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Subject: Economics

  • India’s tax-GDP ratio may be too high

    Context

    What the data conclusively show is that the debate on the Indian economy should shift away from simplistic notions (borrowed from the West?) of the tax-GDP ratio being low in India.

    India’s low tax-to-GDP ratio

    • One of the stylised beliefs in India, and amongst some leading economic commentators both in India and abroad, is that our tax/GDP ratio is lower than what it “should” be.
    • This low tax-to-GDP ratio is blamed for a lower rate of investment, a higher fiscal deficit, and lower GDP growth — and all because the tax ratio is too low.
    • There can be reasonable doubts about the presumed links.
    • There are three important fiscal variables in the economy — taxes, fiscal deficit, and debt.
    • They are inter-related — lower tax revenue means higher fiscal deficit, for the same level of expenditures, and higher deficit means higher debt.
    • All three, directly or indirectly, are assumed to affect growth and/or inflation.

    Analysing India’s tax-to-GDP ratio

    • Two common observations on tax-to-GDP for India — first, it is low at around 10-11 per cent of GDP and it has stayed at close to that level for the last 20 years.
    • In 2019, it hit a decade low of 10 per cent of GDP, the same as in 2014.
    • Second, in comparison with our peers, it is much lower.
    • Hence, logic dictates that we should strive to increase it.
    • But which country should we compare India with?

    Issues with comparing tax-to-GDP with other countries

    • A common observation is to look at the tax-GDP ratio in G20 countries.
    • Function of average level of per capita income: This is the beginning of a set of misinterpretations committed either knowingly, or unknowingly.
    • Because simple logic dictates that tax collected is a function of the average level of per capita income.
    • Per capita income in the G20 varies from around $2,100 (India) to around $65,000 (US).
    • The 10-11 per cent figure for India is the tax/GDP ratio for taxes administered at the central level.
    • Challenges in data collection: Taxes in India, as in many other large, especially federal, countries, are collected at both a federal and state level.
    • And many economies have local (municipal) taxes as well. The tax collected is the sum of all these taxes.
    • Until now, collecting such disaggregated data for a large set of countries was challenging.
    • However, in a recent web publication, the IMF on their World Revenue Longitudinal Data set has published such data for all countries, from 1990-2019.
    • In this pre-pandemic year, among G20 economies, India’s tax-GDP (Xtax) ratio of 16.7 per cent was higher than that of China (15.9 per cent), Mexico (14.1 per cent), Indonesia (11.0 per cent), Saudi Arabia (5.9 per cent) and Turkey (15.9 per cent).
    • A more informative indicator of whether a country is taxing too much or too little in comparison with others is to look at the tax-GDP ratio adjusted for PPP per capita income.
    • Prediction via a simple regression of tax-to-GDP on log PPP per capita GDP can yield one estimate of the tax gap — the difference between actual and actual adjusted for level of income.
    • The world average tax gap is -1.3 per cent; India is +1.2 per cent for the nine years 2011-2019.
    • So, India’s tax GDP ratio averages 2.5 percentage points more than an average economy.
    • For every year for which data are available 1990-2019, India has had a positive tax gap — there is little evidence that a higher tax/GDP ratio helps growth.

    How corporate tax cut helped India

    • Corporate tax cut 2019: For years, the advocacy in India was to increase revenue from corporate tax which is one of three major components of tax revenue, the other being income and indirect taxes.
    • In September 2019, Finance Minister going well against Indian established conventional wisdom, lowered the corporate tax rate by around 10 percentage points.
    • Avoiding triple whammy: Opponents said that empirical evidence around the world (for example, the US) meant that if tax rates were lowered, revenues would decline, the fisc would increase, as would inequality.
    • A triple whammy that is best avoided.
    • However, now, three years later, we can assess the efficacy (or not) of this bold experiment.
    • For the three months April-June 2022, corporate tax revenues, y-o-y, are up 30 per cent.
    • Using fiscal 2019-20 as a base, corporate tax revenue has increased by 66 per cent, GDP by 33 per cent — an average tax buoyancy of 2.0 over three years.
    • The previous largest tax buoyancy was in 2006-7 when the world was buoyant.
    • Tentatively, the tax-GDP ratio in the fiscal year 2022-23 will average over 18 per cent in India, a level close to Japan and the US.

    Conclusion

    In India, the debate should shift to expenditures, and quality of expenditures (and perhaps to reform of the direct tax code). In this regard, suggestion that freebies be critically examined is most timely and welcome.

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     Back2Basics: Tax buoyancy and tax elasticity

    • Tax buoyancy: The buoyancy of a tax system measures the total response of tax revenue both to changes in. national income and to discretionary changes in tax policies over time, and it is traditionally interpreted as the percentage change in revenue associated to a one percent change in income.
    • Tax elasticity: It refers to changes in tax revenue in response to changes in tax rate.
    • For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity.

  • Using a rupee route to get around a dominating dollar

    Context

    A number of countries, including India, are now considering the use of other currencies to avoid the U.S. dollar and its hegemonic role in settling international transactions.

    Currency hierarchy

    • For India, currency hierarchy goes back to colonial times when the Indian rupee was virtually linked to the British pound rather than to gold which it earned through exports.
    • In the post-War period, the neo-colonial currency hierarchy has been clubbed with the continued use, primarily of the U.S. dollar, for the majority of international transactions.

    Rupee settlement of trade

    • In recent times, India has been taking an active interest in having the rupee used for trade and the settlement of payments with other countries, which include Russia, now facing sanctions.
    • The Reserve Bank of India has recently taken a proactive stand to have rupee settlement of trade (circular dated July 11, 2022).
    • While options for invoicing in rupees were already legal in terms of Regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016, the current circular aims to operationalise the special Vostro accounts with Russian banks in India, in a bid to promote trade and also gain a better status for the rupee as an international currency.

    Opportunities for India

    • The advantages India is currently seeking in these arrangements include avoidance of transactions in the highly priced dollar which has an exchange value of â‚č80, impacting the Indian economy with inflation, capital flight and the drop in foreign exchange reserves by $70 billion since September 2021.
    •  Buying oil with a depreciated ruble, and at discounts, is not only cost-saving but also saves transport time with the use of multi-modal routes using land, sea and air routes.
    • In addition, India is looking forward to trade expansion in sanctions-affected Russia.
    • With India having a trade deficit with Russia, which has been around $3.52 billion on average over the last two financial years, India’s opportunities include the possible use, by Russia, of the surpluses in the Vostro rupee account in Russian banks for additional purchases from India.
    • Past attempts: Attempts to use the rupee for invoicing and trading is, however, not new to India.
    • A comprehensive bilateral trade and payments agreement was signed by India in 1953 with the Soviet bloc countries.

    Challenges

    • There are quite a few problems that may prevail in implementing the desired rupee payments and avoiding dollar transactions.
    • Willingness of banks and private parties: Apart from issues that concern an agreed exchange rate between the rupee and the ruble (R-R), two volatile currencies, there is also the question of the willingness of private parties (companies, banks) to accept the rupee for trade and settlements.
    •  If Russia opens its door for exports from India, the ‘R-R’ route may prove attractive for Indian exporters.
    • Concerns of the US: There are official concerns for reactions, particularly from the U.S., to deals, especially for purchase of the S-400 defence equipment.
    • Reaction of the Europe: Moreover, the deals between India and Russia, especially on oil, can be considered by the West as ‘indirect back door support’ — as India is importing Russian crude at 30% discount, processing at refineries in Gujarat which include Reliance, and then exporting those to the West.
    • Trade deficit: There were attempts even before the novel coronavirus pandemic to initiate a clearing account on the BRICS platform.
    • The quantitative implications indicate a skewed pattern of transactions — with China having most of the trade surplus.
    • It is a pattern similar to what is happening in India-Russia trade at the moment.

    Conclusion

    The India-Soviet agreements of the past may provide a clue on how the current ‘R-R’ trade and the problems can be managed by initiating a push for Indian exports to Russia and, of course, avoiding all deals in dollars — benefiting both trade partners and countering, globally, the on-going currency hierarchy.

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  • RBI, government must act in coordination during an economically challenging period

    Context

    In the recent MPC meeting, the policy rate hike was widely expected, more anticipated were the MPC and the RBI Governor’s forward guidance on the trajectory of policy — on both monetary policy and liquidity instruments. So, how do we see monetary policy evolve over the rest of the year and beyond?

    Tightening of monetary policy

    • Repo rate at 5.4 per cent: In its latest meeting, the members of the monetary policy committee voted unanimously to increase the policy repo rate by 50 basis points to 5.4 per cent.
    • The repo rate was 5.15 per cent in February 2020.
    • So, in effect, the RBI’s policy has not only been normalised, but has actually tightened compared to the pre-pandemic level.
    •  Even the lower bound of the rate corridor, the Standing Deposit Facility (SDF) rate, at 5.25 per cent is now above the pre-pandemic repo rate.

    Forward guidance on stance

    • The MPS indicated the retaining the policy stance rather than shifting to “neutral”.
    • This retention of stance might be interpreted as being a bit more hawkish than “neutral”, which implies that rates might be both increased or cut, depending on economic conditions.
    • Now that policy is largely normalised, the pace of tightening is likely to moderate.
    • The urgency of aggressive rate hikes and tightening of liquidity has somewhat moderated, although risks remain.
    • RBI’s research suggests that the “real natural rate” — the rate at which policy is neither loose nor tight – is 0.8-1 per cent.
    • This operative interest rate is usually the three-month T-bill rate, which in “normal” times averages 10-15 basis points above the repo rate.
    • Considering that monetary policy is calibrated over a one-year horizon and using the RBI’s inflation forecast of 5 per cent for the first quarter of 2023-24, the “natural” repo rate will be around 5.85 per cent.

    Inflation and growth conditions

    • The RBI’s growth projection for 2022-23 has been retained at 7.2 per cent, with growth frontloaded in the first half.
    • CPI inflation is still forecast to average 6.7 per cent.
    • Inflationary pressures are likely to wane in the second half of 2022-23, particularly if the recent drop in industrial metals prices persists over the next few months.
    • A more or less normal monsoon might help in keeping food prices stable. However, risks remain.
    • Robust growth prospects: Demand for consumption goods seems to be resilient, enabling some further pass-through of input costs.
    • Combine this with tight labour markets and rising wage costs in some tech-oriented sectors.
    • High frequency indicators of economic activity have recovered after some weakness in June.
    • In addition to resilient demand, there is evidence of a closing of the “output gap”.
    • Global growth: Global growth and trade are forecast to significantly slow down in 2022 and 2023, largely due to aggressive tightening by G-10 central banks and a slowdown in China.
    • The IMF predicts global trade volume (both merchandise and services) to slow to 4.1 per cent and 3.2 per cent in 2022 and 2023, down from 10.1 per cent in 2021.
    • With world growth and trade flows moderating, along with a drop in commodities prices, India’s export growth is likely to be lower than last year.

    External financial condition

    • The current account deficit remains a concern.
    • India’s external balance sheet remains quite robust, as is evident from various balance of payments and debt metrics, and reportedly low unhedged foreign currency borrowings.
    • Continued tightening by global central banks, particularly the US Federal Reserve over the rest of 2022, will keep India’s external financial conditions tight and likely limit portfolio capital flows.
    • However, there are some signs emanating from these central banks that the hitherto front-loaded tightening might moderate going forward.
    • This will take some pressure off the rupee, though, exchange rate volatility management will remain a part of the overall monetary policy management framework.

    Challenge of surplus liquidity

    • During the earlier phase of policy normalisation and the recent tightening, liquidity management has played an important role in influencing short-term money market interest rates.
    • The current latent surplus liquidity — the existing funds with banks and the Union government’s unspent revenues parked with RBI — is over Rs 5 lakh crore.
    • While the extent of liquidity surplus during the Covid months has come down, these levels are still much higher than RBI estimates of non-inflationary levels of surplus, which is around Rs 1.8-2.4 lakh crore.
    • This will gradually fall with cash withdrawals and some potential RBI dollar sales in the coming months.

    Conclusion

    The central bank, in coordination with the government, has ensured an orderly evolution of economic conditions during a very complex and challenging environment. The exit process now will also need the same adroit use of policy instruments.

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    Back2Basics: Standing Deposit Facility rate

    • The Reserve Bank of India (RBI) in April 2022 introduced the Standing Deposit Facility (SDF), an additional tool for absorbing liquidity, at an interest rate of 3.75 per cent.
    • The main purpose of SDF is to reduce the excess liquidity  in the system, and control inflation.
    • In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF – an additional tool for absorbing liquidity without any collateral.
    • By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
    • The SDF is also a financial stability tool in addition to its role in liquidity management.
    • The SDF replaced the fixed rate reverse repo (FRRR) as the floor of the liquidity adjustment facility corridor.
    • The SDF rate will be 25 bps below the policy rate (Repo rate), and it will be applicable to overnight deposits at this stage.
    • It would, however, retain the flexibility to absorb liquidity of longer tenors as and when the need arises, with appropriate pricing.

  • India’s ‘wheat waiver’ WTO demand is risk-fraught

    Context

    The WTO ministerial meeting in June at Geneva did precious little to address the issue of public stockholding of food.

    Public stockholding issue at WTO

    • India’s PSH policy is based on procuring food from farmers at an administered price (minimum support price or MSP), which is generally higher than the market price.
    • PSH’s’ twin objectives: The PSH policy serves the twin objectives of offering remunerative prices to farmers and providing subsidised food to the underprivileged.
    • Trade distortion subsidy: Under WTO law, such price support-based procurement from farmers is counted as a trade-distorting subsidy, and if given beyond the permissible limit, breaches WTO law.
    • India in the World Trade Organization (WTO) — and rightly so — has been to find a permanent solution to the issue of public stockholding (PSH) of food to protect India’s food security (PSH policy).
    • Peace clause: Currently, India has temporary relief due to a ‘peace clause’ which bars countries from bringing legal challenges against price support-based procurement for food security purposes.
    • The WTO ministerial meeting in June at Geneva did precious little to address this issue.
    •  India’s concerns about the PSH issue have been taken on board.

    India’s concerns

    • For India, the real issue is not about maintaining adequate food stocks, which WTO rules do not prohibit, provided food is stocked by employing non-trade distorting instruments such as providing income support to farmers (cash transfers independent of crop production).
    • Use of MSP: India’s concern is that it should have the policy space to hold public food stocks using the MSP, which is a price support instrument.
    • However, there is no mention of price support in the Geneva declaration.
    • India’s demand for a permanent solution to the PSH policy has acquired a new dimension.
    • India insists that it should also be allowed to export food, most notably wheat, from the pool of the foodgrain procured under the MSP.
    • However, WTO law proscribes countries from exporting foodgrain procured at subsidised prices.
    • Paragraph 4 of the 2013 WTO decision on PSH for food security purposes, clearly states that countries procuring food for food-security purposes shall ensure that such procured food does not “distort trade or adversely affect the food security of other Members”.
    • The same spirit is reflected in paragraph 10 of the Geneva ministerial food security declaration, which states that countries may release surplus food stocks in the international market in accordance with WTO law.
    •  However, it is very unlikely that such a request will be acceded to.
    • As per Article IX.3 of the WTO Agreement, waivers can be adopted only in “exceptional circumstances”.

    Way forward

    • Developed countries have historically opposed India’s PSH programme as they apprehend that India might divert some of its public stock to the international market, thus depressing global prices.
    • India actively pushing for exporting food from its official granaries gives fresh ammunition to the PSH solution opponents.
    • Thus, India should revisit its stand on asking for a waiver for wheat exports from its public stockholding, which, in any case, was not a part of India’s PSH policy.
    • Spending scarce negotiating capital on this issue might dilute India’s core agenda of pushing for a permanent solution for its PSH programme to attain the goal of food security and providing remunerative prices to the farmers.
    • Negotiations at the WTO require crystal clarity of the core objectives that should be relentlessly pursued.
    • Adding newer objectives and shifting goalposts might result in falling between two stools.

    Conclusion

    Instead of asking for the waiver to export wheat from public stockholding, the laudable objective of helping countries facing food crises can be accomplished by strengthening India’s commitment to the United Nations World Food Programme.

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  • Online Dispute Resolution in new-age digital commerce

    Context

    Despite the rapid advancement of digital platforms on the one hand and the pervasiveness of the Internet-enabled phone on the other, small enterprises such as local kirana stores have not gained from this. Online purchases from “near and now” inventory from the local store remain in a digital vacuum.

    Online revolution in country

    • Increased smartphone use: The rise in smartphone use fuelled by affordable data plans has catalysed an online revolution in the country.
    • Pandemic accelerated digital inclusion: The novel coronavirus pandemic has further accelerated the process of digital inclusion.
    • It is now not only routine to transact online it is also common to learn online, have medical consultations online, and even resolve disputes online.
    • Increased scope for innovation in digital space: These realisations have given India the opportunity to disrupt the status quo with its innovative abilities.
    • Systems such as the Unique Identification Authority of India (UIDAI) and Aadhaar, the Unified Payments Interface (UPI) and the Ayushman Bharat Digital Mission have reengineered markets.

    Why mall and medium sided businesses have not benefited from digital revolution?

    • Despite the rapid advancement of digital platforms small enterprises such as local kirana stores have not gained from this.
    • Cost of infrastructure: This is because, to sell on numerous platforms, sellers must maintain a separate infrastructure, which only adds costs and limits participation.
    • Distinct terms and conditions of platforms: The distinct terms and conditions of each platform further limit the sellers’ flexibility.
    • Consequently, small and medium-sized businesses have lost their freedom to choose and participate in the country’s e-commerce system at their will and on their terms.

    Way forward: Open Network for Digital Commerce

    • The Department for Promotion of Industry and Internal Trade (DPIIT) of the Government of India established the Open Network for Digital Commerce (ONDC) to level the playing field by developing open e-commerce and enabling access to small businesses and dealers.
    • The ONDC began its pilot in five cities in April 2022, i.e., New Delhi, Bengaluru, Coimbatore, Bhopal and Shillong.
    • Currently, the pilot has expanded to 18 cities, and there are immediate plans to add more cities.
    • The ONDC network makes it possible for products and services from all participating e-commerce platforms to be displayed in search results across all network apps.
    • For instance, a consumer shopping for a product on an e-commerce app named “X” would also receive results from e-commerce app named “Y”, if both X and Y integrated their platforms with the ONDC.

    Dispute resolution through ODR

    • Disputes will be the obvious by-product of this e-commerce revolution.
    • Therefore, it is imperative to support this initiative with a modern-day, cost-effective, timely and high-speed dispute resolution system.
    • Online Dispute Resolution, or ODR as it is popularly called, has the propensity to work alongside the incumbent setup and deliver quick, affordable and enforceable outcomes.
    • The ODR is not restricted to the use of legal mechanisms such as mediation, conciliation and arbitration in an online environment but can be tailormade for the specific use case keeping the participants in mind.
    • ODR commonly involves case management systems, integration of communication technologies such as email, SMS, WhatsApp, Interactive Voice Response, audio/video conferencing.
    • With appropriate data sets in place, it can also involve advanced automation, the use of technologies such as artificial intelligence and machine learning to enable resolutions at the same time as it would take to initiate a transaction over the network.
    • Many e-commerce companies have turned to the ODR with the realisation that in order to maximise transactions it is important to ensure a positive dispute resolution experience.
    • Adoption in India: The ODR is no more a distant dream for India as well.
    • The National Payments Corporation of India (NPCI) has mandated platforms in the UPI ecosystem to adopt the ODR for complaints and grievances connected to failed transactions.
    •  Ingram, SEBI SCORES (or the Securities and Exchange Board of India SEBI COm plaints REdress System), RBI CMS (or the Reserve Bank of India Complaint Management System), MahaRERA (or the Maharashtra Real Estate Regulatory Authority), MSME Samadhaan (or the Micro Small and Medium Enterprises Delayed Payment Monitoring System), and RTIOnline (or the Right to Information Online) are other examples of ODR systems that are widely used in the country.
    • Mitigating litigation risks: The ODR will help mitigate litigation risk and provide valuable insights into problems faced by consumers.
    • Consumers are provided with another choice for effective redress of their grievances, thereby building trust, confidence and brand loyalty.

    Advantages of ONDC

    • Wider choice for consumers: The ONDC achieves the dual objective of wider choice for consumers on the one hand and access to a wider consumer base for sellers on the other.
    • With India’s e-commerce industry set to reach $200 billion by 2027, this shift from a platform-centric paradigm to democratisation of the nation’s online market will catalyse the inclusion of millions of small business owners and kirana businesses.

    Conclusion

    A dispute resolution framework that includes a customised ODR process can play a role in the network achieving its steep five-year target of adding $48 billion in gross merchandise value to India’s e-commerce market, a network of 90 crore buyers and 12 crore sellers with the least hiccups.

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  • Farmer suicide

    farmer suicideContext

    • An agricultural labourer died by suicide every 2 hours in 2021: NCRB
    • The national catastrophe of farmer suicide since the 1990s, often by drinking pesticides is attributed to their inability to repay loans mostly taken from landlords and banks.

    NCRB Stats on Farmers Suicide

    • Some 5,563 agricultural labourers died by suicide in 2021, according to the latest report of the National Crime Records Bureau (NCRB). The number of suicides increased by nine per cent from 2020 and by around 29 per cent from 2019.

    Causes of Farmers Suicide

    • Non sustainable cropping: Most of the suicides have occurred in areas of cash crops like cotton and sugarcane, which is high input, high output gambling, not based on the principle of sustained and resilient high yield.
    • Multiple causes: There is no consensus on what the main causes might be but studies show farmer suicide victims are motivated by more than one cause however the primer reasons being the inability to repay loans.
    • Combined causes: Major causes reportedly are bankruptcy/indebtedness, problems in the families, crop failure, illness and alcohol/substance abuse.

    farmer suicideFaulty measures

    • Low penetration of irrigation: Irrigation reaches less than half of India’s overall farmland, a picture that has not changed much over the past decade, and more than 60% of our farmers are susceptible to rainfall anomalies.
    • Dry land farming: Rain-fed farming yields are typically less than half those of irrigated farmland.
    • High input cost: Though India has caught up with global levels of fertilizer use, this is neither efficient nor environmentally sustainable. Both add to the cost of cultivation.
    • Slow R&D: Research on high-yielding crops has plateaued after an initial burst during the Green Revolution and farmers have to resort to patented seeds to draw more out of their scanty acres.

    farmer suicide7R’ model utility

    It looks at the prevention of farmer suicide

    • Remunerative agriculture,
    • Resilience building,
    • Rational expenditure,
    • Reassurance through connectivity,
    • Righteous conduct,
    • Religious support and
    • Responsible reporting

    farmer suicideWay Forward

    • Information technology promises to improve weather forecasting, crop identification as well as damage control, soil health monitoring, and mapping of available water resources.
    • Improvements in marketing and logistics can significantly raise the share that cultivators get of the money people pay for their food.
    • The govt. is using technology to connect farmers to a nationwide e-market, but the states need to amend their antiquated farm produce marketing laws that have squeezed farmers’ earnings.
    • An old problem of price signals failing to adjust demand and supply may also need fixing.
    • For agricultural incomes to rise, reforms, rather than cash transfers, loan waivers and the like, are the way ahead.

    Conclusion

    • Along with subsidies, increased farm profits, the focus should also be on resilience building and problem-solving skills of farming families.
    • In suicide-prone states, agricultural institutes and scientists should start distributing seeds of resilience, tolerance and contentment among farmers, suggested researchers.

    Mains question

    Q. Despite agricultural growth Indian farmers are committing suicides Discuss the causes and give dynamic way forward to address the issue.

     

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  • Universal basic income

    universal basic income Context

    • New evidence from two Kenyan counties shows that universal basic income  and other income supplements reduce hunger, illness, and risk exposure during crises.
    • Countries should consider building universal basic income that can be activated at short notice to help people weather unanticipated shocks.

    Why in news?

    • When the COVID-19 pandemic and the resulting recession pushed 120 million people worldwide into extreme poverty in 2020, many countries relied on social-protection measures to cushion the blow.

    What is social protection?

    • Social protection is concerned with preventing, managing, and overcoming situations that adversely affect people’s well-being.
    • Social protection programs that assist low-income families, insure against shocks, and break poverty traps offer a potential solution.

    universal basic income Universal basic income meaning

    • Universal basic income (UBI) is a model for providing all citizens of a country or other geographic area with a given sum of money, regardless of their income, resources or employment status.
    • The purpose of UBI is to prevent or reduce poverty and increase equality among citizens.

    What is social security?

    • Social securityin India includes a variety of statutory insurances and social grant schemes bundled into a formerly complex and fragmented system run by the Indian government.
    • These are retirement, healthcare, disability, childcare, gratuity and provident fund and insurance programs.

    What is insurance simple words?

    • An agreement by which a person pays a company and the company promises to pay money if the person becomes injured or dies or to pay for the value of property lost or damaged.

    Constitutional mandate

    • The Directive Principles of State Policy, enshrined in Part IV of the Indian Constitution reflects that India is a welfare state.

    Interesting fact

    India operates the widest spectrum of social security schemes which cater to the largest number of people than any other country.

    What are the benefits of Universal Basic Income?

    • Ending poverty: Advocates for UBI say that it could help bring everyone’s income above the poverty line.
    • Discouraging low wages: UBI would give employees enough security to have bargaining power.
    • Redistributing wealth: The economic growth of high-income countries is making the rich richer, but having very little effect on the working classes.

    Case study / value addition

    Namibia

    Namibia had a basic income pilot program between 2008 and 2009. Every resident of Otjivero-Omitara was entitled to 100 Namibian dollars ($6.75) every month. The program was funded by donors from around the world.

    Findings from the pilot program showed that cases of child malnutrition had dropped significantly while school enrollment went up. Also, social crimes such as theft had significantly dropped.

    universal basic income Negative implications of UBI

    • Induce lethargy: UBI removes the incentive to work, adversely affecting the economy and leading to a labour and skills shortage.
    • Inequity: Universal basic income would be just that: universal. That means that everyone, regardless of how poor, or rich, they were would get the same amount of money.
    • Huge Cost: The cost of implementing UBI could be huge. In the United States it’s estimated to be about $3.9 trillion per year.
    • Motivation to work: One concern is that UBI would incite millions of workers to stop working. If people aren’t working, there is less taxable income.

    Some government initiatives

    • National Pension Scheme for Traders and Self Employed Persons.
    • Pradhan Mantri Suraksha Bima Yojana.
    • Employees’ State Insurance Scheme.
    • Minimum Wages for various employment roles.
    • National Pension System.

    Conclusion

    • One of the major criticisms of poverty alleviation programs is significant leakages. UBI is seen as a more efficient alternative. Though UBI has many advantages, there are many practical challenges too. The idea should be to save costs with better targeting. This will help create the necessary conditions for higher growth which will decisively lift people out of poverty.

    Mains question

    Q. India operates the widest spectrum of social security schemes which cater to the largest number of people than any other country. Do you think they are enough? Discuss in context of rising demand for universal basic income and its pros and cons for ensuring social security.

     

     

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  • Labour Codes

    Addressing to the National Labour Conference, Prime Minister said that the Centre had taken initiatives to abolish laws from “the period of slavery” that reflected a slavery mentality through the Labour Codes.

    New Labour Codes

    The four codes likely to be implemented in FY23 are:

    1. Code on Wages
    2. Industrial Relations Code
    3. Social Security Code, and
    4. Occupational Safety, Health and Working Conditions Code

    Objectives of the Labour Code

    • The new labor codes are aimed at facilitating ease of doing business in the country and seek to replace 29 cumbersome laws.
    • The objective is to encompass over 500 million organized and unorganized sector workers—90% of the workforce which has been outside labour laws.
    • The idea is to ensure that they receive wage security, social security and health security, gender equality in terms of remuneration, a minimum floor wage, make the lives of inter-state migrant workers easier.

    What is the current status of the codes?

    • The central government has completed the process of finalizing the draft rules, state governments are in the process of drafting the same.
    • With labor being a concurrent subject, states are in the process of pre-publishing draft rules for these reforms.

    How many labour laws do Indian states have?

    • The simplification of 29 labour laws into the four labour codes is expected be a watershed moment for labour reforms.
    • India currently has a web of multiple labour legislations, over 40 central laws and 100 state laws involving labour.
    • The Second National Commission on Labour (2002) recommended simplification to bring about transparency and uniformity.

    What are the major reforms in these codes?

    • Social security benefits: With organized sector workers being approximately 10% of the total workforce, the new codes may ensure that social security benefits are for all.
    • Take-home salary: As per the proposed labour codes, total allowances such as house rent, leave, travel etc. are to be capped at 50% of the salary, while basic pay should account for the remaining 50%.
    • Four days work: There could also be a permissible four-day work week of 12 hours per day.

    How will it affect ease of doing business?

    • Labour productivity: It is likely to improve with both employees and employers developing a sense of being partners in wealth creation.
    • Labour reform: A transparent environment in terms of workers’ compensation, clear definition of employee rights and employer duties.
    • Compliance un-burdening: Simplified labour codes making compliance easier are likely to attract investments.
    • Formalization of the economy: With more workers in the organized sector, leakage in terms of direct as well as indirect taxes may be plugged.

    Also read

    [Burning Issue] New Labour Laws

     

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  • Contract Enforcement in India

    Ease of doing business in India remains low, dragged down by the way contracts are enforced in the country. Recent reforms have improved the business climate somewhat, but there is a long way to go.

    What is the Ease of Doing Business index?

    • It is an index designed by the World Bank to rank 190 economies.
    • A higher rank (closer to 1) means the country’s regulatory environment is favourable to business operations.
    • India was ranked 63rd in the overall index in 2020.
    • World Bank has now discontinued the Doing Business index.

    Indicators used

    The ranking is calculated on the basis of indicators such as:

    1. Starting a Business
    2. Dealing with Construction Permits
    3. Getting Electricity
    4. Registering Property
    5. Getting Credit
    6. Protecting Minority Investors, Paying Taxes
    7. Trading across Borders
    8. Enforcing Contracts and
    9. Resolving Insolvency

    How is ‘Enforcing Contracts’ measured?

    • In 2020, in the parameter of ‘Enforcing Contracts’, India was ranked 163rd, against 186th in 2015. The parameter considers time, cost and quality of the judicial process.
    1. Time considers the number of days to resolve a commercial dispute in courts;
    2. Cost measures the expenses of attorney, courts and enforcement as a percentage of claim value; and
    3. Quality considers the use of best practices which can promote efficiency and quality i.e., court proceedings, case management, alternative dispute resolution and court automation.
    • Each of the three indicators have a 33.3% weightage.

    How is India doing on this parameter now?

    • At 163rd position in 2020, the country continues to struggle, with the time taken to resolve a commercial dispute being approximately 1,445 days in the Doing Business Report 2020.
    • However, as of August 2022, law ministry data shows a marked improvement of close to 50% in days taken to resolve a dispute to 744 days in New Delhi and 626 days in Mumbai.

    What are some of the reforms undertaken?

    • The Department of Justice, the nodal point for ‘Enforcing Contracts’ indicator along with the eCommittee of the Supreme Court, has undertaken a series of reforms.
    • Some of the steps include the establishment of dedicated commercial courts with monetary jurisdiction up to â‚č3 lakh.
    • There also exists online case filing, e-payment of court fees, electronic case management, special courts for infrastructure project contracts, as well as automatic and random allocation of commercial cases thereby eliminating human intervention.

    What further steps are required?

    • An efficient judiciary instils confidence in investors and signals the commercial viability of transactions.
    • The number of court hearings should be minimized too; often, lawyers have an incentive to stretch out the process.
    • The judicial system should encourage out-of-court settlements through the respective lawyers as practised in advanced countries.
    • It is equally important that the judiciary leaves matters relating to economic governance to governments.

     

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  • One Nation One Fertiliser (ONOF) Scheme

    The Ministry of Chemicals and Fertilisers will implement One Nation One Fertiliser (ONOF) by introducing a Single Brand for Fertilisers and Logo under the fertiliser subsidy scheme named “Pradhanmantri Bhartiya Janurvarak Pariyojna” (PMBJP).

    One Nation One Fertiliser (ONOF)

    • The single brand name for UREA, DAP, MOP and NPK etc. would be BHARAT UREA, BHARAT DAP, BHARAT MOP and BHARAT NPK etc. respectively for all Fertiliser Companies, State Trading Entities (STEs) and Fertiliser Marketing Entities (FMEs).
    • Also a logo indicating Fertiliser subsidy scheme namely Pradhanmantri Bhartiya Janurvarak Pariyojna will be used on said fertiliser bags.
    • Under the scheme, companies are allowed to display their name, brand, logo and other relevant product information only on one-third space of their bags.
    • On the remaining two-thirds space, the “Bharat” brand and Pradhanmantri Bharatiya Jan Urvarak Pariyojana logo will have to be shown.

    What is the government’s argument for introducing this scheme?

    The government’s logic for introducing a single ‘Bharat’ brand for all subsidised fertilisers being marketed by companies is as follows:

    (1) Subsidies normalization

    • The maximum retail price of urea is currently fixed by the government, which compensates companies for the higher cost of manufacturing or imports incurred by them.
    • The MRPs of non-urea fertilisers are, on paper, decontrolled.
    • But companies cannot avail of subsidy if they sell at MRPs higher than that informally indicated by the government.
    • Simply put, there are some 26 fertilisers (inclusive of urea), on which government bears subsidy and also effectively decides the MRPs;

    (2) Harmonizing markets

    • Apart from subsidising and deciding at what price companies can sell, the government also decides where they can sell.
    • This is done through the Fertiliser (Movement) Control Order, 1973.
    • Under this, the department of fertilisers draws an agreed monthly supply plan on all subsidised fertilisers in consultation with manufacturers and importers.
    • This supply plan is issued before the 25th of each month for the following month, with the department also regularly monitoring movement to ensure fertiliser availability as per requirement, including remote areas.

    (3) Farmers welfare

    • The government is spending vast sums of money on fertiliser subsidy (the bill is likely to cross Rs 200,000 crore in 2022-23).
    • By deciding where and at what price companies can sell, it would obviously want to take credit and send that message to farmers.

    What can be the drawbacks of the scheme?

    • It may disincentivise fertiliser companies from undertaking marketing and brand promotion activities.
    • They will now be reduced to contract manufacturers and importers for the government. Any company’s strength ultimately is its brands and farmer trust built over decades.
    • Currently, in case of any bag or batch of fertilisers not meeting the required standards, the blame is put on the company. But now, that may be passed on fully to the government.
    • Politically, the scheme might well boomerang rather than benefit the ruling party.

     

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