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Subject: Economics

  • Kerala plans to replace Mullaperiyar Dam

    Kerala plans to build a new dam to replace the 126-year-old Mullaperiyar dam in the Idukki district.

    Mullaperiyar Dam

    • It is a masonry gravity dam on the Periyar River in Kerala.
    • It is located on the Cardamom Hills of the Western Ghats in Thekkady, Idukki District.
    • It was constructed between 1887 and 1895 by John Pennycuick and also reached in an agreement to divert water eastwards to the Madras Presidency area.
    • It has a height of 53.6 m (176 ft) from the foundation, and a length of 365.7 m (1,200 ft).

    Operational issue

    • The dam is located in Kerala but is operated and maintained by Tamil Nadu.
    • The catchment area of the Mullaperiyar Dam itself lies entirely in Kerala and thus not an inter-State river.
    • In November 2014, the water level hit 142 feet for first time in 35 years.
    • The reservoir again hit the maximum limit of 142 feet in August 2018, following incessant rains in the state of Kerala.
    • Indeed, the tendency to store water to almost the full level of reservoirs is becoming a norm among water managers across States.

    The dispute: Control and safety of the dam

    • Supreme court judgment came in February 2006, has allowed Tamil Nadu to raise the level of the dam to 152 ft (46 m) after strengthening it.
    • Responding to it, the Mullaperiyar dam was declared an ‘endangered’ scheduled dam by the Kerala Government under the disputed Kerala Irrigation and Water Conservation (Amendment) Act, 2006.
    • For Tamil Nadu, the Mullaperiyar dam and the diverted Periyar waters act as a lifeline for Theni, Madurai, Sivaganga, Dindigul and Ramnad districts.
    • Tamil Nadu has insisted on exercising the unfettered colonial rights to control the dam and its waters, based on the 1886 lease agreement.

    Rule of Curve issue

    • A rule curve or rule level specifies the storage or empty space to be maintained in a reservoir during different times of the year.
    • It decides the fluctuating storage levels in a reservoir.
    • The gate opening schedule of a dam is based on the rule curve. It is part of the “core safety” mechanism in a dam.
    • The TN government often blames Kerala for delaying the finalization of the rule curve.

     

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  • What are Participatory and Non-Participatory Funds?

    The amendment to Section 24 of the LIC Act, brought prior to commencing the IPO, segregated the previously single ‘Life Fund’ into the participatory and non-participatory fund.

    What are Participatory and Non-Participatory Funds?

    • Under a participatory policy, a policyholder can get a share of the profits of the company.
    • This is received as a bonus. Examples of such products offered by LIC include  Jeevan Labh and  Bachat Plus.
    • No such sharing of profits happens under non-participatory products, which under the LIC fold includes policies such as  Saral Pensionand  Nivesh Plus.
    • As all insurance companies do, LIC also reinvests premium monies that policyholders pay.
    • The profits or surplus that comes about, as a result, was till September last year held in one single fund. This was the Life Fund.
    • The surplus was divided in the 95:5 ratio between policyholders (in the form of bonuses) and shareholders (in the form of dividends).

    What has the Amendment changed?

    • But the amendment to Section 24 of the LIC Act has necessitated the segregation of the Life Fund into participatory and non-participatory funds, depending on the nature of the policies they support.
    • The amendment stipulates terms on how surplus is to be shared with respect to participatory and non-participatory funds.
    • As for non-participating funds, surplus from the non-participating business would be transferred to shareholders.
    • Surplus from participatory business, however, would be shared between policyholders and shareholders.

    How does this change impact the shareholder?

    • The change, especially the one that has enabled 100% of the surplus in non-participatory funds to flow to the shareholder, has led to a massive jump in the Indian Embedded Value, or IEV.
    • IEV is a measure of future cash flows in life insurance companies and the key financial gauge for insurers.
    • The embedded value will help establish the market valuation of LIC and determine how much money the government raises in the flotation.
    • That will be crucial for the government to help meet its divestment targets and keep its fiscal deficit in check.

    Why is it a risk, then?

    • LIC has stated in the document that a significant portion of its business premiums come from participating and single premium products.
    • It added, should the participating products generate lower than expected returns for policyholders, it could lead to increased surrenders.
    • This could also potentially bother their financial condition, operations, and cash flows.

     

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  • India, UAE to sign Comprehensive Economic Partnership Agreement (CEPA)

    India and the United Arab Emirates will sign the first-ever bilateral Free Trade Agreement between the two countries.

    What is CEPA?

    • The partnership agreement or cooperation agreement is more comprehensive than an FTA.
    • CECA/CEPA also looks into the regulatory aspect of trade and encompasses an agreement covering the regulatory issues.
    • CECA has the widest coverage. CEPA covers negotiation on the trade in services and investment and other areas of economic partnership.
    • It may even consider negotiation in areas such as trade facilitation and customs cooperation, competition, and IPR.
    • India has signed CEPAs with South Korea and Japan.

    What is a Free Trade Agreement (FTA)?

    • An FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
    • Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
    • The concept of free trade is the opposite of trade protectionism or economic isolationism.

    Key benefits offered by FTA

    • Reduction or elimination of tariffs on qualified: For example, a country that normally charges a tariff of 12% of the value of the incoming product will rationalize or eliminate that tariff.
    • Intellectual Property Protection: Protection and enforcement of intellectual property rights in the FTA partner country is upheld.
    • Product Standards: FTA enhances the ability for domestic exporters to participate in the development of product standards in the FTA partner country.
    • Fair treatment for investors: FTA provides treatment as favorably as the FTA partner country gives equal treatment for investments from the partner country.
    • Elimination of monopolies: With FTAs, global monopolies are eliminated due to increased competition.

     

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  • After the Budget’s ‘crypto signal’, India awaits reform

    Context

    In the Union Budget speech, Finance Minister Nirmala Sitharaman announced a 30% flat tax rate levied on any gains made from the transfer of virtual assets including cryptocurrencies and Non-Fungible Tokens (NFTs).

    What is cryptocurrency?

    • Cryptocurrency (crypto) consists of a digital denomination designed to work as a medium of exchange through a distributed computer network (a blockchain) that is not reliant on any central authority such as a government or a bank for its upholding and maintenance.
    • Legal status: The announcement of the tax by the Finance Minister now leads to the assumption that crypto is legal in India.
    • Foreseeable are changes that would, down the road, legitimize and formally legalize the activities of crypto start-ups and enable them to access the necessary support system which might not have been available previously.

    What are the implications of taxing cryptocurrencies in India?

    • While critics are right in observing that the 30% flat tax rate is a harsh rate, this is a premium and price well-worth paying in exchange for what is effectively a ruling-out of prospects for a total ban on crypto by the central government.
    • Scope for innovation: The high tax rate would inevitably hamper the willingness of investors to convert cryptocurrencies into national fiat, this may, in turn, open up more doors for technologically savvy and innovation-minded investors.
    •  The extremely high tax rate and the fact that the losses cannot be offset would invariably propel investors to turn to alternative means of storing and undertaking transactions in cryptocurrencies, without foregoing the significant losses involved as they “switch” back into the rupee.
    • An inadvertent upside of this, then, is the prospective conversion and reallocation of crypto-funds from one form to another.
    • Such transformations would involve DeFi (Decentralised Finance) activities such as staking, lending, and providing liquidity, among others.

    Scope for DeFi in India

    • DeFi (or “decentralized finance”) is “an umbrella term for financial services on public blockchains.
    • With DeFi, one can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it is faster and does not require paperwork or a third party. 
    • DeFi is global, peer-to-peer (meaning directly between two people, and not routed through a centralised system), pseudonymous, and open to all.
    •  The processes highlighted above would drive innovation in the field of Indian DeFi.

    Concerns

    • Low participation due to high rate: The community of small and medium-sized enterprises (SMEs) and lower-end high net-worth individuals are going to find it most difficult to access the ecosystem given the substantial barriers posed by the tax rates.
    • Lack of clarity: Additionally, when it comes to India’s crypto policy at large, there is a fundamental lack of clarity in aspects other than taxation.
    • There appears to be a push to treat crypto as purely an asset class than a currency.
    • The consolation offered by the Government in the form of the Reserve Bank of India’s CBDC, or Central Bank Digital Currency, will definitely help in pushing for the adoption of digital currencies, but, equally, defeats the fundamental purpose of cryptocurrency, which is decentralization.

    Suggestion

    • Reduce the tax rate:  There is a need to reduce tax rates in the future, though this must be weighed against considerations concerning government revenue and the need to curb speculative bubbles surfacing in relation to the currency.
    • Incorporation of insights: The second reform constitutes the incorporation of insights from seasoned partners from international communities, the key should rest with engaging these individuals for their insights and advice on the best practices associated with cryptocurrency policymaking.

    Consider the question “What is DeFi (decentralised finance)? What are the implications levying high tax on the cryptocurrencies?”

    Conclusion

    Systemic reforms are by no means easy, but they are critical as an amplifier of the successes that India has already accrued in the field and as an accelerator of India’s advancement in the sphere of crypto finance and blockchain social policymaking.

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  • Renewable Purchase Obligations (RPO).

    Telangana CM in harsh words has criticized the Prime Minister over Renewable Purchase Obligations (RPO).

    Why such a gesture by Telangana CM?

    • Telangana has been particularly vocal about the “increasing burden” forced upon states by the Centre on account of the clean energy cess imposed on coal and the RPOs (Renewable Purchase Obligation).

    What are RPOs?

    • Renewable Energy Certificates (REC) is a policy instrument to catalyze the development of renewable energy.
    • It is a market-based mechanism that will help the states meet their regulatory requirements (such as RPOs) by overcoming the geographical constraints on existing renewable potential in different states.
    • Under RPO, power distribution companies purchase a certain percentage of their requirements from renewable energy sources.

    REC Mechanism

    • REC mechanism is a market-based instrument to promote renewable energy and facilitate compliance of renewable purchase obligations (RPO).
    • It is aimed at addressing the mismatch between availability of RE resources in state and the requirement of the obligated entities to meet the RPO.
    • 1 REC is treated as equivalent to 1 MWh.

    How many types of RECs are there?

    There are two categories of RECs, viz., solar RECs and non-solar RECs.

    1. Solar RECs are issued to eligible entities for the generation of electricity based on solar as a renewable energy source.
    2. Non-solar RECs are issued to eligible entities for the generation of electricity based on renewable energy sources other than solar.

    Issues highlighted by Telangana

    • Mandatory purchase: The CM has raised the issue of mandatory purchase of renewables reducing the Plant Load Factor (PLF) for existing thermal power projects.
    • Only solar RPO: The CM questioned the mandate to procure a certain percentage of power from solar energy noting that Telangana had hydropower projects producing over 2,500 MW of power from rivers.
    • Not all states have ample renewables: States have thus far not been able to meet RPO targets, with over a dozen states and UTs achieving less than 60% of RPOs.
    • Penalty for non-compliance: There is a (small) penalty for not meeting RPO obligations. The Centre has proposed to increase penalties on states for non-compliance with RPOs in the draft electricity amendment bill.

    Clarification from the centre

    • States were free to hold their own bids and buy green energy from any developer instead of procuring power based on bids by the SECI.
    • They can choose to have their own bids.

     

     

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  • The myth of the trickle-down

    Context

    There is fear that the way the money will be used by the Centre will disempower the states further, just when they must do most of the heavy lifting on public welfare.

    Wealth creation and trickle-down

    • Failure of trickle-down: Evidence from around the world is that the economic policy paradigm, of first increasing the overall size of the pie by reducing taxes at the top and then “redistributing” the wealth, has not delivered benefits to people.
    • Gandhiji had declared that he was not against wealth creators. He lauded wealth creation.
    • However, it must not be at the cost of workers and welfare.
    • Wealth creators must be trustees of the wealth they create, not its exclusive owners.

    The demand-side problem of the Indian economy

    • The Indian economy is suffering from a chronic “demand-side” problem that is becoming worse with misguided economic policies.
    • Young people who have been getting educated in larger numbers than before, even learning vocational skills, cannot find jobs.
    •  If people don’t earn, demand will not increase, and investments in businesses will not be attractive.
    • Moreover, frustrated youth are tinderboxes for social unrest.

    Financial globalization and its impact on India

    • Around the world, there is a reaction to the financial globalization of the last 30 years.
    • In his book, Davos Man, Peter Goodman explains how the wealthiest people have influenced economic policies in democratic countries from the 1990s to make themselves wealthier.
    • Thomas Piketty has documented how wealth inequalities have increased alarmingly.
    • Wealth has accumulated at the top, with regressive tax policies along with deregulation.
    • Government expenditure on social reforms has been crimped.

    Way forward

    • The global economy must move on from hyper-financial, deregulated capitalism, which has given easy money too much freedom.
    • They must move out from their ideological ruts.
    • Invest in human capital: Until the economy grows there will be no resources to invest in human development — whereas China invested in human development before its economic take-off.
    • Protection to industrial sector: That an unprepared industrial sector will thrive in global free trade — whereas the UK and US (and Japan and China too), grew their industrial sectors behind walls of protection, and then demanded that the rest open their markets to the might of their enterprises.
    • Inclusive growth: Political divisions by religion and caste are tearing India’s social fabric again. The Indian economy must grow inclusively to repair it.

    Conclusion

    Indian policymakers must urgently discover India’s own, contextually appropriate model of development and shed defunct economic theories.

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  • Time to rationalise fuel taxes

    Context

    The disconnect between retail and wholesale inflation suggests that the two measures are driven by distinct and unrelated shocks.

    The disconnect between retain inflation and wholesale inflation

    •  In the months between April 2020 and November 2020, retail inflation remained above 6%, while average wholesale inflation was -0.20%.
    • During the financial crisis (2008-2009) wholesale inflation came down significantly as commodity prices crashed after a boom, but retail inflation kept rising.
    • Correlation: This disconnect is reflected in the contemporaneous correlation between these two measures of inflation, which we find to be very low (0.04), and not significant.

    Understanding the reasons for the disconnect

    •  We cannot rule out feedback from wholesale inflation to retail inflation.
    • To better explore this, it helps to understand the driving forces behind retail and wholesale inflation. 
    • Driving factors for CPI: Retail inflation is closely linked to food and beverage prices, partly because of their higher weightage in the consumer price index (CPI).
    • The dominance of supply shocks: High retail inflation in 2020 was primarily due to the rising prices of food and beverages.
    • The surge was likely led by the usual supply shocks—rainfall, agricultural productivity, or Covid-19-induced supply shocks.
    • This suggests two important features of Indian retail inflation: it is predominantly led by supply shocks (food inflation shock) and it is transitory in nature.
    • Driving factor for WPI: High wholesale inflation in recent months was mainly due to rising prices in fuel and power and manufacturing, which together comprise around 77% of the wholesale price index (WPI).
    • Rising fuel and energy prices in India were a result of the recent increase in global oil prices.

    Takeaways

    • High wholesale inflation should not warrant any immediate policy responses as the two inflation measures seem to reflect different things.
    • Overall, the high correlation between world energy inflation and India’s wholesale inflation (0.88) indicates that India’s wholesale inflation is predominantly driven by world commodity prices.
    • On the other hand, the low correlation between India’s retail inflation and world energy inflation (-0.13, and not significant), suggests that India’s retail inflation is primarily driven by domestic food prices.
    • Higher wholesale inflation implies a higher profit margin for producers, which acts as an incentive for investment
    •  There are, in fact, some early signs of a revival in investment in recent quarters, and policy must be careful not to derail this.

    Policy options

    • Given the pass-through of wholesale inflation into retail inflation, if the ongoing commodity boom persists, then the fuel and power component of the WPI is likely to raise retail inflation directly.
    • At that point, there would be some urgency to increase the interest rate, which may be premature and could dampen the revival of growth prospects.
    • To avoid the interest rate response, the best option going forward would be to rationalise fuel taxes, to reduce the pass-through of global commodity prices into wholesale prices and ultimately into retail inflation.

    Conclusion

    The correct fiscal-monetary coordination requires fiscal policy not to be inflationary, so that the RBI can support growth by keeping interest rates low.

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    Source:

    https://www.financialexpress.com/opinion/time-to-rationalise-fuel-taxes-oil-is-a-major-input-in-production-hence-a-tax-on-it-is-highly-inflationary/2430635/

  • Prevention of Money Laundering Act (PMLA)

    The Supreme Court is looking into allegations of the metamorphosis of the Prevention of Money Laundering Act (PMLA), brought to sniff out drug money, into a potent weapon to raid rivals and deny rights.

    What is meant by money laundering?

    • Money laundering is the process of making significant amounts of money obtained through criminal activities, such as drug trafficking or terrorist funding, appear to have come from a legitimate source.
    • Large profits are made by illegal arms sales, drug trafficking, smuggling and prostitution rings, insider trading, bribery, and computer fraud schemes.
    • As a result, it provides an incentive for money launderers to “legitimize” their ill-gotten gains through money laundering.
    • The money generated is referred to as ‘dirty money,’ and money laundering is the act of converting ‘dirty money’ into ‘legitimate’ money.

    Money Laundering Procedure:

    It is a 3-stage process. They are:

    • Placement: The first stage involves the injection of crime money into the formal financial system.
    • Layering is the second stage, money injected into the system is layered and spread over various transactions in order to conceal the money’s tainted origin.
    • Integration: In the third and final stage, money enters the financial system in such a way that the initial association with the crime is sought to be erased, and the money can then be utilized as clean money by the offender.

    Some of the most Common Money Laundering Methods:

    • Bulk cash smuggling, cash-intensive businesses, round-tripping,trade-based laundering, shell companies and trusts, bank capture, gambling, real estate, black salaries, fictional loans, hawala, and false invoicing

    Prevention of Money Laundering Act (PMLA)

    • PMLA, 2002 is an Act of the Parliament of India enacted by the NDA government to prevent money laundering and to provide for confiscation of property derived from money laundering.
    • It was enacted in response to India’s global commitment (including the Vienna Convention) to combat the menace of money laundering.
    • PMLA and the Rules notified there under came into force with effect from July 1, 2005.
    • The act was amended in the year 2005, 2009 and 2012.

    Objectives of PMLA

    The PMLA seeks to combat money laundering in India and has three main objectives:

    1. To prevent and control money laundering.
    2. To confiscate and seize the property obtained from the laundered money; and
    3. To deal with any other issue connected with money laundering in India.

    Key definitions

    • Payment System: A system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them. It includes the systems enabling credit card, debit card, smart card, money transfer or similar operations.
    • Money-laundering: Whosoever directly or indirectly attempts to indulge or assist other person or actually involved in any activity connected with the proceeds of crime and projecting it as untainted property.
    • Attachment: Prohibition of transfer, conversion, disposition or movement of property by an appropriate legal order.
    • Proceeds of crime: Any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence.

    Salient features

    • Punishment and Jail term: The Act prescribes that any person found guilty of money laundering shall be punishable with rigorous imprisonment from three years to seven years. The maximum punishment may extend to 10 years instead of 7 years.
    • Powers of attachment of tainted property: The Director or officer above the rank of Deputy Director with the authority of the Director, can provisionally attach property believed to be “proceeds of crime”.
    • Adjudicating Authority: It is the authority appointed by the central government which decides whether any of the property attached or seized is involved in money laundering.
    • Presumption in inter-connected transactions: Where money laundering involves two or more inter-connected transactions. It is presumed that the remaining transactions form part of such inter-connected transactions.
    • Burden of proof: A person, who is accused of having committed the offense of money laundering, has to prove that alleged proceeds of crime are in fact lawful property.
    • Appellate Tribunal: It is given the power to hear appeals against the orders of the Adjudicating Authority and any other authority under the Act. Its orders are not final and can be challenged.
    • Establishment of Special Court: To ensure speedy trial.

    Issues with PMLA

    • Misuse of central agencies: PMLA is being pulled into the investigation of even ordinary crimes by the Enforcement Directorate.
    • Seizing of assets: Assets of genuine victims have been attached. The ED could just walk into anybody’s house.
    • Politically motivated raids: In all this, the fundamental purpose of PMLA to investigate the conversion of “illegitimate money into legitimate money” was lost.
    • Opacity of charges: Petitioners pointed out that even the Enforcement Case Information Report (ECIR) – an equivalent of the FIR – is considered an “internal document” and not given to the accused.
    • Vagueness over evidences: The accused is called upon to make statements that are treated as admissible in evidence.
    • Harassment: The ED begins to summon accused persons and seeks details of all their financial transactions and of their family members.
    • Against individual liberty: The initiation of an investigation by the ED has consequences that have the potential of curtailing the liberty of an individual.

    Way ahead

    • It is unlikely that corruption can be substantially reduced without modifying the way government agencies operate.
    • The fight against corruption is intimately linked with the reform of the investigations.
    • Therefore the adjudicating authorities must work in cooperation and ensure the highest standards of transparency and fairness.

     

     

  • Back in news: LIC Disinvestment

    The Union government has filed a draft document with the stock market regulator for selling 5% of its shares in the Life Insurance Corporation (LIC) of India.

    Details of the IPO

    • The IPO is a 100% OFS [offer for sale] by the Government of India and entails no fresh issue of shares by LIC.
    • 6 Crore shares are on offer representing 5% of the government’s equity in the firm.
    • As much as 10% of the offer could be reserved for LIC policyholders, as per the regulatory filing, and another 5% of the shares may be reserved for employees.

    About Life Insurance Corporation of India (LIC)

    • LIC is an Indian state-owned insurance group and investment corporation owned by the Government of India.
    • It was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India.
    • Over 245 insurance companies and provident societies were merged to create the state-owned LIC.

    Why LIC?

    • LIC is India’s largest financial institution.
    • When listed on stock exchanges, it could easily emerge as the country’s top listed company in terms of market valuation, overtaking current leaders Reliance and TCS.
    • It is also the largest investor in government securities and stock markets every year.
    • On average, LIC invests Rs 55,000 crore to Rs 65,000 crore in stock markets every year and emerges as the largest investor in Indian stocks.
    • LIC also has huge investments in debentures and bonds besides providing funding for many infrastructure projects.

    Impacts of listing of LICs

    • Profit-making for govt: The government is trying to make the most of the brand value of LIC, given that it is one of the few remaining profit-making entities owned by the state.
    • Better returns: Listing will boost LIC’s efficiency and thereby policy returns.
    • Reforming the insurance sector: LIC will also become more competitive. This will put pressure on its peers to innovate, benefitting policyholders in terms of pricing, product features, and services.
    • Better financial position: Less govt interference will be a positive for LIC’s financial health.
    • Risk-free: As long as a sovereign guarantee over the maturity proceeds and the sum assured to continue, policyholders won’t perceive any risk.

    Various challenges

    • Structural challenges: LIC can even evolve into a bank like many of its global peers like Axa, Berkshire, and Munich Re.
    • Market hurdles: LIC’s own issues are not the only challenge the company would face in going public. It also remains to be seen if the Indian share market is ready to absorb such a large public issue.
    • Impact on growth: The size of the IPO will determine the extent of liquidity it will suck out, but Indian markets do not have the depth to take the issue of a very size.
    • Fears of disclosure: The Company’s books and operations have been opaque for far too long but it is trusted by 250 million policyholders.
    • Investors trust at risk: Being one of the biggest financial institutions of the country, the move to privatize LIC will shake the confidence of the common man and will be an affront to our financial sovereignty.

    Way Forward

    • Over the years, LIC has become the lender of last resort to the Government of India.
    • Confronted with an unprecedented fiscal deficit and worried by an economy in crisis, the government has to find resources.
    • This disinvestment is also a preferred option for ideological and practical reasons.
    • The government could utilize the money gained by selling off its stakes to improve services in public goods like infrastructure, health, and education.

     

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  • Import Ban on Drones

    The Government has banned the import of drones barring for R&D, defense, and security purposes.

    Why in news?

    • To promote Make-in-India drones.
    • Before this order, the import of drones was “restricted” and needed prior clearance of the Directorate General of Civil Aviation (DGCA) and an import license from DGFT.

    India’s sources of Imports

    • For its defense needs, India imports from Israel and the US.
    • Consumer drones such as those used for wedding photography come from China and drones for light shows also come from China apart from Russia.

    Why need drones?

    • Indian drone manufacturers and service providers arrange drones for a variety of use cases such as survey and mapping, security and surveillance, inspection, construction progress monitoring, and drone delivery.

    What does the order say?

    • The Directorate General of Foreign Trade (DGFT) issued an order prohibiting with immediate effect the import of drones in Completely-Built-Up (CBU), Semi-knocked-down (SKD), or Completely-Knocked-down (CKD) forms.
    • Import of drones by government entities, educational institutions recognized by the Central or State governments, government-recognized R&D entities, and drone manufacturers for R&D purposes as well as for defense and security purposes will be allowed.
    • For this, there has to be an import authorization obtained from the DGFT.
    • The import of drone components is “free”, implying that no permission is needed from the DGFT allowing local manufacturers to import parts like diodes, chips, motors, lithium-ion batteries, etc.

    Steps taken to promote indigenous drone manufacturing

    • In August last year, the Government brought out liberalized Drone Rules, 2021 which reduced the number of forms to be filled to seek authorization from 25 to five.
    • They also dispensed with the need for security clearance before any registration or issuance of the license.
    • R&D entities too have been provided blanket exemption from all kinds of permissions, and restrictions on foreign-owned companies registered in India have also been removed.
    • The Government has also announced a production-linked incentive scheme for drones and drone components with the aim to make India a “global drone hub by 2030”.
    • Foreign manufacturers will be encouraged to set up assembly lines in India.

    Why such a blanket ban?

    • Most drone manufacturers in India assemble imported components in India, and there is less manufacturing.
    • The import ban will ensure that an Indian manufacturer has control of the IP, design, and software which gives him or her a total understanding and control of the product.
    • Over a period of time, this can enable further indigenization.

    Possible repercussions of the ban

    • The ban is likely to hurt those who use drones for photography and videography for weddings and events.
    • These drones primarily come from China because they are cheaper and easy to use and India still has a lot of catching up to do in manufacturing them.

    Also read

    [Sansad TV] Perspective: Keeping Drones in Check

     

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