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Subject: Economics

  • What are Virtual Digital Assets?

    Recently, The Central Board of Direct Taxes (CBDT) issued detailed guidelines on the Tax Deducted at Source (TDS) rule for Virtual Digital Assets (VDAs) such as cryptocurrencies .

    What are Virtual Digital Assets?

    • To define the term “virtual digital asset”, a new clause (47A) is proposed to be inserted into section 2 of the Act.
    • A virtual digital asset is proposed to mean any information or code or number or token (not being Indian currency or any foreign currency):
    1. Generated through cryptographic means or otherwise
    2. Providing a digital representation of value that is exchanged with or without consideration with the promise or representation of having inherent value
    3. Functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes
    4. Can be transferred, stored, or traded electronically.
    • Non-fungible token (NFT) and; any other token of similar nature are included in the definition.

    Why tax them?

    • Popularity: Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets have increased substantially.
    • Growing market: Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset.
    • Increased transactions: There has been a phenomenal rise in such transactions and the magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.
    • Prevalence of gifting: The gifting of virtual digital assets is also a popular mode of exchange.

    Key takeaways from the FM’s speech

    • The bill provides for the definition of virtual digital assets which is wide enough to cover emerging digital assets including NFT, assets in metaverse, cryptocurrencies, etc.
    • This recognition of digital assets under income tax is NOT akin to granting legal status.

     

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  • What is the Digital Rupee?

    The Union Finance Minister has announced the launch of the Digital Rupee — a central bank digital currency (CBDC) — 2022-23 onwards.

    Who will launch the CBDC?

    • The Reserve Bank of India will launch the CBDC in the upcoming financial year.
    • This follows the government’s plans to launch the CBDC that will be backed by blockchain technology.

    What is a CBDC?

    • CBDC is a legal tender issued by a central bank in a digital form.
    • It is similar to a fiat currency issued in paper and is interchangeable with any other fiat currency.
    • One chief difference will be that a Digital Rupee transaction will be instantaneous as opposed to the current digital payment experience.

    Features of CBDC

    • High-security instrument: CBDC is a high-security digital instrument; like paper banknotes, it is a means of payment, a unit of account, and a store of value.
    • Uniquely identifiable: And like paper currency, each unit is uniquely identifiable to prevent counterfeit.
    • Liability of central bank: It is a liability of the central bank just as physical currency is.
    • Transferability: It’s a digital bearer instrument that can be stored, transferred, and transmitted by all kinds of digital payment systems and services.

    What is the need for CBDC?

    • Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
    • High currency in circulation: India has a fairly high currency-to-GDP ratio.
    • Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.
    • The growth of cryptocurrencies such as Bitcoin, Ethereum, etc has raised challenges to fiat currencies.

    Key benefits offered

    • Faster system: CBDC can definitely increase the transmission of money from central banks to commercial banks and end customers much faster than the present system.
    • Financial inclusion: Specific use cases, like financial inclusion, can also be covered by CBDC that can benefit millions of citizens who need money and are currently unbanked or banked with limited banking services
    • Monetary policy facilitation: The move to bring out a CBDC could significantly improve monetary policy development in India.
    • Making of a regional currency: In the cross-border payments domain, India can take a lead by leveraging digital Rupee especially in countries such as Bhutan, Saudia Arabia, and Singapore where NPCI has existing arrangements.

    Why is CBDC preferred over Cryptocurrency?

    • Sovereign guarantee: Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.
    • Market volatility: Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.
    • Risk in security: A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).
    • Malware threats: In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
    • Money laundering: Cryptocurrencies are more vulnerable to criminal activity and money laundering.  They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.
    • Regulatory bypass: A central bank cannot regulate the supply of cryptocurrencies in the economy.  This could pose a risk to the financial stability of the country if their use becomes widespread.
    • Power consumption: Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).

    Way forward

    • The launch of CBDCs may not be a smooth affair and still requires more clarity in India. There are still a lot of misconceptions about the concept of digital currency in the country.
    • The effectiveness of CBDCs will depend on aspects such as privacy design and programmability.
    • There is a huge opportunity for India to take a lead globally via a large-scale rollout and adoption of digital currencies.

     

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  • Govt. proposes new SEZ Law

    The government has proposed to replace the existing law governing Special Economic Zones (SEZs) with new legislation to enable States to become partners in ‘Development of Enterprise and Service Hubs’.

    Why amend SEZ Act, 2005?

    • Units in SEZs used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the ploughed back export profit for another five years.
    • SEZs now have started losing their sheen after the imposition of minimum alternate tax and the introduction of a sunset clause for the removal of tax incentives.
    • The new act will cover all large existing and new industrial enclaves to optimally utilize the available infrastructure and enhance the competitiveness of exports.
    • The government will also undertake reforms in customs administration of SEZs with a view to promote ease of doing business.

    What are SEZs?

    • A Special Economic Zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
    • SEZs are located within a country’s national borders, and their aims include increasing trade balance, employment, increased investment, job creation, and effective administration.
    • To encourage businesses to set up in the zone, financial policies are introduced.
    • These policies typically encompass investing, taxation, trading, quotas, customs, and labor regulations.
    • Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

    SEZs in India

    • The SEZ policy in India first came into inception on April 1, 2000.
    • The prime objective was to enhance foreign investment and provide an internationally competitive and hassle-free environment for exports.
    • The idea was to promote exports from the country and realize the need for a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally.
    • Subsequently, the SEZ Act 2005, was enacted to provide the umbrella legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.

    Who can set up SEZs? Can foreign companies set up SEZs?

    • Any private/public/joint sector or state government or its agencies can set up an SEZ.
    • Yes, a foreign agency can set up SEZs in India.

    What is the role of state governments in establishing SEZs?

    • A representative of the state government, who is a member of the inter-ministerial committee on private SEZ, is consulted while considering the proposal.
    • Before recommending any proposals to the ministry of commerce and industry (department of commerce), the states must satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc.

    Are SEZs controlled by the government?

    • In all SEZs, the statutory functions are controlled by the government.
    • The government also controls the operation and maintenance function in the central government-controlled SEZs. The rest of the operations and maintenance are privatized.

    Are SEZs exempt from labor laws?

    • Normal labor laws are applicable to SEZs, which are enforced by the respective state governments.
    • The state governments have been requested to simplify the procedures/returns and for the introduction of a single-window clearance mechanism by delegating appropriate powers to development commissioners of SEZs.

    Who monitors the functioning of the units in SEZ?

    • The performance of the SEZ units is monitored by a unit approval committee consisting of a development commissioner, custom, and representative of the state government on an annual basis.

    What are the special features for business units that come to the zone?

    • Business units that set up establishments in an SEZ would be entitled to a package of incentives and a simplified operating environment.
    • Besides, no license is required for imports, including second-hand machinery.

    How do SEZs help a country’s economy?

    • SEZs play a key role in the rapid economic development of a country.
    • In the early 1990s, it helped China and there were hopes that the establishment in India of similar export-processing zones could offer similar benefits – provided, however, that the zones offered attractive enough concessions.
    • Traditionally the biggest deterrents to foreign investment in India have been high tariffs and taxes, red-tapism, and strict labor laws.
    • To date, these restrictions have ensured that India has been unable to compete with China’s massively successful light-industrial export machine.

     

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  • PM’s Development Initiative for North East (PM-DevINE)

    Union Budget 2022-23 provided for a new scheme, Prime Minister’s Development Initiative for North East (PM-DevINE) will be implemented through the North-Eastern Council.

    PM-DevINE

    • It will fund infrastructure, in the spirit of PM GatiShakti, and social development projects based on felt needs of the northeast.
    • This will enable livelihood activities for youth and women, filling the gaps in various sectors.
    • While the Central Ministries may also pose their candidate projects, priority will be given to those posed by the States.

    Some of the projects to be implemented are:

    1. Dedicated Services for the Management of Paediatric and Adult Haemotolymphoid Cancers in North East India, Guwahati
    2. Construction of Aizawl bypass on western side, gap funding for passenger ropeway system for Pelling to Sanga-Choeling in West Sikkim
    3. Gap funding for eco-friendly Ropeway (Cable Car) from Dhapper to Bhaleydhunga in South Sikkim
    4. Pilot project for the construction of Bamboo Link Road at different locations in various districts in Mizoram

     

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  • Highlights of the Union Budget 2022-23

    The Union Finance Minister has tabled the Union Budget 2022-23 in Parliament today.

    What is Union Budget in India?

    • The Union Budget also referred to as the Annual Financial Statement in Article 112 of the Constitution of India is the annual budget of India.
    • The Government presents it on the first day of February so that it could be materialized before the beginning of new financial year in April.
    • Until 2016 it was presented on the last working day of February by the Finance Minister in Parliament.
    • The budget, which is presented by means of the Finance bill and the Appropriation Bill, has to be passed by Lok Sabha before it can come into effect on 1 April, the start of India’s financial year.

    Components of the Budget

    There are three major components — expenditure, receipts and deficit indicators.

    The budget is generally classified into Revenue Budget and Capital Budget.

    [A] Revenue Budget

    • It includes the government’s revenue receipts and expenditure.
    • There are two kinds of revenue receipts – tax and non-tax revenue.
    • Revenue expenditure is the expenditure incurred on day to day functioning of the government and on various services offered to citizens.
    • If revenue expenditure exceeds revenue receipts, the government incurs a revenue deficit.

    [B] Capital Budget

    • It includes capital receipts and payments of the government.
    • Loans from public, foreign governments and RBI form a major part of the government’s capital receipts.
    • Capital expenditure is the expenditure on development of machinery, equipment, building, health facilities, education etc.
    • Fiscal deficit is incurred when the government’s total expenditure exceeds its total revenue. 

    What are fiscal rules and how do they affect policy?

    • Fiscal rules provide specific policy targets on the basis of which fiscal policy is formed.
    • In India’s case, its present fiscal rule is guided by the recommendations of the N.K. Singh Committee Report.
    • Allowing for some deviations under exceptional times, it has three policy targets — maintaining a specific level of debt-GDP ratio (stock target), fiscal deficit-GDP ratio (flow target) and revenue deficit-GDP ratio (composition target). 

    Highlights of the Union Budget 2022-23

    PART A

    Entering Amrit Kaal, the 25 year long lead up to India @100, the budget provides impetus for growth along four priorities:

    1. PM Gati-Shakti
    2. Inclusive Development
    3. Productivity Enhancement & Investment, Sunrise opportunities, Energy Transition, and Climate Action
    4. Financing of investments

    (1) PM GatiShakti

    The seven engines that drive PM Gati-Shakti are Roads, Railways, Airports, Ports, Mass Transport, Waterways and Logistics Infrastructure:

    1. National Highways Network to be expanded by 25000 Km in 2022-23
    2. One Station One Product concept to help local businesses & supply chains
    3. 2000 Km of railway network to be brought under Kavach, the indigenous world class technology and capacity augmentation in 2022-23
    4. 400 new generation Vande Bharat Trains to be manufactured during the next three years
    5. National Ropeways Development Program, Parvatmala to be taken up on PPP mode

    (2) Inclusive Development

    Agriculture

    • Grains Procurement
    • NABARD Loans:  To facilitate fund with blended capital to finance startups for agriculture & rural enterprise.
    • Kisan Drones: for crop assessment, digitization of land records, spraying of insecticides and nutrients.
    • Ken Betwa project: 1400 crore outlay for implementation of the Ken – Betwa link project.

    MSME Sector

    • MSME: ECLGS to be extended up to March 2023; Udyam, e-shram, NCS and ASEEM portals to be interlinked
    • Raising and Accelerating MSME performance (RAMP) Program: with outlay of Rs 6000 Crore to be rolled out.

    Skill Development

    • Digital Ecosystem for Skilling and Livelihood (DESH-Stack e-portal):  It will be launched to empower citizens to skill, reskill or upskill through on-line training.
    • Drone-As-A-Service (DrAAS):  Startups will be promoted to facilitate ‘Drone Shakti’.

    Education

    • ‘One class-One TV channel’ programme of PM eVIDYA: To be expanded to 200 TV channels.
    • Virtual labs: skilling e-labs to be set up to promote critical thinking skills and simulated learning environment.
    • High-quality e-content: It will be developed for delivery through Digital Teachers.
    • Digital University: for world-class quality universal education with personalized learning experience to be established. 

    Health

    • National Digital Health Ecosystem: An open platform to be rolled out.
    • National Tele Mental Health Programme: for quality mental health counseling and care services to be launched
    • Saksham Anganwadi: Integrated benefits to women and children through Mission Shakti, Mission Vatsalya, Saksham Anganwadi and Poshan 2.0

    Housing for All

    • Housing for All: Rs. 48,000 crore allocated for completion of 80 lakh houses in 2022-23 under PM Awas Yojana
    • Har Ghar, Nal Se Jal: Rs. 60,000 crore allocated to cover 3.8 crore households in 2022-23 under this

    Prime Minister’s Development Initiative for North-East Region (PM-DevINE)

    •  New scheme PM-DevINE launched to fund infrastructure and social development projects in the North-East.
    • An initial allocation of Rs. 1,500 crore made to enable livelihood activities for youth and women under the scheme.

    Vibrant Villages Programme

    • Vibrant Villages Programme for development of Border villages with sparse population, limited connectivity and infrastructure on the northern border.

    Urban Planning

    • Modernization of building byelaws, Town Planning Schemes (TPS), and Transit Oriented Development (TOD) will be implemented.
    • Battery swapping policy to be brought out for setting up charging stations at scale in urban areas.

    (3) Industrial Sector

    Telecom Sector

    • Scheme for design-led manufacturing to be launched to build a strong ecosystem for 5G as part of the Production Linked Incentive Scheme.

    Export Promotion

    • Special Economic Zones Act to be replaced with a new legislation to enable States to become partners in ‘Development of Enterprise and Service Hubs’.

    Atmanirbharta in Defence

    • 68% of capital procurement budget earmarked for domestic industry in 2022-23, up from 58% in 2021-22 

    GIFT-IFSC

    • World-class foreign universities and institutions to be allowed in the GIFT City.

    An International Arbitration Centre to be set up for timely settlement of disputes under international jurisprudence

    (4) Energy Transition and Climate Action

    • Five to seven per cent biomass pellets to be co-fired in thermal power plants
    • CO2 savings of 38 MMT annually
    • Extra income to farmers and job opportunities to locals
    • Help avoid stubble burning in agriculture fields
    • Pilot projects to be set up for coal gasification and conversion of coal into chemicals for the industry
    • Financial support to farmers belonging to Scheduled Castes and Scheduled Tribes, who want to take up agro-forestry

    (5) Mobilizing Resources

    • Data Centres and Energy Storage Systems to be given infrastructure status.
    • Venture Capital and Private Equity invested more than Rs. 5.5 lakh crore last year facilitating one of the largest start-up and growth ecosystems
    • Blended funds to be promoted for sunrise sectors
    • Sovereign Green Bonds to be issued for mobilizing resources for green infrastructure.

    Digital Rupee

    • Introduction of Digital Rupee by the Reserve Bank of India starting 2022-23.

    Providing Greater Fiscal Space to States

    • Enhanced outlay for ‘Scheme for Financial Assistance to States for Capital Investment’:

    (6) Fiscal Management

    • Budget Estimates: Rs. 34.83 lakh crore
    • Revised Estimates: Rs. 37.70 lakh crore
    • Total expenditure estimated at Rs. 39.45 lakh crore
    • Total receipts other than borrowings estimated at Rs. 22.84 lakh crore
    • Fiscal deficit in current year: 6.9% of GDP (against 6.8% in Budget Estimates)

    PART B

    DIRECT & INDIRECT TAXES

    (Not necessary)

  • What is UNCITRAL Model for Cross-Border Insolvency?

    The Economic Survey 2021-22 has called for a standardized framework for cross-border insolvency as the Insolvency and Bankruptcy Code (IBC) at present does not have an instrument to restructure firms involving cross-border jurisdictions.

    What is the Insolvency and Bankruptcy Code (IBC)?

    • The IBC, 2016 is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
    • It is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
    • The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

    Cross-border insolvency proceedings

    • Cross-border insolvency proceedings are relevant for the resolution of distressed companies with assets and liabilities across multiple jurisdictions.
    • A framework for cross border insolvency proceedings allows for:
    1. Location of such a company’s foreign assets
    2. Identification of creditors and their claims
    3. Establishing payment towards claims and
    4. Process for coordination between courts in different countries

    Current status of foreign stakeholders and courts in other jurisdictions under IBC

    • Foreign creditors can make claims against a domestic company.
    • However, the IBC currently does not allow for automatic recognition of any insolvency proceedings in other countries.
    • Current provisions do not allow Indian courts to address the issue of foreign assets of a company being subjected to parallel insolvency proceedings in other jurisdictions.

    What is the UNCITRAL Model?

    • The UNCITRAL model is the most widely accepted legal framework to deal with cross-border insolvency issues.
    • It has been adopted by 49 countries, including the UK, the US, South Africa, South Korea, and Singapore.
    • It is designed to assist States in reforming and modernizing their laws on the arbitral procedure so as to take into account the particular features and needs of international commercial arbitration.

    Key provisions

    This law works on four main principles: access, recognition, cooperation and coordination:

    1. Direct access to foreign insolvency professionals and foreign creditors to participate in or commence domestic insolvency proceedings against a defaulting debtor.
    2. Recognition of foreign proceedings & provision of remedies.
    3. Cooperation between domestic and foreign courts & domestic and foreign insolvency practitioners.
    4. Coordination between two or more concurrent insolvency proceedings in different countries: The main proceeding is determined by the concept of Centre of Main Interest (COMI).

    Implications for India

    • The framework for cross-border insolvency adopted in India may like in the case of some other countries require reciprocity from any country which seeks to have its insolvency proceedings recognised by Indian courts.
    • This would allow Indian proceedings for foreign corporate debtors to be recognised in foreign jurisdictions.

    How is IBC different from the model law?

    • Many countries that adopt the UNCITRAL model law do make certain changes to suit their domestic requirements.
    • The Indian cross-border insolvency framework excludes financial service providers from being subjected to cross-border insolvency proceedings.
    • This is because many countries exempt businesses providing critical financial services, such as banks and insurance companies, from the provisions of cross-border insolvency frameworks.

    Back2Basics: UNCITRAL

    • It is an affiliate organization to the UN made up of business and legal professionals.
    • This group develops model standards and procedures for dealing with issues affecting international business.
    • Perhaps most notably, UNCITRAL promulgated the Convention on International Sale of Goods (CISG).
    • The CISG is a model law commonly used as the governing provisions in contracts between parties from different nations.

     

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  • What is Design Linked Incentive (DLI) Scheme?

    India has invited applications from 100 domestic companies, startups, and small and medium enterprises to become a part of the design-linked incentive (DLI) scheme.

    What is the DLI scheme?

    • Aims to provide financial and infrastructural support to companies setting up fabs or semiconductor making plants in India.
    • It aims to attract existing and global players as it will support their expenditures related to design software, IP rights, development, testing, and deployment.
    • Centre for Development of Advanced Computing (CDAC), a scientific society operating under MeitY, will serve as the nodal agency for the implementation of the DLI scheme.

    Components of the scheme

    It has three components which are

    1. Chip Design infrastructure support: C-DAC will set up the India Chip Centre to host the state-of-the-art design infrastructure (viz. EDA Tools, IP Cores, and support for MPW (Multi Project Wafer fabrication) & post-silicon validation) and facilitate its access to supported companies.
    2. Product Design Linked Incentive: Reimbursement of up to 50% of the eligible expenditure subject to a ceiling of Rs. 15 Crore per application will be provided as financial support to the approved applicants who are engaged in semiconductor design.
    3. Deployment Linked Incentive: An incentive of 6% to 4% of net sales turnover over 5 years subject to a ceiling of Rs. 30 Crore per application will be provided to approved applicants whose semiconductor design for Integrated Circuits (ICs), Chipsets, System on Chips (SoCs), Systems & IP Cores and semiconductor linked design are deployed in electronic products.

    Why need such a scheme?

    Ans. Growing semiconductor demand in India

    • The semiconductor industry is growing fast and can reach $1 trillion dollars in this decade. India can grow fast and reach $64 billion by 2026 from $27 billion today.
    • Mobiles, wearables, IT, and industrial components are the leading segments in the Indian semiconductor industry contributing around 80% of the revenues in 2021.
    • The mobile and wearables segment is valued at $13.8 billion and is expected to reach $31.5 billion in 2026.

    A boost to semiconductor manufacturing

    • The sudden surge in demand for chips and semiconductor components has underpinned the need to establish a robust semiconductor ecosystem in India.
    • Several sectors, including auto, telecom, and medical technology suffered due to the unexpected surge leading to the scarcity of chips manufactured by only a few countries.
    • The inception of new companies will help in meeting the demand and supply and encourage innovation in India.

    What are other countries doing to be dominant in the race of chip-making?

    • Currently, semiconductor manufacturing is dominated by companies in the U.S., Japan, South Korea, Taiwan, Israel, and the Netherlands.
    • They are also making efforts in solving the chip shortage problem.
    • The US wants to bring manufacturing back to America and reduce the country’s reliance on a small number of chipmakers based largely in Taiwan and South Korea.
    • These chipmakers produce up to 70% of the world’s semiconductors.

    Challenges in India

    • No incubation: In India, more than 90% of global companies already have their R&D and design centers for semiconductors but never established their fabrication units.
    • Strategic sector: Although India has semiconductor fabs in Mohali and Bangalore, they are purely strategic for defense and space applications only
    • Capital requirement: Setting up fabs is capital intensive and needs investment in the range of $5 billion to $10 billion.
    • Lack of supportive policies: Lack of investments and supportive government policies are some of the challenges to setting up fabs in India.
    • Geopolitical limitations: A combination of capital and the geopolitical situation comes into play to build new fabs.

    Way forward

    • Further incentivization: Schemes like the DLI are crucial to avoid high dependencies on a few countries or companies.
    • Raw material supply: Several gases and minerals which are a part of the global semiconductor supply chain are produced in India.
    • Large talent pool: Availability of highly-skilled engineers for semiconductor manufacturing.

    Conclusion

    • The 21st century will be an era of Digital revolution signifying an increased use of mobile phones and computer devices. This enhanced usage can be met only with a robust availability of semiconductor chips that sustains their functioning. Therefore India needs to focus on the indigenous development of semiconductors in order to realize its digital potential and emerge as a strong power in the present era.

     

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  • Highlights of the Economic Survey 2021-22

    The Union Minister for Finance & Corporate Affairs has presented the Economic Survey 2021-22 in Parliament.

    What is the Economic Survey?

    • The Economic Survey is a report on the state of the economy in the past one year, the key challenges it anticipates, and their possible solutions.
    • One day before the Union budget, the Chief Economic Adviser (CEA) releases the Economic Survey.
    • The document is prepared by the Economic Division of the Department of Economic Affairs (DEA) , Ministry of Finance.
    • Once prepared, the Survey is approved by the Finance Minister.
    • The first survey was presented in 1950-51. Until 1964, the document was presented along with the Budget.

    Why is the Economic Survey significant?

    • The Economic Survey is a crucial document as it provides a detailed, official version of the government’s take on the country’s economic condition.
    • It can also be used to highlight some key areas of focus — for example, in 2018, the survey presented by the then CEA Arvind Subramanian was pink in colour, to stress on gender equality.

    Is it binding on the government?

    • The government is NOT constitutionally bound to present the Economic Survey or to follow the recommendations that are made in it.
    • If the government so chooses, it can reject all suggestions laid out in the document.
    • But while the Centre is not obliged to present the Survey at all, it is tabled because of the significance it holds.

    Highlights of the Economic Survey 2021-22

    [1] State of the Economy

    • Economic growth: Indian economy estimated to grow by 9.2 percent in real terms in 2021-22 (as per first advanced estimates) subsequent to a contraction of 7.3 percent in 2020-21. 
    • GDP growth: GDP projected to grow by 8- 8.5 percent in real terms in 2022-23.  
    • Agriculture and allied sectors: They are expected to grow by 3.9 percent; industry by 11.8 percent and services sector by 8.2 percent in 2021-22.

     [2] Fiscal Developments

    • Revenue receipts: These have gone up by 67.2 percent (YoY) as against an expected growth of 9.6 percent in the 2021-22 Budget Estimates.
    • Gross Tax Revenue: It registered a growth of over 50 percent during April to November, 2021 in YoY terms. 
    • Borrowings: With the enhanced borrowings on account of COVID-19, the Central Government debt has gone up from 49.1 percent of GDP in 2019-20 to 59.3 percent of GDP in 2020-21/

    [3] External Sectors

    • India’s merchandise exports and imports rebounded strongly and surpassed pre-COVID levels during the current financial year.
    • Net capital flows: These were higher at US$ 65.6 billion in the first half of 2021-22, on account of continued inflow of foreign investment, revival in net external commercial borrowings, higher banking capital and additional special drawing rights (SDR) allocation.
    • India’s external debt: It rose to US $ 593.1 billion at end-September 2021, from US $ 556.8 billion a year earlier, reflecting additional SDR allocation by IMF, coupled with higher commercial borrowings.
    • Foreign Exchange Reserves: It touched US $ 633.6 billion in Dec 2021 making India the fourth largest forex reserves holder in the world after China, Japan and Switzerland.

    [4] Monetary Management and Financial Intermediation

    • Repo was maintained: The liquidity in the system remained in surplus. Repo rate was maintained at 4 per cent in 2021-22.
    • GSAP: RBI undertook various measures such as G-Sec Acquisition Programme and Special Long-Term Repo Operations to provide further liquidity.
    • NPAs declined: The Gross Non-Performing Advances ratio of Scheduled Commercial Banks (SCBs) declined from 11.2 per cent at the end of 2017-18 to 6.9 per cent at the end of September, 2021.

    [5] Prices and Inflation

    • Control over food inflation: The decline in retail inflation was led by easing of food inflation. Proactive measures were taken to contain the price rise in pulses and edible oils.
    • Supply constraints eased: Effective supply-side management kept prices of most essential commodities under control during the year.
    • Fuel price reduction: Reduction in central excise and subsequent cuts in Value Added Tax by most States helped ease petrol and diesel prices. 

    [6] Sustainable Development and Climate Change

    • Sustainable development: India’s overall score on the NITI Aayog SDG India Index and Dashboard improved to 66 in 2020-21 from 60 in 2019-20 and 57 in 2018-19.
    • Rise in forest cover: India has the tenth largest forest area in the world. In 2020, India ranked third globally in increasing its forest area during 2010 to 2020. In 2020, the forests covered 24% of India’s total geographical, accounting for 2% of the world’s total forest area.
    • Plastic waste management (PWM): In August 2021, the PWM Amendment Rules, 2021, was notified which is aimed at phasing out single use plastic by 2022.
    • Extended Producer Responsibility for plastic: Draft rules for plastic packaging was notified.
    • Pledge on Net-Zero Emissions: The PM participated at COP-26 in Glasgow. He announced ambitious targets to achieve net-zero by 2070.

    [7] Agriculture and Food Management

    • Minimum Support Price (MSP) policy: It is being used to promote crop diversification.
    • Allied sector growth: Allied sectors including animal husbandry, dairying and fisheries are steadily emerging to be high growth sectors and major drivers of overall growth in agriculture sector.
    • Food security:  Government has further extended the coverage of food security network through schemes like PM Gareeb Kalyan Yojana (PMGKY).
    • Income Support: Timely release of PM-KISAN Funds.

    [8] Industry and Infrastructure:

    • Index of Industrial Production (IIP): It grew at 17.4 percent (YoY) during April-November 2021 as compared to -15.3 percent in April-November 2020.
    • Extent of road construction per day: This has increased substantially in 2020-21 to 36.5 Kms per day from 28 Kms per day in 2019-20 – a rise of 30.4 percent.
    • Production Linked Incentive (PLI) Scheme: It gave a major boost to infrastructure-both physical as well as digital.

    [9] Services Sector

    • Growth despite pandemic: Overall service Sector GVA is expected to grow by 8.2 percent in 2021-22.
    • Opening up of space sector to private players: Major government reform.
    • India becomes start-up hub: India has become 3rd largest start-up ecosystem in the world after US and China.
    • Unicorns in India: 44 Indian start-ups have achieved unicorn status in 2021 taking overall tally of unicorns to 83, most of which are in services sector.

    [10] Social Infrastructure and Employment

    • Universal vaccination: 157.94 crore doses of COVID-19 vaccines administered (as on 16th January 2022).
    • Employment recovery: As per the quarterly Periodic Labour Force Survey (PFLS) data up to March 2021, employment in urban sector affected by pandemic has recovered almost to the pre-pandemic level.
    • Expenditure on social services (health, education and others): This expenditure by Centre and States as a proportion of GDP increased from 6.2 % in 2014-15 to 8.6% in 2021-22.
    • National Family Health Survey-5:
    1. Total Fertility Rate (TFR) came down to 2 in 2019-21 from 2.2 in 2015-16
    2. Infant Mortality Rate (IMR), under-five mortality rate and institutional births have improved in 2019-21 over year 2015-16
    3. Jal Jeevan Mission (JJM): Under this, 83 districts have become ‘Har Ghar Jal’ districts.
    4. Continuance of MGNREGS: Increased allotment of funds to Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) to provide buffer for unorganized labour in rural areas during the pandemic.

  • What is Reverse Repo Normalization?

    In a recent report, the State Bank of India, which is the largest public sector bank in the country, has stated that the stage is set for a reverse repo normalization.

    What is Monetary Policy Normalisation?

    The RBI keeps tweaking the total amount of money in the economy to ensure smooth functioning by two types of policies:

    (I) Loose Monetary Policy

    When the RBI wants to boost economic activity it adopts a so-called “loose monetary policy”.

    There are two parts to such a policy:

    1. RBI injects more money (liquidity) into the economy: It does so by buying government bonds from the market. As the RBI buys these bonds, it pays back money to the bondholders, thus injecting more money into the economy.
    2. RBI also lowers the interest rate: it charges banks when it lends money to them; this rate is called the repo rate. Lower interest rates and more liquidity, together, are expected to boost both consumption and production in the economy.

    (II) Tight Monetary Policy

    • It involves the RBI raising interest rates and sucking liquidity out of the economy by selling bonds (and taking money out of the system).
    • When any central bank finds that a loose monetary policy has started becoming counterproductive in reducing inflation, the central bank “normalizes the policy” by tightening the monetary policy stance.

    What is Reverse Repo?

    • An interest rate that the RBI pays to the commercial banks when they park their excess “liquidity” (money) with the RBI.
    • The reverse repo, thus, is the exact opposite of the repo rate.
    • Under normal a circumstance, that is when the economy is growing at a healthy pace, the repo rate becomes the benchmark interest rate in the economy.
    • That’s because it is the lowest rate of interest at which funds can be borrowed.
    • As such, the repo rate forms the floor interest rate for all other interest rates in the economy — be it the rate you pay for a car loan or a home loan or the interest you earn on your fixed deposit, etc.

    How does Reverse Repo fit into policy normalization?

    • Imagine a scenario where the RBI pumps more and more liquidity into the market but there are no takers of fresh loans.
    • This is because the banks are unwilling to lend or because there is no genuine demand for new loans in the economy.
    • In such a scenario, the action shifts from repo rate to reverse repo rate because banks are no longer interested in borrowing money from the RBI.
    • Rather they are more interested in parking their excess liquidity with the RBI. And that is how the reverse repo becomes the actual benchmark interest rate in the economy.

    What does reverse repo normalization mean?

    • Simply put, it means the reverse repo rates will go up.
    • Over the past few months, in the face of rising inflation, several central banks across the world have either increased interest rates or signaled that they would do so soon.
    • In India, too, it is expected that the RBI will raise the repo rate.
    • But before that, it is expected that the RBI will raise the reverse repo rate and reduce the gap between the two rates.
    • In the immediate aftermath of Covid, RBI had increased this gap.

    Implications of such policy

    • Incentivize commercial banks to park excess funds with RBI, thus sucking some liquidity out of the system.
    • The next step would be raising the repo rate.
    • This process of normalization, which is aimed at curbing inflation, will not only reduce excess liquidity but also result in higher interest rates across the board in the Indian economy.
    • This will help reduce the demand for money among consumers (since it would make more sense to just keep the money in the bank) and make it costlier for businesses to borrow fresh loans.

    Try this PYQ from CSP 2020:

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

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

    Select the correct answer using the code given below:

    (a) 1 and 2 only

    (b) 2 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”sr109h9q0i” question=”Please leave a feedback on this” opened=”1″]Post your answers here:[/wpdiscuz-feedback]

     

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  • How budget can generate higher growth, jobs

    Context

    Although the impact of Omicron is less on the economy, the loss of GDP in the last two years is high. Also note that the pre-Covid year FY20 had a low base with 4 per cent growth of GDP. Therefore, the need to focus on higher growth in the forthcoming budget and in the medium term, that is, beyond India@75, is obvious.

    Challenges in creating quantity and quality of jobs in the economy

    • Unemployment rate is high in both rural and urban areas;
    • Decline in work participation rates, particularly for women;
    • Recovery in employment is still below the levels of the pre-Covid period.
    • 85 per cent of the workforce is still in informal sector.
    • Lack of skill: Less than 5 per cent of India’s workforce has formal skill training.
    • Need for structural change: Manufacturing and services need structural change.
    • Focus on MSME sector is needed for higher employment.

    Policies needed to achieve higher economic growth and jobs

    1] Capital expenditure and infrastructure

    • The government outlined an infrastructure project pipeline worth more than Rs 102 lakh crore and asset monetisation pipeline of Rs 6 lakh crore to be implemented in the medium term.
    • Continuing focus on infrastructure and capex by the government is important as it is a key driver for the “future of India”.

    2] Focus on export growth

    • It is well known that rise in exports is one of the main engines of growth and also important for employment creation.
    • Export growth in India has increased and is expected to reach $400 billion by the end of FY22.
    • One worrying aspect of India’s export performance is the failure in expanding the share of labour intensive products in the export basket.
    • Protectionist trade policy: However, one problem in recent years is that India’s trade policy has become more protectionist by increasing import tariffs.
    • Join RCEP: India should also join the Regional Comprehensive Economic Partnership (RCEP) for integrating our industries with the value chains in Asia.

    3] Manufacturing and service sector growth

    • The share of manufacturing in GDP and employment has hardly increased over time.
    • Production Linked Incentive (PLI) schemes can improve performance.
    • However, more efforts are required to improve the manufacturing sector.
    •  Similarly, there are a lot of opportunities for India in the service sector.
    • Brand and customer centricity are important here.
    • India can also think of more business in the service sector.
    • Growing startups including unicorns in manufacturing and services is part of this effort.

    4] Banking reforms

    • Banking reforms are important as bank credit growth is a key indicator of economic growth.
    • Low credit-to-gdp ration in India: Credit to GDP ratio in India is only around 55 per cent compared to 100 per cent and 150 per cent in many other countries.
    • Credit should flow to all categories of economic agents like firms, households etc.
    •  The bad bank, a key initiative of the last budget, is yet to take shape.
    • The role of fintech companies in the financial sector has increased significantly.
    • They may not be able to replace banks although they are competing on payments.
    • The banks also have to focus now on ESG (environment, social and governance) while giving credit.
    • Big technology and digital push is also needed for banks.

    5] Deal with K-shaped recovery

    • The K-shaped recovery of the economy is still continuing.
    • The policies have to focus on giving a push to the MSME sector, increasing investment in agriculture and rural infrastructure, a social sector push including bridging divides in health and education, social protection measures like foodgrain distribution, cash transfers, MGNREGA in rural areas, urban employment guarantee schemes etc.
    • This will also create demand for the economy.

    Conclusion

    In the near term, fiscal policy has to play an important role in achieving the objectives of growth and jobs by expanding fiscal space while the fiscal deficit can be stabilised in the medium term. Increase in private investment may take some more time.

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