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Subject: Economics

  • 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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  • 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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  • 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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  • India’s economy and the challenge of informality

    Context

    Despite efforts by the government, formalisation of economy still eludes us.

    Prevalence of informality in India

    • Despite witnessing rapid economic growth over the last two decades, 90% of workers in India have remained informally employed, producing about half of GDP. 
    • Combining the International Labour Organization’s widely agreed upon template of definitions with India’s official definition (of formal jobs as those providing at least one social security benefit — such as EPF), the share of formal workers in India stood at 9.7% (47.5 million).
    • The prevalence of informal employment is also widespread in the non-agriculture sector.
    • About half of informal workers are engaged in non-agriculture sectors which spread across urban and rural areas.
    • Industries thriving without paying taxes are only the tip of the informal sector’s iceberg.
    • What remains hidden are the large swathes of low productivity informal establishments working as household and self-employment units which represent “petty production”.
    • To conflate the two distinct segments of the informal sector would be a serious conceptual error.

    Fiscal perspective of formalisation

    • Efforts to encourage formalisation: Currency demonetisation, introduction of the Goods and Services Tax (GST), digitalisation of financial transactions and enrolment of informal sector workers on numerous government Internet portals are all meant to encourage the formalisation of the economy.
    • The formal sector is more productive than the informal sector, and formal workers have access to social security benefits.
    • The above-mentioned efforts are based on the “fiscal perspective” of formalisation.
    • This perspective appears to draw from a strand of thought advanced by some international financial institutions such as the International Monetary Fund, which foregrounds the persistence of the informal sector to excessive state regulation of enterprises and labour which drives genuine economic activity outside the regulatory ambit.
    • Hence, it is believed that simplifying registration processes, easing rules for business conduct, and lowering the standards of protection of formal sector workers will bring informal enterprises and their workers into the fold of formality.

    Issues with fiscal perspective

    •  Early on, in an attempt to promote employment, India protected small enterprises engaged in labour intensive manufacturing by providing them with fiscal concessions and regulating large-scale industry by licensing.
    • Such measures led to many labour-intensive industries getting diffused into the informal/unorganised sectors.
    • Further, they led to the formation of dense output and labour market inter-linkages between the informal and formal sectors via sub-contracting and outsourcing arrangements (quite like in labour abundant Asian economies).
    • While such policy initiatives may have encouraged employment, bringing the enterprises which benefited from the policy into the tax net has been a challenge.
    • Political and economic reasons operating at the regional/local level in a competitive electoral democracy are responsible for this phenomenon, too.

    Role of underdevelopment

    • Global evidence suggests that the view that legal and regulatory hurdles alone are mainly responsible for holding back formalisation does not hold much water.
    • A well-regarded study, ‘Informality and Development’ argues that the persistence of informality is, in fact, a sign of underdevelopment.
    • The finding suggests that informality decreases with economic growth, albeit slowly.
    •  A similar association is also evident across major States in India, based on official PLFS data.
    • Hence, the persistence of a high share of informal employment in total employment seems nothing but a lack of adequate growth or continuation of underdevelopment.

    Impact of pandemic

    • Research by the State Bank of India recently reported the economy formalised rapidly during the pandemic year of 2020-21, with the informal sector’s GDP share shrinking to less than 20%, from about 50% a few years ago — close to the figure for developed countries.
    • These findings of a sharp contraction of the informal sector during the pandemic year (2020-21) do not represent a sustained structural transformation.
    • They are a temporary (and unfortunate) outcome of the pandemic and severe lockdowns imposed in 2020 and 2021.

    Way forward

    • Policy efforts directed at bringing the informal sector into the fold of formality fail to appreciate that the bulk of the informal units and their workers are essentially petty producers eking their subsistence out of minimal resources.
    •  The economy will get formalised when informal enterprises become more productive through greater capital investment and increased education and skills are imparted to its workers.

    Consider the question “What are the reasons for persistent informality in India? Suggest the way to ensure the smooth transition to the formality.”

    Conclusion

    Policy efforts to formalise the economy will have limited results as the bulk of informal units are petty producers.

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  • Bank Frauds in India

    1. Poor banking governance: Most frauds show that banks did not observe due diligence, both before and after disbursing loans. Poor level of checks and balances in the banking system is one of the reason.
    2. Poor monitoring: Lack of technology and fraud monitoring agencies to detect frauds makes the problem more complex. There is an absence of an effective mechanism to monitor the credit flow. Flawed risk-mitigation design, which creates an excessive focus on credit or market risks, but focuses less on operational risks also leading to more breaches.
    3. Technological backwardness: Excessive dependence on manual supervision, at both external and internal levels makes it impossible to manually control and supervise the sheer volume of transactions.
    4. Immoral behaviour: The disintegrating moral fibre of Indian businessmen, bankers and other white-collar professionals, nepotism in internal committees of banks, unnecessary political interventions lead to increased frauds.
    5. Political interference: The political pulls and pressures on investigating agencies, and long-drawn processes of legal system act less as a deterrent.

     

  • What is Anti-Dumping Duty?

    India has initiated an anti-dumping probe against imports of a certain type of tiles, used for covering the floors in residential and commercial buildings, from China, Taiwan and Vietnam following a complaint by domestic players.

    Why in news?

    • Countries start anti-dumping probes to determine whether their domestic industries have been hurt because of a surge in cheap imports.
    • The dumping has caused material injury to the domestic players. If established, the Directorate General of Trade Remedies (DGTR) would recommend an anti-dumping duty on these imports.
    • As a countermeasure, they India would impose these duties under the multilateral regime of the World Trade Organisation (WTO).

    What is Dumping?

    • Dumping is a process wherein a company exports a product at a price that is significantly lower than the price it normally charges in its home (or its domestic) market.
    • This is an unfair trade practice which can have a distortive effect on international trade.
    • Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect.

    What is Anti-Dumping Duty?

    • An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value.
    • In order to protect their respective economy, many countries impose duties on products they believe are being dumped in their national market.
    • In fact, anti-dumping is an instrument for ensuring fair trade and is not a measure of protection per se for the domestic industry.
    • Such ‘dumped’ products have the potential to undercut local businesses and the local economy.
    • Anti-dumping duties provide relief to the domestic industry against the injury caused by dumping.

    Mechanism in India

    • The Department of Commerce recommends the anti-dumping duty, provisional or final.
    • The Department of Revenue in Finance Ministry acts upon the recommendation within three months and imposes such duties.

    WTO and Anti-Dumping Duties

    • The WTO operates a set of international trade rules, including the international regulation of anti-dumping measures.
    • It does NOT intervene in the activities of companies engaged in dumping.
    • Instead, it focuses on how governments can—or cannot—react to the practice of dumping.
    • In general, the WTO agreement permits governments to act against dumping if it causes or threatens material injury to an established domestic industry.

    Issues with such duties

    • Anti-dumping duties have the potential to distort the market.
    • In a free market, governments cannot normally determine what constitutes a fair market price for any good or service.

    Back2Basics:

    Countervailing duty (CVD)

    • Countervailing duty (CVD) is a specific form of duty that the government imposes in order to protect domestic producers by countering the negative impact of import subsidies.
    • CVD is thus an import tax by the importing country on imported products.
    • To make their products cheaper and boost their demand in other countries, foreign governments sometimes provide subsidies to their producers.
    • To avoid flooding of the market in the importing country with these goods, the government of the importing country imposes a countervailing duty, charging a specific amount on import of such goods.

    How does it work?

    • The duty nullifies and eliminates the price advantage (low price) enjoyed by an imported product when it is given subsidies or exempted from domestic taxes in the country where they are manufactured.
    • It raises the price of the imported product, bringing it closer to its true market price.
    • In this way, the government is able to provide a level playing field for domestic products.

     CVD and India

    • The World Trade Organization (WTO) permits the imposition of countervailing duty by its member countries.
    • In India, the CVD is imposed as an additional duty besides customs on imported products when such products are given tax concession in the country of their origin.

    Who imposes countervailing measures in India?

    • The countervailing measures in India are administered by the Directorate General of Anti-dumping and Allied Duties (DGAD), in the commerce and industry ministry’s department of commerce.

     

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