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Subject: Economics

  • Tamil Nadu tops State Food Safety Index (SFSI)

    Tamil Nadu topped the State Food Safety Index (SFSI) this year.

    Food safety has been in news this year quite frequent. Do make a note of following – Recommended Dietary Allowance (RDA), Red Octagon, Eat Right Movement, Food Safety Mitra etc.

    State Food Safety Index (SFSI)

    • FSSAI has developed State Food Safety Index to measure the performance of states on various parameters of Food Safety.
    • This index is based on the performance of State/ UT on five significant parameters set by the Health Ministry, namely
    1. Human Resources and Institutional Data
    2. Compliance
    3. Food Testing – Infrastructure and Surveillance
    4. Training & Capacity Building and
    5. Consumer Empowerment
    • The Index is a dynamic quantitative and qualitative benchmarking model that provides an objective framework for evaluating food safety across all States/UTs.

    Highlights of the 2022 Report

    • Tamil Nadu is followed by Gujarat and Maharashtra. Among the smaller States, Goa stood first, followed by Manipur and Sikkim.
    • Among the Union Territories, Jammu and Kashmir, Delhi and Chandigarh secured the first, second and third ranks.

    Back2Basics: Food Safety and Standards Authority of India (FSSAI)

    • The FSSAI is an autonomous body established under the Ministry of Health & Family Welfare, Government of India.
    • It has been established under the Food Safety and Standards Act, 2006 which is a consolidating statute related to food safety and regulation in India.
    • It is responsible for protecting and promoting public health through the regulation and supervision of food safety.
    • It is headed by a non-executive Chairperson, appointed by the Central Government, either holding or has held the position of not below the rank of Secretary to the Government of India.

     

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  • What are Bad Banks?

    The finance ministry said the Rs 6,000-crore National Asset Reconstruction Company (NARCL) or bad bank is expected to take over the first set of non-performing accounts of banks next month.

    What is a Bad Bank?

    • A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
    • Technically, it is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
    • Such a bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
    • The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.

    Bad Banks to be established

    • The NARCL-IDRCL structure is the new bad bank.
    • The National Asset Reconstruction Company Limited (NARCL) has already been incorporated under the Companies Act.
    • It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
    • Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market.

    How will the NARCL-IDRCL work?

    • The NARCL will first purchase bad loans from banks.
    • It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
    • When the assets are sold, with the help of IDRCL, , the commercial banks will be paid back the rest.
    • If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked.
    • The difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.

    Will a bad bank resolve matters?

    • From the perspective of a commercial bank saddled with high NPA levels, it will help.
    • That’s because such a bank will get rid of all its toxic assets, which were eating up its profits, in one quick move.
    • When the recovery money is paid back, it will further improve the bank’s position.
    • Meanwhile, it can start lending again.

    Why do we need a bad bank?

    • The idea gained currency during Rajan’s tenure as RBI Governor.
    • The RBI had then initiated an asset quality review (AQR) of banks and found that several banks had suppressed or hidden bad loans to show a healthy balance sheet.
    • However, the idea remained on paper amid lack of consensus on the efficacy of such an institution.
    • ARCs have not made any impact in resolving bad loans due to many procedural issues.
    • While commercial banks resume lending, the so-called bad bank, or a bank of bad loans, would try to sell these “assets” in the market.

    Good about the bad banks

    • The problem of NPAs continues in the banking sector, especially among the weaker banks.
    • The bad bank concept is in some ways similar to an ARC but is funded by the government initially, with banks and other investors co-investing in due course.
    • The presence of the government is seen as a means to speed up the clean-up process.
    • Many other countries had set up institutional mechanisms such as the Troubled Asset Relief Programme (TARP) in the US to deal with a problem of stress in the financial system.

    Back2Basics: NARCL

    • NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC).
    • NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution.
    • Public Sector Banks will maintain 51% ownership in NARCL.
    • The NARCL will acquire assets by making an offer to the lead bank.
    • Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition.

     

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  • How to keep inflation under control

    Context

    The economy now seems to be largely out of the shadow of Covid-19, and only a notch better than in 2019-20. But the big question remains: can India rein in the raging inflation that is at 7.8 per cent (CPI for April 2022), with food CPI at 8.4 percent, and WPI at more than 15 per cent?

    Need for bold steps on three fronts to tackle inflation

    • Unless bold and innovative steps are taken at least on three fronts, GDP growth and inflation both are likely to be in the range of 6.5 to 7.5 per cent in 2022-23.
    • 1] Tightening of loose monetary policy: The Reserve Bank of India (RBI) is mandated to keep inflation at 4 per cent, plus-minus 2 per cent.
    • The RBI has already started the process of tightening monetary policy by raising the repo rate, albeit a bit late.
    • It is expected that by the end of 2022-3, the repo rate will be at least 5.5 per cent, if not more.
    • It will still stay below the likely inflation rate and therefore depositors will still lose the real value of their money in banks with negative real interest rates.
    • That only reflects an inbuilt bias in the system — in favour of entrepreneurs in the name of growth and against depositors, which ultimately results in increasing inequality in the system.
    • 2] Prudent fiscal policy: Fiscal policy has been running loose in the wake of Covid-19 that saw the fiscal deficit of the Union government soar to more than 9 per cent in 2020-21 and 6.7 per cent in 2021-22, but now needs to be tightened.
    • Government needs to reduce its fiscal deficit to less than 5 per cent, never mind the FRMB Act’s advice to bring it to 3 per cent of GDP.
    • However, it is difficult to achieve when enhanced food and fertiliser subsidies, and cuts in duties of petrol and diesel will cost the government at least Rs 3 trillion more than what was provisioned in the budget.
    • 3] Rational trade policy: Export restrictions/bans go beyond agri-commodities, even to iron ore and steel, etc. in the name of taming inflation.
    • But abrupt export bans are poor trade policy and reflect only the panic-stricken face of the government.
    • A more mature approach to filter exports would be through a gradual process of minimum export prices and transparent export duties for short periods of time, rather than abrupt bans, if at all these are desperately needed to favour consumers.
    • Liberal import policy: A prudent solution to moderate inflation at home lies in a liberal import policy, reducing tariffs across board.

    Way forward

    • If India wants to be atmanirbhar (self-reliant) in critical commodities where import dependence is unduly high, it must focus on two oils — crude oil and edible oils.
    • In crude oil, India is almost 80 per cent dependent on imports and in edible oils imports constitute 55 to 60 per cent of our domestic consumption.
    • In both cases, agriculture can help.
    • Ethanol production: Massive production of ethanol from sugarcane and maize, especially in eastern Uttar Pradesh and north Bihar, where water is abundant and the water table is replenished every second year or so through light floods, is the way to reduce import dependence in crude oil.
    • Palm plantation: In the case of edible oils, a large programme of palm plantations in coastal areas and the northeast is the right strategy.

    Conclusion

    We need to invest in raising productivity, making agri-markets work more efficiently.

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  • GST Council must uphold fiscal federalism

    Context

    The recent ruling of the Supreme Court held that the states were free to use means of persuasion ranging from collaboration to contestation.

     Simultaneous or concurrent powers under Article 246A

    • Article 246A confers simultaneous or concurrent powers on Parliament and the state legislatures to make laws relating to GST.
    • This article is in sharp contrast to the constitutional scheme that prevailed till 2017.
    • It clearly demarcated taxing powers between the Centre and states with no overlaps.
    • After 2017, several central and state levies were subsumed into GST.
    • Each state was to have its own GST Act, all of them being almost identical to the Central GST Act.
    • Inter-state supplies and imported goods are liable to IGST.

    Composition of GST Council

    • The GST Council has the Union finance minister as the chairperson and the Union minister of state in charge of revenue or finance as a member.
    • Centre has one-third voting power, 31 states (including two Union Territories) share the remaining two-thirds of the vote.
    • The GST Council has a total of 33 members.
    • Out of a total of 33 votes, 11 belong to the Centre and 22 votes are shared by 31 states/UT, with each state/UT having a 0.709 vote.
    • Any decision of the GST Council requires a three-fourth majority or a minimum of 25 votes.
    • As the Centre has 11 votes, it requires an additional 14 votes.
    • Unlike so many statutes, Article 279A has made no provision to make the decision of the majority binding on the dissenting states.
    •  Paragraph 2.73 of the Select Committee Report on the 122nd Constitution (Amendment) Bill, 2014, noted that this voting pattern was to maintain a fine balance as, in a federal constitution, the dominance of one over the other was to be disallowed.

    Role of GST Council

    • Under Article 279A, the GST Council has to make “recommendations” on various topics including the tax rate and exemptions.
    • The Union of India argued that the “constitutional architecture” showed that Articles 246A and 279A, when read together, made the GST Council the ultimate policy-making and decision-making body for framing GST laws.
    • The GST Council was unique and incomparable to any other constitutional body and its recommendations would override the legislative power of Parliament and state legislatures.
    • Neither of them could legislate on GST issues independent of the recommendations of the GST Council.
    • The argument went further: On a combined reading of Article 279A, the provisions of the IGST and CGST Acts and the recommendations of the GST Council were transformed into legislation.
    • The Supreme Court rightly noted that several sections in the state GST laws, CGST and in IGST, cast a duty even on dissenting states to issue notifications to implement the recommendations of the GST Council.

    Observations on federalism

    • Delving into legislative history, the court ruled that a draft Article 279B, which provided for a GST Disputes Settlement Authority, was omitted because it would have effectively overridden the sovereignty of Parliament and the state legislatures, and diminished the fiscal autonomy of the states.
    • It was desirable, the Court said, to have some level of friction, some amount of state contestation, some deliberation-generating froth in our democratic system.
    • Putting to rest any controversy, the court held that the recommendations of the GST Council had only a persuasive value.
    • To regard them as binding edicts would disrupt fiscal federalism because both the Union and states were conferred equal power to legislate on GST.
    • Rule-making power bound by recommendations of GST Council: The Court held that the state governments and Parliament, while exercising their rule-making powers under the provisions of the State GST Acts, CGST & IGST Acts, are bound by the recommendations of the GST Council.
    • States can amend GST laws: But even this did not mean that all recommendations of the GST Council are binding on state legislatures or Parliament to enact primary pieces of legislation on GST.
    • In effect, states can amend their GST laws if they so choose.

    Way forward

    •  If the GST Council meets periodically as mandated and there is active participation of the states in making recommendations, no state will oppose a recommendation that has been carefully deliberated and is in the national interest.

    Conclusion

    Indeed, there is little chance of cracks developing in the GST edifice as long as the spirit of cooperative and collaborative federalism prevails.

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  • For India, a lesson in food security from Sri Lanka

    Context

     India needs to have a strategy of self-reliance in basic foods, including edible oils.

    Contrasting cases of Sri Lanka and Saudi Arabia

    • Sri Lanka, a country with 21.5 million population imported dairy products valued at $333.8 million in 2020 and $317.7 million in 2021.
    • The island nation’s imports of whole milk powder (WMP) alone were 89,000 tonnes and 72,000 tonnes in these two years.
    •  The 89,000 tonnes of powder imported in 2020 would have, thus, “produced” almost 2.1 million litres per day (MLPD) equivalent of milk.
    • This is as against the 1.3 MLPD that Sri Lanka produces from its own cows and buffaloes.
    • It translates into an import dependence of over 60 per cent.
    • At the other end, we have Saudi Arabia, home to over 35 million inhabitants (including immigrants) and also the world’s largest vertically integrated dairy company.
    • Almarai Company has six dairy farms producing more than 3.5 MLPD of milk.
    • The animals are sourced from the US and Europe.
    • The entire feed and also forage given to them are procured from abroad.
    • Why is Saudi Arabia taking such pains to produce its own milk?
    • The answer is food security.
    • The Saudis — other Persian Gulf countries have also copied the Almarai model — are prepared to pay any price when it comes to ensuring the availability of basic food like milk.

    Lessons for India: Reducing import dependence on edible oil

    • India annually imports 13.5-14.5 million tonnes of vegetable oils, again roughly 60 per cent of its total consumption.
    •  Low international prices meant that the import bill, though high, fell from $9.85 billion in 2012-13 to $9.67 billion in 2019-20.
    • However, in the last couple of years, retail prices of most oils more than doubled
    • The value of India’s vegetable oil imports surged to a record $19 billion in 2021-22.

    Conclusion

    As a country with a population many times that of Sri Lanka and Saudi Arabia, India needs to have a strategy of self-reliance in basic foods.

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  • Gig Workers’ Rights

    The Union Labour Ministry is organizing a program aimed at sharing information and good experiences on policies and global practices relating to gig and platform workers and their social security.

    What is the Gig Economy?

    • In a gig economy, temporary, flexible jobs are commonplace and companies tend toward hiring independent contractors and freelancers instead of full-time employees.
    • A gig economy undermines the traditional economy of full-time workers who rarely change positions and instead focus on a lifetime career. e.g Employee models of Uber, Ola, Swiggy etc
    • In this economy, tech-enabled platforms connect the consumer to the gig worker to hire services on a short-term basis.
    • Gig workers include self-employed, freelancers, independent contributors and part-time workers.

    Where does gig culture exist in Indian Economy?

    • Sectors such as media, real estate, legal, hospitality, technology-help, management, medicine, allied and education are already operating in gig culture.
    • The gig economy can benefit workers, businesses, and consumers by making work more adaptable to the needs of the moment and demand for flexible lifestyles.

    Key Drivers for Gig Economy

    • Unconventional work approach by millennials: Hectic lifestyles of employees in private sectors have created a negative perception of full-time employment among millennials.
    • Emergence of a start-up culture: The start-up ecosystem in India has been developing rapidly. For start-ups, hiring full-time employees leads to high fixed costs and therefore, contractual freelancers are hired for non-core activities.
    • MNCs are hiring contractual employees: MNCs are adopting flexi-hiring options, especially for niche projects, to reduce operational expenses after the pandemic.
    • Rise in freelancing platforms: Rise in freelancing platforms has also aided in the development of the gig economy.
    • Business Models: Gig employees work on various compensation models such as fixed-fee (decided during contract initiation), time & effort, actual unit of work delivered and quality of outcome.
    • Impact of Covid-19: Many laid-off employees are focusing on developing skills to avail freelance job opportunities and become a part of this burgeoning economy.

    Why is Gig Economy preferred by workers?

    • Profit through multiple work: One can work on freelancing as well as work full-time somewhere else.
    • Women empowerment: It is very beneficial for womenwho work on this concept when they cannot continue their work or take a break from career due to marriage or child birth.
    • Leisure and dependency: Retired peoplecan stay active after retirement as this will keep them engaged away from loneliness and depression and can earn as well on their own.
    • Flexibility and diversity to the workers: It offers flexibility when workers can work according to their convenience and schedule rather than routine like in full-time jobs.
    • Work from home: The travel costs and energy to travel to the workplace is reduced.

    Why is Gig Economy preferred by Employers?

    • Efficiency, efficacy and productivity of workers in the gig economy are much more than that of a stable full-time job.
    • More rconomical for employers-when employment givers can’t afford to hire full-time workers, they hire people for specific projects and pay them.
    • Start-up companies and entrepreneurs – who do not have big financial space – can grow only if they can leverage the services of contract employees or freelancers.
    • In a gig economy, businesses save resources in terms of benefits, office space and training.
    • Competition and efficiency among workers is improved.

    Challenges faced in Gig economy

    • No perks and benefits: There are no labour welfare emoluments like pension, gratuity, etc. for the workers.
    • Job insecurity: Gig workers may face unfair termination. They may also attain minimum wages and less paid leave.
    • No legal protection: Workers do not have the bargaining power to negotiate a fair deal with their employers.
    • Unionization of workers will be difficult.
    • Confidentiality of documents etc. of the workplace is not guaranteed
    • Urban nature: The gig economy is not accessible for people in many rural areas where internet connectivity and electricity is unavailable.

    Way Forward

    • The gig economy has been on the rise and is expected to beat the pre-pandemic estimates due the expected influx of gig workers transitioning from full-time employment.
    • While the government has taken the initial steps to ensure social security of gig workers, the ‘Code on Social Security’ needs to be fine-tuned.

     

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  • What is Liquid Nano Urea?

    During his visit to Gujarat, Prime Minister inaugurated the country’s first liquid nano urea plant at Kalol.

    Liquid Nano Urea (LNU)

    • Urea is chemical nitrogen fertiliser, white in colour, which artificially provides nitrogen, a major nutrient required by plants.
    • LNU is essentially urea in the form of a nanoparticle.
    • It is sprayed directly on the leaves and gets absorbed by the plant.
    • Fertilisers in nano form provide a targeted supply of nutrients to crops, as they are absorbed by the stomata, pores found on the epidermis of leaves.
    • According to IFFCO, liquid nano urea contains 4 per cent total nitrogen (w/v) evenly dispersed in water.
    • The size of a nano nitrogen particle varies from 20-50 nm. (A nanometre is equal to a billionth of a metre.)

    Significance of LNU

    • This patented product is expected to not only substitute imported urea, but to also produce better results in farms.
    • Apart from reducing the country’s subsidy bill, it is aimed at reducing the unbalanced and indiscriminate use of conventional urea.
    • It will help increase crop productivity, and reduce soil, water, and air pollution.

    Using LNU

    • The liquid nano urea produced by Indian Farmers Fertiliser Cooperative (IFFCO) Limited comes in a half-litre bottle priced at Rs 240, and carries no burden of subsidy currently.
    • By contrast, a farmer pays around Rs 300 for a 50-kg bag of heavily subsidised urea.
    • According to IFFCO, a bottle of the nano urea can effectively replace at least one bag of urea.

    How efficient is LNU?

    • While conventional urea has an efficiency of about 25 per cent, the efficiency of liquid nano urea can be as high as 85-90 per cent.
    • Conventional urea fails to have the desired impact on crops as it is often applied incorrectly, and the nitrogen in it is vaporized or lost as a gas.
    • A lot of nitrogen is also washed away during irrigation.
    • Liquid nano urea has a shelf life of a year, and farmers need not be worried about “caking” when it comes in contact with moisture.

     

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  • Unicorn boom in India

    Prime Minister has praised India’s startup ecosystem as he highlighted that the country has reached a landmark figure of 100 unicorns with a valuation of more than $300 billion.

    What is a Unicorn Startup?

    • Unicorns are privately held, venture-capital-backed startups that have reached a value of $1 billion.
    • The valuation of unicorns is not expressly linked to their current financial performance.
    • This is largely based on their growth potential as perceived by investors and venture capitalists who have taken part in various funding rounds.

    Some of the successful Indian unicorns:

    • Lenskart
    • Cred
    • Meesho
    • PharmEasy
    • Licious
    • Grofers etc.

    When was the term first used?

    • American venture capitalist Aileen Lee is credited with coining the term in 2013.
    • It was used to emphasize the rarity of the emergence of such startups.

    Unicorn boost in India

    • The growth of Unicorns in India has been phenomenal in the past two years.
    • From 17 Unicorns in 2018 the number went up to 38 in 2020 and it’s 71 and counting in 2021.
    • Many of these unicorns, which have cumulatively raised more than 9 billion dollars till date, have also seen a surge in valuations.

    Features of a unicorn Start-up

    To be a unicorn is no cakewalk and each unicorn today has its own story with a list of features that worked in its favour.

    The few pointers that are commonly seen across all the unicorns is as under:

    • Disruptive innovation: Mostly, all the unicorns have brought a disruption in the field they belong to. Uber, for example, changed the way people commuted.
    • ‘Firsts’: It is seen that unicorns are mostly the starters in their industry. They change the way people do things and gradually create a necessity for themselves.
    • High on tech: Another common trend across unicorns is that their business model runs on tech. Uber got their model accepted by crafting a friendly app.
    • Consumer-focused: Often, theirgoal is to simplify and make things easy for consumers and be a part of their day-to-day life.
    • Affordability: Keeping things affordable is another key highlight of these startups. Spotify, for example, made listening to music easier to the world.
    • Privately owned: Most of the unicorns are privately owned which gets their valuation bigger when an established company invests in it.
    • *Mostly software based: A recent report suggests that 87% of the unicorns’ products are software, 7% are hardware and the rest 6% are other products & services.

    Entrepreneurship today is ‘survival-driven’ self-employment, formed out of necessity, as well as opportunity motivated, largely because poverty and lack of formal employment opportunities rear their ugly head in striving economies.

    Reasons for sudden success

    • COVID pandemic: The pandemic accelerated adoption of digital services by consumers helping start-ups and new-age ventures that typically build tech-focused businesses delivering an array of offerings to customers.
    • Boost in online services: Many Indians who had traditionally been subscribers of brick-and-mortar businesses moved online and explored a host of services ranging from food delivery and edu-tech to e-grocery.
    • Work-from-home culture: This added significant numbers to start-ups’ user base and expedited their business expansion plans and attracting investors.

    Inherent challenges to Start-ups in India

    • Financial scarcity: Availability of finance is critical for the startups and is always a problem to get sufficient amounts.
    • Lack of Infrastructure: There is a lack of support mechanisms that play a significant role in the lifecycle of startups which include incubators, science and technology parks etc.
    • Regulatory bottlenecks: Starting and exiting a business requires a number of permissions from government agencies. Although there is a perceptible change, it is still a challenge.
    • Compliance hurdles: For example, earlier Angel tax, which stands removed no, falls under corruption and bureaucratic inefficiencies.
    • Low success rate: Several startups fail due to shifting away the focus on the fundamentals of business grows.
    • Lack of an Innovative Business Model: To be successful a start-up must be innovative. Unfortunately, Indian startups are less innovative than startups elsewhere.
    • Non-competitive Indian Markets: Too many startups serving too few consumers are saturating the Indian market.  Most startups serve the fraction of Indians who live in urban India.
    • Digital divide: The majority of Indians who live in rural areas and small towns remain untouched by most startups.

    Various initiatives by the Govt.

    There are numerous government initiatives to assist start-ups:

    • MUDRA Scheme: Through this scheme, start-ups get loans from the banks to set up, grow and stabilize their businesses.
    • SETU (Self-Employment and Talent Utilization) Fund: Government has allotted Rs 1,000 Cr in order to create opportunities for self-employment and new jobs mainly in technology-driven domains.
    • E-Biz Portal: It is India’s first government-to-business portal that integrates 14 regulatory permissions and licenses at one source.
    • Credit Guarantee Fund: launched by the GoI to make available collateral-free credit to the micro and small enterprise sector.
    • Fund of Funds for Start-ups (FFS): 10,000 Rs corpus fund established in line with the Start-up India action plan under SIDBI for extending support to Start-ups.
    • Tax Sops: Tax exemption on Capital gain tax, Removal of Angel tax, Tax exemption for 3 years and Tax exemption in investment above Fair Market Value.

    Roadmap for the future success of start-ups

    Start-ups can judiciously take cues from unicorns in understanding the ecosystem and building a business model that adds value while being sustainable.

    • New-age startups should devise a customer-centric business model.
    • Through proper branding and strategy, they should make sure that this value proposition reaches the end-user.
    • What brings startups closer to success is the execution and customer acquisition strategy, where all the action occurs.
    • Notably, technology (rather deep-technology) has played a key role in the making of pioneer business models.

    Attracting venture capitalists

    • VCs are actively looking for investment opportunities in early-stage startups.
    • They possess the selection ability to effectively screen startups having a higher potential to succeed.
    • VCs primarily look for a mindset alignment with promoters and companies where they, as investors, can add value by leveraging their industry experience, expertise, network and reputation.

    Conclusion

    • The current economic scenario in India is in expansion mode.  Indian Startups are now spread across the length and breadth of the entire country.
    • The word ‘unicorn’ has come a long way from just being a mythological creature to a regular feature in business and finance discussions.
    • Innovation and economic growth depend on being able to produce excellent individuals with the right skills and attitudes to be entrepreneurial in their professional lives.
    • The Indian government’s policies like Make in India, Digital India, Atmanirbhar etc. shows the enthusiasm to arrest this talent.

     

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  • Price Rise and GST

    The GST regime is due for an overhaul in tax rates levied on different products because of structural anomalies and to reduce the multiple tax slabs.

    What is GST?

    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
    • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

    What are GST Slabs?

    • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
    • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
    • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
    • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
    • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

    Why rationalize GST slabs?

    • From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs are taxed more than the final product.
    • These are far too many rates and do not necessarily constitute a Good and Simple Tax.
    • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
    • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.

    Haven’t GST revenues been hitting new records?

    • Yes, they have – GST revenues have scaled fresh highs in three of the first four months of 2022, going past â‚č1.67 lakh crore in April.
    • But there is another key factor — the runaway pace of inflation.
    • Wholesale price inflation, which captures producers’ costs, has been over 10% for over a year and peaked at 15.1% in April.
    • Inflation faced by consumers on the ground has spiked to a near-eight year high of 7.8% in April.
    • The rise in prices was the single most important factor for higher tax inflows along with higher imports.

    Can we expect the rate reset this year?

    • Any re-arrangement of GST rates will entail some products being taxed higher, with concomitant ripple effects on prices.
    • The Centre and the States are not unmindful of the desperate need to rationalise the rate slabs and structure but we just need to get the timing right.
    • Presently inflation is the top worry.
    • With inflation, much of it imported through pricier fuels, commodities and food items, expected to hover high through the year, the GST rate reset hopes appear bleak in 2022-23.

     

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  • GST collections touched a record high of Rs 1.67 lakh crore in April.

    Context

    There has been a remarkable upswing in GST collections in recent months. Collections touched a record high of Rs 1.67 lakh crore in April.

    GST

    GST Interstate Model Example

    What are the reasons for increased collection?

    • 1] Inflation: First, the sharp rise in inflation has played a significant role.
    • Notwithstanding concerns over the unevenness of the economic recovery, in nominal terms, the economy grew by 19.4 per cent in 2021-22 as per the second advance estimates.
    • Deflating GST collection suggests that a large part of the recent increase in collections is driven by rising prices.
    • 2] Higher imports: Part of the overall increase in collections can be traced to higher imports.
    • Higher buoyancy: Even if one is to exclude the revenue accruing from imports, the rise in GST collections has outstripped GDP growth, indicating higher buoyancy.
    • 3] Tightening of the rules: In order to improve compliance levels, the GST Council has been tweaking the rules to tighten the system.
    • Returns filed have gone up, while the number of non-filers and those who delay filing have fallen.
    • Alongside, the administration has also taken steps to tackle the menace of fake invoices by placing restrictions on the quantum of input tax credit that can be used to pay of tax obligations.
    • The introduction of e-invoicing has also played a role.
    • Until recently, this was being implemented for firms with a turnover of more than Rs 50 crore.
    • From April, this process has been extended to firms above Rs 20 crore.
    • The incremental gains from bringing smaller firms into its ambit, while consequential, are unlikely to be of the same order.
    • 4] Industrial activity:  The higher collections in April 2022 seem to be led by increase in industrial activity. This is borne by strong growth in collections in states such as Maharashtra, Karnataka and Odisha which house lot of industries. Relatively tepid growth in more populous states such as Bihar (-2.47 per cent), West Bengal (7.80 per cent) and Jharkhand (4.86 per cent) shows that the GST collections was not propelled by revival in private consumption.
    •  The real challenge lies in improving compliance levels across the entire spectrum of industries where inputs/raw materials are sourced largely from the informal sector.
    • 5] Changing the structure of the economy: The formalisation of firms, the growing concentration of economic power in the hands of a few, imply that for the same level of output, the tax paid will be higher.

    Suggestion

    • Increase tax rate: Around two-fifths of the taxable value (or turnover) falls under the 18 per cent slab as per research by some analysts.
    • This implies that simply merging the 12 per cent and the 18 per cent slab as some have been suggesting would lead to a revenue loss.
    • Before opting for such adjustments, the GST Council must first ascertain the potential revenue (net of cess and refunds) at varying levels of compliance, tax rates and exemptions afforded.
    • Now, as per some estimates presented to the 15th Finance Commission, with existing exemptions in place, the current tax regime should ideally yield revenues equivalent to 8.23 per cent of GDP.
    •  In another scenario, even if existing exemptions are kept in place, and if a single rate of 14 per cent is levied, then collections should rise to 8.93 per cent.

    Conclusion

    Considering the current economic situation, now may not be an opportune moment to raise taxes. But there is no getting around it. Both the Centre and the states need to work towards this.