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Subject: Economics

  • Anchoring inflationary expectations

    Context

    The RBI released the Inflation Expectations Survey of Households (IESH) for March 2022 on April 8. The survey results present interesting behavioural insights for public policy, particularly from a gender perspective.

    Significance of inflation expectations

    • The impact of inflation — the overall increase in the prices in an economy — is felt by everyone.
    • High inflation adversely affects the poor.
    • Individuals, therefore, form expectations about how prices will behave in the future to take precautions.
    • If they anticipate high inflation, they negotiate wages or rents to compensate against a potential fall in their purchasing power.
    • Self-fulfilling: Increased wages increase the cost of production, making expectations self-fulfilling and, therefore, playing a pivotal role in determining inflation.
    • Anchoring inflation expectations: Central banks raise interest rates to ‘anchor’ high inflationary expectations when temporary price shocks, on account of drought or disruption in global supply chains, entail the risk of getting transmitted into actual inflation.

    What shapes inflation expectations of individuals?

    • A recent study carried out by Acunto et al., 2020, validates that what agents frequently purchase, instead of those purchased infrequently, shape their perception of the general level of inflation.
    • Factors shaping individual’s perception: A significant factor shaping perceptions on inflation are the prices that individuals observe in their daily lives, originally posited by Robert Lucas in his seminal Islands model.
    • Therefore, generalising aggregate inflation expectations for making general views of prices in the economy could be misleading.
    • This insight has implications for gender-based differences in anticipating inflation in the future.
    • Existing literature shows that women have higher inflationary expectations compared to men.
    •  However, a new study reveals that it is not the innate characteristics as much as the traditional gender roles that explain this divergence.

    Natural experiments

    • To test its validity, trends of Inflation Expectations Survey of Households (IESH) before and after the lockdown period present itself as a crude ‘natural experiment’.
    • The authors hypothesise that if traditional gender roles are the primary reasons behind the gender inflation expectation gap, then the lockdown-imposed work-from-home (WFH) arrangements or loss of employment should contribute in closing this gap.
    • The logic: during the lockdown, people in urban areas lost jobs or remained at home, taking a relatively equal share in the frequent day-to-day purchases.
    • Two categories of occupations are studied here: homemakers (assumed to be dominated by women) and financial sector employees (assumed to be dominated by men).
    • Looking at the trends of the RBI surveys for the period between March 2018 and March 2020, homemakers report higher inflation expectations than financial sector employees.
    • However, this gap has narrowed over the last two years and has almost converged in March 2022.
    • A possible explanation of closing of the gap could be the gradual ‘experience effect’ of male-dominated financial sector employees.
    • Experience effect, contrary to Rational Expectations Theory that assumes individuals base their decisions on the information available to them, is based on the premise that actual personal experiences shape behaviour more than being informed about the outcome of the event.

    Conclusion

    Focus could be shifted more on the microfoundations — understanding macroeconomic outcomes by studying factors that shape individual behaviour and decision making — for making better policy decisions concerning macroeconomic phenomena.

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  • Effective and Efficient: The Insolvency and Bankruptcy Code

    Context

    The performance of the Insolvency and Bankruptcy Code (IBC) has been under intense scrutiny.

    Basis for the criticism of IBC

    • The Code has been mainly criticised on three counts:
    • 1] Delay in resolution: There are inordinate delays in the resolution procedure.
    • 2] Liquidation:  There have been more liquidations than resolutions.
    • 3] Low recovery amount: The recovery amounts under IBC are not substantial, making it more of a talking point than an effective structural reform.

    Is the criticism about the delay justified?

    • Assessing IBC based only on the average time taken to resolve successful cases does a substantial disservice to how much more efficient the IBC is compared to the previous regimes.
    •  It is calculated by taking a simple average of time taken on each completed case.
    • This is one of the metrics used by the Insolvency and Bankruptcy Board of India (IBBI) to compare the IBC regime with the earlier Board of Industrial and Financial Reconstruction (BIFR) regime.
    •  However, the performance of a bankruptcy resolution should ideally be evaluated along at least three dimensions:
    • The average time taken to resolve a case, the fraction of cases resolved within a given timeframe, and the recovery rate conditional on resolution.
    • Focusing on any single parameter may result in a gross under (over) estimation of the IBC’s (BIFR’s) performance.
    • By examining the fraction of cases that are resolved within a specific timeframe, we see that for any fraction of the total cases resolved under each scheme, the IBC took considerably less time than BIFR.
    • Total number of cases solved: Since its inception in 1987, the BIFR has resolved less than 3,500 cases while the IBC, since it was launched in 2016, resolved about 1,178 cases until it was suspended at the onset of the COVID pandemic.
    • Most analyses of IBC’s performance overlook the important fact that many of the legacy BIFR cases were subsumed by IBC, and these were often zombie firms that were kept alive due to massive evergreening of loans between 2008-2015.

    Conclusion

    The bottom line is straightforward: The IBC has significantly outperformed the earlier BIFR regime in terms of the speed of resolution.

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  • NITI Aayog’s Draft Battery Swapping Policy

    The NITI Aayog has released a draft battery-swapping policy targeted at electric two- and three-wheelers as the government think tank aims to expedite large-scale adoption of EVs.

    What is Battery Swapping?

    • Battery swapping is a mechanism that involves exchanging discharged batteries for charged ones.
    • This provides the flexibility to charge these batteries separately by de-linking charging and battery usage, and keeps the vehicle in operational mode with negligible downtime.
    • Battery swapping is generally used for smaller vehicles such as two-wheelers and three-wheelers with smaller batteries that are easier to swap, compared to four-wheelers and e-buses, although solutions are emerging for these larger segments as well.

    What is BaaS?

    • Battery-as-a-service (BaaS) is seen as a viable charging alternative.
    • Manufacturers can sell EVs in two forms: Vehicles with fixed or removable batteries and vehicles with batteries on lease.
    • If you buy an electric scooter with battery leasing, you do not pay for the cost of the battery—that makes the initial acquisition almost 40% cheaper.
    • Users can swap drained batteries for a fully charged one at a swap station. The depleted batteries are then charged on or off-site.
    • The advantages of swapping include low downtimes for commercial fleets, reduced space requirements, and lower upfront costs.
    • It is also a viable solution for those who don’t have parking spots at home.

    Draft Battery Swapping Policy: Key Proposals

    • Rationalizing taxes on battery: The draft policy has suggested that the GST Council consider reducing the differential across the tax rates on Lithium-ion batteries and electric vehicle supply equipment. Currently, the tax rate on the former is 18 per cent, and 5 per cent on the latter.
    • Incentivization for swapping enabled vehicles: The policy also proposes to offer the same incentives available to electric vehicles that come pre-equipped with a fixed battery to electric vehicles with swappable batteries. The size of the incentive could be determined based on the kWh (kilowatt hour) rating of the battery and compatible EV.
    • Terms of contracts for battery providers: The government will specify a minimum contract duration for a contract to be signed between EV users and battery providers to ensure they continue to provide battery swapping services after receiving the subsidy.
    • Public battery charging stations: The policy also requires state governments to ensure public battery charging stations are eligible for EV power connections with concessional tariffs. It also proposes to install battery swapping stations at several locations like retail fuel outlets, public parking areas, malls, kirana shops and general stores etc.
    • Tariff rationalization: It also proposes to bring such stations under existing or future time-of-day (ToD) tariff regimes, so that the swappable batteries can be charged during off-peak periods when electricity tariffs are low.
    • Registration ease: Transport Departments and State Transport Authorities will be responsible for easing registration processes for vehicles sold without batteries or for vehicles with battery swapping functionality.
    • Unique identification number (UIN): The policy also proposes to assign a UIN to swappable batteries at the manufacturing stage to help track and monitor them. Similarly, a UIN number will be assigned to each battery swapping station.
    • Locations: The NITI Aayog has proposed that all metropolitan cities with a population of more than 40 lakh will be prioritized for the development of battery swapping networks under the first phase, which is within 1-2 years of the draft policy getting finalized.

    Why hasn’t BaaS taken off yet?

    • Hefty taxes: There are economic and operational constraints. Energy service providers offering swapping solutions have to charge 18% goods and services tax (GST) for swapping, compared to 5% GST on the purchase of an EV.
    • No incentives yet: Additionally, the government’s FAME-II incentives are not offered to vehicles sold with BaaS or swap station operators.
    • Lack of interoperability infrastructure: While these are economic disadvantages compared to direct charging solutions, the lack of a dense and interoperable battery swap infrastructure has also hindered the roll-out.

    Does the draft policy talk about EV safety?

    • To ensure a high level of protection at the electrical interface, a rigorous testing protocol will be adopted, the draft said, to avoid any unwanted temperature rise at the electrical interface.
    • The battery management system, which is a software that controls battery functions, will have to be self-certified and open for testing to check its compatibility with various systems, and capability to meet safety requirements.
    • This particularly assumes significance given the recent incidents of electric two-wheelers bursting into flames.

    Issues with BaaS

    • Standardization of specifications: There is a need for standardization of safety specifications as well as the battery.
    • Safety hazard: Swapping in the various permutations and combinations of batteries at a station where  they  have not been tested for compatibility could lead to safety hazards.
    • Non-competitive nature: Also, mandating only one type of battery to  be eligible for  concessions  would be  disadvantageous  to  many  players.

    Significance of battery swapping

    • High Cost of EVs: An EV, by industry standards, is 1.5-2x costlier than IC Engine counterpart and at least half the cost is from the battery pack.
    • Cost reduction: Many manufacturers are offering batteries separately from a vehicle, reducing the cost. In that case, a fleet owner can buy vehicles without battery and utilize battery swapping.
    • Range Anxiety: Another major reason stopping people from buying EVs is range anxiety, or in simple terms, the fear of battery getting empty without finding a charging station.
    • Inadequate charging infrastructure: Unlike petrol pumps, EV charging stations are rare to spot and that further increases the range anxiety exponentially, especially while going on a road trip.
    • Hazard management: In case of a Swapping Station, one can simply locate a station, go and replace the empty battery with a new one.

     

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  • How Indonesia’s ban on Palm Oil exports will hurt India?

    The abrupt ban on palm oil exports by Indonesia, its biggest exporter, is expected to rock household economics globally.

    Indonesia curbs palm oil export

    • Indonesia has clamped down on exports starting 28 April primarily because of soaring inflation in the country.
    • This is not the first time the South East Asian country decided to arrest local prices by banning exports—it had announced limited curbs in January too.
    • However, brokerages suggest that the ban will probably be a temporary measure of two to three weeks, as Indonesia cannot afford to lose out on exports for long.
    • Indonesia’s president Joko Widodo has stated that he would ensure that the availability of cooking oil in the domestic market becomes “abundant and affordable”.

    How will this ban affect India?

    • Palm oil is among the world’s most-used cooking oils, and India’s dependence on Indonesia is expected to deal a supply-side shock.
    • The export ban could send food inflation soaring as India is the largest importer of palm oil from Indonesia.
    • It imports about 8 million tonnes of palm oil annually; the commodity accounts for nearly 40% share of India’s overall edible oil consumption basket.
    • Edible oil prices could surge as much as 100-200% in India if the government fails to find a new source of palm oil.
    • Cooking oil prices are already at record levels as the Ukraine war disrupted shipments of sunflower oil.
    • Prior to the war, the Black Sea region made up over 75% of global sunflower oil exports.

    How could it impact packaged goods firms?

    • Since palm oil and its derivatives are used in the production of several household goods, the impact of the ban could eat into the margins of Indian packaged consumer goods players.
    • Analysts said listed firms such as Hindustan Unilever Ltd, Godrej Consumer Products Ltd, Britannia Industries Ltd, and Nestle SA could feel the impact of the ban in the near term.

    What are India’s import options?

    • India is most likely to turn to Malaysia, the second-biggest palm oil exporter, to plug the gap.
    • But Malaysia is also facing a labour shortage owing to the pandemic which has resulted in a production shortfall.
    • Hence Malaysia is unlikely to be able to plug the gap.
    • Also the bilateral ties have soured since few years due to unwarranted comments by its former PM Mahathir Mohammed on Kashmir.
    • India could also explore importing from Thailand and Africa—they produce three million tonnes each.

    How can India mitigate the impact of the ban?

    • Palm oil prices rose by nearly 5% over the weekend after the announcement of the export ban. Finding an immediate solution is going to be a challenge.
    • Even if India manages to find an alternative source, prices will be high as a major exporter is now out of the calculation.
    • The industry expects India to engage with Indonesia on an urgent basis, before the ban comes into effect on 28 April.
    • Besides, the Centre is likely to negotiate with other oil-supplying nations in Latin America and Canada.

    Back2Basics:

    National Edible Oil Mission (OP)

     

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  • Why reforming the system of free food is necessary

    Context

    The release of two new working papers, one from the World Bank and the other from the IMF, has led to a renewed debate on poverty in India.

    A substantial decline in extreme poverty in India

    • Both papers claim that extreme poverty in the country, based on the international definition of $1.90 per capita per day (in purchasing power parity (PPP), has declined substantially.
    • The World Bank paper uses the Consumer Pyramid Household Surveys (CPHS) data to conclude that 10.2 per cent of the country’s population was at extreme poverty levels in 2019.
    • The IMF paper calculates poverty by using the NSO Consumer Expenditure Survey as the base and adjusts it for the direct effect of the massive food grain subsidy given under the National Food Security Act (NFSA, 2013) and PM Garib Kalyan Anna Yojana (PMGKAY) during the pandemic period.
    • It claims that extreme poverty has almost vanished – it was 0.77 per cent in 2019 and 0.86 per cent in 2020.
    • Another estimate of poverty by the NITI Aayog, the multi-dimensional poverty index (MPI), has put Indian poverty at 25 per cent in 2015 based on NFHS data.
    • How MPI is calculated?: This MPI is calculated using twelve key components from areas such as health and nutrition, education and standard of living.

    How much should be the coverage under NFSA, 2013?

    • The offtake of grains under NFSA in FY20 was 56.1 million metric tonnes (MMT).
    • Following the outbreak of Covid-19, the government launched the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) in April 2020 to distribute 25 kg cereals per family per month in addition to food transfers under the NFSA.
    •  That catapulted the offtake to 87.5 MMT (under PMGKAY and NFSA) in FY21.
    • The scheme continued in FY22, and the grain offtake touched 93.2 MMT. 

    Issues with the wide coverage

    • A further extension of free food on top of the NFSA allocations was uncalled for.
    • This will strain the fisc, reduce public investments and hamper potential job creation.
    • A look at the size of food freebies will help understand the gravity of this problem.
    • As of April 1, the Food Corporation of India’s wheat and rice stocks stood at 74 MMT against a buffer stock norm of 21 MMT – there is, therefore, an “excess stock” of 53 MMT. 
    • The cost of excess stock: The economic cost of rice, as given by FCI, is Rs 3,7267.6/tonne and that of wheat is Rs 2,6838.4/tonne (2020/21).
    • The value of “excess stocks”, beyond the buffer norm, is, therefore, Rs 1.85 lakh crore — this, despite a total of 72.2 MMT grains distributed for free under the PMGKAY in FY21 and FY22.
    • Ballooning food subsidy: All this results in a ballooning food subsidy for FY 23, it is provisioned at Rs 2.06 lakh crore, for FY 23, it is provisioned at Rs 2.06 lakh crore.
    • But this amount is likely to go beyond Rs 2.8 lakh crore with the continuing distribution of free food under the PMGKAY.
    • This would amount to more than 10 per cent of the Centre’s net tax revenue (after deducting the states’ share).

    Way forward

    • It is all the more important to change the current policy of free food given the massive leakages in the PDS.
    • As per the High-Level Committee on restructuring FCI, leakages were more than 40 per cent based on the NSSO data of 2011.
    • Ground reports suggest that these leakages hover around 30 per cent or so today.
    • Make PDS more targeted: In reforming this system of free food, wisdom lies in going back to the Antyodaya Anna Yojana (AAY).
    • Under AAy, the “antyodaya” households (the most poor category) get more rations (35 kg per household) at a higher subsidy (rice, for instance, at Rs 3/kg and wheat at Rs2/kg).
    • For the remaining below poverty line (BPL) families, the price charged was 50 per cent of the procurement price and for above poverty line families (APL), it was 90 per cent of the procurement price.
    •  This will make PDS more targeted and lead to cost savings.
    • Use of technology: There could be some problems in identifying the poor. However, technology can help overcome this difficulty.
    • Option of cash transfer: This measure should be combined with giving people the option of receiving cash instead of providing grains to targeted beneficiaries.
    • The savings so generated from this reform can be ploughed back as investments in agri-R&D, rural infrastructure (irrigation, roads, markets) and innovations that will help create more jobs and reduce poverty on a sustainable basis.

    Conclusion

    The government needs to bite the bullet and emulate the Vajpayee  government (which had introduced AAY) in using scarce resources more wisely.

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  • All-India Household Consumer Expenditure Survey

    The All-India Household Consumer Expenditure Survey, usually conducted by the National Statistical Office (NSO) every five years, is set to resume this year after a prolonged break.

    What is the Consumer Expenditure Survey (CES)?

    • The CES is traditionally a quinquennial (recurring every five years) survey conducted by the government’s National Sample Survey Office (NSSO).
    • It is designed to collect information on the consumer spending patterns of households across the country, both urban and rural.
    • Typically, the Survey is conducted between July and June and this year’s exercise is expected to be completed by June 2023.

    Utility of the survey

    • The data gathered in this exercise reveals the average expenditure on goods (food and non-food) and services.
    • It helps generate estimates of household Monthly Per Capita Consumer Expenditure (MPCE) as well as the distribution of households and persons over the MPCE classes.
    • It is used to arrive at estimates of poverty levels in different parts of the country and to review economic indicators such as the GDP, since 2011-12.

    Why need this survey?

    • India has not had any official estimates on per capita household spending.
    • It provides separate data sets for rural and urban parts, and also splice spending patterns for each State and Union Territory, as well as different socio-economic groups.

    What about the previous survey?

    • The survey was last held in 2017-2018.
    • The government announced that it had data quality issues.
    • Hence the results were not released.

     

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  • Digital Service Tax

    Context

    Over the past four years, 137 countries have engaged intensively with the OECD to find a solution to the tax challenges arising from digitalisation. Like any international agreement, finding a middle ground has been difficult and a series of compromises have been made.

    What makes it difficult to tax the digital economy?

    • Operation across the border: The unique feature of the digital economy is that firms can operate seamlessly across borders and users and their data contribute to their profits.
    • However, this made it harder to tax such an economy.
    • It was not clear how profits were to be pinned down to any jurisdiction.
    • Political issues: Taxing digital economy became a political issue because the largest technology firms are tax residents of developed countries and redefining digital presence as the basis of taxation would potentially allow large markets like India more right to tax.
    • Developing vs. developed countries: Developing countries wanted that profits from digital operations should be fractionally apportioned to markets while developed countries believe that a fraction of residual profit, mainly arising from marketing functions, should be taxed in markets.

     Equalisation levy and DST issue

    • The divergence in developed and developing countries as explained above compelled countries to implement unilateral measures.
    • India was the first country to implement a gross equalisation levy on turnover.
    • This is not covered by tax treaties.
    • So, while the income tax act does not apply to the levy, credit is available for the tax paid by the company in its home country.
    • Similarly, several other countries have announced or implemented a digital services tax (DST).
    • In 2021, India expanded the scope of the equalisation levy.
    • The US initiated the US Trade Representative investigations which found DST to be discriminatory, and then announced retaliatory tariffs.

    Two-pillar approach and issues with its adoption

    • The DSTs encouraged the US to actively participate in finding a consensus-based solution.
    • As talks progressed, the OECD announced that the issue of allocation of taxing rights would be actively considered and adopted a two-pillar approach.
    • Pillar One approach: The first pillar was to define the rules for taxing digital companies.
    • Sovereignty issue: Pillar One was to go beyond digital companies and apply to large companies with annual revenue over € 20 billion. To ensure certainty to taxpayers, the solution will require excessive global coordination.
    • Whether this will undermine sovereignty, remains to be seen.
    • Therefore, it is important to consider if the consensus approach is worth pursuing.
    • EL may still apply to companies not covered by OECD proposal: In fact, the EL may apply to companies that are not covered by the OECD proposal, leaving one to wonder whether it will truly address the tax challenges from digitalisation. 
    • Complications: Corporations that argue in favour of simplicity must also consider the potential benefits from an EL like tax that sets aside the complications of attributing profits to complex functions.
    • The OECD approach creates a fiction of reallocation, where the profits reallocated through Pillar One could in fact be compensated for by taxing back global profits taxed below 15 per cent.

    Conclusion

    As per Pillar One proposal, DSTs will be removed once the OECD approach is ratified in 2023. It is imperative therefore that countries assess the price of compromise.

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  • Indians can now make Payments using UPI in UAE

    Tourists or migrants to the United Arab Emirates (UAE) with Indian bank accounts will be able to make UPI payments at shops, retail establishments and other merchants in the gulf nation.

    What is UPI?

    • Unified Payments Interface (UPI) is an instant real-time payment system developed by National Payments Corporation of India (NPCI) facilitating inter-bank transactions.
    • The interface is regulated by the Reserve Bank of India (RBI) and works by instantly transferring funds between two bank accounts on a mobile platform.

    How does the service work?

    • The NPCI and UAE’s Mashreq Bank’s NEOPAY have partnered for this service
    • It will be mandatory for users to have a bank account in India with UPI enabled on it.
    • The users will also need an application, like BHIM, to make UPI payments.

    Will UPI be accepted everywhere in the UAE?

    • Payments using UPI will only be accepted at those merchants and shops which have NEOPAY terminals.

    Does NPCI have other such international arrangements?

    • NPCI’s international arm NIPL have several such arrangements with international financial services providers for its products, including UPI and RuPay cards.
    • Globally, UPI is accepted in Bhutan and Nepal, and is likely to go live in Singapore later this year.
    • In Singapore, a project to link UPI with the city-state’s instant payment system PayNow is being undertaken by the RBI and the Monetary Authority of Singapore.
    • The linkage is targeted for operationalization by July this year.

    Back2Basics: Bharat Interface for Money (BHIM)

    • BHIM is an Indian mobile payment App developed by the National Payments Corporation of India (NPCI), based on the Unified Payments Interface (UPI).
    • Named after B. R. Ambedkar and launched on 30 December 2016 it is intended to facilitate e-payments directly through banks and encourage cashless transactions.
    • The application supports all Indian banks which use UPI, which is built over the Immediate Payment Service (IMPS) infrastructure and allows the user to instantly transfer money between bank accounts of any two parties.
    • It can be used on all mobile devices.

    Answer this PYQ in the comment box:

    Q. With reference to digital payments, consider the following statements:

    1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
    2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.

    Which of the statements given above is/ are correct? (CSP 2018)

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

     

    [wpdiscuz-feedback id=”ra78wdcdft” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

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  • UK to issue Open General Export Licence (OGEL) to India

    In the backdrop of the rapid geopolitical turmoil, PM Modi and his British counterpart Boris Johnson agreed on a new and expanded India-UK defence partnership and vowed to seal an ambitious free trade agreement by the end of the year.

    What is the news?

    • The UK is creating an Open General Export Licence (OGEL) for India to reduce bureaucracy and slashing delivery times for defence procurement.
    • It will partner with India on new fighter jet technology as well as in the maritime sphere to detect and respond to threats.

    What is OGEL?

    • The open General Licence is a type of license that is used for the export license that is issued by the government for domestic suppliers.
    • The items that are to be exported in India are categorised into three types. They are prohibited items, restricted items, and freely importable items. These classifications are made based on the nature and use of the products.
    • The application processing and grant of OEGL will be taken care of by the Department of Defence Production. The process will vary for each case.
    • The primary aim of the OEGL is to give a boost to the defence exports of India. This will also improve the ease of doing business and imports and exports.
    • The countries allowed under the OGELs are: Belgium, France, Germany, Japan, South Africa, Spain, Sweden, UK, USA, Canada, Italy, Poland and Mexico.

    Items to be exported

    • The items permitted under OGEL includes components of ammunition & fuse setting device without energetic and explosive material; firing control & related alerting and warning equipment & related system; and body protective items.
    • Complete aircraft or complete unmanned aerial vehicles (UAVs) and any components specially designed or modified for UAVs are excluded under this license.

     

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  • Special Purpose Acquisition Companies (SPACs)

    The government is reportedly considering a regulatory framework for special purpose acquisition companies (SPACs) to lay the ground for the possible listing of Indian companies through this route in the future.

    What are SPACs?

    • An SPAC, or a blank-cheque company, is an entity specifically set up with the objective of acquiring a firm in a particular sector.
    • They aim to raise money in an initial public offering (IPO) without any operations or revenues.
    • The money that is raised from the public is kept in an escrow account, which can be accessed while making the acquisition.
    • If the acquisition is not made within two years of the IPO, the SPAC is delisted and the money is returned to the investors.
    • While SPACs are essentially shell companies, a key factor that makes them attractive to investors are the people who sponsor them.
    • Globally, prominent celebrities have participated in SPACs.

    Why in news?

    • According to reports, the Company Law Committee was set up in 2019 to make recommendations to boost ease of doing business in India.
    • This committee has made this suggestion regarding SPACs in its report submitted to the government recently.
    • The concept of SPAC has existed for nearly a decade now, and several investors and company promoters have used this route to take their investments public.
    • The vehicle gained momentum in 2020, which was a record year for SPAC deals; this record was broken in 2021.

    Where does India stand?

    • Early last year, renewable energy producer ReNew Power announced an agreement to merge with RMG Acquisition Corp II, a blank-cheque company.
    • This became the first involving an Indian company during the latest boom in SPAC deals.
    • As things stand now, the Indian regulatory framework does not allow the creation of blank cheque companies.
    • The Companies Act, 2013 stipulates that the Registrar of Companies can strike off a company if it does not commence operations within a year of incorporation.

    Risk factors around SPACs

    • The boom in investor firms going for SPACs and then looking for target companies have tilted the scales in favour of investee firms.
    • This has the potential, theoretically, to limit returns for retail investors post-merger.
    • SPACs are mandated to return money to their investors in the event no merger is made within two years.
    • However the fineprint of several SPAC prospectuses shows that certain clauses could potentially prevent investors from getting their monies back.
    • Historically, though, this has not happened yet.

     

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