substrate to provide physical support. RPP systems maximize the cultivation area with artificial lighting. RPP can be used to grow crops that require higher light intensities and more vertical space.

    Conclusion

    • Urban agriculture faces several constraints, but each of these can be overcome by adopting a range of technologies, establishing urban agriculture initiatives in peri-urban areas, launching community initiatives in common spaces, and altering planning parameters and city regulations to include urban agriculture as a ULB activity.

    Mains Question

    Q. What is the urban agriculture? What are constraints in urban agricultural practice and how to overcome those constraints? 

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  • Civil Aviation Ministry notifies draft Aircraft Security Rules, 2022

    The Ministry of Civil Aviation has notified the draft Aircraft Security Rules, 2022 which enable the aviation security regulator, Bureau of Civil Aviation Security (BCAS) to impose penalties upto ₹1 crore on airports and airlines for violation of security measures.

    Why such move?

    air

    • India’s civil Aviation Sector is facing a unique crisis a crisis of credibility and safety.
    • Some of the issues are-
    1. The windshield of a go air flight cracks mid-air, two go air flights suffer engine snags, a flight could not take off because of a dog on the runway.
    2. A bird was found in the cockpit of an Air India Express cruising at 37 000 feet.
    3. One flight suffered an engine snag another noticed smoke in the cabin.
    4. Luggage is not being loaded or is going missing.

    Draft Aircraft Security Rules, 2022

    • The rules will supersede Aircraft Security Rules, 2011 and were necessary after Parliament passed Aircraft Amendment Act, 2020 in September 2020.
    • It gives statutory powers to BCAS, along with the Director General of Civil Aviation and Aircraft Accident Investigation Bureau.
    • These allow them to impose penalties which could only be imposed by courts earlier.
    • The amendment were necessary after the UN aviation watchdog, International Civil Aviation Organisation (ICAO), raised questions about the three regulators functioning without statutory powers.

    Key features

    • Hefty fines: Once the draft Rules are finalised, the BCAS can impose a fine of ₹50 lakh to ₹1 crore (depending on the size of the company) on airports and airlines if they fail to prepare and implement a security programme.
    • Security clearance: They can commence operations only after seeking a security clearance.
    • Regulating passenger behaviour: Individuals will also face penalties ranging from ₹1 lakh to ₹25 lakh depending on the nature of offence.
    • Data security: In order to deal with cyber security threats, the rules also require each entity to protect its information and communication technology systems against unauthorised use and prohibit disclosure.
    • Unburdening the CISF: The draft rules now authorise airports to engage private security agents instead of CISF personnel at “non-core areas” and assign security duties as per the recommendation of the National Civil Aviation Policy, 2016.

     

    Tap to read more about: India’s ailing Civil Aviation Sector.

     

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  • Retail Inflation and the new trends

    Inflation

    Context

    • The recent data seems to indicate that retail inflation has possibly peaked and is now likely to trend downwards. But, it would be wise to exercise caution. The latest data, while providing useful nuggets of information about price trends in the economy, challenges some of the widely held conceptions about inflation, and gives mixed signals about its trajectory.

    Inflation

    What is a simple definition for inflation?

    • Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over time, but prices can also fall (a situation called deflation).

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    Inflation Rate

    • Inflation Rate is the percentage change in the price level from the previous period. If a normal basket of goods was priced at Rupee 100 last year and the same basket of goods now cost Rupee 120, then the rate of inflation this year is 20%.
    • Inflation Rate= {(Price in year 2 – Price in year 1)/ Price in year 1} *100

    Inflation

    Five broad trends emerge to consider as reasons behind high inflation.

    • Russia- Ukraine war:
    • The sharp rise in commodity prices as a consequence of the war is considered to have been largely responsible for the spurt in inflation this year, pushing it beyond the upper threshold of the RBI’s inflation-targeting framework.
    • For instance, India’s crude oil import price rose from $84.67 per barrel in January to $112.87 in March, and further to $116.01 in June. The ripple effects of higher commodity prices have been felt across the economy.
    • Inflation generalized in formal and informal sectors:
    • There are indications that inflation is getting more generalized across both the formal and informal segments of the economy.
    • One indication of this comes from the clothing and footwear category, a highly fragmented industry with the presence of both formal and informal segments. Another possible indication comes from rentals.
    • Rental inflation in India had tended to remain largely range-bound over much of the past few years. But as this category has the highest individual item-wise weight in the inflation index, any movement in either direction, however small, would have a large impact on core inflation.
    • Supply side disruptions during the pandemic: During the pandemic, supply-side disruptions had caused goods inflation to rise, even as services inflation remained relatively muted owing to risk-averse behaviour by consumers and restrictions on high-contact intensive sectors.
    • Competition and the pricing mechanism in the economy:
    • Prices are rigid on the downside will depend not only on how demand fares now with monetary conditions having been tightened, but also on the extent of competition in the economy, among others.
    • After all, greater market concentration creates conditions for greater pricing power. A badly damaged non-corporate sector (MSMEs) would have led to ruptures in the low-cost economy, increasing the pricing power of the corporate sector during this period.
    • Wage- price spiral:
    • Inflation in India is not a consequence of a strong economy. Wage growth in the large informal rural economy has been lower than inflation.
    • While some skill-intensive segments of the urban formal labour force may be able to exercise some bargaining power, the labour force participation rates suggest continuing slack in urban labour markets.

    Inflation

    What are the concerns?

    • Commodity should have come down over the period: If high core inflation in the months after the beginning of hostilities was an outcome of the passthrough, either in part or completely, of the Ukrainewar, then the decline in commodity prices since then should have led to a moderation in core inflation
    • Services inflation vs goods inflation: But as activities normalised, there was an expectation that services inflation would see a strong pick-up. The recent data indicates that this has not been the case. While services inflation has risen, it remains considerably lower than goods inflation, perhaps owing to a combination of lower cost-push pressures, more slack and less demand.

    Conclusion

    • While inflation may have peaked, it is far from being quashed. The RBI expects inflation to edge downwards from 6.5 per to 5 per cent in the first quarter of the next financial year (2023-24). But RBI ca not afford to underestimate the price pressures in the economy.

    Mains Question

    Q. What is inflation?  Some of the new emerging trends are considered while measuring rising inflation in the current scenario. Discuss.

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  • GST on Online Gaming, Casinos, Racing

    A ministerial panel is likely to recommend a uniform 28 percent tax GST rate on Online Gaming, irrespective of whether it is a game of skill or chance.

    Online gaming sector in India

    • In the past few years, India’s nascent online gaming industry witnessed an unprecedented rise, catapulting it to the top five mobile gaming markets in the world.
    • Registering a growth rate of 38%, online gaming is the next sunrise industry.
    • Currently, there are more than 400 gaming companies in India, and it is home to 420 million online gamers, second only to China, according to an analysis by KPMG.

    Types of gaming

    • The types of online gaming include:
    1. E-sports (well-organized electronic sports which include professional players) ex. Chess
    2. Fantasy sports (choosing real-life sports players and winning points based on players’ performance) ex. MPL cricket
    3. Skill-based (mental skill) ex. Archery
    4. Gamble (based on random activity) ex. Playing Cards, Rummy

    Why is the gaming industry booming in India?

    1. Digital India boom in the gaming industry
    2. Narrowing of the digital divide
    3. IT boom

    Other factors promoting the boom

    1. Growing younger population
    2. Higher disposable income
    3. Inexpensive internet data
    4. Introduction of new gaming genres, and
    5. Increasing number of smartphone and tablet users

    Prospects of online gaming

    • State List Subject:  The state legislators are, vide Entry No. 34 of List II (State List) of the Seventh Schedule, given exclusive power to make laws relating to betting and gambling.
    • Distinction in laws: Most Indian states regulate gaming on the basis of a distinction in law between ‘games of skill’ and ‘games of chance’.
    • Classification on dominant element: As such, a ‘dominant element’ test is utilized to determine whether chance or skill is the dominating element in determining the result of the game.
    • Linked economic activity: Staking money or property on the outcome of a ‘game of chance’ is prohibited and subjects the guilty parties to criminal sanctions.
    • ‘Game of Skill’ debate: Placing any stakes on the outcome of a ‘game of skill’ is not illegal per se and may be permissible. It is important to note that the Supreme Court recognized that no game is purely a ‘game of skill’ and almost all games have an element of chance.

    Need for regulation

    • No comprehensive regulation:  India currently has no comprehensive legislation with regards to the legality of online gaming or boundaries that specify applicable tax rates within the betting and gambling industry.
    • Ambiguity of the sector: The gaming sector is nascent and is still evolving, and many states are bringing about legislation seeking to bring about some order in the online gaming sector.
    • State list subject: Online gaming in India is allowed in most parts of the country. However, different states have their own legislation with regards to whether online gaming is permitted.
    • Economic advantage: Well-regulated online gaming has its own advantages, such as economic growth and employment benefits.

    Issues with online gaming

    • Gaming addiction: Numerous people are developing an addiction to online gaming. This is destroying lives and devastating families.
    • Compulsive gaming: Gaming by children is affecting their performance in schools and impacting their social lives & relationships with family members. Ex. PUBG
    • Impact on psychological health: Online games like PUBG and the Blue Whale Challenge were banned after incidents of violence and suicide.
    • Threat to Data privacy: Inadvertent sharing of personal information can lead to cases of cheating, privacy violations, abuse, and bullying.
    • Betting and gambling: Online games based on the traditional ludo, arguably the most popular online game in India, have run into controversy, and allegations of betting and gambling.

    Why hasn’t a comprehensive law yet materialized?

    • Earlier, states like Tamil Nadu, Telangana, Andhra Pradesh, and Karnataka also passed laws banning online games.
    • However, they were quashed by state High Courts on grounds that an outright ban was unfair to games of skill:
    1. Violation of fundamental rights of trade and commerce, liberty and privacy, speech and expression;
    2. Law being manifestly arbitrary and irrational insofar as it did not distinguish between two different categories of games, i.e. games of skill and chance;
    3. Lack of legislative Competence of State legislatures to enact laws on online skill-based games.

    Way forward

    • Censoring: Minors should be allowed to proceed only with the consent of their parents — OTP verification on Aadhaar could resolve this.
    • Awareness: Gaming companies should proactively educate users about potential risks and how to identify likely situations of cheating and abuse.
    • Regulating mechanism: A Gaming Authority in the central government should be created.
    • Accountability of the gaming company: It could be made responsible for the online gaming industry, monitoring its operations, preventing societal issues, suitably classifying games of skill or chance, overseeing consumer protection, and combatting illegality and crime.
    • All-encompassing legislation: the Centre should formulate an overarching regulatory framework for online games of skill. India must move beyond skill-versus-chance debates to keep up with the global gaming industry.

     

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  • Financial Inclusion in Age of Digitization

    Financial Inclusion

    Context

    • The use of technology in financial inclusion stands to be pertinent in today’s context as it paves the way towards inclusive growth through the upliftment of disadvantaged sections of society.

    Importance of Financial Inclusion

    • Meaning of Financial inclusion: It refers to the availability to both individuals and companies of useful and cost-effective financial goods and services, including payments, transactions, savings, credit, and insurance, that are sustainably and ethically provided.
    • Provides social mobility: The importance of financial inclusion lies in the fact that it allows social mobility. These resources help empower individuals and foster communities, which can aid in promoting economic growth.
    • More financial services: Moreover, account holders are more likely to utilize additional financial services such as credit and insurance to launch and grow enterprises, make investments in their children’s or own health or education, manage risk, and recover from financial setbacks, all of which can enhance their overall quality of life.

    Financial Inclusion

    Challenges to the financial inclusion

    • Inoperative bank accounts: Nearly 80 percent of the Indian population has a bank account, and nearly 18 percent (81.38 million) of bank accounts are inoperative, having “zero balance”. Moreover, up to 38 percent of accounts are inactive, which means that there have been no deposits or withdrawals in the past year, demonstrating that many Indians are still not fully integrated into the formal banking system.
    • Poor telecommunication infrastructure: India still needs a robust telecommunication infrastructure with a stable broadband internet connection. Despite progress in increasing technological features with increasing speeds, the inability of the entire country to adapt to these innovations has widened the gap.
    • All citizens are not cell phone users: India additionally faces the hurdle of getting its citizens online, with more than 310 million individuals needing a basic cell phone. This prevents account holders from receiving crucial information, such as details relating to account transactions.
    • Increasing dependency on local agents: In addition, financial institutions also need to be more willing to deliver messages for transactions of small quantities. These factors have led to an increasing dependency on local agents.

    Financial Inclusion

    The correlation between Technology, digital divide and financial inclusion

    • Rural- Urban digital Divide: There is an evident divide between the urban-rural regions that dominate India. Only 4.4 rural families have computers, compared to 14.4 percent of urban households and 14.9 percent of rural homes have internet connectivity, compared to 42 percent of families in metropolitan regions. Meanwhile, only 13 percent of adults in rural regions have access to the internet, compared to 37 percent in metropolitan areas.
    • High lending rates in rural area: Specifically, such gaps are associated with various factors in finance, starting with small-time lenders charging high-interest rates common in rural regions. Access to credit still needs to be solved. Government programmes are yet to reach more remote areas to improve loan availability efficiently.
    • Unawareness about Online loans: Individuals find that online loans need more options from reliable financial institutions or digital lending. Additionally, rural clients need help accessing prospective financial services due to complicated banking procedures such as requiring identity credentials and maintaining a specific balance in an account.
    • Limited access to technology: The digital divide is also a result of limited access to computer and communication technologies. In India, fewer people can afford the device needed to access digital information.
    • Single nationwide approach is problematic: India additionally faces the burden of providing diversified content across different regions, as individuals across India have different mother tongues. Moreover, the number of individuals who have access to computers or are knowledgeable enough to utilise the internet varies too widely between states. Thus, a blanket approach cannot be implemented nationwide.
    • Lack of Financial literacy: Indian citizens lack the potential to maximise technological interventions. About 266 million adults are illiterate. The lack of financial literacy has also greatly impeded the growth of financial inclusion, with many financial cyber-crimes peaking in proportion to the growing distrust among rural residents, leading to lower adoption rates and a 6-percent jump in cybercrimes in the same year.
    • Concerns of data privacy: As Personal Identifiable Information (PII) guidelines are not strictly enforced and adhered to, large quantities of data are readily accessible to numerous parties, raising serious concerns about data privacy.

    Financial Inclusion

    What can be done to bridge digital divide for financial inclusion?

    • Digital inclusion strategies: It lies in the hands of the government to implement a financial inclusion policy and look at the reasons behind financial exclusion and effectively address them. Information and Communication Technology policies are primarily top-down and supply-focused. Thus, it is necessary to develop financial goods and services focused on the needs of citizens and the disadvantaged. These policies should focus on digital inclusion strategies to ensure that rural areas can access proper internet connectivity.
    • Information in regional language: to ensure digital financial inclusion, the government should encourage the middle-aged bracket to educate themselves in reading and writing to use the various facilities they provide. Government websites have information primarily in Hindi and English, excluding large sections of the population. A systemic strategy focused on digital skills, and financial literacy should be implemented in each region, keeping in mind the language barrier and access to technology.
    • Focus on vulnerable sections: To combat financial fraud, implementing a one-to-one Management of Financial Services (MFS) agent mentorship programme that focuses on vulnerable populations and teaches them the fundamentals of mobile and online interaction is possible. Additionally, removing the barriers to financial service access for low-income persons by reducing transaction costs could facilitate increased participation, as observed in Nepal, where free and easily accessible accounts were more prevalent among women

    Conclusion

    • The digital divide affects every area of life, including literacy, wellness, mobility, security, access to financial services, etc. Therefore, for a fast-growing nation such as India, the focus needs to shift from simple economic growth to equitable and inclusive growth.

    Mains Question

    Q. What are the challenges to Digital financial inclusion in India? Explain in detail the strategies needed to tackle the financial inclusion?

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