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Subject: Economics

  • Capital Gains Tax

    The capital gains tax structure in India is complicated, and it is time for a relook since the union budget has provisions for 30% tax on cryptocurrency.

    What is Capital Gains Tax?

    • Capital gains tax is levied on the profits made on investments.
    • It covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.

    Types

    • It is divided into long-term capital gains tax (LTCG) and short-term capital gains tax (STCG) depending on how long you have held the investment in question.
    • Unlike income tax, the percentage of tax does not change on the basis of your overall tax slab.
    • The LTCG tax, excluding surcharge, on equity is the same for gains of ₹10 lakh or ₹10 crore.
    • There is also a separate set of deductions that apply to LTCG, which do not apply to ordinary income.

    Why is it so complicated?

    Capital gains tax is complicated for a few primary reasons.

    • First, the rate changes from asset to asset. LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation.
    • Second, holding period changes from asset to asset. The holding period for LTCG tax is two years in real estate, one year for stocks, and three years for debt mutual funds and gold.
    • Third, exemptions available against it come with their own complex conditions. For instance, buying a house after selling one can get you an exemption, but the new house must be bought in two years or built in three years of the sale.

    Is cryptocurrency taxed as capital gains?

    • The 2022 budget has proposed a 30% tax on cryptocurrency, which is higher than capital gains tax in many cases.
    • Besides, under capital gains tax, investors can adjust profits and losses on different investments against each other or against profits/losses in the future.
    • However, this cannot be done with cryptocurrency.

    What distortions does it create?

    • As capital gains tax is the same regardless of your overall income it can compound inequality.
    • For instance, a person with a salary of ₹40 lakh will pay 30% tax on it but just 10% LTCG tax on gains from stock trading.
    • A person with a salary of ₹5 lakh will pay a 5% tax on it but the same 10% LTCG tax on stock trading.
    • Second, the smaller one-year qualifying period for LTCG in stocks compared to three years in debt mutual funds may encourage short-term trading in equity.

    What can be done to fix these anomalies?

    • The government can bring about uniformity in rates and holding periods for various assets to ensure that the tax for one asset is not more attractive than another.
    • A uniform and long holding period to qualify for LTCG can also discourage short-term trading and speculative  behavior  in assets  such as  stocks.
    • The exemptions for LTCG such as reinvestment in another house property or capital gains bonds can also be made simpler, with fewer conditions.
    • Small investors can also be given relief by reducing rates of capital gains.

     

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  • An MSP scheme to transform Indian agriculture

    Context

    The MSP must look especially into the requirements of farmers and the landless.

    Background of price stabilisation for food grain

    • The Essential Commodities Act in 1955 sought to counter price rise due to speculative private trading and then MSP in the 1960s.
    • A buffer stock policy was developed over time to involve different kinds of mechanisms such as:
      a) setting cost-based minimum procurement price, paying the difference between procurement price and market price.
      b) storing the procured surplus for sale through the Public Distribution System (PDS) at issue price, and market intervention to stabilise price when deemed necessary.
    • This task required interlinking procurement, storage and distribution with more centralised investment and control of each of these tasks.

    3 Purposes MSP could serve

    MSP could serve, in principle, three purposes:

    • Price stabilisation in the food grains market.
    • Income support to farmers, and
    • As a mechanism for coping with the indebtedness of farmers.

    Advantages of wide coverage

    • Fulfilling three objectives: In this way, the objectives of income support to farmers, price stabilization, food security, and inducing more climate-friendly cropping patterns can be combined to an extent.
    • Solution to debt problem: A real breakthrough in the recurring problem of agricultural debt can be made by the linking of selling of grains under MSP to the provision of bank credit particularly for small farmers.
    • The farmer can get a certificate selling grains at MSP which would be credit points proportional to the amount sold; this will entitle them to a bank loan as their right, and calibrate the fluctuations between good and bad harvest years by storing the certificates for later use.

    Issues with MSP in current form

    • Low accessibility and awareness of the MSP regime: A survey highlighted that 81% of the cultivators were aware of MSP fixed by the Government for different crops and out of them only 10% knew about MSP before the sowing season.
    • Arrears in payments: More than 50% of the farmers receive their payments of MSP after one week.
    • Poor marketing arrangements: Almost 67% of the farmers sell their produce at MSP rate through their own arrangement and 21% through brokers.
    • Partial coverage resulting in skewed cropping pattern: This partial MSP coverage skewed the cropping pattern against several coarse grains and millets particularly in rain-fed areas.

    Way forward

    • Flexible arrangement of MSP: Each crop within a band of maximum and a minimum price depending on harvest conditions i.e. higher price in a bad and lower price in a good harvest year in general will have its price set in the band.
    • High MSP for coarse grains: The price of some selected coarse grains can be fixed at the upper end of its band to encourage their production in rain-fed areas.

    Conclusion

    Greater coverage of all 23 crops under MSP is a way of improving both food security and income support to the poorest farmers in rain-fed regions.

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  • What is a Ratings Agency and why do they matter?

    Finance Secretary has accused rating agencies of “double standards” when assessing emerging markets and developing economies.

    What is the news?

    • Fitch, a rating agency, has termed India as the most indebted emerging market.
    • It claimed that the latest budget did not provide clarity on fiscal consolidation plans.

    What is a Rating Agency?

    • Rating agencies assess the creditworthiness or potential of an equity, debt or country.
    • Their reports are read by investors to make an informed decision on whether or not to invest in a particular country or companies in that geography.
    • They assess if a country, equity or debt is financially stable and whether it at a low/high default risk.
    • In simpler terms, these reports help investors gauge if they would get a return on their investment.

    What do they do?

    • The agencies periodically re-evaluate previously assigned ratings after new developments geopolitical events or a significant economic announcement by the concerned entity.
    • Their reports are sold and published in financial and daily newspapers.

    What grading pattern do they follow?

    • The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.
    • Standard & Poor’s accord their highest grade, that is, AAA, to countries, equity or debt with the exceedingly high capacity to meet their financial commitments.
    • Its grading slab includes letters A, B and C with an addition a single or double letter denoting a higher grade.
    • Moody’s separates ratings into short and long-term definitions. Its longer-term grading ranges from Aaa to C, with Aaa being the highest.
    • Fitch, too, rates from AAA to D, with D being the lowest. It follows the same succession scheme as Moody’s and Fitch.

    Criticism of rating agencies

    • Popular ratings agencies publicly reveal their methodology, which is based on macroeconomic data publicly made available by a country, to lend credibility to their inferences.
    • However, credit rating agencies were subjected to severe criticism for allegedly spurring the financial crisis in the United States, which began in 2017.
    • The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions.
    • They were charged for methodological errors and conflict of interest on multiple counts.

    Do countries pay attention to ratings agencies?

    • Lowered rating of a country can potentially cause panic selling or offloading of investment by a foreign investor.
    • In 2013, the European Union opted for regulating the agencies.
    • Over reliance on credit ratings may reduce incentives for investor to develop their own capacity for credit risk assessment.
    • Ratings Agencies in the EU are now permitted to issue ratings for a country only thrice a year, and after close of trade in the entire Union.

     

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  • What is SWIFT?

    As tensions peaks over Ukraine the United States could exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

    What is SWIFT?

    • SWIFT is an international network for banks worldwide to facilitate smooth money transactions globally.
    • It is basically a messaging network used by banks and financial institutions globally for quick and faultless exchange of information pertaining to financial transactions.
    • The Belgium-headquartered SWIFT connects more than 11,000 banking and securities organization in over 200 countries and territories.
    • First used in 1973, it went live in 1977 with 518 institutions from 22 countries, its website states.

    What exactly is it?

    • SWIFT is merely a platform that sends messages and does not hold any securities or money.
    • It facilitates standardized and reliable communication to facilitate the transaction.

    How does it facilitate banking?

    • Each participant on the platform is assigned a unique eight-digit SWIFT code or a bank identification code (BIC).
    • If a person, say, in New York with a Citibank account, wants to send money to someone with an HSBC account in London, the payee would have to submit to his bank the London-based beneficiary’s account number along with the eight-digit SWIFT code of the latter’s bank.
    • Citibank would then send a SWIFT message to HSBC. Once that is received and approved, the money would be credited to the required account.

    How is the organization governed?

    • SWIFT claims to be neutral. Its shareholders, consisting of 3,500 firms across the globe, elect the 25-member board, which is responsible for oversight and management of the company.
    • It is regulated by G-10 central banks from Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, the UK, the US, Switzerland, and Sweden, alongside the European Central Bank.
    • Its lead overseer is the National Bank of Belgium.
    • The SWIFT oversight forum was established in 2012.
    • The G-10 participants were joined by the central banks of India, Australia, Russia, South Korea, Saudi Arabia, Singapore, South Africa, the Republic of Turkey, and the People’s Republic of China.
    • Europe, Middle East, and Africa are highest contributors to SWIFT.

    What happens if one is excluded from SWIFT?

    • US excluding Russia from SWIFT could have serious repercussions on how Russian banks carry out international financial transactions.
    • If a country is excluded from the most participatory financial facilitating platform, its foreign funding would take a hit, making it entirely reliant on domestic investors.
    • This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
    • An alternative system would be cumbersome to build and even more difficult to integrate with an already expansive system.

    Are any countries excluded from SWIFT?

    • Iranian banks were ousted from the system in 2018 despite resistance from several countries in Europe.
    • This step, while regrettable, was taken in the interest of the stability and integrity of the wider global financial system, and based on an assessment of the economic situation.

     

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  • Privatisation and Related issues

    Context

    There is a consensus that privatization is the panacea. Policymakers often cite the private sector’s ability to grow faster. This may not always be true.

    Meaning of Privatisation

    It means the transfer of ownership, management, and control of the public sector enterprises to the private sector. India adopted a mixed economy model, where the Public Sector Enterprises (PSEs) were established on a socialistic pattern of development. However, due to the poor performance of several PSEs and the consequent huge fiscal deficits, privatization was pursued. 

    Privatization can suggest several things-

    • Migration of something from the public sector to the private sector.
    • It is also used as a metonym for deregulation when a massively regulated private firm or industry becomes less organized.
    • Government services and operations may also be (denationalised) privatised. In these circumstances, private entities are tasked with the application of government plans or the execution of government assistance that had earlier been the vision of state-run companies. Some instances involve law enforcement, revenue collection, and prison management.
    • Privatization of the public sector companies by selling off parts of the equity of PSEs to the public is known as disinvestment.

    Objectives of Privatisation

    1. Providing strong momentum for the inflow of FDI

    2. Improving the efficiency of public sector undertakings (PSUs)

    • The efficiency of PSUs is improved by giving them the autonomy to make decisions.
    • Some companies were given special categories of Navratna and Miniratna.

    3. Reduce the fiscal burden on the government in maintaining PSEs.

    Ways of Privatisation

    Government companies are transformed into private companies in two ways.

    Transfer of ownership

    Government companies can be converted into private companies in the following two ways:

    • By the withdrawal of the government from the ownership and management of public sector companies
    • By the outright sale of public sector companies.

    Disinvestment

    • Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU.
    • The rationale for disinvestment is that the government has no business to be in a business. Thus, the government continues to disinvest in sectors where private companies are already the dominant player.

    However, there are six methods of privatization.

    • Public sale of shares
    • Public auction
    • Public tender
    • Direct negotiations
    • Transfer of control of enterprises that were controlled by the state or by municipalities
    • Lease with a right to purchase

    Benefit of Disinvestment

    • Improves corporate governance: It would result in the introduction of corporate governance in the privatized companies by freeing the PSEs from Government control and giving more scope to innovation. Enhanced corporate and with the introduction of independent Directors.
    • Develops and deepens the capital market through the spread of equity culture: The disinvestment would benefit the small investors and employees as it would lead to a wider distribution of wealth in the form of public offerings of privatized companies.
    • Disinvestment funds can be utilized for long-term goals such as:
      • Financing large-scale infrastructure development.
      • Investing in the economy to encourage spending
      • Expansion and Diversification of the firm
      • Repayment of Government Debts: Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest
      • Investing in social programs like health and education
    • Fiscal space for the relocation of resources locked with CPSEs: Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of the value of the public assets making it critical to disinvest early to realize a high value.
    • Resources locked in sectors developed enough to raise money from the market are channelized into areas of the economy that are less likely to access resources for the market because of their stage of economic development. Letting go of these assets is best in the long-term interest of the taxpayers as the current yield on these investments is abysmally low.
    • Unlocking of shareholder value: It is done with the help of issuing IPO. IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time. Offering an IPO is a money-making exercise. Every company needs money for expansion, to improve their business, to better the infrastructure, to repay loans, etc.
    • Employees: Employees of a firm are benefitted by disinvestment through:
      • Pay rises, which has been done in past disinvestments.
      • Greater opportunities and avenues for career growth and further employment generation through capacity expansion.

    Is privatization a solution?

    • No significant difference in performance: Studies indicate that the gap in growth (and service) between public sector undertakings (PSUs) with autonomy and private firms is not significant.
    • Experience of the privatization in the UK: One study highlighted that the famed British privatization initiative of British Airways, British Gas, and the Railways led to no systemic difference in performance.
    • Evidence on performance after privatization is even more mixed in developing countries.
    • Multiple factors: Growth post-privatization is often due to multiple factors, for example, better funding under a private promoter versus a starved government budget, a better business cycle.

    Failure of Privatisation

    • Privatization as a revenue source:  As a state, we have sought to hock our generational wealth in PSUs for the past two decades, with limited success.
    • Failure to raise funds: Actual receipts from disinvestment have always fallen significantly short of targets.
    • In total, between FY11 and FY21, about ₹5 lakh crore was raised (that is, about 33% of just FY22’s projected fiscal deficit (PRS India, 2021) – some of this, notably through stake sale to other PSUs.
    • Considering social and institutional constraints, it is a slow process. For instance, BPCL’s long-awaited journey.

    Challenges

    • Challenge of valuation: For instance, about 65% of about 300 national highway projects have been recording significant toll collection growth; any valuations of such assets will need to ensure they capture potential growth in toll revenue, as NHAI’s highway expansion bears fruit and the economy recovers.
    • Social consequences: There were about 348 CPSUs in existence in 2018, with a total investment of ₹16.4 trillion and about 10.3 lakh employees in Central Public Sector Enterprises (in 2019). Push for massive privatization resulting in mass layoffs in a period of low job creation.
    • Concentration of wealth: A greater concentration of public assets in select private hands is also a medium-term concern. About 70% of all profits generated in the corporate sector in FY20 were with just 20 firms.
    • Across sectors, a whiff of oligopoly is emerging – cigarettes continue to be dominated by a single player, paints have one entity with ~40% in FY21, airports now have a new operator with about six airports plus a 74% stake in Mumbai’s international airport, while telecom has just three players left.
    • Such concentration, mixed with the privatization of public assets, is likely to lead to higher usage fees (already being seen in telecom) and inflation, coupled with a loss of strategic control.

    Way forward

    • Outright privatization is not a solution: Selective PSU Reform must be considered.
    • The Maruti model is instructive – the government had a joint venture with the Suzuki Corporation, but ceded control, despite Suzuki having only 26% shareholding, in return for a push by Suzuki for greater exports from India and manufacture of global models in India
    • Stake sale route: Empirical evidence highlights that stake sales are considered a preferred route (about 67% of all PSUs sales in about 108 countries between 1977 and 2000 were conducted via this route), as it gives time to ensure price discovery, allowing improved performance to raise valuations over time.
    • Global Experience: In China, for the past few decades, growth has been led by corporatized PSUs, all of them held under a holding company (SASAC), which promotes better governance, appoints leadership, and executes mergers and acquisitions.
    • In Singapore, the Ministry of Finance focuses on policymaking, while the holding firm is focused on corporatizing and expanding its PSUs on a global scale.
    • PSUs with greater autonomy, with the government retaining control via a holding firm, can also be subject to the right incentives.

    Conclusion

    The time has come to take a relook at privatization. Simply pursuing this path, while utilizing such proceeds for loan write-offs or populist giveaways in the election cycle will not do.

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  • Agriculture finance in India

    Context

    While the overall budgetary allocation towards the agricultural sector has marginally increased by 4.4% in the Union Budget 2022-23, the rate of increase is lower than the current inflation rate of 5.5%-6%.

    Agricultural Finance in India – A brief history

    Phase 1 (1951-69):

    • Thrust on developing primary sector since 1st FYP in 1951.
    • National Credit Council in 1968 emphasized that commercial banks must increase financing to small scale industries and agriculture
    • Nationalization of banks in 1969 put thrust on the opening of rural/semi-urban bank branches

    Phase 2 (1970-1990)

    • The decade of 1970s marked the entry of commercial banks into agricultural credit with the Lead Bank Scheme and regulatory prescription of Priority Sector Lending (PSL).
    • Regional Rural Bank Act, 1976 enacted to specifically provide banking and credit facilities for agriculture and
      other rural sectors.
    • National Bank for Agriculture and Rural Development (NABARD) was established in 1982 to promote agricultural and rural development, particularly by financing SHGs and MFIs.
    • RBI introduced in 1989 service area approach (SAA) & Annual Credit Plan (ACP) system to increase outreach
      to rural areas.

    Phase 3 (1991-onwards)

    • Implementation of Narasimham Committee Report of 1991 to increase the operational efficiency of banks.
    • 1st major nationwide farm loan waiver in 1990.
    • Establishment of the Rural Infrastructure Development Fund (RIDF) with NABARD mainly meant for funding rural infrastructure projects.
    • NABARD started a pilot project SHG-Bank Linkage Programme in 1992.

    Mechanisms of Agriculture Credit in India

    • Priority Sector Lending: PSL was introduced to ensure that vulnerable sections of the society get access to credit and that there is an adequate flow of credit to employment-intensive sectors like agriculture and MSME.
    • Interest Subvention Scheme (ISS) was launched for short-term crop loans in 2006-07. 2% interest subvention is given to farmers, which is reimbursed to banks (through RBI and NABARD). Additionally, a 3% prompt repayment incentive (PRI) is provided for good credit discipline.
    • Kisan Credit Card (KCC) Scheme, introduced in 1998, aimed at providing adequate and timely credit with flexible and simplified procedures for agriculture-related and also consumption requirements of farmer households.
    • Self Help Group- Bank Linkage Programme (SHG-BLP) aimed at harnessing the flexibility of an informal system with the strength and affordability of a formal system. The SHG-BLP model accepted informal groups as clients of banks – both deposit and credit linkage & allowed collateral-free lending to groups.
    • Joint Liability Groups (JLG) Scheme was initiated by NABARD in 2006 to enhance credit flow to share croppers/tenant farmers who do not have land rights.

    Issues with India’s low spending in agriculture

    • The UN Food and Agriculture Organization (FAO) report for 2001 to 2019 shows that, globally, India is among the top 10 countries in terms of government spending in agriculture, constituting a share of around 7.3% of its total government expenditure.
    • However, India lags behind several low-income countries such as Malawi (18%), Mali (12.4%), Bhutan (12%), Nepal (8%), as well as upper-middle-income countries such as Guyana (10.3%) and China (9.6%).

    Low budgetary allocation

    a) Low allocation for important schemes

    • Drastic slashing of funds towards the allocation towards important schemes like Market Intervention Scheme and Price Support Scheme (MIS-PSS)- ₹1,500 crores (62% less than the previous allocation of ₹3,959.61 crores in the revised estimates (RE) of FY 2021-22).
    • Similarly, the Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA) was allocated just ₹1 crore for the year as against an expenditure of ₹400 crores in 2021-22.

    b) Low Capital Investment

    • Allocation for the promotion of rural development was 5.59% in the previous budget which has been further reduced to 5.23% for the present financial year

    Other issues

    a) Institutional vis-à-vis Non-Institutional Agricultural Credit: Traditionally, rural agrarian credit needs were met primarily through money-lenders, which led to large-scale indebtedness.

    • According to National All India Rural Financial Inclusion Survey (NAFIS 2015), the share of non-institutional credit still persists at around 28%.
    • Unavailability of credit for consumption purposes and to tenant farmers, sharecroppers, and landless labourers, who are not able to offer collateral security, further pushes them towards non-institutional sources.

    b) Skewed agency share in institutional credit: Dependency on scheduled commercial banks in agricultural & allied credit is still large (~78-80% of the credit). Though co-operative institutions (~15%) and Regional Rural Banks (~5%) play a significant role in extending agricultural credit, their share is highly skewed geographically.
    c) Regional Disparity in Agricultural Credit: States falling under central, eastern, and northeastern regions are getting very low agri-credit as % of their agri-GDP.
    d) Poor deployment of agricultural credit to allied sectors (~6-7%) despite a share of 38-42% in the agricultural output indicates neglect of allied sectors by the banks.
    e) Issues with Priority Sector Lending (PSL): Though at the aggregate level banks have been able to achieve the overall PSL target of 40%, so far they have failed to achieve the agriculture target of 18% at the system-wide level. Moreover, ~60% of Small & Marginal Farmers (SMFs) have not been covered by SCBs.
    f) Interest Subvention Scheme (ISS) on short-term loans have skewed the distribution of agricultural credit in favor of production credit against crop-related investment credit, which is important for the long-term sustainability of the agriculture sector.
    g) Kisan Credit Card: As per Agricultural Census 2015-16, only 45% of the farmers possess operative KCCs. Agricultural households are unable to get credit for their consumption requirements and hence, they are compelled to go-to money lenders.
    h) Diversion of agriculture loans for non-agriculture purposes:     In many states like Tamil Nadu, Andhra Pradesh, Kerala, etc, agri-credit is far higher than their agri-GDP, indicating the possibility of diversion of
    credit for non-agricultural purposes. Diversion accentuates the problem of debt overhang, fuels a high level of indebtedness, and deteriorates credit culture in long run.

    Way forward

    a) Improve the Reach of Institutional Credit:

    • Complete the digitization process and update land records in a time-bound manner.
    • Reforming of land leasing framework by adopting policies like the Model Land Leasing Act proposed by NITI Aayog, which intends to make all lease agreements formal and enhance access to formal credit.
    • Establish a federal institution in agriculture on the lines of GST Council to enable consultation with states during formulation & implementation of reforms.

    b) Addressing regional disparity: PSL guidelines should be revisited for improving the credit off-take in central, eastern, and northeastern states.
    c) Increasing Credit Flow to Allied Activities: Set separate targets for loans towards allied activities under Ground Level Credit (GLC) & Priority Sector Lending (PSL) guidelines.
    d) Enhancing the sub-target of SMFs under PSL- Considering that the total operated area held by SMFs would amount to 51.85% by the year 2020-21, increase the share of agricultural credit under PSL to SMFs to 10% from the current 8%.
    e) Agricultural Loans against Gold as Collateral: Banks should develop an MIS to flag agricultural loans sanctioned against gold as collateral in CBS in order to segregate such loans for effective monitoring of end-use of funds.
    f) Utilizing Farmer Producer Organisations (FPOs): NABARD should promote women-oriented FPOs by identifying successful women SHGs. Government should expand the scope of its credit guarantee program through Small Farmers’ Agribusiness Consortium (SFAC).
    g) Database for Indian Agriculture sector: Develop a centralized database capturing details related to crops cultivated, cropping pattern, output, sown/irrigated area, the health of the soil, natural calamity, etc. Besides, farmer-wise details like identity, land records, loan availed, subsidy given, insurance and details of crop cultivated, etc. should also be captured.
    h) Convergence of National Highways development, Rural infrastructure, rural facilities, and increase the number of markets as recommended by the National Commission on Farmers. 

     

    Consider the question “What explains India’s low score on Agriculture Orientation Index which is the ratio between government spending towards the agricultural sector and the sector’s contribution to GDP? Suggest the way forward.”

    Conclusion

    The intensification in government spending towards the agricultural sector is the key to attaining the sustainable development goals of higher agricultural growth and farm income.

     

  • What is Cartelization?

    The Competition Commission of India (CCI) issued its final order in an alleged case of cartelization involving four Japanese shipping firms, asking them to desist from avoiding competition with each other.

    What is a Cartel?

    • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
    • The three common components of a cartel are:
    1. an agreement
    2. between competitors
    3. to restrict competition

    What is Cartelization?

    • Cartelization is when enterprises collude to fix prices, indulge in bid-rigging, or share customers, etc. But when prices are controlled by the government under law, that is not cartelization.
    • The Competition Act contains strong provisions against cartels.
    • It also has the leniency provision to incentivize a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
    • This has proved a highly effective tool against cartels worldwide.

    How do they work?

    • Four categories of conduct are commonly identified across jurisdictions (countries). These are: price-fixing, output restrictions, market allocation and, bid-rigging
    • In sum, participants in hard-core cartels agree to insulate themselves from the rigors of a competitive marketplace, substituting cooperation for competition.

    How do cartels hurt?

    • They not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
    • A successful cartel raises the price above the competitive level and reduces output.
    • Consumers choose either not to pay the higher price for some or all of the cartelized product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

    Are there provisions in the Competition Act against monopolistic prices?

    • There are provisions in the Competition Act against abuse of dominance.
    • One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in the purchase or sale of goods or services.
    • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
    • However, where pricing is a result of normal supply and demand, the Competition Commission may have no role.

    What is the penalty for cartelization?

    • The Competition Act calls for a penalty on each member of the cartel, which is up to three times its profit for each year of anti-competitive behavior, or 10% of turnover for each year of its continuance, whichever is higher.
    • However, in case of a leniency petition, CCI can waive the penalty depending on the timing and usefulness of the disclosure  and  full cooperation  in  the  probe.

    How might cartels be worse than monopolies?

    • Monopolies are bad for both individual consumer interests as well as society at large.
    • Monopolist completely dominates the concerned market and, more often than not, abuse this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

    How to stop the spread of cartelization?

    • Strong deterrence to those cartels that are found guilty of being one.
    • Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel and it is not always easy to ascertain the exact gains from cartelization.
    • The threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

    Back2Basics: Competition Commission of India (CCI)

    • The CCI is the chief national competition regulator in India.
    • It is a statutory body within the Ministry of Corporate Affairs.
    • It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

     

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  • Revamped Distribution Sector Reform Scheme (RDSS)

    Context

    Launched in July 2021, the Revamped Distribution Sector Reform Scheme (RDSS) is the latest of many central government grant-based programmes towards electricity distribution network investments.

     RDSS overview

    • Revamped Distribution Sector Reform Scheme (RDSS) has an outlay of Rs 3 lakh crore for five years.
    • Half of the outlay is for better feeder and transformer metering and pre-paid smart consumer metering.
    • The remaining half, 60 percent of which will be funded by central government grants, will be spent on power loss reduction and strengthening networks.
    • RDSS stipulates universal pre-paid metering but post-paid options may be suitable in many contexts.
    • RDSS suggested measures such as privatization and franchisee adoption.

    Legacy design issues in RDSS

    • Design issues: Complex processes and conditions for fund disbursal: Only 60 percent of the total Rs 2.5 lakh crore grants allocated in past schemes were disbursed.
    • Lack of review and regulatory oversight: Lack of public review and regulatory oversight in states is another issue.
    • Prescriptive approach: The prescriptive approach of the scheme design impedes effective implementation. For example, RDSS emphasizes loss reduction investments over system strengthening.
    • However, high losses are typically connected to sustained poor quality service which, in turn, is affected by inadequate investment in system strengthening.

    Opportunities for discoms under RDSS

    1] Strengthen rural networks

    • It is important to strengthen rural networks to meet growing demand.
    • In the past decade, 4.9 crore poor households have been electrified and more than Rs 50,000 crore has been invested in rural networks.
    • However, actual investments have been much less than planned.
    • Transformer and sub-station capacities were designed to meet the minimal demand assuming few lights, fans, and TV.
    • Increased supply hours, appliance usage, and the needs of rural enterprises will need more network investment.
    • Without this, the risk of power outages is high.
    • The RDSS system’s strengthening plans can focus on this challenge.

    2] Opportunity to provide reliable supply and reduce subsidy requirements for agriculture

    • About 25 percent of electricity sales is to be highly subsidized, agricultural consumers who also receive an erratic, poor quality supply.
    • Under the national KUSUM scheme, day-time, low-cost supply can be provided to a large number of farmers by installing megawatt scale solar plants.
    • For this to work, separate feeders for agricultural consumers are needed. RDSS prioritizes investments and grants towards dedicated agricultural feeders to accelerate feeder solarisation.
    • States must leverage this grant support to provide reliable supply and reduce subsidy requirements.

    3] Automatic metering of distribution feeders

    • Often, discoms under-estimate losses by over-estimating unmetered consumption in a bid to demonstrate loss reduction.
    • For greater veracity, all feeders must be equipped with meters capable of communicating readings without manual intervention.
    • States should leverage RDSS’s emphasis on automatic meter reading for this.

    4] Smart metering

    • RDSS prescribes a phase-wise roll-out of consumer smart meters, starting with commercial and industrial consumers and urban areas.
    • Such an approach provides states with an opportunity to understand implementation issues, adopt suitable strategies for metering and evolve frameworks for assessing benefits vis-a-vis the costs.

    5] Network for charging EVs

    • Discoms can avail 60 percent of grants under RDSS for network investments required to address the demand of charging infrastructure for electric vehicles.
    • This can accelerate a shift away from petrol and diesel fuels.

    Way forward

    • Flexibility: To leverage various opportunities, states must emphasize the need for flexibility in prioritizing investments in their action plans.
    • Central government agencies should also be flexible in the monitoring, tracking, and fund disbursal mechanisms.
    • Accelerated implementation: This should be accompanied by state-level commitments towards accelerated but deliberate implementation.

    Conclusion

    Despite the challenges, there are opportunities for discoms under RDSS. However, without these efforts, despite its potential, RDSS will likely be important but limited in its impact, like its predecessors.

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  • Fast-tracking Vande Bharat Express

    Presenting the Union Budget for 2022-23, Finance Minister said 400 new energy-efficient Vande Bharat trains will be introduced in three years.

    What is Vande Bharat Express?

    • The Vande Bharat Express is a semi-high speed train designed, developed, and built by the Integral Coach Factory (ICF).
    • Presently there are only two Vande Bharat trains that are running — Delhi to Varanasi and Delhi to Katra.

    Key Features 

    • The current Vande Bharat trains have seating only in two classes — chair car and executive chair car. But Railways is planning to upgrade it.
    • The trains have fully sealed gangways for a dust-free environment, modular bio-vacuum toilets, rotating seats in Executive Class, personalized reading lights, automatic entry/exit doors with sliding footsteps, diffused LED lighting, mini pantry, and sensor-based interconnecting doors in each coach.
    • They are self-propelled trains that do not require an engine. This feature is called a distributed traction power system, which is increasingly becoming the norm the world over for passenger operations(Distributed power gives the train higher acceleration and deceleration compared to loco-hauled trains, which take a much longer time to reach top speed or to gradually come to a halt).
    • 400 trains announced by the Finance Minister carry a potential investment of Rs 50,000 crore over the next three years, because of different specifications and also, inflation.
    • The current Vande Bharat’s are being made at Rs 106 crore per trainset of 16 cars, at 2018 pricing.

    Benefits of Vande Bharat Trains

    1) Cuts Travel Time Drastically

    2) Energy Efficient

    3) Reduce Turnaround Time

    4) Faster Acceleration and Deceleration among others.

    Why High-speed rail projects are important for India?

    • Improve India’s GDP: According to a study conducted by the London School of Economics and Political Science and the University of Hamburg in 2008, cities that are connected to HSR systems tend to witness a rise in their gross domestic product (GDP) by at least 2.7 percentage points compared to their neighbors that do not have an HSR station. The reason for the differential was improved market access.
    • Role of the trains in India’s development: Being the third-largest network in the world under single management and
      with over 68,102 route km IR strives to provide a safe, efficient, competitive, and world-class transport system.
    • During FY21, IR carried 1.23 billion tonnes of
      freight and 1.25 billion passengers. In addition, despite COVID -19 pandemic revenue earning freight loading (excluding loading by Konkan Railway Corporation Ltd. (KRCL) was 1230.9 million tonnes in 2020-21 as compared to 1208.4 million tonnes during2019-20. Passengers originating were 1250 million in 2020-21 as compared to 8086 million in 2019-20- Economic Survey 2021-22. 
    • Spin-off effect: It is about Rs 40,000 crore business opportunity that would also create 15,000 jobs and several spin-off benefits and act as a stimulus for the development of satellite towns.
    • Boost to ‘Make in India’– it involves only about 15 percent import content which will further go down if production volumes increase.
    • Environmental Benefits: More rail traffic translates to less automobile traffic, and by extension, less highway and city street traffic congestion, reduced air pollution. In addition, less congestion means less wear and tear on the roadways, which means that they require fewer repairs.  According to the International Association of Railways (UIC), high-speed rail is eight times more energy-efficient than airplanes and four times more efficient than automobile use.
    • Social Benefits: High-speed rail can promote a sense of social cohesion among residents, by bringing distant populated areas closer together.
    • Global Experience: The High-Speed Railway has an economic multiplier effect. Since the introduction of the first Shinkansen (literally meaning ‘new main line’) in Japan in 1964, high-speed trains have proven to be an undeniable technological, commercial and popular success. Many countries like the UK, France, Germany, Spain, China, and most recently, the US have adopted the technology.

    Challenges faced by the High-Speed Rail Projects

    • Infrastructure Bottlenecks: India’s railway system is saddled with a two-pronged infrastructure deficit – aging infrastructure and the pace of new project execution struck by unforeseen circumstances related to socio-economic issues on land acquisition for new projects and escalating projects costs.
    • New Technologies: For instance, Hyperloop Transportation Technologies which proposes to make travel as fast as 760 miles per hour, investing a humongous capital on bullet trains seems like an outdated investment.
    • Political Will: The politics of Rail Bhavan and an unwillingness to accept the need for change have derailed the project execution.
    • Short of Investments: For instance, the estimated cost of Mumbai-Ahmedabad HSR is ₹1.1 lakh crore (US$17 billion) which is massively expensive. Though India receives funding from Japan (81%), the power demand and up-gradation of existing infrastructure will be more costly.
    • Social Conflict: Development along the corridor will lead to an increase in urbanization, the fight for resources, and social conflicts due to the labor influx of the workforce.
    • Legal Trouble: While farmers in Maharashtra are protesting on the ground, the farmers in Gujarat led by Gujarat Khedut Samaj (GKS)-  fighting a case in the Gujarat High Court against the land acquisition for the bullet train project.

    Way ahead

    • Stakeholders approach: Politics and Policy have to be in sync for the railway modernization. In order to achieve the target, Railways will have to pool in all resources and multiple stakeholders, including private players to deliver the propulsion system and also carry out the assembling. The Policymakers and administration should give priority to systematic sustainable development work- the convergence of jal, jungle, jameen(water-forest-land is an asset for the Adivasi community). 
    • Regular Monitoring: To ensure the induction of these trains in the shortest time possible, as envisaged by Indian Railways.
    • Technology Transfer: The government has to push for the technology transfer of HSR. This is because there is no mention of the transfer of technology anywhere in the agreement.

    Conclusion

    India aspires to become the third-largest economy in the next 25 years. It has already proven its prowess in the field of space and now is the time for furthering its international stature by joining the exclusive club of nations having a high-speed rail network, however, we should be careful not to confuse leapfrogging technology development with elitism, whether it is mobile phones, satellite launches, regional air connectivity, or high-speed rail. This high-speed rail project will therefore help the Indian Railways to become a global leader in scale, technology, and skill.

     

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  • Fiscal management during a pandemic

    Context

    The fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission. However, if we consider the direction of consolidation, it is towards a reduction in the fiscal deficit.

    The budget focuses on capital investment

    • This year’s Union budget projects an increase in capex by Rs 3.14 lakh crore, as compared to the budgeted numbers of the previous fiscal.
    • Given the economy’s savings-investment profile and macroeconomic uncertainties due to the pandemic, private and household investments are likely to be reactive to the general economic environment.
    • Achieving sustainable recovery: For the government, making capital investment in such uncertain times assumes a much higher priority and is equally indispensable for achieving a strong and sustainable recovery from the pandemic.
    • Increasing share of government: As per National Accounts data, gross fixed capital formation by the general government (Centre and states) has shown an increase as a percentage of GDP from 3.48 in 2011-12 to 3.82 in 2019-20, while other sectors, particularly households, the share fell from 15.75 per cent to 11.39 per cent during the same period.
    • The fiscal stance taken in the post-pandemic budgets for higher capital spending, including the budget of 2022-23, is likely to further enhance the general government share in overall capital formation. 
    • Important role of the States: it is also important to recognise that two-thirds of the general government’s capital expenditure is undertaken by states and in this context, the announcement of the Rs 1 lakh crore interest-free loans to the states to increase public investment has been a significant step.
    •  Since states taken together have a higher share in the country’s public capital spending, effective absorption of this additional borrowing facility will be critical for higher public investment.

    Three broad trends on Fiscal Consolidation

    • 1] Increase in taxes: The increase in taxes by Rs 5.71 lakh crore between 2020-21 (the first year of the pandemic) and 2022-23 shows that the fiscal challenges have eased, but remain present as we navigate economic recovery in uncertain times.
    • 2] Reduction in revenue deficit: Between 2020-21 and 2022-23 (BE), the reduction in revenue deficit has been substantial — from 7.3 per cent to 3.8 per cent of GDP.
    • 3] Revenue deficit dominates fiscal deficit: Compositionally, revenue deficit continues to be more than 55 per cent of the fiscal deficit and the management of such a deficit has few important considerations for revenue expenditure, that is, interest payments and allocation under various centrally sponsored and central sector schemes.
    • Role of CSS in revenue deficit: Aggregate allocation under centrally sponsored and central sector schemes (CSS) as per the 2022-23 (BE) is Rs 3.83 lakh crore and the interest payment cost of the Union government is Rs 9.56 lakh crore.
    • Beyond scheme-wise allocations, it is also important to consider CSS allocation as an issue of macro-fiscal management issue at the Union and state level, especially when it is contributing to the high revenue deficit of the central government and binding state resources for matching contribution, thereby increasing states’ deficit.

    Understanding the direction of fiscal consolidation

    • The fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission.
    • However, if we consider the direction of consolidation, it is towards a reduction in the fiscal deficit.
    • Though in the medium-term, the fiscal story is about supporting recovery, it is also true that there is no “one-size-fits-all” solution to fiscal consolidation and debt sustainability. 

    Conclusion

    The direction of fiscal consolidation rather than a specific quantified path in an unprecedented time like this is probably the most appropriate consideration.

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