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Subject: Economics

  • GST Compensation dues

    The West Bengal CM has said that slashing State levies on petrol and diesel will be possible only if the Centre clears its outstanding dues of over â‚č97,000 crore, which includes compensation for implementing the Goods and Services Tax (GST).

    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.

    Compensation under GST regime

    • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
    • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
    • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
    • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

    Distributing GST compensation

    • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
    • The compensation fund so collected is released to the states every 2 months.
    • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

    Significance of GST compensation

    • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
    • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
    • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

    What is the status of the outstanding GST compensation due to the States?

    • The Finance Ministry said that outstanding GST compensation dues to States for 2021-22 stood at â‚č78,704 crore.
    • This means that dues have been remitted to States for the eight-month period of April 2021 till November 2021.
    • Normally, compensation for 10 months from April-January of any financial year is released during that year and the compensation for February-March is released only in the next financial year.
    • The pending amount will also be released as and when the amount from cess accrues in the compensation fund.

    Also read:

    [Burning Issue] GST Compensation

     

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  • RBI surprises with 40 bps rate increase in Repo Rate

    The Reserve Bank of India (RBI), in a sudden move, raised the repo rate by 40 basis points (bps) to 4.4% citing inflation that was globally rising alarmingly and spreading fast.

    Why in news?

    • The repo rate increase was the first since August 2018.
    • The MPC retained its ‘accommodative’ policy stance even as it focuses on withdrawal of accommodation to keep inflation within the target range while supporting growth.
    • Due to Ukraine War, persistent and spreading inflationary pressures are becoming more acute with every passing day.

    Hues over the REPO spike

    • The move — to have such a meeting and to raise the interest rates — is, at two different levels, both surprising and obvious.
    • It is surprising because the RBI’s MPC meets once every two months — and the meeting this week was not scheduled.

    What is Repo Rate?

    • Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
    • It is used by monetary authorities to control inflation.
    • In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank.
    • This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

    How does the repo dynamics work?

    • When there is a shortage of funds, commercial banks borrow money from the central bank which is repaid according to the repo rate applicable.
    • The central bank provides these short terms loans against securities such as treasury bills or government bonds.
    • This monetary policy is used by the central bank to control inflation or increase the liquidity of banks.
    • The government increases the repo rate when they need to control prices and restrict borrowings.
    • An increase in repo rate means commercial banks have to pay more interest for the money lent to them and therefore, a change in repo rate eventually affects public borrowings such as home loan, EMIs, etc.
    • From interest charged by commercial banks on loans to the returns from deposits, various financial and investment instruments are indirectly dependent on the repo rate.

    What is accommodative stance of policy?

    • Accommodative monetary policy is when central banks expand the money supply to boost the economy. Monetary policies that are considered accommodative include lowering the Federal funds rate.
    • These measures are meant to make money less expensive to borrow and encourage more spending.

    What triggered the RBI to take sudden decision?

    • Inflation has been rising for over two years: By law, the RBI is supposed to target retail inflation at 4%. Inflation constantly above 4% since last year.
    • Inflation has not been “transitory”: The reasons for high inflation have tended to change over the months due to wide range of reasons like war, crude oil prices rise, taxes on fuels etc.
    • Spike in crude oil prices is not new: The RBI has pointed to high crude oil prices in the wake of the Ukraine war, as one of the key reasons for high inflation in India.
    • High core inflation: The core inflation which is essentially the inflation rate stripped of the effect of fuel and food prices has been rising up. This is more worrisome for RBI since it cannot be altered overnight.
    • Monetary policy has lags. RBI waited too long: If the RBI wanted to contain inflation in May, it should have acted in February or at least in April. Raising rates right now may not bring down the inflation rate immediately.

    Try this PYQ from CSP 2020:

    Q.If the RBI decides to adopt an expansionist monetary policy, which of the following it would NOT do?

    1. Cut and optimize the statutory liquidity ratio
    2. Increase the Marginal Standing Facility Rate
    3. Cut the Bank Rate and Repo Rate

    Select the correct answer using the code given below:

    (a) 1 and 2 only

    (b) 2 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”u0fhdp0i3d” question=”Please leave a feedback on this” opened=”1″]Post your answers here:

    [/wpdiscuz-feedback]

     

     

     

    Back2Basics: Monetary Policy Committee (MPC)

    • The Monetary Policy Committee (MPC) is a committee of the RBI, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
    • The RBI Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC to bring more transparency and accountability in fixing India’s Monetary Policy.
    • The policy is published after every meeting with each member explaining his opinions.
    • The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
    • Suggestions for setting up a MPC is not new and goes back to 2002 when YV Reddy committee proposed to establish an MPC, then Tarapore committee in 2006, Percy Mistry committee in 2007, Raghuram Rajan committee in 2009 and then Urjit Patel Committee in 2013.

    Composition and Working

    • The committee comprises six members – three officials of the RBI and three external members nominated by the Government of India.
    • The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
    • The Governor of RBI is the chairperson ex officio of the committee.
    • Decisions are taken by a majority with the Governor having the casting vote in case of a tie.
    • They need to observe a “silent period” seven days before and after the rate decision for “utmost confidentiality”.

     

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  • The supply bottlenecks causing power shortages

    Context

    The power sector in India is going through a crisis. Peak shortages in some states have reached double digits.

    Chronology of the crisis

    • First, with summer approaching before time, power demand has shot up to record levels.
    • The second reason for the rise in power demand is that the economy is recovering, and demand from the industrial sector is going up.
    • All things put together, power demand crossed 207 GW on April 29, which is about 14 per cent higher than what it was a year ago.
    • Experts feel that the peak demand may even touch 215 GW in the coming months.

    Coal shortage crisis

    • On average, coal stocks available are only good enough for about eight days’ generation against a norm of 24 days.
    • In some plants, the stocks available are just about enough to run the plant for a day or two more.
    • Part of the problem of poor coal stock is also rumoured to be on account of the non-payment of dues of coal companies.
    • But this is not the major cause of the shortage.

    Reasons for coal shortage and fall in generation

    • The fall in coal stock in power stations is because of two main reasons.
    • 1] Rise in international price of coal: The first is that due to a rise in the international price of coal on account of the Ukraine crisis, all plants that were importing coal have either stopped generating completely or are generating at much lower levels.
    • We have a sizeable generating capacity based on imported coal, estimated at about 16 GW to 17 GW.
    • All these plants after stopping imports are now looking for domestic coal, creating pressure on domestic coal.
    • 2] Non-availability of rakes with Indian railways for transporting coal: Though about 22 MT of coal may be available in power stations, if one includes the stocks available with mining companies, the figure is well over 70 MT.
    • So, it is all a question of transporting the coal to the power stations.
    • 3] Fall in generation from gas-based plants: To make matters worse, generation from gas-based plants has also fallen due to high gas prices in the world market.
    • 4] Impact on hydro generation: Reservoirs, too, are drying up due to intense heat which will adversely affect hydro generation.

    Transportation problem faced by Indian railways

    • The railways have about 2,500 rakes which can be used for coal transportation.
    • With a turn-around time of about four-and-a-half days which goes up to nine days for coastal regions, the railways can provide only about 525 rakes on any single day. 
    • Of this, about 100 rakes are used for transporting imported coal and therefore, only about 425 rakes are available on a daily basis for transporting domestic coal.
    • But only 380 rakes were being provided in the first half of April this year, though efforts are on to increase this to about 415 rakes.
    • The railways prefer to transport coal over short distances in order to save on the turn-around time.
    • There is also the issue of availability of tracks since they are being used on a back-to-back basis.
    • Thus production has to be enhanced so that the replenishment rate is higher than consumption.
    • Unless we do that, the total stock of coal in the country will deplete further and it will no longer be a mere transportation problem as it is now, but a general lack of supply of coal.

    Conclusion

    This is the right time to enhance coal production and build adequate stocks because once the monsoon sets in, production will fall.

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  • [pib] National Open Access Registry (NOAR)

    National Open Access Registry (NOAR) has successfully gone live from 1st May 2022.

    What is NOAR?

    • NOAR is a centralized online platform through which the short-term open access to the inter-state transmission system is being managed in India.
    • It is an integrated platform accessible to all stakeholders in the power sector, including open access customers (both sellers and buyers), power traders, power exchanges, National/Regional/State LDCs and others.
    • The platform provides automation in the workflow to achieve shorter turnaround time for the transactions.
    • NOAR platform also has a payment gateway integrated for making payments related to interstate short-term open access transactions.
    • NOAR platform provides transparency and seamless flow of information among stakeholders of open access.

    Key features

    • Centralized System: Single point electronic platform for all the stakeholders
    • Automated Process: Automated administration process of the short-term open access
    • Common Interface: Interface with the RLDCs scheduling applications and Power Exchanges (s)
    • Payment Gateway: Make payments related to STOA transactions

     

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  • LIC

    Context

    LIC is now at a transformational moment. Its listing on the bourses should lift LIC to be a part of the elite corporate community in India.

    Insurance sector in India

    • Opening of the insurance sector: A milestone in the history of India’s insurance industry was the opening of the sector for private participation in the year 2000 and this caused widespread concern that LIC will find the competition tough and could very well be marginalised.
    • Today, there are 24 private players in the life insurance space and many of them have foreign collaborations.
    • LIC has steadily grown in the past six decades and today with over 290 million policyholders and an asset value of â‚č38 lakh crore ($520 billion), it ranks as one of the largest insurance companies in the world.
    • Yet, LIC remains a colossus capturing 75% of the life insurance business in the country.
    • Its claim settlement at 99.87% is far above the industry average of 84%.

    Role of LIC in skilling and women’s employment

    • LIC created large scale employment for women right from its inception in 1956. 
    • Thousands of women became LIC agents in the 1950s and 60s, when job opportunities were scarce.
    • There was no entry barrier in terms of age or fixed time for work.
    • Education requirement was a mere high school pass.
    • Many of these women were housewives who could earn an extra income by selling LIC policies.
    • This was a period before the arrival of digital technologies and mobile phones.
    • Skill development program: LIC’s training programme with its mix of online education and real-life case studies offer the best model for India’s skill development programmes.
    •  LIC’s relevance comes from its track record of creating vast number of employment opportunities for ordinary Indians, male and female, urban and rural.

    Policies focused on savings

    • In a country of vast poverty and low income, LIC recognised from the beginning that it cannot sell insurance as a risk cover on premature death.
    • It, therefore, devised policies focussing on savings and the need for children’s education and daughter’s marriage which are fundamentals to family values in India.
    • These policies also ensured that a part of the premium paid was returned at regular intervals before the maturity period, providing liquidity for emergencies.
    • They simultaneously covered risk caused by death.
    • People-centric approach: While the private players concentrated on technology-driven marketing, LIC’s approach was significantly people-centric.
    • When Pradhan Mantri Jan Dhan Yojana was launched for financial inclusion of over 300 million of the rural population on August 15, 2014, LIC was already there with its policies covering a rural population of 200 million.

    Conclusion

    The nation must not forget the fact that LIC was built on sweat and tears, pain and sacrifice of ordinary Indians. It is these democratic credentials that remain LIC’s most valuable asset.

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  • PDS has had a spectacular run. That may not last

    Context

    2020-21 was one of Indian agriculture’s finest moments, as memorable as 1967-68 that inaugurated the Green Revolution. Agriculture was the only sector to grow 3.3 per cent in 2020-21, even as the economy overall contracted by 4.8 per cent.

    Increase in grain offtake under PDS

    • NFSA along with PMGKAY has led to a massive jump in grain offtake through the PDS.
    •  More importantly, this increase has largely taken place in the poorer states.
    • UP, Bihar and Jharkhand together accounted for 21.6 per cent of national grain offtake in 2012-13, which was pre-NFSA.
    • Sales of rice and wheat under various government schemes totalled 92.9 million tonnes (mt) in 2020-21 and 105.6 mt in 2021-22.
    • This was as against an average offtake of 62.5 mt during the first seven years after the implementation of the National Food Security Act (NFSA) in 2013-14 and 48.4 mt in the seven years preceding the legislation.

    Provisions under NFSA

    • The NFSA legally entitles up to 75 per cent of India’s rural and 50 per cent of the urban population — translating into some 813.5 million people — to receive 5 kg of grain per person per month at highly subsidised rates of Rs 2/kg for wheat and Rs 3/kg for rice.
    • In the wake of the Covid-induced economic disruptions, a new Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) scheme was launched giving NFSA beneficiaries an extra 5 kg grain per person per month free of cost.
    • PMGKAY was implemented for eight months (April-November) in 2020-21 and 11 months (May-March) of 2021-22.

    PDS reforms in states

    • Only a handful of states — Kerala, Tamil Nadu and Andhra Pradesh — had well-functioning PDS till the early 2000s.
    • In the late-2000s, Chhattisgarh initiated reforms to curb diversion/leakages by entrusting the running of fair price shops to cooperatives and local bodies (as against private licensees), making timely allocation and supplying grain directly to PDS outlets (bypassing middle-level distribution agencies), and using IT to track dispatches right from procurement centres to points of sale.
    • Chhattisgarh’s example was emulated by Odisha, followed by Madhya Pradesh and West Bengal — all by 2015-16.
    • The three poorest states are the latest entrants to the list.
    • The accompanying charts show the offtake of rice and wheat both at the all-India level and for the three poorest states as per the NITI Aayog’s National Multidimensional Poverty Index — Bihar, Jharkhand and Uttar Pradesh (UP).
    • UP particularly has seen its grain offtake soar from 9.5 mt to 17.3 mt in the last two years.
    • Out of the 17.3 mt (10.7 mt wheat and 6.6 mt rice) distributed in 2021-22, 7.8 mt comprised free grains under PMGKAY.
    • The PDS, indeed, turned out to be the only effective social safety net during the pandemic.
    • Some states went beyond rice and wheat.

    Challenges

    •  The expansion of the PDS, especially post-NFSA, was underwritten by the superabundance of rice and wheat in government granaries.
    • Official wheat procurement is likely to halve this time from last year’s record 43.3 mt, because of a poor crop singed by the abnormal spike in March temperatures.
    • Rice stocks are far more comfortable, though the precarious supply situation in fertilisers raises questions about the prospects for the coming kharif season.
    • Looking ahead, the Food Corporation of India’s stocks can probably sustain the pre-2020-21 annual offtake levels of 60-65 mt – enough for NFSA, but certainly not schemes such as PMGKAY.

    Conclusion

    The PDS was originally meant to protect ordinary people from extraordinary price rises. Whether it can do that at a time of renewed global inflation remains to be seen.

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  • Confidentiality ring amendment and its impact on antitrust disputes

    Context

    Amazon (the defendant) decided to take the confidentiality route towards its submissions in an order dated March 7 passed by the DG-CCI on the Amazon dispute.

    About the Confidentiality Ring

    • In 2015, the EU mandated the creation of a data room to respect the confidentiality of certain documents.
    • The EU has to protect this mandate to ensure that the right of defence is not prejudiced. 
    • Articles 101 and 102 of the Treaty of the European Union, which states: “Through confidentiality rings, DG Competition (EU) can safeguard the rights of defence while respecting the legitimate interests in the confidentiality of the information providers.
    • In addition, confidentiality rings remove or reduce the burden of preparing non-confidential versions of documents.”

    Adoption of Confidentiality ring by CCI

    • CCI’s investigation under Sections 3, 4 or 5 of the Competition Act are related to the suo motu powers given to the director-general of the commission, which have now extended toward establishing a confidentiality ring.
    • The CCI has taken an alternative view by vaguely replacing the intent with the regulation.
    • The commission may provide the Confidentiality ring after providing a reasonable opportunity to the informant to represent its case before the Commission.
    • This casts an onus on the informant.
    • Turning to the provider of confidential information, the party seeking confidentiality has to submit reasons and the same must be rebutted by the informant, CCI or any other parties, largely driven by the CCI.

    Issues with the CCI adoption of the Confidentiality Ring

    1] Indiscriminate use of defendant’s reputation ground

    • What would happen if the informant seeks additional documents so that the agency is not prejudiced?
    • By hearing parties out, through redacted information the CCI is bound to be questioned as to the reasons for deciding in a certain manner and worse, could stifle the process at the start.
    • This is likely because the CCI has to hear the objections that the informant may have regarding the reasons for keeping information confidential.
    • The usual ground for seeking this protection is the defendant’s reputation.
    • However, this defence can be used to indiscriminately to subdue any counter that may arise from the informant, who may not possess the intricate details of how a cartel works.

    2] Rejection of informant’s right to know the information

    • The second question is about the relief under Section 35 of the Act that empowers the CCI to establish a confidentiality ring including the parties in dispute to disseminate the information for which the confidentiality clause is invoked.
    • However, this is immediately caveated by Regulation 8 of the “Confidentiality Ring” Amendment of April 8, which states that the informant shall not be part of the ring.
    • This will essentially lead the CCI to gather more information surreptitiously for the determination of the case.
    • Void the informant’s right to know information: It has also effectively rejected the informant’s right to know the information, which would be necessary to establish their claim.
    • Brings secrecy: This not only empowers the CCI to further its cause of suo motu investigation but also brings secrecy to cases of high-value disputes.

    3] It protects the defendant

    • The reason the CCI decided to establish a confidentiality ring is the opposite of the EU directive.
    • The EU would like to protect the information provider, but the CCI seems to want to protect the documents of the defendant.
    • This contradicts the intent in regulation 1 wherein the CCI intends to protect the informant and regulation 2, which gives unfettered rights to “parties” in the dispute to summarily drop the confidentiality card which, according to any reasonable person, includes the defendant.

    Conclusion

    The protection provided to the informants, unfortunately, turns out to be to the advantage of the defendants, who are usually large multi-billion dollar entities. It enables the CCI to ringfence its investigation creating legal immunity for “all” involved.

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  • Recent woes of the jute industry in West Bengal

    Member of Parliament (MP) from Barrackpore constituency in West Bengal met the Union Textile about issues concerning jute farmers, workers and the overall jute industry.

    What is the news?

    • The Barrackpore MP had earlier written to West Bengal CM, seeking her intervention into the “arbitrary decision” of capping the price for procuring raw jute from the mills.
    • He was referring to the Office of the Jute Commissioner (JCO)’s September 30 notification mandating that no entity would be allowed to purchase or sell raw jute at a price exceeding â‚č6,500 per quintal.

    What is Jute?

    • Jute is the only crop where earnings begin to trickle in way before the final harvest.
    • The seeds are planted between April and May and harvested between July and August.
    • The leaves can be sold in vegetable markets for nearly two months of the four-month jute crop cycle.
    • The tall, hardy grass shoots up to 2.5 metres and each part of it has several uses.
    • The outer layer of the stem produces the fibre that goes into making jute products.
    • But the leaves can be cooked, the inner woody stems can be used to manufacture paper and the roots, which are left in the ground after harvest, improve the yield of subsequent crops.
    • A ‘Golden Fibre Revolution’ has long been called for by various committees, but the jute industry is in dire need of basic reforms.

    Jute production in India

    • India is the world’s biggest producer of jute , followed by Bangladesh.
    • Jute is primarily grown in West Bengal, Odisha, Assam, Meghalaya, Tripura and Andhra Pradesh.
    • The jute industry in India is 150 years old.
    • There are about 70 jute mills in the country, of which about 60 are in West Bengal along both the banks of river Hooghly.
    • Jute production is a labour-intensive industry. It employs about two lakh workers in the West Bengal alone and 4 lakh workers across the country.

    Significance of Jute

    • Compared to rice, jute requires very little water and fertiliser.
    • It is largely pest-resistant, and its rapid growth spurt ensures that weeds don’t stand a chance.
    • Jute is the second most abundant natural fibre in the world.
    • It has high tensile strength, acoustic and thermal insulation, breathability, low extensibility, ease of blending with both synthetic and natural fibres, and antistatic properties.
    • Jute can be used: for insulation (replacing glass wool), geotextiles, activated carbon powder, wall coverings, flooring, garments, rugs, ropes, gunny bags, handicrafts, curtains, carpet backings, paper, sandals, carry bags, and furniture.

    Why in news now?

    • Mills are now procuring raw jute at prices higher than what they are selling them at after processing.
    • The government has a fixed Minimum Support Price (MSP) for raw jute procurement from farmers, which is â‚č4,750 per quintal for the 2022-23 season.
    • However, as the executive stated, this reached his mill at â‚č7,200 per quintal, that is, â‚č700 more than the â‚č6,500 per quintal cap for the final product.
    • Though the Union government has come up with several schemes to prevent de-hoarding, the executive believes the mechanism requires a certain “systematic regulation”.

    What happened to supply?

    • What made the situation particularly worrisome recently was the occurrence of Cyclone Amphan in May 2020 and the subsequent rains in major jute producing States.
    • These events led to lower acreage, which in turn led to lower production and yield compared to previous years.
    • Additionally, as the Commission for Agricultural Costs and Prices (CACP) stated in its report, this led to production of a lower quality of jute fibre in 2020-21 as water-logging in large fields resulted in farmers harvesting the crop prematurely.
    • Acreage issues were accompanied by hoarding at all levels – right from the farmers to the traders.

    Where does India stand in comparison to Bangladesh?

    • As per the Food and Agriculture Organisation (FAO), India is the largest producer of jute followed by Bangladesh and China.
    • However, in terms of acreage and trade, Bangladesh takes the lead accounting for three-fourth of the global jute exports in comparison to India’s 7%.
    • This can be attributed to the fact that India lags behind Bangladesh in producing superior quality jute fibre due to infrastructural constraints and varieties suitable for the country’s agro-climate.
    • Further, as the CACP report stated, Bangladesh provides cash subsidies for varied semi-finished and finished jute products.
    • Hence, the competitiveness emerges as a challenge for India to explore export options in order to compensate for the domestic scenario.

    What is at stake?

    • The jute sector provides direct employment to 3.70 lakh workers in the country.
    • It supports the livelihood of around 40 lakh farm families, closure of the mills is a direct blow to workers and indirectly, to the farmers whose production is used in the mills.
    • West Bengal, Bihar and Assam account for almost 99% of India’s total production.

     

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  • Health Star Rating System of FSSAI for Packaged Food

    The “health star rating” system that the Food Safety Standards Authority of India (FSSAI) plans to adopt in order to help consumers reduce their intake of unhealthy foods has been opposed by close to a dozen consumer and health advocacy groups.

    What is the Health Star Rating System?

    • In February, the FSSAI decided to adopt the “health-star rating system”, which gives a product 1/2 a star to 5 stars, in its draft regulations for front of package labelling (FOPL).
    • The HSR format ranks a packaged food item based on salt, sugar, and fat content and the rating will be printed on the front of the package.
    • The underlying premise of the HSR is that positive ingredients such as fruits and nuts can offset negative nutrients such as calories, saturated fat, total sugar, sodium to calculate the number of stars ascribed to a product.
    • The decision was based on the recommendations of a study by the IIM-Ahmedabad the regulator had commissioned in September 2021.
    • In the same meeting, the regulator decided that FOPL implementation could be made voluntary for a period of four years.

    What is FoPL?

    • In India, packaged food has had back-of-package (BOP) nutrient information in detail but no FoPL.
    • Counter to this, FoPL can nudge people towards healthy consumption of packaged food.
    • It can also influence purchasing habits.
    • The study endorsed the HSR format, which speaks about the proportions of salt, sugar, and fat in food that is most suited for consumers.
    • Countries such as the UK, Mexico, Chile, Peru, Hungary, and Australia have implemented FoPL systems.

    What warranted the HSR rating in India?

    • Visual bluff: A lot of Indian consumers do not read the information available at the back of the packaged food item.
    • Burden of NCDs: Also, India has a huge burden of non-communicable diseases that contributes to around 5.87 million (60%) of all deaths in a year.
    • Healthy dietary choices: HSR will encourage people to make healthy choices and could bring a transformational change in the society.
    • Supreme Court order: A PIL seeking direction to the government to frame guidelines on HSR and impact assessment for food items and beverages was filed in the Supreme Court in June 2021.

    Which category of food item will have HSR?

    • All packaged food items or processed food will have the HSR label.
    • These will include chips, biscuits, namkeen, sweets and chocolates, meat nuggets, and cookies.
    • However, milk and its products such as chenna and ghee are EXEMPTED as per the FSSAI draft notified in 2019.

    Will there be pushback from food industry?

    • Negative warning: Some experts opposed the use of the HSR model in India, suggesting that consumers might tend to take this as an affirmation of the health benefits rather than as a negative warning of ill effects.
    • Lack of awareness: This is significant because there is lack of awareness on star ratings related to consumer products in India.
    • Impact on Sale: Certain organisations fear it might affect the sale of certain food products.

    Arguments against health star rating

    • Experts argue that “warning labels” instead have been most effective in various countries.
    • They said the HSR system adopted in countries like Australia and New Zealand has not resulted in any meaningful behavior change.
    • Even after eight years of their implementation, there is still no evidence of HSRs having a significant impact on the nutritional quality of people’s food and beverage purchases.
    • Also, the HSR system “misrepresents nutrition science”.
    • The algorithm of adding and subtracting nutrients does not fit with our understanding of biology.
    • For example, the presence of fruit in a fruit drink juice does not offset the impacts of added sugar in the body.

     

     

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  • Managing the fiscal shock of the Russia-Ukraine conflict

    Context

    The Union Budget 2022-23 received a great deal of attention even before the financial year began due to the Russia-Ukraine conflict, and the consequent rise in inflation. There has been considerable speculation on whether the fiscal targets will be altered due to the evolving conditions.

    Estimate of GDP

    •  The critical estimate of GDP growth assumed for this year has certainly changed, with the RBI also adjusting its earlier forecast.
    • However, the budget was conservative to begin with, assuming an 11.1 per cent growth estimate on which its revenue collection targets were based.
    • Given that real GDP growth has been scaled down by the RBI to 7.2 per cent, and as inflation has gone up, on balance, the 11.1 per cent assumption looks tenable.
    • Hence, inflation has been a positive for the government in this respect.

    Tax collection

    • Another positive that emerged last year was that overall tax collections were even more buoyant than expected.
    • From the budgeted figure of Rs 22.17 lakh crore, the revised estimates raised the target to Rs 25.16 lakh crore.
    • In comparison, actual collections have turned out to be even higher at Rs 27.07 lakh crore.
    • If this buoyancy is maintained, then the government can expect the 2022-23 target of Rs 27.57 lakh crore to be exceeded by around Rs 2.5 lakh crore (of this, around 30 per cent will go to the states).
    • This additional revenue would ideally flow from enhanced GST collections, corporate tax, and customs.
    • Central to GST collections increasing is private consumption.
    • Today, high inflation erodes the purchasing power of households, which will divert a larger portion of their incomes for necessities that have become expensive.
    • Therefore, there will be uncertainty here. 
    • Corporates did well last year as they did manage to pass on higher input costs to the consumers, especially in the second half of the year.
    • Can they do it for the second time is the question.
    • High growth in trade volumes led to the government raking in higher customs collections. W
    • ith global growth set to slow down in 2022, a similar flow is unlikely.

    Excise collection and challenges

    • The government will be watchful of excise collections as it is possible that rising fuel prices will lead to lower consumption.
    • Also, in case crude oil continues on the current path and remains in the region of $100-120/barrel, a call may have to be taken by the government on the excise duty: Once the prices of diesel and petrol remain at a new threshold, there will be a tendency for freight rates to be increased permanently.
    • This will have a secondary impact on inflation. 

    Disinvestment challenges

    • On the revenue side, the LIC disinvestment that was to happen last year will materialise this year.
    • The disinvestment has been pushed through for May, but would be of a much lower amount (around Rs 21,000 crore) than envisaged earlier.
    • It will be interesting to see if this would be a part of the Rs 65,000 crore target for this year.

    Uncertainty on the expenditure side

    • The biggest concern will be the fertiliser subsidy, which has been a volatile expenditure item.
    • Higher prices of natural gas have meant that fertilisers have been more expensive and so, the budgeted amount of Rs 1.05 lakh crore will have to be revisited.
    • With inflation already high and agriculture expected to be the bright spot again, the government cannot risk ignoring the subsidy element on fertilisers because there can be an impact on farm product prices.
    • The food subsidy will also need to be examined.
    • The present rise in food prices globally has meant that there is a good global market, especially for wheat.
    • Exports for wheat and maize might rise but can distort the procurement process.

    Interest rate and its implications for borrowing

    • The budget had assumed that interest rates would be stable.
    • However, conditions have changed quite quickly with bond yields moving up by almost 50 bps for the 10-year G-secs.
    • This will mean that the entire Rs 15.95 lakh crore of gross borrowing will have to be carried out at a higher cost.
    • This can result in an additional Rs 8,000 crore of interest if the 50 basis points increase holds through the year. There could be an upward bias if rates go up further.

    Conclusion

    The longer the conflict continues the greater will be the impact. While the government has adeptly managed the fiscal numbers in the last couple of years, this year will be particularly challenging considering the nature of the shock.

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