đŸ’„Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

Subject: Economics

  • Draft Development of Enterprise and Service Hubs (DESH) Bill

    The Centre plans to table the Development of Enterprise and Service Hubs (DESH) Bill in the monsoon session of the Parliament, which will overhaul the special economic zones (SEZ) legislation.

    What are SEZs?

    • A Special Economic Zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
    • SEZs are located within a country’s national borders, and their aims include increasing trade balance, employment, increased investment, job creation, and effective administration.
    • Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

    SEZs in India

    • The SEZ policy in India first came into inception on April 1, 2000.
    • The prime objective was to enhance foreign investment and provide an internationally competitive and hassle-free environment for exports.
    • The idea was to promote exports from the country and realize the need for a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally.
    • Subsequently, the SEZ Act 2005, was enacted to provide the umbrella legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.
    • SEZ units used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the ploughed back export profit for another five years

    Why replace the existing SEZ Act?

    • The World Trade Organization’s dispute settlement panel has ruled that India’s export-related schemes, including the SEZ Scheme, were inconsistent with WTO rules.
    • India has been accused of giving tax benefits to exports through SEZs.
    • Countries aren’t allowed to directly subsidize exports as it can distort market prices.
    • SEZs also started losing their allure after the introduction of minimum alternate tax and a sunset clause to remove tax sops.

    How is the DESH legislation different?

    • The DESH legislation goes beyond promoting exports.
    • It has a much wider objective of boosting domestic manufacturing and job creation through ‘development hubs’.
    • These hubs will no longer be required to be net foreign exchange positive cumulatively in five years (i.e, export more than they import) as mandated in the SEZ regime.
    • They will be allowed to sell in the domestic area more easily. The hubs will, therefore, be WTO-compliant.
    • DESH legislation also provides for an online single-window portal for the grant of time-bound approvals for establishing and operating the hubs.

    Will there be any tax benefits at these hubs?

    • It’s not clear yet.
    • However, the draft Bill does state that states and the Centre will be allowed to give further incentives in the form of tax rebates, incentives, exemptions, and duty drawbacks.
    • Subsidy schemes may be offered for goods and services at these hubs.
    • States and the Centre may take fresh measures to speed up clearances and simplify compliance.

    Will it be easier to sell in the domestic market?

    • Companies can sell in the domestic market with duties only to be paid on the imported inputs and raw materials instead of the final product.
    • In the current SEZ regime, duty is paid on the final product when a product is sold in the domestic market.
    • Besides, there is no mandatory payment requirement in forex, unlike in the case of SEZs.
    • However, the government may impose an equalization levy on goods or services supplied to the domestic market to bring taxes at par with those provided by units outside

    What role will states play in DESH?

    • DESH is expected to play a larger role, definitely.
    • In the SEZ regime, most decisions were made by the commerce department at the Centre.
    • Now, states will be able to participate and even directly send recommendations for development hubs to a central board for approval.
    • Besides, state boards would be set up to oversee the functioning of the hubs.
    • They would have the powers to approve imports or procurement of goods, and monitor the utilization of goods or services, warehousing, and trading in the development hub.

    Way forward

    • If indeed India needs the special hubs, the govt must address the critical gaps in existing SEZ law through the DESH bill and it must be thought through before bringing it to the Parliament.
    • Effective implementation of the law could act as a lever to India’s growth.

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • Aviation sector in India: Issue and Challenges

    What is the issue?

    Policymakers ought to recognise the country’s untapped potential and work towards dismantling the many hurdles.

    What is the significance of aviation sector?

    India is the world’s third-largest market in aviation sector.

    • Aviation is integral to equitable economic growth, for a country to be globally competitive and to change the situation of poverty and unemployment.
    • Passenger airlines and air cargo overcome geography and connect remote areas that are alienated from the mainstream.
    • They can drive investment deep into the country, giving people access to markets.
    • They also boost tourism, which is the largest employment generator in the unorganised sector.

    What is the status of aviation sector in India?

    • Pre-economic reform period– India had only two airlines – Air India and Indian Airlines.
    • Post 1991 reforms– The reforms that opened up the aviation sector in 1991 and ended the licence raj and the monopoly of Indian Airlines and Air India changed the sector.
    • Numerous private sector airlines were given the licence to fly, but Jet Airways and Sahara, survived, resulting in cartelisation.
    • The concept of low cost airlines in India took shape in 2003 which overcame the cost barrier.
    • Sadly, Indian aviation has become ‘the sick man of India’.

    What are the barriers in Indian aviation sector?

    • Per capita consumption of air tickets – The number of Indians who buy air tickets in 2019 is 140 million of which 35 million to 40 million frequent flyers form the bulk of ticket buyers.
    • It translates to less than 4% of the population who can afford air travel, placing India just alongside some poorer African countries, in terms of the per capita consumption of air tickets.
    • Factors affecting the growth of aviation sector– The growth of aviation has been affected by
      • Choking regulations
      • Tough entry barriers for new entrants
      • High fuel prices on account of sky high taxes
      • Inefficient public sector airports that pave the way for monopoly airports
    • Frequent and knee-jerk changes point to the absence of a long-term visionary strategic policy for the entire gamut of sectors in aviation.

    How efficient are government schemes in the development of the airline sector?

    • Boosting entrepreneurship- Start-up India initiative was started with the objective of supporting entrepreneurs, building a robust startup ecosystem and transforming India into a country of job creators.
    • Regional connectivity– Ude Desh Ka Aam Naagrik (UDAN) scheme aims to connect small and medium cities with big cities through air service.
    • Low cost airlines– UDAN plans to connect the underserved airports to key airports through flights that will cost Rs 2,500 for per hour flight.
    • Comprehensive development– The National Civil Aviation Policy 2016 aims to take flying to the masses and covers 22 areas of the Civil Aviation sector.

    What reforms are needed?

    • Reforms in all sectors– It is critical to understand that for passenger airlines to grow, there have to be reforms in all areas of aviation – air cargo, airports, aviation fuel taxes and Maintenance, Repair and Overhaul (MRO).
    • Updated laws– India’s Aircraft Act, 1934 and Aircraft Rules, 1937 need to be updated to keep pace with modern technology in aerospace, increasing costs to the industry and ultimately affecting passenger growth.
    • Overhaul DGCA – India’s statutory regulatory authority, the Directorate General of Civil Aviation (DGCA), needs to be modernised, well-staffed, motivated and incentivized.
    • Need for aviation professionals– There need to be aviation professionals in charge rather than the ubiquitous bureaucrat from the Indian Administrative Service.

  • What are Critical Minerals?

    India and Australia have decided to strengthen their partnership in the field of projects and supply chains for critical minerals.

    What is the news?

    • Australia has confirmed that it would commit A$5.8 million to the three-year India-Australia Critical Minerals Investment Partnership”.

    What are Critical Minerals?

    • Critical minerals are elements that are the building blocks of essential modern-day technologies, and are at risk of supply chain disruptions.
    • These minerals are now used everywhere from making mobile phones, computers to batteries, electric vehicles and green technologies like solar panels and wind turbines.
    • Based on their individual needs and strategic considerations, different countries create their own lists.
    • However, such lists mostly include graphite, lithium, cobalt, rare earths and silicon which is a key mineral for making computer chips, solar panels and batteries.
    • Aerospace, communications and defence industries also rely on several such minerals as they are used in manufacturing fighter jets, drones, radio sets and other critical equipment.

    Why is this resource critical?

    • As countries around the world scale up their transition towards clean energy and digital economy, these critical resources are key to the ecosystem that fuels this change.
    • Any supply shock can severely imperil the economy and strategic autonomy of a country over-dependent on others to procure critical minerals.
    • But these supply risks exist due to rare availability, growing demand and complex processing value chain.
    • Many times the complex supply chain can be disrupted by hostile regimes, or due to politically unstable regions.
    • They are critical as the world is fast shifting from a fossil fuel-intensive to a mineral-intensive energy system.

    What is China ‘threat’?

    • China is the world’s largest producer of 16 critical minerals.
    • China alone is responsible for some 70% and 60% of global production of cobalt and rare earth elements, respectively, in 2019.
    • The level of concentration is even higher for processing operations, where China has a strong presence across the board.
    • China’s share of refining is around 35% for nickel, 50-70% for lithium and cobalt, and nearly 90% for rare earth elements.
    • It also controls cobalt mines in the Democratic Republic of Congo, from where 70% of this mineral is sourced.
    • In 2010, China suspended rare earth exports to Japan for two months over a territorial dispute.

    What are countries around the world doing about it?

    • US has shifted its focus on expanding domestic mining, production, processing, and recycling of critical minerals and materials.
    • India has set up KABIL or the Khanij Bidesh India Limited to ensure mineral security of the nation.
    • Australia’s Critical Minerals Facilitation Office (CMFO) and KABIL had recently signed an MoU aimed at ensuring reliable supply of critical minerals to India.
    • The UK has unveiled its new Critical Minerals Intelligence Centre to study the future demand for and supply of these minerals.

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • What is Purchasing Managers Index (PMI)?

    India’s services firms saw growth in new business and output accelerate to a 11-year high in June, as per the survey-based S&P Global India Services Purchasing Managers Index (PMI).

    What is the news?

    • The index rose to 59.2 last month, from 58.9 in May, signalling a strengthening in demand across the services sector, which had borne the brunt of the COVID-19 pandemic.

    Purchasing Managers’ Index (PMI)

    • PMI is an indicator of business activity — both in the manufacturing and services sectors.
    • It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
    • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
    • The PMI is compiled by IHS Markit based on responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers.

    How is the PMI derived?

    • The PMI is derived from a series of qualitative questions.
    • Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.

    How does one read the PMI?

    • A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
    • Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
    • If the figure is higher than the previous month’s then the economy is expanding at a faster rate.
    • If it is lower than the previous month then it is growing at a lower rate.

    What are its implications for the economy?

    • The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available.
    • It is, therefore, considered a good leading indicator of economic activity.
    • Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later.
    • Central banks of many countries also use the index to help make decisions on interest rates.

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • The extent of poverty

    Context

    There has been an uproar about the working papers of the IMF and World Bank, reporting no or low poverty for India in the pandemic year or just before that.

    About the IMF paper

    • The paper by Roy and Weide (2022) for the World Bank explores the possibility of using CMIE (unemployment data) in poverty calculations after correcting for the unrepresentative character of its panel data by modifying the weightages of households for aggregation.
    • These adjustments carried out to remove the non-convergence of the CMIE data with other macro statistics have resulted in a poverty figure of 12 per cent.

    What does the poverty index measure or attempt to capture?

    • Its construction involves complex calculations — to identify a poverty basket of consumption, working out price indices for updation of the poverty line and then applying it to the income or consumption of households for determining their poverty status.
    • Absence of consumption expenditure: The computation becomes far more challenging in the absence of data on consumption expenditure as is the case in India and several developing countries.
    • Intending to provide inputs for policy making, researchers have evolved ingenious methods of estimating the data, using past datasets and those that have not been designed to get robust expenditure estimates.

    Background of poverty line in India

    • A nine-member working group set up by the Planning Commission proposed the poverty line at Rs 20 per capita per month in the early Sixties, loosely ensuring the adequacy of minimum requirements.
    • Poverty line based on calorie needs: Dandekar and Rath (1970) went into detail about minimum calorie needs, based on the average consumption pattern.
    • Issues with calorie based poverty line: During the Eighties and Nineties, it was realised that this linkage is getting blurred due to changes in the consumption pattern, microenvironment for living, etc.
    • Sukhatme argued that the emphasis on calories and nutrition is misplaced as the absorption of nutrients depends on physical health, particularly the presence or absence of gastrointestinal diseases.
    • Water and sanitation facilities were noted as important in determining the poverty line.
    •  It was accepted that the state, through poverty interventions, cannot and should not try to guarantee adequate nutrition to people.
    • Delinking the nutritional norms: The Tendulkar Committee formally announced delinking of nutritional norms from poverty in 2010.

    Extrapolating the consumption expenditure on NSS 2011-12

    • Bhalla, Virmani and Bhasin (2022) in their IMF Working Paper have developed a method of interpolation and extrapolation of the consumption expenditure of the NSS 2011-12 and building a series up to 2019-20.
    • They use the growth rate of private final consumption expenditure (PFCE) but bring in the distributional changes by allowing household consumption to grow as per the nominal per capita income in each state.
    • Takes into account rural-urban price difference: Rural-urban price differences are also introduced through separate poverty lines.
    • The method is reasonable except that it assumes the distributions to remain unchanged both within the rural and urban segments in each state over 2014-20.
    • Also, the growth rates of different commodities in the PFCE are significantly different and hence commodity-wise adjustments can be done to give higher weights to the items of consumption by the poor.
    • Taking into account the role of state: The most significant contribution of the study is its bringing in the differential engagement of the state in the provisioning of the essentials to the poor into poverty calculations.
    • This opens up the possibility of changes in the level of state engagement in poverty estimation, including free gas cylinders, etc.

    Conclusion

    People find the World Bank paper figures pegged at 12% more acceptable not because of the methodology but the magnitude. One does not know whether the poverty estimate would be a bit higher had the adjustments been carried out for a few other parameters and also at the state level.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • Hotels cannot force customers to pay Service Charge: Centre

    The Central Consumer Protection Authority (CCPA) issued guidelines asking hotels and restaurants not to collect service charge from customers.

    We often get to hear in news. Once a person had used a loo at a hotel in our national capital. She was charged â‚č499 as a service charge in return of purchasing a water bottle!

    What is the news?

    • Under the guidelines, consumers can lodge complaints against hotels and restaurants by calling the number 1915.
    • The CCPA has issued guidelines under Section 18 (2) (I) of The Consumer Protection Act, 2019.
    • The CCPA was established in July 2020 to promote, protect, and enforce the rights of consumers as a class, and to investigate, prosecute, and punish violators.

    What are the guidelines?

    • The CCPA has issued five major guidelines regarding the levy of service charge by restaurants and hotels, which has for long been a contentious issue and has periodically triggered complaints from consumers.
    • The guidelines say:
    1. No hotel or restaurant shall add service charge automatically or by default in the bill;
    2. Service charge shall not be collected from consumers by any other name;
    3. No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional, and at the consumer’s discretion;
    4. No restriction on entry or provision of services based on collection of service charge shall be imposed on consumers; and
    5. Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

    What can a consumer do in case of a violation of these guidelines?

    • The consumer has four options at different levels of escalation in case she spots the levy of service charge in her bill.
    • First, she can make a request to the hotel or restaurant to remove the service charge from her bill.
    • Second, she can lodge a complaint on the National Consumer Helpline (NCH), which works as an alternative dispute redressal mechanism at the pre-litigation level.
    • The complaint can be lodged by making a call on the number 1915, or on the NCH mobile app.
    • Third, the consumer can complain to the Consumer Commission, or through the edaakhil portal, http://www.edaakhil.nic.in.
    • Fourth, she can submit a complaint to the District Collector of the concerned district for investigation and subsequent proceedings by the CCPA.
    • A consumer can complain directly to the CCPA by sending an e-mail.

    What are the components of a food bill?

    • A restaurant bill in India comprises food charge (from the menu), with an addition of service charge (anywhere between 5 to 15 per cent) and a 5 per cent GST on this amount (IGST+SGST).
    • This is for all kinds of standalone restaurants.
    • In case a restaurant is located inside a hotel wherein room rate is upwards of Rs 7,500 (mostly in case of five-stars), the GST would be 18 per cent.

    Nature of Service charge

    • While the GST is a mandatory component as per law, the service charge is supposed to be optional.
    • It is the equivalent of what is known as gratuity around the world, or tip, in casual parlance.
    • Most restaurants decide the service charge on their own, and print it at the bottom of the menu with an asterisk.

    What do the restaurants say?

    • The levy of service charge by a restaurant is a matter of individual policy to decide if it is to be charged or not.
    • There is no illegality in levying such a charge.
    • Once the customer is made aware of such a charge in advance and then decides to place the order, it becomes an agreement between the parties, and is not an unfair trade practice.
    • GST is also paid on the said charge to the Government.

    Where does the fund go?

    • Restaurants claim that a major chunk of the service charge thus collected goes to the staff, while the rest goes towards a welfare fund to help them out during good and bad times.
    • It’s a default billing option, even as customers can choose not to pay it if they don’t want to.
    • Of course, they are paid the salaries but the service charge works as an incentive for them.
    • Restaurateurs also say that patrons can decide not to pay the charge and tip the server directly, but in this case, the backroom staff doesn’t get anything.
    • A service charge ensures all staff members are rewarded evenly.

    What is the issue then?

    • The issue is that almost all restaurants have put service charge (fixed at their own accord) as a default billing option.
    • And if a consumer is aware that it is not compulsory and wants it removed or wants to tip the server directly, the onus is on them to convince the management why they don’t want to pay it.
    • The department says they received several complaints saying it leads to public embarrassment and spoils the dining experience since at the end of it, they either pay the charge quietly and exit the place feeling cheated, or have to try hard to get it removed.
    • Also, there is no transparency as to where this charge goes.
    • The officials also say that collecting service charge on their own and paying GST on it to the government doesn’t make it authorised.

    Problems faced by customers

    • It is this component which has come under dispute from time to time, with consumers arguing they are not bound to pay it.
    • It also said that hotels and restaurants charging tips from customers without their express consent in the name of service charges amounts to unfair trade practice.

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • The inflation tightrope

    Context

    The Indian economy has been hit by inflationary shocks of late.

    Inflation story so far

    • RBI mandate: The inflation target of the Reserve Bank of India is 4 per cent, with a band of 2 per cent on either side.
    • Inflation was at or above the upper threshold of 6 per cent since the beginning of this year.
    • Only after inflation hit 7 per cent did the RBI raise the repo rate.
    • Increase in interest rate: The RBI has raised the cost of borrowing (by 90 basis points so far), with a promise of more to come.
    • Fuel taxes reduced: The central government has cut fuel taxes with alacrity, and has banned the export of certain items.

    Role of monetary authorities

    • Monetary authorities raise interest rates if inflation is above the preferred target, and vice versa.
    • What should be the interest rate? Interest rates should rise more than inflation so the “real” interest rates rise, causing a compression in demand (and a fall in economic activity), which in turn will reduce inflation.
    • The RBI embraced this idea. In 2016, an independent monetary policy committee was constituted.

    Effects of global inflation

    • Some part of inflation is coming from abroad is an added complication.
    • Outflow of fund: There has also been a steady outflow of foreign funds from the stock market.
    • Depreciation of rupee: This could cause the rupee to depreciate, in turn, raising the prices of imported goods thereby adding to the inflationary woes.

    Two ways in which the Indian economy is different

    1] Role of agriculture in Indian economy

    • India’s non-food and non-oil components of the consumer price index CPI are about 47 per cent.
    •  In comparison, for the ECB, it is less than one-third of the CPI.
    • Of course, the RBI has no control over international prices of food and oil, so it must squeeze less than 50 per cent of the domestic economy to lower inflation.
    • The real interest rise works through demand compression.
    • But the problem is on the supply side.
    • Also, as compared to the RBI, the ECB would suffer a lower rise in inflation, and has a larger menu on which to apply demand compression.

    2] Exchange rate and its effect on output

    • Until the 1970s, the accepted wisdom was that an economy had to achieve both internal balance and external balance.
    • Internal balance consisted of full employment and low inflation using monetary and fiscal policies.
    • Over time, the internal balance has come to mean, from a policy perspective, low inflation, since “the market” will ensure full employment.
    • External balance required a balanced current account over some horizon (“don’t get too much into foreign debt”), by using, for example, the exchange rate.
    • For the OECD countries, the external balance was not a constraint any longer, since they had made their currencies fully convertible, and international capital flows were unrestricted.
    • But this is not the case with India.
    • If it were so, no one would be interested in discussing the country’s foreign exchange reserves, because these could be generated instantaneously by exchanging the domestic currency for foreign exchange.

    India’s foreign reserves and its impact on competitiveness of Indian products

    • Until 2020, India had seen massive portfolio capital inflows when OECD interest rates were low, and its current account deficits were financed by foreign reserves.
    • But portfolio inflows can, and do, reverse themselves.
    • FII inflows also contribute to India’s lack of competitiveness.
    • The RBI bought foreign exchange (with rupees).
    • But fearing this would stoke inflation, it sold government bonds, and removed the excess liquidity.
    • This “sterilised intervention” saw the RBI’s foreign exchange assets going up, matched by a reduced holding of government bonds.
    • Thus, India’s foreign exchange reserves were not its “own”— there were liabilities against it.
    • India’s Dutch Disease: The RBI could have let the rupee appreciate or have accumulated foreign reserves.
    • It chose an intermediate solution — a mix of an appreciation and accumulation of reserves.
    • The appreciation caused by inflows reduced international competitiveness for Indian products.
    • In effect, we had our own episode of the “Dutch Disease”.

    Way forward

    • As the RBI raises interest rates, outflows will possibly slow down with the rupee appreciating.
    • That is not good for external balance.
    •  It is easy to see that inflation targeting could be at odds with external balance.

    Conclusion

    If inflation does prove stubborn, and fighting inflation is all that the authorities in India worry about, we could see an external crisis.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

    Back2Basics: What is Dutch Disease?

    • Dutch disease is an economic term for the negative consequences that can arise from a spike in the value of a nation’s currency.
    • It is primarily associated with the new discovery or exploitation of a valuable natural resource and the unexpected repercussions that such a discovery can have on the overall economy of a nation.
    • Symptoms include a rising currency value leading to a drop in exports and a loss of jobs to other countries.

  • Towards a single low tax regime

    Context

    The introduction of a uniform GST was a watershed moment in India since the country’s earlier regime of taxes and cesses. However, GST is still a complicated tax regime with different slabs.

    Unified single tax

    • Empirical data from across the world on the benefits of a unified single tax is incontrovertible
    • This needs bold and clear reformist thinking at the political level.
    • Imposing a high GST in some areas does not make sense.
    • ‘Sin’ taxes are at cross purposes with the government’s policy of generating growth and creating jobs under ‘Make in India’.
    • High taxes on air-conditioners, air conditioned restaurants, chocolates and luxury cars create an economic ripple effect downstream, in a complex web of businesses that have symbiotic relationships.
    • The effect finally reaches down to the bottom of the employment pyramid.
    • Distrust between State and centre: There is distrust between the States and the Centre on revenue sharing.
    • There is also anger at the Centre for riding roughshod over the States’ autonomy and disregarding the federal structure.

    Multiple rates: A major shortcoming in the structure of GST

    • One of the most important shortcomings in the structure of GST is multiple rates.
    • The committee headed by the Chief Economic Adviser estimated the tax rate at 15-15.5 per cent.
    • It further recommended that in keeping with growing international practice, India should strive towards a single rate in the medium-term to facilitate administrative simplicity and compliance, but in the immediate context, it should have a three-tier structure (excluding zero).
    • The structure finally adopted was to have four rates of 5, 12, 18, and 28 per cent besides zero, though almost 75 per cent of the revenues accrue from the 12 and 18 per cent slabs.
    • Why single rate structure? The reasons for adopting a single rate structure in most countries are:
    • To have a simple tax system,
    • To prevent misclassifications and litigations arising therefrom,
    • To avoid an inverted duty structure of taxes on inputs exceeding those on outputs requiring detailed scrutiny and refunds.
    • Why multiple rates? The main reason for rate differentiation is equity.
    • But it is argued that this is an inefficient way of targeting benefits for the poor. 
    • Although the exempted and low-rated items are consumed relatively more by the poor, in absolute terms, the consumption may be more by the rich.

    Way forward

    • Move people up the value chain: The plan must be to figure out how to rev up the economy by making the rich and upper middle class spend and move more people up the value chain instead of designing a tax system that keeps these products out of the new consumer class’s reach.
    • The same lack of logic applies to taxes on wine, rum and beer, which generate large-scale employment and are the backbone of grape and sugarcane farming and the cocoa industry.
    • In the automobile sector, the GST on electric cars, tractors, cycles, bikes, low-end and luxury cars ranges anywhere from 5% to 50%.
    • The sale of automobiles is the barometer of an economy.
    • Single tax slab: A directive to the bureaucracy is necessary to come up with just two categories: goods eligible for zero tax and goods that will fall under a single rate, say 10% or 12%.
    • Then there are items that are exempt from GST.
    • Bring fuels under GST:  Petrol, diesel, aviation turbine fuel are not under the purview of GST, but come under Central excise and State taxes.
    • A single low tax regime will ensure compliance, widen the tax net, improve ease of doing business, boost the economy, create jobs, increase tax collections and reduce corruption

    Conclusion

    The Finance Minister should take a cue from the Prime Minister, who hinted at major reforms in the aftermath of COVID-19, and do away with all the confusing tax slabs in one fell swoop.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • Why rice and wheat bans aren’t the answer to inflation

    Context

    There are reports suggesting that the government is mulling a ban on rice exports to tame inflation.

    Background

    • This is surely not the first time an attempt is being made to ban wheat and rice exports.
    • It was also done in 2007-08, in the wake of the global financial crisis.
    • Perhaps government will also impose stocking limits on traders for a host of commodities, suspend futures trading in food items, and even conduct income tax raids on traders of food.

    Issues in India’s rice export strategy

    • Highest ever volume: India exported the highest-ever volume of 21 million metric tonnes (MMT) of rice in 2021-22 (FY22) in a global market of about 51.3 MMT, which amounts to about 41 per cent of global exports.
    • Reduces price: Such large volumes of rice exports brought down global prices of rice by about 23 per cent in March (YoY), when all other cereal prices, be it wheat or maize, were going up substantially in global markets.
    • In fact, in FY22, the unit value of exports of common rice was just $354/tonne, which was lower than the minimum support price (MSP) of rice.
    • Below MSP buying or leakage from PMGKAY: This meant that rice exporters were either buying rice (paddy) from farmers and millers at below the MSP or that quite a substantial part of rice was given free under the PM Garib Kalyan Ann Yojana (PMGKAY) was being siphoned away for exports at prices below MSP.
    • Artificial competitive advantage: Free electricity for irrigation in several states, most notably Punjab, and highly subsidised fertilisers, especially urea, create an artificial competitive advantage for Indian rice in global markets.
    • Suggestion: This is a perfect case for “optimal export tax” — not a ban — on rice exports.
    • If we can’t raise the domestic price of urea, which is long overdue, we should at least recover a part of the urea subsidy from rice exports by imposing an optimal export tax.

    Why export ban on wheat and rice is not a solution

    • Small contribution of cereals in inflation: In May, the consumer price index (CPI) inflation was 7.04 per cent (YoY). The cereals group as a whole contributed only 6.6 per cent to this inflation.
    • Within that, wheat, other than through PDS, contributed just 3.11 per cent and non-PDS rice contributed 1.59 per cent.
    • So, by imposing a ban on wheat and rice exports, India can’t tame its inflation as more than 95 per cent of CPI inflation is due to other items.
    • Interestingly, inflation in vegetables contributed 14.4 per cent to CPI inflation, which is more than three times the contribution of rice and wheat combined. And within vegetables, tomatoes alone contributed 7.01 per cent.
    • What all this indicates is that agri-trade policies need to be more stable and predictable, rather than a result of knee-jerk reactions.
    • Irresponsible behaviour: Export bans on food items also show somewhat irresponsible behaviour at the global level, unless there is some major calamity in the country concerned.
    • The recently concluded WTO ministerial meeting as well as the G-7 meet expressed concerns about food security in vulnerable nations.

    Way forward

    • Efficient value chain and processing facilities: In commodities like vegetables, most of which are largely perishable, we need to build efficient value chains and link these to processing facilities.
    • The same would go for onions, which often bring tears to kitchen budgets when prices shoot up.
    • A switch to dehydrated onion flakes and onion powder would be the answer.
    • Our food processing industry, especially in perishable products, is way behind the curve compared to several Southeast Asian nations.

    Conclusion

    If India wants to be a globally responsible player, it should avoid sudden and abrupt bans and, if need be, filter them through transparent export taxes to recover its large subsidies on power and fertilisers.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • After Ukraine, the new energy disorder

    Context

    Our long-standing “friend“ (Russia) is now in the bad books of our other friends (the US and Europe) and in a deepening relationship with our adversary (China). The Gulf countries are crucial for our energy security but Russia has replaced them as our principal supplier

    How Ukraine war is changing the energy policies

    • Six months back before the start of the Ukrainian conflict, there was a deepening sense that fossil fuels and the industry built around them were in terminal decline.
    • After the Ukraine war began, the petroleum market is tight and prices are ratcheting up.
    • Oil prices are close to $120/bbl and gas prices have jumped 500 per cent year on year in Europe.
    • The regulatory constraints on petroleum exploration and distribution infrastructure have been eased and several countries have removed the output limits on thermal power generation and reopened the coal mines that were closed.
    • The share prices of the oil majors are trading at multi-year highs.

    Three issues that influences India’s energy policy

    1] Long term implications of buying oil from Russia

    • India is now a major purchaser of Russian crude.
    • Last month, it reportedly purchased an average of 1.2 mbd.
    • If this figure is correct, Russia is now our largest provider of crude oil surpassing Saudi Arabia and Iraq.
    • The reason for this ramp-up is the price discount offered by Russia.
    • The decision is driven by good economics and energy security.
    • The Western world does not, however, see it this way.
    •  The question does arise: What might be the medium to longer-term implications of our “support” to Russia on relations with Capitol Hill, the UK and the European Commission?

    2] Increased economic and energy ties of Russia and China

    •  Russia and China have, for long, shared the view that the US is their biggest security threat.
    • China also increased the purchase of Russian oil and gas.
    • This tightened economic and energy embrace has implications for India.
    • Several questions will need to be addressed.
    • Russia’s role in India-China conflict: How might a post-Ukraine weakened Russia that is in hock to China respond to India in the event matters deteriorate on our border with China?
    • Will they be reliable providers of crude oil, military equipment, minerals, and metals essential for our green transition?
    • Will they be politically autonomous or client states?

    3] Important role of the Gulf states

    • The Ukrainian crisis has forced a presidential u-turn. Later this month, President Biden will visit Saudi Arabia.
    • Several other European leaders will also beat a path to the Gulf, all in the hope of extracting a promise of higher production to lower oil prices and some to negotiate gas supply deals.
    • India needs the Gulf producers for supply security. But it also wants oil prices to come down.
    •  The position of these producers in the reordered post-Ukraine energy landscape is, therefore, of relevance.
    • Will they respond positively to the courtship of Russia/China, move back into the Western fold, or stay outside both orbits, neutral and opportunistic?
    • The answer will bear on India’s energy security.

    Way forward

    • Integrated energy policy: What we need is a mechanism for the development and execution of an integrated energy policy.
    • This is because currently there is no executive authority responsible for energy.
    • There are ministries responsible for components of energy policy but no formal mechanism for aligning their separate approaches.
    • The Ukraine war has disrupted the existing energy order.
    • The new energy (dis) order has created fissures that impact our national security, economic growth, trade, clean energy supply lines, transfer of technology and international relations.
    • We cannot, therefore, afford to continue with our existing siloed approach.

    Conclusion

    The Ukrainian crisis has radically altered the contours of the global energy landscape and created a tangle of relationships and issues for India. To smoothen this tangle and address the issues India should adopt “a whole of the system” approach to energy policy.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)